<PAGE> 1
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 6, 1997)
$975,000,000
IMC HOME EQUITY LOAN TRUST 1997-5
IMC MORTGAGE COMPANY
SELLER AND SERVICER
IMC SECURITIES, INC.
DEPOSITOR
------------------------------
[IMC LOGO]
The IMC Home Equity Loan Pass-Through Certificates, Series 1997-5 (the
"Certificates") will consist of (i) the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the
Class A-5 Certificates, the Class A-6 Certificates, the Class A-7
Certificates, the Class A-8 Certificates, the Class A-9 Certificates, the
Class A-10 Certificates and the Class A-11IO Certificates (collectively, the
"Class A Certificates"), (ii) the Class M-1 Certificates and the Class M-2
Certificates (collectively, the "Mezzanine Certificates"), (iii) the Class B
Certificates (collectively with the Mezzanine Certificates, the "Subordinate
Certificates") and (iv) the residual class with respect to each REMIC held by
the Trust. Only the Class A Certificates, the Mezzanine Certificates and the
Class B Certificates (collectively, the "Offered Certificates") are offered
hereby.
The Certificates represent an undivided ownership interest in a pool of
fixed rate home equity loans (the "Home Equity Loans") held by IMC Home Equity
Loan Trust 1997-5 (the "Trust"). The Certificates will represent undivided
ownership interests in the Home Equity Loans, which are secured by first and
second lien mortgages or deeds of trust primarily on one- to four-family
residential properties. The Certificates also represent an undivided ownership
interest in all interest and principal due under the respective Home Equity
Loans after September 1, 1997 (the "Cut-Off Date"), security interests in the
properties which secure the related Home Equity Loans (the "Properties"),
funds on deposit in certain trust accounts, and certain other property.
(continued on following page)
------------------------------
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
CERTIFICATES, SEE "RISK FACTORS" BEGINNING ON PAGE S-20 HEREIN, "PREPAYMENT AND
YIELD CONSIDERATIONS" BEGINNING ON PAGE S-35 HEREIN AND "RISK FACTORS" BEGINNING
ON PAGE 6 IN THE PROSPECTUS.
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE
SERVICER, EXCEPT AS DESCRIBED HEREIN, OR ANY OF THEIR AFFILIATES. NEITHER
THE OFFERED CERTIFICATES NOR THE HOME EQUITY LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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 CERTIFICATE PASS-THROUGH PRICE TO UNDERWRITING
PRINCIPAL BALANCE RATE PUBLIC (1) DISCOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Class A-1 Certificate.................. $ 107,250,000.00 6.51% 99.99223% 0.1500%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-2 Certificate.................. $ 141,300,000.00 Variable (3) 100.00000% 0.1000%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-3 Certificate.................. $ 105,200,000.00 6.54% 99.99104% 0.1250%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-4 Certificate.................. $ 122,500,000.00 6.53% 99.98954% 0.1500%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-5 Certificate.................. $ 119,910,000.00 6.61% 99.99372% 0.2000%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-6 Certificate.................. $ 22,480,000.00 6.83% 99.97237% 0.2500%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-7 Certificate.................. $ 72,990,000.00 6.90% 99.98001% 0.3000%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-8 Certificate.................. $ 42,410,000.00 7.14% 99.99944% 0.3500%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-9 Certificate.................. $ 41,085,000.00 7.31% 99.97338% 0.4500%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-10 Certificate................. $ 68,250,000.00 6.88% 99.98850% 0.5000%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class A-11IO Certificate............... (4) 8.50% 19.04114% 0.0476%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class M-1 Certificate.................. $ 39,000,000.00 7.08% 99.99059% 0.4500%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class M-2 Certificate.................. $ 53,625,000.00 7.31% 99.95921% 0.4750%
- -----------------------------------------------------------------------------------------------------------------------------------
Per Class B Certificate.................... $ 39,000,000.00 7.59% 99.96864% 0.5000%
- -----------------------------------------------------------------------------------------------------------------------------------
Total...................................... $ 975,000,000.00 $987,879,876.02 $2,464,690.20
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==================================================================
PROCEEDS TO
DEPOSITOR(1)(2)
- ------------------------------------------------------------------
<S> <C>
Per Class A-1 Certificate.................. 99.84223%
- ------------------------------------------------------------------
Per Class A-2 Certificate.................. 99.90000%
- ------------------------------------------------------------------
Per Class A-3 Certificate.................. 99.86604%
- ------------------------------------------------------------------
Per Class A-4 Certificate.................. 99.83954%
- ------------------------------------------------------------------
Per Class A-5 Certificate.................. 99.79372%
- ------------------------------------------------------------------
Per Class A-6 Certificate.................. 99.72237%
- ------------------------------------------------------------------
Per Class A-7 Certificate.................. 99.68001%
- ------------------------------------------------------------------
Per Class A-8 Certificate.................. 99.64944%
- ------------------------------------------------------------------
Per Class A-9 Certificate.................. 99.52338%
- ------------------------------------------------------------------
Per Class A-10 Certificate................. 99.48850%
- ------------------------------------------------------------------
Per Class A-11IO Certificate............... 18.99354%
- ------------------------------------------------------------------
Per Class M-1 Certificate.................. 99.54059%
- ------------------------------------------------------------------
Per Class M-2 Certificate.................. 99.48421%
- ------------------------------------------------------------------
Per Class B Certificate.................... 99.46864%
- ------------------------------------------------------------------
Total...................................... $985,415,185.83
==================================================================
</TABLE>
(1) Plus accrued interest (other than on the Class A-2 Certificates), if any,
from September 1, 1997.
(2) Before deducting expenses, estimated to be $700,000.
(3) The Pass-Through Rate on the Class A-2 Certificates is adjustable based on
LIBOR as described herein.
(4) Interest will be calculated on the basis of a Notional Principal Amount
equal to the outstanding Certificate Principal Balance of the Class A-10
Certificates until the Payment Date in March, 2000.
------------------------------
The Offered Certificates are offered subject to prior sale, when, as, and if
accepted by the Underwriters and subject to the Underwriters' right to reject
orders in whole or in part. It is expected that delivery of the Offered
Certificates in book-entry form will be made through the facilities of The
Depository Trust Company, Cedel Bank, S.A. and the Euroclear System on or about
September 23, 1997.
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
MORGAN STANLEY DEAN WITTER
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS SEPTEMBER 15, 1997
<PAGE> 2
(cover continued from previous page)
The Class M-1 Certificates are subordinate in right of distribution to
the Class A Certificates to the extent described herein. The Class M-2
Certificates are subordinate in right of distribution to the Class A
Certificates and the Class M-1 Certificates to the extent described herein.
The Class B Certificates are subordinate in right of distribution to the Class
A Certificates and the Mezzanine Certificates to the extent described herein.
The initial aggregate Certificate Principal Balance of the Subordinate
Certificates will equal approximately 13.50% of the initial aggregate
Certificate Principal Balance of all of the Certificates.
The Original Aggregate Loan Balance of the Home Equity Loans as of the
Cut-Off Date was $828,448,840.24 (of which approximately 87.81% by principal
balance are first liens and the remainder are second liens). The Home Equity
Loans were originated or purchased by IMC Mortgage Company (the "Seller" and
"Servicer"). The Trust will be created pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") to be dated as of September
1, 1997 among the Seller, the Servicer, the Depositor and The Chase Manhattan
Bank, as Trustee (the "Trustee").
The Pooling and Servicing Agreement provides that additional Home
Equity Loans (the "Subsequent Home Equity Loans") may be purchased by the Trust
from the Depositor from time to time on or before September 30, 1997 from funds
on deposit in the Pre-Funding Account. On the Closing Date (as defined below),
an aggregate cash amount of $146,551,159.76 (or such amount as may be necessary
to insure that the total aggregate Loan Balance of the Home Equity Loans will
total approximately $975,000,000.00 as of the Cut-Off Date) will be deposited
with the Trustee in the Pre-Funding Account to be used to acquire Subsequent
Home Equity Loans for the Trust.
Distributions of principal and interest will be made to holders (the
"Owners") of the Certificates on the 20th day of each month (or, if such day is
not a business day, the next following business day) beginning October 20, 1997
(each, a "Payment Date"). To the extent available, interest will be passed
through on each Payment Date to the Owners of the Offered Certificates based on
the related Certificate Principal Balance (as defined herein) at the
Pass-Through Rate applicable to such Class of Certificates, subject to the
limitations described herein. The Pass-Through Rate for each Class of Offered
Certificates (other than the Class A-2 Certificates) is set out on the cover
hereof. The Pass-Through Rate for the Class A-2 Certificates adjusts monthly
based on one-month LIBOR (as defined herein) or as otherwise described herein.
The Pass-Through Rate for the Class A-11IO Certificates is described under
"Summary of Terms - Certificates Offered" herein. Distributions of principal
in reduction of the Certificate Principal Balances will be made on each Payment
Date in the manner and the amounts described herein.
As described further herein, the Mezzanine Certificates and Class B
Certificates may not be acquired by Plans (as defined herein). See "ERISA
Considerations" herein.
The Class A-11IO Certificates are interest-only Certificates. The
yield to investors on the Class A-11IO Certificates will be, and the yield to
investors on the other Classes of Offered Certificates sold at prices other
than par may be, extremely sensitive to the rate and timing of principal
payments (including prepayments, repurchases, defaults and liquidations) on the
related Home Equity Loans, which may vary over time. See "Summary of Terms -
Nature of Class A-11IO Certificates," "Prepayment and Yield Considerations"
herein and "Risk Factors" and "Yield, Prepayment and Maturity Considerations"
in the Prospectus.
The Trust Estate will make one or more elections to treat certain
assets thereof as a "real estate mortgage investment conduit" (a "REMIC") for
federal income tax purposes. As described more fully herein, all Classes of
the Offered Certificates will constitute a "regular interest" in a REMIC. See
"Federal Income Tax Consequences" herein and in the Prospectus.
Prior to their issuance, there has been no market for the Offered
Certificates and there can be no assurance that one will develop, or if it does
develop, that it will provide liquidity, or that it will continue for the life
of the Offered Certificates. The Underwriter intends, but is not obligated, to
make a market in the Offered Certificates.
-------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL BE
PART OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR
PURSUANT TO ITS PROSPECTUS DATED JUNE 6, 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.
-------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
CERTIFICATES 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-20
THE SELLER AND SERVICER..........................................................S-23
General.....................................................................S-23
Credit and Underwriting Guidelines..........................................S-24
Delinquency, Loan Loss and Foreclosure Information..........................S-26
THE DEPOSITOR....................................................................S-28
USE OF PROCEEDS..................................................................S-28
THE HOME EQUITY LOAN POOL........................................................S-29
General.....................................................................S-29
Conveyance of Subsequent Home Equity Loans..................................S-34
Interest Payments on the Home Equity Loans..................................S-35
PREPAYMENT AND YIELD CONSIDERATIONS..............................................S-35
General.....................................................................S-35
Mandatory Prepayment........................................................S-36
Prepayment and Yield Scenarios for Offered Certificates.....................S-36
Payment Lag Feature of Offered Certificates.................................S-42
Yield Sensitivity of the Class A-11IO Certificates..........................S-42
FORMATION OF THE TRUST AND TRUST PROPERTY........................................S-43
ADDITIONAL INFORMATION...........................................................S-44
DESCRIPTION OF THE OFFERED CERTIFICATES..........................................S-44
General.....................................................................S-44
Payment Dates...............................................................S-44
Distributions...............................................................S-45
Calculation of LIBOR........................................................S-47
Pre-Funding Account.........................................................S-48
Capitalized Interest Account................................................S-48
Book Entry Registration of the Offered Certificates.........................S-48
Assignment of Rights........................................................S-52
CREDIT ENHANCEMENT...............................................................S-52
Subordination of Subordinate Certificates...................................S-52
Application of Realized Losses..............................................S-52
Application of Monthly Excess Cashflow Amounts..............................S-53
THE POOLING AND SERVICING AGREEMENT..............................................S-55
Covenant of the Seller to Take Certain Actions with Respect
to the Home Equity Loans in Certain Situations..........................S-55
Assignment of Home Equity Loans.............................................S-56
Servicing and Sub-Servicing.................................................S-58
Removal and Resignation of Servicer.........................................S-61
The Trustee.................................................................S-62
Reporting Requirements......................................................S-62
Removal of Trustee for Cause................................................S-63
Governing Law...............................................................S-63
Amendments..................................................................S-63
Termination of the Trust....................................................S-64
Optional Termination........................................................S-64
FEDERAL INCOME TAX CONSEQUENCES..................................................S-64
REMIC Elections.............................................................S-65
ERISA CONSIDERATIONS.............................................................S-65
RATINGS..........................................................................S-69
LEGAL INVESTMENT CONSIDERATIONS..................................................S-70
UNDERWRITING.....................................................................S-70
CERTAIN LEGAL MATTERS............................................................S-74
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...................................................................... 6
DESCRIPTION OF THE CERTIFICATES................................................... 9
General...................................................................... 9
Classes of Certificates......................................................10
Distributions of Principal and Interest......................................11
Book Entry Registration......................................................12
List of Owners of Certificates...............................................13
THE TRUSTS........................................................................13
Mortgage Loans...............................................................14
Mortgage-Backed Securities...................................................15
Other Mortgage Securities....................................................16
CREDIT ENHANCEMENT................................................................16
SERVICING OF MORTGAGE LOANS.......................................................21
Payments on Mortgage Loans...................................................21
Advances.....................................................................22
Collection and Other Servicing Procedures....................................22
Primary Mortgage Insurance...................................................23
Standard Hazard Insurance....................................................24
Title Insurance Policies.....................................................24
Claims Under Primary Mortgage Insurance Policies and Standard Hazard
Insurance Policies; Other Realization Upon Defaulted Loan................24
Servicing Compensation and Payment of Expenses...............................25
Master Servicer..............................................................25
ADMINISTRATION....................................................................26
Assignment of Mortgage Assets................................................26
Evidence as to Compliance....................................................28
The Trustee..................................................................28
Administration of the Certificate Account....................................28
Reports......................................................................29
Forward Commitments; Pre-Funding.............................................30
Servicer Events of Default...................................................30
Rights Upon Servicer Event of Default........................................30
Amendment....................................................................31
Termination..................................................................31
USE OF PROCEEDS...................................................................32
THE DEPOSITOR.....................................................................32
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS......................................32
General......................................................................32
Foreclosure..................................................................33
Soldiers' and Sailors' Civil Relief Act......................................38
LEGAL INVESTMENT MATTERS..........................................................38
ERISA CONSIDERATIONS..............................................................39
FEDERAL INCOME TAX CONSEQUENCES...................................................40
Federal Income Tax Consequences For REMIC Certificates.......................41
Taxation of Regular Certificates.............................................42
Taxation of Residual Certificates............................................47
Treatment of Certain Items of REMIC Income and Expense.......................49
Tax-Related Restrictions on Transfer of Residual Certificates................51
Sale or Exchange of a Residual Certificate...................................53
Taxes That May Be Imposed on the REMIC Pool..................................53
Liquidation of the REMIC Pool................................................54
Administrative Matters.......................................................54
Limitations on Deduction of Certain Expenses.................................55
Taxation of Certain Foreign Investors........................................55
Backup Withholding...........................................................56
Reporting Requirements.......................................................56
Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made..........................................57
Standard Certificates........................................................57
Premium and Discount.........................................................58
Stripped Certificates........................................................60
Reporting Requirements and Backup Withholding................................62
Taxation of Certain Foreign Investors........................................63
Taxation of Securities Classified as Partnership Interests...................63
PLAN OF DISTRIBUTION..............................................................63
RATINGS...........................................................................64
LEGAL MATTERS.....................................................................64
FINANCIAL INFORMATION.............................................................64
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.....................................A-1
</TABLE>
<PAGE> 4
This Page Intentionally Left Blank
<PAGE> 5
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" for the location of the definitions of certain
capitalized terms.
ISSUER: IMC Home Equity Loan Trust 1997-5 (the
"Trust").
CERTIFICATES OFFERED: $975,000,000 IMC Home Equity Loan
Pass-Through Certificates, Series 1997-5,
to be issued in the following Classes
(each, a "Class") and original Certificate
Principal Balances (each, a "Certificate
Principal Balance"), set forth below:
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Principal Balance Rate Class
------------------- ------------ -----
<S> <C> <C>
$107,250,000 6.51% Class A-1 Certificates
$141,300,000 (1) Class A-2 Certificates
$105,200,000 6.54% Class A-3 Certificates
$122,500,000 6.53% Class A-4 Certificates
$119,910,000 6.61% Class A-5 Certificates
$ 22,480,000 6.83% Class A-6 Certificates
$ 72,990,000 6.90% Class A-7 Certificates
$ 42,410,000 7.14%(2) Class A-8 Certificates
$ 41,085,000 7.31%(2) Class A-9 Certificates
$ 68,250,000 6.88%(2) Class A-10 Certificates
$0(3) 8.50% Class A-11IO Certificates
$ 39,000,000 7.08%(2) Class M-1 Certificates
$ 53,625,000 7.31%(2) Class M-2 Certificates
$ 39,000,000 7.59%(2) Class B Certificates
</TABLE>
(1) On each Payment Date, the "Class A-2
Pass-Through Rate" will be equal to the
lesser of (x) the rate equal to the London
interbank offered rate for United States
Dollar deposits ("LIBOR") (calculated as
described under "Description of the Offered
Certificates-Calculation of LIBOR" herein)
plus 0.09% per annum and (y) the weighted
average of the Coupon Rates on the Home
Equity Loans, less 0.50375% per annum (the
rate described in this clause (y), the
"Available Funds Cap").
(2) The Pass-Through Rate with respect to
the Class A-8, Class A-9, Class A-10, Class
M-1, Class M-2 and Class B Certificates
will on any Payment Date equal the lesser
of (x) the Pass-Through Rate for such Class
set out above and (y) the weighted average
Coupon Rate of the Home Equity Loans less
the sum of approximately (a) 0.50375% per
annum and (b) for the first 30 Payment
Dates, the product of (i) 8.50% per annum
and (ii) the Class A-11IO Notional
Principal Amount divided by the Loan
Balance of the Home Equity Loans, or
thereafter, zero.
(3) Interest will be calculated on the
Class A-11IO Certificates on each Payment
Date on the basis of a "Notional Principal
Amount" equal to, for the first 30 Payment
Dates the outstanding Class A-10
Certificate Principal Balance, as of the
first day of the related Remittance Period
and, thereafter, zero. Reference to the
Notional Principal Amount of the Class
A-11IO Certificates is solely for
convenience on certain calculations and
does not represent the right to receive any
distribution allocable to principal.
The Certificates will consist of (i) the
"Class A-1 Certificates," the "Class A-2
Certificates," the "Class A-3
Certificates," the "Class A-4
Certificates," the "Class A-5
Certificates," the "Class A-6
Certificates," the "Class A-7
Certificates," the "Class A-8
Certificates," the "Class A-9
Certificates," the "Class A-10
S-1
<PAGE> 6
Certificates," and the "Class A-11IO
Certificates" (collectively, the "Class A
Certificates"), (ii) the "Class M-1
Certificates" and the "Class M-2
Certificates" (collectively, the "Mezzanine
Certificates") and (iii) the "Class B
Certificates" (and together with the
Mezzanine Certificates, the "Subordinate
Certificates"). Only the Class A
Certificates, the Mezzanine Certificates
and the Class B Certificates (collectively,
the "Offered Certificates") are offered
hereby.
The initial aggregate Certificate Principal
Balance of the Subordinate Certificates
will equal 13.50% of the initial aggregate
Certificate Principal Balance of all
Certificates.
The Subordinate Certificates are
subordinate in right of distribution to the
Class A Certificates to the extent
described herein. The Class M-1
Certificates are subordinate to the Class A
Certificates to the extent described
herein. The Class M- 2 Certificates are
subordinate to the Class A Certificates and
Class M-1 Certificates to the extent
described herein. The Class B Certificates
are subordinate to the Class A Certificates
and the Mezzanine Certificates to the
extent described herein.
On any date after the Closing Date, the
"Aggregate Certificate Principal Balance"
is the sum of the Certificate Principal
Balance of all Classes of the Offered
Certificates (other than the Class A-11IO
Certificates).
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.
TRUSTEE: The Chase Manhattan Bank, a New York
banking corporation, as trustee (the
"Trustee"). The Trustee shall receive a
fee (the "Trustee Fee") equal to 0.00375%
per annum, payable monthly at one-twelfth
the annual rate of the aggregate
outstanding Loan Balance of the Home Equity
Loans.
CUT-OFF DATE: As of the close of business on September 1,
1997 (the "Cut-Off Date").
CLOSING DATE: On or about September 23, 1997.
DESCRIPTION OF THE
CERTIFICATES OFFERED: The Offered Certificates represent
fractional undivided interests in the Trust
and have the rights described in the
Pooling and Servicing Agreement dated as of
September 1, 1997 among the Depositor, the
Seller, the Servicer and the Trustee (the
"Pooling and Servicing Agreement"). The
Trust assets (not all of which will be
included in a REMIC) will include the home
equity loans (the "Home Equity Loans"), all
interest and principal due under the
respective Home Equity Loans after the
Cut-Off Date, security interests in the
properties securing such Home Equity Loans
(the "Properties"), funds on deposit in the
Non-REMIC Accounts and certain other
property. See "Formation of the Trust and
Trust Property" herein.
S-2
<PAGE> 7
On the Closing Date, the Pre-Funded Amount
(as defined herein) will be deposited in a
trust account in the name of the Trustee
(the "Pre-Funding Account"). It is
intended that additional Home Equity Loans
satisfying the criteria specified in the
Pooling and Servicing Agreement (the
"Subsequent Home Equity Loans") will be
purchased by the Trust from the Depositor
from time to time on or before September
30, 1997 from funds on deposit in the
Pre-Funding Account. As a result, the
aggregate principal balance of the Home
Equity Loans will increase by an amount
equal to the aggregate principal balance of
the Subsequent Home Equity Loans so
purchased and the amount in the Pre-Funding
Account will decrease proportionately.
As described below, on the Closing Date,
cash will be deposited in the name of the
Trustee in the Capitalized Interest Account
(as defined herein). Funds in the
Capitalized Interest Account will be
applied by the Trustee to cover shortfalls
in interest during the Funding Period (as
described herein under "Pre-Funding
Account") on the Offered Certificates
attributable to the provisions allowing for
purchase of Subsequent Home Equity Loans
after the Cut-Off Date.
OTHER CERTIFICATES: In addition to the Offered Certificates,
pursuant to the Pooling and Servicing
Agreement, there will be a residual Class
of Certificates for the Lower-Tier REMIC
(the "Lower-Tier REMIC Residual Class") and
a residual Class of Certificates for the
Upper-Tier REMIC (the "Class R
Certificates"). The Offered Certificates
and the Class R Certificates are herein
referred to as the "Certificates." Only
the Offered Certificates are offered
hereby.
DENOMINATIONS: The Offered Certificates are issuable in
minimum denominations of an original
principal amount or Notional Principal
Amount, as applicable, of $25,000 and
multiples of $1,000 in excess thereof.
THE HOME EQUITY LOANS: The Home Equity Loans to be conveyed to the
Trust by the Depositor on the Closing Date
(the "Initial Home Equity Loans") consist
of fixed rate conventional home equity
loans and the Notes relating thereto.
The Home Equity Loans are secured by first
and second lien mortgages or deeds of trust
primarily on one- to- four family
residential properties located in 50 states
and the District of Columbia. No
Loan-to-Value Ratio (based upon appraisals
made at the time of origination of the
related Home Equity Loan) relating to any
Initial Home Equity Loan exceeded 85% as of
the Cut-Off Date except for 1,167 loans
with an aggregate Loan Balance of
$94,712,730.69 (or 11.43% of the aggregate
Loan Balance of the Initial Home Equity
Loans), which had a Loan-to-Value Ratio not
greater than 100%. None of the Initial
Home Equity Loans are insured by pool
mortgage insurance policies and no
significant portion of the Initial Home
Equity Loans are insured by primary
mortgage insurance policies. The Home
Equity Loans are not guaranteed by the
Depositor, the Seller, the Servicer, the
Trustee or any of their affiliates. The
Home Equity Loans will be serviced by the
Servicer generally in accordance with the
standards and procedures required by
FannieMae for FannieMae mortgage-backed
securities and in accordance with the terms
of the Pooling and Servicing Agreement.
S-3
<PAGE> 8
As of the Cut-Off Date, the average Loan
Balance of the Initial Home Equity Loans
was $57,655.29. The minimum and maximum
Loan Balances of the Initial Home Equity
Loans as of the Cut-Off Date were $4,962.78
and $499,660.80, respectively. The
weighted average interest rate (the "Coupon
Rate") of the Initial Home Equity Loans was
11.60%; the Coupon Rates of the Initial
Home Equity Loans ranged from 7.50% to
22.50%; the weighted average combined
Loan-to-Value Ratio of the Initial Home
Equity Loans was 76.08%; the weighted
average remaining term to maturity of the
Initial Home Equity Loans was 223 months;
and the remaining terms to maturity of the
Initial Home Equity Loans ranged from 30
months to 360 months. As of the Cut-Off
Date, 87.81% of the aggregate Loan Balances
of the Initial Home Equity Loans were
secured by first mortgages and 12.19% of
the aggregate Loan Balances of the Initial
Home Equity Loans were secured by second
mortgages. Initial Home Equity Loans
containing "balloon" payments represented
approximately 45.37% of the Initial Home
Equity Loans. No Initial Home Equity Loan
will mature later than September 1, 2027.
See "The Home Equity Loan Pool" herein.
FINAL SCHEDULED PAYMENT
DATE: The Final Scheduled Payment Date for each
Class of the Offered Certificates is as set
forth below, although it is anticipated
that the actual final Payment Date for each
Class of the Offered Certificates will
occur significantly earlier than the
related Final Scheduled Payment Date. See
"Prepayment and Yield Considerations"
herein.
<TABLE>
<CAPTION>
Final Scheduled
Payment Date
----------------
<S> <C>
Class A-1 Certificates February 20, 2006
Class A-2 Certificates December 20, 2011
Class A-3 Certificates June 20, 2013
Class A-4 Certificates June 20, 2013
Class A-5 Certificates June 20, 2013
Class A-6 Certificates April 20, 2015
Class A-7 Certificates January 20, 2022
Class A-8 Certificates October 20, 2025
Class A-9 Certificates November 20, 2028
Class A-10 Certificates November 20, 2028
Class A-11IO Certificates March 20, 2000
Class M-1 Certificates November 20, 2028
Class M-2 Certificates November 20, 2028
Class B Certificates November 20, 2028
</TABLE>
DISTRIBUTIONS--GENERAL: On the 20th day of each month, or if such
a day is not a Business Day, then the next
succeeding Business Day, commencing October
20, 1997 (each such day being a "Payment
Date"), the Trustee will be required,
subject to the availability of amounts
therefor, pursuant to the cashflow
priorities hereinafter described, to
distribute to the Owners of each Class of
Certificates, other than the Class A-2
Certificates, of record as of the last day
of the calendar month preceding the month
in which such Payment Date occurs and to
the Owners of the Class A-2 Certificates
S-4
<PAGE> 9
of record as of the day immediately
preceding such Payment Date (each such
date, the "Record Date") the applicable
"Class Distribution Amount" which shall be
the sum of (x) the related Current
Interest, (y) the related Interest Carry
Forward Amount, if any, and (z) the related
Principal Distribution Amount (each as
defined below).
For each Payment Date, interest due with
respect to the Offered Certificates (other
than the Class A-2 Certificates) will be
interest which has accrued on the related
Certificate Principal Balance or Notional
Principal Amount, as the case may be,
during the calendar month immediately
preceding the month in which such Payment
Date occurs. The interest due with respect
to the Class A-2 Certificates will be the
interest which has accrued on the Class A-2
Certificate Principal Balance from the
preceding Payment Date (or from the Closing
Date in the case of the first Payment Date)
to and including the day prior to the
current Payment Date. Each such period
relating to the accrual of interest is the
"Accrual Period" for the related Class of
Offered Certificates. All calculations of
interest on the Offered Certificates (other
than the Class A-2 Certificates) will be
made on the basis of a 360-day year assumed
to consist of twelve 30-day months.
Calculations of interest on the Class A-2
Certificates will be made on the basis of a
360-day year and the actual number of days
elapsed in the related Accrual Period.
A "Business Day" is any day other than a
Saturday or Sunday or a day on which
banking institutions in The City of New
York, Tampa, Florida or the city in which
the corporate trust office of the Trustee
is located are authorized or obligated by
law or executive order to be closed.
INTEREST: On each Payment Date the Interest
Remittance Amount will be distributed in
the following order of priority:
First, to the Trustee, the Trustee Fee
and any Trustee Reimbursable Expenses;
Second, to the Owners of the Class A
Certificates (including the Class A-11IO
Certificates), the related Current Interest
plus the Interest Carry Forward Amount with
respect to each Class of Class A
Certificates without any priority among
such Class A Certificates ; provided, that
if the Interest Remittance Amount less the
amount paid to the Trustee as the Trustee
Fee and Trustee Reimbursable Expenses (such
amount, the "Interest Amount Available") is
not sufficient to make a full distribution
of interest with respect to all Classes of
the Class A Certificates, the Interest
Amount Available will be distributed among
the outstanding Classes of Class A
Certificates pro rata based on the
aggregate amount of interest due on each
such Class, and the amount of the shortfall
will be carried forward with accrued
interest;
Third, to the extent of the Interest Amount
Available then remaining, to the Owners of
the Class M-1 Certificates, the related
Current Interest;
Fourth, to the extent of the Interest
Amount Available then remaining, to the
Owners of the Class M-2 Certificates, the
related Current Interest;
S-5
<PAGE> 10
Fifth, to the extent of the Interest Amount
Available then remaining, to the Owners of
the Class B Certificates, the related
Current Interest; and
Sixth, the amount, if any, of the Interest
Amount Available remaining in the
Certificate Account after application with
respect to the priorities set forth above
is defined as the "Monthly Excess Interest
Amount" for such Payment Date and shall be
applied as described below under "Credit
Enhancement-Application of Monthly Excess
Cashflow Amounts" in this Summary of Terms.
"Current Interest" with respect to each
Class of Offered Certificates means, with
respect to any Payment Date (i) the
aggregate amount of interest accrued during
the preceding Accrual Period at its
applicable Pass-Through Rate on the
Certificate Principal Balance (or the
Notional Principal Amount with respect to
the Class A- 11IO Certificates) of such
Class of Certificates plus (ii) the
Preference Amount as it relates to interest
previously paid on such Class of the
Offered Certificates prior to such Payment
Date; provided, however, that with respect
to each Class of Offered Certificates,
Current Interest will be reduced by such
Class' pro rata share of any Civil Relief
Interest Shortfalls (as defined in the
Pooling and Servicing Agreement).
"Interest Remittance Amount" means as of
any Monthly Remittance Date, the sum,
without duplication, of (i) all interest
due during the related Remittance Period on
the Home Equity Loans (less the Servicing
Fee), (ii) all Compensating Interest paid
by the Servicer on such Monthly Remittance
Date, (iii) the portion of any Substitution
Amount relating to interest, (iv) the
portion of any purchase price relating to
interest on any Home Equity Loan
repurchased during the related Remittance
Period and (v) the portion of Net
Liquidation Proceeds relating to interest.
The "Interest Carry Forward Amount" with
respect to any Class of the Offered
Certificates for any Payment Date is the
sum of (x) the amount, if any, by which (i)
the sum of the Current Interest for such
Class as of the immediately preceding
Payment Date and all prior unpaid Interest
Carry Forward Amounts exceeded (ii) the
amount of the actual distribution with
respect to interest made to the Owners of
such Class of Offered Certificates on such
immediately preceding Payment Date plus (y)
30 days' interest on such amount,
calculated at the related Pass-Through Rate
in effect with respect to such Class of
Offered Certificates.
PRINCIPAL: On each Payment Date (a) before the
Stepdown Date or (b) with respect to which
a Trigger Event is in effect, Owners of the
Class A Certificates (other than the Class
A-11IO Certificates) will be entitled to
receive payment of 100% of the Principal
Distribution Amount for such Payment Date
as follows: first, to the Owners of the
Class A-10 Certificates, the Class A-10
Lockout Distribution Amount, second, to the
Owners of the Class A-1 Certificates until
the Class A-1 Certificate Principal Balance
has been reduced to its Targeted Amount (as
defined herein) for such Payment Date and
then to the Owners of the Class A-2
Certificates, the Class A-3 Certificates,
the Class A-4 Certificates, the Class A-5
Certificates, the Class A-6 Certificates,
the Class A-7 Certificates, the Class A-8
Certificates, the Class A-9 Certificates,
the Class A-1 Certificates (without regard
to its Targeted Amount) and the Class A-10
Certificates (without regard to the
S-6
<PAGE> 11
Class A-10 Lockout Distribution Amount), in
that order, in each case, until the
Certificate Principal Balance of each Class
of Class A Certificates has been reduced to
zero.
On each Payment Date (a) on or after the
Stepdown Date and (b) as long as a Trigger
Event is not in effect, the Owners of all
Classes of the Offered Certificates (other
than the Class A-11IO Certificates) will be
entitled to receive payments of principal,
in the order of priority, in the amounts
set forth below and to the extent of the
Principal Distribution Amount as follows:
First, the lesser of (x) the Principal
Distribution Amount and (y) the Class A
Principal Distribution Amount shall be
distributed as follows: (i) to the Owners
of the Class A-10 Certificates, in an
amount equal to the Class A-10 Lockout
Distribution Amount and, (ii) to the
Owners of the Class A-1 Certificates until
the Class A-1 Certificate Principal Balance
has been reduced to its Targeted Amount for
such Payment Date and then to the Owners of
the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates,
the Class A-5 Certificates, the Class A-6
Certificates, the Class A-7 Certificates,
the Class A-8 Certificates, the Class A-9
Certificates, the Class A-1 Certificates
(without regard to its Targeted Amount) and
the Class A-10 Certificates (without regard
to the Class A-10 Lockout Distribution
Amount), in that order, in each case, until
the Certificate Principal Balance of each
Class of Class A Certificates has been
reduced to zero;
Second, the lesser of (x) the excess of (i)
the Principal Distribution Amount over (ii)
the amount distributed to the Owners of the
Class A Certificates in clause First above
and (y) the Class M-1 Principal
Distribution Amount shall be distributed to
the Owners of the Class M-1 Certificates,
until the Class M-1 Certificate Principal
Balance has been reduced to zero;
Third, the lesser of (x) the excess of (i)
the Principal Distribution Amount over (ii)
the sum of the amount distributed to the
Owners of the Class A Certificates in
clause First above and the amount
distributed to the Owners of the Class M-1
Certificates in clause Second above and (y)
the Class M-2 Principal Distribution Amount
shall be distributed to the Owners of the
Class M-2 Certificates, until the Class M-2
Certificate Principal Balance has been
reduced to zero;
Fourth, the lesser of (x) the excess of (i)
the Principal Distribution Amount over (ii)
the sum of the amount distributed to the
Owners of the Class A Certificates pursuant
to clause First above, the amount
distributed to the Owners of the Class M-1
Certificates pursuant to clause Second
above and the amount distributed to the
Owners of the Class M-2 Certificates
pursuant to clause Third above and (y) the
Class B Principal Distribution Amount shall
be distributed to the Owners of the Class B
Certificates, until the Class B Certificate
Principal Balance has been reduced to zero;
and,
Fifth, any amount of the Principal
Remittance Amount remaining after making
all of the distributions in clauses First,
Second, Third and Fourth above shall be
included as part of the Monthly Excess
Cashflow Amount and shall be applied as
described below under "Credit
Enhancement-Application of Monthly Excess
Cashflow Amounts" in this Summary of Terms.
S-7
<PAGE> 12
Notwithstanding the foregoing, in the event
that the Certificate Principal Balance of
each Class of the Class A Certificates has
been reduced to zero, all amounts of
principal that would have been distributed
to the Class A Certificates will be
distributed to the Subordinate Certificates
sequentially in the following order: Class
M-1, Class M-2 and Class B. Similarly, if
the Certificate Principal Balance of the
Class M-1 Certificates has been reduced to
zero, all amounts of principal that would
have been distributed to such Class M-1
Certificates will be distributed to the
Class M-2 and Class B Certificates in that
order. Finally, if the Certificate
Principal Balance of the Class M-2
Certificates has been reduced to zero, all
amounts of principal that would have been
distributed on such Class M-2 Certificates
will be distributed to the Class B
Certificates.
Payments of principal on the Class A
Certificates shall be paid out in the order
described above, provided, however, that on
any Payment Date on which the sum of the
Certificate Principal Balance of the
Subordinate Certificates and the
Overcollateralization Amount is zero, any
amounts of principal payable to the Owners
of the Class A Certificates shall be
distributed pro rata.
The Class A-11IO Certificates are
interest-only Certificates and are not
entitled to receive distributions of
principal.
The Owners of the Class A-10 Certificates
are entitled to receive payments of the
Class A-10 Lockout Distribution Amount
specified herein; provided, that if on any
Payment Date the Class A-9 Certificate
Principal Balance and the Class A-1
Certificate Principal Balance are zero, the
Owners of the Class A-10 Certificates
will be entitled to receive the entire
Class A Principal Distribution Amount for
such Payment Date.
In addition to the following definitions,
the above discussion makes use of a number
of defined terms which are defined under
"Description of the Offered Certificates --
Distributions" herein.
"Principal Distribution Amount" means, as
of any Payment Date, the sum of (i) the
Principal Remittance Amount minus, for
Payment Dates occurring on and after the
Stepdown Date, the Overcollateralization
Release Amount, if any, and (ii) the Extra
Principal Distribution Amount, if any.
The "Class A-10 Lockout Distribution
Amount" for any Payment Date will be the
product of (i) the applicable Class A-10
Lockout Percentage for such Payment Date
and (ii) the Class A-10 Lockout Pro Rata
Distribution Amount for such Payment Date.
In no event shall the Class A-10 Lockout
Distribution Amount exceed the outstanding
Class A-10 Certificate Principal Balance.
The "Class A-10 Lockout Percentage" for each
Payment Date shall be as follows:
<TABLE>
<CAPTION>
Payment Dates Lockout Percentage
------------- ------------------
<S> <C>
October 1997 - September 2000 0%
October 2000 - September 2002 45%
October 2002 - September 2003 80%
October 2003 - September 2004 100%
October 2004 and thereafter 300%
</TABLE>
S-8
<PAGE> 13
The "Class A-10 Lockout Pro Rata
Distribution Amount" for any Payment Date
will be an amount equal to the product of
(x) a fraction, the numerator of which is
the Certificate Principal Balance of the
Class A-10 Certificates immediately prior
to such Payment Date and the denominator of
which is the aggregate Certificate
Principal Balance of all Classes of the
Class A Certificates immediately prior to
such Payment Date and (y) the Class A
Principal Distribution 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 Certificate
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 October 1997.
"Principal Remittance Amount" means as of
any Monthly Remittance Date, the sum,
without duplication, of (i) the principal
actually collected by the Servicer on the
Home Equity Loans during the related
Remittance Period, (ii) the Loan Balance of
each Home Equity Loan that was repurchased
from the Trust during the related
Remittance Period, (iii) any Substitution
Amount relating to principal delivered by
the Seller in connection with a
substitution of a Home Equity Loan during
the related Remittance Period, and (iv) all
Net Liquidation Proceeds actually collected
by the Servicer during the related
Remittance Period (to the extent such Net
Liquidation Proceeds related to principal).
A "Trigger Event" has occurred with respect
to a Payment Date if the percentage
obtained by dividing (x) the principal
amount of 60+ Day Delinquent Loans by (y)
the aggregate outstanding Loan Balance of
the Home Equity Loans as of the last day of
the immediately preceding Remittance Period
equals or exceeds one-half of the Senior
Enhancement Percentage.
"Stepdown Date" means the earlier to occur
of (i) the later to occur of (x) the
Payment Date in October 2000 and (y) the
first Payment Date on which the Senior
Enhancement Percentage (after taking into
account distributions of principal on such
Payment Date) is greater than or equal to
the Senior Specified Enhancement Percentage
and (ii) the Payment Date on which the
Certificate Principal Balance of the Class
A Certificates has been reduced to zero.
"Class A Principal Distribution Amount"
means as of any Payment Date (a) prior to
the Stepdown Date or with respect to which
a Trigger Event is in effect, 100% of the
Principal Distribution Amount and (b) on or
after the Stepdown Date and as long as a
Trigger Event is not in effect the excess
of (x) the aggregate Certificate Principal
Balance of the Class A Certificates
immediately prior to such Payment Date over
(y) the lesser of (A) the product of (i)
69.50% and (ii) the outstanding Loan
Balance of the Home Equity Loans as of the
last day of the related Remittance Period
and (B) the aggregate outstanding Loan
Balance as of the last day of the related
Remittance Period minus $4,875,000.
S-9
<PAGE> 14
"Class M-1 Principal Distribution Amount"
means as of any Payment Date on or after
the Stepdown Date and as long as a Trigger
Event is not in effect, the excess of (x)
the sum of (i) the aggregate Certificate
Principal Balance of the Class A
Certificates (after taking into account the
payment of the Class A Principal
Distribution Amount on such Payment Date)
and (ii) the Class M-1 Certificate
Principal Balance immediately prior to such
Payment Date over (y) the lesser of (A) the
product of (i) 77.50% and (ii) the
outstanding Loan Balance of the Home Equity
Loans as of the last day of the related
Remittance Period and (B) the aggregate
outstanding Loan Balance as of the last day
of the related Remittance Period minus
$4,875,000.
"Class M-2 Principal Distribution Amount"
means as of any Payment Date on or after
the Stepdown Date and as long as a Trigger
Event is not in effect, the excess of (x)
the sum of (i) the aggregate Certificate
Principal Balance of the Class A
Certificates (after taking into account the
payment of the Class A Principal
Distribution Amount on such Payment Date),
(ii) the Class M-1 Certificate Principal
Balance (after taking into account the
payment of the Class M-1 Principal
Distribution Amount on such Payment Date)
and (iii) the Class M-2 Certificate
Principal Balance immediately prior to such
Payment Date over (y) the lesser of (A) the
product of (i) 88.50% and (ii) the
outstanding aggregate Loan Balance of the
Home Equity Loans as of the last day of the
related Remittance Period and (B) the
aggregate outstanding Loan Balance as of
the last day of the related Remittance
Period minus $4,875,000.
"Class B Principal Distribution Amount"
means as of any Payment Date on or after
the Stepdown Date and as long as a Trigger
Event is not in effect, the excess of (x)
the sum of (i) the aggregate Certificate
Principal Balance of the Class A
Certificates (after taking into account the
payment of the Class A Principal
Distribution Amount on such Payment Date),
(ii) the Class M-1 Certificate Principal
Balance (after taking into account the
payment of the Class M-1 Principal
Distribution Amount on such Payment Date),
(iii) the Class M-2 Certificate Principal
Balance (after taking into account the
payment of the Class M-2 Principal
Distribution Amount on such date) and (iv)
the Class B Certificate Principal Balance
immediately prior to such Payment Date over
(y) the lesser of (A) the product of (i)
96.50% and (ii) the outstanding aggregate
Loan Balance of the Home Equity Loans as of
the last day of the related Remittance
Period and (B) the aggregate outstanding
Loan Balance as of the last day of the
related Remittance Period minus $4,875,000.
"Overcollateralization Amount" means as of
any Payment Date the difference between (x)
the Loan Balance of the Home Equity Loans
as of the last day of the immediately
preceding Remittance Period and (y) the
Aggregate Certificate Principal Balance
(after taking into account all
distributions of principal on such Payment
Date).
"Senior Enhancement Percentage" for any
Payment Date is the percentage obtained by
dividing (x) the sum of (i) the aggregate
Certificate Principal Balance of the
Subordinate Certificates and (ii) the
Overcollateralization Amount, in each case
after taking into account the distribution
of the Principal Distribution Amount on
such Payment Date by (y) the aggregate Loan
Balance of the Home Equity Loans as of the
last day of the related Remittance Period.
S-10
<PAGE> 15
"Senior Specified Enhancement Percentage"
on any date of determination thereof means
30.50%.
"Extra Principal Distribution Amount"
means, as of any Payment Date, the lesser
of (x) the Monthly Excess Interest Amount
for such Payment Date and (y) the
Overcollateralization Deficiency for such
Payment Date.
"Overcollateralization Deficiency" means,
as of any Payment Date, the excess, if any,
of (x) the Targeted Overcollateralization
Amount for such Payment Date over (y) the
Overcollateralization Amount for such
Payment Date, calculated for this purpose
after taking into account the reduction on
such Payment Date of the Aggregate
Certificate Principal Balance resulting
from the distribution of the Principal
Remittance Amount (but not the Extra
Principal Distribution Amount) on such
Payment Date, but prior to taking into
account any Applied Realized Loss Amount on
such Payment Date.
"Overcollateralization Release Amount"
means, as of any Payment Date, the lesser
of (x) the Principal Remittance Amount for
such Payment Date and (y) the excess of (i)
the Overcollateralization Amount for such
Payment Date, assuming that 100% of the
Principal Remittance Amount is applied on
such Payment Date to the payment of
principal on the Offered Certificates and
(ii) the Targeted Overcollateralization
Amount for such Payment Date.
Notwithstanding the foregoing, the
Overcollateralization Release Amount will
be $0 on any Payment Date if certain loss
and delinquency events are continuing on
such Payment Date as described more fully
in the Pooling and Servicing Agreement.
"Targeted Overcollateralization Amount"
means, as of any Payment Date, (x) prior to
the Stepdown Date, $17,062,500 and (y) on
and after the Stepdown Date, the greater of
(i) 3.50% of the aggregate outstanding Loan
Balance of the Home Equity Loans as of the
last day of the related Remittance Period
and (ii) $4,875,000.
"Preference Amount" means any amount
previously distributed to an Owner on an
Offered Certificate that is recoverable and
sought to be recovered as a voidable
preference by a trustee in bankruptcy under
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.
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 Owners of the Offered
Certificates consists of the subordination
of the Subordinate Certificates to the
Class A Certificates, the further
subordination within the Subordinate
Certificates, the priority of application
of Realized Losses and the application of
Monthly Excess Cashflow Amounts.
Subordination of Subordinate Certificates.
The rights of the Owners of the Subordinate
Certificates and the Class R Certificates
to receive distributions with respect to
the Home Equity Loans will be subordinated,
to the extent described herein, to such
rights of the Owners of the Class A
Certificates. This subordination
S-11
<PAGE> 16
is intended to enhance the likelihood of
regular receipt by the Owners of the Class
A Certificates of the full amount of their
scheduled monthly payment of interest and
principal and to afford such Owners
protection against Realized Losses.
The protection afforded to the Owners of
the Class A Certificates by means of the
subordination of the Subordinate
Certificates and the Class R Certificates
will be accomplished by the preferential
right of the Owners of the Class A
Certificates to receive, prior to any
distribution being made on a Payment Date
in respect of the Subordinate Certificates
and the Class R Certificates, the amounts
of interest due them and principal
available for distribution on such Payment
Date, and, if necessary, by the right of
the Owners of the Class A Certificates to
receive future distributions of amounts
that would otherwise be payable to the
Owners of the Subordinate Certificates and
the Class R Certificates.
In addition, the rights of the Owners of
the Class M-2, Class B and Class R
Certificates to receive distributions will
be subordinated, to the extent described
herein, to such rights of the Owners of the
Class A and Class M-1 Certificates. This
subordination is intended to enhance the
likelihood of regular receipt by the Owners
of the Class A and Class M-1 Certificates
of the amount of interest due them and
principal available for distribution and to
afford such Owners with protection against
Realized Losses.
The rights of the Owners of the Class B and
Class R Certificates to receive
distributions will be subordinated in the
same manner to such rights of the Owners of
the Class A, Class M-1 and Class M-2
Certificates and the rights of Owners of
the Class R Certificates to receive
distributions will be subordinated in the
same manner to such rights of the Owners of
the Offered Certificates.
Application of Realized Losses. The
Pooling and Servicing Agreement provides
that if a Home Equity Loan becomes a
Liquidated Loan during a Remittance Period,
the Net Liquidation Proceeds relating
thereto and allocated to principal may be
less than the Loan Balance of such Home
Equity Loan. The amount of such
insufficiency is a "Realized Loss".
Realized Losses will, in effect, be
absorbed first, by the Class R Certificates
(both through the application of the
Monthly Excess Interest Amount to fund such
deficiency and through a reduction in the
Overcollateralization Amount), second, by
the Owners of the Class B Certificates,
third, by the Owners of the Class M-2
Certificates, and, fourth, by the Owners of
the Class M-1 Certificates.
To the extent that the pool of Home Equity
Loans experiences Realized Losses, such
Realized Losses will reduce the aggregate
outstanding Loan Balance of the Home Equity
Loans (i.e, a reduction in the collateral
balance will occur). Since the
Overcollateralization Amount is the excess,
if any, of the collateral balance over the
Aggregate Certificate Principal Balance,
Realized Losses will in the first instance
reduce the Overcollateralization Amount.
The Pooling and Servicing Agreement
requires that the Overcollateralization
Amount be initially increased to, and
thereafter maintained at, the Targeted
Overcollateralization Amount. This
increase and subsequent maintenance is
S-12
<PAGE> 17
intended to be accomplished by the
application of Monthly Excess Interest
Amounts to the funding of the Extra
Principal Distribution Amount. Such Extra
Principal Distribution Amounts, since they
are funded from interest collections on the
Home Equity Loans but are distributed as
principal on the Offered Certificates, will
increase the Overcollateralization Amount.
If, on any Payment Date after taking into
account all Realized Losses experienced
during the prior Remittance Period and
after taking into account the distribution
of principal (including the Extra Principal
Distribution Amount) with respect to the
Offered Certificates on such Payment Date,
the Aggregate Certificate Principal Balance
exceeds the aggregate Loan Balance of the
Home Equity Loans as of the end of the
related Remittance Period (i.e., if the
level of overcollateralization is
negative), then the Certificate Principal
Balance of the Subordinate Certificates
will be reduced (in effect, "written down")
such that the level of
overcollateralization is zero, rather than
negative. Such a negative level of
overcollateralization is an "Applied
Realized Loss Amount", which is applied as
a reduction in the Certificate Principal
Balance of the Subordinate Certificates in
reverse order of seniority (i.e., first
against the Class B Certificate Principal
Balance until it is reduced to zero, then
against the Class M-2 Certificate Principal
Balance until it is reduced to zero and
then against the Class M-1 Certificate
Principal Balance until it is reduced to
zero). The Pooling and Servicing Agreement
does not permit the "write down" of the
Certificate Principal Balance of any Class
A Certificate.
Once the Certificate Principal Balance of a
Class of Subordinate Certificates has been
"written down," the amount of such write
down will no longer bear interest, nor will
such amount thereafter be "reinstated" or
"written up," although the amount of such
"write down" may, on future Payment Dates
be paid to Owners of the Subordinate
Certificates which experienced the "write
down", in direct order of seniority (i.e.,
first, the Class M-1 Certificates, second,
the Class M-2 Certificates and, third, the
Class B Certificates). The source of
funding of such payments will be the
amount, if any, of the Monthly Excess
Cashflow Amount remaining on such future
Payment Dates after the funding of the
Extra Principal Distribution Amount and
after the payment of Interest Carry Forward
Amounts with respect to the Subordinate
Certificates on such Payment Date.
Application of Monthly Excess Cashflow
Amounts. The weighted average net Coupon
Rate for the Home Equity Loans is expected
to be generally higher than the weighted
average of the Pass-Through Rates on the
Offered Certificates, thus generating
certain excess interest collections which,
in the absence of losses will not be
necessary to fund interest distributions on
the Offered Certificates. The Pooling and
Servicing Agreement provides that this
excess interest be applied to the extent
available, to make accelerated payments of
principal (i.e., the Extra Principal
Distribution Amount) to the Class or
Classes then entitled to receive
distributions of principal; such
application will cause the Aggregate
Certificate Principal Balance to amortize
more rapidly than the pool of Home Equity
Loans, resulting in overcollateralization.
The required level of overcollateralization
for any Payment Date is the Targeted
Overcollateralization Amount for such
Payment Date. The Targeted
Overcollateralization Amount is initially
(i.e., prior to the Stepdown Date)
S-13
<PAGE> 18
$17,062,500. Since the actual level of the
Overcollateralization Amount is $0 as of
the Closing Date, in the early months of
the transaction, subject to the
availability of Monthly Excess Interest
Amounts, Extra Principal Distribution
Amounts will be paid, with the result that
the Overcollateralization Amount will
increase to the level of the Targeted
Overcollateralization Amount.
If, once the Targeted Overcollateralization
Amount has been reached, Realized Losses
occur, such Realized Losses will result in
an Overcollateralization Deficiency (since
such Realized Losses reduce the Loan
Balance of the Home Equity Loans without
giving rise to a corresponding reduction of
the Aggregate Certificate Principal
Balance). The cashflow priorities of the
Trust require that, in this situation, an
Extra Principal Distribution Amount be paid
(subject to the availability of any Monthly
Excess Interest Amount) for the purpose of
re- establishing the Overcollateralization
Amount at the then-required Targeted
Overcollateralization Amount.
On and after the Stepdown Date, the
Targeted Overcollateralization Amount is
permitted to decrease or "step-down" below
the $17,062,500 level to a level equal to
3.50% of the then current aggregate
outstanding Loan Balance (subject to a
floor of $4,875,000). If the Targeted
Overcollateralization Amount is permitted
to "step- down" on a Payment Date, the
Pooling and Servicing Agreement permits a
portion of the Principal Remittance Amount
for such Payment Date not to be passed
through as a distribution of principal on
such Payment Date. This has the effect of
decelerating the amortization of the
Offered Certificates relative to the
aggregate outstanding Loan Balance of the
Home Equity Loans, thereby reducing the
actual level of the Overcollateralization
Amount to the new, lower Targeted
Overcollateralization Amount. This portion
of the Principal Remittance Amount not
distributed as principal on the
Certificates therefore releases
overcollateralization from the Trust. The
amount of such releases are the
Overcollateralization Release Amounts.
On any Payment Date, the sum of the Monthly
Excess Interest Amount and the
Overcollateralization Release Amount is the
" Monthly Excess Cashflow Amount", which is
required to be applied in the following
order of priority on such Payment Date:
(1) to fund the Extra Principal
Distribution Amount for such
Payment Date;
(2) to fund the Class M-1
Interest Carry Forward Amount,
if any;
(3) to fund the Class M-1 Realized
Loss Amortization Amount for
such Payment Date;
(4) to fund the Class M-2 Interest
Carry Forward Amount, if any;
(5) to fund the Class M-2 Realized
Loss Amortization Amount for such
Payment Date;
(6) to fund the Class B Interest Carry
Forward Amount, if any;
S-14
<PAGE> 19
(7) to fund the Class B Realized Loss
Amortization Amount for such
Payment Date;
(8) to the Servicer to the extent of
any unreimbursed Delinquency
Advances or Servicing Advances;
(9) to the Trustee for reimbursement of
expenses of the Trustee that are
not Trustee Reimburseable Expenses;
and
(10) to fund a distribution to Owners of
the Class R Certificates.
NATURE OF CLASS A-11IO
CERTIFICATES: General Character as an Interest-Only
Security. As the owners of interest-only
strip securities, the Owners of the Class
A-11IO Certificates will be entitled to
receive monthly distributions only of
interest, as described herein. Because
they will not receive any distributions of
principal, the Owners of the Class A-11IO
Certificates will be affected by
prepayments, liquidations and other
dispositions (including optional
redemptions described herein) of the Home
Equity Loans to a greater degree than will
the Owners of the other Classes of Offered
Certificates. In addition, the Notional
Principal Amount applicable to interest
calculations on the Class A-11IO
Certificates is (x) through the Payment
Date in March, 2000, the Class A-10
Certificate Principal Balance and (y)
thereafter, zero. Since the Class A-10
Certificates will amortize in accordance
with the distribution of the Class A- 10
Lockout Distribution Amount, the
performance of the Class A-11IO
Certificates is intended to be more stable
than if such Notional Principal Amount were
calculated using the underlying Home Equity
Loans directly. However, there can be no
assurance that such will be the case.
Because there are 14,369 Home Equity Loans
as of the Cut-Off Date, the prepayment
experience of any one Home Equity Loan will
not be material to an investor's overall
return.
In general, losses due to liquidations,
repurchases by the Servicer and other
dispositions of Home Equity Loans from the
Trust will have the same effect on the
Owners of the Class A-11IO Certificates as
do prepayments of principal and are
collectively referred to as "Prepayments."
Because the yield to Owners of the Class
A-11IO Certificates is more sensitive to
rates of prepayment, it is advisable for
potential investors in the Class A-11IO
Certificates to consider carefully, and to
make their own evaluation of, the effect of
any particular assumption regarding the
rates and the timing of prepayments. In
general, when interest rates decline,
prepayments in a pool of receivables such
as the Home Equity Loans will increase as
borrowers seek to refinance at lower rates.
This will have the effect of reducing the
future stream of payments available to an
owner of an interest-only security based on
such receivables pool, thus adversely
affecting such investor's yield.
Conversely, when interest rates increase,
prepayments will tend to decrease (because
attractive refinancing opportunities are
not available) and the future stream of
payments available to such an owner of an
interest-only security may not decline as
rapidly as originally anticipated, thus
positively affecting such investor's yield.
See "Prepayment and Yield Considerations --
Yield Sensitivity of the Class A-11IO
Certificates" herein for other factors
which may also influence prepayment rates.
S-15
<PAGE> 20
Applicability of Credit Enhancement to the
Class A-11IO Certificates. As described
above under "Credit Enhancement," the Trust
includes provisions which subordinate the
distributions on the Subordinate
Certificates and the Class R Certificates
for each Payment Date for the purpose,
inter alia, of funding the full amounts due
on each Class of the Class A Certificates,
including the Class A-11IO Certificates, on
each Payment Date.
In general, the protection afforded by such
subordination and overcollateralization
features is for credit risk and not for
prepayment risk. These features do not
guarantee or insure that any particular
rate of prepayment is experienced by the
Trust. If the entire pool of Home Equity
Loans were to prepay in the initial month,
with the result that the Owners of the
Class A-11IO Certificates receive only a
single month's interest and thus suffer a
nearly complete loss on their investments,
no amounts would be available from the
overcollateralization feature to mitigate
such loss.
Accrual of "Original Issue Discount." The
Class A-11IO Certificates will be issued
with "original issue discount" within the
meaning of the Code. As a result, in
certain rapid prepayment environments the
effect of the rules governing the accrual
of original issue discount may require
Owners of the Class A-11IO Certificates to
accrue original issue discount at a rate in
excess of the rate at which distributions
are received by such Owners. See "Certain
Federal Income Tax Consequences" herein and
in the Prospectus.
PRE-FUNDING ACCOUNT: On the Closing Date, an aggregate cash
amount (the "Pre-Funded Amount") of
$146,551,159.76 (or such amount as may be
necessary to ensure that the total
aggregate Loan Balance of the Home Equity
Loans will total approximately
$975,000,000.00 as of the Cut-Off Date)
will be deposited in the Pre-Funding
Account which account will be in the name
of, and maintained by, the Trustee on
behalf of the Trust. During the period
(the "Funding Period") from the Closing
Date until September 30, 1997, the
Pre-Funded Amount will be maintained in the
Pre-Funding Account. The Pre-Funded Amount
will be reduced during the Funding Period
by the amount thereof used to purchase
Subsequent Home Equity Loans in accordance
with the Pooling and Servicing Agreement.
Subsequent Home Equity Loans purchased on
any date (each, a "Subsequent Transfer
Date") must satisfy the criteria set forth
in the Pooling and Servicing Agreement and
will be selected from a specified pool of
home equity loans owned by the Seller on
the Closing Date. See "The Home Equity
Loan Pool-- Conveyance of Subsequent Home
Equity Loans" herein. The Depositor
expects to deliver all of the Subsequent
Home Equity Loans on the Closing Date. Any
Pre-Funded Amount remaining at the end of
the Funding Period will be distributed to
the Owners of the Class A Certificates
(other than the Class A-11IO Certificates)
then entitled to receive payments of
principal on the Payment Date in October
1997, thus resulting in a partial principal
prepayment of such Class A Certificates as
specified herein under "Description of the
Offered Certificates-- Distributions." All
interest and other investment earnings on
amounts on deposit in the Pre-Funding
Account will be deposited in the
Capitalized Interest Account. The
Pre-Funding Account will not be an asset of
either the Lower-Tier REMIC or the
Upper-Tier REMIC.
S-16
<PAGE> 21
CAPITALIZED INTEREST
ACCOUNT: On the Closing Date, cash will be deposited
in a trust account (the "Capitalized
Interest Account") in the name of, and
maintained by, the Trustee on behalf of the
Trust. During the Funding Period, the
amount on deposit in the Capitalized
Interest Account, including reinvestment
income thereon, will be used by the Trustee
to fund the excess, if any, of (i) the
amount of interest accruing at the weighted
average of the Pass-Through Rates of the
Offered Certificates on the amount by which
the Aggregate Certificate Principal Balance
exceeds the aggregate Loan Balance of the
Home Equity Loans over (ii) the amount of
any reinvestment income on monies on
deposit in the Pre-Funding Account. Such
amounts on deposit will be so applied by
the Trustee on the initial Payment Date to
fund any such excess. Any amounts
remaining in the Capitalized Interest
Account not needed for such purpose will be
paid to the depositor of such funds at the
end of the Funding Period. The Capitalized
Interest Account will not be an asset of
either the Lower-Tier REMIC or the
Upper-Tier REMIC.
MANDATORY PREPAYMENT OF
CERTIFICATES: It is intended that the principal amount of
Subsequent Home Equity Loans sold to the
Trust will require application of
substantially all of the original
Pre-Funded Amount and it is not intended
that there will be any material amount of
principal prepaid to the Owners of the
Class A Certificates from the Pre-Funding
Account. In the event that the Depositor
is unable to sell Subsequent Home Equity
Loans to the Trust during the Funding
Period in an amount equal to the Pre-Funded
Amount, principal prepayments to Owners of
the Class or Classes of Class A
Certificates (other than the Class A-11IO
Certificates) then entitled to receive
payments of principal will occur on the
Payment Date in October 1997 in an amount
equal to the Pre-Funded Amount remaining at
the end of the Funding Period.
BOOK-ENTRY REGISTRATION OF THE
OFFERED CERTIFICATES: Each Class of the Offered Certificates will
initially be issued in book-entry form.
Persons acquiring beneficial ownership
interests in such Offered Certificates
("Beneficial Owners") may elect to 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 Offered
Certificates are Book-Entry Certificates
(as defined herein), such Certificates will
be evidenced by one or more Certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC 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"), on
the relevant depositaries of Cedel and
Euroclear, respectively, and each a
participating member of DTC or one of the
European Depositaries. The Offered
Certificates will initially be registered
in the name of Cede. The interests of the
Owners of such Certificates will be
represented by book-entries on the records
of DTC and participating members thereof.
No Beneficial Owner will be entitled to
receive a definitive certificate
representing such person's interest, except
in the event that Definitive Certificates
(as defined herein) are issued under the
limited circumstances described herein.
All references in this Prospectus
Supplement to any Offered Certificates
reflect the rights of Beneficial Owners
only
S-17
<PAGE> 22
as such rights may be exercised through DTC
and its participating organizations for so
long as such Offered Certificates are held
by DTC. See "Description of the Offered
Certificates -- Book-Entry Registration of
the Offered Certificates" herein, and
"Description of the
Certificates--Book-Entry Registration" in
the Prospectus.
OPTIONAL TERMINATION: The Owners of the Class R Certificates will
have the right to purchase all the Home
Equity Loans on any Monthly Remittance Date
when the aggregate Loan Balance of the Home
Equity Loans has declined to 10% or less of
the sum of (x) the Original Aggregate Loan
Balance plus (y) the original Pre-Funded
Amount (such sum, the "Maximum Collateral
Amount"). See "The Pooling and Servicing
Agreement--Optional Termination" herein.
RATINGS: It is a condition of issuance of the
Offered Certificates that each Class of the
Offered Certificates receive at least the
ratings set out below from Moody's
Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Services, a
division of the McGraw-Hill Companies
("Standard & Poor's") and Fitch Investors
Service, L.P. ("Fitch"):
<TABLE>
<CAPTION>
Class Moody's Standard & Poor's Fitch
----- ------- ----------------- -----
<S> <C> <C> <C>
A-1 through A-10 Aaa AAA AAA
A-11IO Aaa AAAr AAA
M-1 Aa2 AA AA+
M-2 A2 A A+
B Baa3 BBB- BBB
</TABLE>
Moody's, Standard & Poor's and Fitch are
referred to herein collectively as the
"Rating Agencies." A security rating is
not a recommendation to buy, sell or hold
securities, and may be subject to revision
or withdrawal at any time by the assigning
entity. See "Ratings" herein.
Ratings of the Class A-11IO Certificates.
Ratings which are assigned to securities
such as the Class A-11IO Certificates
generally evaluate the ability of the
issuer (i.e., the Trust) to make payments,
as required by such securities. The
amounts distributable on the Class A-11IO
Certificates consist only of interest. In
general, the ratings of such Certificates
address only credit risk and not prepayment
risk. See "Ratings" and "Summary of Terms
- Nature of Class A-11IO Certificates"
herein.
The "r" symbol is appended to the rating by
Standard & Poor's of the Class A- 11IO
Certificates because they are interest-only
Certificates that Standard & Poor believes
may experience high volatility or high
variability in expected returns due to
non-credit risks created by the term of
such Certificates. The absence of an "r"
symbol in the ratings of the other Classes
of Offered Certificates should not be taken
as an indication that such Certificates
will experience no volatility or
variability in total return. See "Ratings"
and "Summary of Terms-Nature of Class
A-11IO Certificates" herein.
FEDERAL TAX ASPECTS: For federal income tax purposes, the Trust,
exclusive of the Pre-Funding Account and
the Capitalized Interest Account (such
accounts collectively, the "Non-REMIC
S-18
<PAGE> 23
Accounts"), created by the Pooling and
Servicing Agreement will consist of two
segregated asset pools (the "Upper-Tier
REMIC" and the "Lower-Tier REMIC") with
respect to which elections will be made to
treat each as a separate "real estate
mortgage investment conduit" ("REMIC").
Each Class of the Offered Certificates will
be designated as a "regular interest" in
the Upper-Tier REMIC. See "Certain Federal
Income Tax Consequences" herein.
Owners of the Offered Certificates,
including Owners that generally report
income on the cash method of accounting,
will be required to include interest on the
Offered Certificates in income in
accordance with the accrual method of
accounting. In addition, the Class A-11IO
Certificates will, and each other Class of
the Offered Certificates may, be considered
to have been issued with original issue
discount or at a premium. Any such
original issue discount will be includible
in the income of the Owner as it accrues
under a method taking into account the
compounding of interest and using the
Prepayment Assumption described herein.
Premium may be deductible by the Owner
either as it accrues or when principal is
received. No representation is made as to
whether the Home Equity Loans will prepay
at the assumed rate, or any other rate.
See "Prepayment and Yield Considerations"
herein. In general, as a result of the
qualification of the Offered Certificates
as regular interests in the Upper-Tier
REMIC, the Offered Certificates will be
treated as "regular . . . interest(s) in a
REMIC" under Section 7701(a)(19)(C) of the
Internal Revenue Code of 1986, as amended
(the "Code"), and "real estate assets"
under Section 856(c) of the Code in the
same proportion that the assets in the
Upper-Tier REMIC consist of qualifying
assets under such sections. In addition,
interest on the Offered Certificates will
be treated as "interest on obligations
secured by mortgages on real property"
under Section 856(c) of the Code to the
extent that such Offered Certificates are
treated as "real estate assets" under
Section 856(c) of the Code. For further
information regarding the federal income
tax consequences of investing in the
Offered Certificates, see "Federal Income
Tax Consequences" herein.
ERISA CONSIDERATIONS: Subject to the considerations discussed
under "ERISA Considerations" herein, the
Class A Certificates may be purchased by
employee benefit plans that are subject to
ERISA. THE SUBORDINATE CERTIFICATES MAY
NOT BE PURCHASED BY EMPLOYEE BENEFIT PLANS
THAT ARE SUBJECT TO ERISA EXCEPT AS
PROVIDED HEREIN. See "ERISA
Considerations" herein and in the
Prospectus.
LEGAL INVESTMENT
CONSIDERATIONS: The Offered Certificates will not
constitute "mortgage related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA").
Accordingly, many institutions with legal
authority to invest in comparably rated
securities based on first home equity loans
may not be legally authorized to invest in
the Offered Certificates.
S-19
<PAGE> 24
RISK FACTORS
Prospective investors in the Offered Certificates should consider,
among other things, the following risk factors (as well as the factors set
forth under "Risk Factors" in the Prospectus) in connection with the purchase
of the Offered Certificates.
SENSITIVITY TO PREPAYMENTS. The Home Equity Loans may be prepaid by
the related Mortgagors in whole or in part, at any time without payment of any
prepayment fee or penalty. However, approximately 70.57% 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. The rate of
prepayments on fixed rate home equity loans is sensitive to prevailing interest
rates. Generally, if prevailing interest rates fall significantly below the
interest rates on the Home Equity Loans, the Home Equity Loans are likely to be
subject to higher prepayment rates than if prevailing rates remain at or above
the interest rates on such Home Equity Loans. Conversely, if prevailing
interest rates rise significantly above the interest rates on the Home Equity
Loans, the rate of prepayments is likely to decrease.
The average life of each Class of Offered Certificates, and, if
purchased at other than par, the yields realized by Owners of the Offered
Certificates will be sensitive to levels of payment (including prepayments of
the Home Equity Loans (the "Prepayments")) on the Home Equity Loans. In
general, the yield on a Class of Offered Certificates that is purchased at a
premium from the outstanding principal amount thereof will be adversely
affected by a higher than anticipated level of Prepayments and enhanced by a
lower than anticipated level. Conversely, the yield on a Class of Offered
Certificates that is purchased at a discount from the outstanding principal
amount thereof will be enhanced by a higher than anticipated level of
Prepayments and adversely affected by a lower than anticipated level. The
yields realized by Owners of the Class A-11IO Certificates will be more
sensitive to the rate of prepayment on the Home Equity Loans. Because amounts
distributable to the Owners of the Class A-11IO Certificates consist entirely
of interest, the yield to maturity of the Class A-11IO Certificates will be
sensitive to the repurchase, prepayment and default experience of the Home
Equity Loans, and prospective investors should fully consider the associated
risks, including the risk that such investors may not fully recover their
initial investment. See "Prepayment and Yield Considerations" herein.
TRUST ASSETS ARE THE ONLY SOURCE OF CREDIT ENHANCEMENT. The
subordination of the Subordinate Certificates to the Class A Certificates, the
further subordination within the Subordinate Certificates, and the
overcollateralization provisions of the Trust are the sole sources of
protection against losses on the Home Equity Loans and other shortfalls in
available funds. If losses or other shortfalls exceed the protection afforded
by such mechanism, Owners of the Offered Certificates will bear their
proportionate share of such losses and shortfalls. The Certificates represent
interests only in the Trust and do not represent interests in, or obligations
of the Depositor, the Seller, the Servicer, the Trustee or any of their
respective affiliates. The assets of the Trust are the sole source of funds
for distributions on the Certificates.
SUBORDINATION-LIMITED PROTECTION AFFORDED TO CLASS A CERTIFICATES.
The rights of the Owners of the Class M-1 Certificates to receive distributions
with respect to the Home Equity Loans will be subordinate to the rights of the
holders of the Class A Certificates to receive such distributions, the rights
of Owners of the Class M-2 Certificates to receive distributions with respect
to the Home Equity Loans will be subordinate to the rights of the Owners of the
Class A and the Class M-1 Certificates to receive such distributions and the
rights of the Owners of the Class B Certificates to receive distributions with
respect to the Home Equity Loans will be subordinate to the rights of the
Owners of the Class A, Class M-1 and Class M-2 Certificates to receive such
distributions. The subordination of the Subordinate Certificates relative to
the Class A Certificates (and of the more lower-ranking Classes of the
Subordinate Certificates to the higher-ranking Classes thereof) is intended to
enhance the likelihood of regular receipt by the Owners of the Class A
Certificates (and such higher-ranking Classes) of the full amount of the
monthly distributions allocable to them, and to afford such Owners protection
against losses.
SUBORDINATION-ALLOCATION OF LOSSES TO SUBORDINATE CERTIFICATES. The
rights of the Owners of each Class of Subordinate Certificates to receive
distributions of principal with respect to the Home Equity Loans will be
S-20
<PAGE> 25
subordinate to the rights of the Owners of the Class A Certificates to receive
such distributions and to the rights of the Owners of each higher-ranking Class
of Subordinate Certificates to receive such distributions. See "Credit
Enhancement-Subordination of Subordinate Certificates" herein.
The yields to maturity on the Mezzanine Certificates and Class B
Certificates will be progressively more sensitive to the rate, timing and
severity of defaults on the Home Equity Loans. Investors should fully consider
the risks associated with an investment in the Mezzanine Certificates or Class
B Certificates, including the possibility that such investors may not fully
recover their initial investment as a result of Realized Losses on the Home
Equity Loans. See "Credit Enhancement-Application of Realized Losses".
The Subordinate Certificates will not be entitled to any principal
distributions until at least the Stepdown Date and during the continuation of a
Trigger Event (unless the aggregate Certificate Principal Balance of the Class
A Certificates has been reduced to zero.) As a result, the weighted average
lives of the Subordinate Certificates will be longer than would be the case if
distributions of principal were to be allocated on a pro rata basis among the
Class A and Subordinate Certificates. As a result of the longer weighted
average lives of the Subordinate Certificates, the Owners of such Certificates
have a greater risk of suffering a loss on their investments.
NATURE OF COLLATERAL; JUNIOR LIENS. Because 12.19% of the aggregate
Loan Balance of the Initial Home Equity Loans are secured by second liens
subordinate to the rights of the mortgagee or beneficiary under the related
first mortgage or deed of trust, the proceeds from any liquidation, insurance
or condemnation proceedings with respect to such Home Equity Loans will be
available to satisfy the outstanding balance of a Home Equity Loan only to the
extent that the claims of such first mortgagee or beneficiary have been
satisfied in full, including any related foreclosure costs. In addition, a
second mortgagee may not foreclose on the property securing a second mortgage
unless it forecloses subject to the first mortgage, in which case it must
either pay the entire amount due on the first mortgage to the first mortgagee
at or prior to the foreclosure sale or undertake the obligation to make
payments on the first mortgage in the event the mortgagor is in default
thereunder. In servicing second mortgages in its portfolio, it is generally
the Servicer's practice to satisfy the first mortgage at or prior to the
foreclosure sale. The Servicer may also advance funds to keep the first
mortgage current until such time as the Servicer satisfies the first mortgage.
The Trust will have no source of funds (and may not be permitted under the
REMIC provisions of the Code) to satisfy the first mortgage or make payments
due to the first mortgagee. The Servicer generally will be required to advance
such amounts in accordance with the Pooling and Servicing Agreement. See "The
Pooling and Servicing Agreement--Servicing and Sub-Servicing" herein.
An overall decline in the residential real estate market, the general
condition of a Property, or other factors, could adversely affect the values of
the Properties such that the outstanding balances of the Home Equity Loans,
together with any senior liens on the Properties, equal or exceed the value of
the Properties. A decline in the value of a Property would affect the interest
of the Trust in the Property before having any effect on the interest of the
related first mortgagee, and could cause the Trust's interest in the Property
to be extinguished. If such a decline occurs, the actual rates of
delinquencies, foreclosures and losses on the Home Equity Loans could be higher
than those currently experienced in the mortgage lending industry in general.
In addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal and interest on the Home Equity Loans and, accordingly,
the actual rates of delinquencies, foreclosures and losses with respect to the
Trust.
THE SUBSEQUENT HOME EQUITY LOANS AND THE PRE-FUNDING ACCOUNT. Each
Subsequent Home Equity Loan will be selected from a pool of home equity loans
owned by the Seller on the Closing Date. In addition, any conveyance of
Subsequent Home Equity Loans is subject to the following conditions, among
others (i) each such Subsequent Home Equity Loan must satisfy the
representations and warranties specified in the agreement pursuant to which
such Subsequent Home Equity Loans are transferred to the Trust (each, a
"Subsequent Transfer Agreement") and in the Pooling and Servicing Agreement;
(ii) the Seller will not select such Subsequent Home Equity Loans in a manner
adverse to the interest of the Owners of the Offered Certificates; (iii) the
Seller will deliver certain opinions of counsel with respect to the validity of
the conveyance of such Subsequent Home Equity Loans; (iv) each Subsequent Home
Equity Loan will be a fixed rate Home Equity Loan; and (v) as of each cut-off
date (each, a "Subsequent Cut-Off Date") applicable thereto, the Home Equity
Loans at that time, including the Subsequent Home Equity Loans to be conveyed
S-21
<PAGE> 26
by the Seller as of such Subsequent Cut-Off Date, will satisfy the criteria set
forth in the Pooling and Servicing Agreement, as described herein under "The
Home Equity Loan Pool--Conveyance of Subsequent Home Equity Loans."
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Home Equity Loans by the
Trust for inclusion in the Trust by the end of the Funding Period, the Owners
of the Class or Classes of Class A Certificates (other than the Class A-11IO
Certificates) then entitled to receive payments of principal will receive a
prepayment of principal in an amount equal to the Pre-Funded Amount remaining
in the Pre-Funding Account on the Payment Date in October 1997. The Depositor
intends that the principal amount of Subsequent Home Equity Loans sold to the
Trust will require the application of substantially all amounts on deposit in
the Pre-Funding Account and that therefore there will be no material principal
prepayment to the Owners of any Class of Class A Certificates.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Home Equity
Loans may have been originated or purchased by the Seller using credit criteria
different from those which were applied to the Initial Home Equity Loans and
may be of a different credit quality. Following the transfer of Subsequent
Home Equity Loans to the Trust, it is anticipated that the aggregate
characteristics of the Home Equity Loans then held in the Trust will not vary
significantly from those of the Initial Home Equity Loans. See "The Home
Equity Loan Pool--Conveyance of Subsequent Home Equity Loans" herein.
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%
S-22
<PAGE> 27
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 Pooling and Servicing Agreement that each Home
Equity Loan was originated in compliance with all applicable laws including the
Truth-in-Lending Act, as amended.
RISK OF HIGHER DEFAULT RATES FOR HOME EQUITY LOANS WITH BALLOON
PAYMENTS. 45.37% of the aggregate Loan Balance of the Initial Home Equity
Loans as of the Cut-Off Date are "balloon loans" that provide for the payment
of the unamortized Loan Balance of such Home Equity Loan in a single payment at
maturity ("Balloon Loans"). The Balloon Loans provide for equal monthly
payments, consisting of principal and interest, generally based on a 30-year
amortization schedule, and a single payment of the remaining balance of the
Balloon Loan generally up to 15 years after origination. Amortization of a
Balloon Loan based on a scheduled period that is longer than the term of the
loan results in a remaining principal balance at maturity that is substantially
larger than the regular scheduled payments. The Seller does not have any
information regarding the default history or prepayment history of payments on
Balloon Loans. Because borrowers of Balloon Loans are required to make
substantial single payments upon maturity, it is possible that the default risk
associated with the Balloon Loans is greater than that associated with
fully-amortizing Home Equity Loans.
RISK OF INSOLVENCY. The Seller believes that its transfer of the Home
Equity Loans to the Depositor and the transfer of the Home Equity Loans by the
Depositor to the Trust constitutes a sale by the Seller to the Depositor and by
the Depositor to the Trust and, accordingly, that such Home Equity Loans will
not be part of the assets of the Seller or the Depositor in the event of the
insolvency of the Seller or the Depositor, as applicable and will not be
available to the creditors of the Seller or the Depositor, as applicable.
However, in the event of an insolvency of the Seller or the Depositor, it is
possible that a bankruptcy trustee or a creditor of the Seller or the Depositor
may argue that the transaction between the Seller and the Depositor or between
the Depositor and the Trust was a pledge of such Home Equity Loans in
connection with a borrowing by the Seller or the Depositor rather than a true
sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
On the Closing Date, the Trustee, the Seller, the Depositor and the
Rating Agencies will have received an opinion of Arter & Hadden, counsel to the
Seller and the Depositor, with respect to the true sale of the Home Equity
Loans from the Seller to the Depositor and from the Depositor to the Trustee,
in form and substance satisfactory to the Rating Agencies.
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 or certain of its subsidiaries have been in the mortgage
lending business since its formation in 1993 and the Seller and certain
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 at least 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
S-23
<PAGE> 28
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
Trust, in consideration of the net proceeds from the sale of the Offered
Certificates, which are being offered hereby. The Seller, in its capacity as
Servicer, will also service each Home Equity Loan.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement, in whole or in part, unless it shall have first obtained
confirmation in writing from the Rating Agencies that such assignment shall not
result in a downgrade or withdrawal of the ratings assigned to the Certificates
by each respective Rating Agency; provided, however, that any assignee must
meet the eligibility requirements for a successor servicer set forth in the
Pooling and Servicing Agreement.
The Servicer may enter into sub-servicing agreements (the
"Sub-Servicing Agreements") with qualified sub-servicers (the "Sub-Servicers")
with respect to the servicing of the Home Equity Loans. None of the
Sub-Servicing arrangements discharge the Servicer from its servicing
obligations. Each Sub-Servicing Agreement shall be terminated at such time as
the Servicer resigns or is removed. See "The Pooling and Servicing
Agreement--Servicing and Sub-Servicing" herein.
The Trustee, at the direction of a majority of the Owners, may remove
the Servicer, and the Servicer may resign, only in accordance with the terms of
the Pooling and Servicing Agreement. No removal or resignation shall become
effective until the Trustee or a successor servicer shall have assumed the
Servicer's responsibilities and obligations in accordance therewith. Any
collections received by the Servicer after removal or resignation shall be
endorsed by it to the Trustee and remitted directly to the Trustee.
Upon removal or resignation of the Servicer, the Trustee (x) may
solicit bids for a successor servicer as described in the Pooling and Servicing
Agreement and (y) until such time as a successor servicer is appointed pursuant
to the terms of the Pooling and Servicing Agreement, shall serve in the
capacity of Backup Servicer (the "Backup Servicer") subject to the right of the
Trustee to assign such duties to a party acceptable to the Owners of a majority
of the Offered Certificates. If the Trustee is unable to obtain a qualifying
bid and is prevented by law from acting as servicer, the Trustee will be
required to appoint, or petition a court of competent jurisdiction to appoint,
an eligible successor. Any successor (including the Backup Servicer) is
required to be a housing and home finance institution, bank or mortgage
servicing institution which has been designated as an approved seller-servicer
by FannieMae or FHLMC for first and second home equity loans having equity of
not less than $5,000,000 as determined in accordance with generally accepted
accounting principles, and which shall assume all or any part of the
responsibilities, duties or liabilities of the Servicer.
The Certificates 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.
S-24
<PAGE> 29
The Seller's business consists primarily of acquiring home equity
loans. The Seller specializes in home equity loans that do not conform to the
underwriting standards of FannieMae ("FannieMae") or the Federal Home Loan
Mortgage Corporation ("FHLMC") and those standards typically applied by banks
and other primary lending institutions, particularly with regard to a
prospective borrower's credit history.
The Seller acquires and originates home equity loans through its
principal office in Tampa, Florida and full- service branch offices in
Cincinnati, Ohio, Ft. Washington, Pennsylvania, Lincoln, Rhode Island and
Cherry Hill, New Jersey. In addition, the Seller maintains retail branch
offices throughout the United States and acquires home equity loans from a
referral network of mortgage lenders and brokers, banks and other referral
sources, which may include one or more affiliates of the Seller.
Home equity loans acquired from mortgage brokers and other lenders are
pre-approved by the Seller prior to funding, or purchased in bulk after
funding, only after each loan has been re-underwritten by the Seller in
accordance with its established underwriting guidelines. These guidelines are
designed to assess the adequacy of the real property which serves as collateral
for the loan and the borrower's ability to repay the loan. The Seller
analyzes, among other factors, the equity in the collateral, the credit history
and debt-to-income ratio of the borrower, the property type, and the
characteristics of the underlying senior mortgage, if any.
The Seller purchases and originates home equity loans with different
credit characteristics depending on the credit profiles of individual
borrowers. The Seller primarily purchases and originates fixed rate loans
which fully amortize (subject to adjustments by reason of being simple interest
loans) over a period not to exceed 30 years. The Seller also acquires and
originates balloon loans, which generally provide for scheduled amortization
over 30 years, with a due date and a balloon payment generally at the end of
the fifteenth year. The principal amount of the loans purchased or originated
by the Seller generally ranges up to a maximum of $400,000. Under current
policy the Seller generally does not acquire or originate home equity loans
where the combined Loan-to-Value Ratio exceeds 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.
The Seller's home equity loan program includes: (i) a full
documentation program for salaried borrowers and (ii) a non-income
qualification program for self-employed, and in limited instances, salaried
borrowers. The borrower's total monthly debt obligations (which include
principal and interest on all other mortgages, loans, charge accounts and all
other scheduled indebtedness) generally cannot exceed 50% of the borrower's
monthly gross income. Loans to substantially all borrowers who are salaried
employees must be supported by current employment information in addition to
employment history. This information for salaried borrowers is verified based
on written confirmation from employers or one or more pay-stubs, recent W-2 tax
forms, recent tax returns or telephone confirmation from the employers. For
the Seller's non-income qualification program, proof of a two year history of
self-employment in the same business plus proof of current self-employed status
is required. The Seller typically requires lower combined Loan-to-Value Ratios
with respect to loans made to self-employed borrowers.
The Seller requires that a full appraisal of the property used as
collateral for any loan that is acquired or originated be performed in
connection with the origination of the loan. These appraisals are performed by
third party, fee-based appraisers. Appraisals of substantially all of the
Properties were completed on standard FannieMae/FHLMC forms and conform to
current FannieMae/FHLMC secondary market requirements for residential property
appraisals. Each such appraisal includes, among other things, an inspection of
the exterior of the subject property, photographs of two or more different
views of the property and data from sales within the preceding 12 months of
similar properties within the same general location as the subject property.
A credit report by an independent, nationally recognized credit
repository agency reflecting the applicant's credit history is required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records.
S-25
<PAGE> 30
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 Industry
Mortgage Company, L.P. However, because the total amount of loans originated
or purchased by IMC Mortgage Company and its subsidiaries has increased over
these periods as a result of new originations, the total amount of loans
serviced as of the end of any indicated period will include many loans which
will not have been outstanding long enough to give rise to some or all of the
indicated periods of delinquencies. In addition, the information in the tables
below has not been adjusted to eliminate the effect of the significant growth
in the size of 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. The Servicer intends to convert the computer systems
through which it services home equity loans during the fourth quarter of 1997.
The Servicer does not anticipate any delays in processing payments on the Home
Equity Loans it services. 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-26
<PAGE> 31
DELINQUENCY AND DEFAULT EXPERIENCE OF THE SERVICER'S SERVICING
PORTFOLIO OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
SIX MONTHS
ENDING JUNE 30, YEAR ENDING DECEMBER 31,
--------------------------- -------------------------------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
NUMBER OF DOLLAR NUMBER OF DOLLAR NUMBER DOLLAR NUMBER OF DOLLAR
LOANS AMOUNT LOANS AMOUNT OF LOANS AMOUNT LOANS AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio At 61,240 $4,039,526,645 35,390 $2,148,068,446 9,376 $535,797,748 1,635 $92,003,157
Delinquency
Percentage (1)
- --------------
30 - 59 days 3.570% 3.459% 3.390% 3.093% 2.613% 2.570% 1.040% 0.831%
60 - 89 days 0.905% 0.907% 1.077% 1.068% 0.672% 0.642% 0.183% 0.152%
90 + days 2.353% 2.426% 2.427% 2.616% 1.237% 1.223% 0.000% 0.000%
------ ------ ------ ------ ------ ------ ------ ------
Total 6.828% 6.792% 6.894% 6.777% 4.522% 4.435% 1.223% 0.983%
====== ====== ====== ====== ====== ====== ====== ======
Delinquency
Default
Percentage (2)
- --------------
Foreclosure 1.388% 1.545% 0.863% 1.003% 0.779% 0.749% 0.000% 0.000%
Bankruptcy(3) 1.107% 1.054% 1.064% 1.069% 0.576% 0.630% 0.122% 0.115%
Real Estate 0.305% 0.310% 0.276% 0.313% 0.117% 0.160% 0.000% 0.000%
------ ------ ------ ------ ------ ------ ------ ------
Owned
Total Default 2.800% 2.909% 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.
S-27
<PAGE> 32
LOAN LOSS EXPERIENCE ON THE SERVICER'S SERVICING
PORTFOLIO OF HOME EQUITY LOANS
<TABLE>
<CAPTION>
SIX MONTHS
ENDING
JUNE 30, YEAR ENDING DECEMBER 31,
----------- ------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Amount Outstanding(1) $2,835,905,348 $1,207,171,960 $294,251,859 $52,709,250
Gross Losses(2) $2,312,072 $1,581,695 $278,632 $0
Recoveries(3) $0 $1,727 $0 $0
Net Losses(4) $2,312,072 $1,579,968 $278,632 $0
Net Losses as a Percentage of Average 0.163% 0.131% 0.095% 0.000%
Amount 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 six months ending June 30, 1997, "Net Losses as a Percentage
of Average Amount Outstanding" was annualized by multiplying "Net
Losses" by 2 before calculating the percentage of "Average Amount
Outstanding."
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 Avenue, Tampa,
Florida 33617-2362. None of the Depositor, the Seller or the Servicer or any
of their affiliates will insure or guarantee distributions on the Certificates.
USE OF PROCEEDS
The Seller will sell the Initial Home Equity Loans to the Depositor
and the Depositor will sell the Initial Home Equity Loans to the Trust
concurrently with delivery of the Certificates. Net proceeds from the sale of
the Offered Certificates will be applied by the Depositor (i) to the purchase
of the Initial Home Equity Loans from the Seller, (ii) to pay off extensions of
credit provided by, among others, certain of the Underwriters with respect to
certain Home Equity Loans, (iii) to the deposit of the Pre-Funded Amount in the
Pre-Funding Account and (iv) to the deposit of certain amounts in the
Capitalized Interest Account. Such net proceeds less the Pre-Funded Amount and
the amount deposited in the Capitalized Interest Account will (together with
the Class R Certificates retained by the Seller) represent the purchase price
to be paid by the Trust to the Depositor and by the Depositor to the Seller for
the Home Equity Loans.
S-28
<PAGE> 33
THE HOME EQUITY LOAN POOL
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Initial Home
Equity Loans as of the Cut-Off Date. Prior to the issuance of the Offered
Certificates, Initial Home Equity Loans may be removed from the pool of Home
Equity Loans and other Initial Home Equity Loans may be substituted therefor
but not in excess of 6% of the Loan Balance of the pool of Initial Home Equity
Loans set forth herein. The Depositor believes that the information set forth
herein with respect to the pool of Initial Home Equity Loans as presently
constituted is representative of the characteristics of the pool of Home Equity
Loans as it will be constituted at the Closing Date, although certain
characteristics of the Home Equity Loans may vary. Initial Home Equity Loans
may be removed from the pool as a result of incomplete documentation or
non-compliance with representations and warranties set forth in the Pooling and
Servicing Agreement, if the Seller deems such removal necessary or appropriate.
Subsequent Home Equity Loans are intended to be purchased by the Trust from the
Depositor from time to time on or before September 30, 1997 from funds on
deposit in the Pre-Funding Account. The Depositor expects to deliver all of
the Subsequent Home Equity Loans on the Closing Date. The Initial Home Equity
Loans and the Subsequent Home Equity Loans are referred to collectively as the
Home Equity Loans. The Subsequent Home Equity Loans to be purchased by the
Trust will be sold by the Seller to the Depositor and then by the Depositor to
the Trust.
This subsection describes generally certain characteristics of the
Initial Home Equity Loans. Unless otherwise noted, all statistical percentages
in this Prospectus Supplement are measured by the aggregate principal balance
(the "Loan Balance") of the related Initial Home Equity Loans as of the Cut-Off
Date. The columns entitled "% of Initial Home Equity Loans" and "% of
Aggregate Loan Balance" in the following tables may not sum to 100% due to
rounding.
The Initial Home Equity Loans to be transferred by the Depositor to
the Trust on the Closing Date will consist of 14,369 fixed rate conventional
home equity loans evidenced by promissory notes (the "Notes") secured by first
and second lien deeds of trust, security deeds or mortgages, which are located
in 50 states and the District of Columbia. The Properties securing the Home
Equity Loans consist primarily of one- to- four family residential properties.
The Properties may be owner-occupied and non-owner occupied investment
properties (which includes second and vacation homes). All of the Initial Home
Equity Loans have a first payment date on or after April 1, 1990 and all of the
Subsequent Home Equity Loans will have been originated or purchased by the
Seller prior to the Closing Date. Initial Home Equity Loans aggregating 87.81%
of the aggregate Loan Balances of the Home Equity Loans as of the Cut-Off Date
(the "Original Aggregate Loan Balance") are secured by first liens on the
related properties, and the remaining 12.19% of Initial Home Equity Loans are
secured by second liens on the related properties.
The Loan-to-Value Ratios shown below were calculated based upon either
the appraised values of the Properties at the time of origination (the
"Appraised Values") or the sales price. In a limited number of circumstances,
and within the Seller's underwriting guidelines, the Seller has reduced the
Appraised Value of Properties where the Properties are unique, have a high
value or where the comparables are not within FannieMae guidelines. The
purpose for making these reductions is to value the Properties more
conservatively than would otherwise be the case if the appraisal were accepted
as written.
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, together with the outstanding balances of
any first mortgage, become equal to or greater than the value of the
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry.
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans was $57,655.29. The minimum and maximum Loan Balances of the
Initial Home Equity Loans as of the Cut-Off Date were $4,962.78 and
$499,660.80, respectively. The weighted average Coupon Rate of the Initial
Home Equity Loans was 11.60%; the
S-29
<PAGE> 34
Coupon Rate of the Initial Home Equity Loans ranged from 7.50% to 22.50%; the
weighted average combined Loan-to- Value Ratio of the Initial Home Equity Loans
was 76.08%; the weighted average remaining term to maturity of the Initial Home
Equity Loans was 223 months; and the remaining terms to maturity of the Initial
Home Equity Loans ranged from 30 months to 360 months. Initial Home Equity
Loans containing "balloon" payments represented not more than 45.37% of the
aggregate Loan Balance of the Initial Home Equity Loans. No Initial Home
Equity Loan will mature later than September 1, 2027.
S-30
<PAGE> 35
GEOGRAPHIC DISTRIBUTION OF PROPERTIES
The geographic distribution of the Initial Home Equity Loans by state, as of
the Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
STATE HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----- ------------------ ------------- ---------------
<S> <C> <C> <C>
Alabama 17 $ 994,050.54 0.12%
Alaska 6 273,342.58 0.03
Arizona 113 6,929,688.60 0.84
Arkansas 81 3,354,614.47 0.40
California 145 7,790,294.81 0.94
Colorado 238 15,021,021.21 1.81
Connecticut 214 13,317,127.87 1.61
Delaware 97 5,582,820.75 0.67
District of Columbia 116 7,772,742.57 0.94
Florida 1,467 81,218,849.12 9.80
Georgia 566 29,630,350.66 3.58
Hawaii 15 1,494,491.16 0.18
Idaho 53 2,121,819.36 0.26
Illinois 708 39,636,381.91 4.78
Indiana 515 23,614,008.07 2.85
Iowa 52 2,429,041.51 0.29
Kansas 42 2,077,291.13 0.25
Kentucky 104 5,130,941.46 0.62
Louisiana 72 2,949,901.07 0.36
Maine 19 970,639.71 0.12
Maryland 917 56,245,883.15 6.79
Massachusetts 237 13,426,509.73 1.62
Michigan 852 43,026,869.73 5.19
Minnesota 104 5,751,457.12 0.69
Mississippi 53 1,988,345.53 0.24
Missouri 156 7,026,932.70 0.85
Montana 11 521,950.96 0.06
Nebraska 62 3,001,770.09 0.36
Nevada 27 1,255,298.06 0.15
New Hampshire 16 850,301.75 0.10
New Jersey 682 47,829,993.67 5.77
New Mexico 82 5,658,492.72 0.68
New York 1,844 144,726,933.82 17.47
North Carolina 651 31,971,842.15 3.86
North Dakota 14 630,506.10 0.08
Ohio 773 43,917,802.44 5.30
Oklahoma 46 1,796,268.24 0.22
Oregon 99 6,482,926.91 0.78
Pennsylvania 1,126 57,519,241.08 6.94
Rhode Island 103 5,920,235.72 0.71
South Carolina 242 10,569,885.33 1.28
South Dakota 2 105,541.52 0.01
Tennessee 588 30,558,790.13 3.69
Texas 169 10,532,434.49 1.27
Utah 130 7,113,159.68 0.86
Vermont 5 274,003.07 0.03
Virginia 363 17,763,064.27 2.14
Washington 165 9,500,669.24 1.15
West Virginia 96 4,378,088.69 0.53
Wisconsin 103 5,176,309.62 0.62
Wyoming 11 617,913.98 0.07
-- ---------- ----
Total 14,369 $828,448,840.24 100.00%
====== =============== =======
</TABLE>
S-31
<PAGE> 36
COMBINED LOAN-TO-VALUE RATIOS
The original combined loan-to-value ratios as of the origination dates
of the Initial Home Equity Loans (based upon appraisals made at the time of
origination thereof) (the "Combined Loan-to-Value Ratios") as of the Cut-Off
Date were distributed as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
ORIGINAL CLTV'S HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- --------------- ------------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
5.01 to 10.00% 6 $ 88,211.23 0.01%
10.01 to 15.00 30 604,766.38 0.07
15.01 to 20.00 41 1,161,229.70 0.14
20.01 to 25.00 77 2,176,089.79 0.26
25.01 to 30.00 108 3,801,611.21 0.46
30.01 to 35.00 122 4,006,337.83 0.48
35.01 to 40.00 170 6,227,443.72 0.75
40.01 to 45.00 225 9,829,096.48 1.19
45.01 to 50.00 317 13,831,436.81 1.67
50.01 to 55.00 332 16,406,840.73 1.98
55.01 to 60.00 602 30,866,565.52 3.73
60.01 to 65.00 902 48,484,910.20 5.85
65.01 to 70.00 1,429 74,444,022.60 8.99
70.01 to 75.00 2,104 128,399,495.42 15.50
75.01 to 80.00 3,615 247,185,032.57 29.84
80.01 to 85.00 1,749 108,876,996.13 13.14
85.01 to 90.00 1,320 92,189,876.69 11.13
90.01 to 95.00 360 11,853,685.98 1.43
95.01 to 100.00 860 28,015,191.25 3.38
--- ------------- ----
Total 14,369 $828,448,840.24 100.00%
====== =============== =======
</TABLE>
CUT-OFF DATE COUPON RATES
The Coupon Rates borne by the Notes relating to the Initial Home
Equity Loans as of the Cut-Off Date were distributed as follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
COUPON RATES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------ ----------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
7.001 to 8.000% 55 $ 4,829,334.89 0.58%
8.001 to 9.000 274 26,233,521.81 3.17
9.001 to 10.000 1,391 109,764,379.97 13.25
10.001 to 11.000 2,875 203,874,663.42 24.61
11.001 to 12.000 3,501 209,284,538.55 25.26
12.001 to 13.000 2,952 151,106,292.00 18.24
13.001 to 14.000 1,852 77,882,567.15 9.40
14.001 to 15.000 1,012 32,638,478.21 3.94
15.001 to 16.000 345 9,857,460.63 1.19
16.001 to 17.000 66 1,968,826.79 0.24
17.001 to 18.000 40 873,404.54 0.11
18.001 to 19.000 4 111,100.82 0.01
19.001 to 20.000 1 19,248.31 0.00
22.001 to 23.000 1 5,023.15 0.00
- -------- ----
Total 14,369 $828,448,840.24 100.00%
====== =============== =======
</TABLE>
S-32
<PAGE> 37
CUT-OFF DATE LOAN BALANCES
The distribution of the outstanding principal amounts of the Initial
Home Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
CUT-OFF DATE NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
LOAN BALANCES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------- ----------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Up to $ 25,000.00 3,055 $ 54,632,725.01 6.59%
25,000.01 to 50,000.00 5,021 186,860,596.77 22.56
50,000.01 to 75,000.00 2,997 183,371,354.89 22.13
75,000.01 to 100,000.00 1,451 125,967,315.51 15.21
100,000.01 to 125,000.00 783 87,850,187.63 10.60
125,000.01 to 150,000.00 460 62,675,223.46 7.57
150,000.01 to 175,000.00 227 36,570,717.18 4.41
175,000.01 to 200,000.00 125 23,300,135.49 2.81
200,000.01 to 250,000.00 130 29,212,915.41 3.53
250,000.01 to 300,000.00 56 15,280,240.01 1.84
300,000.01 to 350,000.00 35 11,197,280.19 1.35
350,000.01 to 400,000.00 17 6,378,451.96 0.77
400,000.01 to 450,000.00 10 4,181,907.07 0.50
450,000.01 to 500,000.00 2 969,789.65 0.12
- ---------- ----
Total 14,369 $828,448,840.24 100.00%
====== =============== =======
</TABLE>
TYPES OF MORTGAGED PROPERTIES
The Properties securing the Initial Home Equity Loans as of the
Cut-Off Date were of the property types as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
PROPERTY TYPES HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- -------------- ----------------- ------------ --------------
<S> <C> <C> <C>
Single Family Detached 13,204 $748,091,556.13 90.30%
Two- to Four-Family 818 60,967,767.66 7.36
Condominium 158 8,800,667.62 1.06
Multi-Family 70 5,012,927.81 0.61
Townhouse 33 1,812,185.35 0.22
Single Family Attached 41 1,777,665.20 0.21
Manufactured Housing 26 970,848.60 0.12
Planned Unit Development 14 560,414.77 0.07
Mixed Use 5 454,807.11 0.05
- ---------- ----
Total 14,369 $828,448,840.24 100.00%
====== =============== =======
</TABLE>
DISTRIBUTION OF MONTHS SINCE ORIGINATION
The distribution of the number of months since the date of origination
of the Initial Home Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF MONTHS NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
SINCE ORIGINATION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ----------------- ----------------- ------------ --------------
<S> <C> <C> <C>
0 to 1 786 $ 42,586,215.47 5.14%
2 to 12 13,488 779,334,221.73 94.07
13 to 24 91 6,431,812.01 0.78
25 or more 4 96,591.03 0.01
- --------- ----
Total 14,369 $828,448,840.24 100.00%
====== =============== =======
</TABLE>
S-33
<PAGE> 38
DISTRIBUTION OF REMAINING TERM TO MATURITY
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
MONTHS REMAINING NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
TO MATURITY HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------- ----------------- ------------ ---------------
<S> <C> <C> <C>
Up to 120 683 $ 19,528,435.55 2.36%
121 to 180 9,510 520,795,201.97 62.86
181 to 240 1,908 102,817,105.33 12.41
241 to 300 47 3,089,905.73 0.37
301 to 360 2,221 182,218,191.66 22.00
----- -------------- -----
Total 14,369 $828,448,840.24 100.00%
====== =============== =======
</TABLE>
OCCUPANCY STATUS
The occupancy status of the Properties securing the Initial Home
Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ---------------- ----------------- ------------ -------------
<S> <C> <C> <C>
Owner Occupied 13,229 $765,833,799.69 92.44%
Investor Owned 1,117 60,964,808.74 7.36
Vacation/Second Home 23 1,650,231.81 0.20
-- ------------ ----
Total 14,369 $828,448,840.24 100.00%
====== =============== =======
</TABLE>
DISTRIBUTION BY LIEN POSITION
The lien position of the Initial Home Equity Loans as of the Cut-Off
Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF INITIAL AGGREGATE % OF AGGREGATE
LIEN POSITION HOME EQUITY LOANS LOAN BALANCE LOAN BALANCE
- ------------- ----------------- ------------ --------------
<S> <C> <C> <C>
First Lien 11,005 $727,492,348.26 87.81%
Second Lien 3,364 100,956,491.98 12.19
----- -------------- -----
Total 14,369 $828,448,840.24 100.00%
====== =============== =======
</TABLE>
CONVEYANCE OF SUBSEQUENT HOME EQUITY LOANS
The Pooling and Servicing Agreement permits the Trust to acquire
Subsequent Home Equity Loans in aggregate principal balance equal to the
Pre-Funded Amount. Accordingly, the statistical characteristics of the Home
Equity Loans will vary as of Subsequent Cut-Off Date upon the acquisition of
Subsequent Home Equity Loans, but the Seller does not expect such variance to
be material.
The obligation of the Trust to purchase a Subsequent Home Equity Loan
on a Subsequent Transfer Date for assignment to the Home Equity Loan Pool is
subject, among other factors, to the following requirements: (i) the ratings on
the Offered Certificates shall not have been downgraded by any Rating Agency;
(ii) such Subsequent Home Equity Loan may not be 30 or more days contractually
delinquent as of the related Subsequent Cut-Off Date (except that Subsequent
Home Equity Loans representing not more than 2% of the aggregate Loan Balance
of the Subsequent Home Equity Loans may not be more than 60 days Delinquent as
of the related Subsequent Cut-Off Date); (iii) such Subsequent Home Equity Loan
will be a fixed rate Home Equity Loan; (iv) the original term to maturity of
such Subsequent Home Equity Loan may not exceed 30 years; (v) such Subsequent
Home Equity Loan will have a Coupon
S-34
<PAGE> 39
Rate of not less than 7.50%; (vi) following the purchase of such Subsequent
Home Equity Loan by the Trust, the Home Equity Loans (including the Subsequent
Home Equity Loans) (a) will have a weighted average Coupon Rate of at least
11.50%; (b) will have a weighted average combined Loan-to-Value Ratio of not
more than 76.50%; (c) will not have Balloon Loans representing more than 48.00%
by aggregate principal balance; and, (d) will have no Home Equity Loan with a
principal balance in excess of $500,000.
INTEREST PAYMENTS ON THE HOME EQUITY LOANS
Approximately 98.50% of the Home Equity Loans provide that interest is
charged to the obligor (the "Mortgagor") thereunder, and payments are due from
such Mortgagors, as of a scheduled day of each month which is fixed at the time
of origination. Scheduled monthly payments made by the Mortgagors on the Home
Equity Loans either earlier or later than the scheduled due dates thereof will
not affect the amortization schedule or the relative application of such
payments to principal and interest.
There are a number of Home Equity Loans on which interest is charged
to the Mortgagor at the Coupon Rate on the outstanding principal balance
calculated based on the number of days elapsed between receipt of the
Mortgagor's last payment through receipt of the Mortgagor's most current
payment (such Home Equity Loans, "Date-of-Payment Loans"). Such interest is
deducted from the Mortgagor's payment amount and the remainder, if any, of the
payment is applied as a reduction to the outstanding principal balance of such
Note. Although the Mortgagor is required to remit equal monthly payments on a
specified monthly payment date that would reduce the outstanding principal
balance of such Note to zero at such Note's maturity date, payments that are
made by the Mortgagor after the due date therefor would cause the outstanding
principal balance of such Note not to be reduced to zero on its maturity date.
In such a case, the Mortgagor would be required to make an additional principal
payment at the maturity date for such Note. If it were assumed that all the
Mortgagors on the Date-of-Payment Loans were to pay on the latest date possible
without the Date-of-Payment Loans being in default, the amount of such
additional principal payment would be a de minimis amount of the aggregate Loan
Balance of the Home Equity Loans. On the other hand, if a Mortgagor makes a
payment (other than a Prepayment) before the due date therefor, the reduction
in the outstanding principal balance of such Note would occur over a shorter
period of time than would have occurred had it been based on the schedule of
amortization in effect on the Cut-Off Date. Accordingly, the timing of
principal payments to the Owners of the Offered Certificates may be affected by
the fact that actual Mortgagor payments may not be made on the due date
therefor.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, the Offered Certificates 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 70.57% of the Home Equity Loans (by Loan Balance) require the
payment of a fee in connection with certain prepayments. The rate of payment
of principal of the Home Equity Loans may also be affected by the amount of
Home Equity Loans secured by a second liens. Such Home Equity Loans are
subordinate to the rights of the mortgagee or beneficiary under a first
mortgage or deed of trust to receive proceeds from any liquidation, insurance
or condemnation proceedings available to satisfy the outstanding balance of the
related Home Equity Loan. However, since only 12.19% of the aggregate Loan
Balance of the Home Equity Loans are secured by second liens, the effect on the
rate of payment of principal, if any, should be minimal. The actual rate of
principal prepayments on pools of home equity loans is influenced by a variety
of economic, tax, geographic, demographic, social, legal and other factors and
has fluctuated considerably in recent years. In addition, the rate of
principal prepayments may differ among pools of home equity loans at any time
because of specific factors relating to the home equity loans in the particular
pool, including, among other things, the age of the home equity loans, the
geographic locations of the properties securing the loans and the extent of the
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home equity loans with fixed rates is affected by prevailing market
rates for home equity loans of a comparable term and risk level. When the
market interest rate is below the mortgage coupon, mortgagors may have an
increased incentive to refinance their home equity loans. Depending on
prevailing market rates, the future outlook for market rates and economic
conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to
meet cash flow needs or to make other investments.
S-35
<PAGE> 40
In addition to the foregoing factors affecting the weighted average
life of the Offered Certificates, the overcollateralization provisions of the
Trust result in an additional reduction of the Class A Certificates relative to
the amortization of the Home Equity Loans in early months of the transaction.
The accelerated amortization is achieved by the application of the Monthly
Excess Interest Amount to the payment of the related Certificate Principal
Balance of the Offered Certificates. This creates overcollateralization which
results from the excess of the aggregate Loan Balance of the Home Equity Loans
over the Aggregate Certificate Principal Balance. Once the Target
Overcollateralization Amount is reached, the application of the Monthly Excess
Interest Amount to pay down principal will cease, unless necessary to maintain
the Overcollateralization Amount at the Target Overcollateralization Amount.
MANDATORY PREPAYMENT
In the event that prior to the end of the Funding Period the Depositor
is unable to sell Subsequent Home Equity Loans to the Trust in an amount equal
to the Pre-Funded Amount, the Owners of the Class or Classes of Class A
Certificates (other than the Class A-11IO Certificates) then entitled to
receive payments of principal will receive a partial prepayment on the Payment
Date in October 1997 in an amount equal to the Pre-Funded Amount remaining at
the end of the Funding Period.
The Seller intends to use substantially all of the amount on deposit
in the Pre-Funding Account to purchase Subsequent Home Equity Loans such that
no material amount of principal is expected to be prepaid on the Payment Date
in October 1997.
PREPAYMENT AND YIELD SCENARIOS FOR OFFERED CERTIFICATES
As indicated above, if purchased at other than par (disregarding, for
purposes of this discussion, the effects on an investor's yield resulting from
the timing of the settlement date and those considerations discussed below
under "Payment Lag Feature of Offered Certificates"), the yield to maturity on
an Offered Certificate will be affected by the rate of the payment of principal
of the Home Equity Loans. If the actual rate of payments on the Home Equity
Loans is slower than the rate anticipated by an investor who purchases a Class
of the Offered Certificates at a discount, the actual yield to such investor
will be lower than such investor's anticipated yield. If the actual rate of
payments on the Home Equity Loans is faster than the rate anticipated by an
investor who purchases a Class of the Offered Certificates at a premium, the
actual yield to such investor will be lower than such investor's anticipated
yield.
The Final Scheduled Payment Date for each Class of the Offered
Certificates is as set forth in the "Summary of Terms" hereof. These dates are
dates on which the "Initial Certificate Principal Balance" set forth in the
"Summary of Terms" hereof for the related Class 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 no Monthly Excess Interest Amount
will be used to make accelerated payments of principal to the Owners of the
Class A Certificates. The Final Scheduled Payment Date for the Class A-9
Certificates, Class A-10 Certificates and each Class of the Subordinate
Certificates is the thirteenth Payment Date following the Remittance Period in
which the Loan Balances of all Home Equity Loans have been reduced to zero
assuming that the Home Equity Loans pay in accordance with their terms. The
weighted average lives of the Offered Certificates are likely to be shorter
than would be the case if payments actually made on the Home Equity Loans
conformed to the foregoing assumptions, and the final Payment Dates with
respect to the Offered Certificates could occur significantly earlier than the
Final Scheduled Payment Dates because (i) Prepayments are likely to occur and
(ii) the Owners of the Class R Certificates may cause a termination of the
Trust when the aggregate outstanding Loan Balance of the Home Equity Loans is
less than 10% of the Maximum Collateral Amount thereof.
The Class A-1 Certificates have been structured so that principal
distributions generally will be made thereon in the amounts determined by using
the table of Targeted Amounts set forth herein, assuming that prepayments on
the Home Equity Loans occur each month at a constant level of 4% CPR, as
described herein (the "Targeted Prepayment Rate"), and based on certain other
assumptions, which assumptions may differ from the actual performance of the
Home Equity Loans.
There can be no assurance that funds available for distribution of
principal on the Class A-1 Certificates will be sufficient to cover, or will
not be in excess of, the amount necessary to reduce the Class A-1 Certificate
Principal Balance to the applicable Targeted Amount on any Payment Date. To
the extent that prepayments occur at a level below the Targeted Prepayment
Rate, the funds available for principal distributions on the Class A-1
Certificates on each Payment Date may deviate from the amount necessary to
reduce the Class A-1 Certificate Principal Balance to the applicable Targeted
Amount and the weighted average life of the Class A-1 Certificates may be
extended.
S-36
<PAGE> 41
It is very unlikely that the Home Equity Loans will prepay at any
particular constant rate. Furthermore, the Targeted Amounts set forth in the
table under "Description of the Offered Certificates-Distributions" were
calculated based on certain assumptions which may differ from the actual
performance of the Home Equity Loans. The actual prepayment rates that will
result in the Class A-1 Certificate Principal Balance equaling the amounts set
forth in such table on the applicable Payment Dates may differ from the
Targeted Prepayment Rate used to calculate such amounts. The prepayment rates
that will result in the Class A-1 Certificate Principal Balances equaling such
amounts may vary over time as a result of the actual prepayment experience of
the Home Equity Loans. Moreover, because the Targeted Amounts were calculated
using certain assumptions regarding the Home Equity Loans, the actual
prepayment behavior of the Home Equity Loans could be such that the amount
available for distributions of principal in reduction of the Certificate
Principal Balance of the Class A-1 Certificates may not result in the Class A-1
Certificate Principal Balance equaling the Targeted Amount even if the Home
Equity Loans prepay at the Targeted Prepayment Rate.
Prior to the reduction of the Class A-1 Certificate Principal Balance
to zero, the remaining Classes of Class A Certificates (other than the Class
A-10 Certificates) will receive no principal distributions on any date on which
the Class A-1 Certificate Principal Balance has not been reduced to the
Targeted Amount. In addition, because the remaining Classes of Class A
Certificates (other than the Class A-10 Certificates) will receive no principal
payments on a Payment Date unless the Class A-1 Certificate Principal Balance
has been reduced to its Targeted Amount and will receive all principal payments
in excess of the amount needed to reduce the Certificate Principal Balance of
the Class A-1 Certificates to its Targeted Amount in the order and priority
described herein, such Class A Certificates will be sensitive in varying
degrees to the rate of principal payments, including prepayments on the Home
Equity Loans.
"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
any Class of the Offered Certificates will be influenced by the rate at which
principal of the Home Equity Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes Prepayments and liquidations due to default). Prepayments on home
equity loans are commonly measured relative to a prepayment standard or model.
The model used in this Prospectus Supplement is the prepayment
assumption (the "Prepayment Assumption") which represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of home equity loans for the life of such home equity loans. A 100%
Prepayment Assumption assumes constant prepayment rates ("CPR") of 4% per annum
of the then outstanding principal balance of the Home Equity Loans in the first
month of the life of such Home Equity Loans and an additional 1.818% (precisely
20/11ths) per annum in each month thereafter until the twelfth month.
Beginning in the thirteenth month and in each month thereafter during the life
of such Home Equity Loans, 100% Prepayment Assumption assumes a constant
prepayment rate of 24% per annum each month. As used in the table below, 0%
Prepayment Assumption assumes prepayment rates equal to 0% of the Prepayment
Assumption; i.e., no prepayments. Correspondingly, 100% Prepayment Assumption
assumes prepayment rates equal to 100% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of home equity loans, including the Home Equity Loans.
The Seller believes that no existing statistics of which it is aware provide a
reliable basis for Owners of Offered Certificates to predict the amount or the
timing of receipt of prepayments on the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Offered Certificates (other than the Class A-11IO
Certificates) set forth in the tables. In addition, since the actual Home
Equity Loans in the Trust have characteristics which differ from those assumed
in preparing the tables set forth below, the distributions of principal on the
Offered Certificates (other than the Class A-11IO Certificates) may be made
earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans consist of pools of loans with level-pay and balloon amortization
methodologies, Cut-Off Date Loan Balances, gross coupon rates, net coupon
rates, original and remaining terms of amortization, and remaining terms to
maturity as applicable, as set forth in the "Representative Loan Pools" table
below, (ii) the Closing Date for the Certificates occurs on September 23, 1997,
(iii) distributions on the Certificates are made on the 20th day of each month
regardless of the day on which the Payment Date actually occurs, commencing in
October 1997 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 Trustee
Fee, (v) the Home Equity Loans' prepayment rates are a multiple of the
Prepayment Assumption, (vi) prepayments include 30 day's interest thereon,
(vii) no optional termination is exercised, (viii) the
S-37
<PAGE> 42
"Targeted Overcollateralization Amount" (as defined under "Credit Enhancement
- -- Overcollateralization Provisions") is set initially as specified in the
Pooling and Servicing Agreement and thereafter decreases in accordance with the
provisions of the Pooling and Servicing Agreement, (ix) all of the Home Equity
Loans are sold to the Trust as of the Closing Date, (x) the Class A-2
Pass-Through Rate remains constant at 5.74625%, and (xi) the scheduled monthly
payments of principal and interest on the Home Equity Loans will be timely
delivered on the first day of the Remittance Period (with no defaults).
REPRESENTATIVE LOAN POOLS
<TABLE>
<CAPTION>
Original Remaining Remaining
Gross Net Term of Term of Term to
Pool Loan Coupon Coupon Amortization Amortization Maturity Amortization
Number Balance Rate Rate (in months) (in months) (in months) Method
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,454,504.66 12.239% 11.739% 72 69 69 Level
2 18,488,891.53 11.753 11.253 120 117 117 Level
3 173,775,859.94 11.919 11.419 180 177 177 Level
4 120,975,990.64 11.224 10.724 240 237 237 Level
5 217,900,658.68 11.171 10.671 359 355 355 Level
6 442,404,094.55 11.785 11.285 360 356 177 Balloon
</TABLE>
S-38
<PAGE> 43
The following tables set forth the percentages of the initial
principal amount of the Offered Certificates that would be outstanding after
each of the dates shown, based on a rate equal to 0%, 50%, 75%, 100%, 125% and
150% of the Prepayment Assumption (as defined above).
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- -- -- --- --- --- - -- -- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1998 74 54 54 54 54 54 100 49 16 0 0 0
9/20/1999 64 10 10 10 10 10 100 2 0 0 0 0
9/20/2000 51 0 0 0 0 0 100 0 0 0 0 0
9/20/2001 38 0 0 0 0 0 100 0 0 0 0 0
9/20/2002 23 0 0 0 0 0 100 0 0 0 0 0
9/20/2003 7 0 0 0 0 0 100 0 0 0 0 0
9/20/2004 0 0 0 0 0 0 92 0 0 0 0 0
9/20/2005 0 0 0 0 0 0 80 0 0 0 0 0
9/20/2006 0 0 0 0 0 0 66 0 0 0 0 0
9/20/2007 0 0 0 0 0 0 51 0 0 0 0 0
9/20/2008 0 0 0 0 0 0 34 0 0 0 0 0
9/20/2009 0 0 0 0 0 0 15 0 0 0 0 0
9/20/2010 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2011 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2012 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2013 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2014 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2015 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2016 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2017 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2018 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2019 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2020 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2021 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2022 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2023 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2024 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2025 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2026 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2027 0 0 0 0 0 0 0 0 0 0 0 0
Weighted 3.1 1.1 1.1 1.1 1.1 1.1 9.9 1.0 0.7 0.5 0.4 0.4
Average
Life (Years)(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS A-3 CLASS A-4
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- -- -- --- --- --- - -- -- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1998 100 100 100 76 31 0 100 100 100 100 100 87
9/20/1999 100 100 18 0 0 0 100 100 100 46 0 0
9/20/2000 100 18 0 0 0 0 100 100 19 0 0 0
9/20/2001 100 0 0 0 0 0 100 48 0 0 0 0
9/20/2002 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2003 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2004 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2005 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2006 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2007 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2008 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2009 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2010 91 0 0 0 0 0 100 0 0 0 0 0
9/20/2011 58 0 0 0 0 0 100 0 0 0 0 0
9/20/2012 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2013 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2014 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2015 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2016 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2017 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2018 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2019 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2020 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2021 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2022 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2023 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2024 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2025 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2026 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2027 0 0 0 0 0 0 0 0 0 0 0 0
Weighted 14.1 2.7 1.7 1.2 0.9 0.8 14.7 4.0 2.7 2.0 1.5 1.2
Average
Life (Years)(2)
</TABLE>
- -----------------------------
(1) The percentages in the following tables have been rounded to the
nearest whole number.
(2) The weighted average life of the Offered Certificates 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 the sum by the initial
respective Certificate Principal Balance for such Class of Offered
Certificate.
S-39
<PAGE> 44
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1998 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1999 100 100 100 100 81 20 100 100 100 100 100 100
9/20/2000 100 100 100 34 0 0 100 100 100 100 0 0
9/20/2001 100 100 52 0 0 0 100 100 100 41 0 0
9/20/2002 100 89 8 0 0 0 100 100 100 0 0 0
9/20/2003 100 54 0 0 0 0 100 100 0 0 0 0
9/20/2004 100 26 0 0 0 0 100 100 0 0 0 0
9/20/2005 100 9 0 0 0 0 100 100 0 0 0 0
9/20/2006 100 0 0 0 0 0 100 53 0 0 0 0
9/20/2007 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2008 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2009 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2010 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2011 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2012 0 0 0 0 0 0 38 0 0 0 0 0
9/20/2013 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2014 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2015 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2016 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2017 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2018 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2019 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2020 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2021 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2022 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2023 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2024 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2025 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2026 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2027 0 0 0 0 0 0 0 0 0 0 0 0
Weighted 14.7 6.3 4.1 3.0 2.3 1.8 15.0 9.1 5.5 4.0 2.8 2.3
Average
Life (Years)(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS A-7 CLASS A-8
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1998 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1999 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2000 100 100 100 100 65 0 100 100 100 100 100 32
9/20/2001 100 100 100 100 27 0 100 100 100 100 100 25
9/20/2002 100 100 100 44 0 0 100 100 100 100 47 0
9/20/2003 100 100 90 0 0 0 100 100 100 100 0 0
9/20/2004 100 100 50 0 0 0 100 100 100 50 0 0
9/20/2005 100 100 32 0 0 0 100 100 100 37 0 0
9/20/2006 100 100 9 0 0 0 100 100 100 12 0 0
9/20/2007 100 87 0 0 0 0 100 100 78 0 0 0
9/20/2008 100 60 0 0 0 0 100 100 45 0 0 0
9/20/2009 100 34 0 0 0 0 100 100 16 0 0 0
9/20/2010 100 11 0 0 0 0 100 100 0 0 0 0
9/20/2011 100 0 0 0 0 0 100 83 0 0 0 0
9/20/2012 100 0 0 0 0 0 100 0 0 0 0 0
9/20/2013 98 0 0 0 0 0 100 0 0 0 0 0
9/20/2014 82 0 0 0 0 0 100 0 0 0 0 0
9/20/2015 65 0 0 0 0 0 100 0 0 0 0 0
9/20/2016 45 0 0 0 0 0 100 0 0 0 0 0
9/20/2017 27 0 0 0 0 0 100 0 0 0 0 0
9/20/2018 18 0 0 0 0 0 100 0 0 0 0 0
9/20/2019 8 0 0 0 0 0 100 0 0 0 0 0
9/20/2020 0 0 0 0 0 0 96 0 0 0 0 0
9/20/2021 0 0 0 0 0 0 75 0 0 0 0 0
9/20/2022 0 0 0 0 0 0 51 0 0 0 0 0
9/20/2023 0 0 0 0 0 0 25 0 0 0 0 0
9/20/2024 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2025 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2026 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2027 0 0 0 0 0 0 0 0 0 0 0 0
Weighted 19.0 11.5 7.4 5.0 3.6 2.6 25.0 14.5 10.9 7.5 5.1 3.3
Average
Life (Years)(2)
</TABLE>
- -----------------------------
(1) The percentages in the following tables have been rounded to the
nearest whole number.
(2) The weighted average life of the Offered Certificates 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 the sum by the initial
respective Certificate Principal Balance for such Class of Offered
Certificate.
S-40
<PAGE> 45
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
CLASS A-9 CLASS A-10
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1998 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1999 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2000 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2001 100 100 100 100 100 100 99 92 89 90 92 99
9/20/2002 100 100 100 100 100 49 98 84 81 79 78 80
9/20/2003 100 100 100 100 95 22 96 74 68 62 58 55
9/20/2004 100 100 100 100 65 14 94 64 54 46 40 35
9/20/2005 100 100 100 100 64 14 85 40 27 18 15 18
9/20/2006 100 100 100 100 53 14 76 25 14 7 4 8
9/20/2007 100 100 100 87 39 11 67 15 7 3 1 1
9/20/2008 100 100 100 65 27 3 58 9 3 1 0 0
9/20/2009 100 100 100 48 15 0 49 5 2 0 0 0
9/20/2010 100 100 91 35 6 0 40 3 1 0 0 0
9/20/2011 100 100 71 24 0 0 32 2 0 0 0 0
9/20/2012 100 61 19 0 0 0 0 0 0 0 0 0
9/20/2013 100 50 12 0 0 0 0 0 0 0 0 0
9/20/2014 100 41 6 0 0 0 0 0 0 0 0 0
9/20/2015 100 33 2 0 0 0 0 0 0 0 0 0
9/20/2016 100 25 0 0 0 0 0 0 0 0 0 0
9/20/2017 100 17 0 0 0 0 0 0 0 0 0 0
9/20/2018 100 12 0 0 0 0 0 0 0 0 0 0
9/20/2019 100 7 0 0 0 0 0 0 0 0 0 0
9/20/2020 100 4 0 0 0 0 0 0 0 0 0 0
9/20/2021 100 0 0 0 0 0 0 0 0 0 0 0
9/20/2022 100 0 0 0 0 0 0 0 0 0 0 0
9/20/2023 100 0 0 0 0 0 0 0 0 0 0 0
9/20/2024 96 0 0 0 0 0 0 0 0 0 0 0
9/20/2025 62 0 0 0 0 0 0 0 0 0 0 0
9/20/2026 23 0 0 0 0 0 0 0 0 0 0 0
9/20/2027 0 0 0 0 0 0 0 0 0 0 0 0
Weighted 28.3 17.1 14.6 12.2 9.2 5.8 11.5 7.6 7.0 6.6 6.4 6.5
Average
Life (Years)(2)
</TABLE>
<TABLE>
<CAPTION>
CLASS M-1 CLASS M-2
PAYMENT DATE 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
- -- -- --- --- --- - -- -- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1998 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1999 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2000 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2001 100 100 89 67 49 35 100 100 89 67 49 35
9/20/2002 100 100 72 50 34 22 100 100 72 50 34 22
9/20/2003 100 87 58 37 23 14 100 87 58 37 23 14
9/20/2004 100 75 46 28 16 9 100 75 46 28 16 9
9/20/2005 100 64 37 20 11 5 100 64 37 20 11 2
9/20/2006 100 55 29 15 7 0 100 55 29 15 6 0
9/20/2007 100 46 23 11 5 0 100 46 23 11 1 0
9/20/2008 100 39 18 8 0 0 100 39 18 7 0 0
9/20/2009 100 33 14 6 0 0 100 33 14 3 0 0
9/20/2010 100 28 11 4 0 0 100 28 11 0 0 0
9/20/2011 100 23 9 0 0 0 100 23 9 0 0 0
9/20/2012 49 7 0 0 0 0 49 6 0 0 0 0
9/20/2013 46 6 0 0 0 0 46 3 0 0 0 0
9/20/2014 42 5 0 0 0 0 42 1 0 0 0 0
9/20/2015 39 3 0 0 0 0 39 0 0 0 0 0
9/20/2016 34 0 0 0 0 0 34 0 0 0 0 0
9/20/2017 30 0 0 0 0 0 30 0 0 0 0 0
9/20/2018 29 0 0 0 0 0 29 0 0 0 0 0
9/20/2019 26 0 0 0 0 0 26 0 0 0 0 0
9/20/2020 24 0 0 0 0 0 24 0 0 0 0 0
9/20/2021 21 0 0 0 0 0 21 0 0 0 0 0
9/20/2022 19 0 0 0 0 0 19 0 0 0 0 0
9/20/2023 15 0 0 0 0 0 15 0 0 0 0 0
9/20/2024 12 0 0 0 0 0 12 0 0 0 0 0
9/20/2025 7 0 0 0 0 0 6 0 0 0 0 0
9/20/2026 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2027 0 0 0 0 0 0 0 0 0 0 0 0
Weighted 18.6 10.3 7.6 5.9 5.0 4.5 18.6 10.2 7.6 5.9 4.8 4.3
Average
Life (Years)(2)
</TABLE>
- -----------------------------
(1) The percentages in the following tables have been rounded to the
nearest whole number.
(2) The weighted average life of the Offered Certificates 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 the sum by the initial
respective Certificate Principal Balance for such Class of Offered
Certificate.
S-41
<PAGE> 46
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
CLASS B
PAYMENT DATE 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100
9/20/1998 100 100 100 100 100 100
9/20/1999 100 100 100 100 100 100
9/20/2000 100 100 100 100 100 100
9/20/2001 100 100 89 67 49 35
9/20/2002 100 100 72 50 34 19
9/20/2003 100 87 58 37 21 7
9/20/2004 100 75 46 27 10 0
9/20/2005 100 64 37 17 3 0
9/20/2006 100 55 29 9 0 0
9/20/2007 100 46 21 3 0 0
9/20/2008 100 39 14 0 0 0
9/20/2009 100 33 8 0 0 0
9/20/2010 100 27 4 0 0 0
9/20/2011 100 20 0 0 0 0
9/20/2012 49 0 0 0 0 0
9/20/2013 46 0 0 0 0 0
9/20/2014 42 0 0 0 0 0
9/20/2015 39 0 0 0 0 0
9/20/2016 34 0 0 0 0 0
9/20/2017 30 0 0 0 0 0
9/20/2018 29 0 0 0 0 0
9/20/2019 26 0 0 0 0 0
9/20/2020 22 0 0 0 0 0
9/20/2021 18 0 0 0 0 0
9/20/2022 14 0 0 0 0 0
9/20/2023 9 0 0 0 0 0
9/20/2024 4 0 0 0 0 0
9/20/2025 0 0 0 0 0 0
9/20/2026 0 0 0 0 0 0
9/20/2027 0 0 0 0 0 0
Weighted 18.3 10.0 7.3 5.6 4.6 4.0
Average
Life (Years)(2)
</TABLE>
- -----------------------------
(1) The percentages in the following tables have been rounded to the
nearest whole number.
(2) The weighted average life of the Offered Certificates 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 the sum by the initial
respective Certificate Principal Balance for such Class of Offered
Certificate.
PAYMENT LAG FEATURE OF OFFERED CERTIFICATES
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Home Equity Loan (net of the Servicing
Fee) received by the Servicer during each Remittance Period is to be remitted
to the Trustee on or prior to the related Monthly Remittance Date while the
Trustee will not be required to distribute any such amounts to the Owners of
the Offered Certificates until the next succeeding Payment Date. As a result,
the monthly distributions to the Owners of the Offered Certificates generally
reflect Mortgagor payments during the prior Remittance Period, and the first
Payment Date will not occur until October 20, 1997. Thus, the effective yield
to the Owners of the Offered Certificates (other than the Class A-2
Certificates) will be below that otherwise produced by the related Pass-Through
Rate because the distribution to the Owners of the Offered Certificates in
respect of any given month will not be made until on or about the 20th day of
the following month.
YIELD SENSITIVITY OF THE CLASS A-11IO CERTIFICATES
Because amounts distributable to the Owners of the Class A-11IO
Certificates consist entirely of interest, the yield to maturity of the Class
A-11IO Certificates will be sensitive to the repurchase, prepayment and default
experience of the Home Equity Loans, and prospective investors should fully
consider the associated risks, including the risk that such investors may not
fully recover their initial investment. In addition, the Notional Principal
Amount applicable to interest calculations on the Class A-11IO Certificates is
(x) through the Payment Date in March, 2000, the Class A-10 Certificate
Principal Balance and (y) thereafter, zero. Since the Class A-10 Certificates
will amortize in accordance with the distribution of the Class A-10 Lockout
Distribution Amount, the performance of the Class A-11IO Certificates is likely
to be more stable than if such Notional Principal Amount were calculated using
the underlying Home Equity Loans directly, and consequently, the yield
sensitivity of such Certificates will only be impacted at extremely high rates
of prepayment.
S-42
<PAGE> 47
The following tables set forth percentages for the sensitivity of the
Class A-11IO Certificates to prepayments based on the modeling assumptions set
forth above.
PRE-TAX YIELD TO MATURITY (1) -- SENSITIVITY OF THE CLASS A-11IO CERTIFICATES
TO PREPAYMENTS
<TABLE>
<CAPTION>
PERCENTAGE OF THE PREPAYMENT ASSUMPTION
---------------------------------------
0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
At a Price of 18.8750%(2) 7.358% 7.358% 7.358% 7.358% 7.358% 7.358%
At a Price of 18.9375%(2) 7.090% 7.090% 7.090% 7.090% 7.090% 7.090%
At a Price of 19.0000%(2) 6.824% 6.824% 6.824% 6.824% 6.824% 6.824%
At a Price of 19.0625%(2) 6.560% 6.560% 6.560% 6.560% 6.560% 6.560%
At a Price of 19.1250%(2) 6.297% 6.297% 6.297% 6.297% 6.297% 6.297%
</TABLE>
- --------------------
(1) Represented on a corporate bond equivalent basis.
(2) As a percent of the Notional Principal Amount as of the
Cut-Off Date. Accrued interest will be added to such price
after calculating the yields set forth in the table.
The yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed
stream of cash flow to be paid on the Class A-11IO Certificates would cause the
discounted present value of such assumed cash flows to equal the assumed
purchase price of the Class A-11IO Certificates plus accrued interest and by
converting such monthly rates to corporate bond equivalent rates. Such
calculations do not take into account variations that may occur in the interest
rates at which investors may be able to reinvest funds received by them as
distributions on the Class A-11IO Certificates.
The Home Equity Loans will not necessarily have the characteristics
assumed above, and there can be no assurance that (i) the Home Equity Loans
will prepay at any of the rates shown in the table or at any other particular
rate or will prepay proportionately, (ii) the pre-tax yield on the Class A-11IO
Certificates will correspond to any of the pre-tax yields shown above or (iii)
the purchase price of the Class A-11IO Certificates will be equal to any of the
purchase prices assumed.
FORMATION OF THE TRUST AND TRUST PROPERTY
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement. The Seller will convey without recourse the Home Equity
Loans to the Depositor, the Depositor will convey without recourse the Home
Equity Loans to the Trust and the Trust will issue the Offered Certificates and
the Class R Certificates to the Owners thereof.
The property of the Trust shall include all (a) the Home Equity Loans
together with the related Home Equity Loan documents and the Seller's interest
in any Property which secures a Home Equity Loan and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing, (b)
such amounts as may be held by the Trustee in the Certificate Account, the
Upper-Tier Distribution Account (as defined in the Pooling and Servicing
Agreement), the Pre-Funding Account, the Capitalized Interest Account and any
other accounts held by the Trustee for the Trust together with investment
earnings on such amounts and such amounts may be held by the Servicer in the
Principal and Interest Account, if any, exclusive of investment earnings
thereon (except as otherwise provided) whether in the form of cash,
instruments, securities or other properties and (c) proceeds of all the
foregoing (including, but not by way of limitation, all proceeds of any
mortgage insurance, hazard insurance and title insurance policy relating to the
Home Equity Loans, cash proceeds, accounts, accounts receivable, notes, drafts,
acceptances, chattel paper, checks, deposit accounts, rights to payment of any
and every kind, and other forms of obligations and receivables which at any
time constitute all or part of or are included in the proceeds of any of the
foregoing) to pay the Certificates as specified in the Pooling and Servicing
Agreement (collectively, the "Trust Estate").
The Offered Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Seller, the Servicer or any of their affiliates.
In addition to the Offered Certificates, the Trust will also issue the
Class R Certificates which will be designated as the "residual interest" in the
Upper-Tier REMIC for purposes of the Code. The Class R Certificates are not
being offered hereby.
S-43
<PAGE> 48
Prior to its formation the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business
activity other than acquiring, holding and collecting payments on the Home
Equity Loans, issuing the Certificates and distributing payments thereon. The
Trust will not acquire any receivables or assets other than the Home Equity
Loans and the rights appurtenant thereto, and will not have any need for
additional capital resources. To the extent that borrowers make scheduled
payments under the Home Equity Loans, the Trust will have sufficient liquidity
to make distributions on the Certificates. As the Trust does not have any
operating history and will not engage in any business activity other than
issuing the Certificates and making distributions thereon, there has not been
included any historical or pro forma ratio of earnings to fixed charges with
respect to the Trust.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Home
Equity Loans and the Properties is based upon the Initial Home Equity Loans as
constituted at the close of business on the Cut-Off Date. Prior to the
issuance of the Offered Certificates, Initial Home Equity Loans may be removed
from the pool of Home Equity Loans and other Initial Home Equity Loans may be
substituted therefor but not in excess of 6% of the Loan Balance of the pool of
Initial Home Equity Loans set forth herein. Such Initial Home Equity Loans may
be removed from the pool as a result of incomplete documentation or
non-compliance with representations and warranties set forth in the Pooling and
Servicing Agreement, if the Seller deems such removal necessary or appropriate.
The Subsequent Home Equity Loans will be added to the pool after the issuance
of the Certificates.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, and incorporated by reference to the
Registration Statement together with the Pooling and Servicing Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates and within 15 days of the addition of any
Subsequent Home Equity Loans. In the event Initial Home Equity Loans are
removed from or added to, or Subsequent Home Equity Loans are added to, the
pool as set forth in the preceding paragraph, such removal or addition will be
noted in a current report on Form 8-K.
DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
Each Offered Certificate will represent certain undivided, fractional
ownership interests in the Trust Estate created and held pursuant to the
Pooling and Servicing Agreement, subject to the limits and the priority of
distribution described therein.
PAYMENT DATES
On each Payment Date, the Owners of each Class of the Offered
Certificates will be entitled to receive, from amounts then on deposit in the
certificate account established and maintained by the Trustee in accordance
with the Pooling and Servicing Agreement (the "Certificate Account") and until
the Certificate Principal Balance of such Class of the Offered Certificates is
reduced to zero, and to the extent funds are available therefor, the related
Current Interest, any Interest Carry Forward Amount and the portion of the
Principal Distribution Amount, if any, allocated therefor as of such Payment
Date, allocated among the Classes of the Offered Certificates as described
below. Distributions will be made in immediately available funds to Owners of
the Offered Certificates by wire transfer or otherwise, to the account of such
Owner at a domestic bank or other entity having appropriate facilities
therefor, if such Owner has so notified the Trustee at least five Business Days
prior to the Record Date, or by check mailed to the address of the person
entitled thereto as it appears on the register (the "Register") maintained by
the Trustee as registrar (the "Registrar"). Beneficial Owners may experience
some delay in the receipt of their payments due to the operations of DTC. See
"Risk Factors--Book Entry Registration" in the Prospectus and "Description of
the Offered Certificates--Book Entry Registration of the Offered Certificates"
herein and "Description of the Certificates--Book Entry Registration" in the
Prospectus.
The Pooling and Servicing Agreement will provide that an Owner, upon
receiving the final distribution on such Owner's Certificate, will be required
to send such Certificate to the Trustee. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed canceled for all
purposes of the Pooling and Servicing Agreement.
S-44
<PAGE> 49
Each Owner of record of the related Class of Offered Certificates will
be entitled to receive such Owner's Percentage Interest in the amounts due such
Class on such Payment Date. The "Percentage Interest" of an Offered
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the principal balance of such Offered Certificate as of
the Cut-Off Date by the Certificate Principal Balance for the related Class of
Certificates as of the Cut-Off Date.
DISTRIBUTIONS
Upon receipt, the Trustee will be required to deposit into the
Certificate Account, (i) the proceeds of any liquidation of the assets of the
Trust, (ii) all remittances made to the Trustee by the Servicer and (iii) on
the first Payment Date, the Capitalized Interest Requirement (as defined in the
Pooling and Servicing Agreement) and any portion of the Pre-Funding Amount, if
any, to be transferred on such Payment Date.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of the Offered Certificates (each, a "Pass-Through Rate") as set
forth in the Summary herein under "Certificates Offered." The Class A-2 Pass-
Through Rate adjusts monthly and will on each Payment Date be equal to the
lesser of (x) LIBOR plus 0.09% and (y) the Available Funds Cap. The "Expense
Fee Rate" will equal the sum of the per annum rates at which the Servicing Fee,
the Trustee Fee and any Trustee Reimbursable Expenses (as defined in the
Pooling and Servicing Agreement) are calculated.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from monies then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement with respect to interest and principal:
Interest: On each Payment Date the Interest Remittance Amount will be
distributed in the following order of priority:
First, to the Trustee, the Trustee Fee and any Trustee Reimbursable
Expenses;
Second, to the Owners of the Class A Certificates (including the Class
A-11IO Certificates), the related Current Interest plus the related
Class A Interest Carry Forward Amount with respect to each Class of
Class A Certificates without any priority among such Class A
Certificates ; provided, that if the Interest Amount Available is not
sufficient to make a full distribution of interest with respect to all
Classes of the Class A Certificates, the Interest Amount Available
will be distributed among the outstanding Classes of Class A
Certificates pro rata based on the aggregate amount of interest due on
each such Class, and the amount of the shortfall will be carried
forward with accrued interest;
Third, to the extent of the Interest Amount Available then remaining,
to the Owners of the Class M-1 Certificates, the related Current
Interest;
Fourth, to the extent of the Interest Amount Available then remaining,
to the Owners of the Class M-2 Certificates, the related Current
Interest;
Fifth, to the extent of the Interest Amount Available then remaining,
to the Owners of the Class B Certificates, the related Current
Interest; and
Sixth, the Monthly Excess Interest Amount shall be applied as
described under "Credit Enhancement-Application of Monthly Excess
Cashflow Amount."
Principal: On each Payment Date (a) before the Stepdown Date or (b)
with respect to which a Trigger Event is in effect, Owners of the Class A
Certificates (other than the Class A-11IO Certificates) will be entitled to
receive payment of 100% of the Principal Distribution Amount as follows:
first, to the Owners of the Class A-10 Certificates, the Class A-10 Lockout
Distribution Amount , second, to the Owners of the Class A-1 Certificates until
the Class A-1 Certificate Principal Balance has been reduced to its Targeted
Amount (as defined herein) for such Payment Date and then to the Owners of the
Class A-2 Certificates, the Class A-3 Certificates, the Class A-4 Certificates,
the Class A-5 Certificates, the Class A-6 Certificates, the Class A-7
Certificates, the Class A-8 Certificates, the Class A-9 Certificates,
S-45
<PAGE> 50
the Class A-1 Certificates (without regard to its Targeted Amount) and the
Class A-10 Certificates (without regard to the Class A-10 Lockout Distribution
Amount), in that order, in each case, until the Certificate Principal Balance
of each Class of Class A Certificates has been reduced to zero.
On each Payment Date (a) on or after the Stepdown Date and (b) as long
as a Trigger Event is not in effect, the Owners of all Classes of the Offered
Certificates (other than the Class A-11IO Certificates) will be entitled to
receive payments of principal, in the order of priority, in the amounts set
forth below and to the extent of the Principal Distribution Amount as follows:
First, the lesser of (x) the Principal Distribution Amount and (y) the
Class A Principal Distribution Amount shall be distributed as follows:
(i) to the Owners of the Class A-10 Certificates, in an amount equal
to the Class A-10 Lockout Distribution Amount and, (ii) to the Owners
of the Class A-1 Certificates until the Class A-1 Certificate
Principal Balance has been reduced to its Targeted Amount on such
Payment Date and then to the Owners of the Class A-2 Certificates, the
Class A-3 Certificates, the Class A-4 Certificates, the Class A-5
Certificates, the Class A-6 Certificates, the Class A-7 Certificates,
the Class A-8 Certificates, the Class A-9 Certificates, the Class A-1
Certificates (without regard to its Targeted Amount) and the Class
A-10 Certificates (without regard to the Class A-10 Lockout
Distribution Amount), in that order, in each case, until the
Certificate Principal Balance of each Class of Class A Certificates
has been reduced to zero;
Second, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the Owners of the Class A
Certificates in clause First above and (y) the Class M-1 Principal
Distribution Amount shall be distributed to the Owners of the Class
M-1 Certificates, until the Class M-1 Certificate Principal Balance
has been reduced to zero;
Third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Owners of
the Class A Certificates in clause First above and the amount
distributed to the Owners of the Class M-1 Certificates in clause
Second above and (y) the Class M-2 Principal Distribution Amount shall
be distributed to the Owners of the Class M-2 Certificates, until the
Class M-2 Certificate Principal Balance has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Owners of
the Class A Certificates pursuant to clause First above, the amount
distributed to the Owners of the Class M-1 Certificates pursuant to
clause Second above and the amount distributed to the Owners of the
Class M-2 Certificates pursuant to clause Third above and (y) the
Class B Principal Distribution Amount shall be distributed to the
Owners of the Class B Certificates, until the Class B Certificate
Principal Balance has been reduced to zero; and,
Fifth, any amount of the Principal Remittance Amount remaining after
making all of the distributions in clauses First, Second, Third and
Fourth above shall be included as part of the Monthly Excess Cashflow
Amount as described under "Credit Enhancement-Application of Monthly
Excess Cashflow Amounts" in the Summary of Terms.
Notwithstanding the foregoing, in the event that the Certificate
Principal Balances of all of the Class A Certificates have been reduced to
zero, all amounts of principal that would have been distributed to such Class A
Certificates will be distributed to the Subordinate Certificates sequentially
in the following order: Class M-1, Class M-2 and Class B. Similarly, if the
Certificate Principal Balance of the Class M-1 Certificates has been reduced to
zero, all amounts of principal that would have been distributed to such Class
M-1 Certificates will be distributed to the Class M-2 and Class B Certificates
in that order. Finally, if the Certificate Principal Balance of the Class M-2
Certificates has been reduced to zero, all amounts of principal that would have
been distributed on such Class M-2 Certificates will be distributed to the
Class B Certificates.
Payments of principal on the Class A Certificates shall be paid out in
the order described above, provided, however, that on any Payment Date on which
the sum of the Certificate Principal Balance of the Subordinate Certificates
and the Overcollateralization Amount is zero, any amounts of principal payable
to the Owners of the Class A Certificates on such Payment Date shall be
distributed pro rata.
S-46
<PAGE> 51
The table below entitled "Targeted Amounts" sets forth for each
Payment Date the applicable targeted amount (the "Targeted Amount") for the
Class A-1 Certificates. There is no assurance that sufficient funds will be
available on any Payment Date to reduce the Class A-1 Certificate Principal
Balance to the Targeted Amount for such Payment Date, or that principal
distributions on the Class A-1 Certificates will not be made in excess of such
amount on any Payment Date. See "Prepayment and Yield Consideration."
TARGETED AMOUNTS
<TABLE>
<CAPTION>
Targeted
Payment Date Amount
------------ --------
<S> <C>
Initial...........................................................$107,250,000.00
October 1997......................................................$103,121,860.75
November 1997......................................................$99,002,580.54
December 1997......................................................$94,892,096.64
January 1998.......................................................$90,790,346.31
February 1998......................................................$86,697,266.85
March 1998.........................................................$82,612,795.52
April 1998.........................................................$78,536,869.62
May 1998...........................................................$74,469,426.42
June 1998..........................................................$70,410,403.22
July 1998..........................................................$66,359,737.30
August 1998........................................................$62,317,365.93
September 1998.....................................................$58,283,226.39
October 1998.......................................................$54,257,255.95
November 1998......................................................$50,239,391.87
December 1998......................................................$46,229,571.39
January 1999.......................................................$42,227,731.78
February 1999......................................................$38,233,810.25
March 1999.........................................................$34,247,744.02
April 1999.........................................................$30,269,470.30
May 1999...........................................................$26,298,926.27
June 1999..........................................................$22,336,049.12
July 1999..........................................................$18,380,775.98
August 1999........................................................$14,433,044.00
September 1999.....................................................$10,492,790.28
October 1999........................................................$6,559,951.91
November 1999.......................................................$2,634,465.97
December 1999...............................................................$0.00
</TABLE>
The Targeted Amounts set forth in the table above were calculated
based on certain assumptions, including the assumption that prepayments on
the Home Equity Loans occur each month at the Targeted Prepayment Rate. The
actual characteristics and performance of the Home Equity Loans may differ
from the assumptions used in determining the Targeted Amounts. The Targeted
Amounts set forth in the table above are final regardless of any error or
alleged error in making such calculation.
CALCULATION OF LIBOR
On each LIBOR Determination Date (as defined below), the Trustee will
determine LIBOR for the next Accrual Period for the Class A-2 Certificates.
"LIBOR" means, as of any LIBOR Determination Date, the rate for
deposits in United States dollars for a period equal to the relevant Accrual
Period (commencing on the first day of such Accrual Period) which appears in
the Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such
rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in United States dollars
are offered by the Reference Banks at approximately 11:00 a.m., London time, on
that day to prime banks in the London interbank market for a period equal to
the relevant Accrual Period (commencing on the first day of such Accrual
Period). The Trustee will request the principal London office of each of the
Reference Banks to provide a quotation of its rate. If
S-47
<PAGE> 52
at least two such quotations are provided, the rate for that day will be the
arithmetic mean of the quotations. If fewer than two quotations are provided
as requested, the rate for that day will be the arithmetic mean of the rates
quoted by major banks in New York City, selected by the Servicer, at
approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period).
"LIBOR Determination Date" means, with respect to any Accrual Period,
the second London business day preceding the commencement of such Accrual
Period (or, in the case of the first Accural Period, the second London business
day preceding the Closing Date). For purposes of determining 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 Trustee and
engaged in transactions in Eurodollar deposits in the international
Eurocurrency market.
PRE-FUNDING ACCOUNT
On the Closing Date, the Pre-Funded Amount will be deposited in the
Pre-Funding Account, which account shall be in the name of and maintained by
the Trustee and shall be part of the Trust. During the Funding Period, the
Pre-Funded Amount will be maintained in the Pre-Funding Account. The
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Home Equity Loans in accordance with the
Pooling and Servicing Agreement. Any Pre-Funded Amount remaining at the end of
the Funding Period will be distributed to the Owners of the Class or Classes of
Class A Certificates (other than the Class A-11IO Certificates) then entitled
to receive principal payments on the Payment Date in October 1997 in reduction
of the Certificate Principal Balance of such Owner's Certificates, thus
resulting in a partial principal prepayment of such Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments. All interest and any other investment earnings on
amounts on deposit in the Pre-Funding Account will be deposited in the
Capitalized Interest Account prior to each Payment Date during the Funding
Period. The Pre-Funding Account will not be an asset of either the Lower-Tier
REMIC or the Upper-Tier REMIC.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee
and shall be part of the Trust. The amount on deposit in the Capitalized
Interest Account, including reinvestment income thereon, will be used by the
Trustee to fund the excess, if any, of (i) the amount of interest accruing at
the weighted average of the Pass-Through Rates of the Offered Certificates on
the amount by which the Aggregate Certificate Principal Balance exceeds the
aggregate Loan Balance of the Home Equity Loans over (ii) the amount of any
reinvestment income on monies on deposit in the Pre-Funding Account; such
amounts on deposit will be so applied by the Trustee on the first Payment Date
to fund any such excess. Any amounts remaining in the Capitalized Interest
Account at the end of the Funding Period and not needed for such purpose will
be paid to the depositor of such funds and will not thereafter be available for
distribution to the Owners of the Class A Certificates.
Amounts on deposit in the Capitalized Interest Account will be
invested in Eligible Investments. The Capitalized Interest Account will not be
an asset of the Lower-Tier REMIC or the Upper-Tier REMIC.
BOOK ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in such Book-Entry Certificates ("Beneficial Owners") may elect to hold their
Book-Entry Certificates directly through DTC 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
Certificates will be issued in one or more certificates per class of Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedel and
S-48
<PAGE> 53
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 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 Certificates in minimum denominations representing
principal amounts of $25,000 and multiples of $1,000 in excess thereof. Except
as described below, no Beneficial Owner will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Owner" of such Book-Entry Certificates will be Cede & Co., as nominee of DTC.
Beneficial Owners will not be Owners as that term is used in the Pooling and
Servicing Agreement. Beneficial Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant 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 Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates.
Participants and indirect participants with whom Beneficial Owners have
accounts with respect to Book- Entry Certificates are similarly required to
make book-entry transfers and receive and transmit such distributions on behalf
of their respective Beneficial Owners. Accordingly, although Beneficial Owners
will not possess certificates, the Rules provide a mechanism by which
Beneficial Owners will receive distributions and will be able to transfer their
interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
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
S-49
<PAGE> 54
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, DTC is expected to record the positions held by each DTC
Participant in the Book-Entry Certificates, whether held for its own account or
as a nominee for another person. In general, beneficial ownership of
Book-Entry Certificates will be subject to the rules, regulations and
procedures governing DTC and DTC Participants as in effect from time to time.
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
S-50
<PAGE> 55
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.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distribution with respect
to Book-Entry Certificates 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 Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing
Agreement on behalf of a Cedel Participant or Euroclear Participant only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedel or the Euroclear Operator, as the case may be, will take
any action permitted to be taken by an Owner under the Pooling and Servicing
Agreement 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 Offered Certificates which conflict with actions taken with respect to
other Offered Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Offered Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Owners under the Pooling and Servicing Agreement.
S-51
<PAGE> 56
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of Certificates 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 Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above.
CREDIT ENHANCEMENT
SUBORDINATION OF SUBORDINATE CERTIFICATES
The rights of the Owners of the Subordinate Certificates and the Class
R Certificates to receive distributions with respect to the Home Equity Loans
will be subordinated, to the extent described herein, to such rights of the
Owners of the Class A Certificates. This subordination is intended to enhance
the likelihood of regular receipt by the Owners of the Class A Certificates of
the full amount of their scheduled monthly payment of interest and principal
and to afford such Owners protection against Realized Losses.
The protection afforded to the Owners of the Class A Certificates by
means of the subordination of the Subordinate Certificates and the Class R
Certificates will be accomplished by the preferential right of the Owners of
the Class A Certificates to receive, prior to any distribution being made on a
Payment Date in respect of the Subordinate Certificates and the Class R
Certificates, the amounts of interest due them and principal available for
distribution on such Payment Date, and, if necessary, by the right of the
Owners of the Class A Certificates to receive future distributions of amounts
that would otherwise be payable to the Owners of the Subordinate Certificates
and the Class R Certificates.
In addition, the rights of the Owners of the Class M-2, Class B and
Class R Certificates to receive distributions will be subordinated, to the
extent described herein, to such rights of the Owners of the Class A and Class
M-1 Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the Owners of the Class A and Class M-1 Certificates of the
amount of interest due them and principal available for distribution and to
afford such Owners with protection against Realized Losses.
The rights of the Owners of the Class B and Class R Certificates to
receive distributions will be subordinated in the same manner to such rights of
the Owners of the Class A, Class M-1 and Class M-2 Certificates and the rights
of Owners of the Class R Certificates to receive distributions will be
subordinated in the same manner to such rights of the Owners of the Offered
Certificates.
APPLICATION OF REALIZED LOSSES
The Pooling and Servicing Agreement provides that if a Home Equity
Loan becomes a Liquidated Loan during a Remittance Period, the Net Liquidation
Proceeds relating thereto and allocated to principal may be less than the Loan
Balance of such Home Equity Loan. The amount of such insufficiency is a
Realized Loss. Realized Losses will, in effect, be absorbed first, by the
Class R Certificates (both through the application of the Monthly Excess
Interest Amount to fund such deficiency and through a reduction in the
Overcollateralization Amount), second, by the Owners of the Class B
Certificates, third, by the Owners of the Class M-2 Certificates, and, fourth,
by the Owners of the Class M-1 Certificates.
To the extent that the pool of Home Equity Loans experiences Realized
Losses, such Realized Losses will reduce the aggregate outstanding Loan Balance
of the Home Equity Loans, i.e, a reduction in the collateral balance will
occur. Since the Overcollateralization Amount is the excess, if any, of the
collateral balance over the Aggregate Certificate Principal Balance, Realized
Losses, to the extent experienced, will in the first instance reduce the
Overcollateralization Amount.
S-52
<PAGE> 57
The Pooling and Servicing Agreement requires that the
Overcollateralization Amount be initially increased to, and thereafter
maintained at, the Targeted Overcollateralization Amount. This increase and
subsequent maintenance is intended to be accomplished by the application of
Monthly Excess Interest Amounts to the funding of the Extra Principal
Distribution Amount. Such Extra Principal Distribution Amounts, since they are
funded from interest collections on the Home Equity Loans but are distributed
as principal on the Offered Certificates, will increase the
Overcollateralization Amount.
If, on any Payment Date after taking into account all Realized Losses
experienced during the prior Remittance Period and after taking into account
the distribution of principal (including the Extra Principal Distribution
Amount) with respect to the Offered Certificates on such Payment Date, the
Aggregate Certificate Principal Balance exceeds the aggregate Loan Balance of
the Home Equity Loans as of the end of the related Remittance Period (i.e. if
the level of overcollateralization is negative), then the Certificate Principal
Balance of the Subordinate Certificates will be reduced (in effect, "written
down") such that the level of overcollateralization is zero, rather than
negative. Such a negative level of overcollateralization is an Applied
Realized Loss Amount, which is applied as a reduction in the Certificate
Principal Balance of the Subordinate Certificates in reverse order of seniority
(i.e., first against the Class B Certificate Principal Balance until it is
reduced to zero, then against the Class M-2 Certificate Principal Balance until
it is reduced to zero and then against the Class M-1 Certificate Principal
Balance until it is reduced to zero). The Pooling and Servicing Agreement does
not permit the "write down" of the Certificate Principal Balance of any Class A
Certificate.
Once the Certificate Principal Balance of a Class of Subordinate
Certificates has been "written down," the amount of such write down will no
longer bear interest, nor will such amount thereafter be "reinstated" or
"written up," although the amount of such "write down" may, on future Payment
Dates be paid to Owners of the Subordinate Certificates which experienced the
"write down", in direct order of seniority (i.e., first, the Class M-1
Certificates, second, the Class M-2 Certificates and, third, the Class B
Certificates). The source of funding of such payments will be the amount, if
any, of the Monthly Excess Cashflow Amount remaining on such future Payment
Dates after the funding of the Extra Principal Distribution Amount and after
the payment of Interest Carry Forward Amounts with respect to the Subordinate
Certificates on such Payment Date.
APPLICATION OF MONTHLY EXCESS CASHFLOW AMOUNTS
The weighted average net Coupon Rate for the Home Equity Loans is
expected to be generally higher than the weighted average of the Pass-Through
Rates on the Offered Certificates, thus generating certain excess interest
collections which, in the absence of losses will not be necessary to fund
interest distributions on the Offered Certificates. The Pooling and Servicing
Agreement provides that this excess interest be applied to the extent
available, to make accelerated payments of principal (i.e., the Extra Principal
Distribution Amount) to the Class or Classes then entitled to receive
distributions of principal; such application will cause the Aggregate
Certificate Principal Balance to amortize more rapidly than the pool of Home
Equity Loans, resulting in overcollateralization.
The required level of overcollateralization for any Payment Date is
the Targeted Overcollateralization Amount for such Payment Date. The Targeted
Overcollateralization Amount is initially (i.e., prior to the Stepdown Date)
$17,062,500. Since the actual level of the Overcollateralization Amount is $0
as of the Closing Date, in the early months of the transaction, subject to the
availability of Monthly Excess Interest Amounts, Extra Principal Distribution
Amounts will be paid, with the result that the Overcollateralization Amount
will increase to the level of the Targeted Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount has been reached,
Realized Losses occur, such Realized Losses will result in an
Overcollateralization Deficiency (since such Realized Losses reduce the Loan
Balance of the Home Equity Loans without giving rise to a corresponding
reduction of the Aggregate Certificate Principal Balance). The cashflow
priorities of the Trust require that, in this situation, an Extra Principal
Distribution Amount be paid (subject to the availability of any Monthly Excess
Interest Amount) for the purpose of re-establishing the Overcollateralization
Amount at the then-required level of the Targeted Overcollateralization Amount.
On and after the Stepdown Date, the Targeted Overcollateralization
Amount is permitted to decrease or "step- down," below the $17,062,500 level to
a level equal to 3.50% of the then current aggregate outstanding Loan Balance
(subject to a floor of $4,875,000). If the Targeted Overcollateralization
Amount is permitted to "step-down" on a Payment Date, the Pooling and Servicing
Agreement permits a portion of the Principal Remittance Amount for such
S-53
<PAGE> 58
Payment Date not to be passed through as a distribution of principal on such
Payment Date. This has the effect of decelerating the amortization of the
Offered Certificates relative to the aggregate outstanding Loan Balance of the
Home Equity Loans, thereby reducing the actual level of the
Overcollateralization Amount to the new, lower Targeted Overcollateralization
Amount. This portion of the Principal Remittance Amount not distributed as
principal on the Certificates therefore releases overcollateralization from the
Trust. The amount of such releases are the Overcollateralization Release
Amounts.
On any Payment Date, the sum of the Monthly Excess Interest Amount and
the Overcollateralization Release Amount is the Monthly Excess Cashflow Amount,
which is required to be applied in the following order of priority on such
Payment Date:
(1) to fund the Extra Principal Distribution Amount for such
Payment Date;
(2) to fund the Class M-1 Interest Carry Forward Amount, if any;
(3) to fund the Class M-1 Realized Loss Amortization Amount for
such Payment Date;
(4) to fund the Class M-2 Interest Carry Forward Amount, if any;
(5) to fund the Class M-2 Realized Loss Amortization Amount for
such Payment Date;
(6) to fund the Class B Interest Carry Forward Amount, if any;
(7) to fund the Class B Realized Loss Amortization Amount for
such Payment Date;
(8) to the Servicer to the extent of any unreimbursed Delinquency
Advances or Servicing Advances;
(9) to the Trustee for reimbursement of expenses of the Trustee
that are not Trustee Reimbursable Expenses; and
(10) to fund a distribution to Owners of the Class R Certificates.
The Certificate Principal Balance of any Class of the Class A
Certificates is the Initial Certificate Principal Balance of such Class as
reduced by all amounts actually distributed to the Owners of such Class of
Class A Certificates on all prior Payment Dates.
"Class B Applied Realized Loss Amount" means, as to any Payment Date,
the lesser of (x) the Class B Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such Payment
Date, but prior to the application of the Class B Applied Realized Loss Amount,
if any, on such Payment Date) and (y) the Applied Realized Loss Amount as of
such Payment Date.
"Class B Certificate Principal Balance" means, as of any date of
determination, the Original Class B Certificate Principal Balance as reduced by
the sum of (x) all amounts actually distributed to the Owners of the Class B
Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Class B Applied Realized Loss Amounts on all
prior Payment Dates.
"Class B Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class B Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount, the Class M-1 Realized
Loss Amortization Amount, the Class M-2 Realized Loss Amortization Amount, the
Class M-1 Interest Carry Forward Amount, the Class M-2 Interest Carry Forward
Amount and the Class B Interest Carry Forward Amount in each case for such
Payment Date.
"Class M-1 Applied Realized Loss Amount" means, as to any Payment
Date, the lesser of (x) the Class M-1 Certificate Principal Balance (after
taking into account the distribution of the Principal Distribution Amount on
such Payment Date, but prior to the application of the Class M-1 Applied
Realized Loss Amount, if any, on such Payment Date) and (y) the excess of (i)
the Applied Realized Loss Amount as of such Payment Date over (ii) the sum of
the Class
S-54
<PAGE> 59
M-2 Applied Realized Loss Amount and the Class B Applied Realized Loss Amount,
in each case as of such Payment Date.
"Class M-1 Certificate Principal Balance" means, as of any date of
determination, the Original Class M-1 Certificate Principal Balance as reduced
by the sum of (x) all amounts actually distributed to the Owners of the Class
M-1 Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Class M-1 Applied Realized Loss Amounts on all
prior Payment Dates.
"Class M-1 Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class M-1 Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount and the Class M-1
Interest Carry Forward Amount for such Payment Date.
"Class M-2 Applied Realized Loss Amount" means, as to any Payment
Date, the lesser of (x) the Class M-2 Certificate Principal Balance (after
taking into account the distribution of the Principal Distribution Amount on
such Payment Date, but prior to the application of the Class M-2 Applied
Realized Loss Amount, if any, on such Payment Date) and (y) the excess of (i)
the Applied Realized Loss Amount as of such Payment Date over (ii) the sum of
the Class B Applied Realized Loss Amount and the Class M-1 Applied Realized
Loss Amount, in each case as of such Payment Date.
"Class M-2 Certificate Principal Balance" means, as of any date of
determination, the Original Class M-2 Certificate Principal Balance as reduced
by the sum of (x) all amounts actually distributed to the Owners of the Class
M-2 Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Class M-2 Applied Realized Loss Amounts on all
prior Payment Dates.
"Class M-2 Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class M-2 Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount, the Class M-1 Realized
Loss Amortization Amount, the Class M-2 Interest Carry Forward Amount for such
Payment Date.
"Unpaid Realized Loss Amount" means for any Class of the Subordinate
Certificates and as to any Payment Date, the excess of (x) the aggregate
cumulative amount of related Applied Realized Loss Amounts with respect to such
Class for all prior Payment Dates over (y) the aggregate, cumulative amount of
related Realized Loss Amortization Amounts with respect to such Class for all
prior Payment Dates.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
COVENANT OF THE SELLER TO TAKE CERTAIN ACTIONS WITH RESPECT TO THE HOME EQUITY
LOANS IN CERTAIN SITUATIONS
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, the Seller, any Sub- Servicer, any Owner, the Custodian or the
Trustee that the representations and warranties set forth below are untrue in
any material respect as of the Closing Date with the result that the interests
of the Owners are materially and adversely affected, the party discovering such
breach is required to give prompt written notice to the other parties.
Upon the earliest to occur of the Seller's discovery, its receipt of
notice of breach from any of the other parties or such time as a situation
resulting from an existing statement which is untrue materially and adversely
affects the interests of the Owners, the Seller will be required promptly to
cure such breach in all material respects or the Seller shall on or prior to
the second Monthly Remittance Date next succeeding such discovery, such receipt
of notice or such time (i) substitute in lieu of each Home Equity Loan which
has given rise to the requirement for action by the Seller a "Qualified
Replacement Mortgage" (as such is defined in the Pooling 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
S-55
<PAGE> 60
balance of the replacement Home Equity Loan plus interest (the "Substitution
Amount") to the Trustee on behalf of the Trust as part of the Monthly
Remittance remitted by the Servicer on such Monthly Remittance Date or (ii)
purchase such Home Equity Loan from the Trust at a purchase price equal to the
Loan Purchase Price (as defined below) thereof. Notwithstanding any provision
of the Pooling and Servicing Agreement to the contrary, with respect to any
Home Equity Loan which is not in default or as to which no default is imminent,
no such repurchase or substitution will be made unless the Seller obtains for
the Trustee, at the Seller's expense, an opinion of counsel experienced in
federal income tax matters to the effect that such a repurchase or substitution
would not constitute a Prohibited Transaction for the Trust or otherwise
subject the Trust to tax and would not jeopardize the status of either the
Upper-Tier REMIC or the Lower-Tier REMIC as a REMIC (a "REMIC Opinion")
addressed to the Trustee. The Seller shall also deliver an Officer's
Certificate to the Trustee concurrently with the delivery of a Qualified
Replacement Mortgage stating that such Home Equity Loan meets the requirements
of a Qualified Replacement Mortgage and that all other conditions to the
substitution thereof have been satisfied. Any Home Equity Loan as to which
repurchase or substitution was delayed pursuant to the Pooling and Servicing
Agreement shall be repurchased or substituted for (subject to compliance with
the provisions of the Pooling and Servicing Agreement) upon the earlier of (a)
the occurrence of a default or imminent default with respect to such Home
Equity Loan and (b) receipt by the Trustee of a REMIC Opinion. In connection
with any breach of a representation, warranty or covenant or defect in
documentation giving rise to such repurchase or substitution obligation, the
Seller agrees that it shall, at the Seller's expense, furnish the Trustee
either a REMIC Opinion or an opinion of counsel rendered by independent counsel
that the effects described in a REMIC Opinion may occur as a result of any such
repurchase or substitution. The obligation of the Seller to so substitute or
repurchase any Home Equity Loan as to which 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 Trustee.
"Loan Purchase Price" means an amount equal to the Loan Balance of
such Home Equity Loan as of the date of purchase (assuming that the Monthly
Remittance Amount remitted by the Servicer on such Monthly Remittance Date has
already been remitted), plus all accrued and unpaid interest on such Home
Equity Loan at the Coupon Rate to but not including the Monthly Remittance Date
in the Remittance Period of such purchase together with (without duplication)
the aggregate amount of (i) all unreimbursed Delinquency Advances and Servicing
Advances theretofore made with respect to such Home Equity Loan, (ii) all
Delinquency Advances which the Servicer has theretofore failed to remit with
respect to such Home Equity Loan and (iii) all reimbursed Delinquency Advances
to the extent that such reimbursement is not made from the Mortgagor or from
Liquidation Proceeds from the respective Home Equity Loan.
ASSIGNMENT OF HOME EQUITY LOANS
Pursuant to the Pooling and Servicing Agreement, the Seller on the
Closing Date will transfer, assign, set over and otherwise convey without
recourse to the Depositor and the Depositor will transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust for the benefit of
the Owners all right, title and interest of the Seller in and to each Initial
Home Equity Loan and all its right, title and interest in and to principal and
interest due on each such Initial Home Equity Loan after the Cut-Off Date;
provided, however, that the Seller will reserve and retain all its right, title
and interest in and to principal (including Prepayments received on or before
the Cut-Off Date) and interest due on each Initial Home Equity Loan on or prior
to the Cut-Off Date (whether or not received on or prior to the Cut-Off Date).
Purely as a protective measure and not to be construed as contrary to the
parties' intent that the transfer on the Closing Date is a sale, the Seller has
also been deemed to have granted to the Depositor and the Depositor has also
been deemed to have granted to the Trustee a security interest in the Trust
Estate in the event that the transfer of the Trust Estate is deemed to be a
loan and not a sale.
In connection with the transfer and assignment of the Initial Home
Equity Loans on the Closing Date and the Subsequent Home Equity Loans on each
Subsequent Transfer Date, the Seller will be required to:
(i) deliver without recourse to BankBoston, N.A. (the
"Custodian") on behalf of the Trustee on the Closing Date with respect
to each Initial Home Equity Loan or on each Subsequent Transfer Date
with respect to each Subsequent Home Equity Loan identified in the
related Schedule of Home Equity Loans (A) the original Notes, endorsed
in blank or to the order of the Trustee, (B) (I) the original title
insurance commitment or a copy thereof certified as a true copy by the
closing agent or the Seller, or if available, the original title
insurance policy or a copy certified by the issuer of the title
insurance policy or (II) the attorney's opinion of title, (C)
originals or copies of all intervening assignments certified as true
copies by the closing agent or the Seller, showing a complete chain of
title from origination to the Trustee, if any, including warehousing
S-56
<PAGE> 61
assignments, if recorded, (D) originals of all assumption and
modification agreements, if any and (E) either: (1) the original
Mortgage, with evidence of recording thereon (if such original
Mortgage has been returned to Seller from the applicable recording
office) or a copy (if such original Mortgage has not been returned to
Seller from the applicable recording office) of the Mortgage certified
as a true copy by the closing agent or the Seller or (2) a copy of the
Mortgage certified by the public recording office in those instances
where the original recorded Mortgage has been lost or retained by the
recording office;
(ii) cause, within 60 days following the Closing Date with
respect to the Initial Home Equity Loans, or Subsequent Transfer Date
with respect to Subsequent Home Equity Loans, assignments of the
Mortgages to "The Chase Manhattan Bank, as Trustee of IMC Home Equity
Loan Trust 1997-5 under the Pooling and Servicing Agreement dated as
of September 1, 1997" 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 Pooling and Servicing Agreement) if the
Seller furnishes to the Trustee and the Rating Agencies, on or before
the Closing Date with respect to the Initial Home Equity Loans or on
each Subsequent Transfer Date with respect to each Subsequent Home
Equity Loans, at the Seller's expense, an opinion of counsel with
respect to the relevant jurisdiction that such recording is not
required to perfect the Trustee's interests in the related Mortgages
Loans (in form satisfactory to the Trustee and the Rating Agencies);
(iii) deliver the title insurance policy, the original
Mortgages and such recorded assignments, together with originals or
duly certified copies of any and all prior assignments (other than
unrecorded warehouse assignments), to the Custodian on behalf of the
Trustee within 15 days of receipt thereof by the Seller (but in any
event, with respect to any Mortgage as to which original recording
information has been made available to the Seller, within one year
after the Closing Date with respect to the Initial Home Equity Loans,
or each Subsequent Transfer Date with respect to the Subsequent Home
Equity Loans); and
(iv) furnish to the Trustee and the Rating Agencies, at the
Seller's expense, an opinion of counsel with respect to the sale and
perfection of all Subsequent Home Equity Loans delivered to the Trust
in form and substance satisfactory to the Trustee and the Rating
Agencies.
The Trustee will agree, for the benefit of the Owners, to cause the
Custodian to review each File within 45 days after the Closing Date or
Subsequent Transfer Date (or the date of receipt of any documents delivered to
the Trustee after the Closing Date or Subsequent Transfer Date) to ascertain
that all required documents (or certified copies of documents) have been
executed and received.
If the Custodian on behalf of the Trustee during such 45-day period
finds any document constituting a part of a File which is not properly
executed, has not been received, is unrelated to the Home Equity Loans or that
any Home Equity Loan does not conform in a material respect to the description
thereof as set forth in the Schedule of Home Equity Loans, the Custodian on
behalf of the Trustee will be required to promptly notify the Depositor, the
Seller and the Owners. The Seller will agree in the Pooling and Servicing
Agreement to use reasonable efforts to remedy a material defect in a document
constituting part of a File of which it is so notified by the Custodian on
behalf of the Trustee. If, however, within 90 days after such notice to it
respecting such defect the Seller shall not have remedied the defect and the
defect materially and adversely affects the interest in the related Home Equity
Loan of the Owners, the Seller will be required on the next succeeding Monthly
Remittance Date to (or will cause an affiliate of the Seller to) (i) substitute
in lieu of such Home Equity Loan a Qualified Replacement Mortgage and deliver
the Substitution Amount to the Trustee on behalf of the Trust as part of the
Monthly Remittance remitted by the Servicer on such Monthly Remittance Date or
(ii) purchase such Home Equity Loan at a purchase price equal to the Loan
Purchase Price thereof, which purchase price shall be delivered to the Trust
along with the Monthly Remittance remitted by the Servicer on such Monthly
Remittance Date.
S-57
<PAGE> 62
In addition to the foregoing, the Custodian on behalf of the Trustee
has agreed to make a review during the 12th month after the Closing Date
indicating the current status of the exceptions previously indicated on the
Pool Certification (the "Final Certification"). After delivery of the Final
Certification, the Custodian, on behalf of the Trustee and the Servicer shall
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 Pooling and Servicing Agreement, the terms of the
respective Home Equity Loans, and the servicing standards set forth in
FannieMae's Servicing Guide (the "FannieMae Guide"); provided, however, that to
the extent such standards, such obligations or the FannieMae Guide is amended
by FannieMae after the date of the Pooling and Servicing Agreement and the
effect of such amendment would be to impose upon the Servicer any material
additional costs or other burdens relating to such servicing obligations, the
Servicer may, at its option, determine not to comply with such amendment in
accordance with the servicing standards set forth in the Pooling and Servicing
Agreement.
The Servicer may retain from the interest portion of each monthly
payment, the Servicing Fee. In addition, the Servicer will be entitled to
retain additional servicing compensation in the form of prepayment charges,
release fees, bad check charges, assumption fees, late payment charges,
prepayment penalties, or any other servicing-related fees, Net Liquidation
Proceeds not required to be deposited in the Principal and Interest Account
pursuant to the Pooling and Servicing Agreement, and similar items.
The Servicer is required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Home Equity Loans,
and, to the extent such procedures are consistent with the Pooling and
Servicing Agreement and the terms and provisions of any applicable insurance
policy, to follow collection procedures for all Home Equity Loans at least as
rigorous as those described in the FannieMae Guide. Consistent with the
foregoing, the Servicer may in its discretion waive or permit to be waived any
late payment charge, prepayment charge, assumption fee or any penalty interest
in connection with the prepayment of a Home Equity Loan or any other fee or
charge which the Servicer would be entitled to retain as additional servicing
compensation. In the event the Servicer consents to the deferment of the due
dates for payments due on a Note, the Servicer will nonetheless be required to
make payment of any required Delinquency Advances with respect to the interest
payments so extended to the same extent as if the interest portion of such
installment were due, owing and delinquent and had not been deferred.
The Servicer is required to create, or cause to be created, in the
name of the Trustee, at one or more depository institutions a principal and
interest account maintained as a trust account in the trust department of such
institution (the "Principal and Interest Account"). All funds in the Principal
and Interest Account are required to be held (i) uninvested, or (ii) invested
in Eligible Investments (as defined in the Pooling and Servicing Agreement).
Any investment of funds in the Principal and Interest Account must mature or be
withdrawable at par on or prior to the immediately succeeding Monthly
Remittance Date. Any investment earnings on funds held in the Principal and
Interest Account are for the account of, and any losses therein are also for
the account of, and must be promptly replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest
Account, within one business day following receipt, all principal and interest
due on the Home Equity Loans after the Cut-Off Date, including any Prepayments
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 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:
S-58
<PAGE> 63
(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 Trustee for deposit in the Certificate
Account the Daily Collections allocable to a Remittance Period not later than
the related Monthly Remittance Date, and Loan Purchase Prices and Substitution
Amounts two Business Days following the related repurchase or substitution, as
the case may be.
On each Monthly Remittance Date, the Servicer shall be required to
remit to the Trustee for deposit to the Certificate Account out of the
Servicer's own funds any Delinquent payment of interest with respect to each
Delinquent Home Equity Loan, which payment was not received on or prior to the
related 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 Certificate Account out of the Monthly Excess Cashflow Amount.
Notwithstanding the foregoing, in the event that the Servicer
determines in its reasonable business judgment in accordance with the servicing
standards of the Pooling and Servicing Agreement that any proposed Delinquency
Advance if made would not be recoverable, the Servicer shall not be required to
make such Delinquency Advances with respect to such Home Equity Loan. To the
extent that the Servicer previously has made Delinquency Advances with respect
to a Home Equity Loan that the Servicer subsequently determines to be
nonrecoverable, the Servicer shall be entitled to reimbursement for such
aggregate unreimbursed Delinquency Advances as provided above. The Servicer
shall give written notice of such determination as to why such amount is or
would be nonrecoverable to the Trustee.
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 Certificate Account as provided in the Pooling 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 Coupon Rate will be due on the
outstanding Loan Balance of each Home Equity Loan as of the beginning of each
Remittance Period. If a prepayment in full of a Home Equity Loan or a
Prepayment of at least six times a Mortgagor's Monthly Payment occurs during
any calendar month, any difference between the interest collected from the
Mortgagor in connection with such payoff and the full month's interest at the
Coupon Rate that would be due on the related due date for such Home Equity Loan
(such difference, the "Compensating Interest") (but not in excess of the
aggregate Servicing Fee for the related Remittance Period), will be required to
be deposited to the Principal and Interest Account (or if such difference is an
excess, the Servicer shall retain such excess) on the next succeeding Monthly
Remittance Date by the Servicer and shall be included in the Monthly Remittance
Amount to be made available to the Trustee on the next succeeding Monthly
Remittance Date.
S-59
<PAGE> 64
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;
provided, however, that the Servicer may not purchase any such Home Equity Loan
unless the Servicer has delivered to the Trustee, at the Servicer's expense, an
opinion of counsel delivered to the Trustee to the effect that such a purchase
would not constitute a Prohibited Transaction for the Trust or otherwise
subject the Trust to tax and would not jeopardize the status of either the
Upper- Tier REMIC or the Lower-Tier REMIC as a REMIC. The purchase price for
any such Home Equity Loan is equal to the Loan Purchase Price thereof, which
purchase price shall be deposited in the Principal and Interest Account.
The Servicer is required to cause to be liquidated any Home Equity
Loan relating to a Property as to which ownership has been effected in the name
of the Servicer on behalf of the Trust and which has not been liquidated within
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 Pooling and Servicing
Agreement to accept applications of Mortgagors for consent to (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Properties. No application for approval may be considered by the
Servicer unless: (a) the provisions of the related Note and Mortgage have been
complied with; (b) the loan-to-value ratio and debt-to-income ratio after any
release do not exceed the loan-to-value ratio and debt-to-income ratio,
respectively, of such Note on the Cut-Off Date provided that the loan-to-value
ratio shall be permitted to be increased by an amount not to exceed 5%; and (c)
the lien priority of the related Mortgage is not affected.
The Servicer shall not agree to any modification, waiver or amendment
of any provision of any Home Equity Loan unless, in the Servicer's good faith
judgment, such modification, waiver or amendment would minimize the loss that
might otherwise be experienced with respect to such Home Equity Loan and only
in the event of a payment default with respect to such Home Equity Loan or in
the event that a payment default with respect to such Home Equity Loan is
reasonably foreseeable by the Servicer; provided, however, that no such
modification, waiver or amendment shall extend the maturity date of such Home
Equity Loan beyond the Remittance Period related to the Final Scheduled Payment
Date of the latest Class of Offered Certificates remaining in the Trust.
Notwithstanding anything set forth in the Pooling and Servicing Agreement to
the contrary, the Servicer shall be permitted to modify, waive or amend any
provision of a Home Equity Loan if required by statute or a court of competent
jurisdiction to do so.
The Servicer shall provide written notice to the Trustee 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 Trustee for
deposit in the related File, an original counterpart of the agreement relating
to such modification, waiver or amendment, promptly following the execution
thereof.
As noted under "The Seller and Servicer -- General" herein, the
Servicer will be permitted under the Pooling and Servicing Agreement to enter
into Sub-Servicing Agreements for any servicing and administration of Home
Equity Loans with any institution that (x) is in compliance with the laws of
each state necessary to enable it to perform its obligations under such
Sub-Servicing Agreement, (y) has experience servicing home equity loans that
are similar to the Home Equity Loans and (z) has equity of not less than
$5,000,000 (as determined in accordance with generally accepted accounting
principles).
No Sub-Servicing arrangements discharge the Servicer from its
servicing obligations. Notwithstanding any Sub-Servicing Agreement, the
Servicer will not be relieved of its obligations under the Pooling and
Servicing Agreement and the Servicer will be obligated to the same extent and
under the same terms and conditions as if it alone were servicing and
administering the Home Equity Loans. The Servicer shall be entitled to enter
into any agreement with a Sub-Servicer for indemnification of the Servicer by
such Sub-Servicer and nothing contained in such Sub- Servicing Agreement shall
be deemed to limit or modify the Pooling and Servicing Agreement.
S-60
<PAGE> 65
The Servicer (except the Trustee if it is required to succeed the
Servicer under the Pooling and Servicing Agreement) has agreed to indemnify and
hold the Trustee and each Owner harmless against any and all claims, losses,
penalties, fines, forfeitures, legal fees and related costs, judgments, and any
other costs, fees and expenses that the Trustee and any Owner may sustain in
any way related to the failure of the Servicer to perform its duties and
service the Home Equity Loans in compliance with the terms of the Pooling and
Servicing Agreement. The Servicer shall immediately notify the Trustee and
each Owner if a claim is made by a third party with respect to the Pooling and
Servicing Agreement, and the Servicer shall assume the defense of any such
claim and pay all expenses in connection therewith, including reasonable
counsel fees, and promptly pay, discharge and satisfy any judgment or decree
which may be entered against the Servicer, the Trustee and/or Owner in respect
of such claim. The Trustee shall reimburse the Servicer from amounts otherwise
distributable on the Class R Certificates for all amounts advanced by it
pursuant to the preceding sentence, except when a final nonappealable
adjudication determines that the claim relates directly to the failure of the
Servicer to perform its duties in compliance with the Pooling and Servicing
Agreement. The indemnification provisions shall survive the termination of the
Pooling and Servicing Agreement and the payment of the outstanding
Certificates.
The Servicer will be required to deliver to the Trustee and the Rating
Agencies on or before April 30 of each year, commencing in 1998: (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 Pooling 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
Pooling and Servicing Agreement for such year, or, if there has been a default
in the fulfillment of all such obligation, specifying each such default known
to such officers and the nature and status thereof including the steps being
taken by the Servicer to remedy such default and (ii) a letter or letters of a
firm of independent, nationally recognized certified public accountants
reasonably acceptable to the Trustee stating that such firm has examined the
Servicer's overall servicing operations in accordance with the requirements of
the Uniform Single Attestation Program for Mortgage Bankers, and stating such
firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF SERVICER
The Trustee, at the direction of a majority of the Owners, will have
the right, pursuant to the Pooling 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 Pooling and
Servicing Agreement (including certain performance tests related to the
delinquency rate and cumulative losses of the Home Equity Loan Pool); (c) the
failure to cure material breaches of the Servicer's representations in the
Pooling and Servicing Agreement; or (d) certain mergers or other combinations
of the Servicer with another entity.
The Servicer is not permitted to resign from the obligations and
duties imposed on it under the Pooling and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Servicer so
causing such conflict being of a type and nature carried on by the Servicer on
the date of the Pooling and Servicing Agreement. Any such determination
permitting the resignation of the Servicer is required to be evidenced by an
opinion of counsel to such effect which shall be delivered, and reasonably
acceptable, to the Trustee.
Upon removal or resignation of the Servicer, the Trustee may (A)
solicit bids for a successor servicer as described in the Pooling and Servicing
Agreement and (B) until such time as a successor servicer is appointed pursuant
to the terms of the Pooling and Servicing Agreement, shall serve in the
capacity of Backup Servicer. The Trustee, if it is unable to obtain a
qualifying bid and is prevented by law from acting as servicer, will be
required to appoint, or petition a court of competent jurisdiction to appoint,
any housing and home finance institution, bank or mortgage servicing
institution designated as an approved seller-servicer by FHLMC or FannieMae,
having equity of not less than $5,000,000, and acceptable to a majority of the
Owners of the Offered Certificates 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 Pooling and Servicing
Agreement.
S-61
<PAGE> 66
THE TRUSTEE
The Chase Manhattan Bank, a New York banking corporation, having its
principal corporate trust office at 450 West 33rd Street, New York, New York
10001, will be named as Trustee under the Pooling and Servicing Agreement.
REPORTING REQUIREMENTS
On each Payment Date the Trustee will be required to report in writing
(based on information provided to the Trustee by the Servicer) to each Owner
and the Rating Agencies:
i) the amount of the distribution with respect each
Class of Certificates (based on a Certificate in the original
principal amount of $1,000);
ii) the amount of such distributions allocable to
principal on the Home Equity Loans, separately identifying the
aggregate amount of any prepayments in full or Prepayments or other
recoveries of principal included therein and any Pre-Funded Amounts
distributed as a prepayment (based on a Certificate in the original
principal amount of $1,000) and any Extra Principal Distribution
Amount;
iii) the amount of such distribution allocable to
interest on the Home Equity Loans (based on a Certificate in the
original principal amount of $1,000);
iv) the Interest Carry-Forward Amount for each Class;
v) the principal amount of each Class of Offered
Certificate (based on a Certificate in the original principal amount
of $1,000) which will be Outstanding after giving effect to any
payment of principal on such Payment Date;
vi) the aggregate Loan Balance of all Home Equity Loans
after giving effect to any payment of principal 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;
viii) the total of any Substitution Amounts or Loan
Purchase Price amounts included in such distribution;
ix) the weighted average Coupon Rate of the Home Equity
Loans;
x) LIBOR relating to such Payment Date;
xi) whether a Trigger Event is in effect;
xii) the Senior Enhancement Percentage;
xiii) the Overcollateralization Amount;
xiv) the amount of any Applied Realized Loss Amount,
Realized Loss Amortizations Amount and Unpaid Realized Loss Amount for
each Class as of the close of such Payment Date; and
xv) for the initial Payment Date the total remaining
Pre-Funded Amount in the Pre-Funding Account.
Certain obligations of the Trustee to provide information to the
Owners are conditioned upon such information being received from the Servicer.
S-62
<PAGE> 67
In addition, on the Business Day preceding each Payment Date the
Trustee will be required to distribute to each Owner and the Rating Agencies,
together with the information described above, the following information
prepared by the Servicer and furnished to the 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
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;
(f) the amount of cumulative Realized Losses, the
current period Realized Losses (each as defined in the Pooling and
Servicing Agreement) and any other loss percentages as required by the
Pooling and Servicing Agreement; and
(g) the aggregate Loan Balances of 60+ Day Delinquent
Loans.
REMOVAL OF TRUSTEE FOR CAUSE
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such
case (i) the Seller or (ii) the Owners of a majority of the Percentage
Interests represented by the Offered Certificates or, if there are no Offered
Certificates then Outstanding, by a majority of the Percentage Interests
represented by the Class R Certificates, may appoint a successor trustee.
GOVERNING LAW
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
AMENDMENTS
The Trustee, the Depositor, the Seller and the Servicer may, at any
time and from time to time and without notice to or the consent of the Owners,
amend the Pooling and Servicing Agreement, and the Trustee will be required to
consent to such amendment, for the purposes of (i) if accompanied by an
approving opinion of counsel experienced
S-63
<PAGE> 68
in federal income tax matters, removing the restriction against the transfer of
a Class R Certificate to a Disqualified Organization (as such term is defined
in the Code), (ii) complying with the requirements of the Code including any
amendments necessary to maintain the REMIC status of the Lower-Tier REMIC and
the Upper-Tier REMIC, (iii) curing any ambiguity, (iv) correcting, modifying or
supplementing any provisions therein which are inconsistent with any other
provisions therein, or (v) for any other purpose, provided that in the case of
clause (v), such amendment shall not adversely affect in any material respect
any Owner. 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
Offered Certificates. Notwithstanding anything to the contrary, no such
amendment shall (a) change in any manner the amount of, or delay the timing of,
payments which are required to be distributed to any Owner without the consent
of the Owner of such Certificate or (b) change the percentages of Percentage
Interest which are required to consent to any such amendments, without the
consent of the Owners of all Certificates of the Class or Classes affected then
Outstanding.
TERMINATION OF THE TRUST
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the payment to the Owners of all Certificates from amounts of
all amounts required to be paid to such Owners upon the later to occur of (a)
the final payment or other liquidation (or any advance made with respect
thereto) of the last Home Equity Loan, (b) the disposition of all property
acquired in respect of any Home Equity Loan remaining in the Trust Estate and
(c) at any time when a Qualified Liquidation (as defined in the Pooling and
Servicing Agreement) of the Trust Estate is effected as described below. To
effect a termination pursuant to clause (c) above, the Owners of all
Certificates then outstanding will be required (i) unanimously to direct the
Trustee on behalf of the Lower-Tier REMIC to adopt a plan of complete
liquidation, as contemplated by Section 860F(a)(4) of the Code and (ii) to
furnish to the Trustee an opinion of counsel experienced in federal income tax
matters acceptable to the Trustee to the effect that such liquidation
constitutes a Qualified Liquidation.
OPTIONAL TERMINATION
BY OWNERS OF CLASS R CERTIFICATES. At their option, the Owners of a
majority of the Percentage Interest represented by the Class R Certificates
then Outstanding may on any Monthly Remittance Date when the aggregate
outstanding Loan Balances of the Home Equity Loans is 10% or less of the
Maximum Collateral Amount purchase from the Trust all (but not fewer than all)
remaining Home Equity Loans, in whole only, and other property acquired by
foreclosure, deed in lieu of foreclosure, or otherwise then constituting the
Trust Estate, and thereby effect early retirement of the Certificates. The
proceeds from any such termination may not be sufficient to distribute the full
amount to which each Class of Certificates is entitled if the purchase price is
based in part on the appraised value of any REO property underlying the Home
Equity Loans and such appraisal value is less than principal balance of the
related Home Equity Loans.
TERMINATION UPON LOSS OF REMIC STATUS. Following a final
determination by the Internal Revenue Service or by a court of competent
jurisdiction, in either case from which no appeal is taken within the permitted
time for such appeal, or if any appeal is taken, following a final
determination of such appeal from which no further appeal can be taken, to the
effect that either the Upper-Tier REMIC or the Lower-Tier REMIC does not and
will no longer qualify as a "REMIC" pursuant to Section 860D of the Code (the
"Final Determination"), at any time on or after the date which is 30 calendar
days following such Final Determination, the Owners of a majority in Percentage
Interests represented by the Offered Certificates then Outstanding may direct
the Trustee on behalf of the Trust to adopt a plan of complete liquidation, as
contemplated by Section 860F(a)(4) of the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following section discusses certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Offered Certificates. Such section must be considered only in connection
with "Federal Income Tax Consequences" in the Prospectus. The discussion
herein and in the Prospectus is based upon laws, regulations, rulings and
decisions now in effect, all of which are subject to change. The discussion
below and in the Prospectus does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal,
S-64
<PAGE> 69
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Offered Certificates.
REMIC ELECTIONS
The Trust (other than the Non-REMIC Accounts) created by the Pooling
and Servicing Agreement will consist of two segregated asset pools with respect
to which elections will be made to treat each as a separate REMIC for federal
income tax purposes. The Lower-Tier REMIC will issue several uncertificated
subclasses of non-voting interests (the "Lower-Tier REMIC Regular Interests"),
which will be designated as the regular interests in the Lower-Tier REMIC, and
an "Lower-Tier REMIC Residual Class", which will be designated as the residual
interest in the Lower-Tier REMIC. The assets of the Lower-Tier REMIC will
consist of the Home Equity Loans and all other property in the Trust except for
the property in the Trust allocated to the Upper-Tier REMIC. The Upper-Tier
REMIC will issue the Offered Certificates which will be designated as the
regular interests in the Upper-Tier REMIC and the Class R Certificate which
will be designated as the residual interest in the Upper-Tier REMIC. The
assets of the Upper-Tier REMIC will consist of the Lower-Tier REMIC Regular
Interests and the Upper-Tier Distribution Accounts. See "Formation of the
Trust and Trust Property" herein.
Qualification as a REMIC requires ongoing compliance with certain
conditions. Arter & Hadden, special tax counsel, is of the opinion that, for
federal income tax purposes, assuming (i) the REMIC elections are made and (ii)
compliance with the Pooling and Servicing Agreement, each of the Lower-Tier
REMIC and the Upper-Tier REMIC will be treated as a REMIC, the Lower-Tier REMIC
Regular Interests will be treated as "regular interests" in the Lower-Tier
REMIC, the Offered Certificates will be treated as "regular interests" in the
Upper-Tier REMIC, the Class R Certificate will be treated as the sole "residual
interest" in the Upper-Tier REMIC and the Lower-Tier REMIC Residual Class will
be the sole "residual interest" in the Lower-Tier REMIC. Except as indicated
below and in the Prospectus, for federal income tax purposes, regular interests
in a REMIC are treated as debt instruments issued by such REMIC on the date on
which those interests are created, and not as ownership interests in such REMIC
or its assets. Owners of the Offered Certificates that otherwise report income
under a cash method of accounting will be required to report income with
respect to such Offered Certificates under an accrual method.
The prepayment assumption for each Class of the Offered Certificates
for calculating original issue discount is 100% of the related Prepayment
Assumption. See "Prepayment and Yield Considerations -- Prepayment and Yield
Scenarios for Offered Certificates" herein.
As a result of the qualification of the Lower-Tier REMIC and the
Upper-Tier REMIC as REMICs, the Trust will not be subject to federal income tax
except with respect to (i) income from prohibited transactions, (ii) "net
income from foreclosure property" and (iii) certain contributions to the Trust
after the Closing Date (see "Federal Income Tax Consequences" in the
Prospectus). The total income of the Trust (exclusive of any income that is
taxed at the REMIC level) will be taxable to the Beneficial Owners of the
Certificates.
Under the laws of New York State and New York City, an entity that is
treated for federal income tax purposes as a REMIC generally is exempt from
entity level taxes imposed by those jurisdictions. This exemption does not
apply, however, to the income on the Offered Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the
restrictions of ERISA, and assets of such plans may be invested in the
Certificates without regard to the ERISA considerations described below,
subject to other applicable federal and state law. However, any such
governmental or church plan which is qualified under section 401(a) of the Code
and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code.
S-65
<PAGE> 70
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions ("prohibited transactions")
involving a Plan and its assets unless a statutory or administrative exemption
applies to the transaction. Section 4975 of the Code imposes certain excise
taxes (or, in some cases, a civil penalty may be assessed pursuant to section
502(i) of ERISA) on parties in interest which engage in non-exempt prohibited
transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity investment"
will be deemed for purposes of ERISA to be assets of the Plan unless certain
exceptions apply.
Under the terms of the regulation, the Trust may be deemed to hold
plan assets by reason of a Plan's investment in a Certificate; such plan assets
would include an undivided interest in the Home Equity Loans and any other
assets held by the Trust. In such an event, persons providing services with
respect to the assets of the Trust, may be parties in interest, subject to the
fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA (and of Section 4975
of the Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
One such exception applies if the class of equity interests in
question is (i) "widely held", (ii) freely transferable, and (iii) sold as part
of an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition the regulation provides that if at all times more
than 75% of the value of classes of equity interests in the Trust are held by
investors other than benefit plan investors (which is defined as including
plans subject to ERISA, government plans and individual retirement accounts),
the investing Plan's assets will not include any of the underlying assets of
the Trust.
The DOL has issued to each of the Underwriters an individual
prohibited transaction exemption from certain of the prohibited transaction
rules of ERISA (the "Exemption"), with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption. The loans covered by
the Exemption include home equity loans such as the Home Equity Loans.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on
terms (including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arms-length transaction
with an unrelated party;
(2) the rights and interests evidenced by the
certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other certificates of the trust;
(3) the certificates acquired by the Plan have received
a rating at the time of such acquisition that is one of the three
highest generic rating categories from either Standard & Poor's
Ratings Services, Moody's, Duff & Phelps Credit Rating Co. ("D&P") or
Fitch;
(4) the Trustee is not an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the loans to the Trust Estate
represents not more than the fair market value of such loans; the sum
of all payments made to and retained by the Trustee and the Servicer
represents not more than reasonable compensation for
S-66
<PAGE> 71
such person's services under the Pooling and Servicing Agreement and
reimbursement of such person's reasonable expenses in connection
therewith; and
(6) the Plan investing in the certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of
1933.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent of each class of certificates
in which Plans have invested is acquired by persons independent of the
Restricted Group; (ii) the Plan's investment in certificates of any class does
not exceed twenty-five percent of all of the certificates of that class
outstanding at the time of the acquisition; and (iii) immediately after the
acquisition, no more than twenty-five percent of the assets of the Plan with
respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Depositor, the Underwriters, the Trustee, the Servicer, any obligor with
respect to Home Equity Loans included in the Trust Estate constituting more
than five percent of the aggregate unamortized principal balance of the assets
in the Trust Estate, or any affiliate of such parties (the "Restricted Group").
On July 21, 1997, the DOL published in the Federal Register amendments
to the Exemptions ("PTE 97-34"), which extend exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendments generally allow Mortgage Loans supporting payments
to Owners, and having a principal amount equal to no more than 25% of the total
principal amount of the Certificates being offered by the Trust, to be
transferred to the Trust within a funding period no longer than 90 days or
three months following the Closing Date instead of requiring that all such
Mortgage Loans be either identified or transferred on or before the Closing
Date. The relief will apply to the purchase, sale and holding of the Class A
Certificates, provided that the following general conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being
offered ("Pre-Funding Limit") does not exceed 25%;
(2) all Subsequent Mortgage Loans meet the same terms
and conditions for eligibility as the original Mortgage Loans used to
create the Trust, which terms and conditions have been approved by the
Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to
the Trust during the Funding Period does not result in the
Certificates to be covered by the Exemptions receiving a lower credit
rating from a Rating Agency upon termination of the Funding Period
than the rating that was obtained at the time of the initial issuance
of the Certificates by the Trust;
(4) solely as a result of the use of pre-funding, the
weighted average annual percentage interest rate (the "Average
Interest Rate") for all of the Mortgage Loans and Subsequent Mortgage
Loans in the Trust at the end of the Funding Period is not more than
100 basis points lower than the Average Interest Rate for the Mortgage
Loans which were transferred to the Trust on the Closing Date;
(5) either: (i) the characteristics of the Subsequent
Mortgage Loans are monitored by an insurer or other credit support
provider which is independent of the Company; or (ii) an independent
accountant retained by the Company provides the Company with a letter
(with copies provided to the Rating Agencies, the Underwriters and the
Trustee) stating whether or not the characteristics of the Subsequent
Mortgage Loans conform to the characteristics described in the
Prospectus or Prospectus Supplement and/or Pooling and Servicing
Agreement. In preparing such letter, the independent accountant must
use the same type of procedures as were applicable to the Mortgage
Loans which were transferred to the Trust as of the Closing Date;
(6) the Funding Period ends no later than three months
or 90 days after the Closing Date or earlier in certain circumstances
if the Pre-Funding Account falls below the minimum level specified in
the Pooling and Servicing Agreement or an event of default occurs;
S-67
<PAGE> 72
(7) amounts transferred to any Pre-Funding Account
and/or Capitalized Interest Account used in connection with the
pre-funding may be invested only in investments which are permitted by
the Rating Agencies and; (i) are direct obligations of, or
obligations fully guaranteed as to timely payment of principal and
interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith
and credit of the United States); or (ii) have been rated (or the
obligor has been rated) in one of the three highest generic rating
categories by such Rating Agency;
(8) the Prospectus or Prospectus Supplement describes:
(i) any Pre-Funding Account and/or Capitalized Interest Account; (ii)
the duration of the Funding Period; (iii) the percentage and/or
dollar amount of the Pre-Funding Limit for the Funding Period that
will be remitted to Owners as repayments of principal; and (iv) that
the amounts remaining in the Pre-Funding Account at the end of the
Funding Period will be remitted to Owners as repayments of principal;
and
(9) the Pooling and Servicing Agreement describes the
permitted investments for the Pre-Funding Account and/or Capitalized
Interest Account and, if not disclosed in the Prospectus or Prospectus
Supplement, the terms and conditions for eligibility of Subsequent
Mortgage Loans.
It is believed that all of the conditions for exemptive relief under
the amendments to the Exemptions with respect to pre-funding have been or will
be satisfied.
The exemptions do not apply to the initial purchase, the holding or
the subsequent resale of the Mezzanine Certificates and Class B Certificates
because such Certificates are subordinate to certain other Classes of
Certificates. Accordingly, PLANS MAY NOT PURCHASE THE MEZZANINE CERTIFICATES
OR CLASS B CERTIFICATES, except that any insurance company may purchase such
Certificates with assets of its general account if the exemptive relief granted
by the DOL for transactions involving insurance company general accounts in
Prohibited Transaction Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995)
("PTCE 95-60") is available with respect to such investment. Any insurance
company proposing to purchase such Certificates for its general account should
consider whether such relief would be available. Pursuant to PTCE 95-60
certain representations or opinions must be made to qualify. By the
transferee's acceptance of the Mezzanine Certificates or Class B Certificates
such transferee will be deemed to have represented that either (i) it is not a
Plan and is not acquiring such Certificate with the assets of a Plan or (ii)
such transferee and its acquisition of such Certificates comply with the
requirements in PTCE 95-60. In the event that such representations are
violated, the transferee must provide the opinions provided for under PTCE
95-60 or any attempted transfers or acquisitions shall be void and of no
effect.
In addition, as of the date hereof, there is no single Home Equity
Loan included in the Trust Estate that constitutes more than five percent of
the aggregate unamortized principal balance of the assets of the Trust Estate.
Before purchasing a Class A Certificate based on the Exemption, however, a
fiduciary of a Plan should itself confirm (1) that such Certificate constitutes
a "certificate" for purposes of the Exemption and (2) that the specific
conditions and other requirements set forth in the Exemption would be
satisfied.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemption, as amended by PTE 97-34, and the potential consequences in their
specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under
the general fiduciary standards of investment procedure and diversification an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
In addition to the matters described above, purchasers of an Offered
Certificate that are insurance companies should consult with their counsel with
respect to the recent 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 Offered Certificates.
S-68
<PAGE> 73
RATINGS
It is a condition of the issuance of the Offered Certificates that the
Offered Certificates receive at least the ratings from the Rating Agencies as
follows:
<TABLE>
<CAPTION>
Class Moody's Standard & Poor's Fitch
----- ------- ----------------- -----
<S> <C> <C> <C>
A-1 through A-10 Aaa AAA AAA
A-11IO Aaa AAAr AAA
M-1 Aa2 AA AA+
M-2 A2 A A+
B Baa3 BBB- BBB
</TABLE>
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, Standard & Poor's, 26
Broadway, New York, New York 10004 and Fitch, One State Street Plaza, 33rd
Floor, New York, New York 10004. Such ratings will be the views only of such
rating agencies. There is no assurance that such ratings will continue for any
period of time or that such ratings will not be revised or withdrawn. Any such
revision or withdrawal of such ratings may have an adverse effect on the market
price of the Offered Certificates. A security rating is not a recommendation
to buy, sell or hold securities.
The ratings assigned by Fitch to pass-through certificates address the
likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Fitch's ratings address the structural and legal aspects
associated with the Certificates, including the nature of the underlying loans
and the credit quality of the credit support provider. Fitch's ratings on home
equity pass-through Certificates do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that Owners might suffer a lower than anticipated yield or that
investors in the Class A-11IO Certificates may not fully recover their
investment.
The ratings of Moody's on home equity pass-through certificates
address the likelihood of the receipt by the Owners of all distributions to
which such Owners are entitled. Moody's rating opinions address the structural
and legal issues and tax-related aspects associated with the Certificates,
including the nature of the underlying home equity loans and the credit quality
of the credit support provider, if any. Moody's ratings on pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments may differ from those originally anticipated.
Ratings which are assigned to securities such as the Class A-11IO
Certificates generally evaluate the ability of the seller (i.e., the Trust) to
make payments, as required by such securities. The amounts distributable on
the Class A-11IO Certificates consist only of interest. In general, the
ratings address credit risk and not prepayment risk. If all of the Home Equity
Loans were to prepay in the initial month, with the result that investors in
the Class A-11IO Certificates receive only a single month's interest and thus
suffer a nearly complete loss of their investment, all amounts "due" to such
Owners will nevertheless have been paid, and such result is consistent with the
"Aaa/AAAr/AAA" ratings received on the Class A-11IO Certificates.
The "r" symbol is appended to the rating by Standard & Poor's of Class
A-11IO Certificates because they are interest-only Certificates that Standard &
Poor's believes may experience high volatility or high variability in expected
returns due to non-credit risks created by the terms of such Certificates. The
absence of an "r" symbol in the rating of the other Classes of Offered
Certificates should not be taken as an indication that such Certificates will
experience no volatility or variability in total return.
The ratings of Moody's, Standard & Poor's and Fitch do not address the
possibility that, as a result of principal prepayments, certificateholders may
receive a lower than anticipated yield.
The ratings of the Certificates 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 Certificates offered
hereby by any rating agency other than Moody's, Standard & Poor's and Fitch and
the Depositor has not provided information relating to the Certificates offered
S-69
<PAGE> 74
hereby or the Home Equity Loans to any rating agency other than Moody's,
Standard & Poor's and Fitch. However, there can be no assurance as to whether
any other rating agency will rate the Certificates offered hereby or, if
another rating agency rates such Certificates, what rating would be assigned to
such Certificates by such rating agency. Any such unsolicited rating assigned
by another rating agency to the Certificates offered hereby may be lower than
the rating assigned to such Certificates by any of Moody's, Standard & Poor's
and Fitch.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates will not constitute "mortgage related
securities" for purposes of SMMEA. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first home equity
loans may not be legally authorized to invest in the Offered Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Offered Certificates (the "Underwriting Agreement"),
the Depositor has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters has severally agreed to purchase,
the principal amount of the Offered Certificates set forth opposite its name
below:
Class A-1 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 42,900,000
PaineWebber Incorporated 42,900,000
Morgan Stanley & Co. Incorporated 21,450,000
----------
Total $ 107,250,000
</TABLE>
Class A-2 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 56,520,000
PaineWebber Incorporated 56,520,000
Morgan Stanley & Co. Incorporated 28,260,000
----------
Total $ 141,300,000
</TABLE>
Class A-3 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 42,080,000
PaineWebber Incorporated 42,080,000
Morgan Stanley & Co. Incorporated 21,040,000
----------
Total $ 105,200,000
</TABLE>
S-70
<PAGE> 75
Class A-4 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 49,000,000
PaineWebber Incorporated 49,000,000
Morgan Stanley & Co. Incorporated 24,500,000
----------
Total $ 122,500,000
</TABLE>
Class A-5 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 47,964,000
PaineWebber Incorporated 47,964,000
Morgan Stanley & Co. Incorporated 23,982,000
----------
Total $ 119,910,000
</TABLE>
Class A-6 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 8,992,000
PaineWebber Incorporated 8,992,000
Morgan Stanley & Co. Incorporated 4,496,000
---------
Total $ 22,480,000
</TABLE>
Class A-7 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 29,196,000
PaineWebber Incorporated 29,196,000
Morgan Stanley & Co. Incorporated 14,598,000
----------
Total $ 72,990,000
</TABLE>
Class A-8 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 16,964,000
PaineWebber Incorporated 16,964,000
Morgan Stanley & Co. Incorporated 8,482,000
----------
Total $ 42,410,000
</TABLE>
S-71
<PAGE> 76
Class A-9 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 16,434,000
PaineWebber Incorporated 16,434,000
Morgan Stanley & Co. Incorporated 8,217,000
---------
Total $ 41,085,000
</TABLE>
Class A-10 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 27,300,000
PaineWebber Incorporated 27,300,000
Morgan Stanley & Co. Incorporated 13,650,000
----------
Total $ 68,250,000
</TABLE>
Class A-11IO Certificates
<TABLE>
<CAPTION>
Underwriters Percentage Interest
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. 34%
PaineWebber Incorporated 33%
Morgan Stanley & Co. Incorporated 33%
---
Total 100%
</TABLE>
No principal payments are distributed with respect to the Class A-11IO
Certificates. Interest will be distributed and calculated on the basis of the
Notional Principal Amount.
Class M-1 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 15,600,000
PaineWebber Incorporated 15,600,000
Morgan Stanley & Co. Incorporated 7,800,000
-----------
Total $ 39,000,000
</TABLE>
Class M-2 Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 21,450,000
PaineWebber Incorporated 21,450,000
Morgan Stanley & Co. Incorporated 10,725,000
----------
Total $ 53,625,000
</TABLE>
S-72
<PAGE> 77
Class B Certificates
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. $ 15,600,000
PaineWebber Incorporated 15,600,000
Morgan Stanley & Co. Incorporated 7,800,000
---------
Total $ 39,000,000
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the Offered
Certificates offered hereby, if any are purchased. The Depositor has been
advised by the Underwriters that they propose initially to offer the Offered
Certificates to the public at the respective offering prices set forth on the
cover page hereof and to certain dealers at such price less a concession not in
excess of the respective amounts set forth in the table below (expressed as a
percentage of the related Certificate Principal Balance). The Underwriters may
allow and such dealers may reallow a discount not in excess of the respective
amounts set forth in the table below to certain other dealers.
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Discount
- ----- ---------- -----------
<S> <C> <C>
A-1..................................... 0.0900% 0.075%
A-2..................................... 0.0600% 0.050%
A-3..................................... 0.0750% 0.050%
A-4..................................... 0.1000% 0.075%
A-5..................................... 0.1200% 0.075%
A-6..................................... 0.1500% 0.100%
A-7..................................... 0.1800% 0.125%
A-8..................................... 0.2100% 0.125%
A-9..................................... 0.2700% 0.200%
A-10.................................... 0.3000% 0.250%
A-11IO.................................. 0.0285% 0.020%
M-1..................................... 0.2700% 0.200%
M-2..................................... 0.2900% 0.200%
B....................................... 0.3000% 0.250%
</TABLE>
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 Offered Certificates 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
Offered Certificates 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 Offered Certificates to be higher than it would
otherwise be in the absence of such transactions. These transactions, if
commenced, may be discontinued at any time.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.
S-73
<PAGE> 78
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller by Arter & Hadden, Washington,
D.C. Certain legal matters relating to insolvency issues and certain federal
income tax matters concerning the Certificates will be passed upon for the
Seller and the Depositor by Arter & Hadden. Certain legal matters relating to
the validity of the issuance of the Certificates will be passed upon for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
S-74
<PAGE> 79
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
$975,000,000 IMC Home Equity Loan Pass-Through Certificates, Series 1997-5 (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
I-1
<PAGE> 80
date to and excluding the settlement date, on the basis of either a 360-day
year comprised of 30-day month's or the actual number of days in such accrual
period and a year assumed to consist of 360 days, as applicable. 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
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 either a 360-day year comprised of 30-day month's or of the actual number
of days in such accrual period and a year assumed to consist to 360 days, as
applicable. 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;
I-2
<PAGE> 81
(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), 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> 82
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 83
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accrual Period..............................................................................................................S-5
Aggregate Certificate Principal Balance.....................................................................................S-2
Applied Realized Loss Amount...............................................................................................S-13
Appraised Values...........................................................................................................S-29
Available Funds Cap.........................................................................................................S-1
Balloon Loans..............................................................................................................S-23
Beneficial Owners..........................................................................................................S-17
Book-Entry Certificates....................................................................................................S-48
Capitalized Interest Account...............................................................................................S-17
Cede.......................................................................................................................S-17
Cedel......................................................................................................................S-17
Cedel Participants.........................................................................................................S-50
Certificate Account........................................................................................................S-44
Certificate Principal Balance...............................................................................................S-1
Chase Manhattan Bank.......................................................................................................S-17
Citibank, N.A..............................................................................................................S-17
Class.......................................................................................................................S-1
Class A Certificates........................................................................................................S-2
Class A Principal Distribution Amount.......................................................................................S-9
Class A-1 Certificates......................................................................................................S-1
Class A-2 Certificates......................................................................................................S-1
Class A-2 Pass-Through Rate.................................................................................................S-1
Class A-3 Certificates......................................................................................................S-1
Class A-4 Certificates......................................................................................................S-1
Class A-5 Certificates......................................................................................................S-1
Class A-6 Certificates......................................................................................................S-1
Class A-7 Certificates......................................................................................................S-1
Class A-8 Certificates......................................................................................................S-1
Class A-9 Certificates......................................................................................................S-1
Class A-10 Certificates.....................................................................................................S-1
Class A-10 Lockout Distribution Amount......................................................................................S-8
Class A-10 Lockout Percentage...............................................................................................S-8
Class A-10 Lockout Pro Rata Distribution Amount.............................................................................S-9
Class A-11IO Certificates...................................................................................................S-2
Class B Applied Realized Loss Amount.......................................................................................S-54
Class B Certificate Principal Balance......................................................................................S-54
Class B Certificates........................................................................................................S-2
Class B Principal Distribution Amount......................................................................................S-10
Class B Realized Loss Amortization Amount..................................................................................S-54
Class Distribution Amount...................................................................................................S-5
Class M-1 Realized Loss Amortization Amount................................................................................S-55
Class M-1 Applied Realized Loss Amount.....................................................................................S-54
Class M-1 Certificate Principal Balance....................................................................................S-55
Class M-1 Certificates......................................................................................................S-2
Class M-1 Principal Distribution Amount....................................................................................S-10
Class M-2 Applied Realized Loss Amount.....................................................................................S-55
Class M-2 Certificate Principal Balance....................................................................................S-55
Class M-2 Certificates......................................................................................................S-2
Class M-2 Principal Distribution Amount....................................................................................S-10
Class M-2 Realized Loss Amortization Amount................................................................................S-55
Closing Date................................................................................................................S-2
Code.......................................................................................................................S-19
Combined Loan-to-Value Ratios..............................................................................................S-32
Compensating Interest......................................................................................................S-59
Cooperative................................................................................................................S-50
Coupon Rate.................................................................................................................S-4
CPR........................................................................................................................S-37
Current Interest............................................................................................................S-6
Custodian..................................................................................................................S-56
Cut-Off Date................................................................................................................S-2
D&P........................................................................................................................S-66
Daily Collections..........................................................................................................S-58
Date-of-Payment Loans......................................................................................................S-35
Definitive Certificate.....................................................................................................S-49
Delinquency Advances.......................................................................................................S-59
Depositor...................................................................................................................S-2
DOL........................................................................................................................S-66
DTC........................................................................................................................S-17
DTC Participants...........................................................................................................S-50
ERISA......................................................................................................................S-65
Euroclear..................................................................................................................S-17
Euroclear Operator.........................................................................................................S-50
Euroclear Participants.....................................................................................................S-50
Euroclear System...........................................................................................................S-17
European Depositaries......................................................................................................S-49
Exchange Act...............................................................................................................S-73
Exemption..................................................................................................................S-66
Expense Fee Rate...........................................................................................................S-45
Extra Principal Distribution Amount........................................................................................S-11
FannieMae..................................................................................................................S-25
FHLMC......................................................................................................................S-25
Final Determination........................................................................................................S-64
Financial Intermediary.....................................................................................................S-49
Fitch......................................................................................................................S-18
FNMA Guide.................................................................................................................S-58
Funding Period.............................................................................................................S-16
Home Equity Loans...........................................................................................................S-2
Initial Home Equity Loans...................................................................................................S-3
Interest Amount Available...................................................................................................S-5
Interest Carry Forward Amount...............................................................................................S-6
Interest Remittance Amount..................................................................................................S-6
LIBOR.......................................................................................................................S-1
LIBOR Determination Date...................................................................................................S-48
Loan Balance...............................................................................................................S-29
Loan Purchase Price........................................................................................................S-56
Lower-Tier REMIC...........................................................................................................S-19
Lower-Tier REMIC Residual Class.............................................................................................S-3
Maximum Collateral Amount..................................................................................................S-18
Mezzanine Certificates......................................................................................................S-2
Monthly Excess Cashflow Amount.............................................................................................S-14
Monthly Remittance Date.....................................................................................................S-9
Moody's....................................................................................................................S-18
Mortgagor..................................................................................................................S-35
Net Liquidation Proceeds...................................................................................................S-58
Non-REMIC Accounts.........................................................................................................S-18
Notes......................................................................................................................S-29
Notional Principal Amount...................................................................................................S-1
Offered Certificates........................................................................................................S-2
Original Aggregate Loan Balance............................................................................................S-29
Overcollateralization Amount...............................................................................................S-10
Overcollateralization Deficiency...........................................................................................S-11
Overcollateralization Release Amount.......................................................................................S-11
Participants...............................................................................................................S-48
Payment Date................................................................................................................S-4
Percentage Interest........................................................................................................S-45
Plans......................................................................................................................S-65
Pooling and Servicing Agreement.............................................................................................S-2
Preference Amount..........................................................................................................S-11
Prepayment Assumption......................................................................................................S-37
Prepayments................................................................................................................S-20
Preservation Expenses......................................................................................................S-59
Pre-Funded Amount..........................................................................................................S-16
Pre-Funding Account.........................................................................................................S-3
Pre-Funding Limit..........................................................................................................S-67
Principal and Interest Account.............................................................................................S-58
Principal Distribution Amount...............................................................................................S-8
</TABLE>
A - 1
<PAGE> 84
<TABLE>
<CAPTION>
Page
----
<S> <C>
Principal Remittance Amount.................................................................................................S-9
Properties..................................................................................................................S-2
Qualified Replacement Mortgage.............................................................................................S-55
Rating Agencies............................................................................................................S-18
REMIC Opinion..............................................................................................................S-56
Realized Loss..............................................................................................................S-12
Record Date.................................................................................................................S-5
Register...................................................................................................................S-44
Registrar..................................................................................................................S-44
Relevant Depositary........................................................................................................S-49
Remittance Period...........................................................................................................S-9
Restricted Group...........................................................................................................S-67
Riegle Act.................................................................................................................S-22
Rules......................................................................................................................S-49
Seller......................................................................................................................S-2
Senior Enhancement Percentage..............................................................................................S-10
Senior Specified Enhancement Percentage....................................................................................S-11
Servicer....................................................................................................................S-2
Servicer Termination Events................................................................................................S-61
Servicing Advance..........................................................................................................S-59
Servicing Fee..............................................................................................................S-11
SMMEA......................................................................................................................S-19
Standard & Poor's..........................................................................................................S-18
Stepdown Date...............................................................................................................S-9
Subordinate Certificates....................................................................................................S-2
Subsequent Cut-Off Date....................................................................................................S-21
Subsequent Home Equity Loans................................................................................................S-3
Subsequent Transfer Agreement..............................................................................................S-21
Subsequent Transfer Date...................................................................................................S-16
Substitution Amount........................................................................................................S-56
Sub-Servicers..............................................................................................................S-24
Sub-Servicing Agreements...................................................................................................S-24
Targeted Amount............................................................................................................S-47
Targeted Overcollateralization Amount......................................................................................S-11
Targeted Prepayment Rate...................................................................................................S-36
Telerate Page 3750.........................................................................................................S-48
Terms and Conditions.......................................................................................................S-50
Trigger Event...............................................................................................................S-9
Trust.......................................................................................................................S-1
Trust Estate...............................................................................................................S-43
Trustee.....................................................................................................................S-2
Trustee Fee.................................................................................................................S-2
Underwriters...............................................................................................................S-70
Unpaid Realized Loss Amount................................................................................................S-55
Upper-Tier REMIC...........................................................................................................S-19
Weighted average life......................................................................................................S-37
</TABLE>
A - 2
<PAGE> 85
PROSPECTUS
HOME EQUITY LOAN PASS THROUGH CERTIFICATES
(Issuable in Series)
IMC SECURITIES, INC.
(DEPOSITOR)
This Prospectus relates to Home Equity Loan Pass Through Certificates to be
issued from time to time in one or more series (and one or more classes within
a series), certain classes of which may be offered on terms determined at the
time of sale and described in this Prospectus and the related Prospectus
Supplement. Each series of Certificates will be issued by a separate trust
(each, a "Trust") and will evidence either a beneficial ownership interest in,
or the debt obligation of, such Trust. The assets of a Trust will include one
or more of the following: (i) single family residential mortgage loans,
including mortgage loans secured by junior liens on the related mortgaged
properties, (ii) mortgage backed securities and (iii) investment income,
reserve funds, cash accounts, insurance policies (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 Certificates of a series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest
or any combination thereof prior to one or more other classes of Certificates
of such series or after the occurrence of certain events or (ii) subordinated
in the right to receive such distributions to one or more senior classes of
Certificates of such series, in each case as specified in the related
Prospectus Supplement. Interest on each class of Certificates entitled to
distributions allocable to interest may accrue at a fixed rate or at a rate
that is subject to change from time to time as specified in the related
Prospectus Supplement. The Depositor or its affiliates may retain or hold for
sale from time to time one or more classes of a series of Certificates.
Distributions on the Certificates will be made at the intervals and on the
dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Certificates.
An affiliate of the Depositor may make or obtain for the benefit of the
Certificates limited representations and warranties with respect to mortgage
assets assigned to the related Trust. Neither the Depositor nor any affiliates
will have any other obligation with respect to the Certificates.
The yield on Certificates will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust.
Each series of Certificates will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat
the Trust for the related series or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
See "Federal Income Tax Consequences" herein and in the related Prospectus
Supplement.
It is a condition to the issuance of the Certificates that the Certificates
be rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE
CERTIFICATES.
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Certificates by "plan
fiduciaries."
AN INVESTOR SHOULD CAREFULLY REVIEW THE INFORMATION IN THE RELATED
PROSPECTUS SUPPLEMENT CONCERNING THE RISKS ASSOCIATED WITH THE DIFFERENT TYPES
AND CLASSES OF CERTIFICATES.
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION
OF THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY
TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT. NEITHER THE CERTIFICATES NOR THE UNDERLYING
MORTGAGE ASSETS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY
ORIGINATOR, ANY TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
THESE CERTIFICATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR ANY RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "Plan of Distribution"
herein and "Underwriting" in the related Prospectus Supplement.
Prior to their issuance there will have been no market for the Certificates
nor can there by any assurance that one will develop or if it does develop,
that it will provide the Owners of the Certificates with liquidity or will
continue for the life of the Certificates.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE
USED TO CONSUMMATE SALES OF CERTIFICATES UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
The date of this Prospectus is June 6, 1997.
<PAGE> 86
AVAILABLE INFORMATION
The representative has filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Certificates. The
Registration Statement and amendments thereof and to the exhibits thereto, as
well as such reports and other information, are available for inspection
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th
Floor, New York, New York 10048; and 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 Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in
any state or other jurisdiction in which such offer would be unlawful. The
delivery of this Prospectus at any time does not imply that information herein
is correct as of any time subsequent to its date.
REPORTS TO OWNERS
Periodic and annual reports concerning any Certificates and the related
Trust will be provided to the persons in whose names the Certificates are
registered (the "Owners"). See "Administration-Reports" herein. If specified
in the related Prospectus Supplement, a Series of Certificates may be issuable
in book-entry form. In such event, the related Certificates will be registered
in the name of a Clearing Agency (as defined herein) 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
Certificates. See "Description of the Certificates 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., 3450 Buschwood Park Drive, Tampa, Florida
33618 (telephone number (813) 932-2211).
<PAGE> 87
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . 1 CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS. 32
General . . . . . . . . . . . . . . . . 32
RISK FACTORS . . . . . . . . . . . . . . . . . 6 Foreclosure . . . . . . . . . . . . . . 33
Soldiers' and Sailors' Civil Relief Act 38
DESCRIPTION OF THE CERTIFICATES . . . . . . . . 9
General . . . . . . . . . . . . . . . . . 9 LEGAL INVESTMENT MATTERS . . . . . . . . . . 38
Classes of Certificates . . . . . . . . . 10
Distributions of Principal and Interest . . 11 ERISA CONSIDERATIONS . . . . . . . . . . . . 39
Book Entry Registration . . . . . . . . . 12
List of Owners of Certificates . . . . . . 13 FEDERAL INCOME TAX CONSEQUENCES . . . . . . . 40
Federal Income Tax Consequences For REMIC
THE TRUSTS . . . . . . . . . . . . . . . . . . 13 Certificates . . . . . . . . . . . . 41
Mortgage Loans . . . . . . . . . . . . . . 14 Taxation of Regular Certificates . . . . 42
Mortgage-Backed Securities . . . . . . . . 15 Taxation of Residual Certificates . . . 47
Other Mortgage Securities . . . . . . . . 16 Treatment of Certain Items of REMIC Income
and Expense . . . . . . . . . . . . 49
CREDIT ENHANCEMENT . . . . . . . . . . . . . . 16 Tax-Related Restrictions on Transfer of
Residual Certificates . . . . . . . 51
SERVICING OF MORTGAGE LOANS . . . . . . . . . . 21 Sale or Exchange of a Residual Certificate 53
Payments on Mortgage Loans . . . . . . . . 21 Taxes That May Be Imposed on the REMIC
Advances . . . . . . . . . . . . . . . . . 22 Pool . . . . . . . . . . . . . . . . 53
Collection and Other Servicing Procedures 22 Liquidation of the REMIC Pool . . . . . 54
Primary Mortgage Insurance . . . . . . . . 23 Administrative Matters . . . . . . . . . 54
Standard Hazard Insurance . . . . . . . . 24 Limitations on Deduction of Certain
Title Insurance Policies . . . . . . . . . 24 Expenses . . . . . . . . . . . . . . 55
Claims Under Primary Mortgage Insurance Taxation of Certain Foreign Investors . 55
Policies and Standard Hazard Insurance Backup Withholding . . . . . . . . . . . 56
Policies; Other Realization Upon Reporting Requirements . . . . . . . . . 56
Defaulted Loan . . . . . . . . . . . . 24 Federal Income Tax Consequences for
Servicing Compensation and Payment of Certificates as to Which No REMIC
Expenses . . . . . . . . . . . . . . . 25 Election Is Made . . . . . . . . . . 57
Master Servicer . . . . . . . . . . . . . 25 Standard Certificates . . . . . . . . . 57
Premium and Discount . . . . . . . . . . 58
ADMINISTRATION . . . . . . . . . . . . . . . . 26 Stripped Certificates . . . . . . . . . 60
Assignment of Mortgage Assets . . . . . . 26 Reporting Requirements and Backup
Evidence as to Compliance . . . . . . . . 28 Withholding . . . . . . . . . . . . 62
The Trustee . . . . . . . . . . . . . . . 28 Taxation of Certain Foreign Investors . 63
Administration of the Certificate Account 28 Taxation of Securities Classified as
Reports . . . . . . . . . . . . . . . . . 29 Partnership Interests . . . . . . . 63
Forward Commitments; Pre-Funding . . . . . 30
Servicer Events of Default . . . . . . . . 30 PLAN OF DISTRIBUTION . . . . . . . . . . . . 63
Rights Upon Servicer Event of Default . . 30
Amendment . . . . . . . . . . . . . . . . 31 RATINGS . . . . . . . . . . . . . . . . . . . 64
Termination . . . . . . . . . . . . . . . 31
LEGAL MATTERS . . . . . . . . . . . . . . . . 64
USE OF PROCEEDS . . . . . . . . . . . . . . . . 32
FINANCIAL INFORMATION . . . . . . . . . . . . 64
THE DEPOSITOR . . . . . . . . . . . . . . . . . 32
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS. A-1
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT 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.
<PAGE> 88
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE> 89
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates and
to the related Agreement which will be prepared in connection with each series
of Certificates. Unless otherwise specified, capitalized terms used and not
defined in this Summary of Prospectus have the meanings given to them in this
Prospectus and in the related Prospectus Supplement. An index indicating where
certain capitalized terms used herein are defined appears on Appendix A hereto.
SECURITIES . . . . . . . . . . . . Home Equity Loan Pass Through
Certificates, 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 (the
"Certificates"). Each Certificate will
represent a beneficial ownership
interest in a trust (a "Trust") created
from time to time pursuant to a pooling
and servicing agreement or trust
agreement (each, an "Agreement").
THE DEPOSITOR . . . . . . . . . . . IMC Securities, Inc. (the "Depositor")
is a Delaware corporation. The
Depositor's principal executive offices
are located at 3450 Buschwood Park
Drive, Tampa, Florida 33618; telephone
number (813) 932-2211. See "The
Depositor" herein. The Depositor or its
affiliates may retain or hold for sale
from time to time one or more classes of
a series of Certificates.
THE SERVICER . . . . . . . . . . . The entity or entities named as the
Servicer in the Prospectus Supplement
(the "Servicer"), will act as servicer,
with respect to the Mortgage Loans
included in the related Trust. The
Servicer may be an affiliate of the
Depositor and may be the seller of
Mortgage Assets to the Depositor (each,
a "Seller").
THE MASTER SERVICER . . . . . . . . A "Master Servicer" may be specified in
the related Prospectus Supplement for
the related series of Certificates.
THE TRUSTEE . . . . . . . . . . . . The trustee (the "Trustee") for each
series of Certificates will be specified
in the related Prospectus Supplement.
TRUST ASSETS . . . . . . . . . . . The assets of a Trust will be
mortgage-related assets (the "Mortgage
Assets") consisting of one or more of
the following types of assets:
A. The Mortgage Loans . . . . . . "Mortgage Loans" may include: (i)
conventional (i.e., not insured or
guaranteed by any governmental agency)
Mortgage Loans secured by one-to-four
family residential properties; (ii)
Mortgage Loans secured by security
interests in shares issued by private,
non-profit, cooperative housing
corporations ("Cooperatives") and in the
related proprietary leases or occupancy
agreements granting exclusive rights to
occupy specific dwelling units in such
Cooperatives' buildings; and, (iii)
Mortgage Loans secured by junior liens
on the related mortgaged properties,
including home improvement retail
installment contracts. See "The Trusts--
Mortgage Loans" herein.
B. Mortgage-
Backed Securities . . . . . . "Mortgage-Backed Securities" (or "MBS")
may include (i) private (that is, not
guaranteed or insured by the United
States or any agency or
1
<PAGE> 90
instrumentality thereof) mortgage
participations, mortgage pass-through
certificates or other mortgage-backed
securities or (ii) certificates insured
or guaranteed by Federal Home Loan
Mortgage Corporation ("FHLMC") or
Federal National Mortgage Association
("FNMA") or Government National Mortgage
Association ("GNMA"). See "The Trusts
Mortgage-Backed Securities" herein.
C. Other Mortgage Assets . . . . . Trust assets may also include
reinvestment income, reserve funds, cash
accounts, insurance policies (including
financial guaranty insurance policies
and surety bonds), guaranties, letters
of credit or similar types of credit
support or enhancement as described in
the related Prospectus Supplement.
The related Prospectus Supplement for a
series of Certificates will describe the
Mortgage Assets to be included in the
Trust for such series.
THE CERTIFICATES . . . . . . . . . The Certificates of any series may be
issued in one or more classes, as
specified in the Prospectus Supplement.
One or more classes of Certificates of
each series (i) may be entitled to
receive distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) may be
entitled to receive distributions only
of prepayments of principal throughout
the lives of the Certificates or during
specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of
Certificates of such series throughout
the lives of the Certificates or during
specified periods; (iv) may be entitled
to receive such distributions only after
the occurrence of events specified in
the Prospectus Supplement; (v) may be
entitled to receive distributions in
accordance with a schedule or formula or
on the basis of collections from
designated portions of the assets in the
related Trust; (vi) as to Certificates
entitled to distributions allocable to
interest, may be entitled to receive
interest at a fixed rate or a rate that
is subject to change from time to time;
(vii) may accrue interest, with such
accrued interest added to the principal
or notional amount of the Certificates,
and no payments being made thereon until
certain other classes of the series have
been paid in full; and (viii) as to
Certificates entitled to distributions
allocable to interest, may be entitled
to distributions allocable to interest
only after the occurrence of events
specified in the Prospectus Supplement
and may accrue interest until such
events occur, in each case as specified
in the related Prospectus Supplement.
The timing and amounts of such
distributions may vary among classes,
over time, or otherwise as specified in
the related Prospectus Supplement.
DISTRIBUTIONS ON
THE CERTIFICATES . . . . . . . . The related Prospectus Supplement will
specify (i) whether distributions on the
Certificates entitled thereto will be
made monthly, quarterly, semi-annually
or at other intervals and dates out of
the payments received in respect of the
Mortgage Assets included in the related
Trust and other assets, if any, pledged
for the benefit of the related Owners of
Certificates; (ii) the amount allocable
to payments of principal and interest on
any Payment Date; and (iii) whether all
distributions will be made pro rata to
Owners of Certificates of the class
entitled thereto.
2
<PAGE> 91
The aggregate original principal balance
of the Certificates will equal the
aggregate distributions allocable to
principal that such Certificates will be
entitled to receive; the Certificates
will have an aggregate original
principal balance equal to or less than
the aggregate unpaid principal balance
of the related Mortgage Assets (plus
amounts held in a Pre-Funding Account,
if any) as of the first day of the month
of creation of the Trust; and the
Certificates will bear interest in the
aggregate at a rate (the "Pass-Through
Rate") equal to the interest rate borne
by the related Mortgage Assets net of
servicing fees and any other specified
amounts.
PRE-FUNDING ACCOUNT . . . . . . . . A Trust may enter into an agreement
(each, a "Pre-Funding Agreement") with
the Depositor whereby the Depositor will
agree to transfer additional Mortgage
Assets to such Trust following the date
on which such Trust is established and
the related Certificates are issued.
Any Pre-Funding Agreement will require
that any Mortgage Loans so transferred
conform to the requirements specified in
such Pre-Funding Agreement. If a
Pre-Funding Agreement is to be utilized,
the related Trustee will be required to
deposit in a segregated account (each, a
"Pre-Funding Account") all or a portion
of the proceeds received by the Trustee
in connection with the sale of one or
more classes of Certificates of the
related series; subsequently, the
additional Mortgage Assets will be
transferred to the related Trust in
exchange for money released to the
Depositor from the related Pre-Funding
Account. The maximum amount deposited
in the Pre-Funding Account to acquire
Mortgage Loans for transfer to a Trust
will not exceed 40% of the aggregate
principal amount of the Certificates
offered pursuant to the related
Prospectus Supplement. Each Pre-Funding
Agreement will set a specified period
during which any such transfers must
occur, which period will not exceed 90
days from the date the Trust is
established. If all moneys originally
deposited to such Pre-Funding Account
are not used by the end of such
specified period, then any remaining
moneys will be applied as a mandatory
prepayment of a class or classes of
Certificates as specified in the related
Prospectus Supplement.
OPTIONAL TERMINATION . . . . . . . The Servicer, the Seller, the Depositor,
or, if specified in the related
Prospectus Supplement, the Owners of a
related class of Certificates or a
credit enhancer may at their respective
options effect early retirement of a
series of Certificates through the
purchase of the Mortgage Assets in the
related Trust. See "Administration--
Termination" herein.
MANDATORY TERMINATION . . . . . . . The Trustee, the Servicer or certain
other entities specified in the related
Prospectus Supplement may be required to
effect early retirement of a series of
Certificates by soliciting competitive
bids for the purchase of the assets of
the related Trust or otherwise. See
"Administration -- Termination" herein.
ADVANCES . . . . . . . . . . . . . The Servicer of the Mortgage Loans will
be obligated (but only to the extent set
forth in the related Prospectus
Supplement) to advance delinquent
installments of principal and/or
interest (less applicable servicing
fees) on the Mortgage Loans in a Trust.
Any such obligation to make advances may
be limited to amounts due to the Owners
of Certificates of the related series,
to amounts deemed to be recoverable from
late payments or liquidation proceeds,
to specified periods or to any
3
<PAGE> 92
combination thereof, in each case as
specified in the related Prospectus
Supplement. Any such advance will be
recoverable as specified in the related
Prospectus Supplement. See "Servicing
of Mortgage Loans and Contracts" herein.
CREDIT ENHANCEMENT . . . . . . . . If specified in the related Prospectus
Supplement, a series of Certificates, or
certain classes within such series, may
have the benefit of one or more types of
credit enhancement ("Credit
Enhancement") including but not limited
to 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 Certificates in a series
under which losses are first allocated
to any Subordinated Certificates 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 . . . . . . Certificates of one or more classes of a
series may be issued in book entry form
("Book Entry Certificates") in the name
of a clearing agency (a "Clearing
Agency") registered with the Securities
and Exchange Commission, or its nominee.
Transfers and pledges of Book Entry
Certificates may be made only through
entries on the books of the Clearing
Agency in the name of brokers, dealers,
banks and other organizations eligible
to maintain accounts with the Clearing
Agency ("Clearing Agency Participants")
or their nominees. Transfers and
pledges by purchasers and other
beneficial owners of Book Entry
Certificates ("Beneficial Owners") other
than Clearing Agency Participants may be
effected only through Clearing Agency
Participants. All references to the
Owners of Certificates shall mean
Beneficial Owners to the extent
Beneficial Owners may exercise their
rights through a Clearing Agency.
Except as otherwise specified in this
Prospectus or a related Prospectus
Supplement, the term "Owners" shall be
deemed to include Beneficial Owners.
See "Risk Factors--Book Entry
Registration" and "Description of the
Certificates--Book Entry Registration"
herein.
FEDERAL INCOME TAX
CONSEQUENCES . . . . . . . . . . Federal income tax consequences will
depend on, among other factors, whether
one or more elections are made to treat
a Trust or specified portions thereof as
a "real estate mortgage investment
conduit" ("REMIC") under the Internal
Revenue Code of 1986, as amended (the
"Code"), or, if no REMIC election is
made, whether the Certificates are
considered to be Standard Certificates,
Stripped Certificates or Partnership
Interests. The related Prospectus
Supplement for each series of
Certificates will specify whether a
REMIC election will be made. See
"Federal Income Tax Consequences" herein
and in the related Prospectus
Supplement.
ERISA CONSIDERATIONS . . . . . . . A fiduciary of any employee benefit plan
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Certificates could give rise to a
transaction
4
<PAGE> 93
prohibited or otherwise impermissible
under ERISA or the Code. Certain
classes of Certificates may not be
transferred unless the Trustee and the
Depositor are furnished with a letter of
representation or an opinion of counsel
to the effect that such transfer will
not result in a violation of the
prohibited transaction provisions of
ERISA and the Code and will not subject
the Trustee, the Depositor or the
Servicer to additional obligations. See
"Description of the Certificates--
General" herein and "ERISA
Considerations" herein and in the
related Prospectus Supplement.
LEGAL INVESTMENT MATTERS . . . . . Certificates that constitute "mortgage
related securities" under the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA") will be so described in the
related Prospectus Supplement.
Certificates that are not so qualified
may not be legal investments for certain
types of institutional investors,
subject, in any case, to any other
regulations which may govern investments
by such institutional investors. See
"Legal Investment Matters" herein and in
the related Prospectus Supplement.
USE OF PROCEEDS . . . . . . . . . . Substantially all the net proceeds from
the sale of a series of Certificates
will be applied to the simultaneous
purchase of the Mortgage Assets included
in the related Trust (or to reimburse
the amounts previously used to effect
such purchase), the costs of carrying
the Mortgage Assets until sale of the
Certificates and to pay other expenses.
See "Use of Proceeds" herein.
RATING . . . . . . . . . . . . . . It is a condition to the issuance of
each class of Certificates that each
class of the Certificates 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 Certificates and
Residual Certificates need not be so
rated. A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time. No
person is obligated to maintain any
rating on any Certificate, and,
accordingly, there can be no assurance
that the ratings assigned to any class
of Certificates upon initial issuance
thereof will not be lowered or withdrawn
by a Rating Agency at any time
thereafter. If a rating of any class of
Certificates of a Series is revised or
withdrawn, the liquidity of such class
of Certificates may be adversely
affected. In general, the ratings
address credit risk and do not represent
any assessment of the likelihood or rate
of principal prepayments. See "Risk
Factors" herein and "Ratings" in the
related Prospectus Supplement.
RISK FACTORS . . . . . . . . . . . Investment in the Certificates will be
subject to one or more risk factors,
including declines in the value of
Mortgaged Properties, prepayment of
Mortgage Loans, higher risks of defaults
on particular types of Mortgage Loans,
limitations on security for the Mortgage
Loans, limitations on credit enhancement
and various other factors. See "Risk
Factors" herein and in the related
Prospectus Supplement.
5
<PAGE> 94
RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors in connection with the purchase of the Certificates:
Declining Real Estate Market; Geographic Concentration. If the
residential real estate market in general or a regional or local area where
Mortgage Assets for a Trust are concentrated should experience an overall
decline in property values, or a significant downturn in economic conditions,
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. See "The Trusts--
Mortgage Loans" herein.
Limited Obligations. The Certificates will not represent an interest
in or obligation of the Depositor. The Certificates of each series will not be
insured or guaranteed by any government agency or instrumentality, the
Depositor, any Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment
experience on Mortgage Loans constituting or underlying the Mortgage Assets
will affect the average life of each Class of Certificates relating to a Trust.
Prepayments may be influenced by a variety of economic, geographic, social and
other factors, including changes in interest rate levels. In general, if
mortgage interest rates fall, the rate of prepayment would be expected to
increase. Conversely, if mortgage interest rates rise, the rate of prepayment
would be expected to decrease. Other factors affecting prepayment of mortgage
loans include changes in housing needs, job transfers, unemployment and
servicing decisions. See "Prepayment and Yield Considerations" in the related
Prospectus Supplement. In addition, investors in the Certificates should be
aware that the Servicer, the Seller, or, if specified in the related Prospectus
Supplement, the Owners of a Class of Certificates or a credit enhancer may at
their respective options effect early retirement of a series of Certificates
through the purchase of Mortgage Assets from the related Trust. See
"Administration--Termination" herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
A portion of the aggregate principal balance of the Mortgage Loans at any time
may be "balloon loans" that provide for the payment of the unamortized
principal balance of such Mortgage Loan in a single payment at maturity
("Balloon Loans"). Such Balloon Loans provide for equal monthly payments,
consisting of principal and interest, generally based on a 30-year amortization
schedule, and a single payment of the remaining balance of the Balloon Loan
generally 5, 7, 10, or 15 years after origination. Amortization of a Balloon
Loan based on a scheduled period that is longer than the term of the loan
results in a remaining principal balance at maturity that is substantially
larger than the regular scheduled payments. The Depositor does not have any
information regarding the default history or prepayment history of payments on
Balloon Loans. Because borrowers of Balloon Loans are required to make
substantial single payments upon maturity, it is possible that the default risk
associated with the Balloon Loans is greater than that associated with
fully-amortizing Mortgage Loans.
Limited Liquidity. There will be no market for the Certificates of
any series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Certificates of
such series. The market value of the Certificates will fluctuate with changes
in prevailing rates of interest. Consequently, the sale of Certificates in any
market that may develop may be at a discount from the Certificates' par value
or purchase price. Owners of Certificates generally have no right to request
redemption of Certificates, and the Certificates are subject to redemption only
under the limited circumstances described in the related Prospectus Supplement.
In addition, the Certificates will not be listed on any securities exchange.
Limited Assets. Owners of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Certificates), for the
payment of principal of, and interest on, that series of Certificates. If the
assets comprising the Trust are insufficient to make payments on such
Certificates, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Certificates of a series in the priority specified in the related
6
<PAGE> 95
Prospectus Supplement, a deficiency may have a disproportionately greater
effect on the Certificates of classes having lower priority in payment. In
addition, due to the priority of payments and the allocation of losses,
defaults experienced on the assets comprising a Trust may have a
disproportionate effect on a specified class or classes within such series.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the
related Prospectus Supplement, including, but not limited to, prioritization as
to payments of one or more classes of such series, a Mortgage Pool Insurance
Policy, a Financial Guaranty Insurance Policy, a Special Hazard Insurance
Policy, a bankruptcy bond, one or more Reserve Funds, other insurance,
guaranties and similar instruments and agreements, or any combination thereof.
See "Credit Enhancement" herein. Regardless of the Credit Enhancement
provided, the amount of coverage may be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancement may provide only very limited coverage as
to certain types of losses and may provide no coverage as to certain other
types of losses. The Trustee may be permitted to reduce, terminate or
substitute all or a portion of the Credit Enhancement for any series of
Certificates, if the applicable rating agencies indicate that the then-current
rating thereof will not be adversely affected.
Original Issue Discount. All the Compound Interest Certificates and
Stripped Certificates that are entitled only to interest distributions will be,
and certain of the other Certificates may be, issued with original issue
discount for federal income tax purposes. An Owner of a Certificate issued
with original issue discount will be required to include original issue
discount in ordinary gross income for federal income tax purposes as it
accrues, in advance of receipt of the cash attributable to such income.
Accrued but unpaid interest on such Certificates generally will be treated as
original issue discount for this purpose. Moreover, the calculation of
original issue discount on REMIC Certificates (as defined herein) is subject to
uncertainties because of the lack of guidance from the Internal Revenue Service
under applicable statutory provisions. See "Federal Income Tax Consequences--
Federal Income Tax Consequences for REMIC Certificates," "--Taxation of Regular
Certificates--Variable Rate Regular Certificates," "Federal Income Tax
Consequences--Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made--Standard Certificates," and "Federal Income Tax
Consequences--Premium and Discount" and "--Stripped Certificates" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Certificates may be reduced to the extent that some investors are
unwilling to hold Certificates in book entry form in the name of Clearing
Agency Participants and the ability to pledge Book Entry Certificates may be
limited due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of payments
of principal and interest because such payments will be forwarded by the
Trustee to the Clearing Agency who will then forward payment to the Clearing
Agency Participants who will thereafter forward payment to Beneficial Owners.
In the event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Certificates are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Certificates may be impaired.
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
Certificates.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior
(i.e., second, third, etc.) liens are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, a
decline in the residential real estate market would adversely affect the
position of the related Trust as a junior beneficiary or junior mortgagee
before having such an effect on the position of the related senior
beneficiaries or
7
<PAGE> 96
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.
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
Certificates that each class of Certificates be rated in one of the four
highest rating categories by one or more of Moody's, Standard & Poor's or
Fitch. See "Summary of Prospectus--Ratings" herein. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time. No person is obligated to maintain the rating on
any Certificate, and, accordingly, there can be no assurance that the ratings
assigned to any class of Certificates on the date on which such Certificates
are initially issued will not be lowered or withdrawn by a Rating Agency at any
time thereafter. In the event any rating is revised or withdrawn, the
liquidity of the related Certificates may be adversely affected. Issuance of
any of the Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary trading market because investors may be unwilling
to purchase Certificates for which they cannot obtain physical certificates.
The rating of Certificates credit enhanced through external credit enhancement
such as a letter of credit, financial guaranty insurance policy or mortgage
pool insurance will depend primarily on the creditworthiness of the issuer of
such external credit enhancement device (a "Credit Enhancer"). Any reduction
in the rating assigned to the claims-paying ability of the related Credit
Enhancer below the rating initially given to the related Certificates would
likely result in a reduction in the rating of the Certificates. See "Ratings"
in the Prospectus Supplement.
Applicable Legal and Regulatory Risks. Applicable federal and state
laws generally regulate interest rates and other charges, require certain
disclosures, prohibit unfair and deceptive practices, regulate debt collection,
and require licensing of the originators of the mortgage loans and contracts.
Depending on the provisions of the applicable law and the specified facts and
circumstances involved, violations of those laws, policies and principles may
limit the ability to collect all or part of the principal of or interest on the
Mortgage Loans and may entitle the borrower to a refund of amounts previously
paid. See "Certain Legal Aspects of the Mortgage Assets" herein.
8
<PAGE> 97
DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to an Agreement entered into among
the Depositor, the Trustee, the Master Servicer, if any, and the Servicer. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust.
Certificates which represent beneficial interests in the Trust will be issued
pursuant to the Agreement similar to the form filed as an Exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries and the summaries set forth under "Administration" describe certain
provisions relating to each series of Certificates. THE PROSPECTUS SUPPLEMENT
FOR A SERIES OF CERTIFICATES WILL DESCRIBE THE SPECIFIC PROVISIONS RELATING TO
SUCH SERIES. The Depositor will provide Owners of Certificates, without
charge, on written request a copy of the Agreement for the related series.
Requests should be addressed to IMC Securities, Inc., 3450 Buschwood Park
Drive, Tampa, Florida 33618. The Agreement relating to a series of
Certificates will be filed with the Securities and Exchange Commission within
15 days after the date of issuance of such series of Certificates (the
"Delivery Date").
The Certificates of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The
Certificates will not represent obligations of the Depositor, the Trustee, the
Master Servicer, if any, any Servicer or any affiliate thereof and will not be
guaranteed by any governmental agency. See "The Trusts" herein.
The Mortgage Assets relating to a series of Certificates will not be
insured or guaranteed by any governmental entity and, to the extent that
delinquent payments on or losses in respect of defaulted Mortgage Assets, are
not advanced or paid from any applicable Credit Enhancement, such delinquencies
may result in delays in the distribution of payments on, or losses allocated to
one or more classes of Certificates of such series.
GENERAL
The Certificates of each series will be issued either in book entry
form or in fully registered form. The minimum original denomination of each
class of Certificates will be specified in the related Prospectus Supplement.
The original "Certificate Principal Balance" of each Certificate will equal the
aggregate distributions or payments allocable to principal to which such
Certificate is entitled and distributions allocable to interest on each
Certificate that is not entitled to distributions allocable to principal will
be calculated based on the "Notional Principal Balance" of such Certificate.
The Notional Principal Balance of a Certificate will not evidence an interest
in or entitlement to distributions allocable to principal but will be used
solely for convenience in expressing the calculation of interest and for
certain other purposes.
Except as described below under "Book Entry Registration" with respect
to Book Entry Certificates, the Certificates of each series will be
transferable and exchangeable on a "Certificate Register" to be maintained at
the corporate trust office or such other office or agency maintained for such
purposes by the Trustee. The Trustee will be appointed initially as the
"Certificate Registrar" and no service charge will be made for any registration
of transfer or exchange of Certificates, but payment of a sum sufficient to
cover any tax or other governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of
ERISA and the Code. See "ERISA Considerations" herein and in the related
Prospectus Supplement. Transfer of Certificates of such a class will not be
registered unless the transferee (i) executes a representation letter stating
that it is not, and is not purchasing on behalf of, any such plan, account or
arrangement or (ii) provides an opinion of counsel satisfactory to the Trustee
and the Depositor that the purchase of Certificates of such a class by or on
behalf of such plan, account or arrangement is permissible under applicable law
and will not subject the Trustee, the Servicer or the Depositor to any
obligation or liability in addition to those undertaken in the Agreement.
9
<PAGE> 98
As to each series, one or more elections may be made to treat the
related Trust or designated portions thereof as a REMIC for federal income tax
purposes. The related Prospectus Supplement will specify whether a REMIC
election is to be made. Alternatively, the Agreement for a series may provide
that a REMIC election may be made at the discretion of the Depositor or the
Servicer and may only be made if certain conditions are satisfied. See
"Federal Income Tax Considerations" herein. As to any such series, the terms
and provisions applicable to the making of a REMIC election, as well as any
material federal income tax consequences to Owners of Certificates not
otherwise described herein, will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a series, one of the
classes will be designated as evidencing the "residual interests" in the
related REMIC, as defined in the Code. All other classes of Certificates in
such a series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each series with respect to which a REMIC election
is to be made, the Servicer, the Trustee, an Owner of Residual Certificates or
another person as specified in the related Prospectus Supplement will be
obligated to take all actions required in order to comply with applicable laws
and regulations and will be obligated to pay any prohibited transaction taxes.
The person so specified will be entitled to reimbursement for any such payment.
CLASSES OF CERTIFICATES
Each series of Certificates will be issued in one or more classes
which will evidence the beneficial ownership in the assets of the Trust that
are allocable to (i) principal of such class of Certificates and (ii) interest
on such Certificates. If specified in the Prospectus Supplement, one or more
classes of a series of Certificates may evidence beneficial ownership interests
in separate groups of assets included in the related Trust.
The Certificates will have an aggregate original Certificate Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
(plus, amounts held in a Pre-Funding Account, if any) as of the time and day
prior to creation of the Trust specified in the related Prospectus Supplement
(the "Cut-Off Date") after deducting payments of principal due before the
Cut-Off Date and will bear interest at rates which, on a weighted basis, will
be equal to the Pass-Through Rate. The Pass-Through Rate will equal the
weighted average rate of interest borne by the related Mortgage Assets, net of
the aggregate servicing fees, amounts allocated to the residual interests and
any other amounts as are specified in the Prospectus Supplement. The original
Certificate Principal Balance (or Notional Principal Balance) of the
Certificates of a series and the interest rate on the classes of such
Certificates will be determined in the manner specified in the Prospectus
Supplement.
Each class of Certificates that is entitled to distributions allocable
to interest will bear interest at a fixed rate or a rate that is subject to
change from time to time (a) in accordance with a schedule, (b) by reference to
an index, or (c) otherwise (each, a "Certificate Interest Rate"). One or more
classes of Certificates may provide for interest that accrues but is not
currently payable ("Compound Interest Certificates"). With respect to any
class of Compound Interest Certificates, any interest that has accrued but is
not paid on a given Payment Date will be added to the aggregate Certificate
Principal Balance of such class of Certificates on that Payment Date.
A series of Certificates may include one or more classes entitled only
to distributions or payments (i) allocable to interest, (ii) allocable to
principal (and allocable as between scheduled payments of principal and
Principal Prepayments, as defined below), or (iii) allocable to both principal
(and allocable as between scheduled payments of principal and Principal
Prepayments) and interest. A series of Certificates may consist of one or more
classes as to which distributions or payments will be allocated (i) on the
basis of collections from designated portions of the assets of the Trust, (ii)
in accordance with a schedule or formula, (iii) in relation to the occurrence
of events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments of principal are
to be made in specified amounts on specified Payment Dates, to the extent of
funds available on such Payment Date. "Companion Certificates" are
Certificates which receive payments of all or a portion of any funds available
on a given Payment Date which are in excess of amounts required to be applied
to payments on Scheduled Amortization Certificates on such Payment Date.
Because of the manner of application of payments of principal to Companion
Certificates, the weighted average lives of Companion Certificates of a series
may be
10
<PAGE> 99
expected to be more sensitive to the actual rate of prepayments on the Mortgage
Assets in the related Trust than will the Scheduled Amortization Certificates
of such series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates", which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As
specified in the related Prospectus Supplement for a series of Special
Allocation Certificates, the timing and/or priority of payments of principal
and/or interest may favor one or more classes of Certificates over one or more
other classes of Certificates. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. Losses on Trust
assets for such series may be disproportionately borne by one or more classes
of such series, and the proceeds and distributions from such assets may be
applied to the payment in full of one or more classes within such series before
the balance, if any, of such proceeds are applied to one or more other classes
within such series. For example, Special Allocation Certificates in a series
may be comprised of one or more classes of Senior Certificates having a
priority in right to distributions of principal and interest over one or more
classes of Subordinated Certificates, as a form of Credit Enhancement. See
"Credit Enhancement - Subordination" herein. Typically, the Subordinated
Certificates will carry a rating by the rating agencies lower than that of the
Senior Certificates. In addition, one or more classes of Certificates
("Priority Certificates") may be entitled to a priority of distributions of
principal or interest from assets in the Trust over another class of
Certificates ("Non-Priority Certificates"), but only after the exhaustion of
other Credit Enhancement applicable to such series. The Priority Certificates
and Non-Priority Certificates nonetheless may be within the same rating
category.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General. Distributions of principal and interest will be made to the
extent of funds available therefor, on the dates specified in the Prospectus
Supplement (each, a "Payment Date") to the persons in whose names the
Certificates are registered (the "Owners") at the close of business on the
dates specified in the Prospectus Supplement (each, a "Record Date"). With
respect to Certificates other than Book Entry Certificates, distributions will
be made by check or money order mailed to the person entitled thereto at the
address appearing in the Certificate Register or, if specified in the
Prospectus Supplement, in the case of Certificates that are of a certain
minimum denomination as specified in the Prospectus Supplement, upon written
request by the Owner of a Certificate, by wire transfer or by such other means
as are agreed upon with the person entitled thereto; provided, however, that
the final distribution in retirement of the Certificates (other than Book Entry
Certificates) will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the notice of
such final distribution. With respect to Book Entry Certificates, such
payments will be made as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds in
a separate account established and maintained for the benefit of the
Certificates of the related series (the "Certificate Account" with respect to
such series), including any funds transferred from any related Reserve Fund.
Amounts may be invested in the Eligible Investments specified herein and in the
Prospectus Supplement, and all income or other gain from such investments will
be deposited in the related Certificate Account and may be available to make
payments on the Certificates of the applicable series on the next succeeding
Payment Date or pay after amounts owed by the Trust.
Distributions of Interest. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance
(as defined below)) of each class of Certificates entitled to interest from the
date, at the applicable Certificate Interest Rate and for the periods (each, an
"Interest Accrual Period") specified in the Prospectus Supplement. The
aggregate Certificate Principal Balance of any class of Certificates entitled
to distributions of principal will be the aggregate original Certificate
Principal Balance of such class of Certificates, reduced by all distributions
allocable to principal, and, in the case of Compound Interest Certificates,
increased by all interest accrued but not then distributable on such Compound
Interest Certificates. With respect to a class of Certificates entitled only
to distributions allocable to interest, such interest will accrue on a notional
principal balance (the "Notional Principal Balance") of such class, computed
solely for purposes of determining the amount of interest accrued and payable
on such class of Certificates.
11
<PAGE> 100
To the extent funds are available therefor, interest accrued during
each Interest Accrual Period on each class of Certificates entitled to interest
(other than a class of Compound Interest Certificates) will be distributable on
the Payment Dates specified in the Prospectus Supplement until the aggregate
Certificate Principal Balance of the Certificates of such class has been
distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate Notional Principal
Balance of such Certificates is reduced to zero or for the period of time
designated in the Prospectus Supplement. Distributions of interest on each
class of Compound Interest Certificates will commence only after the occurrence
of the events specified in the Prospectus Supplement and, prior to such time,
the aggregate Certificate Principal Balance (or Notional Principal Balance) of
such class of Compound Interest Certificates, will increase on each Payment
Date by the amount of interest that accrued on such class of Compound Interest
Certificates during the preceding Interest Accrual Period but that was not
required to be distributed to such class on such Payment Date. Any such class
of Compound Interest Certificates will thereafter accrue interest on its
outstanding Certificate Principal Balance (or Notional Principal Balance) as so
adjusted.
Distributions of Principal. The Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the
Certificates on each Payment Date will be calculated and the manner in which
such amount will be allocated among the classes of Certificates entitled to
distributions of principal.
One or more classes of Certificates may be entitled to receive all or
a disproportionate percentage of the payments of principal which are received
on the related Mortgage Assets in advance of their scheduled due dates and are
not accompanied by amounts representing scheduled interest due after the month
of such payments ("Principal Prepayments"). Any such allocation may have the
effect of accelerating the amortization of such Certificates relative to the
interests evidenced by the other Certificates.
Unscheduled Distributions. The Certificates of a series may be
subject to receipt of distributions before the next scheduled Payment Date
under the circumstances and in the manner described below and in the related
Prospectus Supplement. If applicable, such unscheduled distributions will be
made on the Certificates of a series on the date and in the amount specified in
the related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the related Mortgage Assets, low rates
then available for reinvestment of such payments or both, it is determined,
based on specified assumptions, that the amount anticipated to be on deposit in
the Certificate Account for such series on the next related Payment Date,
together with, if applicable, any amounts available to be withdrawn from any
related Reserve Fund or from any other Credit Enhancement provided for such
series, may be insufficient to make required distributions on the Certificates
on such Payment Date. The amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have
been required to be distributed as principal on the Certificates on the next
Payment Date and will include interest at the applicable Certificate Interest
Rate (if any) on the amount of the unscheduled distribution allocable to
principal for the period and to the date specified in the Prospectus
Supplement.
All distributions allocable to principal in any unscheduled
distribution will be made in the same priority and manner as distributions of
principal on the Certificates would have been made on the next Payment Date
except as otherwise stated in the related Prospectus Supplement, and, with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
BOOK ENTRY REGISTRATION
Certificates may be issued as Book Entry Certificates and held in the
name of a Clearing Agency registered with the Securities and Exchange
Commission or its nominee. Transfers and pledges of Book Entry Certificates
may be made only through entries on the books of the Clearing Agency in the
name of Clearing Agency Participants or their nominees. Clearing Agency
Participants may also be Beneficial Owners of Book Entry Certificates.
Purchasers and other Beneficial Owners may not hold Book Entry
Certificates directly but may hold, transfer or pledge their ownership interest
in the Certificates only through Clearing Agency Participants. Furthermore,
Beneficial Owners will receive all payments of principal and interest with
respect to the Certificates
12
<PAGE> 101
and, if applicable, may request redemption of Certificates, only through the
Clearing Agency and the Clearing Agency Participants. Beneficial Owners will
not be registered Owners of Certificates or be entitled to receive definitive
certificates representing their ownership interest in the Certificates except
under the limited circumstances, if any, described in the related Prospectus
Supplement. See "Risk Factors--Book Entry Registration" herein.
If Certificates of a series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Certificates of such series, and to receive and transmit
requests for redemption with respect to such Certificates. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such
Book Entry Certificates will be similarly required to make book entry transfers
and receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Certificates and will not possess physical
certificates, a method will be provided whereby Beneficial Owners may receive
payments, transfer their interests, submit redemption requests and receive the
reports provided herein.
LIST OF OWNERS OF CERTIFICATES
Upon written request of a specified number or percentage interests of
Owners of Certificates of record of a series of Certificates for purposes of
communicating with other Owners of Certificates with respect to their rights as
Owners of Certificates, the Trustee will afford such Owners access during
business hours to the most recent list of Owners of Certificates of that series
held by the Trustee. With respect to Book Entry Certificates, the only named
Owner on the Certificate Register will be the Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners of Certificates.
THE TRUSTS
The Trust for a series of Certificates will consist of: (i) the
Mortgage Assets (subject, if specified in the related Prospectus Supplement, to
certain exclusions, such as a portion of the mortgage interest rate being
retained by the Seller and not sold to the Trust) received on and after the
related Cut-Off Date; (ii) all payments (subject, if specified in the related
Prospectus Supplement, to certain exclusions, such as the retention by the
Seller of payments due and accrued before the related Cut-Off Date but
collected after such Cut-Off Date) in respect of such Mortgage Assets, which
may be adjusted, to the extent specified in the related Prospectus Supplement,
in the case of interest payments on Mortgage Assets, to the Pass-Through Rate;
(iii) if specified in the Prospectus Supplement, reinvestment income on such
payments; (iv) with respect to a Trust that includes Mortgage Loans all
property acquired by foreclosure or deed in lieu of foreclosure with respect to
any such Mortgage Loan; (v) certain rights of the Trustee, the Depositor and
the Servicer under any insurance policies, hazard insurance or surety bonds
required to be maintained in respect of the related Mortgage Assets; and (vi)
if so specified in the Prospectus Supplement, one or more forms of Credit
Enhancement.
The Certificates of each series will be entitled to payment only from
the assets of the related Trust and any other assets pledged therefor and will
not be entitled to payments in respect of the assets of any other trust
established by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information
respecting the Mortgage Assets is not known at the time the related series of
Certificates initially are offered, more general information of the nature
described below will be provided in the related Prospectus Supplement, and
specific information will be set forth in a report on Form 8-K to be filed with
the Securities and Exchange Commission within fifteen days after the initial
issuance of such Certificates. A copy of the Agreement with respect to each
series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Mortgage Assets
13
<PAGE> 102
relating to each series of Certificates, will be attached to the related
Agreement delivered to the Trustee upon delivery of such Certificates.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages or deeds of trust (the "Mortgages")
creating liens on residential properties (the "Mortgaged Properties"). Such
Mortgage Loans will be within the broad 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
Certificates will be payable either on the first day of each month or on
different scheduled days throughout each month, and the interest will be
calculated either on a simple-interest or accrual method as described in the
related Prospectus Supplement. When a full principal amount is paid on a
Mortgage Loan during a month, the mortgagor is generally charged interest only
on the days of the month actually elapsed up to the date of such prepayment, at
a daily interest rate that is applied to the principal amount of the Mortgage
Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for
a series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index, a rate that is
fixed for a period of time or under certain circumstances and followed
by an adjustable rate, a rate that otherwise varies from time to time,
or a rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
mortgage rate for a period of time or for the life of the Mortgage
Loan with the amount of any difference contributed from funds supplied
by the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service
basis to fully amortize the Mortgage Loan over its term, may be
calculated on the basis of an amortization schedule that is longer
than the original term to maturity or on an interest rate that is
different from the interest rate on the Mortgage Loan or may not be
amortized during all or a portion of the original term. Payment of
all or a substantial portion of the principal may be due on maturity.
Principal may include interest that has been deferred and added to the
principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be
fixed for the life of the Mortgage Loan, may increase over a specified
period of time or may change from period to period. Mortgage Loans
may include limits on periodic increases or decreases in the amount of
monthly payments and may include maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of the Mortgage Loan
or may decline over time, and may be prohibited for the life of the
Mortgage
14
<PAGE> 103
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
certificates or other mortgage-backed securities or (ii) certificates insured
or guaranteed by FHLMC or FNMA or GNMA.
Any MBS will have been issued pursuant to a participation and
servicing agreement, a pooling and servicing agreement, an indenture or similar
agreement (an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer
(the "MBS Servicer") of the underlying mortgage loans will have entered into
the MBS Agreement with a trustee or a custodian under the MBS Agreement (the
"MBS Trustee"), if any, or with the original purchaser or purchasers of the
MBS.
The MBS may have been issued in one or more classes with
characteristics similar to the classes of Certificates described herein.
Distributions in respect of the MBS will be made by the MBS Servicer or the MBS
Trustee on the dates specified in the related Prospectus Supplement. The MBS
Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
15
<PAGE> 104
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit
enhancement similar to that described for the Certificates under "Credit
Enhancement" may have been provided with respect to the MBS. The type,
characteristics and amount of such credit enhancement, if any, will be a
function of the characteristics of the underlying mortgage loans and other
factors and generally will have been established on the basis of the
requirements of any rating agency that may have assigned a rating to the MBS,
or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or
the formula for determining such rates, (iv) the payment characteristics of the
MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans, or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
OTHER MORTGAGE SECURITIES
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, single-family mortgage loans on real property or mortgage-backed
securities, including residual interests in issuances of collateralized
mortgage obligations or mortgage pass-through certificates. Any Other Mortgage
Securities that are privately placed securities will not be included in a Trust
until such time as such privately placed securities would be freely
transferrable pursuant to Rule 144A of the Securities Act of 1933, as amended.
Further (i) such privately placed securities will have been acquired in the
secondary market and not pursuant to an initial offering thereof and (ii) the
underlying issuer of such securities will not be affiliated with the Depositor
and will not have an interest in the Trust. The Prospectus Supplement for a
series of Certificates will describe any Other Mortgage Securities to be
included in the Trust for such series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with
respect to one or more classes of a series of Certificates or with respect to
the assets in the related Trust. Credit Enhancement may be in the form of the
subordination of one or more classes of the Certificates of such series, the
establishment of one or more Reserve Funds, the use of a cross-support feature,
use of a Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
bankruptcy bond, or another form of Credit Enhancement described in the related
Prospectus Supplement, or any combination of the foregoing. Credit Enhancement
may not provide protection against all risks of loss and may not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by Credit Enhancement
or which are not covered by the Credit Enhancement, Owners of Certificates will
bear their allocable share of deficiencies.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Certificates. The issuer of any Financial Guaranty
Insurance Policy (a "Financial Guaranty Insurer") will be described in the
related Prospectus Supplement. Such description will include financial
information on the Financial Guaranty Insurer. In addition, the audited
financial statements of a Financial Guaranty Insurer and an auditors consent to
use such financial statements will be filed with the Securities and Exchange
Commission on Form 8-K or will be incorporated by reference to financial
statements already on file with the Securities and Exchange Commission.
16
<PAGE> 105
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Certificateholders that an amount equal to each full and completed
insured payment will be received by an agent of the Trustee (an "Insurance
Paying Agent") on behalf of Certificateholders, for distribution by the Trustee
to each Certificateholder. The "insured payment" will be defined in the
related Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Certificateholders are
entitled under the related Agreement plus any other amounts specified therein
or in the related Prospectus Supplement (the "Insured Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty
Insurance Policies may have limitations including (but not limited to)
limitations on the insurer's obligation to guarantee the obligations of the
Seller or Depositor to repurchase or substitute for any Mortgage Loans.
Financial Guaranty Insurance Policies will not guarantee any specified rate of
prepayments and/or to provide funds to redeem Certificates on any specified
date.
Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of Certificateholder to receive
payments under the Certificates to the extent of any payment by such Financial
Guaranty Insurer under the related Financial Guaranty Insurance Policy.
Subordination. Distributions in respect of scheduled principal,
interest or any combination thereof otherwise payable to one or more classes of
Certificates of a series (the "Subordinated Certificates") may be paid to one
or more other classes of such series (the "Senior Certificates") under the
circumstances and to the extent provided in the Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Mortgage Assets and losses on defaulted Mortgage Assets will be borne
first by the various classes of Subordinated Certificates and thereafter by the
various classes of Senior Certificates, in each case under the circumstances
and subject to the limitations specified in the Prospectus Supplement. The
aggregate distributions in respect of delinquent payments on the Mortgage
Assets over the lives of the Certificates or at any time, the aggregate losses
in respect of defaulted Mortgage Assets which must be borne by the Subordinated
Certificates by virtue of subordination and the amount of the distributions
otherwise distributable to the Subordinated Certificates that will be
distributable to Owners of Senior Certificates on any Payment Date may be
limited as specified in the Prospectus Supplement. If aggregate distributions
in respect of delinquent payments on the Mortgage Assets or aggregate losses in
respect of such Mortgage Assets were to exceed the total amounts payable and
available for distribution to Owners of Subordinated Certificates or, if
applicable, were to exceed the specified maximum amount, Owners of Senior
Certificates could experience losses on the Certificates.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Certificates on any Payment
Date may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Payment Date, on each Payment Date for specified
periods, or on each Payment Date until the balance in the Reserve Fund has
reached a specified amount and, following payments from the Reserve Fund to
Owners of Senior Certificates or otherwise, thereafter to the extent necessary
to restore the balance in the Reserve Fund to required levels, in each case as
specified in the Prospectus Supplement. If so specified in the Prospectus
Supplement, amounts on deposit in the Reserve Fund may be released to the
Depositor or the Owners of any class of Certificates at the times and under the
circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of
Subordinate Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other classes of
Senior and Subordinated Certificates, respectively, through a cross-support
mechanism or otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified
17
<PAGE> 106
in the Prospectus Supplement. As between classes of Subordinated Certificates,
payments with respect to Senior Certificates on account of delinquencies or
losses and payments to any Reserve Fund will be allocated as specified in the
Prospectus Supplement.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Certificates relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Certificates. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Certificates. Such acceleration may continue
for the life of the related Certificates, or may be limited. In the case of
limited acceleration, once the required level of overcollateralization is
reached, and subject to certain provisions specified in the related Prospectus
Supplement, such limited acceleration feature may cease, unless necessary to
maintain the required level of overcollateralization.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Certificates.
In such case, Credit Enhancement may be provided by a cross-support feature
which may require that distributions be made with respect to Certificates
evidencing beneficial ownership of one or more asset groups prior to
distributions to Subordinated Certificates evidencing a beneficial ownership
interest in other asset groups within the same Trust. The Prospectus
Supplement for a series which includes a cross-support feature will describe
the manner and conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by
one or more forms of Credit Enhancement may apply concurrently to two or more
separate Trusts for a separate series of Certificates. If applicable, the
Prospectus Supplement will identify the Trusts to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trusts.
Pool Insurance. If specified in the related Prospectus Supplement,
one or more mortgage pool insurance policies (each, a "Mortgage Pool Insurance
Policy") will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the
limitations described below and in the Prospectus Supplement, cover loss by
reason of default in payments on such Mortgage Loans up to the amounts
specified in the Prospectus Supplement or report on Form 8-K and for the
periods specified in the Prospectus Supplement. The Trustee under the related
Agreement will agree to use its best reasonable efforts to cause to be
maintained in effect any such Mortgage Pool Insurance Policy and to supervise
the filing of claims thereunder to the issuer of such Mortgage Pool Insurance
Policy (the "Pool Insurer") for the period of time specified in the related
Prospectus Supplement. A Mortgage Pool Insurance Policy, however, is not a
blanket policy against loss, because claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent set forth in such policy as described in the
related Prospectus Supplement. The Mortgage Pool Insurance Policies, if any,
will not cover loss due to a failure to pay or denial of a claim under a
primary mortgage insurance policy, irrespective of the reason therefor. The
related Prospectus Supplement will describe the terms of any applicable
Mortgage Pool Insurance Policy and will set forth certain information with
respect to the related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may not insure against
loss sustained by reason of a default arising from, among other things, (i)
fraud or negligence in the origination or servicing of a Mortgage Loan,
including misrepresentation by the Mortgagor or persons involved in the
origination thereof or (ii) failure to construct a Mortgaged Property in
accordance with plans and specifications. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to one of the
foregoing events might result in a breach of a representation of the Seller and
in such event might give rise to an obligation on the part of the Seller to
purchase the defaulted Mortgage Loan if the breach materially and adversely
affects the interests of the Owners of the Certificates and cannot be cured by
the Seller.
18
<PAGE> 107
The original amount of coverage under any Mortgage Pool Insurance
Policy will be reduced over the life of such Certificates by the aggregate
dollar amount of claims paid less the aggregate of the net amounts realized by
the Pool Insurer upon disposition of all foreclosed properties. The amount of
claims paid will generally include certain expenses incurred with respect to
the applicable Mortgage Loans as well as accrued interest on delinquent
Mortgage Loans to the date of payment of the claim. See "Certain Legal Aspects
of the Mortgage Assets--Foreclosure" herein. Accordingly, if aggregate net
claims paid under any Mortgage Pool Insurance Policy reach the original policy
limit, coverage under that Mortgage Pool Insurance Policy will be exhausted and
any further losses will be borne by one or more classes of Certificates unless
otherwise covered by another form of Credit Enhancement, as specified in the
Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the
Mortgaged Property subject to a defaulted Mortgage Loan be restored to its
original condition prior to claiming against the Pool Insurer, such policy may
not provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans -- Standard Hazard Insurance", the hazard policies concerning
the Mortgage Loans typically exclude from coverage physical damage resulting
from a number of causes and even when the damage is covered, may afford
recoveries which are significantly less than the full replacement cost of such
losses. Even if special hazard insurance is applicable as specified in the
Prospectus Supplement, no coverage in respect of special hazard losses will
cover all risks, and the amount of any such coverage will be limited. See
"Special Hazard Insurance" below. As a result, certain hazard risks will not
be insured against and will therefore be borne by Owners of the Certificates,
unless otherwise covered by another form of Credit Enhancement, as specified in
the Prospectus Supplement.
Special Hazard Insurance. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage) not covered by
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under flood insurance policies, if any,
covering the Mortgaged Properties, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "Servicing of Mortgage Loans -- Standard Hazard Insurance." Any Special
Hazard Insurance Policy may not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear
reaction, flood (if the Mortgaged Property is located in a federally designated
flood area), chemical contamination and certain other risks. Aggregate claims
under each Special Hazard Insurance Policy will be limited as described in the
related Prospectus Supplement. Any Special Hazard Insurance Policy may also
provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the Mortgaged Property has been kept in force and other protection
and preservation expenses have been paid.
Subject to the foregoing limitations, any Special Hazard Insurance
Policy generally will provide that, where there has been damage to property
securing a foreclosed Mortgage Loan (title to which has been acquired by the
insured) and to the extent such damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained with respect to such
Mortgage Loan, the issuer of the Special Hazard Insurance Policy (the "Special
Hazard Insurer") will pay the lesser of (i) the cost of repair or replacement
of such property or (ii) upon transfer of the property to the special hazard
insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure,
plus accrued interest to the date of claim settlement and certain expenses
incurred with respect to such property. If the unpaid principal balance plus
accrued interest and certain expenses is paid by the Special Hazard Insurer,
the amount of further coverage under the related Special Hazard Insurance
Policy will be reduced by such amount less any net proceeds from the sale of
the property. Any amount paid as the cost of repair or replacement of the
property will also reduce coverage by such amount. Restoration of the property
with the proceeds described under (i) above will satisfy the condition under
any applicable Mortgage Pool Insurance Policy that the property be restored
before a claim under such Mortgage Pool Insurance Policy may be validly
presented with respect to the defaulted Mortgage Loan secured by such property.
The payment described under (ii) above will render unnecessary presentation of
a claim in respect of such Mortgage Loan under any related Mortgage Pool
Insurance Policy. Therefore, so long as a Mortgage Pool Insurance Policy
19
<PAGE> 108
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. Such cash and the principal and interest payments on such
other investments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in the Prospectus
Supplement, to provide additional protection against losses in respect of, the
assets in the related Trust, to pay the expenses of the Trust or for such other
purposes specified in the Prospectus Supplement. Whether or not the Depositor
has any obligation to make such a deposit, certain amounts to which the Owners
of Subordinated Certificates, if any, would otherwise be entitled may instead
be deposited into the Reserve Fund from time to time and in the amounts as
specified in the Prospectus Supplement. Any cash in any Reserve Fund and the
proceeds of any other instrument upon maturity will be invested in Eligible
Investments. If a letter of credit is deposited with the Trustee, such letter
of credit will be irrevocable. Any instrument deposited therein will name the
Trustee as a beneficiary and will be issued by an entity acceptable to each
rating agency that rates the Certificates. Additional information with respect
to such instruments deposited in the Reserve Funds may be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Fund for distribution with respect
to the Certificates for the purposes, in the manner and at the times specified
in the Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Certificates, or for such other
20
<PAGE> 109
purpose as is specified in such Prospectus Supplement. Such arrangements may
include agreements under which Owners of Certificates are entitled to receive
amounts deposited in various accounts held by the Trustee upon the terms
specified in the Prospectus Supplement. Such arrangements may be in lieu of
any obligation of the Servicer or the Seller to advance delinquent installments
in respect of the Mortgage Loans. See "Servicing of Mortgage Loans--Advances"
herein.
SERVICING OF MORTGAGE LOANS
With respect to each series of Certificates, the related Mortgage
Loans will be serviced by a sole servicer or by a master servicer with various
sub-servicers pursuant to, or as provided for in, the Agreement. The
Prospectus Supplement for each series will specify the servicer and the master
servicer, if any, for such series.
The Depositor will require that the Servicer have adequate servicing
experience, where appropriate, and financial stability, generally including a
net worth requirement of no less than $10,000,000 (to be specified in the
Agreement) as well as satisfaction of certain other criteria. The Servicer is
required to be a FNMA-approved servicer of conventional mortgage loans.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance or primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, and maintaining accounting
records relating to the Mortgage Loans and, if specified in the related
Prospectus Supplement, maintenance of escrow or impoundment accounts of
Mortgagors for payment of taxes, insurance, and other items required to be paid
by the Mortgagor pursuant to the Mortgage Loan. Each Servicer will also be
obligated to make advances in respect of delinquent installments on Mortgage
Loans as described more fully under "--Payments on Mortgage Loans" and
"--Advances" below and in respect of certain taxes and insurance premiums not
paid on a timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified
in the related Prospectus Supplement. Each Servicer will also generally be
entitled to collect and retain, as part of its servicing compensation, late
payment charges and assumption underwriting fees. Each Servicer will be
reimbursed from proceeds of one or more of the insurance policies described
herein ("Insurance Proceeds") or from proceeds received in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds") for certain
expenditures pursuant to the Agreement. See "--Advances" and "--Servicing
Compensation and Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Agreement for the entire term of such Mortgage Loan unless
such Agreement is earlier terminated. Upon termination, a replacement for the
Servicer will be appointed.
PAYMENTS ON MORTGAGE LOANS
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial
Account must be an account the deposits in which are fully insured by either
the Federal Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of
the coverage provided by such insurance, continuously secured by certain
obligations issued or guaranteed by the United States of America. If at any
time the amount on deposit in such Custodial Account shall exceed the amount so
insured or secured, the applicable Servicer must remit to the Trustee the
amount on deposit in such Custodial Account which exceeds the amount so insured
or secured, less any amount such Servicer may retain for its own account
pursuant to its Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit
21
<PAGE> 110
therein in excess of the amount so insured or secured, so long as such Servicer
meets certain requirements established by the rating agencies requested to rate
the Certificates.
Each Servicer is required to deposit into its Custodial Account on a
daily basis all amounts in respect of each Mortgage Loan received by such
Servicer, with interest adjusted to a rate (the "Remittance Rate") equal to the
related Mortgage Rate less the Servicer's servicing fee rate. On the day of
each month specified in the related Prospectus Supplement (the "Remittance
Date"), each Servicer of the Mortgage Loans will remit to the Trustee all funds
held in its Custodial Account with respect to each Mortgage Loan; provided,
however, that Principal Prepayments may be remitted on the Remittance Date in
the month following the month of such prepayment. Each Servicer will be
required pursuant to the terms of the Agreement and as specified in the related
Prospectus Supplement, to remit with each Principal Prepayment interest thereon
at the Remittance Rate through the last day of the month in which such
Principal Prepayment is made. Each Servicer may also be required to advance
its own funds as described below.
ADVANCES
With respect to a delinquent Mortgage Loan, the Servicer may be
obligated (but only to the extent set forth in the related Prospectus
Supplement) to advance its own funds or funds from its Custodial Account equal
to the aggregate amount of payments of principal and interest (adjusted to the
applicable Remittance Rate) which were due on a due date and which are
delinquent as of the close of business on the business day preceding the
Remittance Date ("Monthly Advance"). Generally, such advances will be required
to be made by the Servicer unless the Servicer determines that such advances
ultimately would not be recoverable under any applicable insurance policy, from
the proceeds of liquidation of the related Mortgaged Properties, or from any
other source (any amount not so reimbursable being referred to herein as a
"Nonrecoverable Advance"). Such advance obligation generally will continue
through the month following the month of final liquidation of such Mortgage
Loan. Any Servicer funds thus advanced will be reimbursable to such Servicer
out of recoveries on the Mortgage Loans with respect to which such amounts were
advanced. Each Servicer will also be obligated to make advances with respect
to certain taxes and insurance premiums not paid by Mortgagors on a timely
basis. Funds so advanced are reimbursable to the Servicers out of recoveries
on the related Mortgage Loans. Each Servicer's right of reimbursement for any
advance will be prior to the rights of the Trust to receive any related
Insurance Proceeds or Liquidation Proceeds. Failure by a Servicer to make a
required Monthly Advance will be grounds for termination under the related
Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will service the Mortgage Loans pursuant to guidelines
established in the related Agreement.
The Servicer will be responsible for making reasonable efforts to
collect all payments called for under the Mortgage Loans. The Servicer will be
obligated to follow such normal practices and procedures as it deems necessary
or advisable to realize upon a defaulted Mortgage Loan. In this regard, the
Servicer may (directly or through a local assignee) sell the property at a
foreclosure or trustee's sale, negotiate with the Mortgagor for a deed in lieu
of foreclosure or, in the event a deficiency judgment is available against the
Mortgagor or other person (see "Certain Legal Aspects of the Mortgage Assets --
Foreclosure--Anti-Deficiency Legislation and Other Limitations on Lenders" for
a description of the limited availability of deficiency judgments), foreclose
against such property and proceed for the deficiency against the appropriate
person. The amount of the ultimate net recovery (including the proceeds of any
Mortgage Pool Insurance Policy or other applicable Credit Enhancement), after
reimbursement to the Servicer of its expenses incurred in connection with the
liquidation of any such defaulted Mortgage Loan and prior unreimbursed advances
of principal and interest with respect thereto will be deposited in the
Certificate Account when realized and will be distributed to Owners of
Certificates on the next Payment Date following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the
22
<PAGE> 111
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 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.
23
<PAGE> 112
STANDARD HAZARD INSURANCE
The Servicer will be required to cause to be maintained for each
Mortgage Loan a standard hazard insurance policy. The coverage of such policy
is required to be in an amount not less than the maximum insurable value of the
improvements securing such Mortgage Loan from time to time or the principal
balance owing on such Mortgage Loan from time to time, whichever is less. In
all events, such coverage shall be in an amount sufficient to ensure avoidance
of the applicability of the co-insurance provisions under the terms and
conditions of the applicable policy. The ability of each Servicer to assure
that hazard insurance proceeds are appropriately applied may be dependent on
its being named as an additional insured under any standard hazard insurance
policy and under any flood insurance policy referred to below, or upon the
extent to which information in this regard is furnished to such Servicer by
Mortgagors. Each Agreement may provide that the related Servicer may satisfy
its obligation to cause hazard insurance policies to be maintained by
maintaining a blanket policy insuring against hazard losses on the Mortgage
Loans serviced by such Servicer.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and mud
flow), nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic
animals, theft and, in certain cases, vandalism. The foregoing list is merely
indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. If the property securing a Mortgage Loan is located in a
federally designated flood area, flood insurance will be required to be
maintained in such amounts as would be required by FNMA in connection with its
mortgage loan purchase program. The Depositor may also purchase special hazard
insurance against certain of the uninsured risks described above. See "Credit
Enhancement--Special Hazard Insurance".
Since the amount of hazard insurance the Servicer is required to cause
to be maintained on the improvements securing the Mortgage Loans declines as
the principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by
other credit support.
TITLE INSURANCE POLICIES
The Agreements will generally require that a title insurance policy be
in effect on each of the Mortgaged Properties and that such title insurance
policy contain no coverage exceptions, except customary exceptions generally
accepted in the mortgage banking industry.
CLAIMS UNDER PRIMARY MORTGAGE INSURANCE POLICIES AND STANDARD HAZARD INSURANCE
POLICIES; OTHER REALIZATION UPON DEFAULTED LOAN
Each Servicer will present claims to any primary insurer under any
related primary mortgage insurance policy and to the hazard insurer under any
related standard hazard insurance policy. All collections under any related
primary mortgage insurance policy or any related standard hazard insurance
policy (less any proceeds to be
24
<PAGE> 113
applied to the restoration or repair of the related Mortgaged Property or to
the reimbursement of Advances by the Servicer) will be remitted to the Trustee.
If any Mortgaged Property securing a defaulted Mortgage Loan is
damaged and proceeds, if any, from the related standard hazard insurance policy
are insufficient to restore the damaged property to a condition sufficient to
permit recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy, each Servicer may be required to
expend its own finds to restore the damaged property to the extent specified in
the related Prospectus Supplement, but only to the extent it determines such
expenditures are recoverable from Insurance Proceeds or Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the Agreement. If the proceeds of any liquidation of the Mortgaged
Property securing the defaulted Mortgage Loan are less than the Principal
Balance of the defaulted Mortgage Loan plus interest accrued thereon, a loss
will be realized on such Mortgage Loan, to the extent the applicable Credit
Enhancement is not sufficient, in the amount of such difference plus the
aggregate of expenses which are incurred by the Servicer in connection with
such proceedings and are reimbursable under the Agreement. In such case there
will be a reduction in the value of the Mortgage Loans and Trust may be unable
to recover the full amount of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Certificate Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Certificates.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its servicing duties, each Servicer will be
entitled to a monthly servicing fee in the amount specified in the related
Prospectus Supplement. In addition to the primary compensation, a Servicer may
be permitted to retain all assumption underwriting fees and late payment
charges, to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans and in connection with advancing delinquent payments.
No loss will be suffered on the Certificates by reason of such expenses to the
extent claims for such expenses are paid directly under any applicable Mortgage
Pool Insurance Policy, a primary mortgage insurance policy, the special hazard
insurance policy or from other forms of Credit Enhancement. In the event,
however, that the defaulted Mortgage Loans are not covered by a Mortgage Pool
Insurance Policy, primary mortgage insurance policies, the Special Hazard
Insurance Policy or another form of Credit Enhancement, or claims are either
not made or paid under such policies or Credit Enhancement, or if coverage
thereunder has ceased, such a loss will occur to the extent that the proceeds
from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's expenses, are less than the Principal Balance
of such defaulted Mortgage Loan.
MASTER SERVICER
A Master Servicer may be specified in the related Prospectus
Supplement for the related series of Certificates. Customary servicing
functions with respect to Mortgage Loans constituting the Mortgage Pool will be
provided by the Servicer directly or through one or more Sub-Servicers subject
to supervision by the Master Servicer. If the Master Servicer is not directly
servicing the Mortgage Loans, then the Master Servicer will (i) administer and
supervise the performance by the Servicer of its servicing responsibilities
under the Agreement with the Master Servicer, (ii) maintain a current data base
with the payment histories of each Mortgagor, (iii) review monthly servicing
reports and data relating to the Mortgage Pool for discrepancies and errors,
and (iv) act as back-
25
<PAGE> 114
up Servicer during the term of the transaction unless the Servicer is
terminated or resigns in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Agreement for any series
for which Mortgage Loans comprise the assets of a Trust. The Master Servicer
will be required to satisfy the standard established for the qualification of
the Master Servicer in the related Agreement. The Master Servicer will be
compensated for the performance of its services and duties under each Agreement
as specified in the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be
common to each Agreement. The summary does not purport to be complete and is
subject to the provisions of a particular Agreement. Material terms of a
specific Agreement will be further described in the related Prospectus
Supplement.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance of the
Certificates, the Depositor will assign the Mortgage Loans to the Trustee,
together with all principal and interest adjusted to the Remittance Rate,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Mortgage Loans on or after the Cut-Off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Agreement. Such schedule may include information as to the Principal Balance
of each Mortgage Loan as of the Cut-Off Date, as well as information respecting
the Mortgage Rate, the scheduled monthly payment of principal and interest as
of the Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to
the Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not
necessarily recorded), evidence of title insurance, if obtained, and, if
applicable, the certificate of private mortgage insurance. In instances where
recorded documents cannot be delivered due to delays in connection with
recording, the Depositor may deliver copies thereof and deliver the original
recorded documents promptly upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's
security interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date
of origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loans; (iii) at the date of initial issuance of the Certificates, the
Seller has good title to the Mortgage Loans and the Mortgage Loans are free of
offsets, defenses or counterclaims; (iv) at the date of initial issuance of the
Certificates, each Mortgage is a valid first lien on the property securing the
Mortgage Note (subject only to (a) the lien of current real property taxes and
assessments, (b) covenants, conditions, and restrictions, rights of way,
easements and other matters of public record as of the date of the recording of
such Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally in the area wherein the property subject to the
Mortgage is located or specifically reflected in the appraisal obtained by the
Depositor and (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by such Mortgage) and such property is free of material
26
<PAGE> 115
damage and is in good repair or, with respect to a junior lien Mortgage Loan,
that such Mortgage is a valid junior lien Mortgage, as the case may be and
specifying the percentage of the Mortgage Loan Pool comprised of junior lien
Mortgage Loans; (v) at the date of initial issuance of the Certificates, no
Mortgage Loan is 31 or more days delinquent (with such exceptions as may be
specified in the related Prospectus Supplement) and there are no delinquent tax
or assessment liens against the property covered by the related Mortgage; (vi)
at the date of initial issuance of the Certificates, the portion of each
Mortgage Loan, if any, which in the circumstances set forth below under
"Servicing of Mortgage Loans--Primary Mortgage Insurance" should be insured
with a private mortgage insurer is so insured; and (vii) each Mortgage Loan at
the time it was made complied in all material respects with applicable state
and federal laws, including, with out limitation, usury, equal credit
opportunity and disclosure laws. The Depositor's rights against the Seller in
the event of a breach of its representations will be assigned to the Trustee
for the benefit of the Certificates of such series.
Assignment of Mortgage-Backed Securities and Other Mortgage
Securities. With respect to each series, the Depositor will cause any
Mortgage-Backed Securities and Other Mortgage Securities included in the
related Trust to be registered in the name of the Trustee (directly or through
a participant in a depository). The Trustee (or its custodian) will have
possession of any certificated Mortgage-Backed Securities and Other Mortgage
Securities. The Trustee will not be in possession of or be assignee of record
of any underlying assets for a Mortgage-Backed Security or Other Mortgage
Security. Each Mortgage-Backed Security and Other Mortgage Security will be
identified in a schedule appearing as an exhibit to the related Agreement which
may specify certain information with respect to such security, including, as
applicable, the original principal amount, outstanding principal balance as of
the Cut-Off Date, annual pass-through rate or interest rate and maturity date
and certain other pertinent information for each such security. The Depositor
will represent and warrant to the Trustee, among other things, the information
contained in such schedule is true and correct and that immediately prior to
the transfer of the related securities to the Trustee, the Depositor had good
title to, and was the sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans. The Trustee will review
the documents delivered to it with respect to the Mortgage Loans included in
the related Trust. If any document is not delivered or is found to be
defective in any material respect and the Depositor or the related Seller, if
so required cannot deliver such document or cure such defect within the period
specified in the related Prospectus Supplement after notice thereof (which the
Trustee will undertake to give within the period specified in the related
Prospectus Supplement), and if any other party obligated to deliver such
document or cure such defect has not done so and has not substituted or
repurchased the affected Mortgage Loan or Contract then the Depositor will
cause the Seller, not later than the first date designated for the deposit of
payments into the Certificate Account (a "Deposit Date") which is more than a
specified number of days after such period, (a) if so provided in the
Prospectus Supplement to remove the affected Mortgage Loan from the Trust and
substitute one or more other Mortgage Loans therefor or (b) repurchase the
Mortgage Loan from the Trustee for a price equal to 100% of its Principal
Balance plus one month's interest thereon at the applicable Remittance Rate.
This repurchase and, if applicable, substitution obligation will generally
constitute the sole remedy available to the Trustee for a material defect in a
document relating to a Mortgage Loan.
The Depositor is required to cause the Seller to do either of the
following (a) cure any breach of any representation or warranty that materially
and adversely affects the interests of the Owners of the Certificates in a
Mortgage Loan (each, a "Defective Mortgage Loan") within a specified number of
days of its discovery by the Depositor or its receipt of notice thereof from
the Trustee, (b) repurchase such Defective Mortgage Loan not later than the
first Deposit Date which is more than a specified number of days after such
period for a price equal to 100% of its Principal Balance plus one month's
interest thereon at the applicable Remittance Rate, or (c) if so specified in
the Prospectus Supplement, remove the affected Mortgage Loan from the Trust and
substitute one or more other mortgage loans or contracts therefor. This
repurchase and, if applicable, substitution obligation will generally
constitute the sole remedies available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage
Loans as described above, whether or not the Depositor obtains such an
agreement from the Seller which sold such Mortgage Loans.
27
<PAGE> 116
In the case of Certificates representing debt obligations of a Trust
all assets of the Trust will be pledged to the Indenture Trustee.
If a REMIC election is to be made with respect to all or a portion of
a Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans.
EVIDENCE AS TO COMPLIANCE
The Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months on and after the Cut-Off Date, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that, based on an
examination of certain specified documents and records relating to the
servicing of the Depositor's mortgage loan portfolio conducted substantially in
compliance with the audit program for mortgages serviced for FNMA or FHLMC, the
United States Department of Housing and Urban Development Mortgage Audit
Standards or the Uniform Single Audit Program for Mortgage Bankers or in
accordance with other standards specified in the Agreement (the "Applicable
Accounting Standards"), such firm is of the opinion that such servicing has
been conducted in compliance with the Applicable Accounting Standards except
for (a) such exceptions as such firm shall believe to be immaterial and (b)
such other exceptions as shall be set forth in such statement.
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor. In addition, the Depositor
and the Trustee acting jointly will have the power and the responsibility for
appointing co-trustees or separate trustees of all or any part of the Trust
relating to a particular series of Certificates. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Agreement shall be conferred or imposed upon the
Trustee and such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Agreement, the Certificates or of any Mortgage Asset or
related document, and will not be accountable for the use or application by the
Depositor of any funds paid to the Depositor in respect of the Certificates or
the related assets, or amounts deposited in the Certificate Account or
deposited into the Distribution Account. If no Event of Default has occurred,
the Trustee will be required to perform only those duties specifically required
of it under the Agreement. However, upon receipt of the various certificates,
reports or other instruments required to be furnished to it, the Trustee will
be required to examine them to determine whether they conform to the
requirements of the Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Depositor will be obligated to appoint a successor Trustee. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that was requested to rate the Certificates,
or (ii) an account or accounts the deposits in which are fully insured by
either the Bank Insurance Fund (the "BIF") of the FDIC or the Savings
Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation) ("SAIF") of the FDIC. The collateral eligible to secure
amounts in the Certificate Account is limited to United States government
securities and other investments acceptable to the rating agencies rating such
series of Certificates, and may include one or more Certificates of a series
("Eligible Investments"). If so specified in the related Prospectus
Supplement, a Certificate Account may
28
<PAGE> 117
be maintained as an interest bearing account, or the funds held therein may be
invested pending each succeeding Payment Date in Eligible Investments. If so
specified in the related Prospectus Supplement, the Servicer or its designee
will be entitled to receive any such interest or other income earned on funds
in the Certificate Account as additional compensation. The Servicer will
deposit in the Certificate Account from amounts previously deposited by it into
the Servicer's Custodial Account on the related Remittance Date the following
payments and collections received or made by it on and after the Cut-Off Date
(including scheduled payments of principal and interest due on and after the
Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal,
including Principal Prepayments and, if specified in the related
Prospectus Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest,
adjusted to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicer or other person entitled thereto, as
described above;
(iv) all Insurance Proceeds, other than proceeds to be
applied to the restoration or repair of the related property or
released to the Mortgagor and net of certain amounts reimbursed to the
Servicer or other person entitled thereto, as described above;
(v) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
(vi) any Advances made as described under "Servicing of
Mortgage Loans--Advances" herein and certain other amounts required
under the Agreement to be deposited in the Certificate Account;
(vii) all proceeds of any Mortgage Loan or property
acquired in respect thereof repurchased by the Depositor, the Seller
or otherwise as described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Certificate Account from any Credit Enhancement for the related
series; and
(ix) all other amounts required to be deposited in the
Certificate Account pursuant to the related Agreement.
REPORTS
Concurrently with each distribution on the Certificates, there will be
mailed to Owners a statement generally setting forth, to the extent applicable
to any series, among other things:
(i) the aggregate amount of such distribution allocable
to principal, separately identifying the amount allocable to each
class;
(ii) the amount of such distribution allocable to
interest, separately identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each
class of the Certificates after giving effect to distributions on such
Payment Date;
(iv) the aggregate Certificate Principal Balance of any
class of Compound Interest Certificates after giving effect to any
increase in such Principal Balance that results from the accrual of
interest that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to
any class of Certificates that was distributed to other classes of
Certificates;
29
<PAGE> 118
(vi) if any class of Certificates has priority in the
right to receive Principal Prepayments, the amount of Principal
Prepayments in respect of the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of
Mortgage Loans which were delinquent as to a total of two installments
of principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans
which (a) were delinquent 30-59 days, 60-89 days, and 90 days or more,
and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually (in the case of Book Entry Certificates, 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 Pre-Funding Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on which
such Trust is established and the related Certificates are issued. The Trustee
of a Trust may enter into Pre-Funding Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the
Delivery Date. Any Pre-Funding Agreement will require that any Mortgage Loans
so transferred to a Trust conform to the requirements specified in such
Pre-Funding Agreement. If a Pre-Funding Agreement is to be utilized, the
related Trustee will be required to deposit in the Purchase Account all or a
portion of the proceeds received by the Trustee in connection with the sale of
one or more classes of Certificates of the related series; the additional
Mortgage Loans will be transferred to the related Trust in exchange for money
released from the related Pre-Funding Account. The maximum amount deposited in
the Pre-Funding Account to acquire Mortgage Loans for transfer to a Trust will
not exceed 40% of the aggregate principal amount of the Certificates offered
pursuant to the related Prospectus Supplement. Each Pre-Funding Agreement will
set a specified period during which any such transfers must occur, which period
will not exceed 90 days from the date the Trust is established. The
Pre-Funding Agreement or the related Agreement will require that, if all moneys
originally deposited to such Pre-Funding Account are not so used by the end of
such specified period, then any remaining moneys will be applied as a mandatory
prepayment of the related class or classes of Certificates as specified in the
related Prospectus Supplement.
SERVICER EVENTS OF DEFAULT
"Events of Default" under the Agreement will consist of (i) any
failure by the Servicer to duly observe or perform in any material respect any
other of its covenants or agreements in the Agreement materially affecting the
rights of Owners which continues unremedied for a specified number of days
after the giving of written notice of such failure to the Depositor by the
Trustee or to the Servicer and the Trustee by the Owners of Certificates
evidencing interests aggregating not less than 25% of the affected class of
Certificates; and (ii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain actions
by the Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
RIGHTS UPON SERVICER EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied
by the Servicer, the Trustee, or Owners of Certificates may terminate all the
rights and obligations of the Servicer under the Agreement, whereupon the
Trustee or Master Servicer, if any, or a new Servicer appointed pursuant to the
Agreement, will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Agreement and will be entitled to similar compensation
arrangements. Following such termination, the Depositor shall appoint any
established mortgage loan servicer satisfying the qualification standards
established in the Agreement to act as successor to the Servicer under the
Agreement. If no such successor shall have been appointed within a specified
number of days following such termination, then either the Depositor or the
Trustee may petition a court of competent jurisdiction for the
30
<PAGE> 119
appointment of a successor Servicer. Pending the appointment of a successor
Servicer, the Trustee or the Master Servicer, if any, shall act as Servicer.
The Owners of Certificates will not have any right under the Agreement
to institute any proceeding with respect to the Agreement, unless they
previously have given to the Trustee written notice of default and unless the
Owners of the percentage of the Certificates specified in the Prospectus
Supplement have made written request to the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity and the Trustee for a specified number of days has
neglected or refused to institute any such proceedings. However, the Trustee
is under no obligation to exercise any of the trusts or powers vested in it by
the Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto
at the request, order or direction of any of the Owners, unless such Owners
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
AMENDMENT
An Agreement generally may be amended by the Depositor, the Servicer
and the Trustee, without the consent of the Owners of the Certificates, to cure
any ambiguity, to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein, to take any action
necessary to maintain REMIC status of any Trust as to which a REMIC election
has been made, to add any other provisions with respect to matters or questions
arising under the Agreement which are not materially inconsistent with the
provisions of the Agreement or for any other purpose, provided that with
respect to amendments for any other purpose (A) the Depositor shall deliver an
opinion of counsel satisfactory to the Trustee, that such amendment will not
adversely affect in any material respect the interests of any Owners of
Certificates of that series and (B) such amendment will not result in a
withdrawal or reduction of the rating of any rated Certificate.
Notwithstanding the foregoing, no such amendment may (i) reduce in any manner
the amount of, or delay the timing of, collections of payments received on the
related Mortgage Assets or distributions which are required to be made on any
Certificate without the consent of the Owner of such Certificate, (ii)
adversely affect in any material respect the interests of the Owners of any
class of Certificates in any manner other than as described in (i), without the
consent of the Owners of Certificates of such class evidencing not less than a
majority of the interests of such class or (iii) reduce the aforesaid
percentage of Certificates of any class required to consent to any such
amendment, without the consent of the Owners of all Certificates of such class
then outstanding. Any other amendment provisions inconsistent with the
foregoing shall be specified in the related Prospectus Supplement.
TERMINATION
The obligations of the Depositor, the Servicer, and the Trustee
created by the Agreement will terminate upon the payment as required by the
Agreement of all amounts held by the Servicer or in the Certificate Account and
required to be paid to them pursuant to the Agreement after the later of (i)
the maturity or other liquidation of the last Mortgage Asset subject thereto or
the disposition of all property acquired upon foreclosure of any such Mortgage
Loan or (ii) the repurchase by the Depositor from the Trust of all the
outstanding Certificates or all remaining assets in the Trust. The Agreement
will establish the repurchase price for the assets in the Trust and the
allocation of such purchase price among the classes of Certificates. The
exercise of such right will effect early retirement of the Certificates of that
series, but the Depositor's right so to repurchase will be subject to the
conditions described in the related Prospectus Supplement. If a REMIC election
is to be made with respect to all or a portion of a Trust, there may be
additional conditions to the termination of such Trust which will be described
in the related Prospectus Supplement. In no event, however, will the trust
created by the Agreement continue beyond the expiration of 21 years from the
death of the survivor of certain persons named in the Agreement. The Trustee
will give written notice of termination of the Agreement to each Owner, and the
final distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency of the Trustee specified in such notice of
termination.
31
<PAGE> 120
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each series
of Certificates will be applied to the simultaneous purchase of the Mortgage
Assets related to such series (or to reimburse the amounts previously used to
effect such a purchase), the costs of carrying such Mortgage Assets until sale
of the Certificates and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool. The Depositor does not
have, nor is it expected in the future to have, any significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the
open market or in privately negotiated transactions, which may be through or
from an affiliate. The Depositor will not receive any fees or other
commissions in connection with its acquisition of Mortgage Assets or its sale
of such Mortgage Assets to the Trust.
Neither the Depositor nor any of its affiliates will insure or
guarantee the Certificates of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects
of mortgage loans and manufactured housing contracts which are general in
nature. Because such legal aspects are governed primarily by applicable state
law (which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the Mortgage Loans is situated.
The summaries are qualified by reference to the applicable federal and state
laws governing the Mortgage Loans.
GENERAL
Mortgages. The Mortgage Loans will be secured either by deeds of
trust or mortgages. A mortgage creates a lien upon the real property
encumbered by the mortgage. It is not prior to liens for real estate taxes and
assessments. Priority between mortgages depends on their terms and generally
on the order of filing with a state or county office. There are two parties to
a mortgage: the mortgagor, who is the borrower and homeowner or the land
trustee (as described below), and the mortgagee, who is the lender. Under the
mortgage instrument, the mortgagor delivers to the mortgagee a note or bond and
the mortgage. Although a deed of trust is similar to a mortgage, a deed of
trust formally has three parties, the borrower-homeowner called the trustor
(similar to a mortgager), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust and generally with a power of sale, to the trustee to secure payment of
the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage and, in some cases, the directions
of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans.
The private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for
project management and, in most cases, payment of real estate taxes and hazard
and liability insurance. If there is a blanket mortgage on the cooperative
apartment building and or underlying land, as is generally the case, the
cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy
32
<PAGE> 121
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 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
33
<PAGE> 122
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.
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
34
<PAGE> 123
by the tenant-stockholder, which the lender generally cannot restrict and does
not monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a foreclosure sale has been
conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due
under the proprietary lease or occupancy agreement. If there are proceeds
remaining, the lender must account to the tenant-stockholder for the surplus.
Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders" below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain
of the Mortgage Loans may be secured by mortgages or deeds of trust providing
for junior (i.e., second, third, etc.) liens on the related Mortgaged
Properties which are junior to the other mortgages or deeds of trust held by
other lenders or institutional investors. The rights of the beneficiary under
a junior deed of trust or as mortgagee under a junior mortgage are subordinate
to those of the mortgagee or beneficiary under the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive hazard insurance and condemnation proceeds and to cause the property
securing the Mortgage Loans to be sold upon default of the mortgagor or
trustor. As discussed more fully below, a junior mortgagee or beneficiary in
some states may satisfy a defaulted senior loan in full and in some states may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent
a provision in the senior mortgage or deed of trust, no notice of default is
required to be given to a junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such
proceeds and awards to any indebtedness secured by the mortgage or deed of
trust, in such order as the mortgagee or beneficiary may determine. Thus, in
the event improvements on the property are damaged or destroyed by fire or
other casualty, or in the event the bankruptcy is taken by condemnation, the
mortgagee or beneficiary under the underlying first mortgage or deed of trust
may have the prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the first
mortgage or deed of trust. In those situations, proceeds in excess of the
amount of first mortgage indebtedness generally may be applied to the
indebtedness of a junior mortgage or trust deed.
Other provisions typically found in the form of the mortgagee or deed
of trust generally used by most institutional lenders obligate the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the property which appear
prior to the mortgage or deed of trust, to provide and maintain fire insurance
on the property, to maintain and repair the property and not to commit or
permit any waste thereof, and to appear in and defend any action or proceeding
purporting to affect the property or the rights of the mortgagee or beneficiary
under the mortgage or deed of trust. Upon a failure of the mortgagor or
trustor to perform any of these obligations, the mortgagee or beneficiary
typically is given the right under the mortgage or deed of trust to perform the
obligation itself at its election, with the mortgagor or trustor
35
<PAGE> 124
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.
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.
36
<PAGE> 125
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 the Agreement, late charges (to the extent
permitted by law and not waived by the Servicer) will be retained by the
Servicer as additional servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the UCC. In such event, the Trustee will not be deemed to be a "holder
in due course," within the meaning of the UCC and may take such a mortgage note
subject to certain restrictions on its ability to foreclose and to certain
contractual defenses available to a mortgagor.
37
<PAGE> 126
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a
Mortgage Loan in a Trust was acquired by the Trust and cleanup costs were
incurred in respect of the Mortgaged Property, the Trust might realize a loss
if such costs were required to be paid by the Trust.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan by such borrower
(including a borrower who is a member of the National Guard or is in reserve
status at the time of the origination of the Mortgage Loan and is later called
to active duty) may not be charged interest above an annual rate of 6% during
the period of such borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such interest
rate limitation or similar limitations under state law could have an effect,
for an indeterminate period of time, on the ability of the Servicer to collect
full amounts of interest on certain of the Mortgage Loans. In addition, the
Relief Act imposes limitations which would impair the ability of the Servicer
to foreclose on an affected Mortgage Loan during the borrower's period of
active duty status. Thus, in the event that such a Mortgage Loan goes into
default there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property in a timely fashion.
Any shortfalls in interest collections resulting from application of
the Relief Act could adversely affect Certificates.
LEGAL INVESTMENT MATTERS
The Certificates may constitute "mortgage related securities" for
purposes of SMMEA, so long as they are rated in one of the two highest rating
categories by the Rating Agency or Agencies identified in the related
Prospectus Supplement and, as such, would be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including but not limited to state-chartered savings banks,
commercial banks, saving and loan associations and insurance companies, as well
as trustees and state government employee retirement systems) created pursuant
to or existing under the laws of the United States or any State (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to State regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any agency or instrumentality thereof constitute legal investments for such
entities. Under SMMEA, in all States which enacted legislation prior to
October 4, 1991 specifically limiting the legal investment authority of any of
such entities with respect to "mortgage related securities," the Certificates
will constitute legal investments for entities subject to such legislation only
to the extent provided in such legislation SMMEA provides, however, that in no
event will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, bold or invest in any securities or require
the sale or over disposition of any securities, so long as such contractual
commitment was made or such securities were acquired prior to the enactment of
such legislation. Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida,
Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska,
New Hampshire, New York, North Carolina, Ohio, South Dakota, Utah, Virginia and
West Virginia each enacted legislation overriding the exemption afforded by
SMMEA prior to the October 4, 1991 deadline.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of the
Certificates. Any financial institution which is subject to the jurisdiction
of the Comptroller of the Currency, the Board of Governors
38
<PAGE> 127
of the Federal Reserve System, the FDIC, the OTS, the NCUA or other federal or
state agencies with similar authority should review any applicable rules,
guidelines and regulations prior to purchasing the certificates. The Federal
Financial Institutions Examination Council, for example, has issued a
Supervisory Policy Statement on Securities Activities effective February 10,
1992 (the "Policy Statement"). The Policy Statement has been adopted by the
Comptroller of the Currency, the Federal Reserve Board, the FDIC and the OTS
with respect to the depository institutions that they regulate. The Policy
Statement prohibits depository institutions from investing in certain
"high-risk mortgage securities" except under limited circumstances, and sets
forth certain investment practices deemed to be unsuitable for regulated
institutions. The NCUA issued final regulations effective December 2, 1991
that restrict and in some instances prohibit the investment by federal credit
unions in certain types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities which are issued in book-entry
form.
Investors should consult their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively, "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Among other things, ERISA requires that the assets
of Plans be held in trust and that the trustee, or other duly authorized
fiduciary, have exclusive authority and discretion to manage and control the
assets of such Plans. ERISA also imposes certain duties on persons who are
fiduciaries of Plans. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). In addition to the imposition of general fiduciary standards
of investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a Plan.
(DOL Reg Section 2510.3-101). Under this regulation, the underlying assets and
properties of corporations, partnerships and certain other entities in which a
Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. In such case, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, and the underlying assets
and properties could be subject to ERISA reporting and disclosure. Certain
exceptions to the regulation may apply in the case of a Plan's investment in
the Certificates, but the Depositor cannot predict in advance whether such
exceptions apply due to the factual nature of the conditions to be met.
Accordingly, because the Mortgage Loans may be deemed Plan assets of each Plan
that purchases Certificates, an investment in the Certificates by a Plan might
give rise to a prohibited transaction under ERISA Sections 406 and 407 and be
subject to an excise tax under Code Section 4975 unless a statutory or
administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance of
such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans involving the origination, maintenance and
termination of mortgage pools
39
<PAGE> 128
consisting of mortgage loans secured by first or second mortgages or deeds of
trust on single-family residential property, and the acquisition and holding of
certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by PTE.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Owners against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan, (ii) the existence of a pool trustee who
is not an affiliate of the sponsor, and (iii) a limitation on the amount of the
payments retained by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor.
Although the Trustee for any series of Certificates will be
unaffiliated with the Depositor, there can be no assurance that the system of
insurance or subordination will meet the general or specific conditions
referred to above. In addition, the nature of a Trust's assets or the
characteristics of one or more classes of the related series of Certificates
may not be included within the scope of PTE 83-1 or any other class exemption
under ERISA. The Prospectus Supplement will provide additional information
with respect to the application of ERISA and the Code to the related
Certificates.
Several underwriters of mortgage-backed securities have applied for
and obtained ERISA prohibited transactions exemptions which are in some
respects broader than PTE 83-1. Such exemptions can only apply to
mortgage-backed securities which, among other conditions, are sold in an
offering with respect to which such underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. Several other
underwriters have applied for similar exemptions. If such an exemption might
be applicable to a series of Certificates, the related Prospectus Supplement
will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Certificates
must make its own determination as to whether the general and the specific
conditions of PTE 83-1 have been satisfied or as to the availability of any
other prohibited transaction exemptions Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited trans
action and will satisfy the other requirements of ERISA and the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Arter & Hadden, special
counsel to the Depositor with respect to the material federal income tax
consequences of the purchase, ownership and disposition of Certificates. The
discussion below does not purport to address all federal income tax
consequences that may be applicable to particular categories of investors, some
of which may be subject to special rules. The authorities on which this
discussion is based are subject to change or differing interpretations, and any
such change or interpretation could apply retroactively. This discussion
reflects the applicable provisions of the Code including recent amendments
under the Omnibus Budget Reconciliation Act of 1993 ("OBRA"), as well as final
regulations concerning REMICs (the "REMIC Regulations") promulgated on December
23, 1992, and final regulations under Sections 1271 through 1273 and 1275 of
the Code concerning debt instruments promulgated on January 27, 1994 (the "OID
Regulations"). The Depositor intends to rely on the OID Regulations for all
Certificates offered pursuant to this Prospectus; however, investors should be
aware that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the Certificates. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of
Certificates. The
40
<PAGE> 129
Prospectus Supplement for each series of Certificates will discuss any special
tax consideration applicable to any class of Certificates of such series, and
the discussion below is qualified by any such discussion in the related
Prospectus Supplement.
For purposes of this opinion, where the applicable Prospectus
Supplement provides for a fixed retained yield with respect to the Mortgage
Assets underlying a series of Certificates, references to the Mortgage Assets
will be deemed to refer to that portion of the Mortgage Assets held by the
Trust which does not include the fixed retained yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
General. With respect to a particular series of Certificates, an
election may be made to treat the Trust or one or more trusts or segregated
pools of assets therein as one or more REMICs within the meaning of Code
Section 860D. A Trust or a portion or portions thereof as to which one or more
REMIC elections will be made will be referred to as a "REMIC Pool." For
purposes of this discussion, Certificates of a series as to which one or more
REMIC elections are made are referred to as "REMIC Certificates" and will
consist of one or more classes of "Regular Certificates" and one class of
"Residual Certificates" in the case of each REMIC Pool. Qualification as a
REMIC requires ongoing compliance with certain conditions. With respect to
each series of REMIC Certificates, Arter & Hadden, special counsel to the
Depositor, has advised the Depositor that in their opinion, assuming (i) the
making of an appropriate election, (ii) compliance with the Agreement and (iii)
compliance with any changes in the law, including any amendments to the Code or
applicable Treasury regulations thereunder, each REMIC Pool will qualify as a
REMIC and that if a Trust qualifies as a REMIC, the tax consequences to the
Owners will be as described below. In such case, the Regular Certificates will
be considered to be "regular interests" in the REMIC Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each series of
Certificates will indicate whether one or more REMIC elections with respect to
the related Trust will be made, in which event references to "REMIC" or "REMIC
Pool" herein shall be deemed to refer to each such REMIC Pool.
Status of REMIC Certificates. REMIC Certificates held by a mutual
savings bank or a domestic building and loan association (a "Thrift
Institution") will constitute "qualifying real property loans" within the
meaning of Code Section 593(d)(1) in the same proportion that the assets of the
REMIC Pool would be so treated. REMIC Certificates held by a domestic building
and loan association will constitute "a regular or residual interest in a
REMIC" within the meaning of Code Section 7701(a) (19)(C) (xi) in the same
proportion that the assets of the REMIC Pool would be treated as "loans secured
by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C).
REMIC Certificates held by a real estate investment trust (a "REIT") will
constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest on the REMIC Certificates will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. If at all times 95% or more of the assets of the REMIC Pool
constitute qualifying assets for Thrift Institutions and REITs, the REMIC
Certificates will be treated entirely as qualifying assets for such entities.
Moreover, the REMIC Regulations provide that, for purposes of Code Sections
593(d)(1) and 856(c)(5)(A), payments of principal and interest on the Mortgage
Assets that are reinvested pending distribution to holders of REMIC
Certificates, constitute qualifying assets for such entities. Where two REMIC
Pools are part of a tiered structure they will be treated as one REMIC for
purposes of the tests described above respecting asset ownership of more or
less than 95%. Notwithstanding the foregoing, however, REMIC income received
by a REIT owning a residual interest in a REMIC Pool could be treated in part
as non-qualifying REIT income if the REMIC Pool holds Mortgage Assets with
respect to which income is contingent on mortgagor profits or property
appreciation. In addition, if the assets of the REMIC include buy-down
Mortgage Assets, it is possible that the percentage of such assets constituting
"qualifying real property loans" or "loans secured by an interest in real
property" for purposes of Code Sections 593(d)(1) and 7701(a)(19)(C)(v),
respectively, may be required to be reduced by the amount of the related
buy-down funds. REMIC Certificates held by a regulated investment company will
not constitute "government securities" within the meaning of Code Section
851(b)(4)(A)(i). REMIC Certificates held by certain financial institutions
will constitute an "evidence of
41
<PAGE> 130
indebtedness" within the meaning of Code Section 582(c)(i). REMIC Certificates
representing interests in obligations secured by manufactured housing treated
as single family residences under Code Section 25(e)(10) will be considered
interests in "qualified mortgages" as defined in Code Section 860E(a)(3).
Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis amount of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the Delivery
Date (which for purposes of this discussion is the date of issuance of the
REMIC Certificates) and at all times thereafter, may consist of assets other
than "qualified mortgages" and "permitted investments." The REMIC Regulations
provide a "safe harbor" pursuant to which the de minimis requirement will be
met if at all times the aggregate adjusted basis of any nonqualified assets
(i.e., assets other than qualified mortgages and permitted investments) is less
than 1% of the aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements
of the Code for REMIC status during any taxable year, the REMIC Pool will not
be treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool might be entitled to treatment as a grantor trust under the
rules described in "Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made." In that case, no entity-level tax would be
imposed on the REMIC Pool. Alternatively, the Regular Certificates may
continue to be treated as debt instruments for federal income tax purposes; but
the REMIC Pool could be treated as a taxable mortgage pool (a "TMP"). If the
REMIC Pool is treated as a TMP, any residual income of the REMIC Pool (income
from the Mortgage Assets less interest and original issue discount expense
allocable to the Regular Certificates and any administrative expenses of the
REMIC Pool) would be subject to corporate income tax at the REMIC Pool level.
On the other hand, an entity with multiple classes of ownership interests may
be treated as a separate association taxable as a corporation under Treasury
regulations, and the Regular Certificates may be treated as equity interests
therein. The Code, however, authorizes the Treasury Department to issue
regulations that address situations where failure to meet one or more of the
requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General. Payments received by holders of Regular Certificates
generally should be accorded the same tax treatment under the Code as payments
received on ordinary taxable corporate debt instruments. In general, interest,
original issue discount and market discount on a Regular Certificate will be
treated as ordinary income to a holder of the Regular Certificate (the "Regular
Certificateholder") as they accrue, and principal payments on a Regular
Certificate will be treated as a return of capital to the extent of the Regular
Certificateholder's basis in the Regular Certificate allocable thereto.
Regular Certificateholders must use the accrual method of accounting with
regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
Original Issue Discount. Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders
of any class of Regular Certificates having original issue discount generally
must include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that
takes into account the compounding of interest, in advance of receipt of the
cash attributable to such income. The Depositor anticipates that the amount of
original issue discount required to be included in a Regular
Certificateholder's income in any taxable year will be computed as described
below.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which distributions of principal are made
in a single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible
42
<PAGE> 131
in a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price." The issue price
of a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public. The Depositor
will determine original issue discount by including the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a period
prior to the issue date of the Regular Certificate in the issue price of a
Regular Certificate and will include in the stated redemption price at maturity
any interest paid on the first Payment Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Payment Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the
Regular Certificate, but generally will not include distributions of stated
interest if such interest distributions constitute "qualified stated interest."
Qualified stated interest generally means stated interest that is
unconditionally payable in cash or in property (other than debt instruments of
the issuer) at least annually at (i) a single fixed rate, (ii) one or more
qualified floating rates (as described below), (iii) a fixed rate followed by
one or more qualified floating rates, (iv) a single objective rate (as
described below) or (v) a fixed rate and an objective rate that is a qualified
inverse floating rate. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payment. Certain debt
securities may provide for default remedies in the event of late payment or
nonpayment of interest. The interest on such debt securities will be
unconditionally payable and constitute qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Any
stated interest in excess of the qualified stated interest is included in the
stated redemption price at maturity. If the amount of original issue discount
is "de minimis" as described below, the amount of original issue discount is
treated as zero, and all stated interest is treated as qualified stated
interest. Distributions of interest on Regular Certificates with respect to
which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Certificates includes all distributions of interest as well as principal
thereon. Moreover, if the interval between the issue date and the first
Payment Date on a Regular Certificate is longer than the interval between
subsequent Payment Dates (and interest paid on the first Payment Date is less
than would have been earned if the stated interest rate were applied to
outstanding principal during each day in such interval), the stated interest
distributions on such Regular Certificate technically do not constitute
qualified stated interest. In such case a special rule, applying solely for
the purpose of determining whether original issue discount is de minimis,
provides that the interest shortfall for the long first period (i.e., the
interest that would have been earned if interest had been paid on the first
Payment Date for each day the Regular Certificate was outstanding) is treated
as made at a fixed rate if the value of the rate on which the payment is based
is adjusted in a reasonable manner to take into account the length of the
interval. Regular Certificateholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a Regular
Certificate.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Regular Certificate and the denominator of which is the stated redemption price
at maturity of the Regular Certificate. Although currently unclear, it appears
that the schedule of such distributions should be determined in accordance with
the assumed rate of prepayment of the Mortgage Assets and the anticipated
reinvestment rate, if any, relating to the Regular Certificates (the
"Prepayment Assumption"). The Prepayment Assumption with respect to a series
of Regular Certificates will be set forth in the related Prospectus Supplement.
The holder of a debt instrument includes any de minimis original issue discount
in income pro rata as stated principal payments are received.
Of the total amount of original issue discount on a Regular
Certificate, the Regular Certificateholder generally must include in gross
income for any taxable year the sum of the "daily portions," as defined below,
of the original issue discount on the Regular Certificate accrued during an
accrual period for each day on which he holds the Regular Certificate,
including the date of purchase but excluding the date of disposition. Although
not
43
<PAGE> 132
free from doubt, the Depositor intends to treat the monthly period ending on
the day before each Payment Date as the accrual period, rather than the monthly
period corresponding to the prior calendar month. With respect to each Regular
Certificate, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Payment Date on
the Regular Certificate. For a Regular Certificate, original issue discount is
to be calculated initially based on a schedule of maturity dates that takes
into account the level of prepayments and an anticipated reinvestment rate that
are most likely to occur, which is expected to be based on the Prepayment
Assumption. The original issue discount accruing in a full accrual period
would be the excess, if any, of (i) the sum of (a) the present value of all of
the remaining distributions to be made on the Regular Certificate as of the end
of that accrual period that are included in the Regular Certificate's stated
redemption price at maturity and (b) the distributions made on the Regular
Certificate during the accrual period that are included in the Regular
Certificate's stated redemption price at maturity over (ii) the adjusted issue
price of the Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Certificate at the issue date, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular
Certificate at the beginning of any accrual period equals the issue price of
the Regular Certificate, increased by the aggregate amount of original issue
discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior period. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be
divided by the number of days in the period to determine the daily portion of
original issue discount for each day in the period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Assets or that exceed
the Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. In
the event of a change in circumstances that does not result in a substantially
contemporaneous pro rata prepayment, the yield and maturity of the Regular
Certificates are redetermined by treating the Regular Certificates as reissued
on the date of the change for an amount equal to the adjusted issue price of
the Regular Certificates. To the extent specified in the applicable Prospectus
Supplement, an increase in prepayments on the Mortgage Assets with respect to a
series of Regular Certificates can result in both a change in the priority of
principal payments with respect to certain classes of Regular Certificates and
either an increase or decrease in the daily portions of original issue discount
with respect to such Regular Certificates.
A purchaser of a Regular Certificate at a price greater than the issue
price also will be required to include in gross income the daily portions of
the original issue discount on the Regular Certificate. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Certificate exceeds
the sum of the issue price and the aggregate amount of original issue discount
that would have been includible in the gross income of an original holder of
the Regular Certificate who purchased the Regular Certificate at its issue
price, less any prior distributions included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for
such Regular Certificate (computed in accordance with the rules set forth
above) for all days after the date of purchase and ending on the date on which
the remaining principal amount of such Regular Certificate is expected to be
reduced to zero under the Prepayment Assumption.
A Certificateholder may elect to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount (as described below under "Market Discount"), de minimis market
discount and unstated interest (as adjusted for any amortizable bond premium or
acquisition premium) currently as it accrues using the constant yield to
maturity method. If this election is made, the holder is treated as satisfying
the requirements for making the elections with respect to amortization of
premium and current inclusion of market discount, each as described under
"Premium" and "Market Discount" below.
44
<PAGE> 133
Variable Rate Regular Certificates. Regular Certificates may provide
for interest based on a variable rate. The OID Regulations provide special
rules for variable rate instruments that meet three requirements. First, the
noncontingent principal payments may not exceed the instrument's issue price by
more than a specified amount equal to the lesser of (i) .015 multiplied by the
product of the total noncontingent payments and the weighted average maturity
or (ii) 15% of the total noncontingent principal payments. Second, the
instrument must provide for stated interest (compounded or paid at least
annually) at (i) one or more qualified floating rates, (ii) a single fixed rate
followed by one or more qualified floating rates, (iii) a single objective rate
or (iv) a single fixed rate and a single objective rate that is a qualified
inverse floating rate. Third, the instrument must provide that each qualified
floating rate or objective rate in effect during an accrual period is set at a
current value of that rate (one occurring in the interval beginning three
months before and ending one year after the rate is first in effect on the
Regular Certificate). A rate is a qualified floating rate if variations in the
rate can reasonably be expected to measure contemporaneous variations in the
cost of newly borrowed funds. Generally, neither (i) a multiple of a qualified
floating rate in excess of a fixed multiple that is greater than zero but not
more than 1.35 (and increased or decreased by a fixed rate) nor (ii) a cap or
floor that is likely to cause the interest rate on a Regular Certificate to be
significantly less or more than the overall expected return on the Regular
Certificate is considered a qualified floating rate. An objective rate is a
rate based on changes in the price of actively traded property or an index of
such prices or is a rate based on (including multiples of) one or more
qualified floating rates. An objective rate is a qualified inverse floating
rate if the rate is equal to a fixed rate minus a qualified floating rate and
variations in such rate can reasonably be expected to reflect inversely
contemporaneous variations in the cost of newly borrowed funds. A rate will
not be an objective rate if it is reasonably expected that the average rate
during the first half of the instrument's term will be significantly more or
less than the average rate in the final term. An objective rate must be
determined according to a single formula that is fixed throughout the term of
the Regular Certificate and is based on objective financial information or
economic information; however, a objective rate does not include a rate based
on information that is in the control of the issuer or that is unique to the
circumstances of a related party. Stated interest on a variable rate debt
instrument is qualified stated interest if the interest is unconditionally
payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified
floating rate or objective rate, all stated interest is qualified stated
interest and the amount of original issue discount, if any, is determined by
assuming the variable rate is a fixed rate equal to (a) in the case of a
qualified floating or inverse floating rate, the value, as of the issue date,
of the qualified floating inverse floating rate or (b) in the case of an
objective rate (other than a qualified inverse floating rate), a fixed rate
that reflects the yield that is reasonably expected for the debt instrument.
For all other variable rate debt instruments, the amount of interest and
original issue discount accruals are determined using the following steps.
First, a fixed rate substitute for each variable rate under the debt instrument
is determined. In general, the fixed rate substitute is a fixed rate equal to
the rate of the applicable type of variable rate as of the issue date. Second,
an equivalent fixed rate debt instrument is constructed using the fixed rate
substitute(s) in lieu of the variable rates and keeping all other terms
identical. Third, the amount of qualified stated interest and original issue
discount with respect to the equivalent fixed rate debt instrument are
determined under the rules for fixed rate debt instruments. Finally,
appropriate adjustments for actual variable rates are made during the term by
increasing or decreasing the qualified stated interest to reflect the amount
actually paid during the applicable accrual period as compared to the interest
assumed to be accrued or paid under the equivalent fixed rate debt instrument.
If there is no qualified stated interest under the equivalent fixed rate debt
instrument, the adjustment is made to the original issue discount for the
period.
The application of the OID Regulations to variable rate debt
instruments is limited and may not apply to some Regular Certificates 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 Certificates. The application of those provisions to instruments
such as variable rate Regular Certificates is subject to varying
interpretations. Prospective purchasers of variable rate Regular Certificates
are advised to consult their tax advisers concerning the tax treatment of such
Regular Certificates.
45
<PAGE> 134
Market Discount. A purchaser of a Regular Certificate also may be
subject to the market discount rules of Code Sections 1276 through 1278. Under
these sections and the principles applied by the OID Regulations in the context
of original issue discount, "market discount" is the amount by which a
subsequent purchaser's initial basis in the Regular Certificate (i) is exceeded
by the stated redemption price at maturity of the Regular Certificate or (ii)
in the case of a Regular Certificate having original issue discount, is exceed
by the sum of the issue price of such Regular Certificate plus any original
issue discount that would have previously accrued thereon if held by an
original Regular Certificateholder (who purchased the Regular Certificate at
its issue price), in either case less any prior distributions included in the
stated redemption price at maturity of such Regular Certificate. Such
purchaser generally will be required to recognize accrued market discount as
ordinary income as distributions includible in the stated redemption price at
maturity of such Regular Certificate are received in an amount not exceeding
any such distribution. That recognition rule would apply regardless of whether
the purchaser is a cash-basis or accrual-basis taxpayer. Such market discount
would accrue in a manner to be provided in Treasury regulations and should take
into account the Prepayment Assumption. The Conference Committee Report to the
1986 Act provides that until such regulations are issued, such market discount
would accrue either (i) on the basis of a constant interest rate or (ii) in the
ratio of stated interest allocable to the relevant period to the sum of the
interest for such period plus the remaining interest as of the end of such
period, or in the case of a Regular Certificate issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the sum of the original issue discount accrued for such period plus
the remaining original issue discount as of the end of such period. Such
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the Regular Certificate as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense
in any taxable year generally will not exceed the accrued market discount on
the Regular Certificate for such year. Any such deferred interest expense is,
in general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Certificateholder may elect to include market
discount in income currently as it accrues in all market discount instruments
acquired by such Regular Certificateholder in that taxable year or thereafter,
in which case the interest deferral rule will not apply. In Revenue Procedure
92-67, the Internal Revenue Service set forth procedures for taxpayers (1)
electing under Code Section 1278(b) to include market discount in income
currently, (2) electing under rules of Code Section 1276(b) to use a constant
interest rate to determine accrued market discount on a bond where the holder
of the bond is required to determine the amount of accrued market discount at a
time prior to the holder's disposition of the bond, and (3) requesting consent
to revoke an election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificates. This election, once
made, applies to all obligations held by the taxpayer at the beginning of the
first taxable year to which such section applies and to all taxable debt
obligations thereafter acquired and is binding on such taxpayer in all
subsequent years. The Conference Committee Report to the 1986 Act indicates a
Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Certificates. On June 27, 1996, the IRS published proposed regulations
46
<PAGE> 135
(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 Certificateholder may offset the
premium against corresponding interest income only as that interest income is
taken into account under the Regular Certificateholder's method of accounting.
For instruments that may be called or prepaid prior to maturity, a Regular
Certificateholder 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
Certificateholder'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 Certificateholder 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 Certificateholder'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 Certificates should consult their tax advisors regarding the election
to amortize premium and the method to be employed.
Sale or Exchange of Regular Certificates. If a Regular
Certificateholder sells or exchanges a Regular Certificate, the Regular
Certificateholder will recognize gain or loss equal to the difference, if any,
between the amount received and his adjusted basis in the Regular Certificate.
The adjusted basis of a Regular Certificate generally will equal the cost of
the Regular Certificate to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income with
respect to the Regular Certificate and reduced by amounts included in the
stated redemption price at maturity of the Regular Certificate that were
previously received by the seller and by any amortized premium.
Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Gain
from the disposition of a Regular Certificate that might otherwise be capital
gain will be treated as ordinary income to the extent that such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the gross income of the holder if his yield on such Regular Certificate were
110% of the applicable Federal rate under Code Section 1274(d) as of the date
of purchase over (ii) the amount of income actually includible in the gross
income of such holder with respect to the Regular Certificate. In addition,
gain or loss recognized from the sale of a Regular Certificate by certain banks
or thrift institutions will be treated as ordinary income or loss pursuant to
Code Section 582(c). The maximum tax rate for individuals on the excess of net
long-term capital gain over net short-term capital loss is 28%.
TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Certificates
("Residual Certificateholders") and will not be taxed separately to the REMIC
Pool. The daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and
by allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility
of investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii)
the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply. REMIC taxable income generally means the REMIC
Pool's gross income, including interest, original issue discount income and
market discount income, if any, on the Mortgage Assets, plus income on
reinvestment of cashflows and reserve assets, minus deductions, including
interest and original issue discount expense on the Regular Certificates,
servicing fees on the Mortgage Assets and other administrative expenses of the
REMIC Pool, amortization of premium, if any, with respect to the Mortgage
Assets, and any tax imposed on the REMIC's income from foreclosure property.
The requirement that Residual Certificateholders
47
<PAGE> 136
report their pro rata share of taxable income or net loss of the REMIC Pool
will continue until there are no Certificates of any class of the related
series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Assets,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles)
which will be matched in later years by a corresponding tax loss or reduction
in taxable income, but which could lower the yield to Residual
Certificateholders due to the lower present value of such future loss or
reduction. For example, if an interest in the Mortgage Assets is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Assets is
prepaid, the Residual Certificateholder may recognize taxable income without
being entitled to receive a corresponding amount of cash because (i) the
prepayment may be used in whole or in part to make distributions in reduction
of principal on the Regular Certificates and (ii) the discount income on the
Mortgage Loan which is includible in the REMIC's taxable income may exceed the
discount deduction allowed to the REMIC upon such distributions on the Regular
Certificates. When there is more than one class of Regular Certificates that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier maturing classes of Certificates to the extent that
such classes are not issued with substantial discount. If taxable income
attributable to such a mismatching is realized in general, losses would be
allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years
than in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a series
of Regular Certificates, may increase over time as distributions in reduction
of principal are made on the lower yielding classes of Regular Certificates,
where interest income with respect to any given Mortgage Loan will remain
constant over time as a percentage of the outstanding principal amount of that
loan. Consequently, Residual Certificateholders must have sufficient other
sources of cash to pay any federal, state or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such
income. Prospective investors should be aware, however, that a portion of such
income may be ineligible for offset by such investor's unrelated deductions.
See the discussion of "excess inclusions" below under "Limitations on Offset or
Exemption of REMIC Income; Excess Inclusions." The timing of such mismatching
of income and deductions described in this paragraph, if present with respect
to a series of Certificates, may have a significant adverse effect upon the
Residual Certificateholders after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Certificateholder for such periods in accordance with
generally accepted accounting principles. Investors should consult their own
advisors concerning the proper tax and accounting treatment of their investment
in Residual Certificates.
Basis and Losses. The amount of any net loss of the REMIC Pool that
may be taken into account by the Residual Certificateholder is limited to the
adjusted basis of the Residual Certificate as of the close of the quarter (or
time of disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis
of a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce
such adjusted basis (but not below zero). Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to the
Residual Certificateholder as to whom such loss was disallowed and may be used
by such Residual Certificateholder only to offset any income generated by the
same REMIC Pool. Residual Certificateholders should consult their tax advisors
about other limitations on the deductibility of net losses that may apply to
them.
A Residual Certificateholder will not be permitted to amortize
directly the cost of its Residual Certificate as an offset to its share of the
taxable income of the related REMIC Pool. However, such taxable income will
not include cash received by the REMIC Pool that represents a recovery of the
REMIC Pool's basis in its assets. Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
48
<PAGE> 137
Certificates over their life. However, in view of the possible acceleration of
the income of Residual Certificateholders described above under "Taxation of
REMIC Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear
whether its issue price would be considered to be zero or such negative amount
for purposes of determining the REMIC Pool's basis in its assets. The REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a
class of Residual Certificates as having a value of less than zero for purposes
of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater than the corresponding portion of the REMIC Pool's basis in the
Mortgage Assets, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless Treasury regulations yet
to be issued provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations do not so provide. See
"Treatment of Certain Items of REMIC Income and Expense--Market Discount"
below regarding the basis of Mortgage Assets to the REMIC Pool and "Sale or
Exchange of Residual Certificates" below regarding possible treatment of a loss
upon termination of the REMIC Pool as a capital loss.
Mark to Market Rules
Prospective purchasers of a Residual Certificate should be aware that
on December 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 Certificate 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 Certificates as described above under "Taxation of
Regular Certificates - Original Issue Discount" and "Variable Rate Regular
Certificates," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The REMIC
Pool's basis in such Mortgage Assets is generally the fair market value of the
Mortgage Assets immediately after the transfer thereof to the REMIC Pool. The
REMIC Regulations provide that such basis is equal in the aggregate to the
issue prices of all regular and residual interests in the REMIC Pool. In
respect of Mortgage Assets that have market discount to which Code Section 1276
applies, the accrued portion of such market discount would be recognized
currently by the REMIC as an item of ordinary income. Market discount income
generally should accrue in the manner described above under "Taxation of
Regular Certificates - Market Discount." However, the rules of Code Section
1276 concerning market discount income will not apply in the case of Mortgage
Assets originated on or prior to July 18, 1984, if any. With respect to such
Mortgage Assets market discount is generally includible in REMIC taxable income
or ordinary gross income pro rata as principal payments are received. Under
another interpretation of the Code and relevant legislative history, market
discount on such Mortgage Assets might be required to be recognized currently
by the REMIC, in the same manner that market discount would be recognized with
respect to Mortgage Assets originated after July 18, 1984. Under that method,
a REMIC would tend to recognize market discount more rapidly than it would
otherwise. In either case, the deduction of a portion of the interest expense
on the Regular Certificates allocable to such discount may be deferred until
such discount is included in income, and any gain on the sale or exchange
thereof will be treated as ordinary income to the extent of the deferred
interest deductible at that time.
49
<PAGE> 138
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Assets exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Assets at a premium equal to the
amount of such excess. As stated above,the REMIC Pool's basis in the Mortgage
Assets is the fair market value of the Mortgage Assets, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner
analogous to the discussion above under "Taxation of Regular Certificates--
Premium," a person that holds a Mortgage Loan as a capital asset under Code
Section 1221 may elect under Code Section 171 to amortize premium on Mortgage
Assets originated after September 27, 1985 under a constant yield method.
Amortizable bond premium will be treated as an offset to interest income on the
Mortgage Assets, rather than as a separate deduction item. Because
substantially all the mortgagors with respect to the Mortgage Assets are
expected to be individuals, Code Section 171 will not be available. Premium on
Mortgage Assets may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the Internal Revenue Service may argue that such premium should be
allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions.
A portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss carryovers
of a Residual Certificateholder, (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the Residual
Certificateholder is a pension fund or any other organization that is subject
to tax only on its unrelated business taxable income and (iii) is not eligible
for any reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor, as further discussed in "Taxation
of Certain Foreign Investors--Residual Certificates" below. Except as
discussed below with respect to excess inclusions from Residual Certificates
without "significant value." 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 Certificates 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 Certificateholder. 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
Certificateholder 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 Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is
the excess, if any, of (i) the income of such Residual Certificateholder for
that calendar quarter from its Residual Certificate over (ii) the sum of the
"daily accruals" (as defined below) for all days during the calendar quarter on
which the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable
portion of the product of the "adjusted issue price" (as defined below) of the
Residual Certificate at the beginning of the calendar quarter and 120 percent
of the "Federal long-term rate" in effect at the time the Residual Certificate
is issued. For this purposes the "adjusted issue price" of a Residual
Certificate at the beginning of any calendar quarter equals the issue price of
the Residual Certificate (adjusted for contributions), increased by the amount
of daily accruals for all prior quarters, and decreased (but not below zero) by
the aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The Federal long-term rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if
the
50
<PAGE> 139
Residual Certificates in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this
respect and the REMIC Regulations did not adopt this rule. However, the
exception from the excess inclusion rules applicable to thrift institutions
does not apply if the Residual Certificates do not have significant value.
Under the REMIC Regulations, the Residual Certificates will have significant
value if: (i) the aggregate of the issue prices of the Residual Certificates is
at least two percent of the aggregate issue prices of all Regular Certificates
and Residual Certificates in the REMIC and (ii) the anticipated weighted
average life of the Residual Certificates is at least 20 percent of the REMIC's
anticipated weighted average life based on the prepayment and reinvestment
assumptions used in pricing the transaction and any recognized or permitted
clean up calls or any required qualified liquidation. Although not entirely
clear, the REMIC Regulations indicate that the significant value determination
is made only on the Startup Day. The anticipated weighted average life of a
Residual Certificate with a principal balance and a market rate of interest is
computed by multiplying the amount of each expected principal payment by the
number of years (or portions thereof) from the Startup Day, adding these sums
and dividing by the total principal expected to be paid on such Residual
Certificate based on the relevant prepayment assumption and expected
reinvestment income. The anticipated weighted average life of a Residual
Certificate with either no specified principal balance or a principal balance
and rights to interest payments disproportionate to such principal balance,
would be computed under the formula described above but would include all
payments expected on the Residual Certificate instead of only the principal
payments. The anticipated weighted average life of a REMIC is a weighted
average of the anticipated weighted average lives of all classes of interest in
the REMIC.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Certificate are to be designated
as excess inclusions in an amount corresponding to the Residual Certificate's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Certificate will be subject to
the limitations on excess inclusions described above. The REMIC Regulations do
not provide guidance on this issue.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
Disqualified Organizations. If legal title or beneficial interest in
a Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of (i)
the present value of the total anticipated excess inclusions with respect to
such Residual Certificate for periods after the transfer and (ii) the highest
marginal federal corporate income tax rate. The REMIC Regulations provide that
the anticipated excess inclusion are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value discount rate equals the applicable Federal rate
under Code Section 1274(d) that would apply to a debt instrument that was
issued on the date the Disqualified Organization acquired the Residual
Certificate and whose term ended on the close of the last quarter in which
excess inclusion was expected to accrue with respect to the Residual
Certificate. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the Treasury Department if
the Disqualified Organization promptly disposes of the Residual Certificate and
the transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income
of the Pass-Through Entity for the taxable year. The Pass-Through Entity would
not be liable for such tax if it has received an affidavit from such record
holder that (i) states under penalty of perjury that it is not a Disqualified
Organization or (ii) furnishes a social security number and states under
penalties of perjury
51
<PAGE> 140
that the social security number is that of the transferee, provided that during
the period such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is
false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide
that neither legal title nor beneficial interest in a Residual Certificate may
be transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is
not a Disqualified Organization, is not purchasing such Residual Certificates
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and is not an entity that holds REMIC residual securities as
nominee to facilitate the clearance and settlement of such securities through
electronic book-entry changes in accounts of participating organizations and
(ii) the transferor provides a statement in writing to the Depositor and the
Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Agreement will provide that any attempted or purported transfer
in violation of these transfer restrictions will be null and void and will vest
no rights in any purported transferee. Each Residual Certificate with respect
to a series will have a legend referring to such restrictions on transfer, and
each Residual Certificateholder will be deemed to have agreed, as a condition
of ownership thereof, to any amendments to the related Agreement required under
the Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must
be furnished to the Internal Revenue Service and to the requesting party within
60 days of the request, and the Depositor or the Trustee may charge a fee for
computing and providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Certificates are disregarded, in which case the
transferor continues to be treated as the owner of the Residual Certificates
and thus continues to be subject to tax on its allocable portion of the net
income of the REMIC Pool. Under the Final REMIC Regulations, a transfer of a
Noneconomic Residual Interest (defined below) to a Residual Certificateholder
(other than a Residual Certificateholder who is not a U.S. Person, as defined
below under "Foreign Investors") is disregarded for all federal income tax
purposes unless no significant purpose of the transfer is to impede the
assessment or collection of tax. A residual interest in a REMIC (including a
residual interest with a positive value at issuance) is a "Noneconomic Residual
Interest" unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest federal corporate income tax rate in effect for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the transferee
will receive distributions from the REMIC at or after the time at which taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes. The anticipated excess inclusions and the present value
rate are determined in the same manner as set forth above under "Disqualified
Organizations." A significant purpose to impede the assessment or collection
of tax exists if the transferor, at the time of the transfer, either knew or
should have known (had "improper knowledge") that the transferor would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. Under the REMIC Regulations, a transferor is presumed not to have
improper knowledge if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor found that the
transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess of any
cash flows
52
<PAGE> 141
generated by the residual interest and that the transferee intends to pay taxes
associated with holding of residual interest as they become due. The Agreement
will require the transferee of a Residual Certificate to state as part of the
affidavit described above under the heading "Disqualified Organizations" that
such transferee (i) has historically paid its debts as they come due, (ii)
intends to continue to pay its debts as they come due in the future, (iii)
understands that, as the holder of a Noneconomic Residual Interest, it may
incur tax liabilities in excess of any cash flows generated by the Residual
Certificate, and (iv) intends to pay any and all taxes associated with holding
the Residual Certificate as they become due. The transferor must have no
reason to believe that such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of
a Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below), unless
such transferee's income is effectively connected with the conduct of a trade
or business within the United States. A Residual Certificate is deemed to have
tax avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each excess inclusion, (i) the REMIC Pool will
distribute to the transferee residual interest holder an amount that will equal
at least 30% of the excess inclusions and (ii) that each such amount will be
distributed at or after the time at which the excess inclusion accrues and not
later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust that
is subject to U.S. federal income tax regardless of the source of its income.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under "Taxation
of Residual Certificates Basis and Losses") of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition
to reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to him from
the REMIC Pool exceeds such adjusted basis on that Payment Date. Such income
will be treated as gain from the sale or exchange of the Residual Certificate.
It is possible that the termination of the REMIC Pool may be treated as a sale
or exchange of a Residual Certificateholder's Residual Certificate, in which
case, if the Residual Certificateholder has an adjusted basis in his Residual
Certificate remaining when his interest in the REMIC Pool terminates, and if he
holds such Residual Certificate as a capital asset under Code Section 1221,
then he will recognize a capital loss at that time in the amount of such
remaining adjusted basis.
The Conference Committee Report to the 1986 Act provides that, except
as provided in Treasury regulations yet to be issued the wash sale rules of
Code Section 1091 will apply to disposition of Residual Certificates.
Consequently, losses on dispositions of Residual Certificates will be
disallowed where the seller of the Residual Certificate, during the period
beginning six months before the sale or disposition of the Residual Certificate
and ending six months after such sale or disposition, acquires (or enters into
any other transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the calculation
of income or loss includible in the federal income tax returns of
53
<PAGE> 142
Residual Certificateholders, but rather will be taxed directly to the REMIC
Pool at a 100% rate. Prohibited transactions generally include (i) the
disposition of a qualified mortgage other than for (a) substitution within two
years of the Startup Day for a defective (including a defaulted) obligation (or
repurchase in lieu of substitution of a defective (including a defaulted)
obligation at any time) or for any qualified mortgage within three months of
the Startup Day, (b) foreclosure, default or imminent default of a qualified
mortgage, (c) bankruptcy or insolvency of the REMIC Pool or (d) a qualified
(complete) liquidation, (ii) the receipt of income from assets that are not the
type of mortgages or investments that the REMIC Pool is permitted to hold,
(iii) the receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a
due-on-sale or encumbrance clause or the conversion of an interest rate by a
mortgagor pursuant to the terms of a convertible adjustable rate Mortgage Loan.
The REMIC Regulations also provide that the modification of mortgage loans
underlying Mortgage-Backed Securities will not be treated as a modification of
the Mortgage-Backed Securities, provided that the trust including the was not
created to avoid prohibited transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general,
the REMIC Pool will be subject to a tax at a 100% rate on the value of any
property contributed to the REMIC Pool after the Startup Day. Exceptions are
provided for cash contributions to the REMIC Pool (i) during the three months
following the Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate
a qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject
to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by the REMIC Pool
through foreclosure or deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions.
Net income from foreclosure property generally means (i) gain from the sale of
a foreclosure property that is inventory property and (ii) gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Certificates and Residual Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The Trustee will be required to sign the REMIC Pool's returns.
Treasury regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool generally will be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Internal Revenue Service of
any adjustments to, among other things, items of REMIC income, gain, loss,
deduction or credit in a unified administrative proceeding. The Depositor or
other designated Residual Certificateholders will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, with respect to
the REMIC Pool. If
54
<PAGE> 143
the Code or applicable Treasury regulations do not permit the Depositor to act
as tax matters person in its capacity as agent of the Residual
Certificateholders, the Residual Certificateholder chosen by the Residual
Certificateholders or such other person specified pursuant to Treasury
regulations will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Certificate
is not required to treat items on its return consistently with their treatment
on the REMIC Pool's return if a holder owns 100% of the Residual Certificates
for the entire calendar year. Otherwise, each holder of a Residual Certificate
is required to treat items on its return consistently with their treatment on
the REMIC Pool's return, unless the holder of a Residual Certificate either
files a statement identifying the inconsistency or establishes that the
inconsistency resulted from incorrect information received from the REMIC Pool.
The Service may assess a deficiency resulting from a failure to comply with the
consistency requirement without instituting an administrative proceeding at the
REMIC Pool level.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000, adjusted yearly for
inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. In the case of a REMIC Pool,
such deductions may include deductions under Code Section 212 for servicing
fees and all administrative and other expenses relating to the REMIC Pool or
any similar expenses allocated to the REMIC Pool with respect to a regular
interest it holds in another REMIC. Such investors who hold REMIC Certificates
either directly or indirectly through certain pass-through entities may have
their pro rata share of such expenses allocated to them as additional gross
income, but may be subject to such limitation on deductions. In addition, such
expenses are not deductible at all for purposes of computing the alternative
minimum tax, and may cause such investors to be subject to significant
additional tax liability. Treasury regulations provide that the additional
gross income and corresponding amount of expenses generally are to be allocated
entirely to the holders of Residual Certificates in the case of a REMIC Pool
that would not qualify as a fixed investment trust in the absence of a REMIC
election. However, such additional gross income and limitation on deductions
will apply to the allocable portion of such expenses to holders of Regular
Certificates, as well as holders of Residual Certificates, where such Regular
Certificates are issued in a manner that is similar to pass-through
certificates in a fixed investment trust. In general, such allocable portion
will be determined based on the ratio that a REMIC Certificateholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Certificates and Residual Certificates with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC, or certain other pass-through entities described in the foregoing
Treasury regulations) may have taxable income in excess of the interest income
at the pass-through rate on Regular Certificates that are issued in a single
class or otherwise consistently with fixed investment trust status or in excess
of cash distributions for the related period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on
the Regular Certificate is effectively connected with the conduct of
55
<PAGE> 144
a trade or business within the United States by such Non-U.S. Person. In the
latter case, such Non-U.S. Person will be subject to United States federal
income tax at regular rates. Investors who are Non-U.S. Persons should consult
their own tax advisors regarding the specific tax consequences to them of
owning a Regular Certificate. The term "Non-U.S. Person" means any person who
is not a U.S. Person.
Residual Certificates. The Conference Committee Report to the 1986
Act indicates that amounts paid to Residual Certificateholders who are Non-U.S.
Persons are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Treasury regulations provide that amounts
distributed to Residual Certificateholders qualify as "portfolio interest,"
subject to the conditions described in "Regular Certificates" above, but only
to the extent that (i) the Mortgage Assets were issued after July 18, 1984 and
(ii) the Trust fund or segregated pool of assets therein (as to which a
separate REMIC election will be made), to which the Residual Certificate
relates, consists of obligations issued in "registered form" within the meaning
of Code Section 163(f)(1). Generally, Mortgage Assets will not be, but regular
interests in another REMIC Pool will be, considered obligations issued in
registered form. Furthermore, a Residual Certificateholder will not be
entitled to any exemption from the 30% withholding tax (or lower treaty rate)
to the extent of that portion of REMIC taxable income that constitutes an
"excess inclusion." See "Taxation of Residual Certificates--Limitations on
Offset or Exemption of REMIC Income; Excess Inclusions." If the amounts paid to
Residual Certificateholders who are Non-U.S. Persons are effectively connected
with the conduct of a trade or business within the United States by such
Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when
the Residual Certificate is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Certificates--Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Certificates.
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 Certificates or Residual Certificates. 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
Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the
sale of the Regular Certificates to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Certificateholder's
federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates,
non-exempt and non-charitable trusts, and partnerships who are either holders
of record of Regular Certificates or beneficial owners who own Regular
Certificates through a broker or middleman as nominee. All brokers, nominees
and all other non-exempt holders of record of Regular Certificates (including
corporations, non-calendar year taxpayers, securities or commodities dealers,
real estate investment trusts, investment companies, common trust funds, thrift
institutions and charitable trusts) may request such information for any
calendar quarter by telephone or in writing by contacting the person designated
in Internal Revenue Service
56
<PAGE> 145
Publication 938 with respect to a particular series of Regular Certificates.
Holders through nominees must request such information from the nominee.
Treasury regulations provide that information necessary to compute the accrual
of any market discount on the Regular Certificates must be furnished for
calendar years beginning after 1990.
The Internal Revenue Service's Form 1066 has an accompanying Schedule
Q, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Certificateholder by the end of the month
following the close of each calendar quarter (41 days after the end of a
quarter under proposed Treasury regulations) in which the REMIC Pool is in
existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
Code Section 67 expenses (see "Limitations on Deduction of Certain Expenses"
above) allocable to such holders. Furthermore, under such regulations,
information must be furnished quarterly to Residual Certificateholders,
furnished annually to holders of Regular Certificates, and filed annually with
the Internal Revenue Service concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under "Federal Income
Tax Consequences for REMIC Certificates," above."
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC ELECTION
IS MADE
Arter & Hadden, special counsel to the Depositor, is of the opinion
that if a Trust does not elect REMIC status and is not treated as a
partnership, the tax consequences to the Owners will be as described below.
STANDARD CERTIFICATES
General. If no election is made to treat a Trust (or a segregated
pool of assets therein) with respect to a series of Certificates as a REMIC,
the Trust may be classified as a grantor trust under subparagraph E, Part 1 of
subchapter J of the Code and not as a partnership or an association taxable as
a corporation. Where there is no fixed retained yield with respect to the
Mortgage Assets underlying the Certificates of a series, and where such
Certificates are not designated as Stripped Certificates, as described below
under "Stripped Certificates" or as Partnership Interests described under
"Taxation of Securities Classified as Partnership Interests," the holder of
each such "Standard Certificate" in such series will be treated as the owner of
a pro rata undivided interest in the ordinary income and corpus portions of the
Trust represented by his Certificate and will be considered the beneficial
owner of a pro rata undivided interest in each of the Mortgage Assets, subject
to the discussion below under "Recharacterization of Servicing Fees."
Accordingly, the holder of a Certificate (a "Certificateholder") of a
particular series will be required to report on its federal income tax return
its pro rata share of the entire income from the Mortgage Assets, original
issue discount (if any), prepayment fees, assumption fees, and late payment
charges received by or on behalf of the Trust, in accordance with such
Certificateholder's method of accounting. A Certificateholder generally will
be able to deduct its share of servicing fees and all administrative and other
expenses of the Trust in accordance with his method of accounting, provided
that such amounts are reasonable compensation for services rendered to that
Trust. However, investors who are individuals, estates or trusts who own
Certificates, either directly or indirectly through certain pass-through
entities, will be subject to limitation with respect to certain itemized
deductions described in Code Section 67, including deductions under Code
Section 212 for servicing fees and all such administrative and other expenses
of the Trust, to the extent that such deductions, in the aggregate, do not
exceed two percent of an investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000, adjusted yearly for
inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. As a result such investors
holding Certificates, directly or indirectly through a pass-through entity,
may have aggregate taxable income in excess of the aggregate amount of cash
received on such Certificates with respect to interest at the pass-through rate
on such Certificates or discount thereon. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax and may
cause such investors to be subject to significant additional tax liability.
Moreover,
57
<PAGE> 146
where there is fixed retained yield with respect to the Mortgage Assets
underlying a series of Certificates or where the servicing fees are in excess
of reasonable servicing compensation, the transaction will be subject to the
application of the "stripped bond" and "stripped coupon" rules of the Code, as
described below under "Stripped Certificates" and "Premium and Discount--
Recharacterization of Servicing Fees," respectively.
Tax Status. Subject to the discussion below, Arter & Hadden, special
counsel to the Depositor, is of the opinion that:
1. A Standard Certificate owned by a "domestic building
and loan association" within the meaning of Code Section 7701(a)(19)
will be considered to represent "loans . . . secured by an interest in
real property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the real property securing the Mortgage Assets
represented by that Certificate is of the type described in such
section.
2. A Standard Certificate owned by a financial
institution described in Code Section 593(a) will be considered to
represent "qualifying real property loans" within the meaning of Code
Section 592(d)(1), provided that the real property securing the
Mortgage Assets represented by that Certificate is of the type
described in such section.
3. A Standard Certificate owned by a real estate
investment trust will be considered to represent "real estate assets"
within the meaning of Code Section 856(C) (5) (A) to the extent that
the assets of the related Trust consist of qualified assets, and
interest income on such assets will he considered "interest on
obligations secured by mortgages on real property" within the meaning
of Code Section 856(c)(3)(B).
4. A Standard Certificate owned by a REMIC will be
considered to represent an "obligation (including any participation or
certificate of beneficial ownership therein) which is principally
secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A) to the extent that the assets of the related
Trust consist of "qualified mortgages" within the meaning of Code
Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. Code Section 593(d)(l)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a buy-down fund with respect to a buy-down Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buy-down Mortgage
Assets as "qualifying real property loans" under Code Section 593(d)(i) if the
exception of Code Section 593(d)(1)(C) is inapplicable, as "loans . . . secured
"by an interest in real property" under Code Section 7701(a)(19)(C)(v), as
"real estate assets" under Code Section 856(c)(5)(A), and as "obligation[s]
principally secured by an interest in real property" under Code Section
860G(a)(3)(A), there is indirect authority supporting treatment of an
investment in a buy-down Mortgage Loan as entirely secured by real property if
the fair market value of the real property securing the loan exceeds the
principal amount of the loan at the time of issuance or acquisition, as the
case may be. There is no assurance that the treatment described above is
proper. Accordingly, Certificateholders are urged to consult their own tax
advisors concerning the effects of such arrangements on the characterization of
such Certificateholder's investment for federal income tax purposes.
PREMIUM AND DISCOUNT
Certificateholders are advised to consult with their tax advisors as
to the federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "--Taxation
of Regular Certificates--Premium."
58
<PAGE> 147
Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to a Certificateholder's
interest in those Mortgage Assets as to which the conditions for the
application of those sections are met. Rules regarding periodic inclusion of
original issue discount income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July l, 1982, and mortgages of individuals
originated after March 2, 1984. Such original issue discount could arise by
the charging of points by the originator of the mortgages in an amount greater
than a statutory de minimis exception, to the extent that the points are not
currently deductible under applicable Code provisions or are not for services
provided by the lender. It is generally not anticipated that adjustable rate
Mortgage Assets will be treated as issued with original issue discount.
However, the application of the OID Regulations to adjustable rate mortgage
loans with incentive interest rates or annual or lifetime interest rate caps
may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage
Assets acquired by a Certificateholder are purchased at a price equal to the
then unpaid principal amount of such Mortgage Assets, no original issue
discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Assets (i.e., points) will be
includible by such holder.
Market Discount. Certificateholders also will be subject to the
market discount rules to the extent that the conditions for application of
those sections are met. Market discount on the Mortgage Assets will be
determined and will be reported as ordinary income generally in the manner
described above under "--Taxation of Regular Certificates--Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount
of such excess would be nondeductible under Code Section 162 or 212. In this
regard,there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Certificates, the reasonableness of servicing compensation should
be determined on a weighted average or loan-by-loan basis. If a loan-by-loan
basis is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Assets would be increased.
Recently issued Internal Revenue Service guidance indicates that a servicing
fee in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Assets to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage
Assets. Under the rules of Code Section 1286, the separation of the right to
receive some or all of the interest payments on an obligation from the right to
receive some or all of the principal payments on the obligation would result in
treatment of such Mortgage Assets as "stripped coupons" and "stripped bonds."
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of
such trust could be viewed as excluding the portion of the Mortgage Assets the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat
such an arrangement as a fixed investment trust, since the multiple classes of
trust interests should be treated as merely facilitating direct investments in
the trust assets and the existence of multiple classes of ownership interests
is incidental to that purpose. In general, such a recharacterization should
not have any significant effect upon the timing or amount of income reported by
a Certificateholder, except that the income reported by a cash method holder
may be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
59
<PAGE> 148
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for
servicing could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Assets.
In such event, the present value of such additional payments might be included
in the Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their
tax advisors as to the proper treatment of the amounts paid to the servicers as
set forth herein as servicing compensation or under either of the alternatives
set forth above.
Sale or Exchange of Certificates. Upon sale or exchange of a
Certificate, a Certificateholder will recognize gain or loss equal to the
difference between the amount realized on the sale and its aggregate adjusted
basis in the Mortgage Assets and other assets represented by the Certificate.
In general, the aggregate adjusted basis will equal the Certificateholder's
cost for the Certificate, increased by the amount of any income previously
reported with respect to the Certificate and decreased by the amount of any
losses previously reported with respect to the Certificate and the amount of
any distributions received thereon. Except as provided above with respect to
market discount on any Mortgage Assets, and except for certain financial
institutions subject to the provisions of Code Section 582(c), any such gain or
loss would be capital gain or loss if the Certificate was held as a capital
asset.
STRIPPED CERTIFICATES
General. Pursuant to Code Section 1286, the separation of ownership
of the right to receive some or all of the principal payments on an obligation
from ownership of the right to receive some or all of the interest payments
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to as
"Stripped Certificates." The Certificates will be subject to those rules if
(i) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii)
the Depositor, any of its affiliates or a servicer is treated as having an
ownership interest in the Mortgage Assets to the extent it is paid (or retains)
servicing compensation in an amount greater than reasonable consideration for
servicing the Mortgage Assets (see "Standard Certificates--Recharacterization
of the Servicing Fees" above) and (iii) a class of Certificates are issued in
two or more classes or subclasses representing the right to non pro rata
percentages of the interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its pro rata share of all or a portion of the principal payments on each
Mortgage Loan and/or "stripped coupons" with respect to its pro rata share of
all or a portion of the interest payments on each Mortgage Loan, including the
Stripped Certificate's allocable share of the servicing fees paid, to the
extent that such fees represent reasonable compensation for services rendered.
See discussion above under "Standard Certificates--Recharacterization of
Servicing Fees." For this purpose the servicing fees will be allocated to the
Stripped Certificates in proportion to the respective offering price of each
class (or subclass) of Stripped Certificates. The holder of a Stripped
Certificate generally will be entitled to a deduction each year in respect of
the servicing fees, as described above under "--Federal Income Tax
Consequences for Certificates as to Which No REMIC Election is Made--Standard
Certificates--General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon
generally as a new obligation issued (i) on the date that the stripped interest
is purchased and (ii) at a price equal to its purchase price or, if more than
one stripped interest is purchased, the share of the purchase price allocable
to such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Trust containing variable-rate Mortgage Assets, the Depositor has
been advised by counsel that (i) the Trust will be treated as a grantor trust
under subpart
60
<PAGE> 149
E, Part 1 of subchapter J of the Code and not as an association taxable as a
corporation, and (ii) each Stripped Certificate should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship
of Code Section 1286 and the regulations thereunder, Code Sections 1272 through
1275, and the OID Regulations. While under Code Section 1286 computations with
respect to Stripped Certificates arguably should be made in one of the ways
described below, the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as a
single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is originated for purposes of calculating any original issue discount.
The preamble to such regulations state that such regulations are premised on
the assumption that an aggregation approach is appropriate in determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis. In addition, under these regulations, a Stripped Certificate that
represents a right to payments of both interest and principal may be viewed
either as issued with original issue discount or market discount (as described
below), at a de minimis original issue discount, or presumably, at a premium.
The preamble to such regulations also provide that such regulations are
premised on the assumption that generally the interest component of such a
Stripped Certificate would be treated as stated interest under the original
issue discount rules. Further, the regulations provide that the purchaser of
such a Stripped Certificate may be required to account for any discount as
market discount rather than original issue discount if either (i) the initial
discount with respect to the Strip Certificate was treated as zero under the de
minimis rule or (ii) no more than 100 basis points in excess of reasonable
servicing is stripped off the related Mortgage Assets. Any such market
discount would be reportable as described above under "Federal Income Tax
Consequences for REMIC Certificates--Taxation of Regular Certificates--Market
Discount," without regard to the de minimis rule therein.
Status of Stripped Certificates. No specific legal authority exists
as to whether the character of the Stripped Certificates, for federal income
tax purposes, will be the same as that of the Mortgage Assets. Although the
issue is not free from doubt, counsel has advised the Depositor that Stripped
Certificates owned by applicable holders should be considered to represent
"qualifying real property loans" within the meaning or Code Section 593(d)(1),
"real estate assets" within the meaning of Code Section 856(c)(A),
"obligations(s) . . . principally secured by an interest in real property"
within the meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by
an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning or Code Section 856(c)(3)(B), provided that in each case the Mortgage
Assets and interest on such Mortgage Assets qualify for such treatment. The
application of such Code provisions to buy-down Mortgage Assets is uncertain.
See "--Federal Income Tax Consequences for Certificates as to Which No REMIC
Election is Made" and "--Standard Certificates--Tax Status" above.
Original Issue Discount. Except as described above under "--General,"
each Stripped Certificate will be considered to have been issued (i)
on the date that the stripped interest is purchased and (ii) at a price equal
to its purchase price or, if more than one stripped interest is purchased, the
share of the purchase price allocable to such stripped interest. Each stripped
interest generally will have original issue discount equal to the excess of its
stated redemption price at maturity (or, in the case of a stripped coupon, the
amount payable on the due date of such coupon) over its issue price. Original
issue discount with respect to a Stripped Certificate must be included in
ordinary income as it accrues, in accordance with a constant yield method that
takes into account the compounding of interest, which may be prior to the
receipt of the cash attributable to such income. Counsel has advised the
Depositor that the amount of original issue discount required to be included in
the income of a Stripped Certificateholder in any taxable year likely will be
computed generally as described above under "Federal Income Tax Consequences
for REMIC Certificates--Taxation of Regular Certificates--Original Issue
Discount" and "--Variable Rate Regular Certificates." However, with the
apparent exception of a Stripped Certificate issued with de minimis original
issue discount, as described above under "--General," the issue price of a
Stripped Certificate will be the purchase price paid by each holder thereof,
and the stated redemption price at maturity will include the aggregate amount
of the payments to be made on the Stripped Certificate to such Stripped
Certificateholder, presumably under the Prepayment Assumption, other than
amounts treated as qualified stated interest.
61
<PAGE> 150
If the Mortgage Assets prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Certificateholder's
recognition of original issue discount will be either accelerated or
decelerated and the amount of such original issue discount will be either
increased or decreased depending on the relative interests in principal and
interest on each Mortgage Loan represented by such Stripped Certificateholder's
Stripped Certificate. While the matter is not free from doubt, the holder of a
Stripped Certificate should be entitled in the year that it becomes certain
(assuming no further prepayments) that the holder will not recover a portion of
its adjusted basis in such Stripped Certificate to recognize an ordinary loss
equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some of
or all the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Assets are prepaid could lead to the interpretation
that such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply,
treatment of a Stripped Certificate under such rules depends on whether the
aggregate amount of principal payments, if any, to be made on the Stripped
Certificate is less than or greater than its issue price. If the aggregate
principal payments are greater than or equal to the issue price, the principal
payments would be treated as a separate installment obligation issued at a
price equal to the purchase price for the Stripped Certificate. In such case,
original issue discount would be calculated and accrued under the method
described above without consideration of the interest payments with respect to
the Stripped Certificate. Such payments of interest would be includible in the
Stripped Certificateholder's gross income in the taxable year in which the
amounts become fixed. If the aggregate amount of principal payments to be made
on the Stripped Certificate is less than its issue price, each payment of
principal would be treated as a return of basis. Each payment of interest
would be treated as includible in gross income to the extent of the applicable
Federal rate under Code Section 1274(d), as applied to the adjusted basis of
the Stripped Certificate, while amounts received in excess of the applicable
Federal rate, as applied to the adjusted basis of the Stripped Certificate,
would be characterized as a return of basis until the total amount of interest
payments treated as a return of basis equalled the excess of the purchase price
over the aggregate stated principal payments. Any additional interest payments
thereafter would be treated as ordinary income. While not free from doubt
uncertainty as to the payment of interest arising as a result of the
possibility of prepayment of the Mortgage Assets should not cause the rules
under the proposed contingent payment regulations to apply to interest with
respect to the Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the
remaining payments on the Stripped Certificates, such subsequent purchaser will
be required for federal income tax purposes to accrue and report such excess as
if it were original issue discount in the manner described above. It is not
clear for this purpose whether the assumed prepayment rate that is to be used
in the case of a Stripped Certificateholder other than by original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on
the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their
62
<PAGE> 151
federal income tax returns. Such information will include the amount of
original issue discount accrued on Certificates held by persons other than
Certificateholders exempted from the reporting requirements. The amounts
required to be reported by the Trustee may not be equal to the proper amount of
original issue discount required to be reported as taxable income by a
Certificateholder, other than an original Certificateholder. The Trustee will
also file such original issue discount information with the Internal Revenue
Service. If a Certificateholder fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Certificateholder has not reported all interest and dividend income required to
be shown on his federal income tax return, 31% backup withholding may be
required in respect of any reportable payments, as described above under
"--Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage
Assets that are issued on or before July 18, 1984, interest or original issue
discount paid by the person required to withhold tax under Code Section 1441 or
1442, which apply to nonresident aliens, foreign corporations, or other
Non-U.S. Persons generally will be subject to 30% United States withholding
tax, or such lower rate as may be provided for interest by an applicable tax
treaty. Accrued original issue discount or market discount recognized by the
Certificateholder on the sale or exchange of such a Certificate also will be
subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements described above under
"--Taxation of Certain Foreign Investors--Regular Certificates."
Certificateholders 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 Certificates. 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 Certificates.
TAXATION OF SECURITIES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Certificates characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement.
With respect to such series of Partnership Interests, Arter & Hadden, special
counsel to the Depositor, is of the opinion that (unless otherwise limited in
the related Prospectus Supplement) the Trust will be characterized as a
partnership and not an association taxable as a corporation for federal income
tax purposes, which will also cover any material federal income tax
consequences applicable to the Owners.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Certificates,
including the public offering or purchase price of each class of Certificates
of such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Certificates will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Certificates from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular series of Certificates will be set forth on
the cover of the Prospectus Supplement relating to such series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement
63
<PAGE> 152
In connection with the sale of the Certificates, Underwriters may
receive compensation from the Depositor or from purchasers of the Certificates
in the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Certificates will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Certificates if any are
purchased and that the Depositor will indemnify the Underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended.
RATINGS
Each class of Certificates of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning Rating Agency. No person is obligated to maintain the rating on any
Certificate, and, accordingly, there can be no assurance that the ratings
assigned to a Certificate upon initial issuance will not be lowered or
withdrawn by a Rating Agency at any time thereafter. In general, ratings
address credit risk and do not represent any assessment of the likelihood or
rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Arter & Hadden,
Washington, D.C. Certain legal matters relating to insolvency issues and
certain federal income tax matters concerning the Certificates will be passed
upon for the Depositor by Arter & Hadden.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Certificates.
No Trust will have any assets or obligations prior to the issuance of the
related series of Certificates. No Trust will engage in any activities other
than those described herein or in the Prospectus Supplement. Accordingly, no
financial statement with respect to any Trust is included in this Prospectus or
will be included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not
material to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
64
<PAGE> 153
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1986 Act . . . . . . . . . . . . . . . . . . . . 42
1996 Act . . . . . . . . . . . . . . . . . . . . 50
Agreement . . . . . . . . . . . . . . . . . . . . 1
AMTI . . . . . . . . . . . . . . . . . . . . . . 50
Applicable Accounting Standards . . . . . . . . . 28
Balloon Loans . . . . . . . . . . . . . . . . . . 6
Beneficial Owners . . . . . . . . . . . . . . . . 4
BIF . . . . . . . . . . . . . . . . . . . . . . . 28
Book Entry Certificates . . . . . . . . . . . . . 4
Certificate Account . . . . . . . . . . . . . . . 11
Certificate Interest Rate . . . . . . . . . . . . 10
Certificate Principal Balance . . . . . . . . . . 9
Certificate Register . . . . . . . . . . . . . . 9
Certificate Registrar . . . . . . . . . . . . . . 9
Certificateholder . . . . . . . . . . . . . . . . 57
Certificates . . . . . . . . . . . . . . . . . . 1
Clearing Agency . . . . . . . . . . . . . . . . . 4
Clearing Agency Participants . . . . . . . . . . 4
Code . . . . . . . . . . . . . . . . . . . . . . 4
Companion Certificates . . . . . . . . . . . . . 10
Compound Interest Certificates . . . . . . . . . 10
Cooperative Loans . . . . . . . . . . . . . . . . 14
Cooperatives . . . . . . . . . . . . . . . . . . 1
Credit Enhancement . . . . . . . . . . . . . . . 4
Credit Enhancer . . . . . . . . . . . . . . . . . 8
Custodial Account . . . . . . . . . . . . . . . . 21
Cut-Off Date . . . . . . . . . . . . . . . . . . 10
Defective Mortgage Loan . . . . . . . . . . . . . 27
Delivery Date . . . . . . . . . . . . . . . . . . 9
Deposit Date . . . . . . . . . . . . . . . . . . 27
Depositor . . . . . . . . . . . . . . . . . . . . 1
Disqualified Organization . . . . . . . . . . . . 52
Distribution Date . . . . . . . . . . . . . . . . 11
DOL . . . . . . . . . . . . . . . . . . . . . . . 39
Eligible Investments . . . . . . . . . . . . . . 28
ERISA . . . . . . . . . . . . . . . . . . . . . . 4
Events of Default . . . . . . . . . . . . . . . . 30
FDIC . . . . . . . . . . . . . . . . . . . . . . 21
FHLMC . . . . . . . . . . . . . . . . . . . . . . 2
Financial Guaranty Insurance Policy . . . . . . . 16
Financial Guaranty Insurer . . . . . . . . . . . 16
Fitch . . . . . . . . . . . . . . . . . . . . . . 5
FNMA . . . . . . . . . . . . . . . . . . . . . . 2
Garn-St. Germain Act . . . . . . . . . . . . . . 37
GNMA . . . . . . . . . . . . . . . . . . . . . . 2
Insurance Paying Agent . . . . . . . . . . . . . 17
Insurance Proceeds . . . . . . . . . . . . . . . 21
Insured Payment . . . . . . . . . . . . . . . . . 17
Interest Accrual Period . . . . . . . . . . . . . 11
Liquidation Proceeds . . . . . . . . . . . . . . 21
Loan-to-Value Ratio . . . . . . . . . . . . . . . 15
Master Servicer . . . . . . . . . . . . . . . . . 1
MBS . . . . . . . . . . . . . . . . . . . . . . . 1
MBS Agreement . . . . . . . . . . . . . . . . . . 15
MBS Issuer . . . . . . . . . . . . . . . . . . . 15
MBS Servicer . . . . . . . . . . . . . . . . . . 15
MBS Trustee . . . . . . . . . . . . . . . . . . . 15
Monthly Advance . . . . . . . . . . . . . . . . . 22
Moody's . . . . . . . . . . . . . . . . . . . . . 5
Mortgage Assets . . . . . . . . . . . . . . . . . 1
Mortgage Loans . . . . . . . . . . . . . . . . . 1
Mortgage Notes . . . . . . . . . . . . . . . . . 14
Mortgage Pool Insurance Policy . . . . . . . . . 18
Mortgage Rates . . . . . . . . . . . . . . . . . 15
Mortgage-Backed Securities . . . . . . . . . . . 1
Mortgaged Properties . . . . . . . . . . . . . . 14
Mortgages . . . . . . . . . . . . . . . . . . . . 14
Mortgagors . . . . . . . . . . . . . . . . . . . 21
NCUA . . . . . . . . . . . . . . . . . . . . . . 21
Non-Priority Certificates . . . . . . . . . . . . 11
Non-U.S. Person . . . . . . . . . . . . . . . . . 56
Noneconomic Residual Interest . . . . . . . . . . 52
Nonrecoverable Advance . . . . . . . . . . . . . 22
Notional Principal Balance . . . . . . . . . . . 11
OBRA . . . . . . . . . . . . . . . . . . . . . . 40
OID Regulations . . . . . . . . . . . . . . . . . 40
Original Value . . . . . . . . . . . . . . . . . 15
OTS . . . . . . . . . . . . . . . . . . . . . . . 37
Owners . . . . . . . . . . . . . . . . . . . . . 11
Partnership Interests . . . . . . . . . . . . . . 63
Pass-Through Entity . . . . . . . . . . . . . . . 52
Pass-Through Rate . . . . . . . . . . . . . . . . 3
Plans . . . . . . . . . . . . . . . . . . . . . . 39
Policy Statement . . . . . . . . . . . . . . . . 39
Pool Insurer . . . . . . . . . . . . . . . . . . 18
Pre-Funding Account . . . . . . . . . . . . . . . 3
Pre-Funding Agreement . . . . . . . . . . . . . . 3
Prepayment Assumption . . . . . . . . . . . . . . 43
Principal Balance . . . . . . . . . . . . . . . . 15
Principal Prepayments . . . . . . . . . . . . . . 12
Priority Certificates . . . . . . . . . . . . . . 11
Proposed Premium Regulations . . . . . . . . . . 47
PTE 83-1 . . . . . . . . . . . . . . . . . . . . 39
Rating Agency . . . . . . . . . . . . . . . . . . 5
Record Date . . . . . . . . . . . . . . . . . . . 11
Regular Certificateholder . . . . . . . . . . . . 42
Regular Certificates . . . . . . . . . . . . . . 41
REIT . . . . . . . . . . . . . . . . . . . . . . 41
Relief Act . . . . . . . . . . . . . . . . . . . 8
REMIC . . . . . . . . . . . . . . . . . . . . . . 4
REMIC Certificates . . . . . . . . . . . . . . . 41
REMIC Pool . . . . . . . . . . . . . . . . . . . 41
REMIC Regulations . . . . . . . . . . . . . . . . 40
Remittance Date . . . . . . . . . . . . . . . . . 22
Remittance Rate . . . . . . . . . . . . . . . . . 22
Reserve Fund . . . . . . . . . . . . . . . . . . 20
Residual Certificateholders . . . . . . . . . . . 47
Residual Certificates . . . . . . . . . . . . . . 41
Retail Class Certificate . . . . . . . . . . . . 42
SAIF . . . . . . . . . . . . . . . . . . . . . . 28
Scheduled Amortization Certificates . . . . . . . 10
Seller . . . . . . . . . . . . . . . . . . . . . 1
Senior Certificates . . . . . . . . . . . . . . . 17
Servicer . . . . . . . . . . . . . . . . . . . . 1
SMMEA . . . . . . . . . . . . . . . . . . . . . . 5
Special Allocation Certificates . . . . . . . . . 11
Special Hazard Insurance Policy . . . . . . . . . 19
Special Hazard Insurer . . . . . . . . . . . . . 19
Standard & Poor's . . . . . . . . . . . . . . . . 5
Standard Certificate . . . . . . . . . . . . . . 57
Stripped Certificateholder . . . . . . . . . . . 60
Stripped Certificates . . . . . . . . . . . . . . 60
Subordinated Certificates . . . . . . . . . . . . 17
Thrift Institution . . . . . . . . . . . . . . . 41
TMP . . . . . . . . . . . . . . . . . . . . . . . 42
Trust . . . . . . . . . . . . . . . . . . . . . . 1
Trustee . . . . . . . . . . . . . . . . . . . . . 1
U.S. Person . . . . . . . . . . . . . . . . . . . 53
UCC . . . . . . . . . . . . . . . . . . . . . . . 35
Underwriters . . . . . . . . . . . . . . . . . . 63
89434.1d
</TABLE>
A-1
<PAGE> 154
===============================================================================
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-20
The Seller and Servicer.................. S-23
The Depositor............................ S-28
Use of Proceeds.......................... S-28
The Home Equity Loan Pool................ S-29
Prepayment and Yield Considerations...... S-35
Formation of the Trust and Trust
Property............................... S-43
Additional Information................... S-44
Description of the Offered
Certificates........................... S-44
Credit Enhancement....................... S-52
The Pooling and Servicing Agreement...... S-55
Federal Income Tax Consequences.......... S-64
ERISA Considerations..................... S-65
Ratings.................................. S-69
Legal Investment Considerations.......... S-70
Underwriting............................. S-70
Certain Legal Matters.................... S-74
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............................. 6
Description of the Certificates.......... 9
The Trusts............................... 13
Credit Enhancement....................... 16
Servicing of Mortgage Loans.............. 21
Administration........................... 26
Use of Proceeds.......................... 32
The Depositor............................ 32
Certain Legal Aspects of the Mortgage
Assets................................. 32
Legal Investment Matters................. 38
ERISA Considerations..................... 39
Federal Income Tax Consequences.......... 40
Plan of Distribution..................... 63
Ratings.................................. 64
Legal Matters............................ 64
Financial Information.................... 64
Index to Location of Principal Defined
Terms.................................. A-1
</TABLE>
===============================================================================
===============================================================================
$975,000,000
IMC HOME EQUITY
LOAN TRUST 1997-5
[IMC LOGO]
IMC MORTGAGE COMPANY
SELLER AND SERVICER
IMC SECURITIES, INC.
DEPOSITOR
------------------------
PROSPECTUS SUPPLEMENT
------------------------
BEAR, STEARNS & CO. INC.
PAINEWEBBER INCORPORATED
MORGAN STANLEY
DEAN WITTER
SEPTEMBER 15, 1997
===============================================================================
