PROSPECTUS SUPPLEMENT
(To Prospectus Dated July 23, 1996)
$400,000,000
IMC HOME EQUITY LOAN TRUST 1997-2
INDUSTRY MORTGAGE COMPANY, L.P.
[LOGO] Seller and Servicer
IMC SECURITIES, INC.
Depositor
The IMC Home Equity Loan Pass-Through Certificates, Series 1997-2 (the
"Certificates") will consist of (i) the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the Class
A-5 Certificates, the Class A-6 Certificates and the Class A-7 Certificates
(collectively, the "Fixed Rate Certificates"), (ii) the Class A-8 Certificates
(collectively with the Fixed Rate Certificates, the "Class A Certificates") and
(iii) a residual Class of Certificates (the "Class R Certificates"). Only the
Class A Certificates are offered hereby.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page S-14 herein, "Prepayment and
Yield Considerations" beginning on page S-36 herein and "Risk Factors" beginning
on page 6 in the Prospectus.
Each Class A Certificate represents an undivided ownership interest in
one of two pools (each, a "Home Equity Loan Group") of fixed and adjustable rate
home equity loans (the "Home Equity Loans") held by IMC Home Equity Loan Trust
1997-2 (the "Trust"). The Fixed Rate Certificates will represent undivided
ownership interests in the Home Equity Loans in Group I, which are secured by
first and second lien mortgages or deeds of trust primarily on one- to
four-family residential properties. The Class A-8 Certificates will represent
undivided ownership interests in the Home Equity Loans in Group II, which are
secured solely by first lien mortgages or deeds of trust primarily on
one-to-four family residential properties. Each Class of the Class A
Certificates also represents an undivided ownership interest in all interest and
principal due under the respective Home Equity Loans after March 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.
Simultaneously with the issuance of the Certificates, the Seller will
obtain from MBIA Insurance Corporation (the "Certificate Insurer") two
certificate guaranty insurance policies relating to the Class A Certificates
(the "Insurance Policies") in favor of the Trustee. One of the Insurance
Policies will be issued with respect to the Fixed Rate Certificates and the
other will be issued with respect to the Class A-8 Certificates. The Insurance
Policies will require the Certificate Insurer to make certain Insured Payments
(as defined herein) on the Class A Certificates.
(continued on following page)
[GRAPHIC OMITTED]
THE CLASS A 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, THE CERTIFICATE INSURER OR ANY
OF THEIR AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR THE HOME
EQUITY LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
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.
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Initial
Certificate
Principal Pass-Through Price to Underwriting Proceeds to
Balance Rate Public (1) Discount Depositor(1)(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Class A-1 Certificate.... $126,643,000.00 6.63% 99.99852% 0.150% 99.84852%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-2 Certificate.... $35,021,000.00 6.70% 99.99517% 0.250% 99.74517%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-3 Certificate.... $63,371,000.00 6.94% 99.99828% 0.300% 99.69828%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-4 Certificate.... $42,030,000.00 7.25% 99.95847% 0.450% 99.50847%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-5 Certificate.... $13,437,000.00 7.48% 99.97692% 0.550% 99.42692%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-6 Certificate.... $22,498,000.00 7.67% 99.95995% 0.600% 99.35995%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-7 Certificate.... $27,000,000.00 7.23% 99.98214% 0.450% 99.53214%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-8 Certificate.... $70,000,000.00 Variable (3) 100.00000% 0.300% 99.70000%
====================================================================================================================================
Total............... $400,000,000.00 $399,960,955.22 $1,197,156.50 $398,763,798.72
====================================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from March 1, 1997 with respect to the Fixed
Rate Certificates.
(2) Before deducting expenses, estimated to be $465,000.
(3) The Pass-Through Rate on the Class A-8 Certificates is adjustable based on
one-month LIBOR as described herein.
The Class A Certificates are offered subject to prior sale, when, as,
and if accepted by the Underwriters and subject to the Underwriters' right to
reject orders in whole or in part. It is expected that delivery of the Class A
Certificates in book-entry form will be made through the facilities of The
Depository Trust Company ("DTC") on or about March 20, 1997.
---------------------
Underwriters of the Fixed Rate Certificates
Bear, Stearns & Co. Inc. PaineWebber Incorporated
Underwriter of the Class A-8 Certificates
Nomura Securities International, Inc.
---------------------
The date of this Prospectus Supplement is March 13, 1997
<PAGE>
(cover continued from previous page)
The Original Aggregate Loan Balance of the Home Equity Loans as of the
Cut-Off Date was $399,852,349.73 (of which approximately 91.35% by principal
balance are first liens and the remainder are second liens in Group I and 99.58%
by principal balance are first liens and the remainder are second liens in Group
II). The Home Equity Loans were originated or purchased by Industry Mortgage
Company, L.P. (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 March 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 March 31, 1997 from funds on
deposit in the Pre- Funding Account. On the Closing Date (as defined below),
aggregate cash amounts of $132,868.83 and $14,781.44 will be deposited with the
Trustee in the Pre-Funding Account to be used to acquire Subsequent Home Equity
Loans for Group I and Group II, respectively.
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 April 21, 1997
(each, a "Payment Date"). Interest will be passed through on each Payment Date
to the Owners of the Class A Certificates based on the related Class A
Certificate Principal Balance (as defined herein) at the Pass-Through Rate
applicable to such Class of Certificates, subject to the limitations described
herein. The Pass-Through Rate for each Class of Fixed Rate Certificates is set
out on the cover hereof.
It is a condition to issuance that the Class A Certificates be rated
"Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc.
The yield to investors on the Class A Certificates sold at prices other
than par may be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the related
Home Equity Loans, which may vary over time. See "Prepayment and Yield
Considerations" herein and "Risk Factors" and "Yield, Prepayment and Maturity
Considerations" in the Prospectus.
An election will be made to treat the Trust Estate (other than certain
accounts contained therein) as a real estate mortgage investment conduit (a
"REMIC") for federal income tax purposes. As described more fully herein, each
Class of the Class A Certificates will constitute a "regular interest" in the
REMIC. See "Federal Income Tax Consequences" herein.
Prior to their issuance, there has been no market for the Class A
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide liquidity, or that it will continue for the life
of the Class A Certificates. Each Underwriter intends, but is not obligated, to
make a market in the Class or Classes of Class A Certificates being purchased by
it.
---------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Class A Certificates offered by this Prospectus Supplement will be
part of a separate series of Certificates being offered by the Depositor
pursuant to its Prospectus dated July 23, 1996, of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein, and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full.
As provided herein under "The Certificate Insurer," the Certificate
Insurer will provide without charge to any person to whom this Prospectus
Supplement is delivered, upon oral or written request of such person, a copy of
any or all financial statements incorporated herein by reference. Requests for
such copies should be directed as provided under "The Certificate Insurer"
herein.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
SUMMARY OF TERMS.............................................................S-1
RISK FACTORS................................................................S-14
THE SELLER AND SERVICER.....................................................S-18
General................................................................S-18
Credit and Underwriting Guidelines.....................................S-19
Delinquency, Loan Loss and Foreclosure Information.....................S-20
THE DEPOSITOR...............................................................S-22
USE OF PROCEEDS.............................................................S-22
THE HOME EQUITY LOAN POOL...................................................S-22
General................................................................S-22
Group I................................................................S-23
Group II...............................................................S-27
Conveyance of Subsequent Home Equity Loans.............................S-36
Interest Payments on the Home Equity Loans.............................S-36
PREPAYMENT AND YIELD CONSIDERATIONS.........................................S-36
General................................................................S-36
Mandatory Prepayment...................................................S-37
Prepayment and Yield Scenarios for Class A Certificates................S-37
Payment Lag Feature of Fixed Rate Certificates.........................S-42
FORMATION OF THE TRUST AND TRUST PROPERTY...................................S-42
ADDITIONAL INFORMATION......................................................S-42
DESCRIPTION OF THE CLASS A CERTIFICATES.....................................S-43
General................................................................S-43
Payment Dates..........................................................S-43
Distributions..........................................................S-43
Pre-Funding Account....................................................S-46
Capitalized Interest Account...........................................S-46
Calculation of One-Month LIBOR.........................................S-47
Book Entry Registration of the Class A Certificates....................S-47
Assignment of Rights...................................................S-49
THE CERTIFICATE INSURER.....................................................S-49
CREDIT ENHANCEMENT..........................................................S-53
Insurance Policies.....................................................S-53
Overcollateralization Provisions.......................................S-53
Crosscollateralization Provisions......................................S-55
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-57
Removal and Resignation of Servicer....................................S-61
The Trustee............................................................S-61
Reporting Requirements.................................................S-61
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 Election.........................................................S-64
ERISA CONSIDERATIONS........................................................S-65
RATINGS.....................................................................S-67
LEGAL INVESTMENT CONSIDERATIONS.............................................S-67
UNDERWRITING................................................................S-67
REPORT OF EXPERTS...........................................................S-69
CERTAIN LEGAL MATTERS.......................................................S-69
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................................A-1
Prospectus
Page
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.......................................................... 13
Mortgage-Backed Securities.............................................. 15
Other Mortgage Securities............................................... 16
CREDIT ENHANCEMENT........................................................... 16
SERVICING OF MORTGAGE LOANS.................................................. 20
Payments on Mortgage Loans.............................................. 21
Advances................................................................ 22
Collection and Other Servicing Procedures............................... 22
Primary Mortgage Insurance.............................................. 23
Standard Hazard Insurance............................................... 23
Title Insurance Policies................................................ 24
Claims Under Primary Mortgage Insurance Policies and Standard Hazard
Insurance Policies; Other Realization Upon Defaulted Loan........... 24
Servicing Compensation and Payment of Expenses.......................... 25
Master Servicer......................................................... 25
ADMINISTRATION............................................................... 25
Assignment of Mortgage Assets........................................... 26
Evidence as to Compliance............................................... 27
The Trustee............................................................. 28
Administration of the Certificate Account............................... 28
Reports................................................................. 29
Forward Commitments; Pre-Funding........................................ 29
Servicer Events of Default.............................................. 30
Rights Upon Servicer Event of Default................................... 30
Amendment............................................................... 30
Termination............................................................. 31
USE OF PROCEEDS.............................................................. 31
THE DEPOSITOR................................................................ 31
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS................................. 32
General................................................................. 32
Foreclosure............................................................. 33
Soldiers' and Sailors' Civil Relief Act................................. 37
LEGAL INVESTMENT MATTERS..................................................... 38
ERISA CONSIDERATIONS......................................................... 38
FEDERAL INCOME TAX CONSEQUENCES.............................................. 40
Federal Income Tax Consequences For REMIC Certificates.................. 40
Taxation of Regular Certificates........................................ 42
Taxation of Residual Certificates....................................... 47
Treatment of Certain Items of REMIC Income and Expense.................. 49
Tax-Related Restrictions on Transfer of Residual Certificates........... 50
Sale or Exchange of a Residual Certificate.............................. 52
Taxes That May Be Imposed on the REMIC Pool............................. 53
Liquidation of the REMIC Pool........................................... 53
Administrative Matters.................................................. 54
Limitations on Deduction of Certain Expenses............................ 54
Taxation of Certain Foreign Investors................................... 55
Backup Withholding...................................................... 55
Reporting Requirements.................................................. 56
Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made..................................... 56
Standard Certificates................................................... 56
Premium and Discount.................................................... 58
Stripped Certificates................................................... 59
Reporting Requirements and Backup Withholding........................... 62
Taxation of Certain Foreign Investors................................... 62
Taxation of Securities Classified as Partnership Interests.............. 62
PLAN OF DISTRIBUTION......................................................... 62
RATINGS...................................................................... 63
LEGAL MATTERS................................................................ 63
FINANCIAL INFORMATION........................................................ 63
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................................A-1
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" for the location of the definitions of certain
capitalized terms.
<TABLE>
<S> <C>
Issuer: IMC Home Equity Loan Trust 1997-2 (the "Trust").
Certificates Offered: $400,000,000 IMC Home Equity Loan Pass-Through Certificates, Series
1997-2, to be issued in the following Classes (each, a "Class"):
</TABLE>
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Principal Balance Rate Class
----------------- ---- -----
<S> <C> <C> <C>
$126,643,000 6.63% Class A-1 Certificates
$35,021,000 6.70% Class A-2 Certificates
$63,371,000 6.94% Class A-3 Certificates
$42,030,000 7.25% Class A-4 Certificates
$13,437,000 7.48% Class A-5 Certificates
$22,498,000 7.67% Class A-6 Certificates
$27,000,000 7.23% Class A-7 Certificates
$70,000,000 (1) Class A-8 Certificates
</TABLE>
<TABLE>
<S> <C>
(1) On each Payment Date, the Class A-8 Pass-Through Rate will be equal to the
lesser of (x) with respect to any Payment Date which occurs on or prior to the
Clean-Up Date (as defined herein), One-Month LIBOR plus 0.22% per annum and for
any Payment Date thereafter, One-Month LIBOR plus 0.44% per annum, and (y) the
weighted average of the Coupon Rates on the Home Equity Loans in Group II, less
0.66% per annum on Payment Dates on or prior to the sixth Payment Date and less
1.16% for any Payment Date thereafter (the rate described in this clause (y),
the "Class A-8 Available Funds Cap").
The Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates,
Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates and
Class A-7 Certificates are collectively referred to herein as the "Fixed Rate
Certificates." The Class A-8 Certificates and the Fixed Rate Certificates are
collectively referred to herein as the "Class A Certificates."
Depositor: IMC Securities, Inc. (the "Depositor"), a Delaware corporation.
Seller and Servicer: Industry Mortgage Company, L.P. (the "Seller" and the
"Servicer"), a Delaware limited partnership. The Seller's and Servicer's
principal executive offices are located at 3450 Buschwood Park Drive, Suite
250, Tampa, Florida 33618. The general partner of the Seller and Servicer is
Industry Mortgage Corporation, a Delaware corporation.
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 0.01%
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 March 1, 1997 (the "Cut-Off Date").
Closing Date: On or about March 20, 1997.
S-1
<PAGE>
Description of the
Certificates Offered: The Class A Certificates represent fractional undivided interests in the Trust
and have the rights described in the Pooling and Servicing Agreement dated as
of March 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 the REMIC election) 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. In addition to the foregoing,
the Seller shall cause the Certificate Insurer to deliver the Insurance
Policies to the Trustee for the benefit of the Owners of the Class A
Certificates. See "Formation of the Trust and Trust Property" herein.
On the Closing Date, an aggregate cash amount of $147,650.27 ($132,868.83 and
$14,781.44 of which shall be allocated to Group I and Group II, respectively)
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 March 31, 1997 from funds on deposit
in the Pre-Funding Account and allocated to the appropriate Home Equity Loan
Group. Each Subsequent Home Equity Loan so acquired will be assigned to Group I
(in the case of fixed rate Subsequent Home Equity Loans) or Group II (in the
case of adjustable rate Subsequent Home Equity Loans). As a result, the
aggregate principal balance of the Home Equity Loans in each Home Equity Loan
Group will increase by an amount equal to the aggregate principal balance of
the Subsequent Home Equity Loans so purchased and the amount in the Pre-
Funding Account will decrease proportionately.
As described below, on the Closing Date, cash will be deposited in the name of
the Trustee in the Capitalized Interest Account (as defined herein). Funds in
the Capitalized Interest Account will be applied by the Trustee to cover
shortfalls in interest during the Funding Period (as described herein under
"Pre-Funding Account") on the Class A Certificates attributable to the
provisions allowing for purchase of Subsequent Home Equity Loans after the
Cut-Off Date.
Other Certificates: In addition to the Class A Certificates, the Trust will issue, pursuant to the
Pooling and Servicing Agreement, a residual Class of Certificates (the "Class R
Certificates") which will represent an undivided ownership interest in the
Trust. The Class A Certificates and the Class R Certificates are herein
referred to as the "Certificates." Only the Class A Certificates are offered
hereby.
Denominations: The Class A Certificates are issuable in minimum denominations of an original
principal amount of $1,000 and integral multiples thereof.
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 and adjustable
rate conventional home equity loans and the Notes relating thereto. The Home
Equity Loans will be divided into two Home Equity Loan Groups. Group I will
consist of fixed rate Home Equity Loans. Group II will consist of Home Equity
Loans that adjust either semiannually based on Six-Month LIBOR ("Six-Month
S-2
<PAGE>
LIBOR Loans") or annually based on the weekly average yield on United States
treasury securities adjusted to a constant maturity of one year (the "CMT
Index"; such loans the "CMT Loans"). However, although a substantial majority
of the Initial Six-Month LIBOR Loans first adjust six months after origination,
a number of the Initial Six-Month LIBOR Loans first adjust two or three years
from the date of origination. Moreover, although a substantial majority of the
Initial CMT Loans first adjust one year after origination, a number of the
Initial CMT Loans first adjust three years from the date of origination.
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 49
states and the District of Columbia. No Loan-to-Value Ratio (based upon
appraisals made at the time of origination of the related Home Equity Loan)
relating to any Initial Home Equity Loan exceeded 85% as of the Cut-Off Date
except for 259 loans with an aggregate Loan Balance of $23,773,276.85 (or 5.95%
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; however, certain distributions due to the owners of the
Class A Certificates are insured by the Certificate Insurer pursuant to the
Insurance Policies. See "The Certificate Insurer" herein. 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 FNMA for
FNMA mortgage-backed securities and in accordance with the terms of the Pooling
and Servicing Agreement.
Group I. As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans in Group I was $61,842.36. The minimum and maximum Loan Balances
of the Initial Home Equity Loans in Group I as of the Cut-Off Date were
$2,979.34 and $547,497.36, respectively. The weighted average interest rate
(the "Coupon Rate") of the Initial Home Equity Loans in Group I was 11.80%; the
Coupon Rates of the Initial Home Equity Loans in Group I ranged from 7.22% to
18.99%; the weighted average combined Loan-to-Value Ratio of the Initial Home
Equity Loans in Group I was 74.86%; the weighted average remaining term to
maturity of the Initial Home Equity Loans in Group I was 209 months; and the
remaining terms to maturity of the Initial Home Equity Loans in Group I ranged
from 13 months to 360 months. As of the Cut-Off Date 91.35% of the aggregate
Loan Balances of the Initial Home Equity Loans in Group I were secured by first
mortgages and 8.65% of the aggregate Loan Balances of the Initial Home Equity
Loans in Group I were secured by second mortgages. Initial Home Equity Loans
containing "balloon" payments represented not more than 59.84% of the Initial
Home Equity Loans in Group I. No Initial Home Equity Loan in Group I will
mature later than February 1, 2027. See "The Home Equity Loan Pool--Group I"
herein.
Group II. As of the Cut-Off Date, 50.06% of the Initial Home Equity Loans in
Group II are Six-Month LIBOR Loans and 49.94% of the Initial Home Equity Loans
in Group II are CMT Loans. The Coupon Rates with respect to all of the
S-3
<PAGE>
Home Equity Loans in Group II are subject to periodic and lifetime rate
adjustment caps. See "The Home Equity Loans Pool -- Group II" herein.
As of the Cut-Off Date, the average Loan Balance of the Initial Home Equity
Loans in Group II was $95,608.22. The minimum and maximum Loan Balances of the
Initial Home Equity Loans in Group II as of the Cut-Off Date were $9,979.11 and
$498,242.22, respectively. The weighted average Coupon Rate of the Initial Home
Equity Loans in Group II was 9.74%; the Coupon Rates of the Initial Home Equity
Loans in Group II ranged from 6.50% to 15.16%; the weighted average maximum
Coupon Rate of the Initial Home Equity Loans in Group II was 16.06%; the
maximum Coupon Rates of the Initial Home Equity Loans in Group II ranged from
10.38% to 58.00%; the weighted average minimum Coupon Rate of the Initial Home
Equity Loans in Group II was 9.64%; the minimum Coupon Rates of the Initial
Home Equity Loans in Group II ranged from 2.38% to 15.00%; the weighted average
combined Loan-to-Value Ratio of the Initial Home Equity Loans in Group II was
74.91%; the weighted average remaining term to maturity of the Initial Home
Equity Loans in Group II was 352 months; and the remaining terms to maturity as
of the Cut-Off Date of the Initial Home Equity Loans in Group II ranged from
166 months to 360 months; the weighted average gross margin of the Initial Home
Equity Loans in Group II was 6.04%; the minimum gross margin of the Initial
Home Equity Loans in Group II was 2.75% and the maximum gross margin of the
Initial Home Equity Loans in Group II was 10.40%. As of the Cut-Off Date,
99.58% of the aggregate Loan Balances of the Initial Home Equity Loans in Group
II were secured by first mortgages and 0.42% of the aggregate Loan Balances of
the Initial Home Equity Loans in Group II were secured by second mortgages. No
more than 0.21% of the Initial Home Equity Loans in Group II contain "balloon"
payments. No Initial Home Equity Loans in Group II will mature later than March
1, 2027. No initial Home Equity Loan in Group II provides for negative
amortization. See "The Home Equity Loan Pool--Group II" herein.
Final Scheduled Payment
Date: The Final Scheduled Payment Date for each Class of Class A Certificates is as
set forth below, although it is anticipated that the actual final Payment Date
for each Class of Class A Certificates will occur significantly earlier than
the related Final Scheduled Payment Date. See "Prepayment and Yield
Considerations" herein.
Final Scheduled
Payment Date
------------
Class A-1 Certificates November 20, 2011
Class A-2 Certificates November 20, 2011
Class A-3 Certificates November 20, 2011
Class A-4 Certificates June 20, 2016
Class A-5 Certificates March 20, 2021
Class A-6 Certificates May 20, 2027
Class A-7 Certificates May 20, 2027
Class A-8 Certificates May 20, 2027
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Class A Distributions: On the 20th day of each month, or if such a day is not a Business Day, then the
next succeeding Business Day, commencing April 21, 1997 (each such day being
a "Payment Date"), the Trustee will be required to distribute to the Owners of
the Fixed Rate Certificates of record as of the last day of the calendar month
preceding the month in which such Payment Date occurs and to the Owners of
the Class A-8 Certificates of record as of the day immediately preceding such
Payment Date (each such date, the "Record Date") the "Class A Distribution
Amount" which shall be the sum of (x) Current Interest and (y) the Class A
Principal Distribution Amount. Such amounts shall be allocated to the Class A
Certificates in the manner described below.
A "Business Day" is any day other than a Saturday or Sunday or a day on which
banking institutions in The City of New York, Tampa, Florida, the city in which
the corporate trust office of the Trustee is located or the city in which the
Certificate Insurer is located are authorized or obligated by law or executive
order to be closed.
"Current Interest" with respect to each Class of Class A Certificates means,
with respect to any Payment Date (i) the aggregate amount of interest accrued
during the preceding Accrual Period at its applicable Pass-Through Rate on the
Class A Certificate Principal Balance of the related Class A Certificates plus
(ii) the Preference Amount as it relates to interest previously paid on such
Class of the Class A Certificates prior to such Payment Date plus (iii) the
Carry Forward Amount, if any, with respect to such Class of Class A
Certificates; provided, however, that with respect to each Class of Class A
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).
For each Payment Date, interest due with respect to the Fixed Rate Certificates
will be interest which has accrued on the related Class A Certificate Principal
Balance at the applicable Pass-Through Rate during the calendar month
immediately preceding the month in which such Payment Date occurs; the interest
due with respect to the Class A-8 Certificates will be the interest which has
accrued on the Class A-8 Certificate Principal Balance at the Class A-8
Pass-Through Rate from the preceding Payment Date (or from the Closing Date in
the case of the first Payment Date) to and including the day prior to the
current Payment Date. Each such period relating to the accrual of interest is
the "Accrual Period" for the related Class of Class A Certificates. All
calculations of interest on the Fixed Rate Certificates will be made on the
basis of a 360-day year assumed to consist of twelve 30-day months.
Calculations of interest on the Class A-8 Certificates will be made on the
basis of the actual number of days elapsed in the related Accrual Period and a
year of 360 days.
Allocations of Interest
and Principal The Class A Distribution Amount for each Home Equity Loan Group for each Payment
Date (to the extent funds are available therefor) shall be allocated among the
Class A Certificates related to such Home Equity Loan Group in the following
amounts and in the following order of priority:
(i) First, to the Owners of the Class A Certificates related to such Home
Equity Loan Group, the related Current Interest for such Certificates on a pro
rata basis based on each such Class A Certificate's Current Interest without
any priority among such Class A Certificates; and
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(ii) Second, with respect to each Group, to the Owners of the Class A
Certificates related to such Home Equity Loan Group, the Class A Principal
Distribution Amount (as defined below under the heading "Principal"). The Class
A Principal Distribution Amount applicable to Group I shall be distributed as
follows: (I) to the Owners of the Class A-7 Certificates an amount equal to the
Class A-7 Lockout Distribution Amount (as defined below) and (II) the remainder
of such Class A Principal Distribution Amount as follows: first, to the Owners
of the Class A-1 Certificates until the Class A-1 Certificate Principal Balance
is reduced to zero; second, to the Owners of the Class A-2 Certificates until
the Class A-2 Certificate Principal Balance is reduced to zero; third, to the
Owners of the Class A-3 Certificates until the Class A-3 Certificate Principal
Balance is reduced to zero; fourth, to the Owners of the Class A-4 Certificates
until the Class A-4 Certificate Principal Balance is reduced to zero; fifth, to
the Owners of the Class A-5 Certificates until the Class A-5 Certificate
Principal Balance is reduced to zero; sixth, to the Owners of the Class A-6
Certificates until the Class A-6 Certificate Principal Balance is reduced to
zero; and, seventh, to the Owners of the Class A-7 Certificates until the Class
A-7 Certificate Principal Balance is reduced to zero. The Class A Principal
Distribution Amount applicable to Group II shall be distributed to the Owners
of the Class A-8 Certificates until the Class A-8 Certificate Principal Balance
is reduced to zero.
The Fixed Rate Certificates (other than the Class A-7 Certificates) are
"sequential pay" classes such that the Owners of the Class A-6 Certificates
will receive no payments of principal until the Class A-5 Certificate Principal
Balance has been reduced to zero, the Owners of the Class A-5 Certificates will
receive no payments of principal until the Class A-4 Certificate Principal
Balance has been reduced to zero, the Owners of the Class A-4 Certificates will
receive no payments of principal until the Class A-3 Certificate Principal
Balance has been reduced to zero, the Owners of the Class A-3 Certificates will
receive no payments of principal until the Class A-2 Certificate Principal
Balance has been reduced to zero, and the Owners of the Class A-2 Certificates
will receive no payments of principal until the Class A-1 Certificate Principal
Balance has been reduced to zero. Notwithstanding the foregoing, in the event
that a Certificate Insurer Default has occurred, and during the time such
default is continuing, if there is a Subordination Deficit, the Class A
Principal Distribution Amount for Group I shall be distributed pro rata to the
Owners of all Classes of the Fixed Rate Certificates.
The Owners of the Class A-7 Certificates are entitled to receive payments of
the Class A-7 Lockout Distribution Amount specified herein; provided, that if
on any Payment Date the Class A-6 Certificate Principal Balance is zero, the
Owners of the Class A-7 Certificates will be entitled to receive the entire
Class A Principal Distribution Amount applicable to Group I for such Payment
Date.
The "Class A-7 Lockout Distribution Amount" for any Payment Date will be the
product of (i) the applicable Class A-7 Lockout Percentage for such Payment
Date and (ii) the Class A-7 Lockout Pro Rata Distribution Amount for such
Payment Date. In no event shall the Class A-7 Lockout Distribution Amount
exceed the outstanding Class A-7 Certificate Principal Balance.
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The "Class A-7 Lockout Percentage" for each Payment Date shall be as follows:
Payment Dates Lockout Percentage
------------- ------------------
April 1997 - March 2000 0%
April 2000 - March 2002 45%
April 2002 - March 2003 80%
April 2003 - March 2004 100%
April 2004 and thereafter 140%
The "Class A-7 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-7 Certificates immediately
prior to such Payment Date and the denominator of which is the aggregate
Certificate Principal Balance of the Fixed Rate Certificates immediately prior
to such Payment Date and (y) the Class A Principal Distribution Amount with
respect to Group I for such Payment Date.
On each Payment Date, distributions in reduction of the Certificate Principal
Balance of the related Class of Class A Certificates will be made in the
amounts described herein. The "Class A Principal Distribution Amount" for each
Home Equity Loan Group and Payment Date shall be the lesser of:
(a) the Total Available Funds (as defined herein) for the related Home Equity
Loan Group plus any Insured Payment with respect to the related Class or
Classes of Class A Certificates minus the related Current Interest, Premium
Amount, Trustee Fee and Trustee Reimbursable Expenses for such Payment Date
with respect to the related Class A Certificates; and
(b) the excess, if any, of
(i) the sum of (without duplication):
(A) the Preference Amount with respect to principal owed to each Owner
of Class A Certificates related to such Home Equity Loan Group that
remains unpaid as of such Payment Date;
(B) the principal portion of all scheduled monthly payments on the Home
Equity Loans in the related Home Equity Loan Group due on or prior to
the related Due Date thereof, to the extent actually received by the
Trustee during the related Remittance Period and any Prepayments made
by the Mortgagors and actually received by the Trustee during the
related Remittance Period;
(C) the balance of each Home Equity Loan (the "Loan Balance") in the
related Home Equity Loan Group that was repurchased by the Seller or
purchased by the Servicer on or prior to the related Monthly Remittance
Date, to the extent such Loan Balance is actually received by the
Trustee during the related Remittance Period;
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<PAGE>
(D) any Substitution Amounts (i.e. the excess, if any, of the Loan
Balance of a Home Equity Loan being replaced over the outstanding
principal balance of a replacement Home Equity Loan plus accrued and
unpaid interest) delivered by the Seller on the related Monthly
Remittance Date in connection with a substitution of a Home Equity Loan
in the related Home Equity Loan Group (to the extent such Substitution
Amounts relate to principal), to the extent such Substitution Amounts
are actually received by the Trustee on the related Remittance Date;
(E) all Net Liquidation Proceeds actually collected by the Servicer
with respect to the Home Equity Loans with respect to the related Home
Equity Loan Group during the related Remittance Period (to the extent
such Net Liquidation Proceeds relate to principal), to the extent such
Net Liquidation Proceeds are actually received by the Trustee during
the related Remittance Period;
(F) the amount of any Subordination Deficit with respect to the related
Home Equity Loan Group for such Payment Date;
(G) the principal portion of the proceeds received with respect to the
related Home Equity Loan Group by the Trustee upon termination of the
Trust (to the extent such proceeds relate to principal);
(H) on the Payment Date immediately following the last day of the
Funding Period, all amounts remaining in the Pre-Funding Account and
allocated to such Home Equity Loan Group to the extent not used to
purchase Subsequent Home Equity Loans for such Home Equity Loan Group
during the Funding Period; and
(I) the amount of any Subordination Increase Amount with respect to the
related Home Equity Loan Group for such Payment Date to the extent of
any Net Monthly Excess Cashflow available for such purpose;
over
(ii) the amount of any Subordination Reduction Amount with respect to the
related Home Equity Loan Group for such Payment Date.
The "Preference Amount" is any amount previously distributed to an Owner on a
Class A Certificate that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (Title 11 of the United States Code) as amended from time to
time, in accordance with a final nonappealable order of a court having
competent jurisdiction.
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 preceeding Business Day, commencing in April 1997.
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A "Subordination Deficit" with respect to a Home Equity Loan Group and a
Payment Date is the amount, if any, by which (x) the aggregate Class A
Certificate Principal Balance related to such Home Equity Loan Group after
taking into account all distributions to be made on such Payment Date, exceeds
(y) the sum of (i) the aggregate Loan Balance of the Home Equity Loans in the
related Home Equity Loan Group as of the close of business on the last day of
the related Remittance Period and (ii) the amount, if any, on deposit in the
Pre- Funding Account as of the close of business on the last day of the related
Remittance Period and allocated to such Home Equity Loan Group.
The "Premium Amount" for a Home Equity Loan is the amount payable to the
Certificate Insurer as premium for the related Insurance Policy.
Monthly Servicing Fee: The Servicer will retain a fee (the "Servicing Fee") equal to 0.50% per annum,
payable monthly at one-twelfth the annual rate of the then outstanding
principal balance of each Home Equity Loan as of the first day of each
Remittance Period. Such Servicing Fee will be reduced with respect to any Home
Equity Loan in Group I that has a Coupon Rate that is less than the sum of (x)
any of the Pass-Through Rates on the Fixed Rate Certificates and (y) the
Expense Fee Rate (as defined herein). As of the Cut-Off Date, there are three
such Home Equity Loans. No Subsequent Home Equity Loan can have such a Coupon
Rate.
Credit Enhancement: The credit enhancement provided for the benefit of the Owners of the Class A
Certificates consists of (x) the overcollateralization and
crosscollateralization mechanics which utilize the internal cash flows of the
Trust and (y) the Insurance Policies.
Overcollateralization. The credit enhancement provisions of the Trust result in
a limited acceleration of the Class A Certificates related to a Home Equity
Loan Group relative to the amortization of the Home Equity Loans in such Home
Equity Loan Group in the early months of the transaction. The accelerated
amortization is achieved by the application of certain excess interest to the
payment in reduction of the related Class A Certificate Principal Balance. This
acceleration feature creates, with respect to each Home Equity Loan Group,
overcollateralization (i.e., the excess of the aggregate outstanding Loan
Balance of the Home Equity Loans in the related Home Equity Loan Group over the
aggregate Class A Certificate Principal Balance) of the Class A Certificates
related to such Home Equity Loan Group. Once the required level of
overcollateralization is reached, and subject to the provisions described in
the next paragraph, the acceleration feature will cease unless necessary to
maintain the required level of overcollateralization.
The Pooling and Servicing Agreement provides that, subject to certain floors,
caps and triggers, the required level of overcollateralization with respect to
a Home Equity Loan Group may increase or decrease over time. An increase would
result in a temporary period of accelerated amortization of the related Class
or Classes of Class A Certificates to increase the actual level of
overcollateralization to its required level; a decrease would result in a
temporary period of decelerated amortization to reduce the actual level of
overcollateralization to its required level.
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<PAGE>
As a result of the generally "sequential pay" feature of the Fixed Rate
Certificates, any such accelerated principal will be paid to that Class of the
Fixed Rate Certificates then entitled to receive distributions of principal.
Crosscollateralization. In addition to the foregoing, the Pooling and Servicing
Agreement provides for crosscollateralization through the application of excess
amounts generated by one Home Equity Loan Group to fund shortfalls in Available
Funds and the required overcollateralization level in the other Home Equity
Loan Group, subject to certain prior debt service and credit enhancement
requirements of such Home Equity Loan Group.
See "Prepayment and Yield Considerations", "Credit Enhancement
--Overcollateralization Provisions" and "--Crosscollateralization Provisions"
herein and "Credit Enhancement" in the Prospectus.
Insurance Policies. MBIA Insurance Corporation, a New York stock insurance
company (the "Certificate Insurer") will issue two certificate guaranty
insurance policies (the "Insurance Policies") with respect to the Class A
Certificates, one with respect to the Fixed Rate Certificates and the other
with respect to the Class A-8 Certificates.
Pursuant to the Insurance Policies, the Certificate Insurer will irrevocably
and unconditionally guarantee certain payments on each Payment Date to the
Trustee for the benefit of the holders of each Class of Class A Certificates.
The amount of the actual payment, if any, made by the Certificate Insurer to
the Owners of the Class A Certificates under the related Insurance Policy on
each Payment Date (the "Insured Payment") and with respect to any Home Equity
Loan Group is the excess, if any, of (i) the sum of (a) the related Current
Interest, (b) the related Subordination Deficit and (c) the related Preference
Amount (without duplication) over (ii) the related Total Available Funds (after
applying the crosscollateralization provisions of the Pooling and Servicing
Agreement, after any deduction for the related Premium Amount, the related
Trustee Fee and any related Trustee Reimbursable Expenses and after taking into
account the portion of the related Class A Principal Distribution Amount to be
actually distributed on such Payment Date without regard to any related Insured
Payment to be made with respect to such Payment Date).
Insured Payments do not cover Realized Losses except to the extent that a
Subordination Deficit exists. Insured Payments do not cover the Servicer's
failure to make Delinquency Advances, except to the extent that a Subordination
Deficit would otherwise result therefrom. Nevertheless, the effect of the
Insurance Policies is to guaranty the timely payment of interest on, and the
ultimate payment of the principal amount of, each related Class of Class A
Certificates.
The Insurance Policies are noncancellable for any reason.
Unless a Certificate Insurer Default exists, the Certificate Insurer shall have
the right to exercise certain rights of the Owners of the Class A Certificates,
as specified in the Pooling and Servicing Agreement, without any consent of
such Owners; and such Owners may exercise such rights only with the prior
written consent of the Certificate Insurer, except as provided in the Pooling
and
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<PAGE>
Servicing Agreement. In addition, to the extent of unreimbursed payments under
the Insurance Policies, the Certificate Insurer will be subrogated to the
rights of the Owners of the Class A Certificates on which such Insured Payments
were made. In connection with each Insured Payment on a Class A Certificate,
the Trustee, as attorney-in-fact for the Owner thereof, will be required to
assign to the Certificate Insurer the rights of such Owner with respect to the
related Class A Certificate to the extent of such Insured Payment. "Certificate
Insurer Default" is defined under the Pooling and Servicing Agreement as the
existence and continuance of (x) the failure by the Certificate Insurer to make
a required payment under an Insurance Policy or (y) the bankruptcy or
insolvency of the Certificate Insurer.
Pre-Funding Account: On the Closing Date, an aggregate cash amount (the "Pre-Funded Amount"),
of $147,650.27 (of which $132,868.83 will be allocated to Group I and
$14,781.44 will be allocated to Group II) 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 March 31, 1997, the Pre-Funded Amount will be maintained
in the Pre-Funding Account. The Pre-Funded Amount allocated to a Home
Equity Loan Group will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Home Equity Loans for such Home Equity
Loan Group 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. In addition, each Subsequent Home
Equity Loan must be acceptable to the Certificate Insurer. See "The Home
Equity Loan Pool -- Conveyance of Subsequent Home Equity Loans" herein.
Any Pre-Funded Amount allocated to a Home Equity Loan Group and remaining
at the end of the Funding Period will be distributed to the Owners of the related
Class A Certificates then entitled to receive payments of principal on the
Payment Date in April 1997, thus resulting in a partial principal prepayment of
the related Class A Certificates as specified herein under "Description of the
Class A Certificates -- Distributions." All interest and other investment
earnings on amounts on deposit in the Pre-Funding Account will be deposited
in the Capitalized Interest Account. The Pre-Funding Account will not be an
asset of the REMIC.
Capitalized Interest
Account: On the Closing Date, cash in an amount satisfactory to the Certificate Insurer
will be deposited in a trust account (the "Capitalized Interest Account") in the
name of, and maintained by, the Trustee on behalf of the Trust. During the
Funding Period, the amount on deposit in the Capitalized Interest Account,
including reinvestment income thereon, will be used by the Trustee to fund the
excess, if any, of (i) the sum of (a) the amount of interest accruing at the
weighted average of the Pass-Through Rates of the Fixed Rate Certificates (in
the case of Group I) or the Class A-8 Pass-Through Rate (in the case of Group
II) on the amount by which the related aggregate Class A Certificate Principal
Balance exceeds the aggregate Loan Balance of the Home Equity Loans in the
related Home Equity Loan Group plus (b) the Premium Amount accruing during
the related Accrual Period on such excess balance over (ii) the amount of any
reinvestment income on monies allocated to such Home Equity Loan Group and
on deposit in the Pre-Funding Account. Such amounts on deposit will be so
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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 the 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 $132,868.83 with respect to Group I or $14,781.44 with respect to Group II,
principal prepayments to Owners of the related Class or Classes of Class A
Certificates then entitled to receive payments of principal will occur on the
Payment Date in April 1997 in an amount equal to the related Pre-Funded
Amount remaining at the end of the Funding Period.
Book-Entry Registration of the
Class A Certificates: Each Class of Class A Certificates will initially be issued in book-entry form.
Persons acquiring beneficial ownership interests in such Class A Certificates
("Beneficial Owners") may elect to hold their interests through The Depository
Trust Company ("DTC"). Transfers within DTC will be in accordance with the
usual rules and operating procedures thereof. So long as the Class A
Certificates are Book-Entry Certificates (as defined herein), such Certificates
will be evidenced by one or more Certificates registered in the name of Cede &
Co. ("Cede"), as the nominee of DTC. The Class A Certificates will initially
be registered in the name of Cede. The interests of the Owners of such
Certificates will be represented by book-entries on the records of DTC and
participating members thereof. No Beneficial Owner will be entitled to receive
a definitive certificate representing such person's interest, except in the event
that Definitive Certificates (as defined herein) are issued under the limited
circumstances described herein. All references in this Prospectus Supplement
to any Class A Certificates reflect the rights of Beneficial Owners only as such
rights may be exercised through DTC and its participating organizations for so
long as such Class A Certificates are held by DTC. See "Description of the
Class A Certificates -- Book-Entry Registration of the Class A Certificates"
herein, and "Description of the Certificates--Book-Entry Registration" in the
Prospectus.
Optional Termination: The Owners of the Class R Certificates will have the right to purchase all the
Home Equity Loans on any Monthly Remittance Date when the aggregate Loan
Balance of the Home Equity Loans has declined to 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"). Under certain
circumstances, the Certificate Insurer may exercise such purchase rights if the
Owners of the Class R Certificates do not do so. See "The Pooling and
Servicing Agreement--Optional Termination" herein.
Ratings: It is a condition of issuance of the Class A Certificates that the Class A
Certificates receive ratings of "AAA" by Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"), and "Aaa" by
Moody's Investors Services, Inc. ("Moody's"). Standard & Poor's and Moody's are
referred to herein collectively as the "Rating Agencies". A
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<PAGE>
security rating is not a recommendation to buy, sell or hold securities, and
may be subject to revision or withdrawal at any time by the assigning entity.
No Rating Agency is obligated to maintain any rating on any Certificate, and,
accordingly, there can be no assurance that the rating assigned to any Class of
Certificate upon initial issuance thereof will not be lowered or withdrawn at
any time thereafter. See "Ratings" herein.
Federal Tax Aspects: An election will be made to treat the Trust, exclusive of the Pre-Funding
Account and the Capitalized Interest Account (such accounts collectively, the
"Non-REMIC Accounts"), created by the Pooling and Servicing Agreement as
a "real estate mortgage investment conduit" ("REMIC"). Each Class of the
Class A Certificates will be designated as a "regular interest" in the REMIC and
such Certificates will be treated as debt instruments of the REMIC for federal
income tax purposes. The Class R Certificates will be designated as the sole
"residual interest" in the REMIC.
Owners of the Class A Certificates, including Owners that generally report
income on the cash method of accounting, will be required to include interest
on the Class A Certificates in income in accordance with the accrual method of
accounting. In addition, the Class A Certificates may be considered to have
been issued with original issue discount or at a premium. Any such original
issue discount will be includible in the income of the Owner as it accrues
under a method taking into account the compounding of interest and using the
Prepayment Assumption described herein. Premium may be deductible by the Owner
either as it accrues or when principal is received. No representation is made
as to whether the Home Equity Loans will prepay at the assumed rate, or any
other rate. See "Prepayment and Yield Considerations" herein. In general, as a
result of the qualification of the Class A Certificates as regular interests in
a REMIC, the Class A Certificates will be treated as "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 REMIC consist of qualifying
assets under such sections. In addition, interest on the Class A Certificates
will be treated as "interest on obligations secured by mortgages on real
property" under Section 856(c) of the Code to the extent that such Class A
Certificates are treated as "real estate assets" under Section 856(c) of the
Code. For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see "Federal Income Tax Consequences"
herein.
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. See "ERISA Considerations" herein and in the Prospectus.
Legal Investment
Considerations: Although the Class A Certificates are expected to be rated "AAA" by Standard &
Poor's and "Aaa" by Moody's, the Class A Certificates will not constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). 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 Class A Certificates.
</TABLE>
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<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider,
among other things, the following risk factors (as well as the factors set forth
under "Risk Factors" in the Prospectus) in connection with the purchase of the
Class A Certificates.
Sensitivity to Prepayments. The majority of the Home Equity Loans may
be prepaid by the related Mortgagors in whole or in part, at any time without
payment of any prepayment fee or penalty. In addition, a substantial portion of
the Home Equity Loans contain due-on-sale provisions which, to the extent
enforced by the Servicer, will result in prepayment of such Home Equity Loans.
See "Prepayment and Yield Considerations" herein and "Certain Legal Aspects of
the Home Equity Loans--Enforceability of Certain Provisions" in the Prospectus.
The rate of prepayments on fixed rate home equity loans is sensitive to
prevailing interest rates. Generally, if prevailing interest rates fall
significantly below the interest rates on the Home Equity Loans in Group I, such
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 in Group I, the rate of prepayments is
likely to decrease.
All of the Home Equity Loans in Group II are adjustable rate Home
Equity Loans. As is the case with fixed rate Home Equity Loans, adjustable rate
Home Equity Loans may be subject to a greater rate of principal prepayments in a
low interest rate environment. For example, if prevailing interest rates were to
fall, Mortgagors with adjustable rate Home Equity Loans may be inclined to
refinance such Home Equity Loans with a fixed rate loan to "lock in" a lower
interest rate. The existence of the applicable periodic rate cap, maximum Coupon
Rate and minimum Coupon Rate also may affect the likelihood of prepayments
resulting from refinancings. The prepayment experience on adjustable rate Home
Equity Loans with delayed first adjustment dates may differ from that on the
other adjustable rate Home Equity Loans particularly as such Home Equity Loans
approach their first adjustment dates. In addition, the delinquency and loss
experience on adjustable rate Home Equity Loans may differ from that on the
fixed rate Home Equity Loans because the amount of the monthly payments on
adjustable rate Home Equity Loans are subject to adjustment on each payment
change date. If such different experience were to occur, the prepayment
experience on the Class A-8 Certificates may differ from that on the Fixed Rate
Certificates.
The average life of each Class of Class A Certificates, and, if
purchased at other than par, the yields realized by Owners of the Class A
Certificates will be sensitive to levels of payment (including prepayments
relating to the Home Equity Loans (the "Prepayments")) on the Home Equity Loans.
In general, the yield on a Class of Class A Certificates that is purchased at a
premium from the outstanding principal amount thereof will be adversely affected
by a higher than anticipated level of Prepayments of the Home Equity Loans and
enhanced by a lower than anticipated level. Conversely, the yield on a Class of
Class A Certificates that is purchased at a discount from the outstanding
principal amount thereof will be enhanced by a higher than anticipated level of
Prepayments and adversely affected by a lower than anticipated level. See
"Prepayment and Yield Considerations" herein.
Nature of Collateral; Junior Liens. Because 8.65% of the aggregate Loan
Balance of the Initial Home Equity Loans in Group I and 0.42% of the aggregate
Loan Balance of the Initial Home Equity Loans in Group II 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
S-14
<PAGE>
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 be acceptable to the
Certificate Insurer and must satisfy the representations and warranties
specified in the agreement pursuant to which such Subsequent Home Equity Loans
are transferred to the Trust (each, a "Subsequent Transfer Agreement") and in
the Pooling and Servicing Agreement; (ii) the Seller will not select such
Subsequent Home Equity Loans in a manner adverse to the interest of the Owners
of the Class A Certificates or the Certificate Insurer; (iii) the Seller will
deliver certain opinions of counsel with respect to the validity of the
conveyance of such Subsequent Home Equity Loans; (iv) each Subsequent Home
Equity Loan assigned to Group I will be a fixed rate Home Equity Loan and each
Subsequent Home Equity Loan assigned to Group II will be an adjustable rate Home
Equity Loan; and (v) as of each cut-off date (each, a "Subsequent Cut-Off Date")
applicable thereto, the Home Equity Loans at that time, including the Subsequent
Home Equity Loans to be conveyed by the Seller as of such Subsequent Cut-Off
Date, will satisfy the criteria set forth in the 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 related Home Equity Loan Group by the end of the
Funding Period, the Owners of the related Class of Class A Certificates then
entitled to receive payments of principal will receive a prepayment of principal
in an amount equal to the Pre-Funded Amount allocated to the related Home Equity
Loan Group and remaining in the Pre-Funding Account on the Payment Date in April
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 the 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 related Home Equity Loan Group will
not vary significantly from those of the Initial Home Equity Loans held in such
Home Equity Loan Group. See "The Home Equity Loan Pool--Conveyance of Subsequent
Home Equity Loans" herein.
Risk of Home Equity Loan Coupon Rates Reducing the Class A-8
Pass-Through Rate. The calculation of the Class A-8 Pass-Through Rate is based
upon (i) the value of an index (LIBOR) which is different from the value of the
indices applicable to the Home Equity Loans in Group II as described under "The
Home Equity Loan Pool -- Group II" (either as a result of the use of a different
index, rate determination date or rate adjustment date) and (ii) the weighted
average of the Coupon Rates of the Group II Home Equity Loans, which are subject
to periodic adjustment caps, maximum rate caps and minimum rate floors. 50.06%
of the Initial Home Equity Loans in Group II by aggregate Loan Balance as of the
Cut-Off Date adjust semi-annually based upon the London
S-15
<PAGE>
interbank offered rate for six-month United States dollar deposits ("Six-Month
LIBOR"). Although a substantial majority of the Initial Six-Month LIBOR Loans
first adjust six months after origination, a number of the Initial Six- Month
LIBOR Loans first adjust two or three years from the date of origination. 49.94%
of the Initial Home Equity Loans in Group II by aggregate Loan Balance as of the
Cut-Off Date are CMT Loans that adjust annually based on the CMT Index. Although
a substantial majority of Initial CMT Loans first adjust one year after
origination, a number of the Initial CMT Loans do not first adjust until three
years from the date of origination. The Pass-Through Rate on the Class A-8
Certificates adjusts monthly based upon One-Month LIBOR as described under
"Description of the Class A Certificates -- Calculation of One-Month LIBOR"
herein, subject to the Class A-8 Available Funds Cap. Consequently, the interest
which becomes due on the Home Equity Loans in Group II (net of the related
Servicing Fee, the related Premium Amount, the related Trustee Fee, any Trustee
Reimbursable Expenses allocable to Group II and certain reductions required by
the Certificate Insurer) during any Remittance Period may not equal the amount
of interest that would accrue at One-Month LIBOR plus the margin on the Class
A-8 Certificates during the related Accrual Period. In particular, the Class A-8
Pass-Through Rate adjusts monthly, while the interest rates of the Home Equity
Loans in Group II adjust less frequently with the result that the Class A-8
Available Funds Cap may limit increases in the Class A-8 Pass-Through Rate for
extended periods in a rising interest rate environment. In addition, One-Month
LIBOR, Six-Month LIBOR and the CMT Index may respond to different economic and
market factors, and there is not necessarily a correlation among them. Thus, it
is possible, for example, that One-Month LIBOR may rise during periods in which
Six-Month LIBOR or the CMT Index are stable or are falling or that, even if each
of One-Month LIBOR, Six-Month LIBOR and the CMT Index rise during the same
period, One-Month LIBOR may rise more rapidly than Six-Month LIBOR and the CMT
Index. Furthermore, if the Class A-8 Available Funds Cap determines the Class
A-8 Pass-Through Rate for a Payment Date, the value of the Class A-8
Certificates will be temporarily or permanently reduced. There is no mechanism
to compensate Owners of the Class A-8 Certificates if the Pass-Through Rate is
limited by the Class A-8 Available Funds Cap.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Seller. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Home Equity Loans. The Seller will be required
to repurchase any Home Equity Loans which, at the time of origination, did not
comply with applicable federal and state laws and regulations. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Trust to collect all or part of the principal of or interest on
the Home Equity Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Seller to damages and
administrative enforcement. See "Certain Legal Aspects of Home Equity Loans"
in the Prospectus.
The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
borrowers regarding the terms of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience.
Violations of certain provisions of these federal laws may limit the ability of
the Seller to collect all or part of the principal of or interest on the Home
Equity Loans and, in addition, could subject the Seller to damages and
administrative enforcement. The Seller will be required to repurchase any Home
Equity Loans which, at the time of origination did not comply with such federal
laws or regulations. See "Certain Legal Aspects of the Home Equity Loans" in the
Prospectus.
S-16
<PAGE>
It is possible that some of the Home Equity Loans will be subject to
the Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Riegle Act"), which incorporates the Home Ownership and Equity Protection Act
of 1994. The Riegle Act adds certain additional provisions to Regulation Z,
which is the implementing regulation of the Truth-in-Lending Act. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money home equity loans with high interest rates or high
upfront fees and charges. In general, home equity loans within the purview of
the Riegle Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. The provisions of the Riegle
Act apply on a mandatory basis to all home equity loans originated on or after
October 1, 1995. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the home equity loan. The Seller will represent and warrant in the 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. 59.84% and 0.21% of the aggregate Loan Balance of the Initial Home
Equity Loans in Group I and Group II, respectively, as of the CutOff 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 (subject to adjustment in the
case of the Home Equity Loans in Group II), consisting of principal and
interest, generally based on a 30-year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan up to 15 years after
origination. Amortization of a Balloon Loan based on a scheduled period that is
longer than the term of the loan results in a remaining principal balance at
maturity that is substantially larger than the regular scheduled payments. The
Seller does not have any information regarding the default history or prepayment
history of payments on Balloon Loans. Because borrowers of Balloon Loans are
required to make substantial single payments upon maturity, it is possible that
the default risk associated with the Balloon Loans is greater than that
associated with fully-amortizing Home Equity Loans.
Risk of Insolvency. The Seller believes that the transfer of the Home
Equity Loans to the Depositor and by the Depositor to the Trust constitutes a
sale by the Seller to the Depositor and by the Depositor to the Trust and,
accordingly, that such Home Equity Loans will not be part of the assets of the
Seller 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, the Rating
Agencies and the Certificate Insurer will have received an opinion of Arter &
Hadden, counsel to the Seller, with respect to the true sale of the Home Equity
Loans from the Seller to the Depositor and from the Depositor to the Trustee, in
form and substance satisfactory to the Certificate Insurer and the Rating
Agencies.
Risk Associated with the Certificate Insurer. If the protection
afforded by overcollateralization and crosscollateralization is insufficient and
if, upon the occurrence of a Subordination Deficit, the Certificate Insurer is
unable to meet its obligations under the Insurance Policies, then the Owners of
the Class A Certificates could experience a loss on their investment.
S-17
<PAGE>
THE SELLER AND SERVICER
General
The Seller and Servicer, Industry Mortgage Company, L.P., is a Delaware
limited partnership. The general partner of the Seller is Industry Mortgage
Corporation, a Delaware corporation, which is a subsidiary of IMC Mortgage
Company and an affiliate of the Depositor. IMC Mortgage Company completed a
public offering of certain shares of its common stock on June 25, 1996. The
principal executive offices of the Seller are located at 3450 Buschwood Park
Drive, Suite 250, Tampa, Florida 33618 and its telephone number is (813)
932-2211.
The Seller has been in the mortgage lending business since its
formation in 1993 and the Seller, IMC Mortgage Company and certain other
subsidiaries of IMC Mortgage Company are engaged in originating, purchasing and
servicing home equity loans secured by first and second mortgages and deeds of
trust on Properties located in at least 48 states and the District of Columbia.
The Seller will sell and assign each Home Equity Loan to the Depositor,
which will in turn sell and assign each Home Equity Loan to the Trust, in
consideration of the net proceeds from the sale of the Class A Certificates,
which are being offered hereby. The Seller will also service each Home Equity
Loan.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement, in whole or in part, unless it shall have first obtained
the written consent of the Trustee and the Certificate Insurer, which consent is
required not to be unreasonably withheld; provided, however, that any assignee
must meet the eligibility requirements for a successor servicer set forth in the
Pooling and Servicing Agreement.
With the consent of the Certificate Insurer and the Trustee, the
Servicer may enter into sub-servicing agreements (the "Sub-Servicing
Agreements") with qualified sub-servicers (the "Sub-Servicers") with respect to
the servicing of the Home Equity Loans. None of the Sub-Servicing arrangements
discharge the Servicer from its servicing obligations. 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 and the Certificate Insurer may remove the Servicer, and
the Servicer may resign, only in accordance with the terms of the Pooling and
Servicing Agreement. No removal or resignation shall become effective until the
Trustee or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance therewith. Any collections
received by the Servicer after removal or resignation shall be endorsed by it to
the Trustee and remitted directly to the Trustee.
Upon removal or resignation of the Servicer, the Trustee (x) may
solicit bids for a successor servicer as described in the Pooling and Servicing
Agreement 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 Certificate Insurer and the
Owners of a majority of the Class R Certificates. If the Trustee is unable to
obtain a qualifying bid and is prevented by law from acting as servicer, the
Trustee will be required to appoint, or petition a court of competent
jurisdiction to appoint, an eligible successor. Any successor (including the
Backup Servicer) is required to be a housing and home finance institution, bank
or mortgage servicing institution which has been designated as an approved
seller-servicer by FNMA or FHLMC for first and second home equity loans having
equity of not less than $5,000,000 as determined in accordance with generally
accepted accounting principles, and which is acceptable to the Certificate
Insurer and shall assume all or any part of the responsibilities, duties or
liabilities of the Servicer.
The Certificates will not represent an interest in or obligation of,
nor are the Home Equity Loans guaranteed by, the Depositor, the Seller, the
Servicer, except as described herein, or any of their affiliates.
S-18
<PAGE>
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines
customarily and currently employed by the Seller with respect to home equity
loans which it originates or purchases from others. Each Home Equity Loan was
underwritten according to those guidelines. The Seller revises such guidelines
from time to time in connection with changing economic and market conditions.
In certain cases loans may be acquired or originated outside of the
criteria included in the guidelines as then in effect with the prior approval of
a pre-designated senior official of the Seller and in light of compensating
factors or other business considerations. No information is available with
respect to the portion of the Home Equity Loans as to which exceptions to the
criteria specified in the guidelines described herein were made. Substantially
all of the Home Equity Loans were acquired or originated in accordance with the
underwriting guidelines described herein or with such permitted exceptions as
are described herein.
The Seller's business consists primarily of acquiring home equity
loans. The Seller specializes in home equity loans that do not conform to the
underwriting standards of the Federal National Mortgage Association ("FNMA") or
the Federal Home Loan Mortgage Corporation ("FHLMC") and those standards
typically applied by banks and other primary lending institutions, particularly
with regard to a prospective borrower's credit history.
The Seller acquires and originates home equity loans through its
principal office in Tampa, Florida and full-service branch offices in
Cincinnati, Ohio, Ft. Washington, Pennsylvania, Lincoln, Rhode Island and Cherry
Hill, New Jersey. In addition, the Seller maintains retail branch offices
throughout the United States and acquires home equity loans from a referral
network of mortgage lenders and brokers, banks and other referral sources, which
may include one or more affiliates of the Seller.
Home equity loans acquired from mortgage brokers and other lenders are
pre-approved by the Seller prior to funding, or purchased in bulk after funding,
only after each loan has been re-underwritten by the Seller in accordance with
its established underwriting guidelines. These guidelines are designed to assess
the adequacy of the real property which serves as collateral for the loan and
the borrower's ability to repay the loan. The Seller analyzes, among other
factors, the equity in the collateral, the credit history and debt-to-income
ratio of the borrower, the property type, and the characteristics of the
underlying senior mortgage, if any.
The Seller purchases and originates home equity loans with different
credit characteristics depending on the credit profiles of individual borrowers.
The Seller primarily purchases and originates fixed rate loans which fully
amortize (subject to adjustments by reason of being simple interest loans) over
a period not to exceed 30 years. The Seller also acquires and originates Balloon
Loans, which generally provide for scheduled amortization over 30 years, with a
due date and a balloon payment generally at the end of the fifteenth year. The
principal amount of the loans purchased or originated by the Seller generally
ranges up to a maximum of $400,000. Under current policy the Seller generally
does not acquire or originate home equity loans where the combined Loan-to-Value
Ratio exceeds 85%. The collateral securing loans acquired or originated by the
Seller is generally one- to four-family residences, including condominiums and
townhomes. The Seller accepts mobile homes or unimproved land as collateral only
in limited 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.
S-19
<PAGE>
The Seller requires that a full appraisal of the property used as
collateral for any loan that is acquired or originated be performed in
connection with the origination of the loan. These appraisals are performed by
third party, fee-based appraisers. Appraisals of substantially all of the
Properties were completed on standard FNMA/FHLMC forms and conform to current
FNMA/FHLMC secondary market requirements for residential property appraisals.
Each such appraisal includes, among other things, an inspection of the exterior
of the subject property, photographs of two or more different views of the
property and data from sales within the preceding 12 months of similar
properties within the same general location as the subject property.
A credit report by an independent, nationally recognized credit
repository agency reflecting the applicant's credit history is required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records.
Certain laws protect loan applicants by offering them a period of time
after loan documents are signed, termed the rescission period, during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to the funding of the loan and may not be waived by the applicant
except as permitted by law.
The Seller requires title insurance coverage issued by an approved ALTA
or CLTA title insurance company on all property securing home equity loans it
originates or purchases. The loan originator and its assignees are generally
named as the insured. Title insurance policies indicate the lien position of the
home equity loan and protect the Seller against loss if the title or lien
position is not indicated. The applicant is also required to secure hazard and,
in certain instances, flood insurance in an amount sufficient to cover the new
loan and any senior mortgage.
Delinquency, Loan Loss and Foreclosure Information
The Seller began originating or purchasing home equity loans in October
1993. In addition, from October 1993 to July 1994 the Seller sold all the home
equity loans it originated to third parties on a servicing released basis.
The delinquency and loss experience percentages indicated below are
calculated on the basis of the total home equity loans serviced as of the end of
the periods indicated. However, because the total amount of loans originated or
purchased by the Servicer has increased over these periods as a result of new
originations, the total amount of loans serviced as of the end of any indicated
period will include many loans which will not have been outstanding long enough
to give rise to some or all of the indicated periods of delinquencies. In
addition, the information in the tables below has not been adjusted to eliminate
the effect of the significant growth in the size of the Seller's home equity
loan portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of home equity loans serviced for
each period would be higher than those shown if a group of home equity loans
were artificially isolated at a point in time and the information showed the
activity only in that isolated group. Accordingly, the historical delinquency
experience and loan loss information set forth below may not be indicative of
the future performance of the home equity loans.
S-20
<PAGE>
Delinquency and Default Experience of the Servicer's Servicing
Portfolio of Home Equity Loans
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Number Dollar Number Dollar Number Dollar
of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Portfolio At 35,381 $2,148,068,446 9,376 $535,797,748 1,635 $92,003,157
Delinquency
Percentage (1)
- --------------
30 - 59 days 3.390% 3.093% 2.613% 2.570% 1.040% 0.831%
60 - 89 days 1.077% 1.068% 0.672% 0.642% 0.183% 0.152%
90 + days 2.427% 2.616% 1.237% 1.223% 0.000% 0.000%
------ ------ ------ ------ ------ ------
Total Delinquency 6.894% 6.777% 4.522% 4.435% 1.223% 0.983%
====== ====== ====== ====== ====== ======
Default
Percentage (2)
Foreclosure 0.863% 1.003% 0.779% 0.749% 0.000% 0.000%
Bankruptcy (3) 1.064% 1.069% 0.576% 0.630% 0.122% 0.115%
Real Estate Owned 0.276% 0.313% 0.117% 0.160% 0.000% 0.000%
------ ------ ------ ------ ------ ------
Total Default 2.204% 2.385% 1.472% 1.539% 0.122% 0.115%
====== ====== ====== ====== ====== ======
</TABLE>
- -----------------
(1) The delinquency percentage represents the number and dollar value of
account balances contractually past due, including home equity loans in
foreclosure or bankruptcy but exclusive of real estate owned.
(2) The default percentage represents the number and dollar value of
account balances on home equity loans in foreclosure, bankruptcy
or real estate owned.
(3) The bankruptcy percentage represents all home equity loans that are in
bankruptcy regardless of delinquency status.
Loan Loss Experience on the Servicer's Servicing
Portfolio of Home Equity Loans
Year Ending December 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
Average Amount Outstanding(1) $1,207,171,960 $294,251,859 $52,709,250
Gross Losses(2) $1,581,695 $278,632 $0
Recoveries(3) $1,727 $0 $0
Net Losses(4) $1,579,968 $278,632 $0
Net Losses as a Percentage
of Average Amount 0.131% 0.095% 0.000%
Outstanding
- -----------------------
(1) "Average Amount Outstanding" during the period is the arithmetic
average of the principal balances of the home equity loans outstanding
on the last business day of each month during the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses include all principal, foreclosure costs
and accrued interest to date.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
S-21
<PAGE>
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in November
1994. The Depositor maintains its principal offices at 3450 Buschwood Park
Drive, Tampa, Florida 33618. 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 Class A
Certificates will be applied by the Depositor (i) to the purchase of the Initial
Home Equity Loans from the Seller, (ii) to the deposit of the Pre-Funded Amount
in the Pre-Funding Account and (iii) to the deposit of certain amounts in the
Capitalized Interest Account. Such net proceeds less the Pre-Funded Amount and
the amount deposited in the Capitalized Interest Account will (together with the
Class 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.
THE HOME EQUITY LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Initial Home
Equity Loans as of the Cut-Off Date. Subsequent Home Equity Loans are intended
to be purchased by the Trust from the Depositor from time to time on or before
March 31, 1997 from funds on deposit in the Pre-Funding Account. The Initial
Home Equity Loans and the Subsequent Home Equity Loans are referred to
collectively as the Home Equity Loans. The Subsequent Home Equity Loans to be
purchased by the Trust will be sold by the Seller to the Depositor and then by
the Depositor to the Trust.
This subsection describes generally certain characteristics of the
Initial Home Equity Loans. Unless otherwise noted, all statistical percentages
in this Prospectus Supplement are measured by the aggregate principal balance of
the related Initial Home Equity Loans as of the Cut-Off Date. The columns
entitled "% of Initial Home Equity Loans" and "% of Aggregate Loan Balance" in
the following tables may not sum to 100% due to rounding.
Each Home Equity Loan in the Trust will be assigned to one of two home
equity loan groups (each a "Home Equity Loan Group" or "Group") comprised of
Home Equity Loans which bear fixed interest rates, in the case of Group I, and
Home Equity Loans which are adjustable-rate Home Equity Loans, in the case of
the Group II. The Fixed Rate Certificates represent undivided ownership
interests in all Home Equity Loans contained in Group I, and distributions on
the Fixed Rate Certificates will be based primarily on amounts available for
distribution in respect of Home Equity Loans in Group I. The Class A-8
Certificates represent undivided ownership interests in all Home Equity Loans
contained in Group II, and distributions on the Class A-8 Certificates will be
based primarily on amounts available for distribution in respect of Home Equity
Loans in Group II.
The Initial Home Equity Loans to be transferred by the Depositor to the
Trust on the Closing Date will consist of 6,066 fixed and adjustable 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 49 states and the District of Columbia. The Properties
securing the Home Equity Loans consist primarily of one- to- four family
residential properties. The Properties may be owner-occupied and non-owner
occupied investment properties (which includes second and vacation homes). All
of the Initial Home Equity Loans have a first payment date on or after October
29, 1989 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 91.35% of the aggregate Loan Balances of the Home Equity Loans in
Group I and 99.58% of the aggregate Loan Balances of the Home Equity Loans in
Group II as of the Cut-Off Date (the "Original Aggregate Loan Balance") are
secured by first liens on the related properties, and the remaining 8.65% of
Initial Home Equity Loans in Group I and 0.42% of the Initial Home Equity Loans
in Group II are secured by second liens on the related properties.
S-22
<PAGE>
The Loan-to-Value Ratios shown below were calculated based upon either
the appraised values of the Properties at the time of origination (the
"Appraised Values") or the sales price. In a limited number of circumstances,
and within the Seller's underwriting guidelines, the Seller has reduced the
Appraised Value of Properties where the Properties are unique, have a high value
or where the comparables are not within FNMA guidelines. The purpose 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.
Group I
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans in Group I was $61,842.36. The minimum and maximum Loan Balances of
the Initial Home Equity Loans in Group I as of the Cut-Off Date were $2,979.34
and $547,497.36, respectively. The weighted average Coupon Rate of the Initial
Home Equity Loans in Group I was 11.80%; the Coupon Rate of the Initial Home
Equity Loans in Group I ranged from 7.22% to 18.99%; the weighted average
combined Loan-to-Value Ratio of the Initial Home Equity Loans in Group I was
74.86%; the weighted average remaining term to maturity of the Initial Home
Equity Loans in Group I was 209 months; and the remaining terms to maturity of
the Initial Home Equity Loans in Group I ranged from 13 months to 360 months. As
of the Cut-Off Date, 91.35% of the aggregate Loan Balance of the Initial Home
Equity Loans in Group I were secured by first mortgages and 8.65% of the
aggregate Loan Balance of the Initial Home Equity Loans in Group I were secured
by second mortgages. Initial Home Equity Loans containing "balloon" payments
represented not more than 59.84% of the aggregate Loan Balance of the Initial
Home Equity Loans in Group I. No Initial Home Equity Loan will mature later than
February 1, 2027.
S-23
<PAGE>
Geographic Distribution of Properties - Group I
The geographic distribution of the Initial Home Equity Loans in Group I
by state, as of the Cut-Off Date, was as follows:
Number of Initial Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ------------
Alabama 2 $ 133,077.70 0.04%
Arizona 41 2,425,653.03 0.74
Arkansas 42 1,791,804.61 0.54
California 50 6,787,146.41 2.06
Colorado 81 5,883,249.71 1.78
Connecticut 52 4,336,400.52 1.31
Delaware 44 2,744,347.11 0.83
District of Columbia 68 4,949,515.06 1.50
Florida 427 26,478,788.33 8.03
Georgia 257 15,954,470.18 4.84
Hawaii 3 169,222.41 0.05
Idaho 24 1,282,399.38 0.39
Illinois 330 19,003,182.89 5.76
Indiana 236 10,941,888.02 3.32
Iowa 35 1,596,628.40 0.48
Kansas 8 328,244.30 0.10
Kentucky 47 2,429,596.28 0.74
Louisiana 10 571,912.20 0.17
Maine 3 152,285.02 0.05
Maryland 281 20,010,985.10 6.07
Massachusetts 65 4,945,918.64 1.50
Michigan 508 27,447,680.05 8.32
Minnesota 58 4,040,995.52 1.23
Mississippi 13 805,638.10 0.24
Missouri 43 1,691,884.70 0.49
Montana 2 194,290.92 0.06
Nebraska 20 896,645.40 0.27
Nevada 6 344,254.44 0.10
New Hampshire 6 420,757.34 0.13
New Jersey 264 20,810,527.51 6.31
New Mexico 38 2,254,749.00 0.68
New York 611 46,814,213.27 14.19
North Carolina 268 13,664,017.57 4.14
North Dakota 2 67,858.37 0.02
Ohio 279 15,901,279.56 4.82
Oklahoma 37 1,577,831.15 0.48
Oregon 40 2,973,036.74 0.90
Pennsylvania 294 15,310,300.53 4.64
Rhode Island 17 1,105,749.13 0.34
South Carolina 82 3,837,835.44 1.16
South Dakota 2 90,328.34 0.03
Tennessee 278 14,565,823.82 4.42
Texas 28 2,344,586.29 0.71
Utah 40 2,253,166.77 0.68
Vermont 3 170,605.44 0.05
Virginia 195 11,005,835.78 3.34
Washington 41 3,407,616.16 1.03
West Virginia 22 1,142,219.34 0.35
Wisconsin 28 1,639,358.32 0.50
Wyoming 3 243,330.87 0.07
----- --------------- ------
Total 5,334 $329,867,131.17 100.00%
===== =============== =======
S-24
<PAGE>
Combined Loan-to-Value Ratios - Group I
The original combined loan-to-value ratios as of the origination dates
of the Initial Home Equity Loans in Group I (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% 2 $ 24,436.33 0.01%
10.01 to 15.00 14 310,633.57 0.09
15.01 to 20.00 17 449,947.02 0.14
20.01 to 25.00 19 469,747.51 0.14
25.01 to 30.00 33 887,006.28 0.27
30.01 to 35.00 44 1,374,721.56 0.42
35.01 to 40.00 65 2,176,202.33 0.66
40.01 to 45.00 86 3,702,285.57 1.12
45.01 to 50.00 145 5,790,696.56 1.76
50.01 to 55.00 135 7,851,144.63 2.38
55.01 to 60.00 217 10,282,245.12 3.12
60.01 to 65.00 318 18,335,708.68 5.56
65.01 to 70.00 685 38,987,918.90 11.82
70.01 to 75.00 953 60,631,101.62 18.38
75.01 to 80.00 1,581 111,016,601.56 33.65
80.01 to 85.00 580 42,491,466.38 12.88
85.01 to 90.00 240 19,127,265.19 5.80
90.01 to 95.00 66 2,351,935.55 0.71
95.01 to 100.00 134 3,606,066.81 1.09
----- --------------- ------
Total 5,334 $329,867,131.17 100.00%
===== =============== ======
</TABLE>
Cut-Off Date Coupon Rates - Group I
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans in Group I 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
- ------------ ----------------- ------------ ------------
<C> <C> <C> <C> <C> <C>
7.001 to 8.000% 3 $ 269,514.34 0.08%
8.001 to 9.000 70 6,338,531.96 1.92
9.001 to 10.000 416 34,000,843.38 10.31
10.001 to 11.000 1,028 74,352,293.62 22.54
11.001 to 12.000 1,400 93,233,391.74 28.26
12.001 to 13.000 1,182 66,696,854.75 20.22
13.001 to 14.000 707 34,578,847.39 10.48
14.001 to 15.000 327 14,407,666.34 4.37
15.001 to 16.000 153 4,601,824.01 1.40
16.001 to 17.000 30 907,703.81 0.28
17.001 to 18.000 16 445,401.13 0.14
18.001 to 19.000 2 34,258.69 0.01
----- --------------- ------
Total 5,334 $329,867,131.17 100.00%
===== =============== ======
</TABLE>
S-25
<PAGE>
Cut-Off Date Loan Balances - Group I
The distribution of the outstanding principal amounts of the Initial
Home Equity Loans in Group I as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Cut-Off Date Number of Initial Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Up to $ 25,000.00 865 $ 16,204,593.23 4.91%
25,000.01 to 50,000.00 1,826 68,810,713.90 20.86
50,000.01 to 75,000.00 1,251 76,719,763.21 23.26
75,000.01 to 100,000.00 619 53,595,569.00 16.25
100,000.01 to 125,000.00 357 39,788,521.51 12.06
125,000.01 to 150,000.00 179 24,410,927.25 7.40
150,000.01 to 175,000.00 79 12,833,673.30 3.89
175,000.01 to 200,000.00 62 11,540,243.93 3.50
200,000.01 to 250,000.00 51 11,348,477.10 3.44
250,000.01 to 300,000.00 23 6,457,150.27 1.96
300,000.01 to 350,000.00 7 2,232,802.54 0.68
350,000.01 to 400,000.00 11 4,036,294.00 1.22
400,000.01 to 450,000.00 2 827,299.09 0.25
500,000.01 to 550,000.00 2 1,061,102.84 0.32
----- --------------- ------
Total 5,334 $329,867,131.17 100.00%
===== =============== ======
</TABLE>
Types of Mortgaged Properties - Group I
The Properties securing the Initial Home Equity Loans in Group I as of
the Cut-Off Date were of the property types as follows:
Number of Initial Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
Single Family Detached 4,804 $295,076,955.78 89.45%
Two- to Four-Family 298 22,712,483.35 6.89
Single Family Attached 110 5,690,382.73 1.73
Condominium 57 3,251,625.08 0.99
Manufactured Housing 30 1,186,884.43 0.36
Townhouse 28 1,477,384.99 0.45
Planned Unit Development 5 355,526.86 0.11
Mixed Use 1 76,223.74 0.02
Multi-Family 1 39,664.21 0.01
----- -------------- -----
Total 5,334 $329,867,131.17 100.00%
===== =============== ======
Distribution of Months Since Origination - Group I
The distribution of the number of months since the date of origination
of the Initial Home Equity Loans in Group I as of the Cut-Off Date was as
follows:
Number of Months Number of Initial Aggregate % of Aggregate
Since Origination Home Equity Loans Loan Balance Loan Balance
- ----------------- ----------------- ------------ ------------
2 to 12 5,276 326,880,560.05 99.09%
13 to 24 46 2,544,184.78 0.77
25 or more 12 442,386.34 0.13
----- ------------- ------
Total 5,334 $329,867,131.17 100.00%
===== =============== =======
S-26
<PAGE>
Distribution of Remaining Term to Maturity - Group I
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans in Group I as of the Cut-Off Date was as follows:
Months Remaining Number of Initial Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
- ----------- ----------------- ------------ ------------
Up to 120 248 $ 7,025,811.95 2.13%
121 to 180 3,749 235,634,886.28 71.43
181 to 240 706 37,657,594.40 11.42
241 to 300 15 871,307.07 0.26
301 or more 616 48,677,531.47 14.76
----- --------------- ------
Total 5,334 $329,867,131.17 100.00%
===== =============== =======
Occupancy Status - Group I
The occupancy status of the Properties securing the Initial Home Equity
Loans in Group I as of the Cut-Off Date was as follows:
Number of Initial Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
Owner Occupied 4,927 $307,383,853.03 93.18%
Investor Owned 382 20,826,453.17 6.31
Vacation/Second Home 25 1,656,824.97 0.50
----- --------------- ------
Total 5,334 $329,867,131.17 100.00%
===== =============== ======
Distribution by Lien Position - Group I
The lien position of the Initial Home Equity Loans in Group I as of the
Cut-Off Date was as follows:
Number of Initial Aggregate % of Aggregate
Lien Position Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
First Lien 4,433 $301,319,996.02 91.35%
Second Lien 901 28,547,135.15 8.65
----- --------------- ------
Total 5,334 $329,867,131.17 100.00%
===== =============== =======
Group II
As of the Cut-Off Date, 50.06% of the Initial Home Equity Loans in
Group II are Six-Month LIBOR Loans and 49.94% of the Initial Home Equity Loans
in Group II are CMT Loans. The Coupon Rates with respect to all of the Initial
Home Equity Loans in Group II are subject to periodic and lifetime rate
adjustment caps.
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans in Group II was $95,608.22. The minimum and maximum Loan Balances
of the Initial Home Equity Loans in Group II as of the Cut-Off Date was
$9,979.11 and $498,242.22, respectively. The weighted average Coupon Rate of the
Initial Home Equity Loans in Group II was 9.74%; the Coupon Rates of the Initial
Home Equity Loans in Group II range from 6.50% to 15.16%; the weighted average
maximum Coupon Rate of the Initial Home Equity Loans in Group II was 16.06%; the
maximum Coupon Rates of the Initial Home Equity Loans in Group II ranged from
10.38% to 58.00%; the weighted average minimum Coupon Rate of the Initial Home
Equity Loans in Group II was 9.64%; the minimum Coupon Rates of the Initial Home
Equity Loans in Group II ranged from 2.38% to 15.00%; the weighted
S-27
<PAGE>
average combined Loan-to-Value Ratio of the Initial Home Equity Loans in Group
II was 74.91%; the weighted average remaining term to maturity of the Initial
Home Equity Loans in Group II was 352 months; and the remaining terms to
maturity as of the Cut-Off Date of the Initial Home Equity Loans in Group II
ranged from 166 months to 360 months; the weighted average gross margin of the
Initial Home Equity Loans in Group II was 6.04%; the minimum gross margin of the
Initial Home Equity Loans in Group II was 2.75%; and the maximum gross margin of
the Initial Home Equity Loans in Group II was 10.40%. As of the Cut-Off Date,
99.58% of the aggregate Loan Balance of the Initial Home Equity Loans in Group
II were secured by first mortgages and 0.42% of the aggregate Loan Balances of
the Initial Home Equity Loans in Group II were secured by second mortgages. None
of the Initial Home Equity Loans in Group II will mature later than March 1,
2027.
Six-Month LIBOR Loans. The Initial Six-Month LIBOR Loans consist of 398
loans aggregating $35,036,332.76 which have semi-annual interest rate and
semi-annual payment adjustment frequencies. While a substantial majority of the
Initial Six-Month LIBOR Loans first adjust six months after origination, a
number of the Initial Six-Month LIBOR Loans first adjust two or three years from
the date of origination. The Initial Six-Month LIBOR Loans have a weighted
average margin of 6.30%. The margin for the Initial Six-Month LIBOR Loans ranges
from 2.75% to 10.40%. The Initial Six-Month LIBOR Loans have a weighted average
initial periodic semi-annual rate adjustment cap of 1.10%. The weighted average
initial Coupon Rate is 9.93%, with initial Coupon Rates that range from 6.50% to
15.16%. The Initial Six-Month LIBOR Loans have a weighted average maximum Coupon
Rate of 16.46% with maximum Coupon Rates that range from 10.38% to 58.00%. The
weighted average number of months to the next rate adjustment date on the
Initial Six-Month LIBOR Loans is 6 months.
CMT Loans. The Initial CMT Loans consist of 334 loans aggregating
$34,948,885.80 which have annual interest rate and annual payment adjustment
frequencies based on the weekly average yield on United States Treasury
securities adjusted to a constant maturity of one year. While a substantial
majority of the Initial CMT Loans first adjust one year after origination, a
number of the Initial CMT Loans first adjust three years from the date of
origination. The Initial CMT Loans have a weighted average margin of 5.78%. The
margin for the Initial CMT Loans ranges from 2.88% to 8.50%. The Initial CMT
Loans have a weighted average initial periodic annual rate adjustment cap of
2.03%. The weighted average initial Coupon Rate is 9.55%, with initial Coupon
Rates that range from 6.63% to 13.38%. The Initial CMT Loans have a weighted
average maximum Coupon Rate of 15.66%, with maximum Coupon Rates that range from
11.00% to 55.00%. The weighted average number of months to the next rate
adjustment date on the Initial CMT Loans is 9 months.
S-28
<PAGE>
Geographic Distribution of Properties - Group II
The geographic distribution of Initial Home Equity Loans in Group II by
state, as of the Cut-Off Date, was as follows:
Number of Initial Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ------------
Alabama 4 $ 502,313.36 0.72%
Arizona 2 338,451.51 0.48
Arkansas 3 258,188.77 0.37
California 29 4,892,738.70 6.99
Colorado 26 2,742,459.30 3.92
Connecticut 2 52,910.04 0.08
Florida 9 723,380.46 1.03
Georgia 61 8,268,614.28 11.81
Hawaii 1 143,292.50 0.20
Idaho 1 153,867.52 0.22
Illinois 52 4,452,136.80 6.36
Indiana 16 954,007.25 1.36
Iowa 4 225,188.68 0.32
Kansas 4 233,406.77 0.33
Kentucky 8 510,034.55 0.73
Maine 2 215,761.44 0.31
Maryland 17 2,518,581.30 3.60
Massachusetts 7 872,319.44 1.25
Michigan 228 17,881,950.31 25.55
Minnesota 9 655,072.81 0.94
Mississippi 1 125,861.89 0.18
Missouri 21 1,259,605.71 1.80
Montana 1 233,724.94 0.33
Nevada 1 174,545.35 0.25
New Hampshire 4 317,235.17 0.45
New Jersey 23 2,973,282.07 4.25
New Mexico 7 599,913.49 0.86
New York 8 712,811.85 1.02
North Carolina 18 1,362,639.60 1.95
Ohio 27 1,733,882.53 2.48
Oregon 13 1,350,922.25 1.93
Pennsylvania 34 2,903,327.53 4.15
Rhode Island 3 320,206.78 0.46
South Carolina 5 386,313.92 0.55
Tennessee 4 587,293.97 0.84
Texas 12 1,514,864.95 2.16
Utah 22 2,060,707.43 2.94
Virginia 4 443,009.34 0.63
Washington 28 3,455,604.62 4.94
Wisconsin 6 535,705.19 0.77
Wyoming 1 69,897.21 0.10
--- -------------- ------
Total 732 $69,985,218.56 100.00%
=== ============== =======
S-29
<PAGE>
Combined Loan-to-Value Ratios - Group II
The original combined loan-to-value ratios as of the origination dates
of the Initial Home Equity Loans in Group II (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:
Range of Number of Initial Aggregate % of Aggregate
Original CLTV's Home Equity Loans Loan Balance Loan Balance
- --------------- ----------------- ------------ ------------
10.01 to 15.00% 1 $ 44,931.28 0.06%
15.01 to 20.00 1 22,485.85 0.03
20.01 to 25.00 4 259,480.16 0.37
25.01 to 30.00 4 98,038.22 0.14
30.01 to 35.00 3 134,957.87 0.19
35.01 to 40.00 4 170,030.73 0.24
40.01 to 45.00 4 167,773.40 0.24
45.01 to 50.00 14 905,419.44 1.29
50.01 to 55.00 14 1,147,794.59 1.64
55.01 to 60.00 34 2,499,498.21 3.57
60.01 to 65.00 80 5,783,148.56 8.26
65.01 to 70.00 108 10,424,630.29 14.90
70.01 to 75.00 130 13,317,964.33 19.03
75.01 to 80.00 211 21,003,408.16 30.01
80.01 to 85.00 84 9,558,302.66 13.66
85.01 to 90.00 29 3,644,366.35 5.21
90.01 to 95.00 6 729,491.23 1.04
95.01 to 100.00 1 73,497.23 0.11
--- -------------- ------
Total 732 $69,985,218.56 100.00%
=== ============== =======
Cut-Off Date Coupon Rates - Group II
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans in Group II as of the Cut-Off Date were distributed as follows:
Range of Number of Initial Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
Up to 7.000% 4 $ 497,393.87 0.71%
7.001 to 8.000 57 8,490,213.99 12.13
8.001 to 9.000 131 15,195,370.29 21.71
9.001 to 10.000 202 19,584,643.77 27.98
10.001 to 11.000 174 14,274,830.97 20.40
11.001 to 12.000 117 9,315,594.70 13.31
12.001 to 13.000 33 1,986,573.79 2.84
13.001 to 14.000 8 396,348.19 0.57
14.001 to 15.000 5 144,512.86 0.21
15.001 to 16.000 1 99,736.13 0.14
--- -------------- ------
Total 732 $69,985,218.56 100.00%
=== ============== =======
S-30
<PAGE>
Cut-Off Date Loan Balances - Group II
The distribution of the outstanding principal amounts of the Initial
Home Equity Loans in Group II as of the Cut-Off Date was as follows:
Cut-Off Date Number of Initial Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
Up to $ 25,000.00 25 $ 519,117.59 0.74%
25,000.01 to 50,000.00 135 5,374,323.61 7.68
50,000.01 to 75,000.00 183 11,226,011.59 16.04
75,000.01 to 100,000.00 129 11,241,036.60 16.06
100,000.01 to 125,000.00 104 11,567,795.13 16.53
125,000.01 to 150,000.00 58 7,824,494.26 11.18
150,000.01 to 175,000.00 27 4,381,681.62 6.26
175,000.01 to 200,000.00 19 3,602,993.89 5.15
200,000.01 to 250,000.00 27 6,155,382.85 8.80
250,000.01 to 300,000.00 12 3,211,750.31 4.59
300,000.01 to 350,000.00 5 1,640,261.07 2.34
350,000.01 to 400,000.00 4 1,470,735.66 2.10
400,000.01 to 450,000.00 3 1,271,392.16 1.82
450,000.01 to 500,000.00 1 498,242.32 0.71
--- -------------- -------
Total 732 $69,985,218.56 100.00%
=== ============== =======
Types of Mortgaged Properties - Group II
The Properties securing the Initial Home Equity Loans in Group II as of
the Cut-Off Date were of the property types as follows:
Number of Initial Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
Single Family Detached 701 $67,500,918.29 96.45%
Two- to Four-Family 15 1,271,552.66 1.82
Condominium 11 864,782.93 1.24
Single Family Attached 2 157,848.99 0.23
Townhouse 2 137,639.67 0.20
Manufactured Housing 1 52,476.02 0.07
--- -------------- -------
Total 732 $69,985,218.56 100.00%
=== ============== =======
Distribution of Months Since Origination - Group II
The distribution of the number of months since the date of origination
of the Initial Home Equity Loans in Group II as of the Cut-Off Date was as
follows:
Number of Months Number of Initial Aggregate % of Aggregate
Since Origination Home Equity Loans Loan Balance Loan Balance
- ----------------- ----------------- ------------ ------------
0 to 1 10 $ 645,850.12 0.92%
2 to 12 669 64,910,834.88 92.75
13 to 24 49 4,085,497.44 5.84
25 or more 4 343,036.12 0.49
--- -------------- -------
Total 732 $69,985,218.56 100.00%
=== ============== =======
S-31
<PAGE>
Distribution of Remaining Term to Maturity - Group II
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans in Group II as of the Cut-Off Date was as follows:
Months Remaining Number of Initial Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
- ----------- ----------------- ------------ ------------
121 to 180 12 $ 698,883.48 1.00%
181 to 240 3 139,180.74 0.20
301 or more 717 69,147,154.34 98.80
--- -------------- ------
Total 732 $69,985,218.56 100.00%
=== ============== =======
Occupancy Status - Group II
The occupancy status of the Properties securing the Initial Home Equity Loans in
Group II as of the Cut-Off Date was as follows:
Number of Initial Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
Owner Occupied 693 $67,069,135.50 95.83%
Investor Owned 35 2,531,572.89 3.62
Vacation/Second Home 4 384,510.17 0.55
--- -------------- ------
Total 732 $69,985,218.56 100.00%
=== ============== =======
Distribution by Lien Position - Group II
The lien position of the Initial Home Equity Loans in Group II as of
the Cut-Off Date was as follows:
Number of Initial Aggregate % of Aggregate
Lien Position Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
First Lien 726 $69,694,656.64 99.58%
Second Lien 6 290,561.92 0.42
--- -------------- ------
Total 732 $69,985,218.56 100.00%
=== ============== =======
S-32
<PAGE>
Distribution of Maximum Coupon Rates -- Group II
The maximum Coupon Rates borne by the Notes relating to the Initial
Home Equity Loans in Group II as of the Cut-Off Date was as follows:
Range of Maximum Number of Initial Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
Up to 12.000% 4 $ 710,683.77 1.02%
12.001 to 13.000 3 310,433.48 0.44
13.001 to 14.000 47 7,324,249.69 10.47
14.001 to 15.000 101 12,581,898.54 17.98
15.001 to 16.000 185 18,235,907.46 26.06
16.001 to 17.000 172 14,550,641.28 20.79
17.001 to 18.000 151 11,722,036.52 16.75
18.001 to 19.000 39 2,885,544.60 4.12
19.001 to 20.000 13 800,677.04 1.14
20.001 to 21.000 7 362,885.03 0.52
21.001 or more 10 500,261.15 0.71
--- -------------- -------
Total 732 $69,985,218.56 100.00%
=== ============== =======
Distribution of Minimum Coupon Rates - Group II
The minimum Coupon Rates borne by the Notes relating to the Initial
Home Equity Loans in Group II as of the Cut-Off Date was as follows:
Range of Minimum Number of Initial Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
Up to 4.000% 1 $ 283,743.39 0.41%
4.001 to 5.000 1 231,827.13 0.33
5.001 to 6.000 1 283,091.71 0.40
6.001 to 7.000 4 381,122.02 0.54
7.001 to 8.000 61 8,838,379.27 12.63
8.001 to 9.000 131 15,240,799.77 21.78
9.001 to 10.000 206 19,689,025.51 28.13
10.001 to 11.000 167 13,639,546.34 19.49
11.001 to 12.000 115 8,874,206.35 12.68
12.001 to 13.000 33 2,007,323.09 2.87
13.001 to 14.000 7 371,641.12 0.53
14.001 to 15.000 5 144,512.86 0.21
--- -------------- -------
Total 732 $69,985,218.56 100.00%
=== ============== =======
S-33
<PAGE>
Distribution of Margins -- Group II
Six-Month LIBOR Loans. The margins borne by the Notes relating to the
Initial Six-Month LIBOR Loans in Group II as of the Cut-Off Date was as follows:
Number of Initial Aggregate % of Aggregate
Range of Margins Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
Up to 4.000% 5 $ 1,075,330.12 1.54%
4.001 to 5.000 38 3,699,620.38 5.29
5.001 to 6.000 109 11,198,669.39 16.00
6.001 to 7.000 115 10,155,197.15 14.51
7.001 to 8.000 84 6,287,631.48 8.98
8.001 to 9.000 34 1,833,828.49 2.62
9.001 or more 13 786,055.75 1.12
---- -------------- -----
Subtotal 398 $35,036,332.76 50.06%
=== ============== ======
CMT Loans. The margins borne by the Notes relating to the Initial CMT
Loans in Group II as of the Cut-Off Date was as follows:
Number of Initial Aggregate % of Aggregate
Range of Margins Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
Up to 4.000% 65 $ 7,368,105.40 10.53%
4.001 to 5.000 57 4,788,122.24 6.84
5.001 to 6.000 62 5,942,348.53 8.49
6.001 to 7.000 85 9,770,420.95 13.96
7.001 to 8.000 46 4,971,181.98 7.10
8.001 to 9.000 19 2,108,706.70 3.01
--- -------------- -------
Subtotal 334 $34,948,885.80 49.94%
=== ============== =======
Total 732 $69,985,218.56 100.00%
=== ============== =======
S-34
<PAGE>
Distribution of Next Coupon Rate Change -- Group II
Six-Month LIBOR Loans. The month of the next Coupon Rate change for
each of the Notes relating to the Initial Six- Month LIBOR Loans in Group II as
of the Cut-Off Date was as follows:
Month of Next Number of Initial Aggregate % of Aggregate
Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
- ------------------ ----------------- ------------ ------------
April 1997 10 $ 1,298,011.58 1.85%
May 1997 10 1,040,924.46 1.49
June 1997 55 5,271,309.52 7.53
July 1997 148 13,225,433.14 18.90
August 1997 115 8,451,092.31 12.08
September 1997 16 1,254,566.87 1.79
October 1997 2 109,184.88 0.16
December 1997 3 533,324.73 0.76
January 1998 1 60,397.55 0.09
February 1998 1 138,938.18 0.20
March 1998 1 71,208.39 0.10
April 1998 1 35,084.94 0.05
August 1998 2 290,157.15 0.41
September 1998 1 119,593.98 0.17
October 1998 1 116,728.40 0.17
November 1998 2 346,462.16 0.50
December 1998 16 1,485,399.41 2.12
January 1999 5 323,608.30 0.46
February 1999 7 581,815.10 0.83
September 1999 1 283,091.71 0.40
--- -------------- ------
Subtotal 398 $35,036,332.76 50.06%
=== ============== ======
CMT Loans. The month of the next Coupon Rate change for each of the
Notes relating to the Initial CMT Loans in Group II as of the Cut-Off Date was
as follows:
Month of Next Number of Initial Aggregate % of Aggregate
Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
- ------------------ ----------------- ------------ ------------
April 1997 11 $ 990,733.76 1.42%
May 1997 12 1,400,264.10 2.00
June 1997 24 2,468,344.95 3.53
July 1997 35 4,082,416.14 5.83
August 1997 48 6,081,359.22 8.69
September 1997 55 5,670,812.98 8.10
October 1997 18 1,463,975.05 2.09
November 1997 34 3,137,626.45 4.48
December 1997 21 2,096,633.69 3.00
January 1998 4 210,281.14 0.30
February 1998 6 738,538.25 1.06
March 1998 9 913,657.96 1.31
May 1998 2 227,145.14 0.32
September 1998 1 131,802.42 0.19
October 1998 2 161,237.80 0.23
November 1998 2 146,340.81 0.21
January 1999 4 530,082.29 0.76
February 1999 17 1,547,161.74 2.21
March 1999 16 1,376,816.39 1.97
April 1999 13 1,573,655.52 2.25
--- -------------- ------
Subtotal 334 $34,948,885.80 49.94%
=== ============== ======
Total 732 $69,985,218.56 100.00%
=== ============== =======
S-35
<PAGE>
Conveyance of Subsequent Home Equity Loans
The Pooling and Servicing Agreement permits the Trust to acquire an
aggregate cash amount of $147,650.27 ($132,868.83 and $14,781.44 of which shall
be allocated to Group I and Group II, respectively) in aggregate principal
balance of Subsequent Home Equity Loans. Accordingly, the statistical
characteristics of the Home Equity Loans will vary as any Subsequent Cut-Off
Date upon the acquisition of Subsequent Home Equity Loans, but the Seller does
not expect such variance to be material.
Interest Payments on the Home Equity Loans
All of the Home Equity Loans provide that interest is charged to the
obligor (the "Mortgagor") thereunder, and payments are due from such Mortgagors,
as of a scheduled day of each month which is fixed at the time of origination.
Scheduled monthly payments made by the Mortgagors on the Home Equity Loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will relate to the rate of payment
of principal of the Home Equity Loans in the related Home Equity Loan Group,
including, for this purpose, Prepayments, liquidations due to defaults,
casualties and condemnations, and repurchases of Home Equity Loans by the
Seller. A significant number of the Home Equity Loans may be prepaid by the
related Mortgagors, in whole or in part, at any time without payment of any
prepayment fee or penalty. The actual rate of principal prepayments on pools of
home equity loans is influenced by a variety of economic, tax, geographic,
demographic, social, legal and other factors and has fluctuated considerably in
recent years. In addition, the rate of principal prepayments may differ among
pools of home equity loans at any time because of specific factors relating to
the home equity loans in the particular pool, including, among other things, the
age of the home equity loans, the geographic locations of the properties
securing the loans and the extent of the mortgagors' equity in such properties,
and changes in the mortgagors' housing needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home equity loans with fixed rates (such as the Home Equity Loans in
Group I) is affected by prevailing market rates for home equity loans of a
comparable term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to refinance their
home equity loans. Depending on prevailing market rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments.
As is the case with conventional fixed rate home equity loans,
adjustable rate home equity loans may also be subject to a greater rate of
principal prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall significantly, adjustable-rate home equity loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed-rate home equity loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable-rate home equity loan to "lock in" a lower fixed interest rate. In
addition, the fact that a number of the Six-Month LIBOR Loans and the CMT Loans
do not adjust for substantial periods of time may affect the prepayment
experience on such loans. However, no assurance can be given as to the level of
prepayments that the Home Equity Loans will experience.
In addition to the foregoing factors affecting the weighted average
life of the Class A Certificates, the overcollateralization provisions of the
Trust result in a limited acceleration of each Class of the Class A Certificates
relative to the amortization of the Home Equity Loans in the related Group in
early months of the transaction. The accelerated amortization is achieved by the
application of certain excess interest to the payment of the applicable Class A
Certificate Principal Balance. This acceleration feature creates
overcollateralization which results from the excess of the aggregate Loan
Balance of the Home Equity Loans over the aggregate Class A Certificate
Principal Balance. Once the required level of overcollateralization is reached,
the acceleration feature will cease, unless necessary to maintain the required
level of overcollateralization.
S-36
<PAGE>
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 $132,868.83 with respect to Group I or $14,781.44 with respect to Group II,
the Owners of the related Class or Classes of Class A Certificates then entitled
to receive payments of principal will receive a partial prepayment on the
Payment Date in April 1997 in an amount equal to the related 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 or before the Payment
Date in April 1997.
Prepayment and Yield Scenarios for Class A Certificates
As indicated above, if purchased at other than par (disregarding, for
purposes of this discussion, the effects on an investor's yield resulting from
the timing of the settlement date and those considerations discussed below under
"Payment Lag Feature of Fixed Rate Certificates"), the yield to maturity on a
Class of Class A Certificates will be affected by the rate of the payment of
principal of the related Home Equity Loans. If the actual rate of payments on
the related Home Equity Loans is slower than the rate anticipated by an investor
who purchases a Class of Class A Certificates at a discount, the actual yield to
such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the related Home Equity Loans is faster than the rate
anticipated by an investor who purchases a Class of Class A Certificates at a
premium, the actual yield to such investor will be lower than such investor's
anticipated yield.
The Final Scheduled Payment Date for each Class of Class A Certificates
is as set forth in the "Summary of Terms" hereof. These dates are dates on which
the "Initial Certificate Principal Balance" set forth in the "Summary of Terms"
hereof for the related Class of Class A Certificates as of the Closing Date less
all amounts previously distributed to the Owners (other than the Certificate
Insurer) on account of principal (such amount as to any Class of Class A
Certificates and as of any time, the related "Class A Certificate Principal
Balance" and as to the Class A Certificates collectively, the "Certificate
Principal Balance" or the "Class A Certificate Principal Balance") would be
reduced to zero, assuming that no Prepayments are received on the Home Equity
Loans, that scheduled monthly payments of principal and interest on the Home
Equity Loans are timely received and that Net Monthly Excess Cashflow will be
used to make accelerated payments of principal (i.e., Subordination Increase
Amounts) to the Owners of the related Class A Certificates. The Final Scheduled
Payment Date for the Class A-7 Certificates is the month following the
Remittance Period in which the Loan Balances of all Home Equity Loans in Group I
have been reduced to zero assuming that the Home Equity Loans in such Group pay
in accordance with their terms. The Final Scheduled Payment Date for the Class
A-8 Certificates is the month following the Remittance Period in which the Loan
Balances of all Home Equity Loans in Group II have been reduced to zero assuming
that the Home Equity Loans in such Group pay in accordance with their terms. The
weighted average lives of the Class A 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
Class A 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 (or the Certificate Insurer) 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.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
related Class A Certificates will be influenced by the rate at which principal
of the Home Equity Loans in the related Home Equity Loan Group is paid, which
may be in the form of scheduled amortization or prepayments (for this purpose,
the term "prepayment" includes Prepayments and liquidations due to default).
Prepayments on home equity loans are commonly measured relative to a prepayment
standard or model.
The model used in this Prospectus Supplement is the prepayment
assumption (the "Prepayment Assumption") which represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of home equity loans for the life of such home equity loans. With respect
to the Fixed Rate Certificates, 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 Group I 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. With respect to the Class A-8 Certificates, a 100% Prepayment
Assumption assumes a CPR of 25% per annum of the then
S-37
<PAGE>
outstanding principal balance of the Home Equity Loans in Group II. 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 Class A Certificates to predict
the amount or the timing of receipt of prepayments on the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Class A Certificates set forth in the tables. In addition,
since the actual Home Equity Loans in the Trust have characteristics which
differ from those assumed in preparing the tables set forth below, the
distributions of principal on the Class A Certificates may be made earlier or
later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans 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 below, (ii) the Closing Date for the Certificates
occurs on March 20, 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 April 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 Premium Amount and the Trustee Fee, (v) the Home Equity Loans'
prepayment rates are a multiple of the applicable Prepayment Assumption, (vi)
prepayments include 30 day's interest thereon, (vii) no optional termination or
mandatory termination is exercised, (viii) the "Specified Subordinated Amount"
(as defined under "Credit Enhancement -- Overcollateralization Provisions") for
each Group 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 Coupon Rate for the Home Equity Loans in Group II
is adjusted on its next rate adjustment date (and on subsequent rate adjustment
dates, if necessary) to equal the sum of (a) an assumed level of the applicable
index of 5.7343% for the Six-Month LIBOR Loans and 5.7050% for the CMT Loans and
(b) the respective gross margin (such sum being subject to the applicable
periodic adjustment cap and maximum and minimum interest rate), (xi) the Class
A-8 Pass- Through Rate is initially 5.6575%; and (xii) the scheduled monthly
payments of principal and interest on the Home Equity Loans will be timely
delivered on the first day of the Remittance Period (with no defaults).
S-38
<PAGE>
<TABLE>
<CAPTION>
GROUP I
Original Remaining Remaining
Term of Term of Term to
Pool Loan Gross Coupon Net 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 $ 286,676.35 12.418% 11.918% 60 58 58 Level Pay
2 5,371,347.21 11.931 11.431 118 115 115 Level Pay
3 39,818,814.52 11.962 11.462 180 177 177 Level Pay
4 38,359,018.12 11.462 10.962 241 238 238 Level Pay
5 48,697,138.54 11.422 10.922 360 356 356 Level Pay
6 197,467,005.26 11.914 11.414 359 355 176 Balloon
</TABLE>
<TABLE>
<CAPTION>
GROUP II
Six-Month LIBOR Loans
Initial Original Remaining
Gross Net Months Periodic Maximum Minimum Term of Term to
Pool Loan Coupon Coupon to Rate Rate Coupon Coupon Amortization Maturity Amortization
Number Balance Rate Rate Change Margin Cap Rate Rate (in months) (in months) Method
- ------ ------- ---- ---- ------ ------ --- ---- ---- ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $29,292,956.61 9.777% 9.277% 4 6.275% 1.059% 16.259% 9.615% 358 354 Level Pay
2 2,096,854.99 10.006 9.506 7 6.002 1.469 17.426 9.940 354 350 Level Pay
3 3,653,921.11 11.068 10.568 21 6.633 1.231 17.466 10.671 359 355 Level Pay
CMT Loans
Initial Original Remaining
Gross Net Months Periodic Maximum Minimum Term of Term to
Pool Loan Coupon Coupon to Rate Rate Coupon Coupon Amortization Maturity Amortization
Number Balance Rate Rate Change Margin Cap Rate Rate (in months) (in months) Method
- ------ ------- ---- ---- ------ ------ --- ---- ---- ----------- ----------- ------
4 $15,026,291.17 9.029% 8.529% 4 6.026% 2.070% 15.265% 9.001% 359 350 Level Pay
5 13,320,680.40 10.099 9.599 7 5.312 1.998 16.146 10.100 360 354 Level Pay
6 6,609,295.72 9.628 9.128 22 6.168 1.990 15.583 9.628 360 347 Level Pay
</TABLE>
S-39
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Class A Certificates that would be outstanding after each of the
dates shown, based on a rate equal to 0%, 50%, 75%, 100%, 125% and 150% of the
Prepayment Assumption (as defined above).
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
Class A-1
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
Initial 0 100 100 100 100 100
3/20/1998 1 65 53 40 27 14
3/20/1999 8 35 11 0 0 0
3/20/2000 5 9 0 0 0 0
3/20/2001 2 0 0 0 0 0
3/20/2002 8 0 0 0 0 0
3/20/2003 4 0 0 0 0 0
3/20/2004 0 0 0 0 0 0
3/20/2005 6 0 0 0 0 0
3/20/2006 1 0 0 0 0 0
3/20/2007 5 0 0 0 0 0
3/20/2008 9 0 0 0 0 0
3/20/2009 3 0 0 0 0 0
3/20/2010 5 0 0 0 0 0
3/20/2011 7 0 0 0 0 0
3/20/2012 0 0 0 0 0 0
3/20/2013 0 0 0 0 0 0
3/20/2014 0 0 0 0 0 0
3/20/2015 0 0 0 0 0 0
3/20/2016 0 0 0 0 0 0
3/20/2017 0 0 0 0 0 0
3/20/2018 0 0 0 0 0 0
3/20/2019 0 0 0 0 0 0
3/20/2020 0 0 0 0 0 0
3/20/2021 0 0 0 0 0 0
3/20/2022 0 0 0 0 0 0
3/20/2023 0 0 0 0 0 0
3/25/2024 0 0 0 0 0 0
3/20/2025 0 0 0 0 0 0
3/20/2026 0 0 0 0 0 0
3/20/2027 0 0 0 0 0 0
Weighted Average 9.6 1.6 1.1 0.9 0.8 0.7
Life (Years)(2)
<PAGE>
Class A-2
0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
100 100 100 100 100 100
100 100 100 100 100 100
100 100 100 58 0 0
100 100 18 0 0 0
100 53 0 0 0 0
100 0 0 0 0 0
100 0 0 0 0 0
100 0 0 0 0 0
100 0 0 0 0 0
100 0 0 0 0 0
100 0 0 0 0 0
100 0 0 0 0 0
100 0 0 0 0 0
100 0 0 0 0 0
100 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
14.7 4.1 2.8 2.1 1.7 1.4
<PAGE>
Class A-3
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- --- --- ---
Initial 100 100 100 100 100 100
3/20/1998 100 100 100 100 100 100
3/20/1999 100 100 100 100 90 50
3/20/2000 100 100 100 56 11 0
3/20/2001 100 100 60 6 0 0
3/20/2002 100 91 21 0 0 0
3/20/2003 100 61 0 0 0 0
3/20/2004 100 36 0 0 0 0
3/20/2005 100 15 0 0 0 0
3/20/2006 100 0 0 0 0 0
3/20/2007 100 0 0 0 0 0
3/20/2008 100 0 0 0 0 0
3/20/2009 100 0 0 0 0 0
3/20/2010 100 0 0 0 0 0
3/20/2011 100 0 0 0 0 0
3/20/2012 0 0 0 0 0 0
3/20/2013 0 0 0 0 0 0
3/20/2014 0 0 0 0 0 0
3/20/2015 0 0 0 0 0 0
3/20/2016 0 0 0 0 0 0
3/20/2017 0 0 0 0 0 0
3/20/2018 0 0 0 0 0 0
3/20/2019 0 0 0 0 0 0
3/20/2020 0 0 0 0 0 0
3/20/2021 0 0 0 0 0 0
3/20/2022 0 0 0 0 0 0
3/20/2023 0 0 0 0 0 0
3/20/2024 0 0 0 0 0 0
3/20/2025 0 0 0 0 0 0
3/20/2026 0 0 0 0 0 0
3/20/2027 0 0 0 0 0 0
Weighted Average 14.7 6.6 4.3 3.2 2.5 2.1
Life (Years)(2)
<PAGE>
Class A-4
0% 50% 75% 100% 125% 150%
-- --- --- --- --- ---
100 100 100 100 100 100
100 100 100 100 100 100
100 100 100 100 100 100
100 100 100 100 100 58
100 100 100 100 44 0
100 100 100 53 0 0
100 100 88 15 0 0
100 100 54 0 0 0
100 100 29 0 0 0
100 95 7 0 0 0
100 70 0 0 0 0
100 49 0 0 0 0
100 30 0 0 0 0
100 12 0 0 0 0
100 0 0 0 0 0
47 0 0 0 0 0
38 0 0 0 0 0
28 0 0 0 0 0
16 0 0 0 0 0
3 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
0 0 0 0 0 0
15.9 11.1 7.3 5.2 4.0 3.2
- -----------------------------
(1) The percentages in the following tables have been rounded to the
nearest whole number.
(2) The weighted average life of the Class A 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 Class A
Certificate.
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<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
Class A-5
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- --- --- ---
Initial 100 100 100 100 100 100
3/20/1998 100 100 100 100 100 100
3/20/1999 100 100 100 100 100 100
3/20/2000 100 100 100 100 100 100
3/20/2001 100 100 100 100 100 79
3/20/2002 100 100 100 100 85 0
3/20/2003 100 100 100 100 0 0
3/20/2004 100 100 100 68 0 0
3/20/2005 100 100 100 15 0 0
3/20/2006 100 100 100 0 0 0
3/20/2007 100 100 69 0 0 0
3/20/2008 100 100 23 0 0 0
3/20/2009 100 100 0 0 0 0
3/20/2010 100 100 0 0 0 0
3/20/2011 100 92 0 0 0 0
3/20/2012 100 0 0 0 0 0
3/20/2013 100 0 0 0 0 0
3/20/2014 100 0 0 0 0 0
3/20/2015 100 0 0 0 0 0
3/20/2016 100 0 0 0 0 0
3/20/2017 69 0 0 0 0 0
3/20/2018 55 0 0 0 0 0
3/20/2019 39 0 0 0 0 0
3/20/2020 20 0 0 0 0 0
3/20/2021 0 0 0 0 0 0
3/20/2022 0 0 0 0 0 0
3/20/2023 0 0 0 0 0 0
3/20/2024 0 0 0 0 0 0
3/20/2025 0 0 0 0 0 0
3/20/2026 0 0 0 0 0 0
3/20/2027 0 0 0 0 0 0
Weighted Average 21.4 14.5 10.5 7.4 5.4 4.2
Life (Years)(2)
<PAGE>
Class A-6
0% 50% 75% 100% 125% 150%
-- -- -- --- --- ---
100 100 100 100 100 100
100 100 100 100 100 100
100 100 100 100 100 100
100 100 100 100 100 100
100 100 100 100 100 100
100 100 100 100 100 75
100 100 100 100 99 41
100 100 100 100 67 25
100 100 100 100 49 18
100 100 100 83 35 12
100 100 100 62 23 6
100 100 100 46 15 2
100 100 91 33 8 0
100 100 71 23 4 0
100 100 55 15 0 0
100 32 7 0 0 0
100 25 3 0 0 0
100 19 1 0 0 0
100 13 0 0 0 0
100 8 0 0 0 0
100 5 0 0 0 0
100 2 0 0 0 0
100 1 0 0 0 0
100 0 0 0 0 0
99 0 0 0 0 0
85 0 0 0 0 0
69 0 0 0 0 0
51 0 0 0 0 0
31 0 0 0 0 0
9 0 0 0 0 0
0 0 0 0 0 0
27.0 15.7 13.9 11.2 8.5 6.4
<PAGE>
Class A-7
Payment Date 0% 50% 75% 100% 125% 150%
-- -- --- --- --- ---
Initial 100 100 100 100 100 100
3/20/1998 100 100 100 100 100 100
3/20/1999 100 100 100 100 100 100
3/20/2000 100 100 100 100 100 100
3/20/2001 99 94 91 88 85 81
3/20/2002 99 87 82 77 72 66
3/20/2003 97 78 69 61 53 45
3/20/2004 95 67 56 46 36 27
3/20/2005 92 54 41 30 20 12
3/20/2006 89 44 30 19 11 5
3/20/2007 86 35 22 12 6 2
3/20/2008 82 28 16 8 3 0
3/20/2009 78 22 11 5 1 0
3/20/2010 73 18 8 3 0 0
3/20/2011 68 14 5 1 0 0
3/20/2012 0 0 0 0 0 0
3/20/2013 0 0 0 0 0 0
3/20/2014 0 0 0 0 0 0
3/20/2015 0 0 0 0 0 0
3/20/2016 0 0 0 0 0 0
3/20/2017 0 0 0 0 0 0
3/20/2018 0 0 0 0 0 0
3/20/2019 0 0 0 0 0 0
3/20/2020 0 0 0 0 0 0
3/20/2021 0 0 0 0 0 0
3/20/2022 0 0 0 0 0 0
3/20/2023 0 0 0 0 0 0
3/20/2024 0 0 0 0 0 0
3/20/2025 0 0 0 0 0 0
3/20/2026 0 0 0 0 0 0
3/20/2027 0 0 0 0 0 0
Weighted Average 13.2 9.0 7.8 7.0 6.4 5.9
Life (Years)(2)
<PAGE>
CLASS A-8
0% 50% 75% 100% 125% 150%
-- --- --- --- --- ---
100 100 100 100 100 100
97 84 78 72 66 60
96 73 63 53 44 36
96 63 50 39 30 23
95 55 40 29 21 14
95 47 33 22 14 9
94 41 26 16 10 5
93 36 21 12 6 3
92 31 17 9 4 2
91 27 14 7 3 1
90 23 11 5 2 0
89 20 9 3 1 0
87 17 7 2 0 0
85 15 5 2 0 0
83 13 4 1 0 0
81 11 3 1 0 0
79 9 2 0 0 0
76 8 2 0 0 0
73 6 1 0 0 0
70 5 1 0 0 0
66 4 1 0 0 0
62 3 0 0 0 0
57 3 0 0 0 0
52 2 0 0 0 0
46 1 0 0 0 0
39 1 0 0 0 0
32 1 0 0 0 0
24 0 0 0 0 0
14 0 0 0 0 0
4 0 0 0 0 0
0 0 0 0 0 0
21.1 6.5 4.4 3.2 2.5 2.0
- -----------------------------
(1) The percentages in the following tables have been rounded to the
nearest whole number.
(2) The weighted average life of the Class A 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 Class A
Certificate.
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<PAGE>
Payment Lag Feature of Fixed Rate Certificates
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Home Equity Loan (net of the Servicing
Fee) received by the Servicer during each Remittance Period is to be remitted to
the Trustee on or prior to the related Monthly Remittance Date; the Trustee will
not be required to distribute any such amounts to the Owners of the Class A
Certificates until the next succeeding Payment Date. As a result, the monthly
distributions to the Owners of the Class A Certificates generally reflect
Mortgagor payments during the prior Remittance Period, and the first Payment
Date will not occur until April 21, 1997. Although the Accrual Period for the
Fixed Rate Certificates is the month preceding the month of the applicable
Payment Date, accrued interest will not be distributed until at least the 20th
day of the month after the month of accrual without any additional payment in
respect of such delay. Thus, the effective yield to the Owners of the Fixed Rate
Certificates will be below that otherwise produced by the related Pass-Through
Rate because the distribution of the Class A Distribution Amount in respect of
any given month will not be made until on or about the 20th day of the following
month.
FORMATION OF THE TRUST AND TRUST PROPERTY
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement. The Seller will convey without recourse the Home Equity
Loans to the Depositor, the Depositor will convey without recourse the Home
Equity Loans to the Trust and the Trust will issue the Class A Certificates and
the Class R Certificates to the Owners thereof.
The property of the Trust shall include all (a) the Home Equity Loans
together with the related Home Equity Loan documents and the Seller's interest
in any Property which secures a Home Equity Loan and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing, (b) such
amounts as may be held by the Trustee in the Certificate Account, the
Pre-Funding Account, the Capitalized Interest Account and any other accounts
held by the Trustee for the Trust together with investment earnings on such
amounts and such amounts may be held by the Servicer in the Principal and
Interest Account, if any, exclusive of investment earnings thereon (except as
otherwise provided) whether in the form of cash, instruments, securities or
other properties and (c) proceeds of all the foregoing (including, but not by
way of limitation, all proceeds of any mortgage insurance, hazard insurance and
title insurance policy relating to the Home Equity Loans, cash proceeds,
accounts, accounts receivable, notes, drafts, acceptances, chattel paper,
checks, deposit accounts, rights to payment of any and every kind, and other
forms of obligations and receivables which at any time constitute all or part of
or are included in the proceeds of any of the foregoing) to pay the Certificates
as specified in the Pooling and Servicing Agreement (collectively, the "Trust
Estate"). In addition to the foregoing, the Seller shall cause the Certificate
Insurer to deliver the Insurance Policies to the Trustee for the benefit of the
Owners of the Class A Certificates.
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Seller, the Servicer or any of their affiliates; however, certain
distributions due to the Owners of the Class A Certificates are insured by the
Certificate Insurer.
In addition to the Class A Certificates, the Trust will also issue the
Class R Certificates which will be designated as the "residual interest" in the
REMIC for purposes of the Code. The Class R Certificates are not being offered
hereby.
Prior to its formation the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business activity
other than acquiring, holding and collecting payments on the Home Equity Loans,
issuing the Certificates and distributing payments thereon. The Trust will not
acquire any receivables or assets other than the Home Equity Loans and the
rights appurtenant thereto, and will not have any need for additional capital
resources. To the extent that borrowers make scheduled payments under the Home
Equity Loans, the Trust will have sufficient liquidity to make distributions on
the Certificates. As the Trust does not have any operating history and will not
engage in any business activity other than issuing the Certificates and making
distributions thereon, there has not been included any historical or pro forma
ratio of earnings to fixed charges with respect to the Trust.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Home
Equity Loans and the Properties is based upon each Home Equity Loan Group as
constituted at the close of business on the Cut-Off Date. Prior to the
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<PAGE>
issuance of the Class A Certificates, Initial Home Equity Loans may be removed
from either Home Equity Loan Group as a result of incomplete documentation or
non-compliance with representations and warranties set forth in the Pooling and
Servicing Agreement, if the Seller deems such removal necessary or appropriate.
A limited number of other Initial Home Equity Loans may be included in the pool
prior to the issuance of the Certificates and the Subsequent Home Equity Loans
will be added to the pool after the issuance of the Certificates.
A current report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed, and incorporated by reference to the
Registration Statement together with the Pooling and Servicing Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Class A Certificates and within 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 CLASS A CERTIFICATES
General
Each Class A Certificate will represent certain undivided, fractional
ownership interests in the Trust Estate created and held pursuant to the Pooling
and Servicing Agreement, subject to the limits and the priority of distribution
described therein.
The Home Equity Loan Pool is divided into two Groups, Group I, which
contains fixed rate Home Equity Loans, and Group II, which contains adjustable
rate Home Equity Loans. For each Home Equity Loan Group, the related Class of
Class A Certificates will evidence the right to receive on each Payment Date the
Class A Distribution Amount for such Class of Class A Certificates, in each case
until the related Class A Certificate Principal Balance has been reduced to
zero.
Payment Dates
On each Payment Date, the Owners of each Class of Class A Certificates
will be entitled to receive, from amounts then on deposit in the certificate
account established and maintained by the Trustee in accordance with the Pooling
and Servicing Agreement (the "Certificate Account") and until the related Class
A Certificate Principal Balance of such Class of Class A Certificates is reduced
to zero, the aggregate Class A Distribution Amount as of such Payment Date
allocated among each Class of Class A Certificates as described below.
Distributions will be made in immediately available funds to Owners of Class A
Certificates by wire transfer or otherwise, to the account of such Owner at a
domestic bank or other entity having appropriate facilities therefor, if such
Owner has so notified the Trustee at least five Business Days prior to the
Record Date, or by check mailed to the address of the person entitled thereto as
it appears on the register (the "Register") maintained by the Trustee as
registrar (the "Registrar").
Beneficial Owners may experience some delay in the receipt of their payments due
to the operations of DTC. See "Risk Factors--Book Entry Registration" in the
Prospectus and "Description of the Class A Certificates--Book Entry Registration
of the Class A Certificates" herein and "Description of the Certificates--Book
Entry Registration" in the Prospectus.
The Pooling and Servicing Agreement will provide that an Owner, upon
receiving the final distribution on such Owner's Certificate, will be required
to send such Certificate to the Trustee. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed canceled for all
purposes of the Pooling and Servicing Agreement and the Insurance Policies.
Each Owner of record of the related Class of Class A Certificates will
be entitled to receive such Owner's Percentage Interest in the amounts due such
Class on such Payment Date. The "Percentage Interest" of a Class A Certificate
as of any date of determination will be equal to the percentage obtained by
dividing the principal balance of such Class A Certificate as of the Cut-Off
Date by the Class A Certificate Principal Balance for the related Class of the
Class A Certificates as of the Cut-Off Date.
Distributions
Upon receipt, the Trustee will be required to deposit into the
Certificate Account, (i) any Insured Payments, (ii) the proceeds of any
liquidation of the assets of the Trust, (iii) all remittances made to the
Trustee by the Servicer
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<PAGE>
and (iv) 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 Class A Certificates (each, a "Pass-Through Rate") as set forth in
the Summary herein under "Certificates Offered." The "Expense Fee Rate" will
equal the sum of the per annum rates at which the Servicing Fee, the Trustee
Fee, any Trustee Reimbursable Expenses (as defined in the Pooling and Servicing
Agreement) and the Premium Amount 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:
(i) first, on each Payment Date from amounts then on deposit in
the Certificate Account, (A) to the Trustee, the Trustee Fee
and the Trustee Reimbursable Expenses and (B) provided that no
Certificate Insurer Default has occurred and is continuing,
the Premium Amount for such Payment Date to the Certificate
Insurer;
(ii) second, on each Payment Date, the Trustee shall allocate an
amount equal to the sum of (x) the Total Monthly Excess Spread
with respect to the related Home Equity Loan Group with
respect to such Payment Date plus (y) any Subordination
Reduction Amount with respect to such Home Equity Loan Group
and Payment Date (such sum being the "Total Monthly Excess
Cashflow" with respect to such Home Equity Loan Group and
Payment Date) in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be
allocated to the payment of the related Class A
Principal Distribution Amount (excluding any
Subordination Increase Amount) pursuant to clause
(iv)(C) below in an amount equal to the amount, if
any, by which (x) such Class A Principal Distribution
Amount (excluding any Subordination Increase Amount)
exceeds (y) the Available Funds with respect to such
Home Equity Loan Group for such Payment Date (net of
the related Current Interest, Trustee Fee, Trustee
Reimbursable Expenses and Premium Amount) (the amount
of such difference with respect to a Home Equity Loan
Group being an "Available Funds Shortfall" for such
Home Equity Loan Group);
(B) second, any portion of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group
remaining after the application described in clause
(A) above shall be allocated pursuant to clause
(iv)(D) below against any Available Funds Shortfall
with respect to the other Home Equity Loan Group;
(C) third, any portion of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group
remaining after the allocations described in clauses
(A) and (B) above shall be paid to the Certificate
Insurer in respect of amounts owed on account of any
Reimbursement Amount (as defined in the Pooling and
Servicing Agreement) owed to the Certificate Insurer
with respect to the related Home Equity Loan Group;
and
(D) fourth, any portion of the Total Monthly Excess
Cashflow remaining after the allocation described in
clauses (A), (B) and (C) above shall be paid to the
Certificate Insurer in respect of amounts owed on
account of any Reimbursement Amount (as defined in
the Pooling and Servicing Agreement) owed to the
Certificate Insurer with respect to the other Home
Equity Loan Group;
(iii) third, the amount, if any, of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group on a
Payment Date remaining after the allocations and payments
described in clause (ii) above is the "Net Monthly Excess
Cashflow" with respect to such Home Equity Loan Group and
Payment Date and is required to be applied in the following
order or priority:
(A) first, such Net Monthly Excess Cashflow shall be used
to reduce to zero, through the payment of a
Subordination Increase Amount to the Owners of the
related Class or
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<PAGE>
Classes of the Class A Certificates pursuant to
clause (iv)(C) below, any Subordination Deficiency
Amount (as defined in the Pooling and Servicing
Agreement) with respect to the related Home Equity
Loan Group as of such Payment Date;
(B) second, any Net Monthly Excess Cashflow remaining
after the application described in clause (A) above
shall be used to reduce to zero, through the payment
of a Subordination Increase Amount to the Owners of
the Class A Certificates related to the other Home
Equity Loan Group pursuant to clause (iv)(D) below,
the Subordination Deficiency Amount, if any, with
respect to the other Home Equity Loan Group; and
(C) third, any Net Monthly Excess Cashflow remaining
after the applications and payments described in
clauses (A) and (B) above shall be paid to the
Servicer to the extent of any unreimbursed
Delinquency Advances and unreimbursed Servicing
Advances;
(iv) fourth, following the making by the Trustee of all
allocations, transfers and disbursements described above from
amounts (including any related Insured Payment ) then on
deposit in the Certificate Account with respect to the related
Home Equity Loan Group, the Trustee shall distribute:
(A) (I) to the Certificate Insurer, the amounts described
in clauses (ii)(C) and (D) above and (II) to the
Servicer the amounts described in clause (iii)(C)
above;
(B) to the Owners of the Class A Certificates of the
related Group, the Current Interest for each Class
(including the proceeds of any Insured Payments made
by the Certificate Insurer) on a pro rata basis based
on each such Class A Certificate's Current Interest
without any priority among the Class A Certificates;
(C) to the Owners of related Classes of Class A
Certificates, the Class A Principal Distribution
Amount applicable to Group I shall be distributed as
follows: (i) to the Owners of the Class A-7
Certificates an amount equal to the Class A-7 Lockout
Distribution Amount and (ii) the remainder as
follows: first, to the Owners of the Class A-1
Certificates until the Class A-1 Certificate
Principal Balance is reduced to zero; second, to the
Owners of the Class A-2 Certificates until the Class
A-2 Certificate Principal Balance is reduced to zero;
third, to the Owners of the Class A-3 Certificates
until the Class A-3 Certificate Principal Balance is
reduced to zero; fourth, to the Owners of the Class
A-4 Certificates until the Class A-4 Certificate
Principal Balance is reduced to zero; fifth, to the
Owners of the Class A-5 Certificates until the Class
A-5 Certificate Principal Balance is reduced to zero;
sixth, to the Owners of the Class A-6 Certificates
until the Class A-6 Certificate Principal Balance is
reduced to zero; and, seventh, to the Owners of the
Class A-7 Certificates until the Class A-7
Certificate Principal Balance is reduced to zero. The
Class A Principal Distribution Amount applicable to
Group II shall be distributed to the Owners of the
Class A-8 Certificates until the Class A-8
Certificate Principal Balance is reduced to zero;
(D) to the Owners of the Class or Classes of Class A
Certificates related to the other Home Equity Loan
Group any amounts specified in clauses (ii)(B) or
(iii)(B) above (such amounts with respect to the
Owners of the Fixed Rate Certificates shall be
distributed sequentially); and
(E) to the Trustee, as reimbursement for all
unreimbursable expenses incurred in connection with
duties and obligations under the Pooling and
Servicing Agreement; and
(v) fifth, following the making by the Trustee of all allocations,
transfers and disbursements described above, from amounts then
on deposit in the Certificate Account, the Trustee shall
distribute to the Owners of the Class R Certificates, the
remaining distributable amounts as specified in the Pooling
and Servicing Agreement, for such Payment Date.
The "Carry-Forward Amount" with respect to any Class of Class A
Certificates is the amount as of any Payment Date, equal to the sum of (i) the
amount, if any, by which (x) the Current Interest for such Class exceeded
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<PAGE>
(y) the amount of the actual distribution in respect of interest on such Class
of Class A Certificates, made to the Owners of such Class of Class A
Certificates on such immediately preceding Payment Date and (ii) 30 days
interest on such excess at the related Pass-Through Rate for such Class of Class
A Certificates.
"Available Funds" as to each Home Equity Loan Group and Payment Date is
the amount on deposit in the Certificate Account with respect to the related
Home Equity Loan Group on such Payment Date (net of Total Monthly Excess
Cashflow and disregarding the amounts of any Insured Payments to be made on such
Payment Date and inclusive of any investment earnings on eligible investments
therein).
"Total Available Funds" as to each Home Equity Loan Group and Payment
Date is the sum of (x) the amount on deposit in the Certificate Account with
respect to such Home Equity Loan Group (net of Total Monthly Excess Cashflow
with respect to the related Home Equity Loan Group) on such Payment Date, (y)
any amounts of Total Monthly Excess Cashflow with respect to such Home Equity
Loan Group to be applied on such Payment Date and (z) any deposit to the
Certificate Account from the Pre-Funding Account or Capitalized Interest Account
expected to be made in accordance with the Pooling and Servicing Agreement
(disregarding the amount of any Insured Payment to be made on such Payment
Date).
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of
each Owner of Class A Certificates any Insured Payment from the Certificate
Insurer and deposit such amounts into the Certificate Account and (ii) disburse
the same to each Owner of Class A Certificates. The Pooling and Servicing
Agreement will provide that to the extent the Certificate Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Trustee or
Paying Agent), to the Owners of such Class A Certificates the Certificate
Insurer will be subrogated to the rights of such Owners of Class A Certificates
with respect to such Insured Payments, and shall receive reimbursement for such
Insured Payment as provided in the Pooling and Servicing Agreement, but only
from the sources and in the manner provided in the Pooling and Servicing
Agreement; such subrogation and reimbursement to have no effect on the
Certificate Insurer's obligations under the Insurance Policies.
The Pooling and Servicing Agreement provides that the term "Available
Funds" does not include Insured Payments and does not include any amounts that
cannot be distributed to the Owners of Class A Certificates, if any, by the
Trustee as a result of proceedings under the United States Bankruptcy Code.
Each Owner of a Class A Certificate will be required promptly to notify
the Trustee in writing upon the receipt of a court order relating to a
Preference Amount and will be required to enclose a copy of such order with such
notice to the Trustee.
Pre-Funding Account
On the Closing Date, the Pre-Funded Amount will be deposited in the
Pre-Funding Account, which account shall be in the name of and maintained by the
Trustee and shall be part of the Trust. During the Funding Period, the
Pre-Funded Amount will be maintained in the Pre-Funding Account. The Pre-Funded
Amount allocated to a Home Equity Loan Group will be reduced during the Funding
Period by the amount thereof used to purchase Subsequent Home Equity Loans for
such Home Equity Loan Group in accordance with the Pooling and Servicing
Agreement. Any Pre-Funded Amount allocated to a Home Equity Loan Group and
remaining at the end of the Funding Period will be distributed to the Owners of
the related Class A Certificates then entitled to receive principal payments on
the Payment Date in April 1997 in reduction of the Certificate Principal Balance
of such Owner's Certificates, thus resulting in a partial principal prepayment
of the related Class of Class A 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 the REMIC.
Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust. The amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon, will be used by the Trustee to
fund the excess, if any, of (i) the sum of (a) the amount of interest accruing
at the weighted average of the Pass-Through Rates of the Fixed Rate Certificates
(in the case of Group I) or the Class A-8 Pass-Through Rate (in the case of
Group II) on the
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<PAGE>
amount by which the aggregate related Class A Certificate Principal Balance
exceeds the aggregate Loan Balance of the Home Equity Loans in the related Home
Equity Loan Group plus (b) the Premium Amount accruing during the related
Accrual Period on such excess balance over (ii) the amount of any reinvestment
income on monies allocated to such Home Equity Loan Group and 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 REMIC.
Calculation of One-Month LIBOR
On each LIBOR Determination Date (as defined below), the Trustee will
determine LIBOR for the next Accrual Period for the Class A-8 Certificates.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
in the Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such
rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in United States dollars
are offered by the Reference Banks at approximately 11:00 a.m., London time, on
that day to prime banks in the London interbank market for a period equal one
month. The Trustee will request the principal London office of each of the
Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations (rounded upwards if necessary to the nearest whole multiple of
1/16%). If fewer than two quotations are provided as requested, the rate for
that day will be the arithmetic mean of the rates quoted by major banks in New
York City, selected by the Servicer, at approximately 11:00 a.m., New York City
time, on that day for loans in United States dollars to leading European banks
for a period equal one month.
"LIBOR Determination Date" means, with respect to any Accrual Period,
the second London business day preceding the commencement of such Accrual
Period. For purposes of determining One-Month LIBOR, a "London business day" is
any day on which dealings in deposits of United States dollars are transacted in
the London interbank market.
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices) and
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market.
Book Entry Registration of the Class A Certificates
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
such Book-Entry Certificates ("Beneficial Owners") may elect to hold their Book-
Entry Certificates directly through DTC participants of such system
("Participants"), or indirectly through organizations which are Participants.
The Book-Entry Certificates will be issued in one or more certificates per class
of Class A Certificates which in the aggregate equal the principal balance of
such Class A Certificates and will initially be registered in the name of Cede &
Co., the nominee of DTC. Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing principal amounts
of $1,000 and in integral multiples in excess thereof. Except as described
below, no Beneficial Owner will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only "Owner" of
such Book-Entry Certificates will be Cede & Co., as nominee of DTC. Beneficial
Owners will not be Owners as that term is used in the Pooling and Servicing
Agreement. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
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
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Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the Beneficial Owner's Financial Intermediary is not a DTC
Participant).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Transfers between Participants will occur in accordance with DTC rules.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book-Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book- Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Because DTC can only act on
behalf of Financial Intermediaries, the ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose
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holdings include such Book-Entry Certificates. DTC may take actions, at the
direction of the related Participants, with respect to some Class A Certificates
which conflict with actions taken with respect to other Class A Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of Certificates among Participants of DTC, it is under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part of
its right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above. Notwithstanding the foregoing, the Pooling and Servicing
Agreement provides that the Certificate Insurer will, in connection with the
subrogation of the Certificate Insurer to the rights of the Owners of the Class
A Certificates in an amount equal to Insured Payments for which the Certificate
Insurer has not received reimbursement, be considered to be an "Owner" to the
extent (but only to the extent) of such rights.
THE CERTIFICATE INSURER
The information set forth in this section has been provided by the
Certificate Insurer. No representation is made by the Underwriters, the Seller,
the Servicer, the Depositor or any of their affiliates as to the accuracy or
completeness of such information or any information related to the Certificate
Insurer incorporated by reference herein.
The Certificate Insurer, in consideration of the payment of the
premiums and subject to the terms of the Insurance Policies, will
unconditionally and irrevocably guarantee to any Owner that an amount equal to
each full and complete Insured Payment will be received by the Trustee or its
successor, as trustee for the Owners, on behalf of the Owners from the
Certificate Insurer, for distribution by the Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Certificate Insurer's
obligations under the Insurance Policies with respect to a particular Insured
Payment shall be discharged to the extent funds equal to the applicable Insured
Payment are received by the Trustee, whether or not such funds are properly
applied by the Trustee. Insured Payments shall be made only at the time set
forth in the related Insurance Policy and no accelerated Insured Payments shall
be made regardless of any acceleration of the Class A Certificates, unless such
acceleration is at the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Insurance Policies do not
cover shortfalls, if any, attributable to the liability of the Trust, the REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount no later than 12:00 noon, New York City time, on the later of
the Payment Date on which the related Preference Amount is due or the third
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Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (i) a certified copy of the order requiring the return of
such preference payment, (ii) an opinion of counsel satisfactory to the
Certificate Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Owner relating to or arising under the Class A Certificates against the debtor
which made such preference payment or otherwise with respect to such preference
payment and (iv) appropriate instruments to effect the appointment of the
Certificate Insurer as agent for such Owner in any legal proceeding related to
such preference payment, such instruments being in a form satisfactory to the
Certificate Insurer; provided, that if such documents are received after 12:00
noon, New York City time on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Class A
Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under an
Insurance Policy no later than 12:00 noon New York City time, on the later of
the Payment Date on which the Insured Payment is due or the second Business Day
following receipt in New York, New York, on a Business Day by State Street Bank
and Trust Company, N.A., as Fiscal Agent for the Certificate Insurer or any
successor fiscal agent appointed by the Certificate Insurer (the "Fiscal Agent")
of a Notice (as described below); provided that if such Notice is received after
12:00 noon New York City time on such Business Day, it will be deemed to be
received on the following Business Day. If any such Notice received by the
Fiscal Agent is not in proper form or is otherwise insufficient for the purpose
of making a claim under an Insurance Policy, it shall be deemed not to have been
received by the Fiscal Agent for purposes of this paragraph, and the Certificate
Insurer or the Fiscal Agent, as the case may be, shall promptly so advise the
Trustee and the Trustee may submit an amended Notice.
Insured Payments due under an Insurance Policy, unless otherwise stated
therein, will be disbursed by the Fiscal Agent to the Trustee on behalf of
Owners by wire transfer of immediately available funds in the amount of the
Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Trustee for the payment of such Insured Payment
and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the related Insurance
Policy.
As used in the related Insurance Policy, the following terms shall have
the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as
of March 1, 1997 among IMC Securities, Inc., as Depositor, Industry
Mortgage Company, L.P., as Seller and Servicer and The Chase Manhattan
Bank, as Trustee, without regard to any amendment or supplement
thereto, unless the Certificate Insurer shall have consented in writing
thereto.
"Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions in New York City, Tampa,
Florida, the city in which the corporate trust office of the Trustee
under the Agreement is located or the city in which the Certificate
Insurer is located are authorized or obligated by law or executive
order to close.
"Insured Payment" means with respect to any Home Equity Loan
Group and for any Payment Date, the excess, if any, of (i) the sum of
(a) the related Current Interest, (b) the related Subordination Deficit
and (c) the related Preference Amount (without duplication) over (ii)
the related Total Available Funds (after applying the
crosscollateralization provisions of the Agreement, after any deduction
for the related Premium Amount, the related Trustee Fee and any related
Trustee Reimbursable Expenses and after taking into account the portion
of the related Class A Principal Distribution Amount to be actually
distributed on such Payment Date without regard to any related Insured
Payment to be made with respect to such Payment Date).
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to the Insurance Policy, the original of which is subsequently
delivered by registered or certified mail, from the Trustee specifying
the Insured Payment which shall be due and owing on the applicable
Payment Date.
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"Owner" means each Owner (as defined in the Agreement) who, on
the applicable Payment Date, is entitled under the terms of the
applicable Class A Certificate to payment thereunder.
"Preference Amount" means any amount previously distributed to
an Owner on a Class A Certificate that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy pursuant
to the United States Bankruptcy Code (11 U.S.C.) as amended from time
to time, in accordance with a final nonappealable order of a court
having competent jurisdiction.
Capitalized terms used in each Insurance Policy and not otherwise
defined therein will have the respective meanings set forth in the Agreement as
of the date of execution of such Insurance Policy, without giving effect to any
subsequent amendment to or modification of the Agreement unless such amendment
or modification has been approved in writing by the Certificate Insurer.
Any notice under an Insurance Policy or service of process on the
Fiscal Agent of the Certificate Insurer may be made at the address listed below
for the Fiscal Agent of the Certificate Insurer or such other address as the
Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
Each Insurance Policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY EACH INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Insurance Policies are not cancelable for any reason. The premium
on each Insurance Policy is not refundable for any reason including payment, or
provision being made for payment, prior to the maturity of the Class A
Certificates.
The Certificate Insurer is the principal operating subsidiary of MBIA
Inc., a New York Stock Exchange listed company. MBIA Inc. is not obligated to
pay the debts of or claims against the Certificate Insurer. The Certificate
Insurer is domiciled in the State of New York and licensed to do business in and
is subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has two European branches, one in the Republic of
France and the other in the Kingdom of Spain. New York has laws prescribing
minimum capital requirements, limiting classes and concentration of investments
and requiring the approval of policy rates and forms. State laws also regulate
the amount of both the aggregate and individual risks that may be insured, the
payment of dividends by the Certificate Insurer, changes in control and
transactions among affiliates. Additionally, the Certificate Insurer is required
to maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
The consolidated financial statements of the Certificate Insurer, a
wholly-owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1995 and December 31, 1994 and for the three years ended December 31, 1995,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1995 and the consolidated financial statements of the Certificate Insurer and
its subsidiaries for the nine months ended September 30, 1996 and for the
periods ending September 30, 1996 and September 30, 1995, included in the
Quarterly Report on Form 10-Q of MBIA Inc. for the period ending September 30,
1996, are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its
subsidiaries included in documents filed by MBIA Inc. pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent
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to the date of this Prospectus Supplement and prior to the termination of the
offering of the Class A Certificates shall be deemed to be incorporated by
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing such documents.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
SAP
------------------------- ----------------------
December 31, September 30,
1995 1996
---- ----
(Audited) (Unaudited)
(In millions)
Admitted Assets $3,814 $4,348
Liabilities 2,540 2,911
Capital and Surplus 1,274 1,437
GAAP
------------------------- ----------------------
December 31, September 30,
1995 1996
---- ----
(Audited) (Unaudited)
(In millions)
Assets $4,463 $4,861
Liabilities 1,937 2,161
Shareholder's Equity 2,526 2,700
--------------------
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 1995
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Certificate
Insurer. The address of the Certificate Insurer is 113 King Street, Armonk, New
York 10504. The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted heretofrom, other than with respect to
the accuracy of the information regarding the Insurance Policies and Certificate
Insurer set forth under the heading "The Certificate Insurer" herein.
Additionally, the Certificate Insurer makes no representations regarding the
Certificates or the advisability of investing in the Certificates.
Moody's rates the claims paying ability of the Certificate Insurer
"Aaa".
Standard & Poor's rates the claims paying ability of the Certificate
Insurer "AAA".
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA".
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Certificates, and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the Class
A Certificates. The
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Certificate Insurer does not guaranty the market price of the Class A
Certificates nor does it guaranty that the ratings on the Class A Certificates
will not be revised or withdrawn.
CREDIT ENHANCEMENT
Insurance Policies
See "The Certificate Insurer" herein for a description of the Insurance
Policies.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow with respect to a Home Equity Loan Group be applied on such Payment
Date as an accelerated payment of principal on the related Class(es) of Class A
Certificates, but only to the limited extent hereafter described. Net Monthly
Excess Cashflow equals the excess of (i) the excess, if any of (x) the interest
which is collected on the Home Equity Loans in such Home Equity Loan Group
during a Remittance Period (net of the Servicing Fee and of certain
miscellaneous administrative amounts with respect to such Home Equity Loan
Group) plus any Delinquency Advances and Compensating Interest with respect to
such Home Equity Loan Group over (y) the sum of the related Current Interest,
Trustee Fee, Premium Amount and Trustee Reimbursable Expenses (the difference
between (x) and (y) is the "Total Monthly Excess Spread" with respect to such
Home Equity Loan Group), over (ii) the portion of the Total Monthly Excess
Cashflow that is used to cover shortfalls in Available Funds on such Payment
Date in the related Home Equity Loan Group or in the other Home Equity Loan
Group, or used to reimburse the Certificate Insurer.
The application of Net Monthly Excess Cashflow has the effect of
accelerating the amortization of the Class A Certificates relative to the
amortization of the Home Equity Loans in the related Home Equity Loan Group. To
the extent that any Net Monthly Excess Cashflow is not so used (and is not
required to satisfy requirements with respect to the other Home Equity Loan
Group or to pay Reimbursement Amounts (as defined in the Pooling and Servicing
Agreement) to the Certificate Insurer), the Pooling and Servicing Agreement
provides that it will be used to reimburse the Servicer with respect to any
amounts owing to it, and, thereafter, paid to the Owners of the Class R
Certificates.
Pursuant to the Pooling and Servicing Agreement, each Home Equity Loan
Group's Net Monthly Excess Cashflow will be applied as an accelerated payment of
principal on the Class A Certificates until the Subordinated Amount has
increased to the level required. "Subordinated Amount" means, with respect to
each Home Equity Loan Group and Payment Date, the excess, if any, of (x) the sum
of (i) the aggregate Loan Balances of the Home Equity Loans in such Home Equity
Loan Group as of the close of business on the last day of the preceding
Remittance Period and (ii) any amount with respect to such Home Equity Loan
Group on deposit in the Pre-Funding Account at such time exclusive of any
Pre-Funding Account Earnings (as defined in the Pooling and Servicing Agreement)
over (y) the aggregate related Class A Certificate Principal Balance as of such
Payment Date (after taking into account the payment of the Class A Principal
Distribution Amount related to such Group (except for any Subordination
Reduction Amount or Subordination Increase Amount related to such Group) on such
Payment Date). With respect to each Home Equity Loan Group, any amount of Net
Monthly Excess Cashflow actually applied as an accelerated payment of principal
is a "Subordination Increase Amount." The required level of the Subordinated
Amount for each Home Equity Loan Group with respect to a Payment Date is the
"Specified Subordinated Amount." The Pooling and Servicing Agreement generally
provides that the related Specified Subordinated Amount may, over time,
decrease, or increase, subject to certain floors, caps and triggers including
triggers that allow the related Specified Subordinated Amount to decrease or
"step down" based on the performance on the Home Equity Loans in the related
Home Equity Loan Group with respect to certain tests specified in the Pooling
and Servicing Agreement based on delinquency rates and cumulative losses. In
addition, Net Monthly Excess Cashflow for each Home Equity Loan Group will be
applied to the payment in reduction of principal of the Class A Certificates
during the period that the Home Equity Loans in such Group are unable to meet
certain tests specified in the Pooling and Servicing Agreement based on
delinquency rates and cumulative losses.
In the event that the Specified Subordinated Amount with respect to a
Home Equity Loan Group is permitted to decrease or "step down" on a Payment Date
in the future, the Pooling and Servicing Agreement provides that a portion of
the principal which would otherwise be distributed to the Owners of the related
Class A Certificates on such Payment Date shall be distributed to the Owners of
the Class R Certificates over the period specified in the Pooling and Servicing
Agreement. This has the effect of decelerating the amortization of Class A
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Certificates relative to the amortization of the Home Equity Loans and of
reducing the related Subordinated Amount. With respect to any Home Equity Loan
Group and Payment Date, the excess, if any, of (x) the related Subordinated
Amount on such Payment Date after taking into account all distributions to be
made on such Payment Date (except for any distributions of related Subordination
Reduction Amounts as described in this sentence) over (y) the related Specified
Subordinated Amount is the "Excess Subordinated Amount" for such Home Equity
Loan Group and Payment Date. If, on any Payment Date, the Excess Subordinated
Amount is, or, after taking into account all other distributions to be made on
such Payment Date would be, greater than zero (i.e., the Subordinated Amount is
or would be greater than the related Specified Subordinated Amount), then any
amounts relating to principal which would otherwise be distributed to the Owners
of the related Class or Classes of Class A Certificates on such Payment Date
shall instead be distributed to the Owners of the Class R Certificates (to the
extent available therefor) in an amount equal to the lesser of (x) the Excess
Subordinated Amount and (y) the amount available for distribution on account of
principal with respect to such Class A Certificates on such Payment Date; such
amount being the "Subordination Reduction Amount" with respect to the related
Home Equity Loan Group and Payment Date. As a result of the cash flow structure
of the Trust, Subordination Reduction Amounts may result even prior to the
occurrence of any decrease or "step down" in the related Specified Subordinated
Amount. This is because the Owners of the Class A Certificates will generally be
entitled to receive 100% of collected principal with respect to the related Home
Equity Loan Group, even though the aggregate Class A Certificate Principal
Balance will, following the accelerated amortization resulting from the
application of the Net Monthly Excess Cashflow, represent less than 100% of the
related Home Equity Loan Group's aggregate Loan Balance. Accordingly, in the
absence of the provisions relating to Subordination Reduction Amounts, the
Subordinated Amount would increase above the Specified Subordinated Amount
requirements even without the further application of any Net Monthly Excess
Cashflow.
The Pooling and Servicing Agreement provides generally that, on any
Payment Date all amounts collected on account of principal (other than any such
amount applied to the payment of a Subordination Reduction Amount) with respect
to a Home Equity Loan Group during the prior Remittance Period will be
distributed to the Owners of the related Class A Certificates on such Payment
Date. If any Home Equity Loan became a Liquidated Loan during such prior
Remittance Period, the Net Liquidation Proceeds related thereto and allocated to
principal may be less than the principal balance of the related Home Equity
Loan; the amount of any such insufficiency is a "Realized Loss." In addition,
the Pooling and Servicing Agreement provides that the principal balance of any
Home Equity Loan which becomes a Liquidated Loan shall thenceforth equal zero.
The Pooling and Servicing Agreement does not contain any requirement that the
amount of any Realized Loss be distributed to the Owners of the related Class A
Certificates on the Payment Date which immediately follows the event of loss;
i.e., the Pooling and Servicing Agreement does not require the current recovery
of losses. However, the occurrence of a Realized Loss will reduce the
Subordinated Amount with respect to the related Home Equity Loan Group, which to
the extent that such reduction causes the Subordinated Amount to be less than
the related Specified Subordinated Amount applicable to the related Payment
Date, will require the payment of a Subordination Increase Amount on such
Payment Date (or, if insufficient funds are available on such Payment Date, on
subsequent Payment Dates, until the Subordinated Amount equals the related
Specified Subordinated Amount). The effect of the foregoing is to allocate
losses to the Owners of the Class R Certificates by reducing, or eliminating
entirely, payments of Total Monthly Excess Spread and Subordination Reduction
Amounts which such Owners would otherwise receive.
Overcollateralization and the Insurance Policies. The Pooling and
Servicing Agreement defines a "Subordination Deficit" with respect to a Home
Equity Loan Group and Payment Date to be the amount, if any, by which (x) the
related aggregate Class A Certificate Principal Balance with respect to such
Payment Date, after taking into account all distributions to be made on such
Payment Date (without regard to any Insured Payment to be made on such Payment
Date and except for any Subordination Deficit), exceeds (y) the sum of (a) the
aggregate Loan Balances of the Home Equity Loans in such Home Equity Loan Group
as of the close of business on the last day of the prior Remittance Period and
(b) the amount, if any, on deposit and allocated to such Home Equity Loan Group
in the Pre-Funding Account on such Payment Date exclusive of any Pre-Funding
Account Earnings. The Pooling and Servicing Agreement requires the Trustee to
make a claim for an Insured Payment under the related Insurance Policy not later
than the second Business Day prior to any Payment Date as to which the Trustee
has determined that a Subordination Deficit will occur for the purpose of
applying the proceeds of such Insured Payment as a payment of principal to the
Owners of the related Class A Certificates on such Payment Date. Each Insurance
Policy is thus similar to the subordination provisions described above insofar
as such Insurance Policy guarantees ultimate, rather than current, payment of
the amounts of any Realized Losses to the Owners of the Class A Certificates.
Investors in the Class A Certificates should realize that, under extreme loss or
delinquency scenarios applicable to the related Home Equity Loan Group, they may
temporarily receive no distributions of principal when
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they would otherwise be entitled thereto under the principal allocation
provisions described herein. Nevertheless, the exposure to risk of loss of
principal of the Owners of the Class A Certificates depends in part on the
ability of the Certificate Insurer to satisfy its obligations under the
Insurance Policies. In that respect and to the extent that the Certificate
Insurer satisfies such obligations, the Owners of the Class A Certificates are
insulated from shortfalls in Available Funds that may arise.
Crosscollateralization Provisions
In addition to the use of Total Monthly Excess Spread and Net Monthly
Excess Cashflow with respect to a Home Equity Loan Group to cover related
Subordination Increase Amounts, Available Funds Shortfalls and Subordination
Deficits, such Total Monthly Excess Spread and Net Monthly Excess Cashflow will
be available to cover such requirements for the other Home Equity Loan Group as
described under the caption "Description of the Class A Certificates --
Distributions" herein.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
Covenant of the Seller to Take Certain Actions with Respect to the Home Equity
Loans in Certain Situations
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, the Seller, the Certificate Insurer, any Sub-Servicer, any Owner,
the Custodian or the Trustee that the representations and warranties set forth
below are untrue in any material respect as of the Closing Date with the result
that the interests of the Owners or of the Certificate Insurer are materially
and adversely affected, the party discovering such breach is required to give
prompt written notice to the other parties.
Upon the earliest to occur of the Seller's discovery, its receipt of
notice of breach from any of the other parties or such time as a situation
resulting from an existing statement which is untrue materially and adversely
affects the interests of the Owners or the Certificate Insurer, the Seller will
be required promptly to cure such breach in all material respects or the Seller
shall on 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 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 and the Certificate Insurer an opinion of counsel
experienced in federal income tax matters and acceptable to the Trustee and the
Certificate Insurer to the effect that such a repurchase or substitution would
not constitute a Prohibited Transaction for the Trust or otherwise subject the
Trust to tax and would not jeopardize the status of the REMIC (other than the
Non-REMIC Accounts) as a REMIC (a "REMIC Opinion") addressed to the Trustee and
the Certificate Insurer and acceptable to the Trustee and the Certificate
Insurer. The Seller shall also deliver an Officer's Certificate to the Trustee
and the Certificate Insurer concurrently with the delivery of a Qualified
Replacement Mortgage stating that such Home Equity Loan meets the requirements
of a Qualified Replacement Mortgage and that all other conditions to the
substitution thereof have been satisfied. Any Home Equity Loan as to which
repurchase or substitution was delayed pursuant to the Pooling and Servicing
Agreement shall be repurchased or substituted for (subject to compliance with
the provisions of the Pooling and Servicing Agreement) upon the earlier of (a)
the occurrence of a default or imminent default with respect to such Home Equity
Loan and (b) receipt by the Trustee and the Certificate Insurer of a REMIC
Opinion. In connection with any breach of a representation, warranty or covenant
or defect in documentation giving rise to such repurchase or substitution
obligation, the Seller agrees that it shall, at its expense, furnish the Trustee
and the Certificate Insurer either a REMIC Opinion or an opinion of counsel
rendered by independent counsel that the effects described in a REMIC Opinion
may occur as a result of any such repurchase or substitution. The obligation of
the Seller to so substitute or repurchase any Home Equity Loan as to which 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.
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"Loan Purchase Price" means an amount equal to the Loan Balance of such
Home Equity Loan as of the date of purchase (assuming that the Monthly
Remittance Amount remitted by the Servicer on such Monthly Remittance Date has
already been remitted), plus all accrued and unpaid interest on such Home Equity
Loan at the Coupon Rate to but not including the Monthly Remittance Date in the
Remittance Period of such purchase together with (without duplication) the
aggregate amount of (i) all unreimbursed Delinquency Advances and Servicing
Advances theretofore made with respect to such Home Equity Loan, (ii) all
Delinquency Advances which the Servicer has theretofore failed to remit with
respect to such Home Equity Loan and (iii) all reimbursed Delinquency Advances
to the extent that such reimbursement is not made from the Mortgagor or from
Liquidation Proceeds from the respective Home Equity Loan.
Assignment of Home Equity Loans
Pursuant to the Pooling and Servicing Agreement, the Seller on the
Closing Date will transfer, assign, set over and otherwise convey without
recourse to the Depositor and the Depositor will transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust for the benefit of the
Owners all right, title and interest of the Seller in and to each Initial Home
Equity Loan and all its right, title and interest in and to principal and
interest due on each such Initial Home Equity Loan after the Cut-Off Date;
provided, however, that the Seller will reserve and retain all its right, title
and interest in and to principal (including Prepayments) and interest due on
each Initial Home Equity Loan on or prior to the Cut-Off Date (whether or not
received on or prior to the Cut-Off Date). Purely as a protective measure and
not to be construed as contrary to the parties' intent that the transfer on the
Closing Date is a sale, the Seller has also been deemed to have granted to the
Depositor and the Depositor has also been deemed to have granted to the Trustee
a security interest in the Trust Estate in the event that the transfer of the
Trust Estate is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Initial Home
Equity Loans on the Closing Date and the Subsequent Home Equity Loans on each
Subsequent Transfer Date, the Seller will be required to:
(i) deliver without recourse to The First National Bank of
Boston (the "Custodian") on behalf of the Trustee on the Closing Date
with respect to each Initial Home Equity Loan or on each Subsequent
Transfer Date with respect to each Subsequent Home Equity Loan
identified in the related Schedule of Home Equity Loans (A) the
original Notes, endorsed in blank or to the order of the Trustee, (B)
(I) the original title insurance commitment or a copy thereof certified
as a true copy by the closing agent or the Seller, or if available, the
original title insurance policy or a copy certified by the issuer of
the title insurance policy or (II) the attorney's opinion of title, (C)
originals or copies of all intervening assignments certified as true
copies by the closing agent or the Seller, showing a complete chain of
title from origination to the Trustee, if any, including warehousing
assignments, if recorded, (D) originals of all assumption and
modification agreements, if any and (E) either: (1) the original
Mortgage, with evidence of recording thereon (if such original Mortgage
has been returned to Seller from the applicable recording office) or a
copy (if such original Mortgage has not been returned to Seller from
the applicable recording office) of the Mortgage certified as a true
copy by the closing agent or the Seller or (2) a copy of the Mortgage
certified by the public recording office in those instances where the
original recorded Mortgage has been lost or retained by the recording
office;
(ii) cause, within 60 days following the Closing Date with
respect to the Initial Home Equity Loans, or Subsequent Transfer Date
with respect to Subsequent Home Equity Loans, assignments of the
Mortgages to "The Chase Manhattan Bank, as Trustee of IMC Home Equity
Loan Trust 1997-2 under the Pooling and Servicing Agreement dated as of
March 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, the Certificate Insurer and the Rating Agencies, on or before
the Closing Date with respect to the Initial Home Equity Loans or on
each Subsequent Transfer Date with respect to 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, the Certificate Insurer and
the Rating Agencies);
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(iii) deliver the title insurance policy, the original
Mortgages and such recorded assignments, together with originals or
duly certified copies of any and all prior assignments (other than
unrecorded warehouse assignments), to the Custodian on behalf of the
Trustee within 15 days of receipt thereof by the Seller (but in any
event, with respect to any Mortgage as to which original recording
information has been made available to the Seller, within one year
after the Closing Date with respect to the Initial Home Equity Loans,
or each Subsequent Transfer Date with respect to the Subsequent Home
Equity Loans); and
(iv) furnish to the Trustee, the Certificate Insurer and the
Rating Agencies, at the Seller's expense, an opinion of counsel with
respect to the sale and perfection of all Subsequent Home Equity Loans
delivered to the Trust in form and substance satisfactory to the
Trustee, the Certificate Insurer and the Rating Agencies.
The Trustee will agree, for the benefit of the Owners, to cause the
Custodian to review each File within 45 days after the Closing Date or
Subsequent Transfer Date (or the date of receipt of any documents delivered to
the Trustee after the Closing Date or Subsequent Transfer Date) to ascertain
that all required documents (or certified copies of documents) have been
executed and received.
If the Custodian on behalf of the Trustee during such 45-day period
finds any document constituting a part of a File which is not properly executed,
has not been received, is unrelated to the Home Equity Loans or that any Home
Equity Loan does not conform in a material respect to the description thereof as
set forth in the Schedule of Home Equity Loans, the Custodian on behalf of the
Trustee will be required to promptly notify the Depositor, the Seller, the
Owners and the Certificate Insurer. The Seller will agree in the Pooling and
Servicing Agreement to use reasonable efforts to remedy a material defect in a
document constituting part of a File of which it is so notified by the Custodian
on behalf of the Trustee. If, however, within 90 days after such notice to it
respecting such defect the Seller shall not have remedied the defect and the
defect materially and adversely affects the interest in the related Home Equity
Loan of the Owners or the Certificate Insurer, the Seller will be required on
the next succeeding Monthly Remittance Date to (or will cause an affiliate of
the Seller to) (i) substitute in lieu of such Home Equity Loan a Qualified
Replacement Mortgage and deliver the Substitution Amount to the Trustee on
behalf of the Trust as part of the Monthly Remittance remitted by the Servicer
on such Monthly Remittance Date or (ii) purchase such Home Equity Loan at a
purchase price equal to the Loan Purchase Price thereof, which purchase price
shall be delivered to the Trust along with the Monthly Remittance remitted by
the Servicer on such Monthly Remittance Date.
In addition to the foregoing, the Custodian on behalf of the Trustee
has agreed to make a review during the 12th month after the Closing Date
indicating the current status of the exceptions previously indicated on the Pool
Certification (the "Final Certification"). After delivery of the Final
Certification, the Custodian, on behalf of the Trustee and the Servicer shall
provide to Certificate Insurer no less frequently than monthly updated
certifications indicating the then current status of exceptions, until all such
exceptions have been eliminated.
Servicing and Sub-Servicing
The Servicer is required to service the Home Equity Loans in accordance
with the Pooling and Servicing Agreement, the terms of the respective Home
Equity Loans, and the servicing standards set forth in FNMA's Servicing Guide
(the "FNMA Guide"); provided, however, that to the extent such standards, such
obligations or the FNMA Guide is amended by FNMA after the date of the Pooling
and Servicing Agreement and the effect of such amendment would be to impose upon
the Servicer any material additional costs or other burdens relating to such
servicing obligations, the Servicer may, at its option, determine not to comply
with such amendment in accordance with the servicing standards set forth in the
Pooling and Servicing Agreement.
The Servicer may retain from the interest portion of each monthly
payment, the Servicing Fee. In addition, the Servicer will be entitled to retain
additional servicing compensation in the form of prepayment charges, release
fees, bad check charges, assumption fees, late payment charges, prepayment
penalties, or any other servicing-related fees, Net Liquidation Proceeds not
required to be deposited in the Principal and Interest Account pursuant to the
Pooling and Servicing Agreement, and similar items.
The Servicer is required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Home Equity Loans,
and, to the extent such procedures are consistent with the Pooling and Servicing
Agreement and the terms and provisions of any applicable insurance policy, to
follow collection procedures for all Home Equity Loans at least as rigorous as
those described in the FNMA Guide. Consistent with
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the foregoing, the Servicer may in its discretion waive or permit to be waived
any late payment charge, prepayment charge, assumption fee or any penalty
interest in connection with the prepayment of a Home Equity Loan or any other
fee or charge which the Servicer would be entitled to retain as additional
servicing compensation. In the event the Servicer consents to the deferment of
the due dates for payments due on a Note, the Servicer will nonetheless be
required to make payment of any required Delinquency Advances with respect to
the interest payments so extended to the same extent as if the interest portion
of such installment were due, owing and delinquent and had not been deferred.
The Servicer is required to create, or cause to be created, in the name
of the Trustee, at one or more depository institutions a principal and interest
account maintained as a trust account in the trust department of such
institution (the "Principal and Interest Account"). All funds in the Principal
and Interest Account are required to be held (i) uninvested, or (ii) invested in
Eligible Investments (as defined in the Pooling and Servicing Agreement). Any
investment of funds in the Principal and Interest Account must mature or be
withdrawable at par on or prior to the immediately succeeding Monthly Remittance
Date. Any investment earnings on funds held in the Principal and Interest
Account are for the account of, and any losses therein are also for the account
of, and must be promptly replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest
Account, within one business day following receipt, all principal and interest
due on the Home Equity Loans after the Cut-Off Date, including any Prepayments,
the proceeds of any liquidation of a Home Equity Loan net of expenses and
unreimbursed Delinquency Advances ("Net Liquidation Proceeds"), any income from
REO Properties and Delinquency Advances, but net of (i) Net Liquidation Proceeds
to the extent that such Net Liquidation Proceeds exceed the sum of (I) the Loan
Balance of the related Home Equity Loan immediately prior to liquidation, (II)
accrued and unpaid interest on such Home Equity Loan (net of the Servicing Fee)
to the date of such liquidation and (III) any Realized Losses during the related
Remittance Period, (ii) principal (including Prepayments) collected and interest
due on the Home Equity Loans on or prior to the Cut-Off Date, (iii)
reimbursements for Delinquency Advances, and (iv) reimbursement for amounts
deposited in the Principal and Interest Account representing payments of
principal and/or interest on a Note by a Mortgagor which are subsequently
returned by a depository institution as unpaid (all such net amounts being
referred to herein as the "Daily Collections").
The Servicer may make withdrawals for its own account from the
Principal and Interest Account in the following order and only for the following
purposes:
(i) on each Monthly Remittance Date, to pay itself the
Servicing Fee;
(ii) to withdraw investment earnings on amounts on deposit
in the Principal and Interest Account;
(iii) to withdraw amounts that have been deposited to the
Principal and Interest Account in error;
(iv) to reimburse itself for unrecovered Delinquency
Advances and for any excess interest collected from a
Mortgagor; and
(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
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to be replaced on future dates to the extent necessary) or from the Certificate
Account out of Net Monthly Excess Cashflow.
Notwithstanding the foregoing, in the event that the Servicer
determines in its reasonable business judgment in accordance with the servicing
standards of the Pooling and Servicing Agreement that any proposed Delinquency
Advance if made would not be recoverable, the Servicer shall not be required to
make such Delinquency Advances with respect to such Home Equity Loan. To the
extent that the Servicer previously has made Delinquency Advances with respect
to a Home Equity Loan that the Servicer subsequently determines to be
nonrecoverable, the Servicer shall be entitled to reimbursement for such
aggregate unreimbursed Delinquency Advances as provided above. The Servicer
shall give written notice of such determination as to why such amount is or
would be nonrecoverable to the Trustee and the Certificate Insurer.
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, (i) expenditures in connection with a foreclosed Home Equity
Loan prior to the liquidation thereof, including, without limitation,
expenditures for real estate property taxes, hazard insurance premiums, property
restoration or preservation ("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and (iii) the cost
of the management and liquidation of Property acquired in satisfaction of the
related Mortgage, except to the extent that 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.
The Servicer, and in the absence of the exercise thereof by the
Servicer, the Certificate Insurer will have the right and the option, but not
the obligation, to purchase for its own account any Home Equity Loan which
becomes delinquent as to three consecutive monthly installments or any Home
Equity Loan as to which enforcement proceedings have been brought by the
Servicer; provided, however, that the Servicer may not purchase any such Home
Equity Loan unless the Servicer has delivered to the Certificate Insurer and the
Trustee, at the Servicer's expense, an opinion of counsel acceptable to the
Certificate Insurer and the Trustee to the effect that such a purchase would not
constitute a Prohibited Transaction for the Trust or otherwise subject the Trust
to tax and would not jeopardize the status of the REMIC (other than the
Non-REMIC Accounts) 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.
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The Servicer will have the right under the Pooling and Servicing
Agreement (upon receiving the consent of the Certificate Insurer) to accept
applications of Mortgagors for consent to (i) partial releases of Mortgages,
(ii) alterations and (iii) removal, demolition or division of Properties. No
application for approval may be considered by the Servicer unless: (i) the
provisions of the related Note and Mortgage have been complied with; (ii) the
loan-to-value ratio and debt-to-income ratio after any release do not exceed the
loan-to-value ratio and debt-to-income ratio, respectively, of such Note on the
Cut-Off Date and any increase in the loan-to-value ratio shall not exceed 5%
unless approved in writing by the Certificate Insurer; and (iii) the lien
priority of the related Mortgage is not affected.
The Servicer shall not agree to any modification, waiver or amendment
of any provision of any Home Equity Loan unless, in the Servicer's good faith
judgment, such modification, waiver or amendment would minimize the loss that
might otherwise be experienced with respect to such Home Equity Loan and only in
the event of a payment default with respect to such Home Equity Loan or in the
event that a payment default with respect to such Home Equity Loan is reasonably
foreseeable by the Servicer; provided, however, that no such modification,
waiver or amendment shall extend the maturity date of such Home Equity Loan
beyond the Remittance Period related to the Final Scheduled Payment Date of the
latest Class of Class A 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 and the
Certificate Insurer prior to the execution of any modification, waiver or
amendment of any provision of any Home Equity Loan; provided that if the
Certificate Insurer does not object in writing to the modification, waiver or
amendment specified in such notice within 5 Business Days after its receipt
thereof, the Servicer may effectuate such modification, waiver or amendment and
shall deliver to the Custodian, on behalf of the Trustee for deposit in the
related File, an original counterpart of the agreement relating to such
modification, waiver or amendment, promptly following the execution thereof.
As noted under "The Seller and Servicer -- General" herein, the
Servicer, with the consent of the Certificate Insurer, will be permitted under
the Pooling and Servicing Agreement to enter into Sub-Servicing Agreements for
any servicing and administration of Home Equity Loans with any institution that
(x) is in compliance with the laws of each state necessary to enable it to
perform its obligations under such Sub-Servicing Agreement, (y) has experience
servicing home equity loans that are similar to the Home Equity Loans and (z)
has equity of not less than $5,000,000 (as determined in accordance with
generally accepted accounting principles).
With the consent of the Certificate Insurer, the Servicer may enter
into Sub-Servicing Agreements with Sub-Servicers with respect to the servicing
of the Home Equity Loans. No Sub-Servicing arrangements discharge the Servicer
from its servicing obligations. Notwithstanding any Sub-Servicing Agreement, the
Servicer will not be relieved of its obligations under the Pooling and Servicing
Agreement and the Servicer will be obligated to the same extent and under the
same terms and conditions as if it alone were servicing and administering the
Home Equity Loans. The Servicer shall be entitled to enter into any agreement
with a Sub-Servicer for indemnification of the Servicer by such Sub-Servicer and
nothing contained in such Sub-Servicing Agreement shall be deemed to limit or
modify the Pooling and Servicing Agreement.
The Servicer (except the Trustee if it is required to succeed the
Servicer under the Pooling and Servicing Agreement) has agreed to indemnify and
hold the Trustee, the Certificate Insurer, and each Owner harmless against any
and all claims, losses, penalties, fines, forfeitures, legal fees and related
costs, judgments, and any other costs, fees and expenses that the Trustee, the
Certificate Insurer, and any Owner may sustain in any way related to the failure
of the Servicer to perform its duties and service the Home Equity Loans in
compliance with the terms of the Pooling and Servicing Agreement. The Servicer
shall immediately notify the Trustee, the Certificate Insurer and each Owner if
a claim is made by a third party with respect to the Pooling and Servicing
Agreement, and the Servicer shall assume the defense of any such claim and pay
all expenses in connection therewith, including reasonable counsel fees, and
promptly pay, discharge and satisfy any judgment or decree which may be entered
against the Servicer, the Trustee, the Certificate Insurer and/or Owner in
respect of such claim. The Trustee shall reimburse the Servicer from amounts
otherwise distributable on the Class R Certificates for all amounts advanced by
it pursuant to the preceding sentence, except when a final nonappealable
adjudication determines that the claim relates directly to the failure of the
Servicer to perform its duties in compliance with the Pooling and Servicing
Agreement. The indemnification provisions shall survive the termination of the
Pooling and Servicing Agreement and the payment of the outstanding Certificates.
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The Servicer will be required to deliver to the Trustee, the
Certificate Insurer, and the Rating Agencies on or before April 30 of each year,
commencing in 1998: (1) an officers' certificate stating, as to each signer
thereof, that (i) a review of the activities of the Servicer during such
preceding calendar year and of performance under the Pooling and Servicing
Agreement has been made under such officers' supervision, and (ii) to the best
of such officers' knowledge, based on such review, the Servicer has fulfilled
all its obligations under the Pooling and Servicing Agreement for such year, or,
if there has been a default in the fulfillment of all such obligation,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by the Servicer to remedy such default
and (2) a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the Certificate Insurer
stating that such firm has examined the Servicer's overall servicing operations
in accordance with the requirements of the Uniform Single Attestation Program
for Mortgage Bankers, and stating such firm's conclusions relating thereto.
Removal and Resignation of Servicer
The Certificate Insurer (or, the Owners, with the consent of the
Certificate Insurer) will have the right, 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 and the Certificate Insurer.
Upon removal or resignation of the Servicer, the Trustee may (A)
solicit bids for a successor servicer as described in the Pooling and Servicing
Agreement 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 FNMA, having equity of not less than
$5,000,000, and acceptable to the Certificate Insurer and a majority of the
Owners of the Class R Certificates (provided that if the Certificate Insurer and
such Owners cannot agree as to the acceptability of such successor servicer, the
decision of the Certificate Insurer shall control) as the successor to the
Servicer in the assumption of all or any part of the responsibilities, duties or
liabilities of the Servicer.
No removal or resignation of the Servicer will become effective until
the Backup Servicer or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
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,
the Rating Agencies and the Certificate Insurer:
(i) the amount of the distribution with respect to the Class A
Certificates and the Class R Certificates (based on a Certificate in
the original principal amount of $1,000);
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(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 Subordination Increase Amount);
(iii) the amount of such distribution allocable to interest on
the Home Equity Loans in each Group (based on a Certificate in the
original principal amount of $1,000);
(iv) if the distribution (net of any Insured Payment) to the
Owners of any Class of the Class A Certificates on such Payment Date
was less than the related Class A Distribution Amounts on such Payment
Date and the related Class A Carry-Forward Amount resulting therefrom;
(v) the amount of any Insured Payment included in the amounts
distributed to the Owners of Class A Certificates on such Payment Date;
(vi) the principal amount of each Class of Class A Certificate
(based on a Certificate in the original principal amount of $1,000)
which will be Outstanding after giving effect to any payment of
principal on such Payment Date;
(vii) the Subordinated Amount and Subordination Deficit for
each Group, if any, remaining after giving effect to all distributions
and transfers on such Payment Date;
(viii) the aggregate Loan Balance of all Home Equity Loans and
the aggregate Loan Balance of the Home Equity Loans in each Group, in
each case after giving effect to any payment of principal on such
Payment Date;
(ix) based upon information furnished by the Seller such
information as may be required by Section 6049(d)(7)(C) of the Code and
the regulations promulgated thereunder to assist the Owners in
computing their market discount;
(x) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution with respect to each Group;
(xi) the weighted average Coupon Rate of the Home Equity Loans
in each Group and in the aggregate;
(xii) such other information as the Certificate Insurer or any
Owner may reasonably request with respect to delinquent Home Equity
Loans;
(xiii) the largest Home Equity Loan balance outstanding in
each Group;
(xiv) the Pass-Through Rate on the Class A-8 Certificates; and
(xv) for the initial Payment Date the total remaining
Pre-Funded Amount with respect to each Group 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.
In addition, on the Business Day preceding each Payment Date the
Trustee will be required to distribute to each Owner, the Certificate Insurer
and the Rating Agencies, together with the information described above, the
following information prepared by the Servicer and furnished to the Trustee for
such purpose and with respect to each Home Equity Loan Group;
(a) the number and aggregate principal balances of Home Equity
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent, (iii) 90
or more days delinquent, as of the close of business on the last day of
the Remittance Period immediately preceding the Payment Date, (iv) the
numbers and aggregate Loan Balances of all Home Equity Loans as of such
Payment Date and (v) the percentage that each of the amounts
represented by clauses (i), (ii) and (iii) represent as a percentage of
the respective amounts in clause (iv);
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(b) the status and the number and dollar amounts of all Home
Equity Loans in foreclosure proceedings as of the close of business on
the last day of the Remittance Period immediately preceding such
Payment Date;
(c) the number of Mortgagors and the Loan Balances of (i) the
related Mortgages involved in bankruptcy proceedings as of the close of
business on the last day of the Remittance Period immediately preceding
such Payment Date and (ii) Home Equity Loans that are "balloon" loans;
(d) the existence and status of any Properties as to which
title has been taken in the name of, or on behalf of the Trustee, as of
the close of business of the last day of the Remittance Period
immediately preceding the Payment Date;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the close
of business on the last day of the Remittance Period immediately
preceding the Payment Date;
(f) the Cumulative Loss Percentage, the amount of cumulative
Realized Losses, the current period Realized Losses (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 amount of delinquent loans and delinquency percentage
(each as specified in the Pooling and Servicing Agreement).
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case
(i) the Certificate Insurer or (ii) with the prior written consent of the
Certificate Insurer (which is required not to be unreasonably withheld), the
Depositor and the Owners of a majority of the Percentage Interests represented
by the Class A Certificates or, if there are no Class A Certificates then
Outstanding, by a majority of the Percentage Interests represented by the Class
R Certificates, may appoint a successor trustee.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
Amendments
The Trustee, the Depositor, the Seller and the Servicer with the
written consent of the Certificate Insurer may, at any time and from time to
time and without notice to or the consent of the Owners, amend the Pooling and
Servicing Agreement, and the Trustee will be required to consent to such
amendment, for the purposes of (i) if accompanied by an approving opinion of
counsel experienced in federal income tax matters, removing the restriction
against the transfer of a Class R Certificate to a Disqualified Organization (as
such term is defined in the Code), (ii) complying with the requirements of the
Code including any amendments necessary to maintain REMIC status, (iii) curing
any ambiguity, (iv) correcting, 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 the Class A Certificates without regard to the related Insurance
Policy. Notwithstanding anything to the contrary, no such amendment shall (a)
change in any manner the amount of, or delay the timing of, payments which are
required to be distributed to any Owner without the consent of the Owner of such
Certificate, (b) change
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the percentages of Percentage Interest which are required to consent to any such
amendments, without the consent of the Owners of all Certificates of the Class
or Classes affected then Outstanding or (c) which affects in any manner the
terms or provisions of either Insurance Policy.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the payment to the Owners of all Certificates from amounts other
than those available under the Insurance Policies 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 to furnish to the Trustee an opinion of counsel experienced in federal
income tax matters acceptable to the Certificate Insurer and the Trustee to the
effect that such liquidation constitutes a Qualified Liquidation.
Optional Termination
By Owners of Class R Certificates. At their option, the Owners of a
majority of the Percentage Interest represented by the Class R Certificates then
Outstanding may on any Monthly Remittance Date when the aggregate outstanding
Loan Balances of the Home Equity Loans is 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. Under certain
circumstances, the Certificate Insurer may also exercise such purchase rights if
the Owners of the Class R Certificate do not do so.
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 the REMIC
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination the Certificate Insurer or the
Owners of a majority in Percentage Interests represented by the Class A
Certificates then Outstanding with the consent of the Certificate Insurer may
direct the Trustee on behalf of the Trust to adopt a plan of complete
liquidation, as contemplated by Section 860F(a)(4) of the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following section discusses certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Class A Certificates. Such section must be considered only in connection
with "Federal Income Tax Consequences" in the Prospectus. The discussion herein
and in the Prospectus is based upon laws, regulations, rulings and decisions now
in effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Certificates.
REMIC Election
Pursuant to the Pooling and Servicing Agreement, the Trustee will elect
to treat the Trust (other than the Non-REMIC Accounts) as a REMIC for federal
income tax purposes. The REMIC will issue the Class A Certificates which will be
designated as regular interests in the REMIC and the Class R Certificates will
be designated as the residual interest in the REMIC. 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 election is made and (ii)
compliance with the Pooling and Servicing Agreement, the REMIC will be treated
as a REMIC, the Class A Certificates will be treated as "regular interests" in
the REMIC and the Class R Certificates will be the sole "residual interest" in
the REMIC. Except as indicated below and in the Prospectus, for federal income
tax
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purposes, regular interests in a REMIC are treated as debt instruments issued by
the REMIC on the date on which those interests are created, and not as ownership
interests in the REMIC or its assets. Owners of the Class A Certificates that
otherwise report income under a cash method of accounting will be required to
report income with respect to such Class A Certificates under an accrual method.
The prepayment assumption for each Class of the Class A Certificates
for calculating original issue discount is 100% of the related Prepayment
Assumption. See "Prepayment and Yield Considerations -- Prepayment and Yield
Scenarios for Class A Certificates" herein.
As a result of the qualification of the Trust as a REMIC, the Trust
will not be subject to federal income tax except with respect to (i) income from
prohibited transactions, (ii) "net income from foreclosure property" and (iii)
certain contributions to the Trust after the Closing Date (see "Federal Income
Tax Consequences" in the Prospectus). The total income of the Trust (exclusive
of any income that is taxed at the REMIC level) will be taxable to the
Beneficial Owners of the Certificates.
Under the laws of New York State and New York City, an entity that is
treated for federal income tax purposes as a REMIC generally is exempt from
entity level taxes imposed by those jurisdictions. This exemption does not
apply, however, to the income on the Class A Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Certificates without
regard to the ERISA considerations described below, subject to other applicable
federal and state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions ("prohibited transactions") involving
a Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3- 101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust may be deemed to hold plan
assets by reason of a Plan's investment in a Certificate; such plan assets would
include an undivided interest in the Home Equity Loans and any other assets held
by the Trust. In such an event, persons providing services with respect to the
assets of the Trust, may be parties in interest, subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA (and of Section 4975 of the
Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
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
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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, Moody's, Duff
& Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, Inc.
("Fitch");
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the loans to the Trust Estate
represents not more than the fair market value of such loans; the sum
of all payments made to and retained by the Trustee and the Servicer
represents not more than reasonable compensation for such person's
services under the 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 Certificate Insurer, the Underwriters, the Trustee, the
Servicer, any obligor with respect to Home Equity Loans included in the Trust
Estate constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Estate, or any affiliate of such
parties (the "Restricted Group").
In addition, as of the date hereof, there is no single Home Equity Loan
included in the Trust Estate that constitutes more than five percent of the
aggregate unamortized principal balance of the assets of the Trust Estate.
Before purchasing a Class A Certificate based on the Exemption, however, a
fiduciary of a Plan should itself confirm (1) that such Certificate constitutes
a "certificate" for purposes of the Exemption and (2) that the specific
conditions and other requirements set forth in the Exemption would be satisfied.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
and the potential consequences in their specific circumstances, prior to making
an investment in the Class A Certificates. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment procedure
and diversification an investment in the Class A
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Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
RATINGS
It is a condition of the issuance of the Class A Certificates that the
Class A Certificates receive ratings of "AAA" by Standard & Poor's and "Aaa" by
Moody's. The ratings assigned to the Class A Certificates will be based
primarily on the claims-paying ability of the Certificate Insurer. Explanations
of the significance of such ratings may be obtained from Moody's, 99 Church
Street, New York, New York and Standard & Poor's, 25 Broadway, New York, New
York 10004. Such ratings will be the views only of such rating agencies. There
is no assurance that any such ratings will continue for any period of time or
that such ratings will not be revised or withdrawn. Any such revision or
withdrawal of such ratings may have an adverse effect on the market price of the
Class A Certificates. A security rating is not a recommendation to buy, sell or
hold securities.
LEGAL INVESTMENT CONSIDERATIONS
Although the Class A Certificates are expected to be rated "AAA" by
Standard & Poor's and "Aaa" by Moody's, the Class A Certificates will not
constitute "mortgage related securities" for purposes of 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
Class A Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Class A Certificates (the "Underwriting Agreement"),
the Depositor has agreed to cause the Trust to sell to each of the Underwriters
named below (the "Underwriters"), and each of the Underwriters has severally
agreed to purchase, the principal amount of the Class A Certificates set forth
opposite its name below:
Class A-1 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $63,322,000
PaineWebber Incorporated $63,321,000
-----------
Total $126,643,000
Class A-2 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $17,511,000
PaineWebber Incorporated $17,510,000
-----------
Total $35,021,000
Class A-3 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $31,686,000
PaineWebber Incorporated $31,685,000
-----------
Total $63,371,000
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Class A-4 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $21,015,000
PaineWebber Incorporated $21,015,000
-----------
Total $42,030,000
Class A-5 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $6,719,000
PaineWebber Incorporated $6,718,000
----------
Total $13,437,000
Class A-6 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $11,249,000
PaineWebber Incorporated $11,249,000
-----------
Total $22,498,000
Class A-7 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $13,500,000
PaineWebber Incorporated $13,500,000
-----------
Total $27,000,000
Class A-8 Certificates
Underwriters Principal Amount
------------ ----------------
Nomura Securities International, Inc. $70,000,000
-----------
Total $70,000,000
The Seller has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the Underwriters may be required to make in respect
thereof.
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Class A
Certificates offered hereby, if any are purchased. The Depositor has been
advised by the Underwriters that they propose initially to offer the Class A
Certificates to the public at the respective offering prices set forth on the
cover page hereof and to certain dealers at such price less a concession not in
excess of the respective amounts set forth in the table below (expressed as a
percentage of the relative Certificate Principal Balance). The Underwriters may
allow and such dealers may reallow a discount not in excess of the respective
amounts set forth in the table below to certain other dealers.
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Selling Reallowance
Class Concession Discount
- ----- ---------- --------
A-1............................. 0.090% 0.075%
A-2............................. 0.150 0.100
A-3............................. 0.180 0.125
A-4............................. 0.270 0.150
A-5............................. 0.330 0.200
A-6............................. 0.360 0.250
A-7............................. 0.270 0.200
A-8............................. 0.180 0.060
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 Class A 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
Class A 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 Class A 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.
REPORT OF EXPERTS
The consolidated financial statements of the Certificate Insurer, MBIA
Insurance Corporation and its subsidiaries, as of December 31, 1995 and 1994 and
for the three years in the period ended December 31, 1995, incorporated by
reference into this Prospectus Supplement, have been audited by Coopers &
Lybrand L.L.P., independent accountants, as set forth in their report thereon
incorporated by reference herein in reliance upon the authority of such firm as
experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
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. Certain legal
matters relating to the Certificate Insurer and the Insurance Policies will be
passed upon for the Certificate Insurer by Kutak Rock, Omaha, Nebraska.
S-69
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<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
Accrual Period...........................................................S-5
Appraised Values........................................................S-23
Available Funds.........................................................S-46
Backup Servicer.........................................................S-18
Balloon Loans...........................................................S-17
Beneficial Owners.......................................................S-12
Book-Entry Certificates.................................................S-47
Capitalized Interest Account............................................S-11
Carry-Forward Amount....................................................S-45
Cede....................................................................S-12
Certificate Account.....................................................S-43
Certificate Insurer.....................................................S-10
Certificate Insurer Default.............................................S-10
Class....................................................................S-1
Class A Certificate Principal Balance...................................S-37
Class A Certificates.....................................................S-1
Class A Distribution Amount..............................................S-5
Class A Principal Distribution Amount....................................S-7
Class A-1 Certificates...................................................S-1
Class A-2 Certificates...................................................S-1
Class A-3 Certificates...................................................S-1
Class A-4 Certificates...................................................S-1
Class A-5 Certificates...................................................S-1
Class A-6 Certificates...................................................S-1
Class A-7 Certificates...................................................S-1
Class A-7 Lockout Distribution Amount....................................S-6
Class A-7 Lockout Percentage.............................................S-7
Class A-7 Lockout Pro Rata Distribution Amount...........................S-7
Class A-8 Available Funds Cap............................................S-1
Class A-8 Certificates...................................................S-1
Class R Certificates.....................................................S-2
Closing Date.............................................................S-1
CMT Index................................................................S-3
CMT Loans................................................................S-3
Code....................................................................S-13
Combined Loan-to-Value Ratios...........................................S-25
Compensating Interest...................................................S-59
Coupon Rate..............................................................S-3
CPR.....................................................................S-37
Current Interest.........................................................S-5
Custodian...............................................................S-56
Cut-Off Date.............................................................S-1
D&P.....................................................................S-66
Daily Collections.......................................................S-58
Definitive Certificate..................................................S-47
Delinquency Advances....................................................S-58
Depositor................................................................S-1
DOL.....................................................................S-65
DTC.....................................................................S-12
DTC Participants........................................................S-48
ERISA...................................................................S-65
Excess Subordinated Amount..............................................S-54
Exchange Act............................................................S-69
Exemption...............................................................S-66
Expense Fee Rate........................................................S-44
FHLMC...................................................................S-19
Final Determination.....................................................S-64
Financial Intermediary..................................................S-47
Fiscal Agent............................................................S-50
Fitch...................................................................S-66
Fixed Rate Certificates..................................................S-1
FNMA....................................................................S-19
FNMA Guide..............................................................S-57
Funding Period..........................................................S-11
GAAP....................................................................S-52
Group...................................................................S-22
Home Equity Loan Group..................................................S-22
Home Equity Loans........................................................S-2
Initial Home Equity Loans................................................S-2
Insurance Policies......................................................S-10
Insured Payment.........................................................S-10
LIBOR Determination Date................................................S-47
Loan Balance.............................................................S-7
Loan Purchase Price.....................................................S-56
Maximum Collateral Amount...............................................S-12
Monthly Remittance Date..................................................S-8
Moody's.................................................................S-12
Mortgagor...............................................................S-36
Net Liquidation Proceeds................................................S-58
Non-REMIC Accounts......................................................S-13
Notes...................................................................S-22
One-Month LIBOR.........................................................S-47
Original Aggregate Loan Balance.........................................S-22
Owners...................................................................S-3
Participants............................................................S-47
Payment Date.............................................................S-5
Percentage Interest.....................................................S-43
Plans...................................................................S-65
Pooling and Servicing Agreement..........................................S-2
Preference Amount........................................................S-8
Pre-Funded Amount.......................................................S-11
Pre-Funding Account......................................................S-2
Premium Amount...........................................................S-9
Prepayment Assumption...................................................S-37
Prepayments.............................................................S-14
Preservation Expenses...................................................S-59
Principal and Interest Account..........................................S-58
Properties...............................................................S-2
Qualified Replacement Mortgage..........................................S-55
Rating Agencies.........................................................S-12
Realized Loss...........................................................S-54
Record Date..............................................................S-5
Reference Banks.........................................................S-47
Register................................................................S-43
Registrar...............................................................S-43
REMIC...................................................................S-13
REMIC Opinion...........................................................S-55
Remittance Period........................................................S-8
Restricted Group........................................................S-66
Riegle Act..............................................................S-17
Rules...................................................................S-48
SAP.....................................................................S-52
Seller...................................................................S-1
Servicer.................................................................S-1
Servicer Termination Events.............................................S-61
Servicing Advance.......................................................S-59
Servicing Fee............................................................S-9
Six-Month LIBOR.........................................................S-16
Six-Month LIBOR Loans....................................................S-2
SMMEA...................................................................S-13
Specified Subordinated Amount...........................................S-53
Standard & Poor's.......................................................S-12
Subordinated Amount.....................................................S-53
Subordination Deficit...................................................S-54
Subordination Increase Amount...........................................S-53
Subordination Reduction Amount..........................................S-54
Subsequent Cut-Off Date.................................................S-15
Subsequent Home Equity Loans.............................................S-2
Subsequent Transfer Agreement...........................................S-15
Subsequent Transfer Date................................................S-11
Sub-Servicers...........................................................S-18
Sub-Servicing Agreements................................................S-18
Substitution Amount.....................................................S-55
Telerate Page 3750......................................................S-47
Total Available Funds...................................................S-46
Total Monthly Excess Spread.............................................S-53
Trust....................................................................S-1
Trust Estate............................................................S-42
Trustee..................................................................S-1
Trustee Fee..............................................................S-1
Underwriters............................................................S-67
Weighted average life...................................................S-37
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<PAGE>
PROSPECTUS
Home Equity Loan Pass Through Certificates
(Issuable in Series)
IMC Securities, Inc.
(Depositor)
This Prospectus relates to Home Equity Loan Pass Through Certificates to be
issued from time to time in one or more series (and one or more classes within a
series), certain classes of which may be offered on terms determined at the time
of sale and described in this Prospectus and the related Prospectus Supplement.
Each series of Certificates will be issued by a separate trust (each, a "Trust")
and will evidence either a beneficial ownership interest in, or the debt
obligation of, such Trust. The assets of a Trust will include one or more of the
following: (i) single family residential mortgage loans, including mortgage
loans secured by junior liens on the related mortgaged properties, (ii) mortgage
backed securities and (iii) investment income, reserve funds, cash accounts,
insurance policies (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 on page S-11 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 July 23, 1996.
<PAGE>
AVAILABLE INFORMATION
The representative has filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Certificates. The Registration
Statement and amendments thereof and to the exhibits thereto, as well as such
reports and other information, are available for inspection without charge at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New
York, New York 10048; and 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>
TABLE OF CONTENTS
Page
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.......................................................... 13
Mortgage-Backed Securities.............................................. 15
Other Mortgage Securities............................................... 16
CREDIT ENHANCEMENT......................................................... 16
SERVICING OF MORTGAGE LOANS................................................ 20
Payments on Mortgage Loans.............................................. 21
Advances................................................................ 22
Collection and Other Servicing Procedures............................... 22
Primary Mortgage Insurance.............................................. 23
Standard Hazard Insurance............................................... 23
Title Insurance Policies................................................ 24
Claims Under Primary Mortgage Insurance Policies
and Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan...................................... 24
Servicing Compensation and Payment of Expenses.......................... 25
Master Servicer......................................................... 25
ADMINISTRATION............................................................. 25
Assignment of Mortgage Assets........................................... 26
Evidence as to Compliance............................................... 27
The Trustee............................................................. 28
Administration of the Certificate Account............................... 28
Reports................................................................. 29
Forward Commitments; Pre-Funding........................................ 29
Servicer Events of Default.............................................. 30
Rights Upon Servicer Event of Default................................... 30
Amendment............................................................... 30
Termination............................................................. 31
USE OF PROCEEDS............................................................ 31
THE DEPOSITOR.............................................................. 31
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
ASSETS.................................................................. 32
General................................................................. 32
Foreclosure............................................................. 33
Soldiers' and Sailors' Civil Relief Act................................. 37
LEGAL INVESTMENT MATTERS................................................... 38
ERISA CONSIDERATIONS....................................................... 38
FEDERAL INCOME TAX CONSEQUENCES............................................ 40
Federal Income Tax Consequences For REMIC
Certificates......................................................... 40
Taxation of Regular Certificates........................................ 42
Taxation of Residual Certificates....................................... 47
Treatment of Certain Items of REMIC Income and
Expense.............................................................. 49
Tax-Related Restrictions on Transfer of Residual
Certificates......................................................... 50
Sale or Exchange of a Residual Certificate.............................. 52
Taxes That May Be Imposed on the REMIC Pool............................. 53
Liquidation of the REMIC Pool........................................... 53
Administrative Matters.................................................. 54
Limitations on Deduction of Certain Expenses............................ 54
Taxation of Certain Foreign Investors................................... 55
Backup Withholding...................................................... 55
Reporting Requirements.................................................. 56
Federal Income Tax Consequences for Certificates as
to Which No REMIC Election Is Made................................... 56
Standard Certificates................................................... 56
Premium and Discount.................................................... 58
Stripped Certificates................................................... 59
Reporting Requirements and Backup Withholding........................... 62
Taxation of Certain Foreign Investors................................... 62
Taxation of Securities Classified as Partnership
Interests............................................................ 62
PLAN OF DISTRIBUTION....................................................... 62
RATINGS.................................................................... 63
LEGAL MATTERS.............................................................. 63
FINANCIAL INFORMATION...................................................... 63
INDEX TO LOCATION OF PRINCIPAL DEFINED
TERMS...................................................................A-1
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<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates and to
the related Agreement which will be prepared in connection with each series of
Certificates. Unless otherwise specified, capitalized terms used and not defined
in this Summary of Prospectus have the meanings given to them in this Prospectus
and in the related Prospectus Supplement.
Securities................ Home Equity Loan Pass Through Certificates, issuable
in series, in fully registered form or book entry
only form, in authorized denominations, as described
in the Prospectus Supplement (the "Certificates").
Each Certificate will represent a beneficial
ownership interest in a trust (a "Trust") created
from time to time pursuant to a pooling and
servicing agreement or trust agreement (each, an
"Agreement").
The Depositor............. IMC Securities, Inc. (the "Depositor") is a Delaware
corporation. The Depositor's principal executive
offices are located at 3450 Buschwood Park Drive,
Tampa, Florida 33618; telephone number (813)
932-2211. See "The Depositor" herein. The Depositor
or its affiliates may retain or hold for sale from
time to time one or more classes of a series of
Certificates.
The Servicer.............. The entity or entities named as the Servicer in the
Prospectus Supplement (the "Servicer"), will act as
servicer, with respect to the Mortgage Loans
included in the related Trust. The Servicer may be
an affiliate of the Depositor and may be the seller
of Mortgage Assets to the Depositor (each, a
"Seller").
The Master Servicer....... A "Master Servicer" may be specified in the related
Prospectus Supplement for the related series of
Certificates.
The Trustee............... The trustee (the "Trustee") for each series of
Certificates will be specified in the related
Prospectus Supplement.
Trust Assets.............. The assets of a Trust will be mortgage-related
assets (the "Mortgage Assets") consisting of one or
more of the following types of assets:
A. The Mortgage Loans.... "Mortgage Loans" may include: (i) conventional
(i.e., not insured or guaranteed by any governmental
agency) Mortgage Loans secured by one-to-four family
residential properties; (ii) Mortgage Loans secured
by security interests in shares issued by private,
non-profit, cooperative housing corporations
("Cooperatives") and in the related proprietary
leases or occupancy agreements granting exclusive
rights to occupy specific dwelling units in such
Cooperatives' buildings; and, (iii) Mortgage Loans
secured by junior liens on the related mortgaged
properties, including home improvement retail
installment contracts. See "The Trusts - Mortgage
Loans" herein.
B. Mortgage-
Backed Securities... "Mortgage-Backed Securities" (or "MBS") may include
(i) private (that is, not guaranteed or insured by
the United States or any agency or instrumentality
thereof) mortgage participations, mortgage
pass-through certificates or other mortgage-backed
securities or (ii) certificates insured or
guaranteed by Federal Home Loan Mortgage Corporation
("FHLMC")
1
<PAGE>
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.
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
2
<PAGE>
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 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.
3
<PAGE>
Credit Enhancement........ If specified in the related Prospectus Supplement, a
series of Certificates, or certain classes within
such series, may have the benefit of one or more
types of credit enhancement ("Credit Enhancement")
including but not limited to subordination, cross
support, mortgage pool insurance, special hazard
insurance, financial guaranty insurance policies, a
bankruptcy bond, reserve funds, other insurance,
guaranties and similar instruments and arrangements.
The protection against losses afforded by any such
Credit Enhancement will be limited. If Owners of
Certificates are materially dependent upon Credit
Enhancement for timely payments of interest and/or
principal on their Certificates, the related
Prospectus Supplement will include information,
including financial information, concerning the
provider of such Credit Enhancement. See "Credit
Enhancement" herein.
Book Entry Registration... Certificates of one or more classes of a series may
be issued in book entry form ("Book Entry
Certificates") in the name of a clearing agency (a
"Clearing Agency") registered with the Securities
and Exchange Commission, or its nominee. Transfers
and pledges of Book Entry Certificates may be made
only through entries on the books of the Clearing
Agency in the name of brokers, dealers, banks and
other organizations eligible to maintain accounts
with the Clearing Agency ("Clearing Agency
Participants") or their nominees. Transfers and
pledges by purchasers and other beneficial owners of
Book Entry Certificates ("Beneficial Owners") other
than Clearing Agency Participants may be effected
only through Clearing Agency Participants. All
references to the Owners of Certificates shall mean
Beneficial Owners to the extent Beneficial Owners
may exercise their rights through a Clearing Agency.
Except as otherwise specified in this Prospectus or
a related Prospectus Supplement, the term "Owners"
shall be deemed to include Beneficial Owners. See
"Risk Factors - Book Entry Registration" and
"Description of the Certificates - Book Entry
Registration" herein.
Federal Income Tax
Consequences........... Federal income tax consequences will depend on,
among other factors, whether one or more elections
are made to treat a Trust or specified portions
thereof as a "real estate mortgage investment
conduit" ("REMIC") under the Internal Revenue Code
of 1986, as amended (the "Code"), or, if no REMIC
election is made, whether the Certificates are
considered to be Standard Certificates, Stripped
Certificates or Partnership Interests. The related
Prospectus Supplement for each series of
Certificates will specify whether a REMIC election
will be made. See "Federal Income Tax Consequences"
herein and in the related Prospectus Supplement.
ERISA Considerations...... A fiduciary of any employee benefit plan subject to
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or the Code should carefully
review with its own legal advisors whether the
purchase or holding of Certificates could give rise
to a transaction prohibited or otherwise
impermissible under ERISA or the Code. Certain
classes of Certificates may not be transferred
unless the Trustee and the Depositor are furnished
with a letter of representation or an opinion of
counsel to the effect that such transfer will not
result in a violation of the prohibited transaction
provisions of ERISA and the Code and will not
subject the Trustee, the Depositor or the Servicer
to additional obligations.
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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") and
Fitch Investors Service, Inc. ("Fitch" and each of
Fitch, Moody's 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.
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RISK FACTORS
Prospective investors should consider, among other things, the following
risk factors in connection with the purchase of the Certificates:
Declining Real Estate Market; Geographic Concentration. If the residential
real estate market in general or a regional or local area where Mortgage Assets
for a Trust are concentrated should experience an overall decline in property
values, or a significant downturn in economic conditions, rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. See "The Trusts - Mortgage Loans"
herein.
Limited Obligations. The Certificates will not represent an interest in or
obligation of the Depositor. The Certificates of each series will not be insured
or guaranteed by any government agency or instrumentality, the Depositor, any
Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment experience
on Mortgage Loans constituting or underlying the Mortgage Assets will affect the
average life of each Class of Certificates relating to a Trust. Prepayments may
be influenced by a variety of economic, geographic, social and other factors,
including changes in interest rate levels. In general, if mortgage interest
rates fall, the rate of prepayment would be expected to increase. Conversely, if
mortgage interest rates rise, the rate of prepayment would be expected to
decrease. Other factors affecting prepayment of mortgage loans include changes
in housing needs, job transfers, unemployment and servicing decisions. See
"Prepayment and Yield Considerations" in the related Prospectus Supplement. In
addition, investors in the Certificates should be aware that the Servicer, the
Seller, or, if specified in the related Prospectus Supplement, the 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
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Certificates of classes
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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.
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 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
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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.
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DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to an Agreement entered into among the
Depositor, the Trustee, the Master Servicer, if any, and the Servicer. The
provisions of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the related Trust.
Certificates which represent beneficial interests in the Trust will be issued
pursuant to the Agreement. The following summaries and the summaries set forth
under "Administration" describe certain provisions relating to each series of
Certificates. The Prospectus Supplement for a series of Certificates will
describe the specific provisions relating to such series. The Depositor will
provide Owners of Certificates, without charge, on written request a copy of the
Agreement for the related series. Requests should be addressed to IMC
Securities, Inc., 3450 Buschwood Park Drive, Tampa, Florida 33618. The Agreement
relating to a series of Certificates will be filed with the Securities and
Exchange Commission within 15 days after the date of issuance of such series of
Certificates (the "Delivery Date").
The Certificates of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The Certificates
will not represent obligations of the Depositor, the Trustee, the Master
Servicer, if any, any Servicer or any affiliate thereof and will not be
guaranteed by any governmental agency. See "The Trusts" herein.
The Mortgage Assets relating to a series of Certificates will not be
insured or guaranteed by any governmental entity and, to the extent that
delinquent payments on or losses in respect of defaulted Mortgage Assets, are
not advanced or paid from any applicable Credit Enhancement, such delinquencies
may result in delays in the distribution of payments on, or losses allocated to
one or more classes of Certificates of such series.
General
The Certificates of each series will be issued either in book entry form or
in fully registered form. The minimum original denomination of each class of
Certificates will be specified in the related Prospectus Supplement. The
original "Certificate Principal Balance" of each Certificate will equal the
aggregate distributions or payments allocable to principal to which such
Certificate is entitled and distributions allocable to interest on each
Certificate that is not entitled to distributions allocable to principal will be
calculated based on the "Notional Principal Balance" of such Certificate. The
Notional Principal Balance of a Certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
Except as described below under "Book Entry Registration" with respect to
Book Entry Certificates, the Certificates of each series will be transferable
and exchangeable on a "Certificate Register" to be maintained at the corporate
trust office or such other office or agency maintained for such purposes by the
Trustee. The Trustee will be appointed initially as the "Certificate Registrar"
and no service charge will be made for any registration of transfer or exchange
of Certificates, but payment of a sum sufficient to cover any tax or other
governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of ERISA
and the Code. See "ERISA Considerations" herein and in the related Prospectus
Supplement. Transfer of Certificates of such a class will not be registered
unless the transferee (i) executes a representation letter stating that it is
not, and is not purchasing on behalf of, any such plan, account or arrangement
or (ii) provides an opinion of counsel satisfactory to the Trustee and the
Depositor that the purchase of Certificates of such a class by or on behalf of
such plan, account or arrangement is permissible under applicable law and will
not subject the Trustee, the Servicer or the Depositor to any obligation or
liability in addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the related
Trust or designated portions thereof as a REMIC for federal income tax purposes.
The related Prospectus Supplement will specify whether a
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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 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.
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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.
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
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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 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.
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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 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
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Mortgage Loans will be within the broad classification of single family mortgage
loans, defined generally as loans on residences containing one to four dwelling
units. If specified in the Prospectus Supplement, the Mortgage Loans may include
cooperative apartment loans ("Cooperative Loans") secured by security interests
in shares issued by Cooperatives and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings, or the Mortgage Loans may be secured by junior
liens on the related mortgaged properties, including home improvement retail
installment contracts. The Mortgaged Properties securing the Mortgage Loans may
include investment properties and vacation and second homes. Each Mortgage Loan
will be selected by the Depositor for inclusion in the Trust from among those
acquired by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans.
The Mortgage Loans will be "conventional" mortgage loans, that is they will
not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a series of
Certificates will be payable either on the first day of each month or on
different scheduled days throughout each month, and the interest will be
calculated either on a simple-interest or accrual method as described in the
related Prospectus Supplement. When a full principal amount is paid on a
Mortgage Loan during a month, the mortgagor is generally charged interest only
on the days of the month actually elapsed up to the date of such prepayment, at
a daily interest rate that is applied to the principal amount of the Mortgage
Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for a
series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a period of
time or under certain circumstances and followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a Mortgage Loan for such periods and under such
circumstances as may be specified in the related Prospectus Supplement.
Mortgage Loans may provide for the payment of interest at a rate lower than
the specified mortgage rate for a period of time or for the life of the
Mortgage Loan with the amount of any difference contributed from funds
supplied by the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of
an amortization schedule that is longer than the original term to maturity
or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity. Principal may include interest that has been deferred
and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time or
may change from period to period. Mortgage Loans may include limits on
periodic increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ("lockout periods"). Certain Mortgage Loans may permit prepayments
after expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection with any such subsequent
prepayment. Other Mortgage Loans may permit prepayments without payment of
a fee unless the prepayment occurs during specified time periods. The
Mortgage Loans may include "due-on-sale" clauses which permit the mortgagee
to demand payment of the entire Mortgage Loan in connection with the sale
or certain transfers of the related mortgaged property. Other Mortgage
Loans may
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be assumable by persons meeting the then applicable underwriting standards
of the Servicer, or as may be required by any applicable government
program.
With respect to a series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due before the Cut-Off Date, reduced by all principal payments,
including principal payments advanced pursuant to the related Agreement,
previously distributed with respect to such Mortgage Loan and reported as
allocable to principal.
The "Loan-to-Value Ratio" of any Mortgage Loan will be determined by
dividing the amount of the Mortgage Loan by the Original Value (defined below)
of the related Mortgaged Property. The "principal amount" of the Mortgage Loan,
for purposes of computation of the Loan-to-Value Ratio of any Mortgage Loan,
will include any part of an origination fee that has been financed. In some
instances, it may also include amounts which the seller or some other party to
the transaction has paid to the mortgagee, such as minor reductions in the
purchase price made at the closing. The "Original Value" of a Mortgage Loan is
(a) in the case of any purchase money Mortgage Loan, the lesser of (i) the value
of the mortgaged property, based on an appraisal thereof and (ii) the selling
price, and (b) otherwise the value of the mortgaged property, based on an
appraisal thereof.
There can be no assurance that the Original Value will reflect actual real
estate values during the term of a Mortgage Loan. If the residential real estate
market should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Loans become equal to or greater
than the values of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions (which may or may not affect real estate values) may affect the
timely and ultimate payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
Mortgage-Backed Securities
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that is,
not guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates insured or guaranteed by FHLMC
or FNMA or GNMA.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Servicer or the MBS Trustee on the
dates specified in the related Prospectus Supplement. The MBS Issuer or the MBS
Servicer or another person specified in the related Prospectus Supplement may
have the right or obligation to repurchase or substitute assets underlying the
MBS after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Certificates under "Credit Enhancement" may
have been provided with respect to the MBS. The type, characteristics and amount
of such credit enhancement, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
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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.
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.
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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 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
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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.
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
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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 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
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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 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.
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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 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.
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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 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
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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.
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.
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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 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
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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-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.
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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 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
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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.
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.
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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 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;
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(v) all condemnation awards or settlements which are not released to
the Mortgagor in accordance with normal servicing procedures;
(vi) any Advances made as described under "Servicing of Mortgage Loans
- Advances" herein and certain other amounts required under the 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;
(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
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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 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
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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.
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.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed primarily by applicable state law (which
laws may differ substantially), the summaries do not purport to be complete nor
to reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the Mortgage Loans is situated. The summaries
are qualified by reference to the applicable federal and state laws governing
the Mortgage Loans.
General
Mortgages. The Mortgage Loans will be secured either by deeds of trust or
mortgages. A mortgage creates a lien upon the real property encumbered by the
mortgage. It is not prior to liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust formally has three
parties, the borrower-homeowner called the trustor (similar to a mortgager), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust and generally with a
power of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust or mortgage
and, in some cases, the directions of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and or underlying land, as is generally the case, the cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who 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
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collateral or tenant-stockholder as an individual as provided in the security
agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares.
Foreclosure
Mortgages. Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
or and any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, the trustee must provide notice in some states
to any other individual having an interest in the real property, including any
junior lienholders. The borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees' which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
Judicial foreclosure proceedings are often not protested by any of the parties
defendant. However, when the mortgagee's right to foreclose is contested, the
legal proceedings necessary to resolve the issue can be time consuming. After
the completion of judicial foreclosure, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during foreclosure proceedings, it is uncommon
for a third party to purchase the property at the foreclosure sale. Rather it is
common for the lender to purchase the property from the trustee or referee for
an amount equal to the principal amount of the mortgage or deed of trust,
accrued and unpaid interest and expenses of foreclosure. Thereafter, the lender
will assume the burdens of ownership, including paying real estate taxes,
obtaining casualty insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
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"
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clause contained in the senior mortgage or deed of trust. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are applied
pursuant to the terms of the deed of trust, which may require application first
to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. In some states, any surplus money remaining may be available to
satisfy claims of the holders of junior mortgages or deeds of trust and other
junior liens and claims in order of their priority, whether or not the mortgagor
or trustee is in default, while in some states, any surplus money remaining may
be payable directly to the mortgagor or trustor. Any balance remaining is
generally payable to the mortgagor or trustor. Following the sale, in some
states the mortgagee or beneficiary following a foreclosure of a mortgage or
deed of trust may not obtain a deficiency judgment against the mortgagor or
trustor. A junior lienholder whose rights in the property are terminated by the
foreclosure by a senior lienholder will not share in the proceeds from the
subsequent disposition of the property.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owned by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
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.
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Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain of the
Mortgage Loans may be secured by mortgages or deeds of trust providing for
junior (i.e., second, third, etc.) liens on the related Mortgaged Properties
which are junior to the other mortgages or deeds of trust held by other lenders
or institutional investors. The rights of the beneficiary under a junior deed of
trust or as mortgagee under a junior mortgage are subordinate to those of the
mortgagee or beneficiary under the senior mortgage or deed of trust, including
the prior rights of the senior mortgagee or beneficiary to receive hazard
insurance and condemnation proceeds and to cause the property securing the
Mortgage Loans to be sold upon default of the mortgagor or trustor. As discussed
more fully below, a junior mortgagee or beneficiary in some states may satisfy a
defaulted senior loan in full and in some states may cure such default and bring
the senior loan current, in either event adding the amounts expended to the
balance due on the junior loan. In most states, absent a provision in the senior
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the bankruptcy is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
Other provisions typically found in the form of the mortgagee or deed of
trust generally used by most institutional lenders obligate the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property and,
when due, all encumbrances, charges and liens on the property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary typically is given the
right under the mortgage or deed of trust to perform the obligation itself at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the trustor. All sums so expended by the mortgagee or beneficiary generally
become part of the indebtedness secured by the mortgage or deed of trust
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
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a beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the residence
had yet occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
fact of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan. Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award 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
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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.
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.
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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 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
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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 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.
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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 Prospectus Supplement for each
series of Certificates will discuss any special tax consideration applicable to
any class of Certificates of such series, and the discussion below is qualified
by any such discussion in the related Prospectus Supplement.
For purposes of this opinion, where the applicable Prospectus Supplement
provides for a fixed retained yield with respect to the Mortgage Assets
underlying a series of Certificates, references to the Mortgage Assets will be
deemed to refer to that portion of the Mortgage Assets held by the Trust which
does not include the fixed retained yield.
Federal Income Tax Consequences For REMIC Certificates
General. With respect to a particular series of Certificates, an election
may be made to treat the Trust or one or more trusts or segregated pools of
assets therein as one or more REMICs within the meaning of Code Section 860D. A
Trust or a portion or portions thereof as to which one or more REMIC elections
will be made will be referred to as a "REMIC Pool." For purposes of this
discussion, Certificates of a series as to which one or more REMIC elections are
made are referred to as "REMIC Certificates" and will consist of one or more
classes of "Regular Certificates" and one class of "Residual Certificates" in
the case of each REMIC Pool. Qualification as a REMIC requires ongoing
compliance with certain conditions. With respect to each series of REMIC
Certificates, Arter & Hadden, special counsel to the Depositor, has advised the
Depositor that in their opinion, assuming (i) the making of an appropriate
election, (ii) compliance with the Agreement and (iii) compliance with any
changes in the law, including any amendments to the Code or applicable Treasury
regulations thereunder, each REMIC Pool will qualify as a REMIC and that if a
Trust qualifies as a REMIC, the tax consequences to the Owners will be as
described below. In such case, the Regular Certificates will be considered to be
"regular interests" in the REMIC Pool and generally will be treated for federal
income tax purposes as if they were newly originated debt instruments, and the
Residual Certificates will be considered to be "residual interests" in the REMIC
Pool. The Prospectus Supplement for each series of Certificates will indicate
whether one or more REMIC elections with respect to the related Trust will be
made, in which event references to "REMIC" or "REMIC Pool" herein shall be
deemed to refer to each such REMIC Pool.
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Status of REMIC Certificates. REMIC Certificates held by a mutual savings
bank or a domestic building and loan association (a "Thrift Institution") will
constitute "qualifying real property loans" within the meaning of Code Section
593(d)(1) in the same proportion that the assets of the REMIC Pool would be so
treated. REMIC Certificates held by a domestic building and loan association
will constitute "a regular or residual interest in a REMIC" within the meaning
of Code Section 7701(a) (19)(C) (xi) in the same proportion that the assets of
the REMIC Pool would be treated as "loans secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v) or as other
assets described in Code Section 7701(a)(19)(C). REMIC Certificates held by a
real estate investment trust (a "REIT") will constitute "real estate assets"
within the meaning of Code Section 856(c)(5)(A), and interest on the REMIC
Certificates will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that, for both purposes, the assets
of the REMIC Pool would be so treated. If at all times 95% or more of the assets
of the REMIC Pool constitute qualifying assets for Thrift Institutions and
REITs, the REMIC Certificates will be treated entirely as qualifying assets for
such entities. Moreover, the REMIC Regulations provide that, for purposes of
Code Sections 593(d)(1) and 856(c)(5)(A), payments of principal and interest on
the Mortgage Assets that are reinvested pending distribution to holders of REMIC
Certificates, constitute qualifying assets for such entities. Where two REMIC
Pools are part of a tiered structure they will be treated as one REMIC for
purposes of the tests described above respecting asset ownership of more or less
than 95%. Notwithstanding the foregoing, however, REMIC income received by a
REIT owning a residual interest in a REMIC Pool could be treated in part as
non-qualifying REIT income if the REMIC Pool holds Mortgage Assets with respect
to which income is contingent on mortgagor profits or property appreciation. In
addition, if the assets of the REMIC include buy-down Mortgage Assets, it is
possible that the percentage of such assets constituting "qualifying real
property loans" or "loans secured by an interest in real property" for purposes
of Code Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required
to be reduced by the amount of the related buy-down funds. REMIC Certificates
held by a regulated investment company will not constitute "government
securities" within the meaning of Code Section 851(b)(4)(A)(i). REMIC
Certificates held by certain financial institutions will constitute an "evidence
of indebtedness" within the meaning of Code Section 582(c)(i). REMIC
Certificates representing interests in obligations secured by manufactured
housing treated as single family residences under Code Section 25(e)(10) will be
considered interests in "qualified mortgages" as defined in Code Section
860E(a)(3).
Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis amount of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the Delivery
Date (which for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations provide
a "safe harbor" pursuant to which the de minimis requirement will be met if at
all times the aggregate adjusted basis of any nonqualified assets (i.e., assets
other than qualified mortgages and permitted investments) is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of the
Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made." In that case, no entity-level tax would be imposed on
the REMIC Pool. Alternatively, the Regular Certificates may continue to be
treated as debt instruments for federal income tax purposes; but the REMIC Pool
could be treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is
treated as a TMP, any residual income of the REMIC Pool (income from the
Mortgage Assets less interest and original issue discount expense allocable to
the Regular Certificates and any administrative expenses of the REMIC Pool)
would be subject to corporate income tax at the REMIC Pool level. On the other
hand, an entity with multiple classes of ownership interests may be treated as a
separate association taxable as a corporation under Treasury regulations, and
the Regular Certificates may be treated as equity interests therein. The Code,
however, authorizes the Treasury Department to issue regulations that address
situations where failure to meet one or more of the requirements for REMIC
status occurs inadvertently and in good faith, and disqualification of the REMIC
Pool would occur absent regulatory relief. Investors should be aware, however,
that the Conference Committee Report to the Tax Reform Act of 1986 (the "1986
Act") indicates that the relief may be accompanied by sanctions,
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such as the imposition of a corporate tax on all or a portion of the REMIC
Pool's income for the period of time in which the requirements for REMIC status
are not satisfied.
Taxation of Regular Certificates
General. Payments received by holders of Regular Certificates generally
should be accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. In general, interest, original
issue discount and market discount on a Regular Certificate will be treated as
ordinary income to a holder of the Regular Certificate (the "Regular
Certificateholder") as they accrue, and principal payments on a Regular
Certificate will be treated as a return of capital to the extent of the Regular
Certificateholder's basis in the Regular Certificate allocable thereto. Regular
Certificateholders must use the accrual method of accounting with regard to
Regular Certificates, regardless of the method of accounting otherwise used by
such Regular Certificateholders.
Original Issue Discount. Regular Certificates may be issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any class
of Regular Certificates having original issue discount generally must include
original issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, in advance of receipt of the cash attributable to
such income. The Depositor anticipates that the amount of original issue
discount required to be included in a Regular Certificateholder's income in any
taxable year will be computed as described below.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which distributions of principal are made in a
single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price." The issue price
of a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public. The Depositor
will determine original issue discount by including the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a period
prior to the issue date of the Regular Certificate in the issue price of a
Regular Certificate and will include in the stated redemption price at maturity
any interest paid on the first Payment Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Payment Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of stated interest if
such interest distributions constitute "qualified stated interest." Qualified
stated interest generally means stated interest that is unconditionally payable
in cash or in property (other than debt instruments of the issuer) at least
annually at (i) a single fixed rate, (ii) one or more qualified floating rates
(as described below), (iii) a fixed rate followed by one or more qualified
floating rates, (iv) a single objective rate (as described below) or (v) a fixed
rate and an objective rate that is a qualified inverse floating rate. The OID
Regulations state that interest payments are unconditionally payable only if a
late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain debt securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such debt securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where debt securities do not provide for default remedies, the interest payments
will be included in the debt security's stated redemption price at maturity and
taxed as OID. Any stated interest in excess of the qualified stated interest is
included in the stated redemption price at maturity. If the amount of original
issue discount is "de minimis" as described below, the amount of original issue
discount is treated as zero, and all stated interest is treated as qualified
stated interest. Distributions of interest on Regular Certificates with respect
to which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Certificates includes all distributions of interest as well as principal
thereon. Moreover, if the interval between the issue date and the first Payment
Date on a Regular Certificate is longer than the interval between subsequent
Payment Dates (and interest paid on the first Payment Date is less than would
have been earned if the stated interest rate were applied to outstanding
principal during each day in such interval), the stated interest distributions
on such Regular Certificate technically do not constitute qualified stated
interest. In such case a special 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
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on the first Payment Date for each day the Regular Certificate was outstanding)
is treated as made at a fixed rate if the value of the rate on which the payment
is based is adjusted in a reasonable manner to take into account the length of
the interval. Regular Certificateholders should consult their own tax advisors
to determine the issue price and stated redemption price at maturity of a
Regular Certificate.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted maturity of the Regular Certificate is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Certificate and the denominator of
which is the stated redemption price at maturity of the Regular Certificate.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the assumed rate of prepayment of the
Mortgage Assets and the anticipated reinvestment rate, if any, relating to the
Regular Certificates (the "Prepayment Assumption"). The Prepayment Assumption
with respect to a series of Regular Certificates will be set forth in the
related Prospectus Supplement. The holder of a debt instrument includes any de
minimis original issue discount in income pro rata as stated principal payments
are received.
Of the total amount of original issue discount on a Regular Certificate,
the Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which he holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. Although not free from doubt,
the Depositor intends to treat the monthly period ending on the day before each
Payment Date as the accrual period, rather than the monthly period corresponding
to the prior calendar month. With respect to each Regular Certificate, a
calculation will be made of the original issue discount that accrues during each
successive full accrual period (or shorter period from the date of original
issue) that ends on the day before the related Payment Date on the Regular
Certificate. For a Regular Certificate, original issue discount is to be
calculated initially based on a schedule of maturity dates that takes into
account the level of prepayments and an anticipated reinvestment rate that are
most likely to occur, which is expected to be based on the Prepayment
Assumption. The original issue discount accruing in a full accrual period would
be the excess, if any, of (i) the sum of (a) the present value of all of the
remaining distributions to be made on the Regular Certificate as of the end of
that accrual period that are included in the Regular Certificate's stated
redemption price at maturity and (b) the distributions made on the Regular
Certificate during the accrual period that are included in the Regular
Certificate's stated redemption price at maturity over (ii) the adjusted issue
price of the Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Certificate at the issue date, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular
Certificate at the beginning of any accrual period equals the issue price of the
Regular Certificate, increased by the aggregate amount of original issue
discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior period. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Assets or that exceed
the Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. In the
event of a change in circumstances that does not result in a substantially
contemporaneous pro rata prepayment, the yield and maturity of the Regular
Certificates are redetermined by treating the Regular Certificates as reissued
on the date of the change for an amount equal to the adjusted issue price of the
Regular 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
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principal payments with respect to certain classes of Regular Certificates and
either an increase or decrease in the daily portions of original issue discount
with respect to such Regular Certificates.
A purchaser of a Regular Certificate at a price greater than the issue
price also will be required to include in gross income the daily portions of the
original issue discount on the Regular Certificate. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Certificate exceeds
the sum of the issue price and the aggregate amount of original issue discount
that would have been includible in the gross income of an original holder of the
Regular Certificate who purchased the Regular Certificate at its issue price,
less any prior distributions included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for such
Regular Certificate (computed in accordance with the rules set forth above) for
all days after the date of purchase and ending on the date on which the
remaining principal amount of such Regular Certificate is expected to be reduced
to zero under the Prepayment Assumption.
A Certificateholder may elect to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount (as described below under "Market Discount"), de minimis market
discount and unstated interest (as adjusted for any amortizable bond premium or
acquisition premium) currently as it accrues using the constant yield to
maturity method. If this election is made, the holder is treated as satisfying
the requirements for making the elections with respect to amortization of
premium and current inclusion of market discount, each as described under
"Premium" and "Market Discount" below.
Variable Rate Regular Certificates. Regular Certificates may provide for
interest based on a variable rate. The OID Regulations provide special rules for
variable rate instruments that meet three requirements. First, the noncontingent
principal payments may not exceed the instrument's issue price by more than a
specified amount equal to the lesser of (i) .015 multiplied by the product of
the total noncontingent payments and the weighted average maturity or (ii) 15%
of the total noncontingent principal payments. Second, the instrument must
provide for stated interest (compounded or paid at least annually) at (i) one or
more qualified floating rates, (ii) a single fixed rate followed by one or more
qualified floating rates, (iii) a single objective rate or (iv) a single fixed
rate and a single objective rate that is a qualified inverse floating rate.
Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period is set at a current value of
that rate (one occurring in the interval beginning three months before and
ending one year after the rate is first in effect on the Regular Certificate). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than zero but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Certificate to be significantly less or
more than the overall expected return on the Regular Certificate is considered a
qualified floating rate. An objective rate is a rate based on changes in the
price of actively traded property or an index of such prices or is a rate based
on (including multiples of) one or more qualified floating rates. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Certificate. Stated interest on a variable
rate debt instrument is qualified stated interest if the interest is
unconditionally payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a) 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
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instruments, the amount of interest and original issue discount accruals are
determined using the following steps. First, a fixed rate substitute for each
variable rate under the debt instrument is determined. In general, the fixed
rate substitute is a fixed rate equal to the rate of the applicable type of
variable rate as of the issue date. Second, an equivalent fixed rate debt
instrument is constructed using the fixed rate substitute(s) in lieu of the
variable rates and keeping all other terms identical. Third, the amount of
qualified stated interest and original issue discount with respect to the
equivalent fixed rate debt instrument are determined under the rules for fixed
rate debt instruments. Finally, appropriate adjustments for actual variable
rates are made during the term by increasing or decreasing the qualified stated
interest to reflect the amount actually paid during the applicable accrual
period as compared to the interest assumed to be accrued or paid under the
equivalent fixed rate debt instrument. If there is no qualified stated interest
under the equivalent fixed rate debt instrument, the adjustment is made to the
original issue discount for the period.
Where the issue price of a Regular Certificate exceeds the original
principal amount of the Regular Certificate, it appears appropriate to reduce
the ordinary income reportable for an accrual period by a portion of such excess
in a manner similar to the amortization of premium on the constant yield method.
Under proposed regulations (the "contingent payment rules"), a Regular
Certificate that provides for (i) non-contingent payments greater than or equal
to its issue price and (ii) one or more contingent payments determined by
reference to the value of publicly traded stock, securities, commodities, or
other publicly traded property must be divided into its component parts for
purposes of performing original issue discount calculations (and possibly for
other federal income tax purposes as well). The non-contingent portion of the
Regular Certificate would be treated as a debt instrument, and the original
issue discount accruals on that portion would be computed in the same manner as
with any non-contingent debt instrument. The issue price of the non-contingent
portion would be that portion of the issue price of the Regular Certificate that
reflects the right to receive the non-contingent payments, determined in the
same manner as if the separate non-contingent debt instrument were a debt
instrument issued as part of an investment unit. The contingent components of
the Regular Certificate would constitute options or other property rights and
would be taxed as if issued as a separate instrument. No accrual of original
issue discount generally would be required with respect to such components under
the contingent payment rules. Accordingly, the rate at which income is accrued
by a Certificateholder may vary depending on whether the original issue discount
rules or the contingent payment rules apply to certain variable rate debt
instruments.
Market Discount. A purchaser of a Regular Certificate also may be subject
to the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Certificate (i) is exceeded by the
stated redemption price at maturity of the Regular Certificate or (ii) in the
case of a Regular Certificate having original issue discount, is exceed by the
sum of the issue price of such Regular Certificate plus any original issue
discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity of
such Regular Certificate are received in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount would
accrue either (i) on the basis of a constant interest rate or (ii) in the ratio
of stated interest allocable to the relevant period to the sum of the interest
for such period plus the remaining interest as of the end of such period, or in
the case of a Regular Certificate issued with original issue discount, in the
ratio of original issue discount accrued for the relevant period to the sum of
the original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Certificate as ordinary income to the extent of the market discount accrued to
the date of disposition under one of the foregoing methods, less any accrued
market discount previously reported as ordinary 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
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for such year. Any such deferred interest expense is, in general, allowed as a
deduction not later than the year in which the related market discount income is
recognized or the Regular Certificate is disposed of. As an alternative to the
inclusion of market discount in income on the foregoing basis, the Regular
Certificateholder may elect to include market discount in income currently as it
accrues in all market discount instruments acquired by such Regular
Certificateholder in that taxable year or thereafter, in which case the interest
deferral rule will not apply. In Revenue Procedure 92-67, the Internal Revenue
Service set forth procedures for taxpayers (1) electing under Code Section
1278(b) to include market discount in income currently, (2) electing under rules
of Code Section 1276(b) to use a constant interest rate to determine accrued
market discount on a bond where the holder of the bond is required to determine
the amount of accrued market discount at a time prior to the holder's
disposition of the bond, and (3) requesting consent to revoke an election under
Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificates. This election, once made,
applies to all obligations held by the taxpayer at the beginning of the first
taxable year to which such section applies and to all taxable debt obligations
thereafter acquired and is binding on such taxpayer in all subsequent years. The
Conference Committee Report to the 1986 Act indicates a Congressional intent
that the same rules that apply to the accrual of market discount on installment
obligations will also apply to amortizing bond premium under Code Section 171 on
installment obligations such as the Regular Certificates, although it is unclear
whether the alternatives to the constant interest method described above under
"Market Discount" are available. Except as otherwise provided in Treasury
regulations yet to be issued amortizable bond premium will be treated as an
offset to interest income on a Regular Certificate rather than as a separate
deduction item. Purchasers who pay a premium for their Regular Certificates
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
Sale or Exchange of Regular Certificates. If a Regular Certificateholder
sells or exchanges a Regular Certificate, the Regular Certificateholder will
recognize gain or loss equal to the difference, if any, between the amount
received and his adjusted basis in the Regular Certificate. The adjusted basis
of a Regular Certificate generally will equal the cost of the Regular
Certificate to the seller, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller and by any amortized premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Certificate that might otherwise be capital gain will
be treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the gross
income of the holder if his yield on such Regular Certificate were 110% of the
applicable Federal rate under Code Section 1274(d) as of the date of purchase
over (ii) the amount of income actually 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%.
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Taxation of Residual Certificates
Taxation of REMIC Income. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in determining
the federal taxable income of holders of Residual Certificates ("Residual
Certificateholders") and will not be taxed separately to the REMIC Pool. The
daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility of
investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. REMIC taxable income generally means the REMIC Pool's gross
income, including interest, original issue discount income and market discount
income, if any, on the Mortgage Assets, plus income on reinvestment of cashflows
and reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Assets and other administrative expenses of the REMIC Pool, amortization of
premium, if any, with respect to the Mortgage Assets, and any tax imposed on the
REMIC's income from foreclosure property. The requirement that Residual
Certificateholders report their pro rata share of taxable income or net loss of
the REMIC Pool will continue until there are no Certificates of any class of the
related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Assets,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles) which
will be matched in later years by a corresponding tax loss or reduction in
taxable income, but which could lower the yield to Residual Certificateholders
due to the lower present value of such future loss or reduction. For example, if
an interest in the Mortgage Assets is acquired by the REMIC Pool at a discount,
and one or more of such Mortgage Assets is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to receive
a corresponding amount of cash because (i) the prepayment may be used in whole
or in part to make distributions in reduction of principal on the Regular
Certificates and (ii) the discount income on the Mortgage Loan which is
includible in the REMIC's taxable income may exceed the discount deduction
allowed to the REMIC upon such distributions on the Regular Certificates. When
there is more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates when
distributions in reduction of principal are being made in respect of earlier
maturing classes of Certificates to the extent that such classes are not issued
with substantial discount. If taxable income attributable to such a mismatching
is realized in general, losses would be allowed in later years as distributions
on the later classes of Regular Certificates are made. Taxable income may also
be greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a series of Regular Certificates, may increase over
time as distributions in reduction of principal are made on the lower yielding
classes of Regular Certificates, where interest income with respect to any given
Mortgage Loan will remain constant over time as a percentage of the outstanding
principal amount of that loan. Consequently, Residual Certificateholders must
have sufficient other sources of cash to pay any federal, state or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income. Prospective investors should be aware, however, that a
portion of such income may be ineligible for offset by such investor's unrelated
deductions. See the discussion of "excess inclusions" below under "Limitations
on Offset or Exemption of REMIC Income; Excess Inclusions." The timing 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.
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Basis and Losses. The amount of any net loss of the REMIC Pool that may be
taken into account by the Residual Certificateholder is limited to the adjusted
basis of the Residual Certificate as of the close of the quarter (or time of
disposition of the Residual Certificate if earlier), determined without taking
into account the net loss for the quarter. The initial adjusted basis of a
purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce such
adjusted basis (but not below zero). Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Certificateholder as to whom such loss was disallowed and may be used by such
Residual Certificateholder only to offset any income generated by the same REMIC
Pool. Residual Certificateholders should consult their tax advisors about other
limitations on the deductibility of net losses that may apply to them.
A Residual Certificateholder will not be permitted to amortize directly the
cost of its Residual Certificate as an offset to its share of the taxable income
of the related REMIC Pool. However, such taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's basis
in its assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual
Certificateholders described above under "Taxation of REMIC Income," the period
of time over which such issue price is effectively amortized may be longer than
the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC Pool's basis in its assets. The REMIC Regulations do
not address whether residual interests could have a negative basis and a
negative issue price. The Depositor does not intend to treat a class of Residual
Certificates as having a value of less than zero for purposes of determining the
bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater than the corresponding portion of the REMIC Pool's basis in the Mortgage
Assets, the Residual Certificateholder will not recover a portion of such basis
until termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The REMIC Regulations do not so provide. See "Treatment of Certain
Items of REMIC Income and Expense - Market Discount" below regarding the basis
of Mortgage Assets to the REMIC Pool and "Sale or Exchange of Residual
Certificates" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
Mark to Market Rules
Prospective purchasers of a Residual Certificate should be aware that on
December 18, 1993, the Internal Revenue Service released temporary regulations
(the "Temporary Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The
Temporary Regulations provide that for purposes of this mark-to-market
requirement, a "negative value" Residual Certificate is not treated as a
security and thus may not be marked to market. In general, a Residual
Certificate has negative value if, as of the date a taxpayer acquires the
Residual Certificate, the present value of the tax liabilities associated with
holding the Residual Certificate exceeds the sum of (i) the present value of the
expected future distributions on the Residual Certificate, and (ii) the present
value of the anticipated tax savings associated with holding the Residual
Certificate as the REMIC generates losses. The amounts and present values of the
anticipated tax liabilities, expected future distributions and anticipated tax
savings are all to be determined using (i) the prepayment and reinvestment
assumptions adopted under Section 1272(a)(6), or that would have been adopted
had the REMIC's regular interests been issued with original issue discount, (ii)
any required or permitted clean up calls, or required qualified liquidation,
provided for in the REMIC's organizational documents and (iii) a discount rate
equal to the "applicable Federal rate" instrument issued on the date of
acquisition of the Residual Certificate ending on or after December 31, 1993.
Prospective purchasers of a Residual Certificate should consult their tax
advisors regarding the possible application of the Temporary Regulations.
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Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates - Original Issue Discount" and "Variable Rate Regular
Certificates," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Assets if, in general, the basis of the REMIC Pool in such Mortgage
Assets is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Assets is generally the fair market value of the Mortgage Assets
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. In respect of Mortgage Assets
that have market discount to which Code Section 1276 applies, the accrued
portion of such market discount would be recognized currently by the REMIC as an
item of ordinary income. Market discount income generally should accrue in the
manner described above under "Taxation of Regular Certificates - Market
Discount." However, the rules of Code Section 1276 concerning market discount
income will not apply in the case of Mortgage Assets originated on or prior to
July 18, 1984, if any. With respect to such Mortgage Assets market discount is
generally includible in REMIC taxable income or ordinary gross income pro rata
as principal payments are received. Under another interpretation of the Code and
relevant legislative history, market discount on such Mortgage Assets might be
required to be recognized currently by the REMIC, in the same manner that market
discount would be recognized with respect to Mortgage Assets originated after
July 18, 1984. Under that method, a REMIC would tend to recognize market
discount more rapidly than it would otherwise. In either case, the deduction of
a portion of the interest expense on the Regular Certificates allocable to such
discount may be deferred until such discount is included in income, and any gain
on the sale or exchange thereof will be treated as ordinary income to the extent
of the deferred interest deductible at that time.
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Assets
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Assets at a premium equal to the amount of such
excess. As stated above,the REMIC Pool's basis in the Mortgage Assets is the
fair market value of the Mortgage Assets, based on the aggregate of the issue
prices of the regular and residual interests in the REMIC Pool immediately after
the transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates - Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Assets originated after September
27, 1985 under a constant yield method. Amortizable bond premium will be treated
as an offset to interest income on the Mortgage Assets, rather than as a
separate deduction item. Because substantially all the mortgagors with respect
to the Mortgage Assets are expected to be individuals, Code Section 171 will not
be available. Premium on Mortgage Assets may be deductible in accordance with a
reasonable method regularly employed by the holder thereof. The allocation of
such premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that such premium should
be allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions. A
portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss carryovers
of a Residual Certificateholder, (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the Residual
Certificateholder is a pension fund or any other organization that is subject to
tax only on its unrelated business taxable income and (iii) is not eligible for
any reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor, as further discussed in "Taxation
of Certain Foreign Investors - Residual Certificates" below. Except as discussed
below with respect to excess inclusions from Residual Certificates without
"significant value," this general rule does not apply to thrift institutions to
which Code Section 593 applies. For this purpose a thrift institution and its
qualified subsidiary are considered a single corporation. A qualified subsidiary
is one all the stock of which, and substantially all the debt of which, is held
by the thrift institution and which is organized and operating exclusively in
connection with the organization and operation of one or more REMICs. Except in
the case of a thrift institution (including qualified
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subsidiaries) members of an affiliated group are treated as one corporation for
purposes of applying the limitation on offset of excess inclusion income.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Certificateholder for that
calendar quarter from its Residual Certificate over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" (as defined below) of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Certificate is
issued. For this purposes the "adjusted issue price" of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate (adjusted for contributions), increased by the amount of daily
accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The Federal long-term rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if the
Residual Certificates in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this respect
and the REMIC Regulations did not adopt this rule. However, the exception from
the excess inclusion rules applicable to thrift institutions does not apply if
the Residual Certificates do not have significant value. Under the REMIC
Regulations, the Residual Certificates will have significant value if: (i) the
aggregate of the issue prices of the Residual Certificates is at least two
percent of the aggregate issue prices of all Regular Certificates and Residual
Certificates in the REMIC and (ii) the anticipated weighted average life of the
Residual Certificates is at least 20 percent of the REMIC's anticipated weighted
average life based on the prepayment and reinvestment assumptions used in
pricing the transaction and any recognized or permitted clean up calls or any
required qualified liquidation. Although not entirely clear, the REMIC
Regulations indicate that the significant value determination is made only on
the Startup Day. The anticipated weighted average life of a Residual Certificate
with a principal balance and a market rate of interest is computed by
multiplying the amount of each expected principal payment by the number of years
(or portions thereof) from the Startup Day, adding these sums and dividing by
the total principal expected to be paid on such Residual Certificate based on
the relevant prepayment assumption and expected reinvestment income. The
anticipated weighted average life of a Residual Certificate with either no
specified principal balance or a principal balance and rights to interest
payments disproportionate to such principal balance, would be computed under the
formula described above but would include all payments expected on the Residual
Certificate instead of only the principal payments. The anticipated weighted
average life of a REMIC is a weighted average of the anticipated weighted
average lives of all classes of interest in the REMIC.
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
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Organization acquired the Residual Certificate and whose term ended on the close
of the last quarter in which excess inclusion was expected to accrue with
respect to the Residual Certificate. Such a tax generally would be imposed on
the transferor of the Residual Certificate, except that where such transfer is
through an agent (including a broker, nominee, or other middleman) for a
Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Certificate would in no event be liable for
such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a Disqualified Organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that such affidavit is false. The tax also may be waived by the
Treasury Department if the Disqualified Organization promptly disposes of the
Residual Certificate and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the Residual Certificate is actually
held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i) states
under penalty of perjury that it is not a Disqualified Organization or (ii)
furnishes a social security number and states under penalties of perjury that
the social security number is that of the transferee, provided that during the
period such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass- Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide that
neither legal title nor beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not 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
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(other than a Residual Certificateholder who is not a U.S. Person, as defined
below under "Foreign Investors") is disregarded for all federal income tax
purposes unless no significant purpose of the transfer is to impede the
assessment or collection of tax. A residual interest in a REMIC (including a
residual interest with a positive value at issuance) is a "Noneconomic Residual
Interest" unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest federal corporate income tax rate in effect for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the transferee
will receive distributions from the REMIC at or after the time at which taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes. The anticipated excess inclusions and the present value rate
are determined in the same manner as set forth above under "Disqualified
Organizations." A significant purpose to impede the assessment or collection of
tax exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferor would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. Under
the REMIC Regulations, a transferor is presumed not to have improper knowledge
if (i) the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and, as a result of
the investigation, the transferor found that the transferee had historically
paid its debts as they came due and found no significant evidence to indicate
that the transferor will not continue to pay its debts as they come due in the
future; and (ii) the transferee represents to the transferor that it understands
that, as the holder of the Noneconomic Residual Interest, the transferee may
incur tax liabilities in excess of any cash flows generated by the residual
interest and that the transferee intends to pay taxes associated with holding of
residual interest as they become due. The Agreement will require the transferee
of a Residual Certificate to state as part of the affidavit described above
under the heading "Disqualified Organizations" that such transferee (i) has
historically paid its debts as they come due, (ii) intends to continue to pay
its debts as they come due in the future, (iii) understands that, as the holder
of a Noneconomic Residual Interest, it may incur tax liabilities in excess of
any cash flows generated by the Residual Certificate, and (iv) intends to pay
any and all taxes associated with holding the Residual Certificate as they
become due. The transferor must have no reason to believe that such statement is
untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each excess inclusion, (i) the REMIC Pool will
distribute to the transferee residual interest holder an amount that will equal
at least 30% of the excess inclusions and (ii) that each such amount will be
distributed at or after the time at which the excess inclusion accrues and not
later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will 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
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exchange of a Residual Certificateholder's Residual Certificate, in which case,
if the Residual Certificateholder has an adjusted basis in his Residual
Certificate remaining when his interest in the REMIC Pool terminates, and if he
holds such Residual Certificate as a capital asset under Code Section 1221, then
he will recognize a capital loss at that time in the amount of such remaining
adjusted basis.
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued the wash sale rules of Code
Section 1091 will apply to disposition of Residual Certificates. Consequently,
losses on dispositions of Residual Certificates will be disallowed where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any residual interest in
any REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC
owner trust) that is economically comparable to a Residual Certificate.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Net income from certain transactions by the REMIC
Pool, called prohibited transactions, will not be part of the calculation of
income or loss includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC Pool at a
100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c) bankruptcy
or insolvency of the REMIC Pool or (d) a qualified (complete) liquidation, (ii)
the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold, (iii) the receipt of
compensation for services or (iv) the receipt of gain from disposition of cash
flow investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv), it is not a prohibited transaction to sell REMIC Pool property to
prevent a default on Regular Certificates as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Certificates is outstanding). The REMIC Regulations indicate that the
modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the Mortgage Loan, the waiver of a due-on-sale or encumbrance
clause or the conversion of an interest rate by a mortgagor pursuant to the
terms of a convertible adjustable rate Mortgage Loan. The REMIC Regulations also
provide that the modification of mortgage loans underlying Mortgage-Backed
Securities will not be treated as a modification of the Mortgage-Backed
Securities, provided that the trust including the was not created to avoid
prohibited transaction rules.
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
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date of the adoption of the plan of liquidation, the REMIC Pool will recognize
no gain or loss on the sale of its assets, provided that the REMIC Pool credits
or distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Certificates and Residual Certificateholders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Certificateholder for an
entire taxable year, the REMIC Pool generally will be subject to the procedural
and administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction or credit in a unified
administrative proceeding. The Depositor or other designated Residual
Certificateholders will be obligated to act as "tax matters person," as defined
in applicable Treasury regulations, with respect to the REMIC Pool. If the Code
or applicable Treasury regulations do not permit the Depositor to act as tax
matters person in its capacity as agent of the Residual Certificateholders, the
Residual Certificateholder chosen by the Residual Certificateholders or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person.
Treasury regulations provide that a holder of a Residual Certificate is not
required to treat items on its return consistently with their treatment on the
REMIC Pool's return if a holder owns 100% of the Residual Certificates for the
entire calendar year. Otherwise, each holder of a Residual Certificate is
required to treat items on its return consistently with their treatment on the
REMIC Pool's return, unless the holder of a Residual Certificate either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC Pool. The Service
may assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the 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
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Certificates that are issued in a single class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the related
period on Residual Certificates.
Taxation of Certain Foreign Investors
Regular Certificates. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
Residual Certificates. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Certificateholders who are Non-U.S.
Persons are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Treasury regulations provide that amounts
distributed to Residual Certificateholders qualify as "portfolio interest,"
subject to the conditions described in "Regular Certificates" above, but only to
the extent that (i) the Mortgage Assets were issued after July 18, 1984 and (ii)
the Trust fund or segregated pool of assets therein (as to which a separate
REMIC election will be made), to which the Residual Certificate relates,
consists of obligations issued in "registered form" within the meaning of Code
Section 163(f)(1). Generally, Mortgage Assets will not be, but regular interests
in another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Certificateholder will not be entitled to any exemption
from the 30% withholding tax (or lower treaty rate) to the extent of that
portion of REMIC taxable income that constitutes an "excess inclusion." See
"Taxation of Residual Certificates - Limitations on Offset or Exemption of REMIC
Income; Excess Inclusions." If the amounts paid to Residual Certificateholders
who are Non-U.S. Persons are effectively connected with the conduct of a trade
or business within the United States by such Non-U.S. Persons, 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
Non-U.S. Persons will be subject to United States federal income tax at regular
rates. If 30% (or lower treaty rate) withholding is applicable, such amounts
generally will be taken into account for purposes of withholding only when paid
or otherwise distributed (or when the Residual Certificate is disposed of) under
rules similar to withholding upon disposition of debt instruments that have
original issue discount. See "Tax-Related Restrictions on Transfer of Residual
Certificates - Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential." Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences to
them of owning Residual Certificates.
Backup Withholding
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Certificateholder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the Trustee, its agent or the
broker who effected the sale of the Regular Certificate, or such
Certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Internal Revenue Service or allowed as a
credit against the Regular Certificateholder's federal income tax liability.
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Reporting Requirements
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-exempt
and non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular series of Regular
Certificates. Holders through nominees must request such information from the
nominee. Treasury regulations provide that information necessary to compute the
accrual of any market discount on the Regular Certificates must be furnished for
calendar years beginning after 1990.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Certificateholder by the end of the month
following the close of each calendar quarter (41 days after the end of a quarter
under proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
Code Section 67 expenses (see "Limitations on Deduction of Certain Expenses"
above) allocable to such holders. Furthermore, under such regulations,
information must be furnished quarterly to Residual Certificateholders,
furnished annually to holders of Regular Certificates, and filed annually with
the Internal Revenue Service concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under "Federal Income
Tax Consequences for REMIC Certificates," above."
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
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provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. As a result such investors holding
Certificates, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Certificates with respect to interest at the pass-through rate on such
Certificates or discount thereon. In addition, such expenses are not deductible
at all for purposes of computing the alternative minimum tax and may cause such
investors to be subject to significant additional tax liability. Moreover, where
there is fixed retained yield with respect to the Mortgage Assets underlying a
series of Certificates or where the servicing fees are in excess of reasonable
servicing compensation, the transaction will be subject to the application of
the "stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Premium and Discount - Recharacterization of
Servicing Fees," respectively.
Tax Status. Subject to the discussion below, Arter & Hadden, special
counsel to the Depositor, is of the opinion that:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v), provided
that the real property securing the Mortgage Assets represented by that
Certificate is of the type described in such section.
2. A Standard Certificate owned by a financial institution described
in Code Section 593(a) will be considered to represent "qualifying real
property loans" within the meaning of Code Section 592(d)(1), provided that
the real property securing the Mortgage Assets represented by that
Certificate is of the type described in such section.
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.
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Premium and Discount
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under " - Taxation
of Regular Certificates - Premium."
Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to a Certificateholder's
interest in those Mortgage Assets as to which the conditions for the application
of those sections are met. Rules regarding periodic inclusion of original issue
discount income are applicable to mortgages of corporations originated after May
27, 1969, mortgages of noncorporate mortgagors (other than individuals)
originated after July l, 1982, and mortgages of individuals originated after
March 2, 1984. Such original issue discount could arise by the charging of
points by the originator of the mortgages in an amount greater than a statutory
de minimis exception, to the extent that the points are not currently deductible
under applicable Code provisions or are not for services provided by the lender.
It is generally not anticipated that adjustable rate Mortgage Assets will be
treated as issued with original issue discount. However, the application of the
OID Regulations to adjustable rate mortgage loans with incentive interest rates
or annual or lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross income
as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Assets
acquired by a Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Assets, no original issue discount
attributable to the difference between 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
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to a servicer, or as including such portion as a second class of equitable
interest. Applicable Treasury regulations treat such an arrangement as a fixed
investment trust, since the multiple classes of trust interests should be
treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, such a recharacterization should not have any significant
effect upon the timing or amount of income reported by a Certificateholder,
except that the income reported by a cash method holder may be slightly
accelerated. See "Stripped Certificates" below for a further description of the
federal income tax treatment of stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees paid to
the servicers are deemed to exceed reasonable compensation for servicing could
be treated as deferred payments of purchase price by the Certificateholders to
purchase an undivided interest in the Mortgage Assets. In such event, the
present value of such additional payments might be included in the
Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
Sale or Exchange of Certificates. Upon sale or exchange of a Certificate, a
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the Mortgage
Assets and other assets represented by the Certificate. In general, the
aggregate adjusted basis will equal the Certificateholder's cost for the
Certificate, increased by the amount of any income previously reported with
respect to the Certificate and decreased by the amount of any losses previously
reported with respect to the Certificate and the amount of any distributions
received thereon. Except as provided above with respect to market discount on
any Mortgage Assets, and except for certain financial institutions subject to
the provisions of Code Section 582(c), any such gain or loss would be capital
gain or loss if the Certificate was held as a capital asset.
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.
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Code Section 1286 treats a stripped bond or a stripped coupon generally as
a new obligation issued (i) on the date that the stripped interest is purchased
and (ii) at a price equal to its purchase price or, if more than one stripped
interest is purchased, the share of the purchase price allocable to such
stripped interest. Each stripped interest generally will have original issue
discount equal to the excess of its stated redemption price at maturity (or, in
the case of a stripped coupon, the amount payable on the due date of such
coupon) over its issue price. Although the treatment of Stripped Certificates
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a Trust
containing variable-rate Mortgage Assets, the Depositor has been advised by
counsel that (i) the Trust will be treated as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation, and (ii) each Stripped Certificate should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286 and the regulations thereunder, Code Sections 1272 through
1275, and the OID Regulations. While under Code Section 1286 computations with
respect to Stripped Certificates arguably should be made in one of the ways
described below, the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as a
single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the treatment
of a Stripped Certificate as a single debt instrument issued on the date it is
originated for purposes of calculating any original issue discount. The preamble
to such regulations state that such regulations are premised on the assumption
that an aggregation approach is appropriate in determining whether original
issue discount on a stripped bond or stripped coupon is de minimis. In addition,
under these regulations, a Stripped Certificate that represents a right to
payments of both interest and principal may be viewed either as issued with
original issue discount or market discount (as described below), at a de minimis
original issue discount, or presumably, at a premium. The preamble to such
regulations also provide that such regulations are premised on the assumption
that generally the interest component of such a Stripped Certificate would be
treated as stated interest under the original issue discount rules. Further, the
regulations provide that the purchaser of such a Stripped Certificate may be
required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Strip
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
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Certificateholder in any taxable year likely will be computed generally as
described above under "Federal Income Tax Consequences for REMIC Certificates -
Taxation of Regular Certificates - Original Issue Discount" and " - Variable
Rate Regular Certificates." However, with the apparent exception of a Stripped
Certificate issued with de minimis original issue discount, as described above
under " - General," the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to such Stripped Certificateholder, presumably under the
Prepayment Assumption, other than amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in such
Stripped Certificate to recognize an ordinary loss equal to such portion of
unrecoverable basis.
As an alternative to the method described above, the fact that some of or
all the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Assets are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply, treatment
of a Stripped Certificate under such rules depends on whether the aggregate
amount of principal payments, if any, to be made on the Stripped Certificate is
less than or greater than its issue price. If the aggregate principal payments
are greater than or equal to the issue price, the principal payments would be
treated as a separate installment obligation issued at a price equal to the
purchase price for the Stripped Certificate. In such case, original issue
discount would be calculated and accrued under the method described above
without consideration of the interest payments with respect to the Stripped
Certificate. Such payments of interest would be includible in the Stripped
Certificateholder's gross income in the taxable year in which the amounts become
fixed. 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.
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Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described above)
as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on Certificates held
by persons other than Certificateholders exempted from the reporting
requirements. The amounts required to be reported by the Trustee may not be
equal to the proper amount of original issue discount required to be reported as
taxable income by a Certificateholder, other than an original Certificateholder.
The Trustee will also file such original issue discount information with the
Internal Revenue Service. If a Certificateholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a Certificateholder has not reported all interest and dividend income
required to be shown on his federal income tax return, 31% backup withholding
may be required in respect of any reportable payments, as described above under
" - Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Certificate evidences ownership in Mortgage Assets
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442,
which apply to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or such
lower rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount or market discount recognized by the Certificateholder
on the sale or exchange of such a Certificate also will be subject to federal
income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements described above under " -
Taxation of Certain Foreign Investors - Regular Certificates."
Taxation of Securities Classified as Partnership Interests
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Certificates characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such series of Partnership Interests, Arter & Hadden, special counsel
to the Depositor, is of the opinion that (unless otherwise limited in the
related Prospectus Supplement) the Trust will be characterized as a partnership
and not an association taxable as a corporation for federal income tax purposes,
which will also cover any material federal income tax consequences applicable to
the Owners.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Certificates,
including the public offering or purchase price of each class of Certificates of
such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Certificates will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Certificates from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular series of Certificates will be set forth on
the cover of the Prospectus
62
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Supplement relating to such series and the members of the underwriting
syndicate, if any, will be named in such Prospectus Supplement
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Depositor or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Certificates will provide that the obligations of the Underwriters
will be subject to certain conditions precedent, that the Underwriters will be
obligated to purchase all such Certificates if any are purchased and that the
Depositor will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended.
RATINGS
Each class of Certificates of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings assigned to a
Certificate upon initial issuance will not be lowered or withdrawn by a Rating
Agency at any time thereafter. In general, ratings address credit risk and do
not represent any assessment of the likelihood or rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Arter & Hadden,
Washington, D.C. Certain legal matters relating to insolvency issues and certain
federal income tax matters concerning the Certificates will be passed upon for
the Depositor by Arter & Hadden.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Certificates. No
Trust will have any assets or obligations prior to the issuance of the related
series of Certificates. No Trust will engage in any activities other 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.
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
1986 Act....................................................................41
Agreement....................................................................1
Applicable Accounting Standards.............................................27
Balloon Loans................................................................6
Beneficial Owners............................................................4
BIF.........................................................................28
Book Entry Certificates......................................................4
Certificate Account.........................................................11
Certificate Interest Rate...................................................10
Certificate Principal Balance................................................9
Certificate Register.........................................................9
Certificate Registrar........................................................9
Certificateholder...........................................................56
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...................................................51
Distribution Date...........................................................11
DOL.........................................................................39
Eligible Investments........................................................28
ERISA........................................................................4
Events of Default...........................................................30
FDIC........................................................................21
FHLMC........................................................................1
Financial Guaranty Insurance Policy.........................................16
Financial Guaranty Insurer..................................................16
Fitch........................................................................5
FNMA.........................................................................2
Garn-St. Germain Act........................................................36
GNMA.........................................................................2
Insurance Paying Agent......................................................16
Insurance Proceeds..........................................................21
Insured Payment.............................................................16
Interest Accrual Period.....................................................11
Liquidation Proceeds........................................................21
Loan-to-Value Ratio.........................................................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..............................................................13
Mortgage Pool Insurance Policy..............................................18
Mortgage Rates..............................................................15
Mortgage-Backed Securities...................................................1
Mortgaged Properties........................................................13
Mortgages...................................................................13
Mortgagors..................................................................21
NCUA........................................................................21
Non-Priority Certificates...................................................11
Non-U.S. Person.............................................................55
Noneconomic Residual Interest...............................................52
Nonrecoverable Advance......................................................22
Notional Principal Balance..................................................11
OBRA........................................................................40
OID Regulations.............................................................40
Original Value..............................................................15
OTS.........................................................................36
Owners......................................................................11
Partnership Interests.......................................................62
Pass-Through Entity.........................................................51
Pass-Through Rate............................................................3
Plans.......................................................................38
Policy Statement............................................................38
Pool Insurer................................................................18
Pre-Funding Account..........................................................3
Pre-Funding Agreement........................................................3
Prepayment Assumption.......................................................43
Principal Balance...........................................................15
Principal Prepayments.......................................................12
Priority Certificates.......................................................11
PTE 83-1....................................................................39
Rating Agency................................................................5
Record Date.................................................................11
Regular Certificateholder...................................................42
Regular Certificates........................................................40
REIT........................................................................41
Relief Act...................................................................8
REMIC........................................................................4
REMIC Certificates..........................................................40
REMIC Pool..................................................................40
REMIC Regulations...........................................................40
Remittance Date.............................................................21
Remittance Rate.............................................................21
Reserve Fund................................................................20
Residual Certificateholders.................................................47
Residual Certificates.......................................................40
Retail Class Certificate....................................................42
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........................................................56
Stripped Certificateholder..................................................59
Stripped Certificates.......................................................59
Subordinated Certificates...................................................17
Thrift Institution..........................................................41
TMP.........................................................................41
Trust........................................................................1
Trustee......................................................................1
U.S. Person.................................................................52
UCC.........................................................................34
Underwriters................................................................62
A-1
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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.
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TABLE OF CONTENTS
Page
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PROSPECTUS SUPPLEMENT
Summary.....................................................................S-1
Risk Factors ...............................................................S-14
The Seller and Servicer.....................................................S-18
The Depositor...............................................................S-22
Use of Proceeds.............................................................S-22
The Home Equity Loan Pool...................................................S-22
Prepayment and Yield Considerations.........................................S-36
Formation of the Trust and Trust Property...................................S-42
Additional Information......................................................S-42
Description of the Class A Certificates.....................................S-43
The Certificate Insurer.....................................................S-49
Credit Enhancement..........................................................S-53
The Pooling and Servicing Agreement.........................................S-55
Federal Income Tax Consequences.............................................S-64
ERISA Considerations........................................................S-65
Ratings.....................................................................S-67
Legal Investment Considerations.............................................S-67
Underwriting................................................................S-67
Report of Experts...........................................................S-69
Certain Legal Matters.......................................................S-69
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.................................................20
Administration..............................................................25
Use of Proceeds.............................................................31
The Depositor...............................................................31
Certain Legal Aspects of the Mortgage Assets................................32
Legal Investment Matters....................................................38
ERISA Considerations........................................................38
Federal Income Tax Consequences.............................................40
Plan of Distribution........................................................62
Ratings.....................................................................63
Legal Matters...............................................................63
Financial Information.......................................................63
Index to Location of Principal Defined Terms...............................A-1
================================================================================
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$400,000,000
IMC HOME EQUITY
LOAN TRUST 1997-2
[LOGO]
INDUSTRY MORTGAGE COMPANY, L.P.
Seller and Servicer
IMC SECURITIES, INC.
Depositor
-----------
PROSPECTUS SUPPLEMENT
-----------
Bear, Stearns & Co. Inc.
PaineWebber Incorporated
Nomura Securities
International, Inc.
March 13, 1997
================================================================================
