PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 29, 1998)
IMC HOME EQUITY LOAN OWNER TRUST 1998-4
$600,000,000 ADJUSTABLE RATE HOME EQUITY LOAN
ASSET BACKED NOTES, SERIES 1998-4
DUE AUGUST 20, 2029
IMC MORTGAGE COMPANY
SELLER AND SERVICER
IMC SECURITIES, INC.
DEPOSITOR
------------------------------
The IMC Home Equity Loan Owner Trust 1998-4 (the "Issuer") will be formed
pursuant to a trust agreement to be dated as of June 1, 1998 (the "Trust
Agreement") between IMC Securities, Inc., as depositor (the "Depositor") and
Wilmington Trust Company, as owner trustee (the "Owner Trustee"). The Issuer is
hereby offering $600,000,000 aggregate principal amount of its Adjustable Rate
Home Equity Loan Asset Backed Notes, Series 1998-4 (the "Notes"). The Notes will
be issued pursuant to an indenture, dated as of June 1, 1998 (the "Indenture"),
between the Issuer and The Chase Manhattan Bank, as indenture trustee (the
"Indenture Trustee"), and will be secured by a trust estate (the "Trust Estate")
consisting primarily of (i) a pool (the "Pool") of adjustable rate home equity
loans secured by liens on one-to-four family residential properties (the "Home
Equity Loans"), (ii) the Issuer's rights under the Sale and Servicing Agreement
(as defined herein), (iii) the Note Insurance Policy, as described herein and
(iv) certain other assets described in the Indenture. The Issuer also will issue
instruments evidencing the residual interest in the Trust Estate (the "Residual
Interest"). The Residual Interest and the Notes are collectively referred to as
the "Securities." Only the Notes are offered hereby.
Simultaneously with the issuance of the Notes, the Seller will obtain from
MBIA Insurance Corporation (the "Note Insurer") a financial guaranty note
insurance policy relating to the Notes (the "Note Insurance Policy") in favor of
the Indenture Trustee. The Note Insurance Policy will require the Note Insurer
to make certain Insured Payments (as defined herein) on the Notes.
------------------------------
(continued on following page)
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE NOTES,
SEE "RISK FACTORS" BEGINNING ON PAGE S-12 HEREIN, "PREPAYMENT AND YIELD
CONSIDERATIONS" BEGINNING ON PAGE S-31 HEREIN AND "RISK FACTORS" BEGINNING ON
PAGE 7 IN THE PROSPECTUS.
THE NOTES REPRESENT NON-RECOURSE OBLIGATIONS OF THE ISSUER ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE
SERVICER, THE INDENTURE TRUSTEE, THE OWNER TRUSTEE, THE NOTE
INSURER OR ANY OF THEIR AFFILIATES, EXCEPT AS DESCRIBED
HEREIN. NEITHER THE NOTES NOR THE HOME EQUITY
LOANS ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
<TABLE>
<CAPTION>
INITIAL NOTE PRICE TO UNDERWRITING
PRINCIPAL BALANCE NOTE RATE PUBLIC DISCOUNT
<S> <C> <C> <C> <C>
Per Note........................... $600,000,000 Variable(2) 100.000% 0.250%
Total.............................. $600,000,000 $600,000,000 $1,500,000
<CAPTION>
PROCEEDS TO
DEPOSITOR(1)
<S> <C>
Per Note........................... 99.750%
Total.............................. $598,500,000
</TABLE>
(1) Before deducting expenses, estimated to be $475,000.
(2) The Note Rate on the Notes is adjustable based on one-month LIBOR as
described herein.
------------------------------
The Notes are offered subject to prior sale, when, as, and if accepted by
the Underwriters and subject to the Underwriters' rights to reject orders in
whole or in part. It is expected that the Notes will be delivered in book entry
form only through the facilities of The Depository Trust Company, Cedel Bank,
S.A. and the Euroclear System on or about June 26, 1998. The Notes will be
offered in Europe and the United States of America.
PAINEWEBBER INCORPORATED
BEAR, STEARNS & CO. INC.
DEUTSCHE BANK SECURITIES INC.
NOMURA SECURITIES INTERNATIONAL, INC.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 19, 1998.
<PAGE>
(cover continued from previous page)
The aggregate Loan Balance of the Home Equity Loans as of the
Statistical Calculation Date was $395,573,642 (of which 99.85% are first liens
and the remainder are second liens). The Home Equity Loans were originated or
purchased by IMC Mortgage Company (the "Seller" and "Servicer").
In addition to the Home Equity Loans as of the Statistical Calculation
Date, additional Home Equity Loans will be purchased by the Trust from the
Depositor on the Closing Date. All of the Home Equity Loans in the Trust as of
the Closing Date (the "Initial Home Equity Loans") will have a Cut-Off Date of
June 1, 1998 and the Seller expects that the Initial Home Equity Loans will
total at least $450,000,000 as of the Closing Date (as defined below). The Home
Equity Loans as of the Statistical Calculation Date consist of adjustable rate
home equity loans and all of the additional Home Equity Loans to be delivered on
the Closing Date and all of the Subsequent Home Equity Loans will be adjustable
rate home equity loans. See "The Home Equity Loan Pool" herein.
The Sale and Servicing Agreement provides that additional Home Equity
Loans (the "Subsequent Home Equity Loans") may be purchased by the Issuer from
the Depositor from time to time on or before August 15, 1998 from funds on
deposit in the Pre-Funding Account. On the Closing Date an aggregate cash amount
of not more than $150,000,000 (the "Pre-Funded Amount") will be deposited with
the Indenture Trustee in the Pre-Funding Account to be used by the Issuer to
acquire Subsequent Home Equity Loans.
Payments of principal and interest will be made to the owners (the
"Owners") of the Notes on the 20th day of each month (or, if such day is not a
business day, the next following business day) beginning July 20, 1998 (each, a
"Payment Date"). Interest will be paid on each Payment Date to the Owners of the
Notes based on the Note Principal Balance (as defined herein) at the Note Rate
subject to the limitations described herein.
The Notes will constitute non-recourse obligations of the Issuer. The
Seller will have limited obligations arising in respect of certain
representations and warranties on the Home Equity Loans. The Servicer will have
limited obligations that arise pursuant to certain representations and
warranties and to its contractual servicing obligations under that certain
agreement to be entered into among the Depositor, the Servicer, the Seller, the
Indenture Trustee and the Issuer (the "Sale and Servicing Agreement"), including
any obligation it may have to advance delinquent interest payments on the Home
Equity Loans.
The Notes will be unconditionally and irrevocably guaranteed as to
timely payment of interest due to Owners and as to ultimate payment of the Note
Principal Balance, in each case pursuant to the terms of the Note Insurance
Policy issued by the Note Insurer. See "The Note Insurer" herein.
The stated maturity for the Notes is the Payment Date occurring on
August 20, 2029 (the "Final Payment Date").
The yield to maturity on the Notes will be affected by, among other
things, the rate of payment of principal (including by reason of prepayments,
defaults and liquidations) of the Home Equity Loans and the timing and receipt
of such payments as described herein and in the Prospectus. See "Risk Factors"
in the Prospectus and "Prepayment and Yield Considerations" herein.
The Notes are subject to optional redemption in full by the holder(s)
of a majority of the Residual Interest at any time after the aggregate Loan
Balance of the Home Equity Loans has declined to less than 10% of the sum of (x)
the Original Aggregate Loan Balance and (y) the Pre-Funded Amount. In addition,
the Note Insurer will have rights, under the limited circumstances described in
the Sale and Servicing Agreement, to acquire all of the Home Equity Loans from
the Issuer and thereby effect a redemption of the Notes. See "Administration --
Redemption of the Notes" herein.
It is a condition to the issuance of the Notes that they be rated "Aaa"
by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's, a division of
The McGraw-Hill Companies, Inc.
No election will be made to treat the Trust as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes.
There is currently no secondary market for the Notes. The Underwriters
intend to make a secondary market for the Notes, but have no obligation to do
so. There can be no assurance that a secondary market for the Notes will develop
or, if one does develop, that it will provide investors with a satisfactory
level of liquidity or that it will continue.
---------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
The Notes offered by this Prospectus Supplement will be a separate
series of Asset Backed Notes being offered by the Depositor pursuant to its
Prospectus dated May 29, 1998, of which this Prospectus Supplement is a part and
which accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
As provided herein under "The Note Insurer -- Incorporation of Certain
Documents by Reference," the Seller will provide without charge to any person to
whom this Prospectus Supplement is delivered, upon oral or written request of
such person, a copy of any or all financial statements incorporated herein by
reference. Requests for such copies should be directed as provided under "The
Note Insurer -- Incorporation of Certain Documents by Reference" herein.
---------------------
To the extent statements contained herein do not relate to historical
or current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Notes,
which risks and uncertainties are discussed under "Risk Factors" and "Prepayment
and Yield Considerations" herein. As a consequence, no assurance can be given as
to the actual distributions on, or the yield of, the Notes.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
NOTES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
----
SUMMARY OF TERMS..........................................................S-1
RISK FACTORS.............................................................S-12
THE SELLER AND SERVICER..................................................S-14
General.................................................................S-14
Credit and Underwriting Guidelines......................................S-16
Delinquency, Loan Loss and Foreclosure Information......................S-17
Year 2000 Compliance....................................................S-19
THE ISSUER...............................................................S-19
THE DEPOSITOR............................................................S-19
USE OF PROCEEDS..........................................................S-19
THE HOME EQUITY LOAN POOL................................................S-20
General.................................................................S-20
Conveyance of Subsequent Home Equity Loans..............................S-30
Interest Payments on the Home Equity Loans..............................S-31
PREPAYMENT AND YIELD CONSIDERATIONS......................................S-31
General.................................................................S-31
Mandatory Prepayment....................................................S-32
Prepayment and Yield Scenarios for the Notes ...........................S-32
ADDITIONAL INFORMATION...................................................S-36
DESCRIPTION OF THE NOTES.................................................S-36
General.................................................................S-36
Payment Dates...........................................................S-36
Payments................................................................S-37
Calculation of One-Month LIBOR..........................................S-39
Pre-Funding Account.....................................................S-39
Capitalized Interest Account............................................S-39
Book Entry Registration of the Notes....................................S-40
Assignment of Rights....................................................S-43
THE NOTE INSURER.........................................................S-43
CREDIT ENHANCEMENT.......................................................S-47
Note Insurance Policy...................................................S-47
Overcollateralization Provisions........................................S-48
ADMINISTRATION...........................................................S-49
Covenant of the Seller to Take Certain Actions with Respect
to the Home Equity Loans in Certain Situations.....................S-49
Assignment of Home Equity Loans.........................................S-50
Servicing and Sub-Servicing.............................................S-52
Removal and Resignation of Servicer.....................................S-55
Redemption of the Notes.................................................S-56
The Indenture Trustee...................................................S-56
The Indenture...........................................................S-57
Voting..................................................................S-58
Reporting Requirements..................................................S-58
Removal of Indenture Trustee for Cause..................................S-60
Governing Law...........................................................S-60
FEDERAL INCOME TAX CONSEQUENCES..........................................S-60
STATE TAX CONSEQUENCES...................................................S-61
ERISA CONSIDERATIONS.....................................................S-61
RATINGS..................................................................S-62
LEGAL INVESTMENT CONSIDERATIONS..........................................S-63
UNDERWRITING.............................................................S-63
REPORT OF EXPERTS........................................................S-64
CERTAIN LEGAL MATTERS....................................................S-64
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES................................................I-1
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.............................A-1
<PAGE>
Prospectus
Page
----
SUMMARY OF PROSPECTUS......................................................1
RISK FACTORS...............................................................7
DESCRIPTION OF THE SECURITIES.............................................11
General..................................................................11
Classes of Securities....................................................12
Distributions of Principal and Interest..................................13
Book Entry Registration..................................................15
List of Owners of Securities.............................................15
THE TRUSTS................................................................16
Mortgage Loans...........................................................16
Mortgage-Backed Securities...............................................18
Other Mortgage Securities................................................19
CREDIT ENHANCEMENT........................................................19
SERVICING OF MORTGAGE LOANS...............................................24
Payments on Mortgage Loans...............................................24
Advances.................................................................25
Collection and Other Servicing Procedures................................25
Primary Mortgage Insurance...............................................27
Standard Hazard Insurance................................................27
Title Insurance Policies.................................................28
Claims Under Primary Mortgage Insurance Policies and Standard
Hazard Insurance Policies; Other
Realization Upon Defaulted Loan.....................................28
Servicing Compensation and Payment of Expenses...........................28
Master Servicer..........................................................29
THE POOLING AND SERVICING AGREEMENT.......................................29
Assignment of Mortgage Assets............................................29
Evidence as to Compliance................................................31
The Trustee..............................................................31
Administration of the Security Account...................................32
Reports..................................................................33
Forward Commitments; Pre-Funding.........................................33
Servicer Events of Default...............................................34
Rights Upon Servicer Event of Default....................................34
Amendment................................................................34
Termination..............................................................35
THE INDENTURE.............................................................35
General..................................................................35
Modification of Indenture ...............................................35
Note Events of Default...................................................36
Rights Upon Note Events of Default.......................................37
List of Note Owners......................................................37
Annual Compliance Statement..............................................37
Indenture Trustee's Annual Report........................................38
Satisfaction and Discharge of Indenture..................................38
Redemption of Notes......................................................38
Reports by Indenture Trustee to Note Owners..............................38
Limitation on Suits......................................................38
The Sale and Servicing Agreement.........................................38
USE OF PROCEEDS...........................................................39
THE DEPOSITOR.............................................................39
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS..............................40
General..................................................................40
Foreclosure..............................................................41
Enforceability of Certain Provisions.....................................44
Soldiers' and Sailors' Civil Relief Act..................................46
LEGAL INVESTMENT MATTERS..................................................46
ERISA CONSIDERATIONS......................................................47
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES...........................................48
REMIC Securities.........................................................49
Non-REMIC Securities.....................................................65
Debt Certificates........................................................71
Notes....................................................................73
Certificates Classified as Partnership Interests.........................73
FASIT Securities.........................................................73
PLAN OF DISTRIBUTION......................................................74
RATINGS...................................................................74
LEGAL MATTERS.............................................................75
FINANCIAL INFORMATION.....................................................75
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>
Securities Offered: $600,000,000 Adjustable Rate Home Equity Loan Asset Backed Notes,
Series 1998-4 (the "Notes"). The Notes represent non-recourse obligations
of the Issuer. Proceeds of the assets in the Trust Estate will be the sole
source of payments on the Notes.
Note Issuer: IMC Home Equity Loan Owner Trust 1998-4 (the "Issuer" or the "Trust"),
a Delaware business trust established by the Depositor pursuant to a trust
agreement, dated as of June 1, 1998 (the "Trust Agreement"), between the
Depositor and the Owner Trustee. The Issuer does not have, nor is it
expected in the future to have, any significant assets, other than the assets
included in the Trust Estate. See "The Issuer" herein.
Depositor: IMC Securities, Inc. (the "Depositor"), a Delaware corporation. The
Depositor's principal executive offices are located at 5901 East Fowler
Avenue, Tampa, Florida 33617-2362.
Seller and Servicer: IMC Mortgage Company (the "Seller" and the "Servicer"), a Florida
corporation. The Seller's and Servicer's principal executive offices
are located at 5901 East Fowler Avenue, Tampa, Florida 33617-2362.
Indenture Trustee: The Chase Manhattan Bank, a New York banking corporation, as Indenture
Trustee (the "Indenture Trustee"). The Indenture Trustee shall receive a
fee (the "Indenture Trustee Fee") equal to 0.00375% per annum, payable
monthly at one-twelfth the annual rate of the aggregate outstanding Loan
Balance of the Home Equity Loans.
Owner Trustee: Wilmington Trust Company, a Delaware banking corporation, as owner
trustee under the Trust Agreement (the "Owner Trustee"). The Owner
Trustee shall receive a fee (the "Owner Trustee Fee") as provided under
the Trust Agreement.
Custodian: Bank One Trust Company, N.A., a nationally-chartered trust company (the
"Custodian").
Cut-Off Date: As of the close of business on June 1, 1998 (the "Cut-Off Date").
Statistical Calculation Date: As of the close of business on June 1, 1998 (the "Statistical Calculation
Date").
Closing Date: On or about June 26, 1998.
Description of the Notes: The Notes represent non-recourse obligations of the Issuer and will be
issued pursuant to an indenture to be dated as of June 1, 1998 (the
"Indenture"), entered into between the Issuer and the Indenture Trustee.
The assets included in the trust estate created by the Indenture (the
"Trust
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
Estate") will be the sole source of payments on the Notes. The Notes
will be issued in a single class.
The assets of the Trust Estate will consist of (i) a pool (the "Pool")
of adjustable rate home equity loans (the "Home Equity Loans") secured
by first or second lien mortgages or deeds of trust on one-to-four
family residential properties, including units in condominiums, planned
unit developments, townhouses and manufactured housing units (the
"Properties"), and including any note or other instrument of
indebtedness (each, a "Mortgage Note"); (ii) all payments in respect of
principal and interest on the Home Equity Loans (other than any
principal or interest payments due thereon on or prior to the Cut-Off
Date whether or not received); (iii) security interests in the
Properties; (iv) the Issuer's rights under the Sale and Servicing
Agreement; (v) the Note Insurance Policy and (vi) certain other
property.
On the Closing Date, the Pre-Funded Amount (as defined herein) will be
deposited in a trust account held by the Indenture Trustee in the name
of the Indenture Trustee for the benefit of the Owners of the Notes and
the Note Insurer (the "Pre-Funding Account"). It is intended that
additional Home Equity Loans satisfying the criteria specified in the
Sale and Servicing Agreement (the "Subsequent Home Equity Loans") will
be purchased by the Issuer from the Depositor from time to time on or
before August 15, 1998 from funds on deposit in the Pre-Funding Account.
As a result, the aggregate principal balance of the Home Equity Loans
will increase by an amount equal to the aggregate principal balance of
the Subsequent Home Equity Loans so purchased and the amount in the
Pre-Funding Account will decrease proportionately.
As described below, on the Closing Date, cash will be deposited in the
name of the Indenture Trustee in the Capitalized Interest Account (as
defined herein). Funds in the Capitalized Interest Account will be
applied by the Indenture Trustee to cover shortfalls in interest during
the Funding Period (as described herein under "Pre-Funding Account") on
the Notes attributable to the provisions allowing for purchase of
Subsequent Home Equity Loans after the Cut-Off Date.
Other Securities: In addition to the Notes, pursuant to the Trust Agreement the Trust will
issue a class of securities (the "Residual Interest") which will
represent the residual interest in the Trust. The Notes and the Residual
Interest are herein referred to as the "Securities." Only the Notes are
offered hereby.
Denominations: The Notes are issuable in minimum denominations of an original principal
amount of $25,000 and multiples of $1,000 in excess thereof.
The Home Equity Loans: Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are approximate and measured by the aggregate Loan Balance of
the Home Equity Loans as of the Statistical Calculation Date. See
"Additional Information" in this Prospectus Supplement. The Home Equity
Loans to be included in the Trust Estate on the Closing Date (the
"Initial Home Equity Loans") consist of adjustable rate conventional
home equity
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C>
loans and the Mortgage Notes relating thereto. As of the Statistical
Calculation Date, there are 4,337 Home Equity Loans. The aggregate Loan
Balance of the Home Equity Loans as of the Statistical Calculation Date
was $395,573,642. The Home Equity Loans as of the Statistical
Calculation Date are secured by first or 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 Home Equity Loan exceeded 90% as of the
Statistical Calculation Date except for 50 loans with an aggregate Loan
Balance of $5,521,128 (or 1.40% of the aggregate Loan Balance of the
Home Equity Loans as of the Statistical Calculation Date), which had a
Loan-to-Value Ratio not greater than 100%. None of the Home Equity Loans
as of the Statistical Calculation Date are insured by pool mortgage
insurance policies and no significant portion of the Home Equity Loans
as of the Statistical Calculation Date are insured by primary mortgage
insurance policies; however, certain distributions due to the owners of
the Notes (the "Owners") are insured by the Note Insurer pursuant to the
Note Insurance Policy. The Home Equity Loans are not guaranteed by the
Issuer, the Depositor, the Seller, the Servicer, the Note Insurer, the
Owner Trustee, the Indenture Trustee or any of their affiliates. The
Home Equity Loans will be serviced by the Servicer generally in
accordance with the standards and procedures required by Fannie Mae for
Fannie Mae mortgage-backed securities and in accordance with the terms
of that Sale and Servicing Agreement dated as of June 1, 1998 (the "Sale
and Servicing Agreement") among the Issuer, the Depositor, the Seller,
the Servicer and the Indenture Trustee.
As of the Statistical Calculation Date, 98.50% of the Home Equity Loans
by aggregate Loan Balance are Home Equity Loans which adjust based upon
the London interbank offered rate for six-month United States dollar
deposits ("Six-Month LIBOR Loans"). 1.50% of the Home Equity Loans by
aggregate Loan Balance as of the Statistical Calculation Date are Home
Equity Loans which adjust 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"). The weighted average
interest rate (the "Coupon Rate") of the Home Equity Loans as of the
Statistical Calculation Date was 10.17%. As of the Statistical
Calculation Date, the Coupon Rates on the Home Equity Loans ranged from
5.625% to 16.250%; the average Loan Balance of the Home Equity Loans was
$91,209; the minimum and maximum Loan Balances of the Home Equity Loans
were $11,258 and $660,148, respectively; the weighted average
Loan-to-Value Ratio of the Home Equity Loans was 77.83%; the weighted
average remaining term to maturity of the Home Equity Loans was 354
months; and the remaining terms to maturity of the Home Equity Loans
ranged from 104 months to 360 months. As of the Statistical Calculation
Date, 99.85% of the aggregate Loan Balance of the Home Equity Loans was
secured by first mortgages and 0.15% of the aggregate Loan Balance of
the Home Equity Loans was secured by second mortgages. As of the
Statistical Calculation Date, Home Equity Loans containing "balloon"
payments represented not more than 0.17% of the Home Equity Loans. No
Home Equity Loan as of the Statistical Calculation Date will mature
later than June
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
1, 2028. As of the Statistical Calculation Date, no Home Equity Loan
provides for negative amortization. See "The Home Equity Loan Pool"
herein.
Final Payment Date: The Final Payment Date for the Notes is August 20, 2029, although it is
anticipated that the actual final Payment Date for the Notes will occur
significantly earlier than the Final Payment Date. See "Prepayment and
Yield Considerations" herein.
Payments--General: On the 20th day of each month, or if such a day is not a Business Day, then
the next succeeding Business Day, commencing July 20, 1998 (each such
day being a "Payment Date"), the Indenture Trustee will be required, subject
to the availability of amounts therefor, pursuant to the cash flow priorities
hereinafter described, to make payments on the Notes to the Owners thereof
of record as of the last Business Day preceding such Payment Date (the
"Record Date").
A "Business Day" is any day other than a Saturday or Sunday or a day on
which banking institutions in The City of New York, Tampa, Florida, the
city in which the corporate trust office of the Indenture Trustee is
located or the city in which the Note Insurer is located are authorized
or obligated by law or executive order to be closed.
Interest: On each Payment Date, the Notes will be entitled to payments in respect of
Current Interest.
"Current Interest" means, with respect to any Payment Date the sum of
(i) the aggregate amount of interest accrued from and including the
preceding Payment Date (or from the Closing Date in the case of the
first Payment Date) to and including the day prior to the current
Payment Date (the "Accrual Period") at the Note Rate on the outstanding
principal balance of the Notes (the "Note Principal Balance"), (ii) any
Interest Carry Forward Amount and (iii) the Preference Amount as it
relates to interest previously paid on such Note prior to such Payment
Date (in accordance with the Note Insurance Policy); provided, however,
that Current Interest will be reduced by the amount of any Civil Relief
Interest Shortfalls (as defined in the Sale and Servicing Agreement).
All calculations of interest on the Notes will be made on the basis of
the actual number of days elapsed in the related Accrual Period and a
year of 360 days.
The "Interest Carry Forward Amount" for any Payment Date is the sum of
(x) the amount, if any, by which (i) the Current Interest as of the
immediately preceding Payment Date exceeded (ii) the amount of the
actual payments of interest made on such immediately preceding Payment
Date plus (y) interest on the amount in clause (x) above calculated at
the Note Rate for the number of days in the related Accrual Period.
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
On each Payment Date, the "Note Rate" will be equal to the lesser of (x)
the Formula Note Rate and (y) the Available Funds Cap.
The "Formula Note Rate" for any Payment Date will equal the lesser of
(x)(i) with respect to any Payment Date which occurs on or prior to the
Redemption Date (as defined herein), One-Month LIBOR plus 0.16% per
annum and (ii) with respect to any Payment Date thereafter, One-Month
LIBOR plus 0.32% per annum, and (y) 15.00% per annum.
The "Available Funds Cap" for any Payment Date will equal the weighted
average of the Coupon Rates on the Home Equity Loans, less (i) prior to
the Payment Date in January 1999, 0.63375% per annum, and (ii) on or
after the Payment Date in January 1999, 1.13375% per annum.
If, on any Payment Date, the Available Funds Cap limits the Note Rate
(i.e., the rate as determined by the Available Funds Cap is less than
the Formula Note Rate), the amount of any such shortfall will be carried
forward and be due and payable on future Payment Dates and shall accrue
interest at the Formula Note Rate, until paid (such shortfall, together
with such accrued interest, the "Available Funds Cap Carry Forward
Amount"). The Note Insurance Policy does not cover the Available Funds
Cap Carry Forward Amount; the payment of such amount may be funded only
from (i) any excess interest resulting from the Available Funds Cap
being in excess of the Formula Note Rate on future Payment Dates and
(ii) any Net Monthly Excess Cashflow which would otherwise be paid to
the Servicer or the Indenture Trustee on account of certain reimbursable
amounts described in the Sale and Servicing Agreement, or to the Owners
of the Residual Interests.
The "Redemption Date" is the first Monthly Remittance Date on which the
aggregate Loan Balance of the Home Equity Loans has declined to less
than 10% of the sum of (x) the aggregate Loan Balance of the Initial
Home Equity Loans as of the Cut-Off Date (the "Original Aggregate Loan
Balance") plus (y) the original Pre-Funded Amount (such sum, the
"Maximum Collateral Amount").
Principal: On each Payment Date, payments in reduction of the Note Principal Balance
will be made in the amounts described herein. The "Principal Payment
Amount" for each Payment Date shall be the lesser of:
(a) the Total Available Funds (as defined herein) plus any Insured
Payment minus the Current Interest and the Trust Fees and Expenses for
such Payment Date; and
(b) the excess, if any, of
(i) the sum of (without duplication):
(A) the Preference Amount with
respect to principal owed to
each Owner of a Note that
remains unpaid as of such
Payment Date;
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(B) the principal portion of
all scheduled monthly payments
on the Home Equity Loans due
on or prior to the related Due
Date thereof, to the extent
actually received by the
Servicer during the related
Remittance Period and any
Prepayments made by the
Mortgagors and actually
received by the Servicer
during the related Remittance
Period;
(C) the balance of each Home
Equity Loan (the "Loan
Balance") that was repurchased
by the Seller or purchased by
the Servicer on or prior to
the related Monthly Remittance
Date, to the extent such Loan
Balance is actually received
by the Servicer during the
related Remittance Period;
(D) any Substitution Amounts
(i.e., the excess, if any, of
the Loan Balance of a Home
Equity Loan being replaced
over the outstanding principal
balance of a replacement Home
Equity Loan plus accrued and
unpaid interest) delivered by
the Seller on the related
Monthly Remittance Date in
connection with a substitution
of a Home Equity Loan (to the
extent such Substitution
Amounts relate to principal),
to the extent such
Substitution Amounts are
actually received by the
Servicer on the related
Remittance Date;
(E) all Net Liquidation
Proceeds actually collected by
the Servicer with respect to
the Home Equity Loans during
the related Remittance Period
(to the extent such Net
Liquidation Proceeds relate to
principal);
(F) the amount of any
Overcollateralization Deficit
for such Payment Date;
(G) the principal portion of
the proceeds received by the
Indenture Trustee upon
termination of the Trust
Estate (to the extent such
proceeds relate to principal);
<PAGE>
(H) on the Payment Date
immediately following the end
of the Funding Period, all
amounts remaining on deposit
in the Pre-Funding Account to
the extent not used to
purchase Subsequent Home
Equity Loans during the
Funding Period; and
(I) the amount of any
Overcollateralization Increase
Amount for such Payment Date
to the extent of any Net
Monthly Excess Cashflow
available for such purpose;
over
(ii) the amount of any
Overcollateralization
Reduction Amount for such
Payment Date.
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The "Remittance Period" with respect to any Monthly Remittance Date is
the period from the second day of the month immediately preceding such
Monthly Remittance Date to the first day of the month in which such
Monthly Remittance Date occurs. A "Monthly Remittance Date" is any date
on which funds on deposit in the Principal and Interest Account are
remitted to the Note Account, which is the 18th day of each month, or if
such day is not a Business Day, the next preceding Business Day,
commencing in July 1998.
The "Preference Amount" is any amount (other than amounts in respect of
the Available Funds Cap Carry Forward Amount) previously distributed to
an Owner on a Note that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (Title 11 of the United States Code), as amended
from time to time, in accordance with a final nonappealable order of a
court having competent jurisdiction.
The "Premium Amount" is the amount payable to the Note Insurer as
premium for the Note Insurance Policy.
Monthly Servicing Fee: The Servicer will retain a fee (the "Servicing Fee") equal to 0.50% per
annum, payable monthly at one-twelfth the annual rate of the then
outstanding principal balance of each Home Equity Loan as of the first
day of each Remittance Period.
Credit Enhancement: The credit enhancement provided for the benefit of the Notes consists of
(x) the overcollateralization which utilizes the excess interest created
by the internal cash flows of the Pool and (y) the Note Insurance
Policy.
Overcollateralization. The required application of the cash flow from
the Pool results in a limited acceleration of the Notes relative to the
amortization of the Home Equity Loans in the early months of the
transaction. The accelerated amortization is achieved by the application
of certain excess interest to the payment in reduction of the Note
Principal Balance. This acceleration feature creates
overcollateralization (i.e., the excess of the aggregate outstanding
Loan Balance of the Home Equity Loans over the Note Principal Balance).
Once the required level of overcollateralization is reached, and subject
to the provisions described in the next paragraph, the acceleration
feature will cease unless necessary to maintain the required level of
overcollateralization.
The Sale and Servicing Agreement provides that, subject to certain
floors, caps and triggers, the required level of overcollateralization
may increase or decrease over time. An increase would result in a
temporary period of accelerated amortization of the Notes to increase
the actual level of overcollateralization to its required level; a
decrease would result in a temporary period of decelerated amortization
to reduce the actual level of overcollateralization to its required
level. See "Prepayment and Yield Considerations", "Credit Enhancement --
Overcollateralization Provisions" herein and "Credit Enhancement" in the
Prospectus.
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Financial Guaranty Note Insurance Policy. MBIA Insurance Corporation, a
New York stock insurance company (the "Note Insurer"), will issue a
financial guaranty note insurance policy (the "Note Insurance Policy")
with respect to the Notes.
Pursuant to the provisions of the Note Insurance Policy, the Note
Insurer will irrevocably and unconditionally guarantee certain payments
to the Indenture Trustee for the benefit of the Owners of the Notes. The
amount of the actual payment, if any, made by the Note Insurer to the
Indenture Trustee for the benefit of the Owners of the Notes under the
Note Insurance Policy on each Payment Date (the "Insured Payment") is
the excess, if any, of (i) the sum of (a) the Current Interest, (b) the
Overcollateralization Deficit and (c) the Preference Amount (without
duplication) over (ii) the Total Available Funds (after any deduction
for the Trust Fees and Expenses) and after taking into account the
portion of the Principal Payment Amount to be actually distributed on
such Payment Date (without regard to any Insured Payment to be made with
respect to such Payment Date). The Note Insurance Policy does not insure
the payment of Available Funds Cap Carry Forward Amounts.
Insured Payments do not cover Realized Losses except to the extent that
an Overcollateralization Deficit exists. Insured Payments do not cover
the Servicer's failure to make Delinquency Advances pursuant to the Sale
and Servicing Agreement, except to the extent that an
Overcollateralization Deficit would otherwise result therefrom.
Nevertheless, the effect of the Note Insurance Policy is to guaranty the
timely payment of interest on, and the ultimate payment of the principal
amount of, the Notes.
The Note Insurance Policy is noncancellable for any reason.
Unless a Note Insurer Default exists, the Note Insurer shall have the
right to exercise certain rights of the Owners of the Notes, as
specified in the Indenture, without any consent of such Owners; and such
Owners may exercise such rights only with the prior written consent of
the Note Insurer, except as provided in the Indenture. In addition, to
the extent of unreimbursed payments under the Note Insurance Policy, the
Note Insurer will be subrogated to the rights of the Owners of the Notes
on which such Insured Payments were made. In connection with each
Insured Payment on a Note, the Indenture Trustee, as attorney-in-fact
for the Owner thereof, will be required to assign to the Note Insurer
the rights of such Owner with respect to the Note to the extent of such
Insured Payment. "Note Insurer Default" is defined under the Sale and
Servicing Agreement as the existence and continuance of (x) the failure
by the Note Insurer to make a required payment under the Note Insurance
Policy or (y) the bankruptcy or insolvency of the Note Insurer.
The "Trust Fees and Expenses" are the Premium Amount, the Indenture
Trustee Fee and any Trustee Reimbursable Expenses (each as defined
herein).
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Pre-Funding Account: On the Closing Date, an aggregate cash amount (the "Pre-Funded Amount")
of no more than $150,000,000 will be deposited in the Pre-Funding
Account. During the period (the "Funding Period") from the Closing Date
until the earliest to occur of (i) the date on which the Pre-Funded Amount
is reduced to $100,000 or less, (ii) the occurrence of a "Servicer
Termination Event" (as defined in the Sale and Servicing Agreement) or an
"Event of Default" (as defined herein) or (iii) August 15, 1998, the Pre-
Funded Amount will be maintained in the Pre-Funding Account. The Pre-
Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Home Equity Loans in accordance with
the Sale and Servicing Agreement. Subsequent Home Equity Loans
purchased on any date (each, a "Subsequent Transfer Date") must satisfy the
criteria set forth in the Sale and Servicing Agreement. See "The Home
Equity Loan Pool-- Conveyance of Subsequent Home Equity Loans"
herein. Any Pre-Funded Amount remaining at the end of the Funding
Period will be distributed to the Owners of the Notes on the Payment Date
immediately following the end of the Funding Period, thus resulting in a
partial principal prepayment of the Notes as specified herein under
"Description of the Notes-- Payments." All interest and other investment
earnings on amounts on deposit in the Pre-Funding Account will be
deposited in the Capitalized Interest Account.
Capitalized Interest
Account: On the Closing Date, cash in an amount satisfactory to the Note Insurer will
be deposited in a trust account (the "Capitalized Interest Account") in the
name of, and maintained by, the Indenture Trustee in trust for the Owners
of the Notes. The amount on deposit in the Capitalized Interest Account,
including reinvestment income thereon, will be used by the Indenture
Trustee on each Payment Date during and immediately after the Funding
Period to fund the excess, if any, of (i) the amount of interest accruing on
the outstanding Pre-Funded Amount at a rate equal to the Note Rate over (ii)
the amount of any reinvestment income on monies on deposit in the Pre-
Funding Account. Such amounts on deposit will be so applied by the
Indenture Trustee on the Payment Dates during and immediately after the
Funding Period to fund any such excess. Any amounts remaining in the
Capitalized Interest Account not needed for such purpose will be paid to the
Seller or its designee at the end of the Funding Period.
Mandatory Prepayment of
Certificates: It is intended that the principal amount of Subsequent Home Equity Loans
sold to the Issuer will require application of substantially all of the original
Pre-Funded Amount and it is not intended that there will be any material
amount of principal prepaid to the Owners of the Notes from the Pre-
Funding Account. In the event that the Depositor is unable to sell
Subsequent Home Equity Loans to the Issuer during the Funding Period in
an amount equal to the Pre-Funded Amount, principal prepayments to
Owners of the Notes will occur on the Payment Date immediately following
the end of the Funding Period in an amount equal to the Pre-Funded
Amount remaining at the end of the Funding Period.
Book Entry Registration of the
Notes: The Notes will initially be issued in book entry form. Persons acquiring
beneficial ownership interests in the Notes ("Beneficial Owners") will
hold
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their interests through The Depository Trust Company ("DTC"), in the
United States, or Cedel Bank, S.A. ("Cedel") or the Euroclear System
("Euroclear"), in Europe. Transfers within DTC, Cedel or Euroclear, as
the case may be, will be in accordance with the usual rules and
operating procedures of the relevant system. So long as the Notes are
Book Entry Notes (as defined herein), such Notes will be evidenced by
one or more Notes registered in the name of Cede & Co. ("Cede"), as the
nominee of DTC or one of the European Depositaries. Cross-market
transfers between persons holding directly or indirectly through DTC, on
the one hand, and counterparties holding directly or indirectly through
Cedel or Euroclear, on the other, will be effected in DTC through
Citibank, N.A. ("Citibank") or The Chase Manhattan Bank ("Chase" and
together with Citibank, the "European Depositaries"), the relevant
depositaries of Cedel and Euroclear, respectively, and each a
participating member of DTC or one of the European Depositaries. The
Notes will initially be registered in the name of Cede. The interests of
the Owners of such Notes will be represented by book entries on the
records of DTC and participating members thereof. No Beneficial Owner
will be entitled to receive a definitive note representing such person's
interest, except in the event that Definitive Notes (as defined herein)
are issued under the limited circumstances described herein. All
references in this Prospectus Supplement to any Notes reflect the rights
of Beneficial Owners only as such rights may be exercised through DTC
and its participating organizations for so long as such Notes are held
by DTC. See "Global Clearance, Settlement and Tax Documentation
Procedures" in Annex I attached hereto and "Description of the Notes --
Book Entry Registration of the Notes" herein, and "Description of the
Securities -- Book Entry Registration" in the Prospectus.
Optional Redemption - Clean-Up
Call: The holders of Residual Interests exceeding in the aggregate a 50%
percentage interest (the "Majority Residualholders") may, at their
option, effect an early redemption of the Notes and terminate the Trust
on any Payment Date on or after the Redemption Date by purchasing all of
the Home Equity Loans at a price equal to or greater than the Redemption
Price (as defined under "Administration--Redemption of Notes" herein).
The proceeds from any such purchase of the Home Equity Loans will be
used by the Issuer to redeem the Notes and terminate the Indenture. In
addition, the Note Insurer will have rights, under the limited
circumstances described in the Sale and Servicing Agreement, to acquire
all of the Home Equity Loans from the Issuer and thereby effect a
redemption of the Notes and terminate the Indenture. See
"Administration-- Redemption of the Notes" herein.
Ratings: It is a condition of issuance of the Notes that they be rated "Aaa" by
Moody's Investors Services Inc. ("Moody's") and "AAA" by Standard &
Poor's Rating Services, a division of the McGraw-Hill Companies, Inc.
("Standard & Poor's"). Moody's and Standard & Poor's are referred to
herein collectively as the "Rating Agencies". The ratings issued by the
Rating Agencies on the payment of principal and interest on the Notes do
not cover the payment of any Available Funds Cap Carry Forward Amounts.
A security rating is not a recommendation to buy, sell or hold
securities, and may be subject to revision or withdrawal at any time by
the assigning entity.
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No Rating Agency is obligated to maintain any rating on the Notes and,
accordingly, there can be no assurance that the rating assigned to Notes
upon initial issuance thereof will not be lowered or withdrawn at any
time thereafter. See "Ratings" herein.
Federal Tax Aspects: No election will be made to treat the Trust Estate or any portion
thereof as a "real estate mortgage investment conduit" (a "REMIC") for
federal income tax purposes.
Upon the issuance of the Notes, Arter & Hadden LLP, counsel to the
Issuer, will deliver its opinion that the Notes will be treated as debt
obligations and not as representing an ownership interest in the Trust
Estate or an equity interest in the Issuer, the Depositor or the Seller.
In addition, for federal income tax purposes, the Issuer will not be (i)
classified as an association taxable as a corporation, (ii) a taxable
mortgage pool as defined in Section 7701(i) of the Code, or (iii) a
"publicly traded partnership" as defined in Treasury Regulation Section
1.7704-1. An Owner of a Note, by its acceptance of a Note, will be
deemed to have agreed to treat the Note as indebtedness. An Owner will
not be required to report income with respect to the Note under an
accrual method unless the Owner otherwise uses the accrual method or
purchases a Note which has original issue discount.
The Notes will not represent "real estate assets" for purposes of
Section 856(c)(5)(A) of the Internal Revenue Code of 1986, as amended
(the "Code"), or "[l]oans . . . principally secured by an interest in
real property" within the meaning of Section 7701(a)(19)(C)(v) of the
Code.
Investors are advised to consult their tax advisors and to review
"Federal Income Tax Consequences" herein and in the Prospectus.
ERISA Considerations:
Subject to the considerations discussed under "ERISA Considerations"
herein and in the Prospectus, the Notes may be purchased by employee
benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). See "ERISA Considerations"
herein and in the Prospectus. Legal Investment Considerations: The Notes
will not constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Accordingly, many institutions with legal authority to invest in
comparably rated securities based on qualifying first lien mortgage
loans may not be legally authorized to invest in the Notes.
Legal Investment
Considerations: The Notes will not constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Accordingly, many institutions with legal authority to invest in
comparably rated securities based on qualifying first lien mortgage
loans may not be legally authorized to invest in the Notes.
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RISK FACTORS
Prospective investors in the Notes should consider, among other things,
the following risk factors (as well as the factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Notes.
Sensitivity to Prepayments. The Home Equity Loans may be prepaid by the
related Mortgagors in whole or in part, at any time. However, approximately
60.31% of the Home Equity Loans as of the Statistical Calculation Date (by Loan
Balance) require the payment of a fee in connection with certain prepayments. In
addition, a substantial portion of the Home Equity Loans contain due-on-sale
provisions which, to the extent enforced by the Servicer, will result in
prepayment of such Home Equity Loans. See "Prepayment and Yield Considerations"
herein and "Certain Legal Aspects of the Mortgage Assets -- Enforceability of
Certain Provisions" in the Prospectus. Generally, if prevailing interest rates
fall significantly below the interest rates on the Home Equity Loans, the Home
Equity Loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest rates on such Home Equity
Loans. Conversely, if prevailing interest rates rise significantly above the
interest rates on the Home Equity Loans, the rate of prepayments is likely to
decrease.
All of the Home Equity Loans are adjustable rate home equity loans. As
is the case with fixed rate home equity loans, adjustable rate home equity loans
may be subject to a greater rate of principal prepayments in a low interest rate
environment. For example, if prevailing interest rates were to fall, mortgagors
with adjustable rate home equity loans may be inclined to refinance such home
equity loans with a fixed rate loan to "lock in" a lower interest rate. The
existence of the applicable periodic rate cap, maximum Coupon Rate and minimum
Coupon Rate also may affect the likelihood of prepayments resulting from
refinancings. In addition, the delinquency and loss experience on adjustable
rate home equity loans may differ from that on fixed rate home equity loans
because the amount of the monthly payments on adjustable rate home equity loans
are subject to adjustment on each payment change date.
The average life of the Notes, and, if purchased at other than par, the
yields realized by Owners of the Notes will be sensitive to levels of payment
(including any payments of principal received before the scheduled due date (the
"Prepayments")) on the Home Equity Loans. In general, the yield on the Notes if
purchased at a premium from the outstanding principal amount thereof will be
adversely affected by a higher than anticipated level of Prepayments and
enhanced by a lower than anticipated level. Conversely, the yield on Notes if
purchased at a discount from the outstanding principal amount thereof will be
enhanced by a higher than anticipated level of Prepayments and adversely
affected by a lower than anticipated level. See "Prepayment and Yield
Considerations" herein.
Risk of Home Equity Loan Coupon Rates Reducing the Note Rate. The
calculation of the Note Rate is based upon (i) the value of an index (One-Month
LIBOR) which is different from the value of the indices applicable to the Home
Equity Loans as described under "The Home Equity Loan Pool" either as a result
of the use of a different index, rate determination date or rate adjustment date
and (ii) the weighted average of the Coupon Rates of the Home Equity Loans,
which are subject to periodic adjustment caps, maximum rate caps and minimum
rate floors. As of the Statistical Calculation Date, 98.50% of the Home Equity
Loans by aggregate Loan Balance are Six-Month LIBOR Loans. While 12.95% of the
Six-Month LIBOR Loans first adjust approximately six months after origination,
85.76% of the Six-Month LIBOR Loans do not first adjust until approximately two
or three years from the date of origination and the remainder of the Six-Month
LIBOR Loans do not first adjust until approximately one or five years from the
date of origination. 1.50% of the Home Equity Loans by aggregate Loan Balance as
of the Statistical Calculation Date are CMT Loans. While 80.39% of CMT Loans
first adjust approximately one year after origination, 19.61% of the CMT Loans
do not first adjust until approximately two or three years from the date of
origination. The Note Rate adjusts monthly based upon One-Month LIBOR as
described under "Description of the Notes -- Calculation of One- Month LIBOR"
herein, subject to the Available Funds Cap. Consequently, the interest which
becomes due on the Home Equity Loans (net of the Servicing Fee and the Trust
Fees and Expenses) during any Remittance Period may not equal the amount of
interest that would accrue at One-Month LIBOR plus the margin on the Notes
during the related Accrual Period. In particular, the Note Rate adjusts monthly,
while the interest rates of the Home Equity Loans adjust less frequently with
the result that the Available Funds Cap may limit increases in the Note Rate for
extended periods in a rising interest rate environment. In addition, One-Month
LIBOR, Six-Month LIBOR and the CMT Index
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may respond to different economic and market factors, and there is not
necessarily a correlation among them. Thus, it is possible, for example, that
One-Month LIBOR may rise during periods in which Six-Month LIBOR or the CMT
Index are stable or are falling or that, even if each of One-Month LIBOR,
Six-Month LIBOR and the CMT Index rise during the same period, One-Month LIBOR
may rise more rapidly than Six-Month LIBOR and the CMT Index. Furthermore, if
the Available Funds Cap determines the Note Rate for a Payment Date, the value
of the Notes may be temporarily or permanently reduced.
Although Owners of the Notes will be entitled to receive any Available
Funds Cap Carry Forward Amount from and to the extent of funds available
therefor as described herein, there is no assurance that such funds will be
available. The failure to pay any Available Funds Cap Carry Forward Amount due
to a lack of funds therefor will not constitute an Event of Default under the
Indenture. In addition, the Note Insurance Policy does not cover, and the
ratings of the Notes do not address the likelihood of the payment of any
Available Funds Cap Carry Forward Amount.
The Subsequent Home Equity Loans and the Pre-Funding Account. Any
conveyance of Subsequent Home Equity Loans is subject to the following
conditions, among others (i) each such Subsequent Home Equity Loan must satisfy
the representations and warranties specified in the agreement pursuant to which
such Subsequent Home Equity Loans are transferred to the Issuer (each, a
"Subsequent Transfer Agreement") and in the Sale and Servicing Agreement; (ii)
the Depositor will not select such Subsequent Home Equity Loans in a manner
adverse to the interest of the Owners of the Notes; (iii) the Depositor will
deliver certain opinions of counsel with respect to the validity of the
conveyance of such Subsequent Home Equity Loans; (iv) each Subsequent Home
Equity Loan will be 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 Depositor as of such Subsequent Cut-Off Date, will satisfy the
criteria set forth in the Sale and Servicing Agreement, as described herein
under "The Home Equity Loan Pool -- Conveyance of Subsequent Home Equity Loans"
and the Note Insurer shall have consented to such conveyance. The Sale and
Servicing Agreement will provide that any of such requirements may be waived or
modified in any respect upon prior written consent of the Note Insurer.
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
Issuer by the end of the Funding Period, the Owners of the Notes will receive a
prepayment of principal in an amount equal to the Pre-Funded Amount remaining in
the Pre-Funding Account on the Payment Date immediately following the Funding
Period. The Seller intends that the principal amount of Subsequent Home Equity
Loans sold to the Issuer 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 Notes.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Home Equity
Loans may be 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 Issuer, it is anticipated that the aggregate characteristics
of the Home Equity Loans then held by the Issuer will not vary significantly
from those of the Initial Home Equity Loans. See "The Home Equity Loan Pool --
Conveyance of Subsequent Home Equity Loans" herein.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Seller. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Home Equity Loans. The Seller will be required
to repurchase any Home Equity Loans which, at the time of origination, did not
comply with applicable federal and state laws and regulations. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Home Equity Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Seller to damages and
administrative enforcement. See "Certain Legal Aspects of the Mortgage Assets"
in the Prospectus.
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The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
borrowers regarding the terms of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience.
Violations of certain provisions of these federal laws may limit the ability of
the Servicer to collect all or part of the principal of or interest on the Home
Equity Loans and, in addition, could subject the Seller to damages and
administrative enforcement. The Seller will be required to repurchase any Home
Equity Loans which, at the time of origination did not comply with such federal
laws or regulations. See "Certain Legal Aspects of Loans" in the Prospectus.
It is possible that some of the Home Equity Loans will be subject to
the Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Riegle Act"), which incorporates the Home Ownership and Equity Protection Act
of 1994. The Riegle Act adds certain additional provisions to Regulation Z,
which is the implementing regulation of the Truth-in-Lending Act. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money home equity loans with high interest rates or high
upfront fees and charges. In general, home equity loans within the purview of
the Riegle Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. The provisions of the Riegle
Act apply on a mandatory basis to all home equity loans originated on or after
October 1, 1995. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the home equity loan. The Seller will represent and warrant in the Sale and
Servicing Agreement that each Home Equity Loan was originated in compliance with
all applicable laws including the Truth-in-Lending Act, as amended.
Risk Associated with the Note Insurer. If the protection afforded by
overcollateralization is insufficient and if, upon the occurrence of an
Overcollateralization Deficit, the Note Insurer is unable to meet its
obligations under the Note Insurance Policy, then the Owners of the Notes could
experience a loss of their investment.
THE SELLER AND SERVICER
General
The Seller and Servicer, IMC Mortgage Company, is a Florida
corporation. IMC Mortgage Company completed an initial public offering of
certain shares of its common stock on June 25, 1996 and a secondary offering of
certain shares of its common stock in April 1997. The principal executive
offices of the Seller are located at 5901 East Fowler Avenue, Tampa, Florida
33617-2362 and its telephone number is (813) 984-8801.
The Seller has been in the mortgage lending business since its
formation in 1993 and the Seller and certain other subsidiaries of the Seller
are engaged in originating, purchasing and servicing home equity loans secured
by first and second mortgages and deeds of trust on Properties located in 50
states and the District of Columbia.
S-14
<PAGE>
In September 1997, IMC Mortgage Company began servicing loans
previously serviced by Industry Mortgage Company, L.P., a Delaware limited
partnership, which was a subsidiary of IMC Mortgage Company and an affiliate of
the Depositor. Consequently, information on loans serviced prior to September
1997 was generated by Industry Mortgage Company, L.P. and not by IMC Mortgage
Company. The transfer of servicing to IMC Mortgage Company is part of an ongoing
effort to consolidate mortgage banking functions of the Seller and Servicer.
Since both IMC Mortgage Company and Industry Mortgage Company, L.P. had the same
management and staff at the time of the servicing transfer, such transfer did
not result in any substantial changes to the management and staff previously
servicing the loans for Industry Mortgage Company, L.P. In addition, there have
not been any substantial changes made to any of the servicing procedures
previously utilized by Industry Mortgage Company, L.P.
The Seller will sell and assign each Home Equity Loan to the Depositor,
which will in turn sell and assign each Home Equity Loan to the Issuer, without
recourse, but subject to the terms of the Sale and Servicing Agreement, in
consideration of the net proceeds from the sale of the Notes, which are being
offered hereby. The Seller, in its capacity as Servicer, will also service each
Home Equity Loan pursuant to the Sale and Servicing Agreement.
The Servicer may not assign its obligations under the Sale and
Servicing Agreement, in whole or in part, unless it shall have first obtained
consent from the Note Insurer and confirmation in writing from the Rating
Agencies that such assignment shall not result in a downgrade or withdrawal of
the ratings assigned to the Notes by each respective Rating Agency; provided,
however, that any assignee must meet the eligibility requirements for a
successor servicer set forth in the Sale and Servicing Agreement.
The Servicer may, with the prior written consent of the Note Insurer,
enter into sub-servicing agreements (the "Sub-Servicing Agreements") with
qualified sub-servicers (the "Sub-Servicers") with respect to the servicing of
the Home Equity Loans. None of the Sub-Servicing arrangements discharge the
Servicer from its servicing obligations. Each Sub-Servicing Agreement shall be
terminated at such time as the Servicer resigns or is removed. See
"Administration -- Servicing and Sub-Servicing" herein.
The Note Insurer or the Indenture Trustee (with the prior written
consent of the Note Insurer) (or, in certain circumstances the Owners, with the
consent of the Note Insurer), may remove the Servicer, and the Servicer may
resign, only in accordance with the terms of the Sale and Servicing Agreement.
No removal or resignation shall become effective until the Indenture Trustee or
a successor servicer shall have assumed the Servicer's responsibilities and
obligations in accordance therewith. Any collections received by the Servicer
after removal or resignation shall be endorsed by it to the Indenture Trustee
and remitted directly to the Indenture Trustee or the successor servicer.
Upon removal or resignation of the Servicer, the Indenture Trustee (x)
may solicit bids for a successor servicer as described in the Sale and Servicing
Agreement and (y) until such time as a successor servicer is appointed pursuant
to the terms of the Sale and Servicing Agreement, shall serve in the capacity of
Backup Servicer (the "Backup Servicer") subject to the right of the Indenture
Trustee to assign such duties to a party acceptable to the Note Insurer and
Majority Residualholders. If the Indenture Trustee is unable to obtain a
qualifying bid and is prevented by law from acting as servicer, the Indenture
Trustee will be required to appoint, or petition a court of competent
jurisdiction to appoint, an eligible successor. Any successor (including the
Backup Servicer) is required to be a housing and home finance institution, bank
or mortgage servicing institution which has been designated as an approved
seller-servicer by Fannie Mae or FHLMC for first and second home equity loans
having equity of not less than $5,000,000 as determined in accordance with
generally accepted accounting principles, and which shall assume all or any part
of the responsibilities, duties or liabilities of the Servicer.
The Notes will not represent an interest in or obligation of, nor are
the Home Equity Loans guaranteed by the Depositor, the Seller, the Servicer,
except as described herein, or any of their affiliates.
S-15
<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 Fannie Mae ("Fannie Mae") or the Federal Home Loan
Mortgage Corporation ("FHLMC") and those standards typically applied by banks
and other primary lending institutions, particularly with regard to a
prospective borrower's credit history.
The Seller acquires and originates home equity loans through its
principal office in Tampa, Florida and full-service branch offices in
Cincinnati, Ohio, Ft. Washington, Pennsylvania, Lincoln, Rhode Island and Cherry
Hill, New Jersey. In addition, the Seller maintains retail branch offices
throughout the United States and acquires home equity loans from a referral
network of mortgage lenders and brokers, banks and other referral sources, which
may include one or more affiliates of the Seller.
Home equity loans acquired from mortgage brokers and other lenders are
pre-approved by the Seller prior to funding, or purchased in bulk after funding,
only after each loan has been re-underwritten by the Seller in accordance with
its established underwriting guidelines. These guidelines are designed to assess
the adequacy of the real property which serves as collateral for the loan and
the borrower's ability to repay the loan. The Seller analyzes, among other
factors, the equity in the collateral, the credit history and debt-to-income
ratio of the borrower, the property type, and the characteristics of the
underlying senior mortgage, if any.
The Seller purchases and originates home equity loans with different
credit characteristics depending on the credit profiles of individual borrowers.
The Seller primarily purchases and originates fixed rate or adjustable rate
loans which fully amortize (subject to adjustments by reason of being simple
interest loans) over a period not to exceed 30 years. The Seller also acquires
and originates balloon loans, which generally provide for scheduled amortization
over 30 years, with a due date and a balloon payment generally at the end of the
fifteenth year. The principal amount of the loans purchased or originated by the
Seller generally ranges up to a maximum of $400,000. Under current policy the
Seller generally does not acquire or originate home equity loans where the
combined Loan-to-Value Ratio exceeds 90%. The collateral securing loans acquired
or originated by the Seller is generally one- to four-family residences,
including condominiums and townhomes. The Seller accepts mobile homes or
unimproved land as collateral only in limited circumstances. The Seller does not
purchase loans where any senior mortgage contains open-end advance, negative
amortization or shared appreciation provisions.
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
S-16
<PAGE>
self-employment in the same business plus proof of current self-employed status
is required. The Seller typically requires lower combined Loan-to-Value Ratios
with respect to loans made to self-employed borrowers.
The Seller requires that a full appraisal of the property used as
collateral for any loan that is acquired or originated be performed in
connection with the origination of the loan. These appraisals are performed by
third party, fee-based appraisers. Appraisals of substantially all of the
Properties were completed on standard Fannie Mae/ FHLMC forms and conform to
current Fannie Mae/FHLMC secondary market requirements for residential property
appraisals. Each such appraisal includes, among other things, an inspection of
the exterior of the subject property, photographs of two or more different views
of the property and data from sales within the preceding 12 months of similar
properties within the same general location as the subject property.
A credit report by an independent, nationally recognized credit
repository agency reflecting the applicant's credit history is required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records.
Certain laws protect loan applicants by offering them a period of time
after loan documents are signed, termed the rescission period, during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to the funding of the loan and may not be waived by the applicant
except as permitted by law.
The Seller requires title insurance coverage issued by an approved ALTA
or CLTA title insurance company on all property securing home equity loans it
originates or purchases. The loan originator and its assignees are generally
named as the insured. Title insurance policies indicate the lien position of the
home equity loan and protect the Seller against loss if the title or lien
position is not indicated. The applicant is also required to secure hazard and,
in certain instances, flood insurance in an amount sufficient to cover the new
loan and any senior mortgage.
Delinquency, Loan Loss and Foreclosure Information
In September 1997, the Servicer began servicing loans previously
serviced by its former subsidiary, Industry Mortgage Company, L.P. IMC Mortgage
Company and Industry Mortgage Company, L.P. had the same management and staff at
the time of the servicing transfer and therefore the transfer of servicing did
not result in any substantial changes to the management and staff previously
servicing the loans for Industry Mortgage Company, L.P. The delinquency and loss
experience percentages indicated below are calculated on the basis of the total
home equity loans serviced as of the end of the periods indicated and reflect
information which was partially generated by Industry Mortgage Company, L.P.
However, because the total amount of loans originated or purchased by IMC
Mortgage Company and its subsidiaries has increased substantially over the
indicated 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 home equity loan portfolio during the periods shown.
Accordingly, loss and delinquency as percentages of aggregate principal balance
of home equity loans serviced for each period would be higher than those shown
if a group of home equity loans were artificially isolated at a point in time
and the information showed the activity only in that isolated group. As a
result, the historical delinquency experience and loan loss information set
forth below may not be indicative of the future performance of the home equity
loans. The columns in the following tables may not total exactly due to
rounding.
S-17
<PAGE>
Delinquency and Default Experience of the Servicer's Servicing
Portfolio of Home Equity Loans
<TABLE>
<CAPTION>
Three Months
Ending March 31, Year Ending December 31,
--------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
Number of Dollar Number of Dollar Number of Dollar Number of Dollar
Loans Amount Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio At 121,275 $8,222,154,541 102,275 $6,956,905.062 35,390 $2,148,068,446 9,376 $535,797,748
Delinquency
Percentage (1)
- --------------
30 - 59 days 2.038% 1.991% 2.598% 2.371% 3.390% 3.093% 2.613% 2.570%
60 - 89 days 1.071% 1.121% 1.438% 1.292% 1.077% 1.068% 0.672% 0.642%
90 + days 4.269% 4.178% 4.042% 3.886% 2.427% 2.616% 1.237% 1.223%
------ ------ ------ ------ ------ ------ ------ ------
Total
Delinquency 7.377% 7.290% 8.078% 7.549% 6.894% 6.777% 4.522% 4.435%
====== ====== ====== ====== ====== ====== ====== ======
Default
Percentage (2)
- -------------
Foreclosure 1.921% 2.260% 1.235% 1.420% 0.863% 1.003% 0.779% 0.749%
Bankruptcy(3) 1.289% 1.219% 1.208% 1.139% 1.064% 1.069% 0.576% 0.630%
Real Estate
Owned 0.435% 0.423% 0.462% 0.441% 0.276% 0.313% 0.117% 0.160%
------ ------ ------ ------ ------ ------ ------ ------
Total Default 3.645% 3.903% 2.904% 3.000% 2.204% 2.385% 1.472% 1.539%
====== ======= ====== ====== ====== ====== ====== ======
</TABLE>
- -----------------
(1) The delinquency percentage represents the number and dollar value of
account balances contractually past due, including home equity loans
in foreclosure or bankruptcy but exclusive of real estate owned.
(2) The default percentage represents the number and dollar value of
account balances on home equity loans in foreclosure, bankruptcy or
real estate owned.
(3) The bankruptcy percentage represents all home equity loans that are
in bankruptcy regardless of delinquency status.
Loan Loss Experience on the Servicer's Servicing
Portfolio of Home Equity Loans
<TABLE>
<CAPTION>
Three Months
Ending
March 31, Year Ending December 31,
------------ ----------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Amount Outstanding(1) $7,755,974,490 $4,315,237,578 $1,207,171,960 $294,251,859
Gross Losses(2) $4,299,148 $6,274,022 $1,581,695 $278,632
Recoveries(3) $0 $0 $1,727 $0
Net Losses(4) $4,299,148 $6,274,022 $1,579,968 $278,632
Net Losses as a Percentage of
Average Amount Outstanding(5) 0.220% 0.145% 0.131% 0.095%
</TABLE>
- -----------------------
(1) "Average Amount Outstanding" during the period is the arithmetic
average of the principal balances of the home equity loans outstanding
on the last business day of each month during the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses include all principal, foreclosure costs
and accrued interest to date.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
(5) For the three months ending March 31, 1998, "Net Losses as a Percentage
of Average Amount Outstanding" was annualized by multiplying "Net
Losses" by 4 before calculating the percentage of "Average Amount
Outstanding."
S-18
<PAGE>
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process date fields containing a two
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Servicer has identified all significant applications that will
require modification to ensure Year 2000 Compliance. The modification process of
all significant applications is substantially complete and the Servicer plans on
completing the modification process by December 31, 1998.
In addition, the Servicer has communicated with others with whom it
does significant business to determine their Year 2000 Compliance readiness and
the extent to which the Servicer is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Servicer's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Servicer's systems, would not have a material adverse effect on the Servicer.
The total cost to the Servicer of these Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Servicer plans to complete the Year 2000 modification process is based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those plans.
THE ISSUER
The Issuer is a Delaware business trust established by the Depositor
pursuant to the Trust Agreement under the laws of the State of Delaware. After
its formation, the Issuer will not engage in any activity other than (i)
acquiring, holding and managing the Home Equity Loans and the other assets of
the Trust Estate and the proceeds therefrom, (ii) issuing the Notes and the
Residual Interest, (iii) making payments on the Notes and the Residual Interest
and (iv) engaging in other activities that are necessary, suitable or convenient
to accomplish the foregoing or are incidental thereto or in connection
therewith. The Residual Interest represents the residual interest in the assets
of the Trust Estate. The Notes and the Residual Interests will be delivered by
the Issuer to the Depositor as consideration for the Home Equity Loans sold to
it and the Depositor will in turn deliver the Residual Interests and the
proceeds of the Notes to the Seller as consideration for the Home Equity Loans
sold to it, all pursuant to the Sale and Servicing Agreement. The Issuer does
not have, nor is it expected in the future to have, any significant assets,
other than the assets included in the Trust Estate.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in November
1994. The Depositor is a subsidiary of the Seller and the Servicer. The
Depositor maintains its principal offices at 5901 East Fowler Drive, Tampa,
Florida 33617-2362. None of the Issuer, the Depositor, the Seller or the
Servicer or any of their affiliates will insure or guarantee payments on the
Notes.
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 Issuer concurrently
with delivery of the Notes. Net proceeds from the sale of the Notes 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. The Seller in turn will use the net proceeds from the sale of the
Initial Home Equity Loans to pay
S-19
<PAGE>
off extensions of credit provided by, among others, certain of the Underwriters
with respect to certain Home Equity Loans. Such net proceeds less the Pre-Funded
Amount and the amount deposited in the Capitalized Interest Account will
(together with the Residual Interest retained by the Seller) represent the
purchase price to be paid by the Issuer to the Depositor and by the Depositor to
the Seller for the Initial Home Equity Loans.
THE HOME EQUITY LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Home Equity
Loans as of Statistical Calculation Date. The pool of Home Equity Loans
aggregated $395,573,642 as of the Statistical Calculation Date. Additional Home
Equity Loans will be purchased by the Trust for inclusion in the Trust from the
Depositor on the Closing Date. Such additional Initial Home Equity Loans will
represent Initial Home Equity Loans acquired or to be acquired by the Depositor
on or prior to the Closing Date. The Depositor expects that the actual pool of
Initial Home Equity Loans as of the Closing Date will represent at least
$450,000,000. In addition, with respect to the pool of Home Equity Loans as of
the Statistical Calculation Date as to which statistical information is
presented herein, some amortization of the pool will occur prior to the Closing
Date. Moreover, certain loans included in the pool of Home Equity Loans as of
the Statistical Calculation Date may prepay in full, or may be determined not to
meet the eligibility requirements for the final pool, and may not be included in
the final pool. As a result of the foregoing, the statistical distribution of
characteristics for the Initial Home Equity Loan pool as of the Closing Date
will vary from the statistical distribution of such characteristics for the Home
Equity Loans as of the Statistical Calculation Date as presented in this
Prospectus Supplement. Unless otherwise noted, all statistical percentages in
this Prospectus Supplement are measured by the aggregate principal balance of
the Home Equity Loans as of the Statistical Calculation Date.
Subsequent Home Equity Loans are intended to be purchased by the Issuer
from the Depositor from time to time on or before August 15, 1998 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 Issuer will be
sold by the Seller to the Depositor and then by the Depositor to the Issuer.
This subsection describes generally certain characteristics of the Home
Equity Loans as of the Statistical Calculation Date. Unless otherwise noted, all
statistical percentages in this Prospectus Supplement are measured by the
aggregate principal balance of the Home Equity Loans as of the Statistical
Calculation Date. The columns entitled "% of Aggregate Loan Balance" and
"Aggregate Loan Balance" in the following tables may not sum to 100% and
$395,573,642, respectively, due to rounding.
As of the Statistical Calculation, there are 4,337 Home Equity Loans.
The aggregate Loan Balance of the Home Equity Loans as of the Statistical
Calculation Date was $395,573,642. The Home Equity Loans as of the Statistical
Calculation Date are secured by first or 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 include second and vacation
homes). All of the Home Equity Loans as of the Statistical Calculation Date have
a first payment date on or after November 1, 1995. As of the Statistical
Calculation Date, 99.85% of the aggregate Loan Balance of the Home Equity Loans
was secured by first liens and 0.15% of the aggregate Loan Balance of the Home
Equity Loans was secured by second liens on the related properties.
The Loan-to-Value Ratios shown below were calculated based upon either
the appraised values of the Properties at the time of origination (the
"Appraised Values") or the sales price. In a limited number of circumstances,
and within the Seller's underwriting guidelines, the Seller has reduced the
Appraised Value of Properties where the Properties are unique, have a high value
or where the comparables are not within Fannie Mae guidelines. The purpose for
making these reductions is to value the Properties more conservatively than
would otherwise be the case if the appraisal were accepted as written.
S-20
<PAGE>
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, together with the outstanding balances of any
other mortgage, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
As of the Statistical Calculation Date, 98.50% of the Home Equity Loans
were Six-Month LIBOR Loans and 1.50% of the Home Equity Loans were CMT Loans.
The Coupon Rates with respect to all of the Home Equity Loans are subject to
periodic and lifetime rate adjustment caps.
As of the Statistical Calculation Date, the weighted average Coupon
Rate of the Home Equity Loans was 10.17%. As of the Statistical Calculation
Date, the Coupon Rates of the Home Equity Loans ranged from 5.625% to 16.250%;
the average Loan Balance of the Home Equity Loans was $91,209; the minimum and
maximum Loan Balances of the Home Equity Loans were $11,258 and $660,148,
respectively; the weighted average of the original loan-to-value ratios as of
the origination dates of the Home Equity Loans (based upon either appraisals
made at the time of origination or the sales price thereof) (the "Loan-to-Value
Ratios") was 77.83%; the weighted average remaining term to maturity of the Home
Equity Loans was 354 months; and the remaining terms to maturity of the Home
Equity Loans ranged from 104 months to 360 months. As of the Statistical
Calculation Date, Home Equity Loans containing "balloon" payments represented
not more than 0.17% of the aggregate Loan Balance of the Home Equity Loans. No
Home Equity Loan as of the Statistical Calculation Date will mature later than
June 1, 2028.
Six-Month LIBOR Loans. As of the Statistical Calculation Date, the
Six-Month LIBOR Loans consist of 4,281 loans aggregating $389,652,241, all of
which have semi-annual interest rate and semi-annual payment adjustment
frequencies. While 12.95% of the Six-Month LIBOR Loans first adjust
approximately six months after origination, 85.76% of the Six-Month LIBOR Loans
do not first adjust until approximately two or three years from the date of
origination and the remainder of the Six-Month LIBOR Loans do not first adjust
until approximately one or five years from the date of origination. As of the
Statistical Calculation Date, the Six-Month LIBOR Loans have a weighted average
margin of 6.98%; margins which range from 3.000% to 12.800%; a weighted average
initial periodic semi-annual rate adjustment cap of 2.57% and a weighted average
periodic semi-annual rate adjustment cap of 1.06%. As of the Statistical
Calculation Date, the Six-Month LIBOR Loans have a weighted average initial
Coupon Rate of 10.14%, with initial Coupon Rates that range from 6.490% to
15.600%. As of the Statistical Calculation Date, the Six-Month LIBOR Loans have
a weighted average maximum Coupon Rate of 16.66%. The weighted average number of
months to the next rate adjustment date on the Six-Month LIBOR Loans is 18
months.
CMT Loans. As of the Statistical Calculation Date, the CMT Loans
consist of 56 loans aggregating $5,921,402, all of which have annual interest
rate and annual payment adjustment frequencies based on the weekly average yield
on United States Treasury securities adjusted to a constant maturity of one
year. While 80.39% of the CMT Loans first adjust approximately one year after
origination, 19.61% of the CMT Loans first adjust approximately two or three
years from the date of origination. As of the Statistical Calculation Date, the
CMT Loans have a weighted average margin of 6.35%; margins which range from
5.000% to 8.000%; a weighted average initial periodic annual rate adjustment cap
of 2.20% and a weighted average periodic annual rate adjustment cap of 1.99%. As
of the Statistical Calculation Date, the CMT Loans have a weighted average
initial Coupon Rate of 9.33%, with initial Coupon Rates that range from 7.500%
to 12.875%. As of the Statistical Calculation Date, the CMT Loans have a
weighted average maximum Coupon Rate of 15.34%. The weighted average number of
months to the next rate adjustment date on the CMT Loans is 11 months.
S-21
<PAGE>
Geographic Distribution of Properties
The geographic distribution of the Home Equity Loans by state as of the
Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ------------
<S> <C> <C> <C>
Alaska 7 $ 718,038 0.18%
Arizona 65 6,755,491 1.71
Arkansas 9 461,401 0.12
California 298 43,009,112 10.87
Colorado 117 12,496,140 3.16
Connecticut 123 12,889,605 3.26
Delaware 12 889,950 0.23
District of Columbia 5 447,980 0.11
Florida 225 20,419,171 5.16
Georgia 83 8,805,596 2.23
Hawaii 23 3,992,653 1.01
Idaho 63 5,722,175 1.45
Illinois 248 21,459,460 5.42
Indiana 214 12,554,181 3.17
Iowa 22 1,274,963 0.32
Kansas 16 906,975 0.23
Kentucky 32 2,077,412 0.53
Louisiana 14 928,897 0.23
Maine 6 683,974 0.17
Maryland 115 11,228,894 2.84
Massachusetts 103 11,375,931 2.88
Michigan 339 24,585,125 6.22
Minnesota 78 5,979,944 1.51
Mississippi 6 374,120 0.09
Missouri 84 5,457,587 1.38
Montana 17 1,578,821 0.40
Nebraska 8 332,699 0.08
Nevada 20 2,845,028 0.72
New Hampshire 11 1,077,800 0.27
New Jersey 137 16,785,446 4.24
New Mexico 88 8,273,773 2.09
New York 269 28,191,084 7.13
North Carolina 192 15,191,749 3.84
North Dakota 1 37,652 0.01
Ohio 445 29,753,333 7.52
Oklahoma 19 898,492 0.23
Oregon 74 8,653,698 2.19
Pennsylvania 136 11,570,267 2.92
Rhode Island 33 2,927,819 0.74
South Carolina 34 2,697,351 0.68
South Dakota 2 178,881 0.05
Tennessee 25 1,910,874 0.48
Texas 182 15,279,833 3.86
Utah 77 8,580,598 2.17
Vermont 3 244,873 0.06
Virginia 39 4,190,941 1.06
Washington 83 8,868,540 2.24
West Virginia 14 1,016,939 0.26
Wisconsin 116 8,662,712 2.19
Wyoming 5 329,668 0.08
----- ------------ ------
Total 4,337 $395,573,642 100.00%
===== ============ ======
</TABLE>
S-22
<PAGE>
Loan-to-Value Ratios
The original loan-to-value ratios as of the origination dates of the
Home Equity Loans (based upon either appraisals made at the time of origination
or the sales price thereof) (the "Loan-to-Value Ratios") as of the Statistical
Calculation Date were distributed as follows:
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Original LTV's Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
<S> <C> <C> <C>
10.001 to 15.000% 1 $ 14,994 0.00%
20.001 to 25.000 9 269,210 0.07
25.001 to 30.000 10 385,683 0.10
30.001 to 35.000 14 773,392 0.20
35.001 to 40.000 28 1,417,934 0.36
40.001 to 45.000 38 2,183,280 0.55
45.001 to 50.000 57 3,643,150 0.92
50.001 to 55.000 71 4,554,324 1.15
55.001 to 60.000 128 8,635,766 2.18
60.001 to 65.000 296 21,633,707 5.47
65.001 to 70.000 478 36,580,836 9.25
70.001 to 75.000 733 64,298,416 16.25
75.001 to 80.000 1,324 127,674,526 32.28
80.001 to 85.000 621 63,970,501 16.17
85.001 to 90.000 479 54,016,796 13.66
90.001 to 95.000 23 2,770,508 0.70
95.001 to 100.000 27 2,750,621 0.70
----- ------------ ------
Total 4,337 $395,573,642 100.00%
===== ============ =======
</TABLE>
Statistical Calculation Date Coupon Rates
The Coupon Rates borne by the Notes relating to the Home Equity Loans as
of the Statistical Calculation Date were distributed as follows:
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
<S> <C> <C> <C>
5.001 to 6.000% 4 $ 310,572 0.08%
6.001 to 7.000 4 595,515 0.15
7.001 to 8.000 78 10,274,306 2.60
8.001 to 9.000 520 60,534,207 15.30
9.001 to 10.000 1,241 129,545,710 32.75
10.001 to 11.000 1,331 116,111,651 29.35
11.001 to 12.000 701 51,735,755 13.08
12.001 to 13.000 303 18,778,452 4.75
13.001 to 14.000 112 5,865,522 1.48
14.001 to 15.000 35 1,385,802 0.35
15.001 to 16.000 6 356,241 0.09
16.001 to 17.000 2 79,909 0.02
----- ------------ ------
Total 4,337 $395,573,642 100.00%
===== ============ =======
</TABLE>
S-23
<PAGE>
Statistical Calculation Date Loan Balances
The distribution of the outstanding principal amounts of the Home Equity
Loans as of the Statistical Calculation Date were as follows:
<TABLE>
<CAPTION>
Statistical Calculation Number of Aggregate % of Aggregate
Date Loan Balances Home Equity Loans Loan Balance Loan Balance
------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
Up to $25,000.00 123 $ 2,569,955 0.65%
25,000.01 to 50,000.00 887 34,645,804 8.76
50,000.01 to 75,000.00 1,169 72,609,876 18.36
75,000.01 to 100,000.00 762 66,363,769 16.78
100,000.01 to 125,000.00 547 61,329,003 15.50
125,000.01 to 150,000.00 313 43,082,399 10.89
150,000.01 to 175,000.00 180 29,103,839 7.36
175,000.01 to 200,000.00 115 21,406,342 5.41
200,000.01 to 250,000.00 121 26,753,466 6.76
250,000.01 to 300,000.00 58 15,796,568 3.99
300,000.01 to 350,000.00 43 13,811,502 3.49
350,000.01 to 400,000.00 13 5,003,551 1.26
400,000.01 to 450,000.00 1 419,515 0.11
450,000.01 to 500,000.00 3 1,475,939 0.37
500,000.01 to 550,000.00 1 541,967 0.14
Over 550,000.00 1 660,148 0.17
---- ------------ ------
Total 4,337 $395,573,642 100.00%
===== ============ =======
</TABLE>
Types of Mortgaged Properties
The Properties securing the Home Equity Loans as of the Statistical
Calculation Date were of the property types as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Single Family Detached 3,800 $348,515,459 88.10%
Two- to Four-Family 265 24,460,008 6.18
Condominium 108 8,897,673 2.25
Single Family Attached 73 5,725,811 1.45
Manufactured Housing 36 2,530,667 0.64
Planned Unit Development 27 2,846,150 0.72
Townhouse 17 1,701,402 0.43
Multi-Family 10 832,793 0.21
Mixed Use 1 63,680 0.02
----- ------------ ------
Total 4,337 $395,573,642 100.00%
===== ============ =======
</TABLE>
S-24
<PAGE>
Distribution of Months Since Origination
The distribution of the number of months since the date of origination
of the Home Equity Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Months Number of Aggregate % of Aggregate
Since Origination Home Equity Loans Loan Balance Loan Balance
- ----------------- ----------------- ------------ ------------
<S> <C> <C> <C>
0 to 1 321 $ 29,066,142 7.35%
2 to 12 3,946 359,547,904 90.89
13 to 24 67 6,767,451 1.71
25 or more 3 192,144 0.05
----- ------------ ------
Total 4,337 $395,573,642 100.00%
===== ============ ======
</TABLE>
Distribution of Remaining Term to Maturity
The distribution of the number of months remaining to maturity of the
Home Equity Loans as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Months Remaining Number of Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
- ----------- ----------------- ------------ ------------
<S> <C> <C> <C>
Up to 120 2 $ 52,413 0.01%
121 to 180 17 1,310,769 0.33
181 to 240 5 524,077 0.13
301 to 360 4,313 393,686,383 99.52
----- ----------- ------
Total 4,337 $395,573,642 100.00%
===== ============ ======
</TABLE>
Occupancy Status (1)
The occupancy status of the Properties securing the Home Equity Loans as
of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied 3,993 $373,154,741 94.33%
Investor Owned 329 21,022,301 5.31
Vacation/Second Home 15 1,396,601 0.35
----- ------------ ------
Total 4,337 $395,573,642 100.00%
===== ============ ======
</TABLE>
- -----------------
(1) Based on representations by the borrowers at the time of origination of
the Home Equity Loan.
S-25
<PAGE>
Distribution by Lien Position
The lien position of the Home Equity Loans as of the Statistical
Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Lien Position Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
First Lien 4,328 $394,972,690 99.85%
Second Lien 9 600,953 0.15
----- ------------ ------
Total 4,337 $395,573,642 100.00%
===== ============ ======
</TABLE>
Distribution of Maximum Coupon Rates
The maximum Coupon Rates borne by the Mortgage Notes relating to the
Home Equity Loans as of the Statistical Calculation Date were as follows:
<TABLE>
<CAPTION>
Range of Maximum Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
------------ ----------------- ------------ ------------
<S> <C> <C> <C>
6.001 7.000% 1 $ 60,772 0.02%
7.001 8.000 1 57,762 0.01
10.001 11.000 3 384,558 0.10
11.001 12.000 6 487,460 0.12
12.001 13.000 11 1,790,872 0.45
13.001 14.000 48 6,284,044 1.59
14.001 15.000 266 31,693,186 8.01
15.001 16.000 891 94,346,079 23.85
16.001 17.000 1,345 129,915,432 32.84
17.001 18.000 1,017 82,628,623 20.89
18.001 19.000 466 32,752,372 8.28
19.001 20.000 180 10,345,889 2.62
20.001 21.000 76 3,575,169 0.90
21.001 22.000 15 689,776 0.17
22.001 23.000 2 44,796 0.01
26.001 27.000 1 75,522 0.02
30.001 35.000 7 414,087 0.10
35.001 40.000 1 27,243 0.01
----- ------------ ------
Total 4,337 $395,573,642 100.00%
===== ============ =======
</TABLE>
S-26
<PAGE>
Distribution of Minimum Coupon Rates
The minimum Coupon Rates borne by the Mortgage Notes relating to the
Home Equity Loans as of the Statistical Calculation Date were as follows:
<TABLE>
<CAPTION>
Range of Minimum Number of Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
------------ ----------------- ------------ ------------
<S> <C> <C> <C>
2.001 3.000% 1 $ 134,854 0.03%
3.001 4.000 6 688,402 0.17
4.001 5.000 17 1,617,276 0.41
5.001 6.000 82 7,936,534 2.01
6.001 7.000 158 14,863,334 3.76
7.001 8.000 205 21,733,978 5.49
8.001 9.000 505 56,734,867 14.34
9.001 10.000 1,110 115,093,569 29.10
10.001 11.000 1,207 105,947,415 26.78
11.001 12.000 638 47,223,037 11.94
12.001 13.000 272 16,696,971 4.22
13.001 14.000 101 5,362,453 1.36
14.001 15.000 28 1,161,265 0.29
15.001 16.000 7 379,687 0.10
----- ------------ ------
Total 4,337 $395,573,642 100.00%
===== ============ =======
</TABLE>
Distribution of Margins
Six-Month LIBOR Loans. The margins borne by the Mortgage Notes relating
to the Six-Month LIBOR Loans as of the Statistical Calculation Date were as
follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Range of Margins Home Equity Loans Loan Balance Loan Balance
---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
2.001 3.000% 2 $ 202,955 0.05%
3.001 4.000 10 1,290,506 0.33
4.001 5.000 103 9,938,739 2.51
5.001 6.000 842 88,046,832 22.26
6.001 7.000 1,529 145,431,808 36.76
7.001 8.000 994 81,419,234 20.58
8.001 9.000 424 32,383,761 8.19
9.001 10.000 198 15,321,645 3.87
10.001 11.000 116 10,046,652 2.54
11.001 12.000 50 4,422,668 1.12
12.001 13.000 13 1,147,440 0.29
----- ------------ -----
Subtotal 4,281 $389,652,241 98.50%
===== ============ =====
</TABLE>
S-27
<PAGE>
CMT Loans. The margins borne by the Mortgage Notes relating to the CMT
Loans as of the Statistical Calculation Date were as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Range of Margins Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
4.001 to 5.000% 1 $ 30,909 0.01%
5.001 to 6.000 21 2,511,114 0.63
6.001 to 7.000 20 2,086,117 0.53
7.001 to 8.000 14 1,293,261 0.33
----- ------------ ------
Subtotal 56 $ 5,921,402 1.50%
===== ============ =======
Total 4,337 $395,573,642 100.00%
===== ============ =======
</TABLE>
S-28
<PAGE>
Distribution of Next Coupon Rate Change
Six-Month LIBOR Loans. The month of the next Coupon Rate change for
each of the Mortgage Notes relating to the Six-Month LIBOR Loans as of the
Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Month of Next Number of Initial Aggregate % of Aggregate
Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
- ------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
June 1998 37 $ 2,170,255 0.55%
July 1998 87 7,717,879 1.95
August 1998 90 8,281,000 2.09
September 1998 119 10,966,741 2.77
October 1998 111 9,728,023 2.46
November 1998 105 9,525,039 2.41
December 1998 36 3,778,216 0.96
January 1999 7 1,244,771 0.31
February 1999 7 477,930 0.12
March 1999 4 413,113 0.10
April 1999 5 716,911 0.18
May 1999 22 2,070,459 0.52
June 1999 75 8,776,070 2.22
July 1999 100 9,017,084 2.28
August 1999 98 9,111,818 2.30
September 1999 184 18,554,012 4.69
October 1999 174 14,945,889 3.78
November 1999 332 32,881,784 8.31
December 1999 307 26,736,277 6.76
January 2000 345 32,601,281 8.24
February 2000 562 48,905,411 12.36
March 2000 591 49,324,580 12.47
April 2000 404 37,440,101 9.46
May 2000 123 10,440,456 2.64
June 2000 8 569,642 0.14
July 2000 1 122,334 0.03
August 2000 3 293,532 0.07
September 2000 2 98,981 0.03
October 2000 8 415,353 0.11
November 2000 8 423,852 0.11
December 2000 7 486,270 0.12
January 2001 50 5,482,561 1.39
February 2001 46 5,517,345 1.39
March 2001 71 6,527,177 1.65
April 2001 92 7,755,163 1.96
May 2001 20 2,167,158 0.55
August 2002 1 127,253 0.03
December 2002 1 159,276 0.04
January 2003 5 522,077 0.13
February 2003 7 572,198 0.14
March 2003 6 633,729 0.16
April 2003 16 1,641,383 0.41
May 2003 4 311,858 0.08
----- ------------ -----
Subtotal 4,281 $389,652,241 98.50%
===== ============ ======
</TABLE>
S-29
<PAGE>
CMT Loans. The month of the next Coupon Rate change for each of the
Mortgage Notes relating to the CMT Loans as of the Statistical Calculation Date
was as follows:
<TABLE>
<CAPTION>
Month of Next Number of Aggregate % of Aggregate
Coupon Rate Change Home Equity Loans Loan Balance Loan Balance
- ------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
July 1998 11 $ 1,448,482 0.37%
August 1998 2 175,556 0.04
December 1998 1 32,828 0.01
January 1999 1 23,328 0.01
April 1999 6 763,140 0.19
May 1999 8 622,699 0.16
June 1999 14 1,694,360 0.43
September 1999 1 38,410 0.01
April 2000 2 216,598 0.05
May 2000 1 65,662 0.02
June 2000 6 537,383 0.14
July 2000 2 240,038 0.06
February 2001 1 62,918 0.02
----- ------------ ------
Subtotal 56 $ 5,921,402 1.50%
===== ============ =======
Total 4,337 $395,573,642 100.00%
===== ============ =======
</TABLE>
Conveyance of Subsequent Home Equity Loans
The Sale and Servicing Agreement permits the Issuer to acquire
Subsequent Home Equity Loans in an aggregate principal balance equal to the
Pre-Funded Amount. Accordingly, the statistical characteristics of the Home
Equity Loans will vary as of each Subsequent Cut-Off Date upon the acquisition
of Subsequent Home Equity Loans, but the Seller does not expect such variance to
be material.
The obligation of the Issuer to purchase a Subsequent Home Equity Loan
on a Subsequent Transfer Date for assignment to the Home Equity Loan Pool is
subject, among other factors, to the following requirements: (i) the rating on
the Notes shall not have been downgraded by any Rating Agency; (ii) such
Subsequent Home Equity Loan may not be 30 or more days contractually delinquent
as of the related Subsequent Cut-Off Date (except that not more than 1.00% of
the aggregate Loan Balance of the Home Equity Loans (including Initial Home
Equity Loans and Subsequent Home Equity Loans) may be 60 or more days delinquent
as of the related date of delivery); (iii) the weighted average margin of the
Subsequent Home Equity Loans will be at least 6.87%; (iv) such Subsequent Home
Equity Loan will be an adjustable rate Home Equity Loan; (v) the original term
to maturity of such Subsequent Home Equity Loan may not exceed 30 years; (vi)
such Subsequent Home Equity Loan must be a first lien; (vii) following the
purchase of such Subsequent Home Equity Loan by the Trust, the Home Equity Loans
(including the Subsequent Home Equity Loans) (a) will have a weighted average
Coupon Rate of at least 10.02%; (b) will have a weighted average Loan-to-Value
Ratio of not more than 78.40%; (c) will have at least 93.00% Home Equity Loans
which are owner occupied; and (d) will have at least 87.00% Home Equity Loans
secured by single family detached properties.
S-30
<PAGE>
Interest Payments on the Home Equity Loans
99.94% of the Home Equity Loans by aggregate Loan Balance as of the
Statistical Calculation Date 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.
In addition, 0.06% of Home Equity Loans by aggregate Loan Balance as of the
Statistical Calculation Date provide that interest is charged to the Mortgagor
at the Coupon Rate on the outstanding principal balanced calculated based on the
number of days elapsed between receipt of the Mortgagor's last payment through
receipt of the Mortgagor's most current payment (such Home Equity Loans,
"Date-of-Payment Loans"). Such interest is deducted from the Mortgagor's payment
amount and the remainder, if any, of the payment is applied as a reduction to
the outstanding principal balance of such Mortgage Note. Although the Mortgagor
is required to remit equal monthly payments on a specified monthly payment date
that would reduce the outstanding principal balance of such Mortgage Note to
zero at such Mortgage Note's maturity date, payments that are made by the
Mortgagor after the due date therefor would cause the outstanding principal
balance of such Mortgage Note not to be reduced to zero on its maturity date. In
such a case, the Mortgagor would be required to make an additional principal
payment at the maturity date for such Mortgage Note.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, the Notes will relate to the rate of payment of principal
of the Home Equity Loans, including, for this purpose, Prepayments, liquidations
due to defaults, casualties and condemnations, and repurchases of Home Equity
Loans by the Seller. The Home Equity Loans may be prepaid by the related
Mortgagors, in whole or in part, at any time. However, approximately 60.31% of
the Home Equity Loans as of the Statistical Calculation Date (by Loan Balance)
require the payment of a fee in connection with certain prepayments. The actual
rate of principal prepayments on pools of home equity loans is influenced by a
variety of economic, tax, geographic, demographic, social, legal and other
factors and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among pools of home equity loans at any time
because of specific factors relating to the home equity loans in the particular
pool, including, among other things, the age of the home equity loans, the
geographic locations of the properties securing the loans and the extent of the
mortgagors' equity in such properties, and changes in the mortgagors' housing
needs, job transfers and unemployment.
Adjustable rate Home Equity Loans may be subject to a greater rate of
principal prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall significantly, adjustable rate home equity loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed rate home equity loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable rate home equity loan to "lock in" a lower fixed interest rate. In
addition, the fact that a substantial majority of the Six- Month LIBOR Loans and
the CMT Loans do not adjust for substantial period of time may affect the
prepayment experience on such loans. However, no assurance can be given as to
the level of prepayments that the Home Equity Loans will experience.
In addition to the foregoing factors affecting the weighted average
life of the Notes, the overcollateralization provisions of the transaction
result in an additional reduction of the Note Principal Balance relative to the
amortization of the Home Equity Loans in early months of the transaction. This
creates overcollateralization which results from the excess of the aggregate
Loan Balance of the Home Equity Loans over the Note Principal Balance.
S-31
<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 Issuer in an amount equal
to the Pre-Funded Amount, the Owners of the Notes will receive a partial
prepayment on the Payment Date immediately following the end of the Funding
Period in an amount equal to the Pre- Funded Amount remaining at the end of the
Funding Period.
The Depositor 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 at the end of the Funding
Period.
Prepayment and Yield Scenarios for the Notes
As indicated above, if purchased at other than par (disregarding, for
purposes of this discussion, the effects on an investor's yield resulting from
the timing of the settlement date), the yield to maturity on a Note will be
affected by the rate of the payment of principal of the Home Equity Loans. If
the actual rate of payments on the Home Equity Loans is slower than the rate
anticipated by an investor who purchases Notes at a discount, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the Home Equity Loans is faster than the rate
anticipated by an investor who purchases Notes at a premium, the actual yield to
such investor will be lower than such investor's anticipated yield.
The Final Payment Date for the Notes is August 20, 2029. This date is
the Payment Date in the twelfth month after the date on which the initial Note
Principal Balance as of the Closing Date would be reduced to zero, assuming that
no Prepayments are received on the Home Equity Loans, that scheduled monthly
payments of principal and interest on the Home Equity Loans are timely received
and that the overcollateralization mechanics of the transaction are not used to
make accelerated payments of principal to the Owners of the Notes. The weighted
average life of the Notes is likely to be shorter than would be the case if
payments actually made on the Home Equity Loans conformed to the foregoing
assumptions, and the actual final Payment Date with respect to the Notes could
occur significantly earlier than the Final Payment Date because (i) Prepayments
are likely to occur and (ii) the Majority Residualholders may cause a redemption
of the Notes on or after the Redemption Date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
Notes will be influenced by the rate at which principal of the Home Equity Loans
is paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes Prepayments and liquidations due to
default). Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model.
The model used in this Prospectus Supplement is the constant prepayment
rate ("CPR") which represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of home equity loans for the
life of such home equity loans. CPR does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of home equity loans, including the Home Equity Loans.
The Seller believes that no existing statistics of which it is aware provide a
reliable basis for Owners of the Notes to predict the amount or the timing of
receipt of prepayments on the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Note Principal Balance outstanding and weighted average
life of the Notes set forth in the tables. In addition, since the actual Home
Equity Loans have characteristics which differ from those assumed in preparing
the tables set forth below, the payments of principal on the Notes may be made
earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans consist of pools of loans having the approximate characteristics as
set forth in the "Representative Loan Pools" table below, (ii) the Closing Date
for the Notes occurs on June 26, 1998, (iii) payments on the Notes are made on
the 20th day of each month regardless
S-32
<PAGE>
of the day on which the Payment Date actually occurs, commencing in July 1998 in
accordance with the priorities described herein, (iv) the difference between the
gross Coupon Rate and the net Coupon Rate is equal to the Servicing Fee and the
net Coupon Rate is further reduced by the Trust Fees and Expenses, (v) the
prepayment rate of the Home Equity Loans occurs at the CPR rates set forth in
the table, (vi) prepayments include 30 days' interest thereon, (vii) no
reinvestment income from any Trust account is available for payment to the
Owners of the Notes other than the Pre- Funding Account, which accrues on the
funds therein based on a rate of 6.00% per annum; (viii) the scheduled monthly
payments of principal and interest on the Home Equity Loans will be timely
delivered on the first day of the Remittance Period (with no defaults), (ix) the
level of Six-Month LIBOR remains constant at approximately 5.75%, (x) the level
of One-Month LIBOR remains constant at approximately 5.65625%, (xi) all Home
Equity Loans are considered Six- Month LIBOR Loans, (xii) the Coupon Rate for
each Adjustable Rate Home Equity Loan is adjusted on its next rate change date
(and on subsequent rate change dates, if necessary) to equal the sum of (a) the
applicable index and (b) the respective gross margin (subject to applicable
interest rate caps and floors), (xiii) the overcollateralization levels are set
as specified in the Sale and Servicing Agreement; (xiv) no optional redemption
is exercised (except in the case of the "Weighted Average Life to Call" set
forth below) and (xv) all Home Equity Loans accrue interest based on a 360-day
year assumed to consist of twelve 30-day months.
S-33
<PAGE>
REPRESENTATIVE LOAN POOLS
<TABLE>
<CAPTION>
Gross Months to Rate Periodic
Pool Loan Coupon Net Coupon Rate Reset Initial Period Rate
Number Balance Rate Rate Change Frequency Margin Rate Cap Cap
- ----------- ------------------ ----------- ----------- ----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 31,447,548.63 9.826% 9.326% 2 6 6.593% 1.170% 1.092%
2 47,671,614.90 10.011 9.511 7 6 6.636 2.001 1.140
3 40,781,895.04 9.969 9.469 14 6 6.429 4.566 1.106
4 42,031,690.99 10.373 9.873 17 6 6.830 2.594 1.068
5 35,880,972.05 10.249 9.749 18 6 6.854 2.596 1.066
6 33,529,437.83 10.206 9.706 19 6 6.645 2.662 1.123
7 41,207,857.06 10.445 9.945 20 6 7.096 2.516 1.097
8 55,963,589.81 10.270 9.770 21 6 7.212 2.380 1.044
9 59,506,978.63 10.223 9.723 22 6 7.134 2.342 1.011
10 23,695,318.48 10.135 9.635 23 6 7.261 2.526 1.027
11 38,283,096.58 10.051 9.551 36 6 7.909 2.804 1.044
12 115,137,150.00(1) 10.221 9.721 22 6 6.926 2.753 1.064
13 34,862,850.00(1) 9.991 9.491 4 6 7.122 1.671 1.100
</TABLE>
Remaining Term of
Pool Maximum Minimum Maturity Amortization
Number Coupon Rate Coupon Rate (in months) Method
- ----------- -------------- -------------- ------------------ -----------------
1 16.190% 9.329% 352 Level
2 16.151 9.081 351 Level
3 16.389 9.794 349 Level
4 16.553 10.055 353 Level
5 16.824 9.985 354 Level
6 16.919 9.876 355 Level
7 17.052 10.205 356 Level
8 16.829 9.902 357 Level
9 16.773 9.916 358 Level
10 16.473 9.645 356 Level
11 16.771 9.505 356 Level
12 16.729 9.904 358 Level
13 16.362 9.317 358 Level
- -------------------
(1) Home Equity Loans in the pool will be Subsequent Home Equity Loans.
S-34
<PAGE>
The following table sets forth the percentages of the initial
principal amount of the Notes that would be outstanding after each of the dates
shown, based on a rate equal to 0.0%, 15.0%, 22.5%, 30.0% , 37.5% and 45.0% of
the CPR (as defined above).
PERCENTAGE OF INITIAL NOTE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
Payment 0.0% 15.0% 22.5% 30.0% 37.5% 45.0%
Date ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100
06/20/1999 96 81 74 67 60 52
06/20/2000 95 68 56 45 35 26
06/20/2001 95 57 42 31 22 15
06/20/2002 94 47 33 22 14 8*
06/20/2003 93 40 25 15 9* 4*
06/20/2004 93 34 19 11 5* 2*
06/20/2005 92 28 15 7* 3* 1*
06/20/2006 91 24 11 5* 2* 0
06/20/2007 90 20 9* 3* 1* 0
06/20/2008 89 17 7* 2* 0 0
06/20/2009 88 14 5* 1* 0 0
06/20/2010 87 12 4* 1* 0 0
06/20/2011 86 10 3* 0 0 0
06/20/2012 84 8* 2* 0 0 0
06/20/2013 82 7* 1* 0 0 0
06/20/2014 80 6* 1* 0 0 0
06/20/2015 77 5* 1* 0 0 0
06/20/2016 75 4* 0 0 0 0
06/20/2017 71 3* 0 0 0 0
06/20/2018 68 2* 0 0 0 0
06/20/2019 64 2* 0 0 0 0
06/20/2020 59 1* 0 0 0 0
06/20/2021 54 1* 0 0 0 0
06/20/2022 48 1* 0 0 0 0
06/20/2023 42 0 0 0 0 0
06/20/2024 34 0 0 0 0 0
06/20/2025 27 0 0 0 0 0
06/20/2026 17 0 0 0 0 0
06/20/2027 7* 0 0 0 0 0
Weighted
Average
Life to
Maturity
(Years)(2) 21.30 5.43 3.59 2.60 1.99 1.58
Weighted
Average
Life to Call
(Years)(2) 21.26 5.03 3.30 2.39 1.83 1.45
</TABLE>
- -------------------
(1) The percentages in the above table have been rounded to the nearest whole
number.
(2) The weighted average life of the Notes is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing by the initial Note Principal Balance and rounding to one decimal
place.
* Indicates that the cash flows are contingent on the optional termination
provision not being exercised. Otherwise, the percentage would equal zero.
S-35
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Home Equity Loans
and the Properties is based upon the pool as constituted at the close of
business on the Statistical Calculation Date. Prior to the issuance of the
Notes, Home Equity Loans may be removed from the pool as a result of incomplete
documentation or non-compliance with representations and warranties set forth in
the Sale and Servicing Agreement, if the Seller deems such removal necessary or
appropriate. An aggregate amount of at least $54,426,358 of additional Home
Equity Loans will also be included in the pool prior to the issuance of the
Notes and the Subsequent Home Equity Loans will be added to the pool after the
issuance of the Notes.
A current report on Form 8-K will be available to purchasers of the
Notes and will be filed, and incorporated by reference to the Registration
Statement together with the Indenture, the Trust Agreement and the Sale and
Servicing Agreement, with the Securities and Exchange Commission within fifteen
days after the initial issuance of the Notes and within fifteen days of the
addition of any Subsequent Home Equity Loans. In the event Initial Home Equity
Loans are removed from, 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. A description of the pool of Initial
Home Equity Loans, as of the Closing Date including such additional Home Equity
Loans, will be filed in a current report on Form 8-K within fifteen days after
the initial issuance of the Notes.
DESCRIPTION OF THE NOTES
General
The Issuer will issue the Notes pursuant to the Indenture. The Issuer
will also issue the Residual Interest pursuant to the Trust Agreement, which
represents the residual interest in the Trust Estate. The summaries of certain
provisions of the Indenture, the Sale and Servicing Agreement and the Trust
Agreement (collectively, the "Agreements") set forth below, under the caption
"Administration" herein, while complete in material respects, do not purport to
be exhaustive. For more details regarding the terms of the Agreements,
prospective investors in the Notes are advised to review the Agreements, a copy
of each of which the Depositor will provide (without exhibits) without charge
upon written request addressed to the Depositor.
The Notes will be secured by the Trust Estate created by the Indenture.
The Notes represent non-recourse obligations of the Issuer and proceeds of the
assets in the Trust Estate will be the sole source of payments of the Notes. The
Notes will not represent an interest in or obligation of the Depositor, the
Servicer, the Note Insurer, the Owner Trustee, the Indenture Trustee, the
Underwriters, any of their respective affiliates or any other entity.
Payment Dates
On each Payment Date, the Owners of the Notes will be entitled to
receive, from amounts then on deposit in a trust account established and
maintained by the Indenture Trustee in accordance with the Sale and Servicing
Agreement (the "Note Account") and until the Note Principal Balance is reduced
to zero, the aggregate payment amount as of such Payment Date as described
below. Payments will be made in immediately available funds to Owners of Notes
by wire transfer or otherwise, to the account of such Owner at a domestic bank
or other entity having appropriate facilities therefor, if such Owner has so
notified the Indenture Trustee at least five Business Days prior to the Record
Date, or by check mailed to the address of the person entitled thereto as it
appears on the register (the "Register") maintained by the Indenture Trustee as
registrar (the "Registrar"). Beneficial Owners may experience some delay in the
receipt of their payments due to the operations of DTC. See "Risk Factors --
Book Entry Registration" and "Description of the Notes -- Book Entry
Registration of the Notes" herein and "Description of the Securities -- Book
Entry Securities" in the Prospectus.
S-36
<PAGE>
The Indenture will provide that an Owner, upon receiving the final
payment on such Owner's Notes, will be required to send such Note to the
Indenture Trustee. The Indenture additionally will provide that, in any event,
any Note as to which the final payment thereon has been made shall be deemed
canceled for all purposes of the Indenture and the Note Insurance Policy.
Each Owner of record of the Notes will be entitled to receive such
Owner's Percentage Interest in the amounts due on such Payment Date. The
"Percentage Interest" as of any date of determination will be equal to the
percentage obtained by dividing the principal balance of such Note as of the
Cut-Off Date by the Note Principal Balance as of the Cut-Off Date.
Payments
Upon receipt, the Indenture Trustee will be required to deposit into
the Note Account, (i) any Insured Payments, (ii) the proceeds of any liquidation
of the assets of the Trust Estate, (iii) all remittances made to the Indenture
Trustee by the Servicer, (iv) on the Payment Dates in July and August 1998, the
Capitalized Interest Requirement (as defined in the Sale and Servicing
Agreement) and (v) on the Payment Date immediately following the end of the
Funding Period any portion of the Pre-Funding Amount remaining unused.
On each Payment Date, the Indenture Trustee is required to make the
following payments and transfers from monies then on deposit in the Note Account
as specified below in the following order of priority of each such transfer and
payment:
(i) first, on each Payment Date from amounts then on deposit in
the Note Account the Indenture Trustee shall distribute (A)
to itself, the Indenture Trustee Fee and the Indenture
Trustee Reimbursable Expenses and (B) provided that no Note
Insurer Default has occurred and is continuing, the Premium
Amount for such Payment Date to the Note Insurer;
(ii) second, on each Payment Date, the Indenture Trustee shall
allocate an amount equal to the sum of (x) the Total Monthly
Excess Spread (as defined herein) with respect to such
Payment Date plus (y) any Overcollateralization Reduction
Amount with respect to such Payment Date (such sum being the
"Total Monthly Excess Cashflow" with respect to such Payment
Date) in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be
allocated to the payment of the Principal Payment
Amount (excluding any Overcollateralization Increase
Amount) pursuant to clause (iv)(C) below in an amount
equal to the amount, if any, by which (x) the
Principal Payment Amount (excluding any
Overcollateralization Increase Amount) exceeds (y) the
Available Funds for such Payment Date (net of the
related Current Interest and the Trust Fees and
Expenses) (the amount of such difference being an
"Available Funds Shortfall"); and
(B) second, any portion of the Total Monthly Excess
Cashflow remaining after the allocation described in
clause (A) above shall be paid to the Note Insurer in
respect of amounts owed on account of any
Reimbursement Amount (as defined in the Sale and
Servicing Agreement) owed to the Note Insurer;
(iii) third, the amount, if any, of the Total Monthly Excess
Cashflow on a Payment Date remaining after the allocations
and payments described in clause (ii) above is the "Net
Monthly Excess Cashflow" with respect to such Payment Date
and is required to be applied in the following order or
priority:
(A) first, such Net Monthly Excess Cashflow shall be used
to reduce to zero, through the payment of an
Overcollateralization Increase Amount to the Owners of
the Notes pursuant to clause
S-37
<PAGE>
(iv)(C) below, any Overcollateralization Deficiency
Amount (as defined in the Sale and Servicing
Agreement) as of such Payment Date;
(B) second, any portion of the Net Monthly Excess Cashflow
remaining after the application described in clause
(A) above shall be used to pay any Available Funds Cap
Carry Forward Amount to the Owners of the Notes; and
(C) third, any Net Monthly Excess Cashflow remaining after
the applications and payments described in clauses (A)
and (B) above shall be paid to the Servicer to the
extent of any unreimbursed Delinquency Advances and
unreimbursed Servicing Advances;
(iv) fourth, following the making by the Indenture Trustee of all
allocations, transfers and disbursements described above
from amounts (including any related Insured Payment) then on
deposit in the Note Account, the Indenture Trustee shall
distribute:
(A) (x) to the Note Insurer, the amounts described in
clause (ii)(B) above and (y) to the Servicer the
amounts described in clause (iii)(C) above;
(B) to the Owners of the Notes, the Current Interest
(including the proceeds of any Insured Payments made
by the Note Insurer) on a pro rata basis without any
priority among the Notes;
(C) to the Owners of the Notes, the Principal Payment
Amount until the Note Principal Balance is reduced to
zero;
(D) to the Indenture Trustee, as reimbursement of expenses
of the Indenture Trustee not reimbursed pursuant to
(i) above and incurred in connection with duties and
obligations under the Indenture; and
(v) fifth, following the making by the Indenture Trustee of all
allocations, transfers and disbursements described above,
from amounts then on deposit in the Note Account, the
Indenture Trustee shall distribute to the holders of the
Residual Interest, the remaining distributable amounts as
specified in the Sale and Servicing Agreement, for such
Payment Date.
"Available Funds" as to each Payment Date is the amount on deposit in
the Note Account on such Payment Date (net of Total Monthly Excess Cashflow and
disregarding the amounts of any Insured Payments to be made on such Payment Date
and inclusive of any investment earnings on eligible investments therein).
"Total Available Funds" as to each Payment Date is the sum of (x) the
amount on deposit in the Note Account on such Payment Date (net of Total Monthly
Excess Cashflow) on such Payment Date, (y) any amounts of Total Monthly Excess
Cashflow to be applied on such Payment Date and (z) any deposit to the Note
Account from the Pre- Funding Account or Capitalized Interest Account expected
to be made in accordance with the Sale and Servicing Agreement (disregarding the
amount of any Insured Payment to be made on such Payment Date).
The Indenture Trustee or Paying Agent (as defined in the Indenture)
shall (i) receive as attorney-in-fact of each Owner of Notes any Insured Payment
from the Note Insurer and deposit such amounts into the Note Account and (ii)
disburse the same to each Owner of Notes. The Sale and Servicing Agreement will
provide that to the extent the Note Insurer makes Insured Payments, either
directly or indirectly (as by paying through the Indenture Trustee), to the
Owners of such Notes, the Note Insurer will be subrogated to the rights of such
Owners of Notes with respect to such Insured Payments and shall receive
reimbursement for such Insured Payment as provided in the Sale and Servicing
Agreement, but only from the sources and in the manner provided in the Sale and
Servicing Agreement, such subrogation and reimbursement to have no effect on the
Note Insurer's obligations under the Note Insurance Policy.
S-38
<PAGE>
Each Owner of a Note will be required promptly to notify the Indenture
Trustee in writing upon the receipt of a court order relating to a Preference
Amount and will be required to enclose a copy of such order with such notice to
the Indenture Trustee.
Calculation of One-Month LIBOR
On each LIBOR Determination Date (as defined below), the Indenture
Trustee will determine LIBOR for the next Accrual Period for the Notes.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
in the Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such
rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in United States dollars
are offered by the Reference Banks at approximately 11:00 a.m., London time, on
that day to prime banks in the London interbank market for a period equal to one
month. The Indenture Trustee will request the principal London office of each of
the Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations (rounded upwards if necessary to the nearest whole multiple of
1/16%). If fewer than two quotations are provided as requested, the rate for
that day will be the arithmetic mean of the rates quoted by major banks in New
York City, selected by the Servicer, at approximately 11:00 a.m., New York City
time, on that day for loans in United States dollars to leading European banks
for a period equal to one month.
"LIBOR Determination Date" means, for the Accrual Period related to the
July 1998 Payment Date, One- Month LIBOR on the second London business day
preceding the Closing Date, and for any Accrual Period thereafter, the second
London business day preceding the commencement of such Accrual Period. For
purposes of determining One-Month LIBOR, a "London business day" is any day on
which dealings in deposits of United States dollars are transacted in the London
interbank market.
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices).
"Reference Banks" means leading banks selected by the Indenture Trustee
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market.
Pre-Funding Account
On the Closing Date, the Pre-Funded Amount will be deposited in the
Pre-Funding Account, which account shall be in the name of and maintained by the
Indenture Trustee in trust for the Owners of the Notes. During the Funding
Period, the Pre-Funded Amount will be maintained in the Pre-Funding Account. The
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Home Equity Loans in accordance with the
Sale and Servicing Agreement. Any Pre-Funded Amount remaining at the end of the
Funding Period will be distributed to the Owners of the Notes on the Payment
Date immediately following the end of the Funding Period in reduction of the
Note Principal Balance of such Owner's Notes, thus resulting in a partial
principal prepayment of such Notes.
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments. All interest and any other investment earnings on amounts
on deposit in the Pre-Funding Account will be deposited in the Capitalized
Interest Account prior to each Payment Date during the Funding Period.
Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Indenture
Trustee in trust for the Owners of the Notes. The amount on deposit in the
S-39
<PAGE>
Capitalized Interest Account, including reinvestment income thereon, will be
used by the Indenture Trustee on each Payment Date during and immediately after
the Funding Period to fund the excess, if any, of (i) the amount of interest
accruing on the outstanding Pre-Funded Amount at a rate equal to the Note Rate
over (ii) the amount of any reinvestment income on monies on deposit in the
Pre-Funding Account; such amounts on deposit will be so applied by the Indenture
Trustee on the each Payment Date during and immediately after the Funding Period
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 Seller and will not thereafter be available for distribution to the
Owners of the Notes. Amounts on deposit in the Capitalized Interest Account will
be invested in Eligible Investments.
Book Entry Registration of the Notes
The Notes will originally be issued as book entry notes (the "Book
Entry Notes"). Persons acquiring beneficial ownership interests in such Book
Entry Notes ("Beneficial Owners") may elect to hold their Book Entry Notes
directly through DTC in the United States, or Cedel or Euroclear (in Europe) if
they are participants of such system ("Participants"), or indirectly through
organizations which are Participants. The Book Entry Notes will be issued in one
or more Notes which in the aggregate equal the principal balance of such Notes
and will initially be registered in the name of Cede & Co., the nominee of DTC.
Cedel and Euroclear will hold omnibus positions on behalf of their Participants
through customers' securities accounts in Cedel's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for Cedel and Chase will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Investors may hold such beneficial
interests in the Book Entry Notes in minimum denominations representing
principal amounts of $25,000 and multiples of $1,000 in excess thereof. Except
as described below, no Beneficial Owner will be entitled to receive a physical
certificate representing such Note (a "Definitive Note"). Unless and until
Definitive Notes are issued, it is anticipated that the only "Owner" of such
Book Entry Notes will be Cede & Co., as nominee of DTC. Beneficial Owners will
not be Owners as that term is used in the Agreements. Beneficial Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book Entry Note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book Entry Note will be recorded on the records
of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Cedel and Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book Entry Notes from the Indenture Trustee through DTC and DTC
Participants. While such Notes are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make book
entry transfers among Participants on whose behalf it acts with respect to such
Notes and is required to receive and transmit distributions of principal of, and
interest on, such Notes. Participants and indirect participants with whom
Beneficial Owners have accounts with respect to Book Entry Notes are similarly
required to make book entry transfers and receive and transmit such
distributions on behalf of their respective Beneficial Owners. Accordingly,
although Beneficial Owners will not possess notes, the Rules provide a mechanism
by which Beneficial Owners will receive distributions and will be able to
transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Notes, except under
the limited circumstances described below. Unless and until Definitive Notes are
issued, Beneficial Owners who are not Participants may transfer ownership of
Notes only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer such Notes, by book entry
transfer, through DTC for the account of the purchasers of such Notes, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of such Notes
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited.
S-40
<PAGE>
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant Cedel or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Notes, see "Federal Income Tax
Considerations -- Debt Certificates" in the Prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book Entry Notes, whether held for its own account or as a nominee for
another person. In general, beneficial ownership of Book Entry Notes will be
subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Cedel Bank, S.A. was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more than
five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institut Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
S-41
<PAGE>
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Payments on the Book Entry Notes will be made on each Payment Date by
the Indenture Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the Book
Entry Notes that it represents and to each Financial Intermediary for which it
acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book Entry Notes that it
represents.
Under a book entry format, Beneficial Owners of the Book Entry Notes
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Indenture Trustee to Cede. Distributions with respect to
Book Entry Notes held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book Entry Notes to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book Entry
Notes, may be limited due to the lack of physical certificates for such Book
Entry Notes. In addition, issuance of the Book Entry Notes in book entry form
may reduce the liquidity of such Notes in the secondary market since certain
potential investors may be unwilling to purchase Notes for which they cannot
obtain physical certificates.
Monthly and annual reports on the Issuer provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book Entry Notes of such Beneficial Owners are credited.
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DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book Entry Notes under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book Entry Notes. Cedel or the
Euroclear Operator, as the case may be, will take any action permitted to be
taken by an Owner under the Indenture on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Notes which conflict with actions taken with
respect to other Notes.
Definitive Notes will be issued to Beneficial Owners of the Book Entry
Notes, or their nominees, rather than to DTC, only if (a) DTC or the Depositor
advises the Indenture Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book Entry Notes and the Depositor or the
Indenture Trustee is unable to locate a qualified successor, (b) the Depositor,
at its sole option, elects to terminate a book entry system through DTC or (c)
DTC, at the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Notes, advises the Indenture Trustee in
writing that the continuation of a book entry system through DTC (or a successor
thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability through
DTC of Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book Entry Notes and instructions for
re-registration, the Indenture Trustee will issue Definitive Notes, and
thereafter the Indenture Trustee will recognize the holders of such Definitive
Notes as Owners under the Indenture.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of Notes among Participants of DTC, Cedel and Euroclear,
they are under no obligation to perform or continue to perform such procedures
and such procedures may be discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part of
its right to receive distributions under any Notes, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of such Notes
without compliance with the provisions of the Indenture described above.
THE NOTE INSURER
The information set forth in this section has been provided by the Note
Insurer. No representation is made by the Underwriters, the Issuer, the Seller,
the Servicer, the Depositor or any of their affiliates as to the accuracy or
completeness of such information or any information related to the Note Insurer
incorporated by reference herein.
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Note Insurance Policy, will unconditionally and
irrevocably guarantee to any Owner that an amount equal to each full and
complete Insured Payment will be received by the Indenture Trustee or its
successor, as trustee for the Owners, on behalf of the Owners from the Note
Insurer, for distribution by the Indenture Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Note Insurer's obligations under
the Note Insurance Policy with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the Indenture Trustee, whether or not such funds are properly
applied by the Indenture Trustee. Insured Payments shall be made only at the
time set forth in the Note Insurance Policy and no accelerated Insured Payments
shall be made regardless of any acceleration of the Notes, unless such
acceleration is at the sole option of the Note Insurer.
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Notwithstanding the foregoing paragraph, the Note Insurance Policy does
not cover shortfalls, if any, attributable to the liability of the Issuer or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Note Insurer will pay any Insured Payment that is a Preference
Amount no later than 12:00 noon, New York City time, on the later of the Payment
Date on which the related Preference Amount is due or the third Business Day
following receipt on a Business Day by the Fiscal Agent (as described below) of
(i) a certified copy of the order requiring the return of such preference
payment, (ii) an opinion of counsel satisfactory to the Note Insurer that such
order is final and not subject to appeal, (iii) an assignment in such form as is
reasonably required by the Note Insurer, irrevocably assigning to the Note
Insurer all rights and claims of the Owner relating to or arising under the
Notes against the debtor which made such preference payment or otherwise with
respect to such preference payment and (iv) appropriate instruments to effect
the appointment of the Note Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Note Insurer; provided, that if such documents are received
after 12:00 noon, New York City time on such Business Day, they will be deemed
to be received on the following Business Day. Such payments shall be disbursed
to the receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Notes to such
receiver or trustee in bankruptcy, in which case such payment shall be disbursed
to such Owner.
The Note Insurer will pay any other amount payable under the Note
Insurance Policy no later than 12:00 noon New York City time, on the later of
the Payment Date on which the Insured Payment is due or the second Business Day
following receipt in New York, New York, on a Business Day by State Street Bank
and Trust Company, N.A., as Fiscal Agent for the Note Insurer or any successor
fiscal agent appointed by the Note Insurer (the "Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after 12:00 noon New
York City time on such Business Day, it will be deemed to be received on the
following Business Day. If any such Notice received by the Fiscal Agent is not
in proper form or is otherwise insufficient for the purpose of making a claim
under the Note Insurance Policy, it shall be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Note Insurer or the
Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee
and the Indenture Trustee may submit an amended Notice.
Insured Payments due under the Note Insurance Policy, unless otherwise
stated therein, will be disbursed by the Fiscal Agent to the Indenture Trustee
on behalf of Owners by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Indenture Trustee for the payment of
such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Note Insurer only and the Fiscal
Agent shall in no event be liable to Owners for any acts of the Fiscal Agent or
any failure of the Note Insurer to deposit or cause to be deposited, sufficient
funds to make payments due under the Note Insurance Policy.
Subject to the terms of the Sale and Servicing Agreement, the Note
Insurer shall be subrogated to the rights of each Owner to receive payments
under the Notes to the extent of any payment by the Note Insurer under the Note
Insurance Policy.
As used in the Note Insurance Policy, the following terms shall have
the following meanings:
"Agreement" means the Sale and Servicing Agreement dated as
of June 1, 1998 among IMC Securities, Inc., as Depositor, IMC Mortgage
Company, as Seller and Servicer, IMC Home Equity Loan Owner Trust
1998-4, as Issuer, and The Chase Manhattan Bank, as Indenture Trustee,
without regard to any amendment or supplement thereto, unless the Note
Insurer shall have consented in writing thereto.
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"Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions in New York City, Tampa,
Florida, the city in which the corporate trust office of the Indenture
Trustee under the Indenture is located or the city in which the
principal office of the Note Insurer is located are authorized or
obligated by law or executive order to close.
"Insured Payment" means for any Payment Date, the excess, if
any, of (i) the sum of (a) the Current Interest, (b) the
Overcollateralization Deficit and (c) the Preference Amount (without
duplication) over (ii) the Total Available Funds (after any deduction
for the Trust Fees and Expenses and after taking into account the
portion of the Principal Payment Amount to be actually paid on such
Payment Date without regard to any related Insured Payment to be made
with respect to such Payment Date). Insured Payments do not include the
payment of any Available Funds Cap Carry Forward Amounts.
"Notice" means the telephonic or telegraphic notice,
promptly confirmed in writing by telecopy substantially in the form of
Exhibit A attached to the Note Insurance Policy, the original of which
is subsequently delivered by registered or certified mail, from the
Indenture Trustee specifying the Insured Payment which shall be due and
owing on the applicable Payment Date.
"Owner" means each Owner (as defined in the Indenture) who,
on the applicable Payment Date, is entitled under the terms of the
applicable Note to payment thereunder.
"Preference Amount" means any amount previously distributed
to an Owner on a Note that is recoverable and sought to be recovered as
a voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.) as amended from time to time, in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Note Insurance Policy and not otherwise
defined therein will have the respective meanings set forth in the Agreement as
of the date of execution of the Note Insurance Policy, without giving effect to
any subsequent amendment to or modification of the Agreement unless such
amendment or modification has been approved in writing by the Note Insurer.
Any notice under the Note Insurance Policy or service of process on the
Fiscal Agent of the Note Insurer may be made at the address listed below for the
Fiscal Agent of the Note Insurer or such other address as the Note Insurer shall
specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Note Insurance Policy is being issued under and pursuant to, and
shall be construed under, the laws of the State of New York, without giving
effect to the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE NOTE INSURANCE POLICY IS NOT COVERED BY
THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Note Insurance Policy is not cancelable for any reason. The premium
on the Note Insurance Policy is not refundable for any reason including payment,
or provision being made for payment, prior to the maturity of the Notes.
The Note Insurer is the principal operating subsidiary of MBIA Inc., a
New York Stock Exchange listed company. MBIA Inc. is not obligated to pay the
debts of or claims against the Note Insurer. The Note Insurer is domiciled in
the State of New York and licensed to do business in and is subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana
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Islands, the Virgin Islands of the United States and the Territory of Guam. The
Note Insurer has two European branches, one in the Republic of France and the
other in the Kingdom of Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentration of investments and requiring
the approval of policy rates and forms. State laws also regulate the amount of
both the aggregate and individual risks that may be insured, the payment of
dividends by the Note Insurer, changes in control and transactions among
affiliates. Additionally, the Note Insurer is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
Effective February 17, 1998, MBIA, Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to the Note Insurer. MBIA Inc. is not obligated to pay the debts of or
claims against CMAC.
The consolidated financial statements of the Note Insurer, a
wholly-owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1997 and December 31, 1996 and for each of the three years in the period ended
December 31, 1997, 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, 1997 and the consolidated financial statements of the Note
Insurer and its subsidiaries as of March 31, 1998 and for the three month
periods ended March 31, 1998 and March 31, 1997, included in the Quarterly
Report on Form 10-Q of MBIA Inc. for the period ending March 31, 1998, are
hereby incorporated by reference into this Prospectus Supplement and shall be
deemed to be a part hereof. Any statement contained in a document incorporated
by reference herein shall be modified or superseded for purposes of this
Prospectus Supplement to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
All financial statements of the Note Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
The tables below present selected financial information of the Note
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
SAP
-------------------- ------------------
December 31, March 31,
1997 1998
---- ----
(Audited) (Unaudited)
(In millions)
Admitted Assets $5,256 $5,475
Liabilities 3,496 3,658
Capital and Surplus 1,760 1,817
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GAAP
------------------- ------------------
December 31, March 31
1997 1998
---- ----
(Audited) (Unaudited)
(In millions)
Assets $5,988 $6,196
Liabilities 2,624 2,725
Shareholder's Equity 3,364 3,471
--------------------
Copies of the financial statements of the Note Insurer incorporated by
reference herein and copies of the Note Insurer's 1997 year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Note Insurer. The address of the Note
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of the
Note Insurer is (914) 273-4545.
The Note Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted heretofrom, other than with respect to the accuracy
of the information regarding the Note Insurance Policy and Note Insurer set
forth under the heading "The Note Insurer" herein. Additionally, the Note
Insurer makes no representations regarding the Notes or the advisability of
investing in the Notes.
Moody's rates the claims paying ability of the Note Insurer "Aaa".
Standard & Poor's rates the claims paying ability of the Note Insurer
"AAA".
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the claims paying ability of the Note Insurer "AAA".
Each rating of the Note Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Note Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Notes and such ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Notes. The Note
Insurer does not guaranty the market price of the Notes nor does it guaranty
that the ratings on the Notes will not be revised or withdrawn.
CREDIT ENHANCEMENT
Note Insurance Policy
See "The Note Insurer" herein for a description of the Note Insurance
Policy.
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Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Sale and
Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow be applied on such Payment Date as an accelerated payment of principal
on the Notes, but only to the limited extent hereafter described. Net Monthly
Excess Cashflow equals the excess of (i) the excess, if any of (x) the interest
which is collected on the Home Equity Loans during a Remittance Period (net of
the Servicing Fee and of certain miscellaneous administrative amounts) plus any
Delinquency Advances and Compensating Interest plus any amounts required to be
transferred from the Capitalized Interest Account and Pre- Funding Account
pursuant to the terms of the Sale and Servicing Agreement over (y) the sum of
the Current Interest and the Trust Fees and Expenses (the difference between (x)
and (y) is the "Total Monthly Excess Spread"), over (ii) the portion of the
Total Monthly Excess Cashflow that is used to cover shortfalls in Available
Funds on such Payment Date or used to reimburse the Note Insurer.
The application of Net Monthly Excess Cashflow has the effect of
accelerating the amortization of the Notes relative to the amortization of the
Home Equity Loans. To the extent that any Net Monthly Excess Cashflow is not so
used, the Sale and Servicing Agreement provides that it will be used to
reimburse the Owners of the Notes with respect to any Available Funds Cap Carry
Forward Amount and then to reimburse the Servicer with respect to any amounts
owing to it, and, thereafter, paid to the Owners of the Residual Interest.
Pursuant to the Sale and Servicing Agreement, Net Monthly Excess
Cashflow will be applied as an accelerated payment of principal on the Notes
until the Overcollateralization Amount has increased to the level required.
"Overcollateralization Amount" means, the excess, if any, of (x) the sum of (i)
the aggregate Loan Balances of the Home Equity Loans as of the close of business
on the last day of the preceding Remittance Period and (ii) any amount on
deposit in the Pre-Funding Account at such time exclusive of Pre-Funding Account
Earnings (as defined in the Sale and Servicing Agreement) over (y) the aggregate
Note Principal Balance as of such Payment Date (after taking into account the
payment of the Principal Payment Amount (except for any Overcollateralization
Reduction Amount or Overcollateralization Increase Amount) on such Payment
Date). Any amount of Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal is an "Overcollateralization Increase Amount."
The required level of the Overcollateralization Amount with respect to a Payment
Date is the "Specified Overcollateralization Amount." The Sale and Servicing
Agreement generally provides that the Specified Overcollateralization Amount
may, over time, decrease, or increase, subject to certain floors, caps and
triggers including triggers that allow the related Specified
Overcollateralization Amount to decrease or "step down" based on the performance
on the Home Equity Loans with respect to certain tests specified in the Sale and
Servicing Agreement based on delinquency rates and cumulative losses. In
addition, Net Monthly Excess Cashflow will be applied to the payment in
reduction of principal of the Notes during the period that the Home Equity Loans
are unable to meet certain tests specified in the Sale and Servicing Agreement
based on delinquency rates and cumulative losses.
In the event that the Specified Overcollateralization Amount is
permitted to decrease or "step down" on a Payment Date in the future, the Sale
and Servicing Agreement provides that a portion of the principal which would
otherwise be distributed to the Owners of the Notes on such Payment Date shall
be distributed to the Owners of the Residual Interest over the period specified
in the Sale and Servicing Agreement. This has the effect of decelerating the
amortization of the Notes relative to the amortization of the Home Equity Loans
and of reducing the Overcollateralization Amount. With respect to any Payment
Date, the excess, if any, of (x) the Overcollateralization Amount on such
Payment Date after taking into account all distributions to be made on such
Payment Date (except for any distributions of the Overcollateralization
Reduction Amount as described in this sentence) over (y) the Specified
Overcollateralization Amount is the "Excess Overcollateralization Amount" for
such Payment Date. If, on any Payment Date, the Excess Overcollateralization
Amount is, or, after taking into account all other distributions to be made on
such Payment Date would be, greater than zero (i.e., the Overcollateralization
Amount is or would be greater than the Specified Overcollateralization Amount),
then any amounts relating to principal which would otherwise be distributed to
the Owners of the Notes on such Payment Date shall instead be distributed to the
Owners of the Residual Interest (to the extent available therefor) in an amount
equal to the lesser of (x) the Excess Overcollateralization Amount and (y)
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the amount available for distribution on account of principal with respect to
the Notes on such Payment Date; such amount being the "Overcollateralization
Reduction Amount" with respect to the related Payment Date.
The Sale and Servicing Agreement provides generally that, on any
Payment Date all amounts collected on account of principal (other than any such
amount applied to the payment of an Overcollateralization Reduction Amount)
during the prior Remittance Period will be distributed to the Owners of the
Notes on such Payment Date. If any Home Equity Loan became a Liquidated Loan
during such prior Remittance Period, the Net Liquidation Proceeds related
thereto and allocated to principal may be less than the principal balance of the
related Home Equity Loan; the amount of any such insufficiency is a "Realized
Loss." In addition, the Sale and Servicing Agreement provides that the principal
balance of any Home Equity Loan which becomes a Liquidated Loan shall
thenceforth equal zero. The Sale and Servicing Agreement does not contain any
requirement that the amount of any Realized Loss be distributed to the Owners of
the Notes on the Payment Date which immediately follows the event of loss; i.e.,
the Sale and Servicing Agreement does not require the current recovery of
losses. However, the occurrence of a Realized Loss will reduce the
Overcollateralization Amount, which to the extent that such reduction causes the
Overcollateralization Amount to be less than the related Specified
Overcollateralization Amount applicable to the related Payment Date, will
require the payment of an Overcollateralization Increase Amount on such Payment
Date (or, if insufficient funds are available on such Payment Date, on
subsequent Payment Dates, until the Overcollateralization Amount equals the
Specified Overcollateralization Amount).
Overcollateralization and the Note Insurance Policy. The Sale and
Servicing Agreement defines a "Overcollateralization Deficit" with respect to a
Payment Date to be the amount, if any, by which (x) the Note Principal Balance
with respect to such Payment Date, after taking into account all distributions
to be made on such Payment Date (without regard to any Insured Payment to be
made on such Payment Date and except for any Overcollateralization Deficit),
exceeds (y) the sum of (i) the aggregate Loan Balances of the Home Equity Loans
as of the close of business on the last day of the prior Remittance Period and
(ii) the amount, if any, on deposit in the Pre-Funding Account as of the close
of business on the last day of the prior Remittance Period (exclusive of
Pre-Funding Account Earnings). The Sale and Servicing Agreement requires the
Indenture Trustee to make a claim for an Insured Payment under the Note
Insurance Policy not later than the second Business Day prior to any Payment
Date as to which the Indenture Trustee has determined that an
Overcollateralization Deficit will occur for the purpose of applying the
proceeds of such Insured Payment as a payment of principal to the Owners of the
Notes on such Payment Date. The Note Insurance Policy is thus similar to the
overcollateralization provisions described above insofar as the Note Insurance
Policy guarantees ultimate, rather than current, payment of the amounts of any
Realized Losses to the Owners of the Notes. Investors in the Notes should
realize that, under extreme loss or delinquency scenarios, they may temporarily
receive no distributions of principal when they would otherwise be entitled
thereto under the principal allocation provisions described herein.
Nevertheless, the exposure to risk of loss of principal of the Owners of the
Notes depends in part on the ability of the Note Insurer to satisfy its
obligations under the Note Insurance Policy. In that respect and to the extent
that the Note Insurer satisfies such obligations, the Owners of the Notes are
insulated from shortfalls in Available Funds that may arise.
ADMINISTRATION
In addition to the provisions of the Agreements summarized elsewhere in
the Prospectus and this Prospectus Supplement there is set forth below a summary
of certain other provisions of the Agreements.
Covenant of the Seller to Take Certain Actions with Respect to the Home Equity
Loans in Certain Situations
Pursuant to the Sale and Servicing Agreement, upon the discovery by the
Depositor, the Seller, the Note Insurer, any Sub-Servicer, any Owner, the
Custodian or the Indenture Trustee that the representations and warranties set
forth therein between the Seller and the Depositor are untrue in any material
respect as of the Closing Date with the result that the interests of the Owners
or of the Note Insurer are materially and adversely affected, the party
discovering such breach is required to give prompt written notice to the other
parties.
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Upon the earliest to occur of the Seller's discovery, its receipt of
notice of breach from any of the other parties or such time as a situation
resulting from an existing statement which is untrue materially and adversely
affects the interests of the Owners or the Note Insurer, the Seller will be
required promptly to cure such breach in all material respects or the Seller
shall on or prior to the second Monthly Remittance Date next succeeding such
discovery, such receipt of notice or such time (i) substitute in lieu of each
Home Equity Loan which has given rise to the requirement for action by the
Seller a "Qualified Replacement Mortgage" (as such is defined in the Sale and
Servicing Agreement) and deliver an amount equal to the excess, if any, of the
Loan Balance of the Home Equity Loan being replaced over the outstanding
principal balance of the replacement Home Equity Loan plus interest (the
"Substitution Amount") to the Indenture Trustee on behalf of the Issuer as part
of the Monthly Remittance remitted by the Servicer on such Monthly Remittance
Date or (ii) purchase such Home Equity Loan from the Issuer at a purchase price
equal to the Loan Purchase Price (as defined below) thereof. The Seller shall
also deliver an Officer's Certificate to the Indenture Trustee and the Note
Insurer concurrently with the delivery of a Qualified Replacement Mortgage
stating that such Home Equity Loan meets the requirements of a Qualified
Replacement Mortgage and that all other conditions to the substitution thereof
have been satisfied. The obligation of the Seller to so substitute or repurchase
any Home Equity Loan as to which a representation of warranty is untrue in any
material respect and has not been remedied constitutes the sole remedy available
to the Owners and the Indenture Trustee.
"Loan Purchase Price" means an amount equal to the Loan Balance of such
Home Equity Loan as of the date of purchase (assuming that the Monthly
Remittance Amount remitted by the Servicer on such Monthly Remittance Date has
already been remitted), plus all accrued and unpaid interest on such Home Equity
Loan at the Coupon Rate to but not including the Monthly Remittance Date in the
Remittance Period of such purchase together with (without duplication) the
aggregate amount of (i) all unreimbursed Delinquency Advances and Servicing
Advances theretofore made with respect to such Home Equity Loan, (ii) all
Delinquency Advances which the Servicer has theretofore failed to remit with
respect to such Home Equity Loan and (iii) all reimbursed Delinquency Advances
to the extent that such reimbursement is not made from the Mortgagor or from
Liquidation Proceeds from the respective Home Equity Loan.
Assignment of Home Equity Loans
The Seller on the Closing Date will sell, transfer, assign, set over
and otherwise convey without recourse to the Depositor and the Depositor will
sell, transfer, assign, set over and otherwise convey without recourse to the
Issuer all its respective right, title and interest in and to each Initial Home
Equity Loan and all its respective right, title and interest in and to principal
and interest due on each such Initial Home Equity Loan after the Cut-Off Date;
provided, however, that the Seller will reserve and retain all its right, title
and interest in and to principal (including Prepayments received on or before
the Cut-Off Date) and interest due on each Initial Home Equity Loan on or prior
to the Cut-Off Date (whether or not received on or prior to the Cut-Off Date).
The Issuer will pledge each Initial Home Equity Loan to the Indenture Trustee
for the benefit of the Owners of the Notes and the Note Insurer pursuant to the
Indenture.
In connection with the transfer and assignment of the 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 Bank One Trust Company, N.A.,
acting as the Custodian on behalf of the Indenture Trustee, on the
Closing Date with respect to each Initial Home Equity Loan or on each
Subsequent Transfer Date with respect to each Subsequent Home Equity
Loan identified in the Schedule of Home Equity Loans (A) the original
Mortgage Notes, endorsed in blank or to the order of the "The Chase
Manhattan Bank, as Indenture Trustee for the IMC Adjustable Rate Home
Equity Loan Asset Backed Notes, Series 1998-4", (B) (1) the original
title insurance commitment or a copy thereof certified as a true copy
by the closing agent or the Seller, or if available, the original title
insurance policy or a copy certified by the issuer of the title
insurance policy or (2) the attorney's opinion of title, (C) originals
or copies of all intervening assignments certified as true copies by
the closing agent or the Seller, showing a complete chain of title from
origination to the Indenture Trustee, if any, including warehousing
assignments, if recorded, (D) originals of all assumption and
modification agreements, if any, and (E) either: (1) the original
Mortgage, with evidence of recording thereon (if such original Mortgage
has been returned to the Seller from the applicable recording
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office) or a copy (if such original Mortgage has not been returned to
the Seller from the applicable recording office) of the Mortgage
certified as a true copy by the closing agent or the Seller or (2) a
copy of the Mortgage certified by the public recording office in those
instances where the original recorded Mortgage has been lost or
retained by the recording office;
(ii) cause, within 60 days following the Closing Date with
respect to the Initial Home Equity Loans, or the Subsequent Transfer
Date with respect to Subsequent Home Equity Loans, assignments of the
Mortgages to "The Chase Manhattan Bank, as Indenture Trustee for the
IMC Adjustable Rate Home Equity Loan Asset Backed Notes, Series 1998-4"
to be submitted for recording in the appropriate jurisdictions;
provided, however, that the Seller shall not be required to prepare any
assignment of Mortgage for a Mortgage with respect to which the
original recording information has not yet been received from the
recording office until such information is received; provided, further,
that the Seller shall not be required to record an assignment of a
Mortgage (except upon the occurrence of certain triggers specified in
the Sale and Servicing Agreement) if the Seller furnishes to the
Indenture Trustee, the Note Insurer and the Rating Agencies, on or
before the Closing Date with respect to the Initial Home Equity Loans,
or on each Subsequent Transfer Date with respect to the Subsequent Home
Equity Loans, at the Seller's expense, an opinion of counsel with
respect to the relevant jurisdiction that such recording is not
required to perfect the Indenture Trustee's interests in the Home
Equity Loans (in form satisfactory to the Indenture Trustee, the Note
Insurer and the Rating Agencies);
(iii) deliver the title insurance policy, the original
Mortgages and such recorded assignments, together with originals or
duly certified copies of any and all prior assignments (other than
unrecorded warehouse assignments), to the Custodian on behalf of the
Indenture Trustee within 15 days of receipt thereof by the Seller (but
in any event, with respect to any Mortgage as to which original
recording information has been made available to the Seller, within one
year after the Closing Date with respect to the Initial Home Equity
Loans, or on each Subsequent Transfer Date with respect to the
Subsequent Home Equity Loans); and
(iv) furnish to the Indenture Trustee, the Note 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
Indenture Trustee, the Note Insurer and the Rating Agencies.
The Indenture Trustee will agree, for the benefit of the Owners, to
cause the Custodian to review each File within 45 days after the Closing Date or
Subsequent Transfer Date (or the date of receipt of any documents delivered to
the Indenture Trustee after the Closing Date or Subsequent Transfer Date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
If the Custodian on behalf of the Indenture Trustee during such 45-day
period finds any document constituting a part of a File which is not properly
executed, has not been received, is unrelated to the Home Equity Loans or that
any Home Equity Loan does not conform in a material respect to the description
thereof as set forth in the Schedule of Home Equity Loans, the Custodian on
behalf of the Indenture Trustee will be required to promptly notify the
Depositor, the Seller, the Owners and the Note Insurer. The Seller will agree to
use reasonable efforts to remedy a material defect in a document constituting
part of a File of which it is so notified by the Custodian on behalf of the
Indenture Trustee. If, however, within 90 days after such notice to it
respecting such defect the Seller shall not have remedied the defect and the
defect materially and adversely affects the interest in the related Home Equity
Loan of the Owners, the Seller will be required on the next succeeding Monthly
Remittance Date to (or will cause an affiliate of the Seller to) (i) substitute
in lieu of such Home Equity Loan a Qualified Replacement Mortgage and deliver
the Substitution Amount to the Indenture Trustee on behalf of the Owners of the
Notes as part of the Monthly Remittance Amount remitted by the Servicer on such
Monthly Remittance Date or (ii) purchase such Home Equity Loan at a purchase
price equal to the Loan Purchase Price thereof, which purchase price shall be
delivered to the Indenture Trustee along with the Monthly Remittance Amount
remitted by the Servicer on such Monthly Remittance Date.
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In addition to the foregoing, the Custodian on behalf of the Indenture
Trustee has agreed to make a review during the 12th month after the Closing Date
indicating the current status of the exceptions previously indicated on the Pool
Certification (the "Final Certification"). After delivery of the Final
Certification, the Custodian, on behalf of the Indenture Trustee and the
Servicer shall monitor no less frequently than monthly the then current status
of exceptions, until all such exceptions have been eliminated.
Servicing and Sub-Servicing
The Servicer is required to service the Home Equity Loans in accordance
with the Sale and Servicing Agreement, the terms of the respective Home Equity
Loans, and the servicing standards set forth in Fannie Mae's Servicing Guide
(the "Fannie Mae Guide"); provided, however, that to the extent such standards,
such obligations or the Fannie Mae Guide is amended by Fannie Mae after the date
of the Sale and Servicing Agreement and the effect of such amendment would be to
impose upon the Servicer any material additional costs or other burdens relating
to such servicing obligations, the Servicer may, at its option, determine not to
comply with such amendment in accordance with the servicing standards set forth
in the Indenture.
The Servicer may retain from the interest portion of each monthly
payment, the Servicing Fee. In addition, the Servicer will be entitled to retain
additional servicing compensation in the form of prepayment charges, release
fees and bad check charges, assumption fees, late payment charges, prepayment
penalties, or any other servicing-related fees and Net Liquidation Proceeds not
required to be deposited in the Principal and Interest Account.
The Servicer is required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Home Equity Loans,
and, to the extent such procedures are consistent with the Sale and Servicing
Agreement and the terms and provisions of any applicable insurance policy, to
follow collection procedures for all Home Equity Loans at least as rigorous as
those described in the Fannie Mae Guide. Consistent with the foregoing, the
Servicer may in its discretion waive or permit to be waived any late payment
charge, prepayment charge, assumption fee or any penalty interest in connection
with the prepayment of a Home Equity Loan or any other fee or charge which the
Servicer would be entitled to retain as additional servicing compensation. In
the event the Servicer consents to the deferment of the due dates for payments
due on a Note, the Servicer will nonetheless be required to make payment of any
required Delinquency Advances with respect to the interest payments so extended
to the same extent as if the interest portion of such installment were due,
owing and delinquent and had not been deferred.
The Servicer is required to create, or cause to be created, in the name
of the Indenture Trustee, at one or more depository institutions a principal and
interest account maintained as a trust account in the trust department of such
institution (the "Principal and Interest Account"). All funds in the Principal
and Interest Account are required to be held (i) uninvested, or (ii) invested in
Eligible Investments (as defined in the Indenture). Any investment of funds in
the Principal and Interest Account must mature or be withdrawable at par on or
prior to the immediately succeeding Monthly Remittance Date. Any investment
earnings on funds held in the Principal and Interest Account are for the account
of, and any losses therein are also for the account of, and must be promptly
replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest
Account, within one business day following receipt, all principal and interest
due on the Home Equity Loans after the Cut-Off Date, including any Prepayments
received after the Cut-Off Date, the proceeds of any liquidation of a Home
Equity Loan net of expenses and unreimbursed Delinquency Advances ("Net
Liquidation Proceeds"), any income from REO Properties and Delinquency Advances,
but net of (i) Net Liquidation Proceeds to the extent that such Net Liquidation
Proceeds exceed the sum of (a) the Loan Balance of the related Home Equity Loan
immediately prior to liquidation, (b) accrued and unpaid interest on such Home
Equity Loan (net of the Servicing Fee) to the date of such liquidation and (c)
any Realized Losses during the related Remittance Period, (ii) principal
(including Prepayments) collected and interest due on the Home Equity Loans on
or prior to the Cut-Off Date, (iii) reimbursements for Delinquency Advances, and
(iv) reimbursement for amounts deposited in the Principal and Interest Account
representing payments of principal and/or interest on a Mortgage Note by a
Mortgagor which are subsequently returned by a depository institution as unpaid
(all such net amounts being referred to herein as the "Daily Collections").
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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 Indenture Trustee for deposit in the
Note Account the Daily Collections allocable to a Remittance Period not later
than the related Monthly Remittance Date, and Loan Purchase Prices and
Substitution Amounts two Business Days following the related repurchase or
substitution, as the case may be.
On each Monthly Remittance Date, the Servicer shall be required to
remit to the Indenture Trustee for deposit to the Note Account out of the
Servicer's own funds any Delinquent payment of interest with respect to each
Delinquent Home Equity Loan, which payment was not received on or prior to the
related Monthly Remittance Date and was not theretofore advanced by the
Servicer. Such amounts of the Servicer's own funds so deposited are "Delinquency
Advances." The Servicer may reimburse itself on any Business Day for any
Delinquency Advances paid from the Servicer's own funds, from collections on any
Home Equity Loan that are not required to be distributed on the Payment Date
occurring during the month in which such reimbursement is made (such amount to
be replaced on future dates to the extent necessary) or from the Note Account
out of Net Monthly Excess Cashflow.
Notwithstanding the foregoing, in the event that the Servicer
determines in its reasonable business judgment in accordance with the servicing
standards of the Sale and Servicing Agreement that any proposed Delinquency
Advance if made would not be recoverable, the Servicer shall not be required to
make such Delinquency Advances with respect to such Home Equity Loan. To the
extent that the Servicer previously has made Delinquency Advances with respect
to a Home Equity Loan that the Servicer subsequently determines to be
nonrecoverable, the Servicer shall be entitled to reimbursement for such
aggregate unreimbursed Delinquency Advances as provided above. The Servicer
shall give written notice of such determination as to why such amount is or
would be nonrecoverable to the Indenture Trustee and the Note Insurer.
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, (i) expenditures in connection with a foreclosed Home Equity
Loan prior to the liquidation thereof, including, without limitation,
expenditures for real estate property taxes, hazard insurance premiums, property
restoration or preservation ("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and (iii) the cost
of the management and liquidation of Property acquired in satisfaction of the
related Mortgage, except to the extent that the Servicer in its reasonable
business judgment determines that any such proposed amount would not be
recoverable. Such costs and expenses will constitute "Servicing Advances". The
Servicer may recover a Servicing Advance to the extent permitted by the Home
Equity Loans or, if not theretofore recovered from the Mortgagor on whose behalf
such Servicing Advance was made, from Liquidation Proceeds realized upon the
liquidation of the related Home Equity Loan or from certain amounts on deposit
in the Note Account as provided in the Sale and Servicing Agreement. Except as
provided above, in no case may the Servicer recover Servicing Advances from the
principal and interest payments on any other Home Equity Loan.
A full month's interest at the related Coupon Rate will be due on the
outstanding Loan Balance of each Home Equity Loan as of the beginning of each
Remittance Period. If a prepayment in full of a Home Equity Loan or a Prepayment
of at least six times a Mortgagor's Monthly Payment occurs during any calendar
month, any difference
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between the interest collected from the Mortgagor in connection with such payoff
and the full month's interest at the related Coupon Rate that would be due on
the related due date for such Home Equity Loan (such difference, the
"Compensating Interest") (but not in excess of the aggregate Servicing Fee for
the related Remittance Period), will be required to be deposited to the
Principal and Interest Account (or if such difference is an excess, the Servicer
shall retain such excess) on the next succeeding Monthly Remittance Date by the
Servicer and shall be included in the Monthly Remittance Amount to be made
available to the Indenture Trustee on such Monthly Remittance Date. The Servicer
shall not be entitled to reimbursement for amounts paid as Compensating
Interest.
In accordance with the terms of the Sale and Servicing Agreement, the
Servicer will have the right and the option, but not the obligation, to purchase
for its own account any Home Equity Loan which becomes delinquent as to three
consecutive monthly installments or any Home Equity Loan as to which enforcement
proceedings have been brought by the Servicer. The purchase price for any such
Home Equity Loan is equal to the Loan Purchase Price thereof, which purchase
price shall be deposited in the Principal and Interest Account.
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 35
months of such effecting of ownership at such price as the Servicer deems
necessary to comply with this requirement, or within such period of time as may,
in the opinion of counsel nationally recognized in federal income tax matters,
be permitted under the Code.
The Servicer will be required to cause hazard insurance to be
maintained with respect to the related Property and to advance sums on account
of the premiums therefor if not paid by the Mortgagor if permitted by the terms
of such Home Equity Loan.
The Servicer will have the right under the Sale and Servicing Agreement
(upon receiving the consent of the Note Insurer) to accept applications of
Mortgagors for consent to (i) partial releases of Mortgages, (ii) alterations
thereof and (iii) removal, demolition or division of Properties. No application
for approval may be considered by the Servicer unless: (a) the provisions of the
related Mortgage Note and Mortgage have been complied with; (b) the
loan-to-value ratio and debt-to-income ratio after any release do not exceed the
loan-to-value ratio and debt-to-income ratio, respectively, of such Mortgage
Note on the Cut-Off Date provided that the loan-to-value ratio shall be
permitted to be increased by an amount not to exceed 5% unless approved by the
Note Insurer; and (c) the lien priority of the related Mortgage is not affected.
The Servicer shall not agree to any modification, waiver or amendment
of any provision of any Home Equity Loan unless, in the Servicer's good faith
judgment, such modification, waiver or amendment would minimize the loss that
might otherwise be experienced with respect to such Home Equity Loan and only in
the event of a payment default with respect to such Home Equity Loan or in the
event that a payment default with respect to such Home Equity Loan is imminent;
provided, however, that no such modification, waiver or amendment shall extend
the maturity date of such Home Equity Loan beyond the Remittance Period related
to the Final Payment Date. Notwithstanding anything set forth in the Sale and
Servicing Agreement to the contrary, the Servicer shall be permitted to modify,
waive or amend any provision of a Home Equity Loan if required by statute or a
court of competent jurisdiction to do so.
The Servicer shall provide written notice to the Indenture Trustee and
the Note Insurer, prior to the execution of any modification, waiver or
amendment of any provision of any Home Equity Loan and shall deliver to the
Custodian, on behalf of the Indenture Trustee for deposit in the related File,
an original counterpart of the agreement relating to such modification, waiver
or amendment, promptly following the execution thereof.
As noted under "The Seller and Servicer -- General" herein with the
consent of the Note Insurer, the Servicer will be permitted under the Sale and
Servicing Agreement to enter into Sub-Servicing Agreements for any servicing and
administration of Home Equity Loans with any institution that (x) is in
compliance with the laws of each state necessary to enable it to perform its
obligations under such Sub-Servicing Agreement, (y) has experience servicing
home
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equity loans that are similar to the Home Equity Loans and (z) has equity of not
less than $5,000,000 (as determined in accordance with generally accepted
accounting principles).
No Sub-Servicing arrangements will discharge the Servicer from its
servicing obligations. Notwithstanding any Sub-Servicing Agreement, the Servicer
will not be relieved of its obligations under the Sale and Servicing Agreement
and the Servicer will be obligated to the same extent and under the same terms
and conditions as if it alone were servicing and administering the Home Equity
Loans. The Servicer shall be entitled to enter into any agreement with a
Sub-Servicer for indemnification of the Servicer by such Sub-Servicer; provided,
however, that nothing contained in such Sub-Servicing Agreement shall be deemed
to limit or modify the Sale and Servicing Agreement.
The Servicer (except the Indenture Trustee if it is required to succeed
the Servicer under the Sale and Servicing Agreement) has agreed to indemnify and
hold the Issuer, the Indenture Trustee, the Depositor, the Note Insurer and each
Owner harmless against any and all claims, losses, penalties, fines,
forfeitures, legal fees and related costs, judgments, and any other costs, fees
and expenses that the Indenture Trustee, the Note Insurer and any Owner may
sustain in any way related to the failure of the Servicer to perform its duties
and service the Home Equity Loans in compliance with the terms of the Sale and
Servicing Agreement. The Servicer shall immediately notify the Issuer, the
Indenture Trustee, the Depositor, the Note Insurer and each Owner if a claim is
made by a third party with respect to the Sale and Servicing Agreement, and the
Servicer shall assume the defense of any such claim and pay all expenses in
connection therewith, including reasonable counsel fees, and promptly pay,
discharge and satisfy any judgment or decree which may be entered against the
Servicer, the Indenture Trustee, the Depositor, the Note Insurer and/or Owner in
respect of such claim. The Indenture Trustee shall reimburse the Servicer from
amounts otherwise distributable on the Residual Interest for all amounts
advanced by it pursuant to the preceding sentence, except when a final
nonappealable adjudication determines that the claim relates directly to the
failure of the Servicer to perform its duties in compliance with the Sale and
Servicing Agreement. The indemnification provisions shall survive the
termination of the Sale and Servicing Agreement and the payment of the
outstanding Notes.
The Servicer will be required to deliver to the Indenture Trustee, the
Note Insurer and the Rating Agencies on or before April 30 of each year,
commencing in 1999: (i) an officers' certificate stating, as to each signer
thereof, that (a) a review of the activities of the Servicer during such
preceding calendar year and of performance under the Sale and Servicing
Agreement has been made under such officers' supervision, and (b) to the best of
such officers' knowledge, based on such review, the Servicer has fulfilled all
its obligations under the Sale and Servicing Agreement for such year, or, if
there has been a default in the fulfillment of all such obligation, specifying
each such default known to such officers and the nature and status thereof
including the steps being taken by the Servicer to remedy such default and (ii)
a letter or letters of a firm of independent, nationally recognized certified
public accountants reasonably acceptable to the Note Insurer stating that such
firm has examined the Servicer's overall servicing operations in accordance with
the requirements of the Uniform Single Attestation Program for Mortgage Bankers,
and stating such firm's conclusions relating thereto.
Removal and Resignation of Servicer
The Note Insurer or the Indenture Trustee (with the prior written
consent of the Note Insurer) (or except as specified in the Sale and Servicing
Agreement, the Owners, with the consent of the Note Insurer) will have the
right, pursuant to the Sale and Servicing Agreement, to remove the Servicer upon
the occurrence of certain events (collectively, the "Servicer Termination
Events") including, without limitation: (a) certain acts of bankruptcy or
insolvency on the part of the Servicer; (b) certain failures on the part of the
Servicer to perform its obligations under the Sale and Servicing Agreement
(including certain performance tests related to the delinquency rate and
cumulative losses of the Home Equity Loan Pool); (c) the failure to cure
material breaches of the Servicer's representations in the Sale and Servicing
Agreement; or (d) certain mergers or other combinations of the Servicer with
another entity.
The Servicer is not permitted to resign from the obligations and duties
imposed on it under the Sale and Servicing Agreement except upon determination
that its duties thereunder are no longer permissible under applicable law or are
in material conflict by reason of applicable law with any other activities
carried on by it, the other activities
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of the Servicer so causing such conflict being of a type and nature carried on
by the Servicer on the date of the Sale and Servicing Agreement. Any such
determination permitting the resignation of the Servicer is required to be
evidenced by an opinion of counsel to such effect which shall be delivered, and
reasonably acceptable, to the Indenture Trustee and the Note Insurer.
Upon removal or resignation of the Servicer, the Indenture Trustee may
(A) solicit bids for a successor servicer as described in the Sale and Servicing
Agreement and (B) until such time as a successor servicer is appointed pursuant
to the terms of the Sale and Servicing Agreement, shall serve in the capacity of
Backup Servicer. The Indenture Trustee, if it is unable to obtain a qualifying
bid and is prevented by law from acting as servicer, will be required to
appoint, or petition a court of competent jurisdiction to appoint, any housing
and home finance institution, bank or mortgage servicing institution designated
as an approved seller-servicer by FHLMC or Fannie Mae, having equity of not less
than $5,000,000, and acceptable to the Note Insurer and a majority of the Owners
of the Notes (provided that if the Note Insurer and such Owners cannot agree as
to the acceptability of such successor servicer, the decision of the Note
Insurer will control) as the successor to the Servicer in the assumption of all
or any part of the responsibilities, duties or liabilities of the Servicer.
No removal or resignation of the Servicer will become effective until
the Backup Servicer or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Indenture.
Redemption of the Notes
The Majority Residualholders, may, at their option, on any Payment Date
on or after the Redemption Date redeem the Notes at a price equal to the
Redemption Price. Upon such redemption, the Indenture shall be terminated. The
Notes will be redeemed upon payment of the Redemption Price, and the payment of
the amount set forth in clause (i) of the definition of Redemption Price to the
Owners shall be in lieu of the payment otherwise required to be made on such
Payment Date in respect of the Notes. The "Redemption Price" is equal to the sum
of (i) the then outstanding Note Principal Balance plus all accrued and unpaid
interest thereon (and any Available Funds Cap Carry Forward Amount), (ii) any
Trust Fees and Expenses due and unpaid on such date, (iii) the payment of all
amounts owed to the Note Insurer and (iv) any unreimbursed Delinquency Advances
and Servicing Advances (as defined in the Sale and Servicing Agreement). The
Redemption Price will be distributed first, to the payment of any outstanding
Trust Fees and Expenses, second, to the Note Insurer, all amounts owed thereto,
third, to the Servicer for unreimbursed Servicing Advances and Delinquency
Advances, and fourth, to the Owners of the Notes in an amount equal to the then
outstanding Note Principal Balance plus all accrued and unpaid interest thereon
(plus any Available Funds Cap Carry Forward Amount). Any amounts remaining will
be distributed to the holders of the Residual Interest. Under certain
circumstances described in the Sale and Servicing Agreement, the Note Insurer
may acquire all the Home Equity Loans from the Issuer and thereby effect a
redemption of the Notes and terminate the Indenture.
The Indenture Trustee
The Chase Manhattan Bank will be the Indenture Trustee under the
Indenture. The Indenture will provide that the Indenture Trustee is entitled to
certain fees and reimbursement of expenses.
The Indenture also will provide that the Indenture Trustee may resign
at any time, upon notice to the Issuer, the Note Insurer, the Servicer and each
Rating Agency, in which event the Issuer (with the consent of the Note Insurer)
will be obligated to appoint a successor Indenture Trustee. The Issuer or the
Note Insurer may remove the Indenture Trustee if the Indenture Trustee ceases to
be eligible to continue as such under the Indenture Trustee and appointment of a
successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee. The Indenture will provide that
the Indenture Trustee is under no obligation to exercise any of the rights or
powers vested in it by the Indenture at the request or direction of any of the
Owners, unless such Owners shall have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which might be incurred by it in compliance with such request or direction. The
Indenture Trustee may execute any of the rights of powers granted by the
Indenture or perform any duties thereunder either directly or by or through
agents or
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attorneys, and the Indenture Trustee is responsible for any misconduct or
negligence on the part of any agent or attorney appointed and supervised with
due care by it thereunder. Pursuant to the Indenture, the Indenture Trustee is
not liable for any action it takes or omits to take in good faith which it
reasonably believes to be authorized by an authorized officer of any person or
within its rights or powers under the Indenture. The Indenture Trustee and any
director, officer, employee or agent of the Indenture Trustee may rely and will
be protected in acting or refraining from acting in good faith in reliance on
any certificate, notice or other document of any kind prima facie properly
executed and submitted by the authorized officer of any person respecting any
matters arising under the Indenture.
The Indenture
Pursuant to the Indenture, the Indenture Trustee shall, upon the
direction of the Note Insurer (unless a Note Insurer Default (as defined in the
Sale and Servicing Agreement) has occurred and is continuing), direct the time,
method and place of conducting any proceeding for any remedy available to the
Indenture Trustee (including acceleration of the Notes) or exercising any trust
or power conferred on the Indenture Trustee.
An "Event of Default" with respect to the Notes is defined in the
Indenture as follows: (a) a default by the Issuer in the payment of any Current
Interest or Principal Payment Amount on any Note when the same becomes due and
payable (provided that for purposes of this clause, the Available Funds Cap
Carry Forward Amount does not constitute interest due and payable); (b) a
default in the observance or performance of any covenant or agreement of the
Issuer in the Indenture, or any representation or warranty of the Issuer made in
the Indenture, the Insurance Agreement, the Sale and Servicing Agreement or in
any certificate or other writing delivered pursuant thereto proving to have been
incorrect in any material respect as of the time made, and the continuation of
any such default, or the circumstance in respect of which any representation or
warranty not having been cured, as the case may be, for a period of thirty days
after notice is given to the Issuer by the Indenture Trustee, or to the Issuer
and the Indenture Trustee by the Owners of a majority of the Percentage Interest
of the Notes and, (c) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
In case an Event of Default should occur and be continuing, the
Indenture Trustee shall, but only upon receipt of the prior written consent of
the Note Insurer or, if a Note Insurer Default has occurred and is continuing,
the Owners of Notes representing not less than a majority of the Percentage
Interest of the Notes may declare all the Notes to be immediately due and
payable. Such declaration may under certain circumstances be rescinded by the
Note Insurer, or if a Note Insurer Default exists, the Owners of Notes
representing a majority of the Percentage Interest of the Notes.
If, following an Event of Default, the Notes have been declared to be
due and payable, the Indenture Trustee may, with the prior written consent of
the Note Insurer (unless a Note Insurer Default has occurred and is continuing),
in its discretion, refrain from selling such assets and continue to apply all
amounts received on such assets to payments due on the Notes in accordance with
their terms, notwithstanding the acceleration of the maturity of such Notes. In
addition, upon an Event of Default, the Indenture Trustee may, with the consent
of Owners of 100% of the Percentage Interest of the Notes, sell all or part of
the assets included in the Trust Estate, in which event the collections on, or
the proceeds from the sale of, such assets will be applied as follows: (i) to
the payment of the fees of the Indenture Trustee and the Owner Trustee which
have not been previously paid; (ii) to the Note Insurer, any premium amount then
due and unpaid; (iii) to the Servicer for the Servicing Fee then due and unpaid;
(iv) to the Owners, the amount of interest then due and unpaid on the Notes, pro
rata; (v) to the Owners, the amount of principal then due and unpaid on the
Notes, pro rata; (vi) to the payment of amounts due and owing to the Note
Insurer, to the extent not previously reimbursed; (vii) to the Owners, the
Available Funds Cap Carry Forward Amount then unpaid; and (viii) to the Trust
Paying Agent, the amounts to be distributed, pro rata, to the Owners of the
Residual Interest.
No Owner of any Note shall have any right to institute any proceeding
with respect to the Indenture unless (i) such Owner has previously given written
notice to the Indenture Trustee of a continuing Event of Default; (ii) the
Owners of a majority of the Percentage Interest of the Notes have made written
request to the Indenture Trustee to institute proceedings in respect of such
Event of Default in its own name as Indenture Trustee; (iii) such Owner has
offered the Indenture Trustee reasonable indemnity against the costs, expenses
and liabilities to be incurred in complying
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with such request; (iv) the Indenture Trustee for 60 days after its receipt of
such notice, request and offer of indemnity has failed to institute such
proceeding; and (v) no direction inconsistent with such written request has been
given to the Indenture Trustee during such 60-day period by the Owners of a
majority of the Percentage Interest of the Notes.
Voting
Unless otherwise specified in the Indenture, with respect to any
provisions of the Indenture providing for the action, consent or approval of the
Owners evidencing specified "Voting Interests", each Owner will have a Voting
Interest equal to the Percentage Interest represented by such Owner's Note. Any
Note registered in the name of the Issuer or any affiliate thereof will be
deemed not to be outstanding and the Percentage Interest evidenced thereby shall
not be taken into account in determining whether the requisite amount of Voting
Interests necessary to take any such action, or effect any such consent, has
been obtained.
Reporting Requirements
On each Payment Date the Indenture Trustee will be required to report
in writing (based on information provided to the Indenture Trustee by the
Servicer) to each Owner, the Note Insurer , the Rating Agencies and the Note
Insurer:
(i) the amount of the distribution with respect the Notes
(based on a Note in the original principal amount of $1,000);
(ii) the amount of such distributions allocable to principal
on the Home Equity Loans, separately identifying the aggregate amount
of any prepayments in full or Prepayments or other recoveries of
principal included therein and any Pre-Funded Amounts distributed as a
prepayment (based on a Note in the original principal amount of $1,000)
and any related Overcollateralization Increase Amount;
(iii) the amount of such distribution allocable to interest on
the Home Equity Loans (based on a Note in the original principal amount
of $1,000);
(iv) if the interest paid to Owners is less than the Current
Interest, the Interest Carry Forward Amount on such Payment Date;
(v) the principal amount of the Notes (based on a Note in the
original principal amount of $1,000) which will be outstanding after
giving effect to any payment of principal on such Payment Date;
(vi) the aggregate Loan Balance of all Home Equity Loans after
giving effect to any payment of principal on such Payment Date;
(vii) the amount of any Insured Payment included in the
amounts distributed to the Owners on such Payment Date;
(viii) 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;
(ix) the weighted average Coupon Rate of the Home Equity
Loans;
(x) such other information as the Note Insurer may reasonably
request with respect to delinquent Home Equity Loans;
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(xi) the amount of the Available Funds Cap Carry Forward
Amounts paid to Owners of the Notes on such Payment Date, if any, and
the Available Funds Cap Carrying Forward Amounts remaining, if any,
after such Payment Date;
(xii) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution;
(xiii) the weighted average Coupon Rate of the Home Equity
Loans;
(xiv) the Loan Balance of each of the three largest Home
Equity Loans outstanding;
(xv) the Note Rate; and
(xvi) for Payment Dates during and immediately following the
Funding Period the total remaining Pre-Funded Amount in the Pre-Funding
Account.
Certain obligations of the Indenture Trustee to provide information to
the Owners are conditioned upon such information being received from the
Servicer.
In addition, on the Business Day preceding each Payment Date the
Indenture Trustee will be required to distribute to each Owner, the Note Insurer
and the Rating Agencies, together with the information described above, the
following information prepared by the Servicer and furnished to the Indenture
Trustee for such purpose:
(a) the number and aggregate principal balances of Home Equity
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent, (iii) 90
or more days delinquent, as of the close of business on the last day of
the calendar month immediately preceding the Payment Date, (iv) the
numbers and aggregate Loan Balances of all Home Equity Loans as of such
Payment Date and (v) the percentage that each of the amounts
represented by clauses (i), (ii) and (iii) represent as a percentage of
the respective amounts in clause (iv);
(b) the status and the number and dollar amounts of all Home
Equity Loans in foreclosure proceedings as of the close of business on
the last day of the calendar month immediately preceding such Payment
Date;
(c) the number of Mortgagors and the Loan Balances of (i) the
related Mortgages involved in bankruptcy proceedings as of the close of
business on the last day of the calendar month immediately preceding
such Payment Date and (ii) Home Equity Loans that are "balloon" loans;
(d) the existence and status of any Properties as to which
title has been taken in the name of, or on behalf of the Indenture
Trustee, as of the close of business of the last day of the calendar
month immediately preceding the Payment Date;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the close
of business on the last day of the calendar month immediately preceding
the Payment Date; and
(f) the amount of cumulative Realized Losses, the current
period Realized Losses (each as defined in the Sale and Servicing
Agreement) and any other loss percentages as required by the Sale and
Servicing Agreement.
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Removal of Indenture Trustee for Cause
The Indenture Trustee may be removed upon the occurrence of any one of
the following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Indenture Trustee: (i)
failure to make distributions of available amounts; (ii) certain breaches of
covenants and representations by the Indenture Trustee; (iii) certain acts of
bankruptcy or insolvency on the part of the Indenture Trustee; and (iv) failure
to meet the standards of Indenture Trustee eligibility as set forth in the
Indenture.
If any such event occurs and is continuing, then and in every such case
(i) the Note Insurer or (ii) with the prior written consent of the Note Insurer
(which is required not to be unreasonably withheld), the Issuer and the Owners
of a majority of the Percentage Interests represented by the Notes may remove
the Indenture Trustee.
Governing Law
The Agreements and each Note will be construed in accordance with and
governed by the laws of the State of New York applicable to agreements made and
to be performed therein.
FEDERAL INCOME TAX CONSEQUENCES
The following section discusses certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Notes. Such section must be considered only in connection with "Federal
Income Tax Consequences" in the Prospectus. The discussion herein and in the
Prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the Prospectus
does not purport to deal with all federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Notes.
No election will be made to treat the Trust or the Trust Estate or any
portion thereof as a REMIC for federal income tax purposes.
Upon issuance of the Notes, Arter & Hadden LLP, special tax counsel,
will deliver its opinion that the Notes will be treated as newly originated debt
obligations and not as representing an ownership interest in the Trust Estate or
an equity interest in the Issuer, the Depositor or the Seller. In addition, for
federal income tax purposes, the Issuer will not be classified (i) as an
association taxable as a corporation, (ii) a taxable mortgage pool as defined in
Section 7701(i) of the Code or (iii) a "publicly traded partnership" as defined
in Treasury Regulations Section 1.7704-1. Each Owner of a Note, by its
acceptance of a Note, will agree to treat the Notes as indebtedness. It is
anticipated that the Notes will be issued without original issue discount for
federal income tax purposes. However, it is possible that the Internal Revenue
Service could treat a portion of the additional interest which would become
payable on the Notes after the Redemption Date as original issue discount.
Owners are urged to consult their tax advisor with respect to the tax
consequences of holding the Notes.
The prepayment assumption that is to be used in determining whether the
Notes are issued with original issue discount and the rate of accrual of
original issue discount is a CPR of 30%. No representation is made as to the
actual rate at which the Home Equity Loans will prepay. See "Certain Federal
Income Tax Considerations - Debt Certificates" in the Prospectus.
The Notes will not represent "real estate assets" for purposes of
Section 856(c)(5)(A) of the Code or "[l]oans . . . principally secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code. The Notes will also not be treated as "qualified mortgages" under
Section 860G(a)(3)(C) of the Code.
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STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Notes. State income tax law may differ substantially from the
corresponding federal tax law, and this discussion does not purport to describe
any aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Notes.
ERISA CONSIDERATIONS
ERISA and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA) and plans described in Code section
4975(e)(1), including individual retirement accounts (the "Plans") and (b)
persons who have certain specified relationships to such Plans or who constitute
"disqualified persons" under Code section 4975(e)(2) with respect to such Plans
("parties in interest"). Certain employee benefit plans, such as governmental
plans and church plans (if no election has been made under section 410(d) of the
Code), are not subject to the restrictions of ERISA, and assets of such plans
may be invested in the Notes without regard to the ERISA considerations
described below, subject to other applicable federal and state law. However, any
such governmental or church plan which is qualified under section 401(a) of the
Code and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code. Any Plan
fiduciary which proposes to cause a Plan to acquire any of the Notes should
consult with its counsel with respect to the potential consequences under ERISA,
and the Code, of the Plan's acquisition and ownership of the Notes. See "ERISA
Considerations" in the Prospectus. Investments by Plans are also subject to
ERISA's general fiduciary requirements, including the requirement of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions ("prohibited transactions") involving
a Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101) concerning the definition of what
constitutes the assets of a Plan for purposes of ERISA and the prohibited
transaction provisions of the Code (the "Plan Asset Regulation"). The Plan Asset
Regulation describes the circumstances under which the assets of an entity in
which a Plan invests will be considered to be "plan assets" such that any person
who exercises control over such assets would be subject to ERISA's fiduciary
standards. Under the Plan Asset Regulation, generally when a Plan invests in
another entity, the Plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity. However, the Plan Asset
Regulation provides that, if a Plan acquires an "equity interest" in any entity
that is neither a "publicly-offered security" (as defined therein) nor a
security issued by an investment company registered under the Investment Company
Act of 1940, the assets of the entity will be treated as assets of the Plan
investor unless certain exceptions apply. If the Notes were deemed to be equity
interests and no statutory, regulatory or administrative exemption applies, the
Issuer could be considered to hold plan assets by reason of a Plan's investment
in the Notes. Such plan assets would include an undivided interest in any assets
held by the Issuer. In such an event, the Servicer and other persons, in
providing services with respect to the Issuer's assets, may be parties in
interest with respect to such Plans, subject to fiduciary responsibility
provisions of Title I of ERISA, including the general fiduciary duties of
Section 404 of ERISA, the prohibited transaction provisions of Section 406 of
ERISA, and to Section 4975 of the Code with respect to transactions involving
the Trust's assets. Under the Plan Asset Regulation, the term "equity interest"
is defined as any interest in an entity other than an instrument that is treated
as indebtedness under "applicable local law" and which has no "substantial
equity features." Although the Plan Asset
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Regulation is silent with respect to the question of which law constitutes
"applicable local law" for this purpose, the DOL has stated that these
determinations should be made under the state law governing interpretation of
the instrument in question. In the preamble to the Plan Asset Regulation, the
DOL declined to provide a precise definition of what features are equity
features or the circumstances under which such features would be considered
"substantial," noting that the question of whether a plan's interest has
substantial equity features is an inherently factual one, but that in making a
determination it would be appropriate to take into account whether the equity
features are such that a Plan's investment would be a practical vehicle for the
indirect provision of investment management services.
Without regard to whether the Notes are treated as an equity interest
under the Plan Asset Regulation, the acquisition or holding of the Notes by or
on behalf of a Plan could be considered to give rise to a prohibited transaction
if such acquisition or holding is deemed to be a prohibited loan to a party in
interest with respect to such Plan. Certain exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of the Notes
by a Plan depending on the type and circumstances of the plan fiduciary making
the decision to acquire the Notes. Included among these exemptions are:
Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts; PTCE
95-60, regarding certain transactions entered into by insurance company general
accounts; PTCE 96-23, regarding certain transactions effected by "in-house asset
managers"; PTCE 91-38, regarding certain transactions entered into by bank
collective investment funds; and PTCE 84-14, regarding certain transactions
effected by "qualified professional asset managers."
Any Plan fiduciary considering whether to purchase any Notes on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Notes, a
fiduciary of a Plan should make its own determination as to whether the Trust,
as obligor on the Notes, is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions. Investors
should analyze whether the decision may have an impact with respect to purchases
of the Notes.
In addition to the matters described above, purchasers of an Notes that
are insurance companies should consult with their counsel with respect to the
United States Supreme Court case interpreting the fiduciary responsibility rules
of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings
Bank 114 S.Ct. 517 (1993). In John Hancock, the Supreme Court ruled that assets
held in an insurance company's general account may be deemed to be "plan assets"
for ERISA purposes under certain circumstances. Prospective purchasers using
insurance company general account assets should determine whether the decision
affects their ability to make purchases of the Notes.
RATINGS
It is a condition of the issuance of the Notes that the Notes receive
ratings of "Aaa" by Moody's and "AAA" by Standard & Poor's. Explanations of the
significance of such ratings may be obtained from Moody's, 99 Church Street, New
York, New York 10007 and Standard Poor's, 25 Broadway, New York, New York 10004.
Such ratings will be the views only of such rating agencies. There is no
assurance that such ratings will continue for any period of time or that such
ratings will not be revised or withdrawn. Any such revision or withdrawal of
such ratings may have an adverse effect on the market price of the Notes. A
security rating is not a recommendation to buy, sell or hold securities.
The ratings issued by Moody's and Standard & Poor's on the payment of
principal and interest on the Notes do not cover the payment of the Available
Funds Cap Carry Forward Amount. The ratings of Moody's and Standard & Poor's do
not address the possibility that, as a result of principal prepayments, Owners
of the Notes may receive a lower than anticipated yield.
The ratings of the Notes should be evaluated independently from similar
ratings on other types of securities. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating agency.
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The Depositor has not requested a rating of the Notes offered hereby by
any rating agency other than Moody's and Standard & Poor's and the Depositor has
not provided information relating to the Notes offered hereby or the Home Equity
Loans to any rating agency other than Moody's and Standard & Poor's. However,
there can be no assurance as to whether any other rating agency will rate the
Notes offered hereby or, if another rating agency rates such Notes, what rating
would be assigned to such Notes by such rating agency. Any such unsolicited
rating assigned by another rating agency to the Notes offered hereby may be
lower than the rating assigned to such Notes by either or both of Moody's and
Standard & Poor's.
LEGAL INVESTMENT CONSIDERATIONS
The Notes will not constitute "mortgage related securities" for
purposes of SMMEA. Accordingly, many institutions with legal authority to invest
in comparably rated securities based on qualifying first mortgage loans may not
be legally authorized to invest in the Notes.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Notes (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters"), has severally agreed to purchase, the
principal amount of the Notes set forth opposite its name below:
Underwriters Principal Amount
------------ ----------------
PaineWebber Incorporated $150,000,000
Bear, Stearns & Co. Inc. 150,000,000
Deutsche Bank Securities Inc. 150,000,000
Nomura Securities International, Inc. 150,000,000
------------
Total $600,000,000
============
The Depositor and the Seller have agreed to indemnify the Underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or to contribute to payments which the Underwriters may be required to make
in respect thereof.
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Notes offered
hereby, if any are purchased. The Depositor has been advised by the Underwriters
that they propose initially to offer the Notes to the public at the offering
price set forth on the cover page hereof and to certain dealers at such price
less a concession not in excess of 0.15% (expressed as a percentage of the Note
Principal Balance). The Underwriters may allow and such dealers may reallow a
discount not in excess of 0.10%.
After the initial public offering, such prices and discounts may be
changed.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934 (the "Exchange
Act"). Over- allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not
exceed a specific maximum. Syndicate covering transactions involve purchases of
the Notes in the open market after the distribution has been completed in order
to cover syndicate short positions. Penalty bids permit the Underwriters to
reclaim a selling concession from a syndicate member when the Notes originally
sold by such syndicate member are purchased in a syndicate covering transaction
to cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Notes to be
higher than it would otherwise be in the absence of such transactions. These
transactions, if commenced, may be discontinued at any time.
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REPORT OF EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1997, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand, L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Notes will be passed upon for the Seller, the Depositor, the Servicer and the
Issuer by Arter & Hadden LLP, Washington, D.C. Certain legal matters relating to
insolvency issues and certain federal income tax matters concerning the Notes
will be passed upon for the Seller, Depositor and the Issuer by Arter & Hadden
LLP. Certain legal matters relating to the validity of the issuance of the Notes
will be passed upon for the Underwriters by Stroock & Stroock & Lavan LLP, New
York, New York. Certain legal matters relating to the Note Insurer and the Note
Insurance Policy will be passed upon for the Note Insurer by Kutak Rock, Omaha,
Nebraska.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
$600,000,000 Adjustable Rate Home Equity Loan Asset Backed Notes, Series 1998-4,
(the "Global Securities") will be available only in book entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
Cedel or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lockup" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed securities issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days
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in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by the Relevant Depositary to the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Cedel
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedel or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear account
in order to settle the sale side of the trade; or
I-2
<PAGE>
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Note Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate the income of which is includible in gross income for United States tax
purposes, regardless of its source or a trust if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust. The term "Non-U.S. Person" means any
person who is not a U.S. Person. This summary does not deal with all aspects of
U.S. Federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
I-3
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
----
Accrual Period.............................................................S-4
Agreements................................................................S-36
Appraised Values..........................................................S-20
Available Funds Cap........................................................S-5
Available Funds Cap Carry Forward Amount...................................S-5
Available Funds Shortfall.................................................S-37
Backup Servicer...........................................................S-15
Beneficial Owners..........................................................S-9
Book-Entry Notes..........................................................S-40
Business Day...............................................................S-4
Capitalized Interest Account...............................................S-9
Cede......................................................................S-10
Cedel.....................................................................S-10
Cedel Participants........................................................S-41
Closing Date...............................................................S-1
CMT Index..................................................................S-3
CMT Loans..................................................................S-3
Compensating Interest.....................................................S-54
Cooperative...............................................................S-42
Coupon Rate................................................................S-3
CPR.......................................................................S-32
Current Interest...........................................................S-4
Custodian..................................................................S-1
Cut-Off Date...............................................................S-1
Daily Collections.........................................................S-52
Date-of-Payment Loans.....................................................S-31
Definitive Note...........................................................S-40
Delinquency Advances......................................................S-53
Depositor..................................................................S-1
DOL.......................................................................S-61
DTC.......................................................................S-10
DTC Participants..........................................................S-41
ERISA.....................................................................S-11
Euroclear.................................................................S-10
Euroclear Operator........................................................S-42
Euroclear Participants....................................................S-42
European Depositaries.....................................................S-10
Event of Default..........................................................S-57
Excess Overcollateralization Amount.......................................S-48
Exchange Act..............................................................S-63
Fannie Mae................................................................S-16
FHLMC.....................................................................S-16
Final Certification.......................................................S-52
Financial Intermediary....................................................S-40
Fiscal Agent..............................................................S-44
FNMA Guide................................................................S-52
Formula Note Rate..........................................................S-5
Funding Period.............................................................S-9
GAAP......................................................................S-46
Home Equity Loans..........................................................S-2
Indenture..................................................................S-1
Indenture Trustee Fee.....................................................S-1
Indenture Trustee..........................................................S-1
Initial Home Equity Loans..................................................S-2
Insured Payment............................................................S-8
Interest Carry Forward Amount..............................................S-4
Issuer.....................................................................S-1
LIBOR Determination Date..................................................S-39
Loan Balance...............................................................S-6
Loan Purchase Price.......................................................S-50
Loan-to-Value Ratios......................................................S-21
Majority Residualholders..................................................S-10
Maximum Collateral Amount..................................................S-5
Monthly Remittance Date....................................................S-7
Moody's...................................................................S-10
Mortgage Note..............................................................S-2
Mortgagor.................................................................S-31
Net Liquidation Proceeds..................................................S-52
Net Monthly Excess Cashflow...............................................S-37
Note Account..............................................................S-36
Note Insurance Policy......................................................S-8
Note Insurer...............................................................S-8
Note Insurer Default.......................................................S-8
Note Principal Balance.....................................................S-4
Note Rate..................................................................S-5
Notes......................................................................S-1
One-Month LIBOR...........................................................S-39
Original Aggregate Loan Balance............................................S-5
Overcollateralization Amount..............................................S-48
Overcollateralization Deficit.............................................S-49
Overcollateralization Increase Amount.....................................S-48
Overcollateralization Reduction Amount....................................S-49
Owner Trust................................................................S-1
Owner Trustee Fee..........................................................S-1
Owners.....................................................................S-3
Participants..............................................................S-40
Payment Date...............................................................S-4
Percentage Interest.......................................................S-37
Plan Asset Regulation.....................................................S-61
Plans.....................................................................S-61
Pool.......................................................................S-2
Preference Amount..........................................................S-7
Premium Amount.............................................................S-7
Prepayments...............................................................S-12
Preservation Expenses.....................................................S-53
Pre-Funded Amount..........................................................S-9
Pre-Funding Account........................................................S-2
Principal and Interest Account............................................S-52
Principal Payment Amount...................................................S-5
Properties.................................................................S-2
Qualified Replacement Mortgage............................................S-50
Rating Agencies...........................................................S-10
REMIC.....................................................................S-11
Realized Loss.............................................................S-49
Record Date................................................................S-4
Redemption Date............................................................S-5
Redemption Price..........................................................S-56
Reference Banks...........................................................S-39
Register..................................................................S-36
Registrar.................................................................S-36
Remittance Period..........................................................S-7
Residual Interest..........................................................S-2
Riegle Act................................................................S-14
Rules.....................................................................S-40
SAP.......................................................................S-46
Sale and Servicing Agreement...............................................S-3
Securities.................................................................S-2
Seller.....................................................................S-1
Servicer...................................................................S-1
Servicer Termination Events...............................................S-55
Servicing Advances........................................................S-53
Servicing Fee..............................................................S-7
Six-Month LIBOR Loans......................................................S-3
SMMEA.....................................................................S-11
Specified Overcollateralization Amount....................................S-48
Standard & Poor's.........................................................S-10
Statistical Calculation Date...............................................S-1
Subsequent Cut-Off Date...................................................S-13
Subsequent Home Equity Loans...............................................S-2
Subsequent Transfer Agreement.............................................S-13
Subsequent Transfer Date...................................................S-9
Substitution Amount.......................................................S-50
Sub-Servicers.............................................................S-15
Sub-Servicing Agreements..................................................S-15
Telerate Page 3750........................................................S-39
Terms and Conditions......................................................S-42
Total Available Funds.....................................................S-38
Total Monthly Excess Cashflow.............................................S-37
Total Monthly Excess Spread...............................................S-48
Trust......................................................................S-1
Trust Agreement............................................................S-1
Trust Estate...............................................................S-1
Trust Fees and Expenses....................................................S-8
Underwriters..............................................................S-63
Underwriting Agreement....................................................S-63
Weighted average life.....................................................S-32
A - 1
<PAGE>
PROSPECTUS
Home Equity Loan Asset Backed Certificates
Home Equity Loan Asset Backed Notes
(Issuable in Series)
IMC Securities, Inc.
(Depositor)
This Prospectus relates to Home Equity Loan Asset Backed Certificates (the
"Certificates") and Home Equity Loan Asset Backed Notes (the "Notes" and
together with the Certificates, the "Securities") to be issued from time to time
in one or more series (each, a "Series") (and one or more classes within a
Series), certain classes of which may be offered on terms determined at the time
of sale and described in this Prospectus and the related Prospectus Supplement.
Each Series of Securities will be issued by a separate trust (each, a "Trust")
and will evidence either a beneficial ownership interest in, or the debt
obligation of, such Trust. The assets of a Trust will include one or more of the
following: (i) single family residential mortgage loans, including mortgage
loans secured by junior liens on the related mortgaged properties, (ii) mortgage
backed securities and (iii) investment income, reserve funds, cash accounts,
insurance policies (including financial guaranty insurance policies and surety
bonds), guaranties, letters of credit or similar types of credit support or
enhancement as more particularly described in the related Prospectus Supplement.
One or more classes of Securities of a Series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest or
any combination thereof prior to one or more other classes of Securities of such
Series or after the occurrence of certain events or (ii) subordinated in the
right to receive such distributions to one or more senior classes of Securities
of such Series, in each case as specified in the related Prospectus Supplement.
Interest on each class of Securities entitled to distributions allocable to
interest may accrue at a fixed rate or at a rate that is subject to change from
time to time as specified in the related Prospectus Supplement. The Depositor or
its affiliates may retain or hold for sale from time to time one or more classes
of a Series of Securities.
Distributions on the Securities will be made at the intervals and on the
dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Securities. An
affiliate of the Depositor may make or obtain for the benefit of the Securities
limited representations and warranties with respect to mortgage assets assigned
to the related Trust. Neither the Depositor nor any affiliates will have any
other obligation with respect to the Securities.
The yield on Securities will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust. Each
Series of Securities will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement for a Series of Certificates, one
or more elections may be made to treat the Trust for the related Series or
specified portions thereof as a "real estate mortgage investment conduit"
("REMIC") for federal income tax purposes. See "Federal Income Tax Consequences"
herein and in the related Prospectus Supplement.
It is a condition to the issuance of the Securities that the Securities be
rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
See "Risk Factors" beginning on page 7 herein and in the related Prospectus
Supplement for a discussion of significant matters affecting investments in the
Securities.
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Securities by "plan
fiduciaries."
An investor should carefully review the information in the related
Prospectus Supplement concerning the risks associated with the different types
and classes of Securities.
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE, ANY
INDENTURE TRUSTEE, ANY OWNER TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET
FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE SECURITIES
NOR THE UNDERLYING MORTGAGE ASSETS WILL BE GUARANTEED OR INSURED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SERVICER, ANY
MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE, ANY INDENTURE TRUSTEE, ANY OWNER
TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED
PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ANY RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described herein and in
the related Prospectus Supplement. See "Plan of Distribution" herein and
"Underwriting" in the related Prospectus Supplement. Prior to their issuance
there will have been no market for the Securities nor can there by any assurance
that one will develop or if it does develop, that it will provide the Owners of
the Securities with liquidity or will continue for the life of the Securities.
- --------------------------------------------------------------------------------
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is May 29, 1998.
<PAGE>
AVAILABLE INFORMATION
The representative has filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Securities. The Registration
Statement and amendments thereof and to the exhibits thereto, as well as such
reports and other information, are available for inspection without charge at
the public reference facilities maintained by the Commission at its Public
Reference Section 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048; and Chicago Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of the Registration Statement and amendments thereof and
exhibits thereto may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates
and electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval system at the Commission's Web site (http://www.sec.gov).
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any accompanying
Prospectus Supplement with respect hereto do not constitute an offer to sell or
a solicitation of an offer to buy any securities other than the Securities
offered hereby and thereby nor an offer of the Securities to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
REPORTS TO OWNERS
Periodic and annual reports concerning any Securities and the related Trust
will be provided to the persons in whose names the Securities are registered
(the "Owners"). See "The Pooling and Servicing Agreement - Reports", "The
Indenture - Indenture Trustee's Annual Report" and "- Reports by Indenture
Trustee to Note Owners" herein. If specified in the related Prospectus
Supplement, a Series of Securities may be issuable in book-entry form. In such
event, the related Securities will be registered in the name of a Clearing
Agency (as defined herein) and, therefore, the Clearing Agency will be the Owner
for purposes hereof. All reports will be provided to the Clearing Agency, which
in turn will provide such reports to its Clearing Agency Participants (as
defined herein). Such Clearing Agency Participants will then forward such
reports to the beneficial owners of Securities. See "Description of the
Securities - Book Entry Registration" herein. The Depositor will file or cause
to be filed with the Commission such periodic reports with respect to each Trust
as are required under the Exchange Act and the rules and regulations of the
Commission thereunder. It is the Depositor's intent to suspend filing such
reports as soon as such reports are no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Securities of such Trust offered hereby shall be deemed to be
incorporated by reference into this Prospectus when delivered with respect to
such Trust. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to IMC Securities, Inc., 5901 East Fowler Avenue, Tampa, Florida
33617-2362 (telephone number (813) 984-8801).
<PAGE>
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) a description of the
class or classes of Securities and the interest rate or method of determining
the rate or the amount of interest, if any, to be paid to each such class; (ii)
the aggregate principal amount and Payment Dates relating to such Series and, if
applicable, the initial and final scheduled Payment Dates for each class; (iii)
information as to the assets comprising the Trust, including the general
characteristics of the Trust Assets included therein and, if applicable, the
insurance policies, surety bonds, guarantees, letters of credit, reserve funds,
cash accounts, reinvestment income or other instruments or agreements included
in the Trust or otherwise, and the amount and source of any reserve account or
cash account; (iv) the circumstances, if any, under which the Trust may be
subject to early termination; (v) the methods used to calculate the amount of
principal to be distributed with respect to each class of Securities; (vi) the
order of application of distributions to each of the classes within such Series,
whether sequential, pro rata, or otherwise; (vii) additional information with
respect to the method of distribution of such Securities; (viii) whether one or
more REMIC elections will be made and designation of the regular interests and
residual interests; (ix) the aggregate original percentage ownership interest in
the Trust to be evidenced by each class of Securities; (x) information as to the
Trustee or Indenture Trustee; (xi) information as to the nature and extent of
subordination with respect to any class of Securities that is subordinate in
right of payment to any other class; and (xii) information as to the Master
Servicer, if any.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligations of dealers to deliver a Prospectus Supplement and the Prospectus
when acting as underwriters of the Securities covered by such Prospectus
Supplement and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS.........................................................1
RISK FACTORS..................................................................7
DESCRIPTION OF THE SECURITIES................................................11
General.................................................................11
Classes of Securities...................................................12
Distributions of Principal and Interest.................................13
Book Entry Registration.................................................15
List of Owners of Securities............................................15
THE TRUSTS...................................................................16
Mortgage Loans..........................................................16
Mortgage-Backed Securities..............................................18
Other Mortgage Securities...............................................19
CREDIT ENHANCEMENT...........................................................19
SERVICING OF MORTGAGE LOANS..................................................24
Payments on Mortgage Loans..............................................24
Advances................................................................25
Collection and Other Servicing Procedures...............................25
Primary Mortgage Insurance..............................................27
Standard Hazard Insurance...............................................27
Title Insurance Policies................................................28
Claims Under Primary Mortgage Insurance Policies and
Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan.....................................28
Servicing Compensation and Payment of Expenses..........................28
Master Servicer.........................................................29
THE POOLING AND SERVICING AGREEMENT..........................................29
Assignment of Mortgage Assets...........................................29
Evidence as to Compliance...............................................31
The Trustee.............................................................31
Administration of the Security Account..................................32
Reports.................................................................33
Forward Commitments; Pre-Funding........................................33
Servicer Events of Default..............................................34
Rights Upon Servicer Event of Default...................................34
Amendment...............................................................34
Termination.............................................................35
THE INDENTURE................................................................35
General.................................................................35
Modification of Indenture ..............................................35
Note Events of Default..................................................36
Rights Upon Note Events of Default......................................37
List of Note Owners.....................................................37
Annual Compliance Statement.............................................37
Indenture Trustee's Annual Report.......................................38
Satisfaction and Discharge of Indenture.................................38
Redemption of Notes.....................................................38
Reports by Indenture Trustee to Note Owners.............................38
Limitation on Suits.....................................................38
The Sale and Servicing Agreement........................................38
USE OF PROCEEDS..............................................................39
THE DEPOSITOR................................................................39
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS.................................40
General.................................................................40
Foreclosure.............................................................41
Enforceability of Certain Provisions....................................44
Soldiers' and Sailors' Civil Relief Act.................................46
LEGAL INVESTMENT MATTERS.....................................................46
ERISA CONSIDERATIONS.........................................................47
FEDERAL INCOME TAX CONSEQUENCES..............................................48
REMIC Securities........................................................49
Non-REMIC Securities....................................................65
Debt Certificates.......................................................71
Notes...................................................................73
Certificates Classified as Partnership Interests........................73
FASIT Securities........................................................73
PLAN OF DISTRIBUTION.........................................................74
RATINGS......................................................................74
LEGAL MATTERS................................................................75
FINANCIAL INFORMATION........................................................75
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS................................A-1
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular Series of Securities and to
the Pooling and Servicing Agreement or the Indenture and the Trust Agreement
which will be prepared in connection with each Series of Securities. Unless
otherwise specified, capitalized terms used and not defined in this Summary of
Prospectus have the meanings given to them in this Prospectus and in the related
Prospectus Supplement. An index indicating where certain capitalized terms used
herein are defined appears on Appendix A hereto.
Securities............................ Home Equity Loan Asset Backed
Certificates (the "Certificates") and
Home Equity Loan Asset Backed Notes (the
"Notes" and together with the
Certificates, the "Securities"),
issuable from time to time in Series, in
fully registered form or book entry only
form, in authorized denominations, as
described in the Prospectus Supplement.
Each Security will represent a
beneficial ownership interest in a trust
(a "Trust") created from time to time
pursuant to a pooling and servicing
agreement (a "Pooling and Servicing
Agreement") or trust agreement (a "Trust
Agreement" and together with a Pooling
and Servicing Agreement an "Agreement").
Securities evidencing a debt obligation
of a Trust will be issued pursuant to a
trust indenture (each, an "Indenture").
The Depositor......................... IMC Securities, Inc. (the "Depositor")
is a Delaware corporation. The
Depositor's principal executive offices
are located at 5901 East Fowler Avenue,
Tampa, Florida 33617-2362; telephone
number (813) 984-8801. See "The
Depositor" herein. The Depositor or its
affiliates may retain or hold for sale
from time to time one or more classes of
a Series of Securities.
The Servicer.......................... The entity or entities named as the
Servicer in the Prospectus Supplement
(the "Servicer"), will act as servicer,
with respect to the Mortgage Loans
included in the related Trust. The
Servicer may be an affiliate of the
Depositor and may be the seller of
Mortgage Assets to the Depositor (each,
a "Seller").
The Master Servicer................... A "Master Servicer" may be specified in
the related Prospectus Supplement for
the related Series of Securities.
Trustees.............................. The trustee (the "Trustee") for each
Series of Certificates will be specified
in the related Prospectus Supplement.
The owner trustee (the "Owner Trustee")
and the indenture trustee (the
"Indenture Trustee") for each Series of
Notes will be specified in the related
Prospectus Supplement.
Issuer of Notes....................... With respect to each Series of Notes,
the issuer (the "Issuer") will be the
Depositor or an owner trust established
by it for the purpose of issuing such
Series of Notes. Each such owner trust
will be created pursuant to a Trust
Agreement between the Depositor, acting
as depositor, and the Owner Trustee.
Each Series of Notes will represent
indebtedness of the Issuer and will be
issued pursuant to an Indenture between
the Issuer and the Trustee whereby the
Issuer will pledge the related Trust to
secure the Notes under the lien of the
Indenture. As to each Series of Notes
where the Issuer is an owner trust, the
ownership of the related Trust will be
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evidenced by certificated or
noncertificated interests (the "Equity
Certificates") issued under the Trust
Agreement, which, unless otherwise
specified in the Prospectus Supplement,
are not offered hereby. The Notes will
represent nonrecourse obligations solely
of the Issuer, and the proceeds of the
related Trust will be the sole source of
payments on the Notes, except as
described herein under "Credit
Enhancement" and in the related
Prospectus Supplement.
Trust Assets.......................... The assets of a Trust will be
mortgage-related assets (the "Mortgage
Assets") consisting of one or more of
the following types of assets:
A. The Mortgage Loans................ "Mortgage Loans" may include: (i)
conventional (i.e., not insured or
guaranteed by any governmental agency)
Mortgage Loans secured by one-to-four
family residential properties; (ii)
Mortgage Loans secured by security
interests in shares issued by private,
non-profit, cooperative housing
corporations ("Cooperatives") and in the
related proprietary leases or occupancy
agreements granting exclusive rights to
occupy specific dwelling units in such
Cooperatives' buildings; and, (iii)
Mortgage Loans secured by junior liens
on the related mortgaged properties,
including home improvement retail
installment contracts. See "The Trusts -
Mortgage Loans" herein.
B. Mortgage-
Backed Securities................ "Mortgage-Backed Securities" (or "MBS")
may include (i) private (that is, not
guaranteed or insured by the United
States or any agency or instrumentality
thereof) mortgage participations,
mortgage pass-through certificates or
other mortgage-backed securities or (ii)
certificates insured or guaranteed by
Federal Home Loan Mortgage Corporation
("FHLMC") or Fannie Mae ("Fannie Mae")
or Government National Mortgage
Association ("GNMA"). See "The Trusts -
Mortgage-Backed Securities" herein.
C. Other Mortgage Assets............. Trust assets may also include
reinvestment income, reserve funds, cash
accounts, insurance policies (including
financial guaranty insurance policies
and surety bonds), guaranties, letters
of credit or similar types of credit
support or enhancement as described in
the related Prospectus Supplement.
The related Prospectus Supplement for a
Series of Securities will describe the
Mortgage Assets to be included in the
Trust for such Series.
The Securities........................ The Securities of any Series may be
issued in one or more classes, as
specified in the Prospectus Supplement.
One or more classes of Securities of
each Series (i) may be entitled to
receive distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) may be
entitled to receive distributions only
of prepayments of principal throughout
the lives of the Securities or during
specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of Securities
of such Series throughout the lives of
the Securities or during specified
periods; (iv) may be entitled to receive
such distributions only after the
occurrence
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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 Securities entitled to distributions
allocable to interest, may be entitled
to receive interest at a fixed rate or a
rate that is subject to change from time
to time; (vii) may accrue interest, with
such accrued interest added to the
principal or notional amount of the
Securities, and no payments being made
thereon until certain other classes of
the Series have been paid in full; and
(viii) as to Securities entitled to
distributions allocable to interest, may
be entitled to distributions allocable
to interest only after the occurrence of
events specified in the Prospectus
Supplement and may accrue interest until
such events occur, in each case as
specified in the related Prospectus
Supplement. The timing and amounts of
such distributions may vary among
classes, over time, or otherwise as
specified in the related Prospectus
Supplement.
Distributions on
the Securities...................... The related Prospectus Supplement will
specify (i) whether distributions on the
Securities entitled thereto will be made
monthly, quarterly, semi-annually or at
other intervals and dates out of the
payments received in respect of the
Mortgage Assets included in the related
Trust and other assets, if any, pledged
for the benefit of the related holders
of the Securities (the "Owners"); (ii)
the amount allocable to payments of
principal and interest on any Payment
Date; and (iii) whether all
distributions will be made pro rata to
Owners of Securities of the class
entitled thereto.
The aggregate original principal balance
of the Securities will equal the
aggregate distributions allocable to
principal that such Securities will be
entitled to receive; the Securities will
have an aggregate original principal
balance equal to or less than the
aggregate unpaid principal balance of
the related Mortgage Assets (plus
amounts held in a Pre-Funding Account,
if any) as of the first day of the month
of creation of the Trust; and the
Securities will bear interest in the
aggregate at a rate (the "Pass-Through
Rate") equal to the interest rate borne
by the related Mortgage Assets net of
servicing fees and any other specified
amounts.
Pre-Funding Account................... A Trust may enter into an agreement
(each, a "Subsequent Transfer
Agreement") with the Depositor whereby
the Depositor will agree to transfer
additional Mortgage Assets to such Trust
following the date on which such Trust
is established and the related
Securities are issued. Any Subsequent
Transfer Agreement will require that any
Mortgage Loans so transferred conform to
the requirements specified in such
Subsequent Transfer Agreement. If a
Subsequent Transfer Agreement is to be
utilized, the related Trustee will be
required to deposit in a segregated
account (each, a "Pre-Funding Account")
all or a portion of the proceeds
received by the Trustee in connection
with the sale of one or more classes of
Securities of the related Series;
subsequently, the additional Mortgage
Assets will be transferred to the
related Trust in exchange for money
released to the Depositor from the
related Pre-Funding Account. The maximum
amount deposited in the Pre-Funding
Account to acquire Mortgage Loans for
transfer to a Trust will not exceed 25%
of the
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aggregate principal amount of the
Securities offered pursuant to the
related Prospectus Supplement. Each
Subsequent Transfer Agreement will set a
specified period during which any such
transfers must occur, which period will
not exceed 90 days from the date the
Trust is established. If all moneys
originally deposited to such Pre-Funding
Account are not used by the end of such
specified period, then any remaining
moneys will be applied as a mandatory
prepayment of a class or classes of
Securities as specified in the related
Prospectus Supplement.
Optional Termination.................. The Servicer, the Seller, the Depositor,
or, if specified in the related
Prospectus Supplement, the Owners of a
related class of Securities or a credit
enhancer may at their respective options
effect early retirement of a Series of
Securities through the purchase of the
Mortgage Assets in the related Trust.
See "The Pooling and Servicing Agreement
- Termination" and "The Indenture -
Redemption of Notes" herein.
Mandatory Termination................. The Trustee, the Servicer or certain
other entities specified in the related
Prospectus Supplement may be required to
effect early retirement of a Series of
Securities by soliciting competitive
bids for the purchase of the assets of
the related Trust or otherwise. See
"Pooling and Servicing Agreement -
Termination" and "The Indenture - Rights
Upon Note Events of Default" herein.
Advances.............................. The Servicer of the Mortgage Loans will
be obligated (but only to the extent set
forth in the related Prospectus
Supplement) to advance delinquent
installments of principal and/or
interest (less applicable servicing
fees) on the Mortgage Loans in a Trust.
Any such obligation to make advances may
be limited to amounts due to the Owners
of Securities of the related Series, to
amounts deemed to be recoverable from
late payments or liquidation proceeds,
to specified periods or to any
combination thereof, in each case as
specified in the related Prospectus
Supplement. Any such advance will be
recoverable as specified in the related
Prospectus Supplement. See "Servicing of
Mortgage Loans" herein.
Credit Enhancement.................... If specified in the related Prospectus
Supplement, a Series of Securities, or
certain classes within such Series, may
have the benefit of one or more types of
credit enhancement ("Credit
Enhancement") including but not limited
to overcollateralization, cross support,
mortgage pool insurance, special hazard
insurance, financial guaranty insurance
policies, a bankruptcy bond, reserve
funds, other insurance, guaranties and
similar instruments and arrangements.
Credit Enhancement also may be provided
in the form of subordination of one or
more classes of Securities in a Series
under which losses are first allocated
to any Subordinated Securities up to a
specified limit. The protection against
losses afforded by any such Credit
Enhancement will be limited as described
in the related Prospectus Supplement.
See "Credit Enhancement" herein.
Book Entry Registration............... Securities of one or more classes of a
Series may be issued in book entry form
("Book Entry Securities") in the name of
a clearing agency (a "Clearing Agency")
registered with the Securities and
Exchange Commission, or its nominee.
Transfers and pledges of Book Entry
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Securities 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 Securities
("Beneficial Owners") other than
Clearing Agency Participants may be
effected only through Clearing Agency
Participants. All references to the
Owners of Securities shall mean
Beneficial Owners to the extent
Beneficial Owners may exercise their
rights through a Clearing Agency. Except
as otherwise specified in this
Prospectus or a related Prospectus
Supplement, the term "Owners" shall be
deemed to include Beneficial Owners. See
"Risk Factors - Book Entry Registration"
and "Description of the Securities -
Book Entry Registration" herein.
Federal Income Tax
Consequences....................... Federal income tax consequences will
depend on, among other factors, whether
one or more elections are made to treat
a Trust or specified portions thereof as
a "real estate mortgage investment
conduit" ("REMIC") or financial asset
securitization investment trust
("FASIT") under the Internal Revenue
Code of 1986, as amended (the "Code"),
or, if no REMIC or FASIT election is
made, whether the Securities are
considered to be debt obligations,
Standard Securities, Stripped Securities
or Partnership Interests. The related
Prospectus Supplement for each Series of
Securities will specify whether a REMIC
or FASIT election will be made. See
"Federal Income Tax Consequences" herein
and in the related Prospectus
Supplement.
ERISA Considerations.................. A fiduciary of any employee benefit plan
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain classes of Securities may not be
transferred unless the Trustee or the
Indenture Trustee and the Depositor are
furnished with a letter of
representation or an opinion of counsel
to the effect that such transfer will
not result in a violation of the
prohibited transaction provisions of
ERISA and the Code and will not subject
the Trustee or the Indenture Trustee,
the Depositor or the Servicer to
additional obligations. See "Description
of the Securities - General" herein and
"ERISA Considerations" herein and in the
related Prospectus Supplement.
Legal Investment Matters.............. Securities that constitute "mortgage
related securities" under the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA") will be so described in the
related Prospectus Supplement.
Securities that are not so qualified may
not be legal investments for certain
types of institutional investors,
subject, in any case, to any other
regulations which may govern investments
by such institutional investors. See
"Legal Investment Matters" herein and in
the related Prospectus Supplement.
Use of Proceeds....................... Substantially all the net proceeds from
the sale of a Series of Securities will
be applied to the simultaneous purchase
of the Mortgage Assets included in the
related Trust (or to reimburse the
amounts previously used
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to effect such purchase), the costs of
carrying the Mortgage Assets until sale
of the Securities and to pay other
expenses. See "Use of Proceeds" herein.
Rating................................ It is a condition to the issuance of
each class of Securities that each class
of the Securities of such Series be
rated by one or more of Moody's
Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Services, a
division of the McGraw-Hill Companies
("Standard & Poor's"), Duff & Phelps
Credit Rating Co. ("DCR") and Fitch
IBCA, Inc. ("Fitch" and each of Fitch,
Moody's, DCR and Standard & Poor's, a
"Rating Agency") in one of their four
highest rating categories; provided,
however, that one or more classes of
Subordinated Securities and Residual
Securities need not be so rated. A
security rating is not a recommendation
to buy, sell or hold securities and may
be subject to revision or withdrawal at
any time. No person is obligated to
maintain any rating on any Security,
and, accordingly, there can be no
assurance that the ratings assigned to
any class of Securities upon initial
issuance thereof will not be lowered or
withdrawn by a Rating Agency at any time
thereafter. If a rating of any class of
Securities of a Series is revised or
withdrawn, the liquidity of such class
of Securities may be adversely affected.
In general, the ratings address credit
risk and do not represent any assessment
of the likelihood or rate of principal
prepayments. See "Risk Factors" herein
and "Ratings" in the related Prospectus
Supplement.
Risk Factors.......................... Investment in the Securities will be
subject to one or more risk factors,
including declines in the value of
Mortgaged Properties, prepayment of
Mortgage Loans, higher risks of defaults
on particular types of Mortgage Loans,
limitations on security for the Mortgage
Loans, limitations on credit enhancement
and various other factors. See "Risk
Factors" herein and in the related
Prospectus Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors in connection with the purchase of the Securities:
Limited Liquidity. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Securities of such
Series. The market value of the Securities will fluctuate with changes in
prevailing rates of interest. Consequently, the sale of Securities in any market
that may develop may be at a discount from the Securities' par value or purchase
price. Owners of Securities generally have no right to request redemption of
Securities, and the Securities are subject to redemption only under the limited
circumstances described in the related Prospectus Supplement. In addition, the
Securities will not be listed on any securities exchange.
Declining Real Estate Market; Geographic Concentration. If the
residential real estate market in general or a regional or local area where
Mortgage Assets for a Trust are concentrated should experience an overall
decline in property values, or a significant downturn in economic conditions,
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. See "The Trusts -
Mortgage Loans" herein.
Limited Obligations. The Securities will not represent an interest in
or obligation of the Depositor. The Securities of each Series will not be
insured or guaranteed by any government agency or instrumentality, the
Depositor, any Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment
experience on Mortgage Loans constituting or underlying the Mortgage Assets will
affect the average life of each class of Securities relating to a Trust.
Prepayments may be influenced by a variety of economic, geographic, social and
other factors, including changes in interest rate levels. In general, if
mortgage interest rates fall, the rate of prepayment would be expected to
increase. Conversely, if mortgage interest rates rise, the rate of prepayment
would be expected to decrease. Other factors affecting prepayment of mortgage
loans include changes in housing needs, job transfers, unemployment and
servicing decisions. See "Prepayment and Yield Considerations" in the related
Prospectus Supplement. In addition, investors in the Securities should be aware
that the Servicer, the Seller, or, if specified in the related Prospectus
Supplement, the Owners of a Class of Securities or a credit enhancer may at
their respective options effect early retirement of a Series of Securities
through the purchase of Mortgage Assets from the related Trust. See "The Pooling
and Servicing Agreement - Termination" and "The Indenture - Redemption of Notes"
herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
A portion of the aggregate principal balance of the Mortgage Loans at any time
may be "balloon loans" that provide for the payment of the unamortized principal
balance of such Mortgage Loan in a single payment at maturity ("Balloon Loans").
Such Balloon Loans provide for equal monthly payments, consisting of principal
and interest, generally based on a 30- year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
Limited Assets. Owners of Securities of each Series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such Series (which assets may be subject to
release from such pledge prior to payment in full of the Securities), for the
payment of principal of, and interest on, that Series of Securities. If the
assets comprising the Trust are insufficient to make payments on such
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Securities, 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 Securities of a Series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Securities of classes having lower priority in payment. In addition, due
to the priority of payments and the allocation of losses, defaults experienced
on the assets comprising a Trust may have a disproportionate effect on a
specified class or classes within such Series.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of such Series, a Mortgage Pool Insurance
Policy, a Financial Guaranty Insurance Policy, a Special Hazard Insurance
Policy, a bankruptcy bond, one or more Reserve Funds, other insurance,
guaranties and similar instruments and agreements, or any combination thereof.
See "Credit Enhancement" herein. Regardless of the Credit Enhancement provided,
the amount of coverage may be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancement may provide only very limited coverage as
to certain types of losses and may provide no coverage as to certain other types
of losses. The Trustee or the Indenture Trustee, as applicable, may be permitted
to reduce, terminate or substitute all or a portion of the Credit Enhancement
for any Series of Securities, if the applicable rating agencies indicate that
the then-current rating thereof will not be adversely affected.
Original Issue Discount. All the Compound Interest Securities and
Stripped Securities that are entitled only to interest distributions will be,
and certain of the other Securities may be, issued with original issue discount
for federal income tax purposes. An Owner of a Security issued with original
issue discount will be required to include original issue discount in ordinary
gross income for federal income tax purposes as it accrues, in advance of
receipt of the cash attributable to such income. Accrued but unpaid interest on
such Securities generally will be treated as original issue discount for this
purpose. Moreover, the calculation of original issue discount on REMIC
Securities (as defined herein) is subject to uncertainties because of the lack
of guidance from the Internal Revenue Service under applicable statutory
provisions. See "Federal Income Tax Consequences - REMIC Securities - Taxation
of Regular Securities - Variable Rate Regular Securities," and "- Non-REMIC
Securities - Standard Securities," "- Non-REMIC Securities - Premium and
Discount" and "- Non-REMIC Securities - Stripped Securities" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Securities may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Securities may be reduced to the extent that some investors are
unwilling to hold Securities in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Securities may be limited due
to lack of a physical certificate. Beneficial Owners of Book Entry Securities
may, in certain cases, experience delay in the receipt of payments of principal
and interest because such payments will be forwarded by the Trustee to the
Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Securities are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Securities may be impaired.
The Status of the Mortgage Assets in the Event of Bankruptcy of the
Seller. The Seller and the Depositor intend that the transfers of the Mortgage
Assets from the Seller to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, the Seller were to become a debtor under the federal
bankruptcy code, it is possible that a creditor, trustee-in-bankruptcy or
receiver of the Seller may argue that the sale thereof by the Seller is a pledge
rather than a sale. This position, if argued or accepted by a court, could
result in a delay in or reduction of distributions on the related Securities.
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Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior
(i.e., second, third, etc.) liens are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, a
decline in the residential real estate market would adversely affect the
position of the related Trust as a junior beneficiary or junior mortgagee before
having such an effect on the position of the related senior beneficiaries or
senior mortgagees. A rise in interest rates over a period of time, the general
condition of a Mortgaged Property and other factors may also have the effect of
reducing the value of the Mortgaged Property from the value at the time the
junior lien Mortgage Loan was originated and, as a result, may reduce the
likelihood that, in the event of a default by the borrower, liquidation or other
proceeds will be sufficient to satisfy the junior lien Mortgage Loan after
satisfaction of any senior liens and the payment of any liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loans at
the time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
State and Federal Regulations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures and require
licensing of the Seller and the Servicer. In addition, most states have other
laws, public policies and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the origination, servicing and collection of the Mortgage Loans. See
"Certain Legal Aspects of the Mortgage Assets" herein.
The Mortgage Loans may also be subject to federal laws, including: (i)
the Truth in Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act, in the extension of credit;
(iii) the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to borrowers regarding the
settlement and servicing of the Mortgage Loans; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience; and (v) the Federal Trade Commission Preservation
of Consumer's Claims and Defense Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act amended the Truth in Lending Act, which in turn led to certain
additional provisions being added to Regulation Z, the implementing regulation
of the Truth in Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates on high up-front fees and changes. In general,
mortgage loans within the purview of the Riegle Act have annual percentage rates
over 10% greater than the yield on Treasury Securities of comparable maturity
and/or fees and points which exceed the greater of 8% of the total loan amount
or $400. The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. The provisions can impose
specific statutory liabilities upon creditors who fail to comply with their
provisions and may affect the enforceability of the related loans. In addition,
any assignee of the creditor would generally be subject to all claims and
defenses that the consumer could assert against the creditor, including, without
limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer to collect all or part of the
principal of or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid
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and, in addition, could subject the Servicer to damages and administrative
sanctions. If the Servicer is unable to collect all or part of the principal or
interest on any Mortgage Loans because of a violation of the aforementioned
laws, public policies or general principles of equity, distributions or payments
to Owners of realized proceeds of the assets in the related Trust may be
delayed, or such proceeds may not be sufficient to repay all amounts owed to
Owners. Furthermore, depending upon whether damages and sanctions are assessed
against the Servicer, such violations may have a material impact upon the
financial ability of the Servicer to continue to act in such capacity or the
ability of the Depositor or the Issuer to withdraw or replace Mortgage Loans if
such violation breaches a representation or warranty contained in the related
Pooling and Servicing Agreement, Sale and Servicing Agreement or Indenture, as
applicable.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
related Servicer to collect full amounts of interest on certain of the Mortgage
Loans. In addition, the Relief Act imposes limitations that would impair the
ability of the related Servicer to foreclose on an affected Mortgage Loan during
the Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
Limited Nature of Ratings. It is a condition to the issuance of the
Securities that each class of offered Securities be rated in one of the four
highest rating categories by one or more of Moody's, Standard & Poor's DCR or
Fitch. See "Summary of Prospectus - Ratings" herein. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to maintain the rating on any
Security, and, accordingly, there can be no assurance that the ratings assigned
to any class of Securities on the date on which such Securities are initially
issued will not be lowered or withdrawn by a Rating Agency at any time
thereafter. In the event any rating is revised or withdrawn, the liquidity of
the related Securities may be adversely affected. Issuance of any of the
Securities in book-entry form may reduce the liquidity of such Securities in the
secondary trading market because investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates. The rating of
Securities credit enhanced through external credit enhancement such as a letter
of credit, financial guaranty insurance policy or mortgage pool insurance will
depend primarily on the creditworthiness of the issuer of such external credit
enhancement device (a "Credit Enhancer"). Any reduction in the rating assigned
to the claims-paying ability of the related Credit Enhancer below the rating
initially given to the related Securities would likely result in a reduction in
the rating of the Securities. The rating of Securities credit enhanced through
subordination or reserve amounts will depend on the actual performance of the
related Mortgage Loans, and a reduction in such rating could occur if defaults
and losses on the related Mortgage Loans exceed the rate assumed in determining
the original level of credit enhancement. Reduction of a rating would adversely
affect the market value and possibly the liquidity of the related Securities.
See "Ratings" in the Prospectus Supplement.
Funds Available for Redemptions at the Request of Note Owners. With
respect to any Series of Notes for which the related Prospectus Supplement
provides for redemptions of such Notes at the request of Note Owners, there can
be no assurance that amounts available for such redemptions for such Notes will
be sufficient to permit such Notes to be redeemed within a reasonable time after
redemption is requested, for reasons including the following:
(i) Scheduled principal payments on the related Mortgage Loans
generally will be minimal in the early years and will increase in the
later years of such Mortgage Loans. As a result, funds available to be
applied to redemptions at the request of Note Owners, may be expected
to be limited in the early years and to increase during the later years
of each Series. Accordingly, the availability of funds for
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redemptions of Notes of any Series at the request of Note Owners will
depend largely upon the rates of prepayment of the related Mortgage
Loans.
(ii) Prepayments of principal on Mortgage Loans are less
likely to occur during periods of higher interest rates when it is more
likely that requests for redemption by Note Owners will be made. During
periods in which prevailing interest rates are higher than the interest
rate paid on Notes that may be redeemed at the request of Note Owners,
greater numbers of such Notes are expected to be tendered for
redemption in order to take advantage of the higher interest rates
payable on other investments then available. During such periods, there
will likely also be a reduction in the rate of prepayments on the
related Mortgage Loans, thus limiting the funds available to satisfy
requested redemption by Note Owners.
(iii) As specified in the related Prospectus Supplement,
certain Note Owners, such as personal representatives of deceased Note
Owners, may have certain priorities as to redemption at the request of
Note Owners.
DESCRIPTION OF THE SECURITIES
Each Trust will be created pursuant to an Agreement entered into among
the Depositor, the Trustee or Indenture Trustee, the Owner Trustee, if any, the
Master Servicer, if any, and the Servicer. The provisions of each Agreement will
vary depending upon the nature of the Securities to be issued thereunder and the
nature of the related Trust. Securities which represent beneficial interests in
the Trust will be issued pursuant to the Pooling and Servicing Agreement similar
to the form filed as an Exhibit to the Registration Statement of which this
Prospectus is a part. Securities which represent debt obligations of the Trust
will be issued pursuant to an Indenture between the Trust and the Indenture
Trustee. The following summaries and the summaries set forth under "The Pooling
and Servicing Agreement" and "The Indenture" describe certain provisions
relating to each Series of Securities. The Prospectus Supplement for a Series of
Securities will describe the specific provisions relating to such Series. The
Depositor will provide Owners of Securities, without charge, on written request
a copy of the Pooling and Servicing Agreement or the Indenture and the Trust
Agreement, as applicable, for the related Series. Requests should be addressed
to IMC Securities, Inc., 5901 East Fowler Avenue, Tampa, Florida 33617-2362. The
Pooling and Servicing Agreement or the Indenture and the Trust Agreement, as
applicable, relating to a Series of Securities will be filed with the Securities
and Exchange Commission within 15 days after the date of issuance of such Series
of Securities (the "Delivery Date").
The Securities of a Series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Securities and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The Securities
will not represent obligations of the Depositor, the Trustee or the Indenture
Trustee, the Owner Trustee, if any, the Master Servicer, if any, any Servicer or
any affiliate thereof and will not be guaranteed by any governmental agency. See
"The Trusts" herein.
The Mortgage Assets relating to a Series of Securities will not be
insured or guaranteed by any governmental entity and, to the extent that
delinquent payments on or losses in respect of defaulted Mortgage Assets, are
not advanced or paid from any applicable Credit Enhancement, such delinquencies
may result in delays in the distribution of payments on, or losses allocated to
one or more classes of Securities of such Series.
General
The Securities of each Series will be issued either in book entry form
or in fully registered form. The Securities of a given Series will evidence
undivided beneficial interests in the assets of the related Trust specified in
the related Prospectus Supplement. The Notes of a given Series will represent
non-recourse obligations of the related Issuer, secured by the assets in the
related Trust, and the proceeds of such assets will be in the sole source of
payments on such Notes. The minimum original denomination of each class of
Securities will be specified in
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the related Prospectus Supplement. The original "Security Principal Balance" of
each Security will equal the aggregate distributions or payments allocable to
principal to which such Security is entitled and distributions allocable to
interest on each Security that is not entitled to distributions allocable to
principal will be calculated based on the "Notional Principal Balance" of such
Security. The Notional Principal Balance of a Security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
Except as described below under "Book Entry Registration" with respect
to Book Entry Securities, the Securities of each Series will be transferable and
exchangeable on a "Security Register" to be maintained at the corporate trust
office or such other office or agency maintained for such purposes by the
Trustee or the Indenture Trustee, as applicable. The Trustee or the Indenture
Trustee, as applicable, will be appointed initially as the "Security Registrar"
and no service charge will be made for any registration of transfer or exchange
of Securities, but payment of a sum sufficient to cover any tax or other
governmental charge may be required.
Under current law the purchase and holding of certain classes of
Securities may result in "prohibited transactions" within the meaning of ERISA
and the Code. See "ERISA Considerations" herein and in the related Prospectus
Supplement. Transfer of Securities of such a class will not be registered unless
the transferee (i) executes a representation letter stating that it is not, and
is not purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the Trustee or the Indenture
Trustee and the Depositor that the purchase of Securities of such a class by or
on behalf of such plan, account or arrangement is permissible under applicable
law and will not subject the Trustee or the Indenture Trustee, the Servicer or
the Depositor to any obligation or liability in addition to those undertaken in
the Pooling and Servicing Agreement or the Indenture, as applicable.
As to each Series of Certificates, one or more elections may be made to
treat the related Trust or designated portions thereof as a REMIC for federal
income tax purposes. The related Prospectus Supplement will specify whether a
REMIC election is to be made. Alternatively, the Agreement for a Series may
provide that a REMIC election may be made at the discretion of the Depositor or
the Servicer and may only be made if certain conditions are satisfied. See
"Federal Income Tax Considerations" herein. As to any such Series, the terms and
provisions applicable to the making of a REMIC election, as well as any material
federal income tax consequences to Owners of Certificates not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the "residual interests" in the related REMIC, as
defined in the Code. All other classes of Securities in such a Series will
constitute "regular interests" in the related REMIC, as defined in the Code. As
to each Series with respect to which a REMIC election is to be made, the
Servicer, the Trustee, an Owner of Residual Securities or another person as
specified in the related Prospectus Supplement will be obligated to take all
actions required in order to comply with applicable laws and regulations and
will be obligated to pay any prohibited transaction taxes. The person so
specified will be entitled to reimbursement for any such payment.
Classes of Securities
Each Series of Securities will be issued in one or more classes which
will evidence the beneficial ownership in the assets of the Trust that are
allocable to (i) principal of such class of Securities and (ii) interest on such
Securities. If specified in the Prospectus Supplement, one or more classes of a
Series of Securities may evidence beneficial ownership interests in separate
groups of assets included in the related Trust.
The Securities will have an aggregate original Security Principal
Balance equal to or less than 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 or
paid, as specified in the related Prospectus Supplement, 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
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in the Prospectus Supplement. The original Security Principal Balance (or
Notional Principal Balance) of the Securities of a Series and the interest rate
on the classes of such Securities will be determined in the manner specified in
the Prospectus Supplement.
Each class of Securities that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) by reference to an
index, or (c) otherwise (each, a "Security Interest Rate"). One or more classes
of Securities may provide for interest that accrues but is not currently payable
("Compound Interest Securities"). With respect to any class of Compound Interest
Securities, any interest that has accrued but is not paid on a given Payment
Date will be added to the aggregate Security Principal Balance of such class of
Securities on that Payment Date.
A Series of Securities may include one or more classes entitled only to
distributions or payments (i) allocable to interest, (ii) allocable to principal
(and allocable as between scheduled payments of principal and Principal
Prepayments, as defined below), or (iii) allocable to both principal (and
allocable as between scheduled payments of principal and Principal Prepayments)
and interest. A Series of Securities may consist of one or more classes as to
which distributions or payments will be allocated (i) on the basis of
collections from designated portions of the assets of the Trust, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A Series of Securities may include one or more Classes of Scheduled
Amortization Securities and Companion Securities. "Scheduled Amortization
Securities" are Securities with respect to which payments of principal are to be
made in specified amounts on specified Payment Dates, to the extent of funds
available on such Payment Date. "Companion Securities" are Securities which
receive payments of all or a portion of any funds available on a given Payment
Date which are in excess of amounts required to be applied to payments on
Scheduled Amortization Securities on such Payment Date. Because of the manner of
application of payments of principal to Companion Securities, the weighted
average lives of Companion Securities of a Series may be expected to be more
sensitive to the actual rate of prepayments on the Mortgage Assets in the
related Trust than will the Scheduled Amortization Securities of such Series.
One or more Series of Securities may constitute Series of "Special
Allocation Securities", which may include Senior Securities, Subordinated
Securities, Priority Securities and Non-Priority Securities. As specified in the
related Prospectus Supplement for a Series of Special Allocation Securities, the
timing and/or priority of payments of principal and/or interest may favor one or
more classes of Securities over one or more other classes of Securities. Such
timing and/or priority may be modified or reordered upon the occurrence of one
or more specified events. Losses on Trust assets for such Series may be
disproportionately borne by one or more classes of such Series, and the proceeds
and distributions from such assets may be applied to the payment in full of one
or more classes within such Series before the balance, if any, of such proceeds
are applied to one or more other classes within such Series. For example,
Special Allocation Securities in a Series may be comprised of one or more
classes of Senior Securities having a priority in right to distributions of
principal and interest over one or more classes of Subordinated Securities, as a
form of Credit Enhancement. See "Credit Enhancement Subordination" herein.
Typically, the Subordinated Securities will carry a rating by the rating
agencies lower than that of the Senior Securities. In addition, one or more
classes of Securities ("Priority Securities") may be entitled to a priority of
distributions of principal or interest from assets in the Trust over another
class of Securities ("Non-Priority Securities"), but only after the exhaustion
of other Credit Enhancement applicable to such Series. The Priority Securities
and Non-Priority Securities nonetheless may be within the same rating category.
Distributions of Principal and Interest
General. Distributions of principal and interest will be made to the
extent of funds available therefor, on the dates specified in the Prospectus
Supplement (each, a "Payment Date") to the persons in whose names the Securities
are registered (the "Owners") at the close of business on the dates specified in
the Prospectus Supplement (each, a "Record Date"). With respect to Securities
other than Book Entry Securities, distributions
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will be made by check or money order mailed to the person entitled thereto at
the address appearing in the Security Register or, if specified in the
Prospectus Supplement, in the case of Securities that are of a certain minimum
denomination as specified in the Prospectus Supplement, upon written request by
the Owner of a Security, by wire transfer or by such other means as are agreed
upon with the person entitled thereto; provided, however, that the final
distribution in retirement of the Securities (other than Book Entry Securities)
will be made only upon presentation and surrender of the Securities at the
office or agency of the Trustee specified in the notice of such final
distribution. With respect to Book Entry Securities, such payments will be made
as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds in
a separate account established and maintained for the benefit of the Securities
of the related Series (the "Security Account" with respect to such Series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments specified herein and in the Prospectus
Supplement, and all income or other gain from such investments will be deposited
in the related Security Account and may be available to make payments on the
Securities of the applicable Series on the next succeeding Payment Date or pay
after amounts owed by the Trust.
Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement relating to a given Series of Securities, each Class of Certificates
may bear interests at a different Security Interest Rate, which may be fixed or
adjustable. All of the Notes of a given Series will bear interest at the same
rate, which may be fixed or adjustable (the "Note Rate"). Interest will accrue
on the aggregate Security Principal Balance (or, in the case of Securities
entitled only to distributions allocable to interest, the aggregate Notional
Principal Balance (as defined below)) of each class of Securities entitled to
interest from the date, at the applicable Security Interest Rate and for the
periods (each, an "Interest Accrual Period") specified in the Prospectus
Supplement. The aggregate Security Principal Balance of any class of Securities
entitled to distributions of principal will be the aggregate original Security
Principal Balance of such class of Securities, reduced by all distributions
allocable to principal, and, in the case of Compound Interest Securities,
increased by all interest accrued but not then distributable on such Compound
Interest Securities. With respect to a class of Securities entitled only to
distributions allocable to interest, such interest will accrue on a notional
principal balance (the "Notional Principal Balance") of such class, computed
solely for purposes of determining the amount of interest accrued and payable on
such class of Securities.
To the extent funds are available therefor, interest accrued during
each Interest Accrual Period on each class of Securities entitled to interest
(other than a class of Compound Interest Securities) will be distributable on
the Payment Dates specified in the Prospectus Supplement until the aggregate
Security Principal Balance of the Securities of such class has been distributed
in full or, in the case of Securities entitled only to distributions allocable
to interest, until the aggregate Notional Principal Balance of such Securities
is reduced to zero or for the period of time designated in the Prospectus
Supplement. Distributions of interest on each class of Compound Interest
Securities will commence only after the occurrence of the events specified in
the Prospectus Supplement and, prior to such time, the aggregate Security
Principal Balance (or Notional Principal Balance) of such class of Compound
Interest Securities, will increase on each Payment Date by the amount of
interest that accrued on such class of Compound Interest Securities during the
preceding Interest Accrual Period but that was not required to be distributed to
such class on such Payment Date. Any such class of Compound Interest Securities
will thereafter accrue interest on its outstanding Security Principal Balance
(or Notional Principal Balance) as so adjusted.
Distributions of Principal. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Securities on
each Payment Date will be calculated and the manner in which such amount will be
allocated among the classes of Securities entitled to distributions of
principal.
One or more classes of Securities may be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments"). Any such allocation may have the effect
of accelerating the amortization of such Securities relative to the interests
evidenced by the other Securities.
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Unscheduled Distributions. The Securities of a Series may be subject to
receipt of distributions before the next scheduled Payment Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, such unscheduled distributions will be made on the
Securities of a Series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Security
Account for such Series on the next related Payment Date, together with, if
applicable, any amounts available to be withdrawn from any related Reserve Fund
or from any other Credit Enhancement provided for such Series, may be
insufficient to make required distributions on the Securities on such Payment
Date. The amount of any such unscheduled distribution that is allocable to
principal will not exceed the amount that would otherwise have been required to
be distributed as principal on the Securities on the next Payment Date and will
include interest at the applicable Security Interest Rate (if any) on the amount
of the unscheduled distribution allocable to principal for the period and to the
date specified in the Prospectus Supplement.
All distributions allocable to principal in any unscheduled
distribution will be made in the same priority and manner as distributions of
principal on the Securities would have been made on the next Payment Date except
as otherwise stated in the related Prospectus Supplement, and, with respect to
Securities of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the Trustee or the Indenture Trustee prior to the date of such distribution.
Book Entry Registration
Securities may be issued as Book Entry Securities and held in the name
of a Clearing Agency registered with the Securities and Exchange Commission or
its nominee. Transfers and pledges of Book Entry Securities may be made only
through entries on the books of the Clearing Agency in the name of Clearing
Agency Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Securities.
Purchasers and other Beneficial Owners may not hold Book Entry
Securities directly but may hold, transfer or pledge their ownership interest in
the Securities only through Clearing Agency Participants. Furthermore,
Beneficial Owners will receive all payments of principal and interest with
respect to the Securities and, if applicable, may request redemption of
Securities, only through the Clearing Agency and the Clearing Agency
Participants. Beneficial Owners will not be registered Owners of Securities or
be entitled to receive definitive certificates representing their ownership
interest in the Securities except under the limited circumstances, if any,
described in the related Prospectus Supplement. See "Risk Factors - Book Entry
Registration" herein.
If Securities of a Series are issued as Book Entry Securities, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Securities of such Series, and to receive and transmit
requests for redemption with respect to such Securities. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such Book
Entry Securities will be similarly required to make book entry transfers and
receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Securities and will not possess physical certificates, a
method will be provided whereby Beneficial Owners may receive payments, transfer
their interests, submit redemption requests and receive the reports provided
herein.
List of Owners of Securities
Upon written request of a specified number or percentage interests of
Owners of Securities of record of a Series of Securities for purposes of
communicating with other Owners of Securities with respect to their rights as
Owners of Securities, the Trustee or the Indenture Trustee will afford such
Owners access during business hours
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to the most recent list of Owners of Securities of that Series held by the
Trustee or the Indenture Trustee. With respect to Book Entry Securities, the
only named Owner on the Security Register will be the Clearing Agency.
The Pooling and Servicing Agreement or the Indenture, as applicable,
will not provide for the holding of any annual or other meetings of Owners of
Securities.
THE TRUSTS
The Trust for a Series of Securities will consist of: (i) the Mortgage
Assets (subject, if specified in the related Prospectus Supplement, to certain
exclusions, such as a portion of the mortgage interest rate being retained by
the Seller and not sold to the Trust) received on and after the related Cut-Off
Date; (ii) all payments (subject, if specified in the related Prospectus
Supplement, to certain exclusions) in respect of such Mortgage Assets, which may
be adjusted, to the extent specified in the related Prospectus Supplement, in
the case of interest payments on Mortgage Assets, to the Security Interest Rate;
(iii) if specified in the Prospectus Supplement, reinvestment income on such
payments; (iv) with respect to a Trust that includes Mortgage Loans all property
acquired by foreclosure or deed in lieu of foreclosure with respect to any such
Mortgage Loan; (v) certain rights of the Trustee or the Indenture Trustee, the
Depositor and the Servicer under any insurance policies, hazard insurance or
surety bonds required to be maintained in respect of the related Mortgage
Assets; and (vi) if so specified in the Prospectus Supplement, one or more forms
of Credit Enhancement.
The Securities of each Series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information respecting
the Mortgage Assets is not known at the time the related Series of Securities
initially are offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific information
will be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Securities. A copy of the Pooling and Servicing Agreement or the Indenture, the
Sale and Servicing Agreement and the Trust Agreement, as applicable, with
respect to each Series of Securities will be attached to the Form 8-K and will
be available for inspection at the corporate trust office of the Trustee or the
Indenture Trustee specified in the related Prospectus Supplement. A schedule of
the Mortgage Assets relating to each Series of Securities, will be attached to
the related Pooling and Servicing Agreement or Sale and Servicing Agreement, as
applicable delivered to the Trustee or the Indenture Trustee upon delivery of
such Securities.
Mortgage Loans
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans will
be within the broad classifications of single family mortgage loans, defined
generally as loans on residences containing one to four dwelling units. If
specified in the Prospectus Supplement, the Mortgage Loans may include
cooperative apartment loans ("Cooperative Loans") secured by security interests
in shares issued by Cooperatives and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings, or the Mortgage Loans may be secured by junior
liens on the related mortgaged properties, including home improvement retail
installment contracts. The Mortgaged Properties securing the Mortgage Loans may
include investment properties and vacation and second homes. Each Mortgage Loan
will be selected by the Depositor for inclusion in the Trust from among those
acquired by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans.
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The Mortgage Loans will be "conventional" mortgage loans, that is they
will not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a Series of Securities
will be payable either on the first day of each month or on different scheduled
days throughout each month, and the interest will be calculated either on a
simple-interest or accrual method as described in the related Prospectus
Supplement. When a full principal amount is paid on a Mortgage Loan during a
month, the mortgagor is generally charged interest only on the days of the month
actually elapsed up to the date of such prepayment, at a daily interest rate
that is applied to the principal amount of the Mortgage Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for a
Series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for a
period of time or under certain circumstances and followed by an
adjustable rate, a rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
mortgage rate for a period of time or for the life of the Mortgage Loan
with the amount of any difference contributed from funds supplied by
the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an amortization schedule that is longer than the original
term to maturity or on an interest rate that is different from the
interest rate on the Mortgage Loan or may not be amortized during all
or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity. Principal may include
interest that has been deferred and added to the principal balance of
the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
"due-on-sale" clauses which permit the mortgagee to demand payment of
the entire Mortgage Loan in connection with the sale or certain
transfers of the related mortgaged property. Other Mortgage Loans may
be assumable by persons meeting the then applicable underwriting
standards of the Servicer, or as may be required by any applicable
government program.
(e) Another type of mortgage loan described in the Prospectus
Supplement.
With respect to a Series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due or
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paid, as specified in the related Prospectus Supplement, 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 Fannie Mae or GNMA.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/ or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with
characteristics similar to the classes of Securities described herein.
Distributions in respect of the MBS will be made by the MBS Servicer or the MBS
Trustee on the dates specified in the related Prospectus Supplement. The MBS
Issuer or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Securities under "Credit Enhancement" may have
been provided with respect to the MBS. The type, characteristics and amount of
such credit enhancement, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a Series of Securities that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or the
formula for determining such rates, (iv) the payment characteristics
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of the MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vi) a description of the credit support, if any, (vii) the circumstances under
which the stated underlying mortgage loans, or the MBS themselves may be
purchased prior to their maturity, (viii) the terms on which mortgage loans may
be substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
Other Mortgage Securities
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, single-family mortgage loans on real property or mortgage-backed
securities, including residual interests in issuances of collateralized mortgage
obligations or mortgage pass-through certificates. Any Other Mortgage Securities
that are privately placed securities will not be included in a Trust until such
time as such privately placed securities would be freely transferrable pursuant
to Rule 144A of the Securities Act of 1933, as amended. Further (i) such
privately placed securities will have been acquired in the secondary market and
not pursuant to an initial offering thereof and (ii) the underlying issuer of
such securities will not be affiliated with the Depositor and will not have an
interest in the Trust. The Prospectus Supplement for a Series of Securities will
describe any Other Mortgage Securities to be included in the Trust for such
Series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with
respect to one or more classes of a Series of Securities or with respect to the
assets in the related Trust. Credit Enhancement may be in the form of (i) the
subordination of one or more classes of the Securities of such Series, (ii) the
establishment of one or more Reserve Funds, (iii) the use of a cross-support
feature, use of a Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy, bankruptcy bond, or another form of Credit Enhancement described in the
related Prospectus Supplement, or (iv) any combination of the foregoing. Credit
Enhancement may not provide protection against all risks of loss and may not
guarantee repayment of the entire principal balance of the Securities and
interest thereon. If losses occur which exceed the amount covered by Credit
Enhancement or which are not covered by the Credit Enhancement, Owners of
Securities will bear their allocable share of deficiencies.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or Series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. Such description will include financial information on
the Financial Guaranty Insurer. In addition, the audited financial statements of
a Financial Guaranty Insurer and an auditors consent to use such financial
statements will be filed with the Securities and Exchange Commission on Form 8-K
or will be incorporated by reference to financial statements already on file
with the Securities and Exchange Commission.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Owners that an amount equal to each full and completed insured
payment will be received by an agent of the Trustee or the Indenture Trustee, as
applicable (an "Insurance Paying Agent"), on behalf of Owners, for distribution
by the Trustee or the Indenture Trustee, as applicable, to each Owner. The
"insured payment" will be defined in the related Prospectus Supplement, and will
generally equal the full amount of the distributions of principal and interest
to which Owners are entitled under the related Agreement plus any other amounts
specified therein or in the related Prospectus Supplement (the "Insured
Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
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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 Securities on any specified date.
Subject to the terms of the related Pooling and Servicing Agreement or
Sale and Servicing Agreement, as applicable, the Financial Guaranty Insurer may
be subrogated to the rights of Owners to receive payments under the Securities
to the extent of any payment by such Financial Guaranty Insurer under the
related Financial Guaranty Insurance Policy.
Subordination. Distributions in respect of scheduled principal,
interest or any combination thereof otherwise payable to one or more classes of
Securities of such Series (the "Subordinated Securities") may be paid to one or
more other classes of such Series (the "Senior Securities") under the
circumstances and to the extent provided in the Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Mortgage Assets and losses on defaulted Mortgage Assets will be borne
first by the various classes of Subordinated Securities and thereafter by the
various classes of Senior Securities, in each case under the circumstances and
subject to the limitations specified in the Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Mortgage Assets over the
lives of the Securities or at any time, the aggregate losses in respect of
defaulted Mortgage Assets which must be borne by the Subordinated Securities by
virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Securities that will be distributable to
Owners of Senior Securities on any Payment Date may be limited as specified in
the Prospectus Supplement. If aggregate distributions in respect of delinquent
payments on the Mortgage Assets or aggregate losses in respect of such Mortgage
Assets were to exceed the total amounts payable and available for distribution
to Owners of Subordinated Securities or, if applicable, were to exceed the
specified maximum amount, Owners of Senior Securities could experience losses on
the Securities.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Securities on any Payment Date
may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Payment Date, on each Payment Date for specified
periods, or on each Payment Date until the balance in the Reserve Fund has
reached a specified amount and, following payments from the Reserve Fund to
Owners of Senior Securities or otherwise, thereafter to the extent necessary to
restore the balance in the Reserve Fund to required levels, in each case as
specified in the Prospectus Supplement. If so specified in the Prospectus
Supplement, amounts on deposit in the Reserve Fund may be released to the
Depositor or the Owners of any class of Securities at the times and under the
circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of
Subordinate Securities and Subordinated Securities may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement. As
between classes of Subordinated Securities, payments with respect to Senior
Securities on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Securities relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Securities. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the
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aggregate principal balance of the related Mortgage Loans, or a group thereof,
over the principal balance of the related class of Securities. Such acceleration
may continue for the life of the related Securities, or may be limited. In the
case of limited acceleration, once the required level of overcollateralization
is reached, and subject to certain provisions specified in the related
Prospectus Supplement, such limited acceleration feature may cease, unless
necessary to maintain the required level of overcollateralization.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
Series may be evidenced by separate classes of related Series of Securities. In
such case, Credit Enhancement may be provided by a cross-support feature which
may require that distributions be made with respect to Securities evidencing
beneficial ownership of one or more asset groups prior to distributions to
Subordinated Securities evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of Credit Enhancement may apply concurrently to two or more
separate Trusts for a separate Series of Securities. If applicable, the
Prospectus Supplement will identify the Trusts to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trusts.
Pool Insurance. If specified in the related Prospectus Supplement, one
or more mortgage pool insurance policies (each, a "Mortgage Pool Insurance
Policy") will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the
limitations described below and in the Prospectus Supplement, cover loss by
reason of default in payments on such Mortgage Loans up to the amounts specified
in the Prospectus Supplement or report on Form 8-K and for the periods specified
in the Prospectus Supplement. The Trustee or the Indenture Trustee under the
related Pooling and Servicing Agreement or Sale and Servicing Agreement, as
applicable, will agree to use its best reasonable efforts to cause to be
maintained in effect any such Mortgage Pool Insurance Policy and to supervise
the filing of claims thereunder to the issuer of such Mortgage Pool Insurance
Policy (the "Pool Insurer") for the period of time specified in the related
Prospectus Supplement. A Mortgage Pool Insurance Policy, however, is not a
blanket policy against loss, because claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent set forth in such policy as described in the
related Prospectus Supplement. The Mortgage Pool Insurance Policies, if any,
will not cover loss due to a failure to pay or denial of a claim under a primary
mortgage insurance policy, irrespective of the reason therefor. The related
Prospectus Supplement will describe the terms of any applicable Mortgage Pool
Insurance Policy and will set forth certain information with respect to the
related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may not insure against
loss sustained by reason of a default arising from, among other things, (i)
fraud or negligence in the origination or servicing of a Mortgage Loan,
including misrepresentation by the Mortgagor or persons involved in the
origination thereof or (ii) failure to construct a Mortgaged Property in
accordance with plans and specifications. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to one of the
foregoing events might result in a breach of a representation of the Seller and
in such event might give rise to an obligation on the part of the Seller to
purchase the defaulted Mortgage Loan if the breach materially and adversely
affects the interests of the Owners of the Securities and cannot be cured by the
Seller.
The original amount of coverage under any Mortgage Pool Insurance
Policy will be reduced over the life of such Securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will generally include certain expenses incurred with respect to the applicable
Mortgage Loans as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. See "Certain Legal Aspects of the Mortgage Assets
- - Foreclosure" herein. Accordingly, if aggregate net claims paid under any
Mortgage Pool Insurance Policy reach
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the original policy limit, coverage under that Mortgage Pool Insurance Policy
will be exhausted and any further losses will be borne by one or more classes of
Securities unless otherwise covered by another form of Credit Enhancement, as
specified in the Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the Mortgaged
Property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy may not
provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans - Standard Hazard Insurance", the hazard policies concerning the
Mortgage Loans typically exclude from coverage physical damage resulting from a
number of causes and even when the damage is covered, may afford recoveries
which are significantly less than the full replacement cost of such losses. Even
if special hazard insurance is applicable as specified in the Prospectus
Supplement, no coverage in respect of special hazard losses will cover all
risks, and the amount of any such coverage will be limited. See "Special Hazard
Insurance" below. As a result, certain hazard risks will not be insured against
and will therefore be borne by Owners of the Securities, unless otherwise
covered by another form of Credit Enhancement, as specified in the Prospectus
Supplement.
Special Hazard Insurance. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage) not covered by
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under flood insurance policies, if any,
covering the Mortgaged Properties, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "Servicing of Mortgage Loans - Standard Hazard Insurance." Any Special
Hazard Insurance Policy may not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the Mortgaged Property is located in a federally designated flood area),
chemical contamination and certain other risks. Aggregate claims under each
Special Hazard Insurance Policy will be limited as described in the related
Prospectus Supplement. Any Special Hazard Insurance Policy may also provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
Mortgaged Property has been kept in force and other protection and preservation
expenses have been paid.
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.
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Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the property securing the related
Mortgage Loan at an amount less than the then outstanding principal balance of
such Mortgage Loan. The amount of the secured debt could be reduced to such
value and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the property by the bankruptcy court. In
addition, certain other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including the reduction in monthly payments
required to be made by the borrower. See "Certain Legal Aspects of the Mortgage
Assets" herein. If so provided in the related Prospectus Supplement, the
Depositor will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") for proceedings with respect to borrowers under the
Bankruptcy Code. The bankruptcy bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal of and
interest on a Mortgage Loan or a reduction by such court of the principal amount
of a Mortgage Loan and will cover certain unpaid interest on the amount of such
a principal reduction from the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement. Such amount will be reduced by
payments made under such bankruptcy bond in respect of the related Mortgage
Loans and will not be restored.
If specified in the related Prospectus Supplement, other forms of
Credit Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
Reserve Funds. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date in
one or more accounts (each, a "Reserve Fund") established and maintained with
the Trustee or the Indenture Trustee, as applicable. Such cash and the principal
and interest payments on such other investments will be used to enhance the
likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust, to pay the expenses of
the Trust or for such other purposes specified in the Prospectus Supplement.
Whether or not the Depositor has any obligation to make such a deposit, certain
amounts to which the Owners of Subordinated Securities, if any, would otherwise
be entitled may instead be deposited into the Reserve Fund from time to time and
in the amounts as specified in the Prospectus Supplement. Any cash in any
Reserve Fund and the proceeds of any other instrument upon maturity will be
invested in Eligible Investments. If a letter of credit is deposited with the
Trustee or the Indenture Trustee, as applicable, such letter of credit will be
irrevocable. Any instrument deposited therein will name the Trustee or the
Indenture Trustee, as applicable, as a beneficiary and will be issued by an
entity acceptable to each rating agency that rates the Securities. Additional
information with respect to such instruments deposited in the Reserve Funds may
be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Fund for distribution with respect
to the Securities for the purposes, in the manner and at the times specified in
the Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Securities, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Securities are entitled to receive amounts
deposited in various accounts held by the Trustee or the Indenture Trustee, as
applicable, upon the terms specified in the Prospectus Supplement. Such
arrangements
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may be in lieu of any obligation of the Servicer or the Seller to advance
delinquent installments in respect of the Mortgage Loans. See "Servicing of
Mortgage Loans - Advances" herein.
SERVICING OF MORTGAGE LOANS
With respect to each Series of Securities, the related Mortgage Loans
will be serviced by a sole servicer or by a master servicer with various
sub-servicers pursuant to, or as provided for in, the related Pooling and
Servicing Agreement or any Sale and Servicing Agreement (a "Sale and Servicing
Agreement") entered into among the Seller, the Servicer, the Depositor, the
Issuer and the Indenture Trustee. The Prospectus Supplement for each Series will
specify the servicer and the master servicer, if any, for such Series.
The Depositor will require that the Servicer have adequate servicing
experience, where appropriate, and financial stability, generally including a
net worth requirement of no less than $10,000,000 (to be specified in the
related Pooling and Servicing Agreement or Sale and Servicing Agreement) as well
as satisfaction of certain other criteria. The Servicer is required to be a
Fannie Mae-approved servicer of conventional mortgage loans.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee or the Indenture
Trustee, as applicable, maintenance of applicable standard hazard insurance or
primary mortgage insurance policies, attempting to cure delinquencies,
supervising foreclosures, management of Mortgaged Properties under certain
circumstances, and maintaining accounting records relating to the Mortgage Loans
and, if specified in the related Prospectus Supplement, maintenance of escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance, and other
items required to be paid by the Mortgagor pursuant to the Mortgage Loan. Each
Servicer will also be obligated to make advances in respect of delinquent
installments on Mortgage Loans as described more fully under " - Payments on
Mortgage Loans" and " - Advances" below and in respect of certain taxes and
insurance premiums not paid on a timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified
in the related Prospectus Supplement. Each Servicer will also generally be
entitled to collect and retain, as part of its servicing compensation, late
payment charges and assumption underwriting fees. Each Servicer will be
reimbursed from proceeds of one or more of the insurance policies described
herein ("Insurance Proceeds") or from proceeds received in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds") for certain
expenditures pursuant to the related Pooling and Servicing Agreement or Sale and
Servicing Agreement, as applicable. See " - Advances" and " - Servicing
Compensation and Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Pooling and Servicing Agreement or the Sale and Servicing
Agreement, as applicable, for the entire term of such Mortgage Loan unless such
Pooling and Servicing Agreement or Sale and Servicing Agreement is earlier
terminated. Upon termination, a replacement for the Servicer will be appointed.
Payments on Mortgage Loans
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial Account
must be an account the deposits in which are fully insured by either the Federal
Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of the
coverage provided by such insurance, continuously secured by certain obligations
issued or guaranteed by the United States of America. If at any time the amount
on deposit in such Custodial Account shall exceed the amount so insured or
secured, the applicable Servicer must remit to the Trustee or the Indenture
Trustee, as applicable, the amount on deposit in such Custodial Account which
exceeds the amount so insured or secured, less any amount such Servicer may
retain for its own account pursuant to its Sale and Servicing Agreement.
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Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Securities.
Each Servicer is required to deposit into its Custodial Account on a
daily basis all amounts in respect of each Mortgage Loan received by such
Servicer, with interest adjusted to a rate (the "Remittance Rate") equal to the
related Mortgage Rate less the Servicer's servicing fee rate. On the day of each
month specified in the related Prospectus Supplement (the "Remittance Date"),
each Servicer of the Mortgage Loans will remit to the Trustee or the Indenture
Trustee, as applicable, all funds held in its Custodial Account with respect to
each Mortgage Loan; provided, however, that Principal Prepayments may be
remitted on the Remittance Date in the month following the month of such
prepayment. Each Servicer will be required pursuant to the terms of the related
Pooling and Servicing Agreement or Sale and Servicing Agreement and as specified
in the related Prospectus Supplement, to remit with each Principal Prepayment
interest thereon at the Remittance Rate through the last day of the month in
which such Principal Prepayment is made. Each Servicer may also be required to
advance its own funds as described below.
Advances
With respect to a delinquent Mortgage Loan, the Servicer may be
obligated (but only to the extent set forth in the related Prospectus
Supplement) to advance its own funds or funds from its Custodial Account equal
to the aggregate amount of payments of principal and interest (adjusted to the
applicable Remittance Rate) which were due on a due date and which are
delinquent as of the close of business on the business day preceding the
Remittance Date ("Monthly Advance"). Generally, such advances will be required
to be made by the Servicer unless the Servicer determines that such advances
ultimately would not be recoverable under any applicable insurance policy, from
the proceeds of liquidation of the related Mortgaged Properties, or from any
other source (any amount not so reimbursable being referred to herein as a
"Nonrecoverable Advance"). Such advance obligation generally will continue
through the month following the month of final liquidation of such Mortgage
Loan. Any Servicer funds thus advanced will be reimbursable to such Servicer out
of recoveries on the Mortgage Loans with respect to which such amounts were
advanced. Each Servicer will also be obligated to make advances with respect to
certain taxes and insurance premiums not paid by Mortgagors on a timely basis.
Funds so advanced are reimbursable to the Servicers out of recoveries on the
related Mortgage Loans. Each Servicer's right of reimbursement for any advance
will be prior to the rights of the Trust to receive any related Insurance
Proceeds or Liquidation Proceeds. Failure by a Servicer to make a required
Monthly Advance will be grounds for termination under the related Pooling and
Servicing Agreement or Sale and Servicing Agreement, as applicable.
Collection and Other Servicing Procedures
Each Servicer will service the Mortgage Loans pursuant to guidelines
established in the related Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable.
The Servicer will be responsible for making reasonable efforts to
collect all payments called for under the Mortgage Loans. The Servicer will be
obligated to follow such normal practices and procedures as it deems necessary
or advisable to realize upon a defaulted Mortgage Loan. In this regard, the
Servicer may (directly or through a local assignee) sell the property at a
foreclosure or trustee's sale, negotiate with the Mortgagor for a deed in lieu
of foreclosure or, in the event a deficiency judgment is available against the
Mortgagor or other person (see "Certain Legal Aspects of the Mortgage Assets -
Foreclosure - Anti-Deficiency Legislation and Other Limitations on Lenders" for
a description of the limited availability of deficiency judgments), foreclose
against such property and proceed for the deficiency against the appropriate
person. The amount of the ultimate net recovery (including the proceeds of any
Mortgage Pool Insurance Policy or other applicable Credit Enhancement), after
reimbursement to the Servicer of its expenses incurred in connection with the
liquidation of any such defaulted Mortgage Loan and prior unreimbursed advances
of principal and interest with respect thereto will be deposited in the Security
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Account when realized and will be distributed to Owners of Securities on the
next Payment Date following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the Trust's ability to sell and realize the value of
those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)
(2)) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Code Section 216(b)(1) is allowed a deduction for amounts
paid or accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to its tenant-stockholders
under Code Section 216(a) with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies as a cooperative housing corporation, however, the likelihood
that such a failure would be permitted to continue over a period of years
appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be restricted
by law, for any reason, from enforcing such a "due-on-sale" clause, the Servicer
may enter into an assumption and modification agreement with the person to whom
such 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.
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So long as it acts as servicer of the Mortgage Loans, the Servicer will
be required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
Primary Mortgage Insurance
Mortgage Loans that the Depositor acquires will generally not have
primary mortgage insurance. If obtained, the primary mortgage insurance policies
will not insure against certain losses which may be sustained in the event of a
personal bankruptcy of the mortgagor under a Mortgage Loan.
Standard Hazard Insurance
The Servicer will be required to cause to be maintained for each
Mortgage Loan a standard hazard insurance policy. The coverage of such policy is
required to be in an amount not less than the maximum insurable value of the
improvements securing such Mortgage Loan from time to time or the principal
balance owing on such Mortgage Loan from time to time, whichever is less. In all
events, such coverage shall be in an amount sufficient to ensure avoidance of
the applicability of the co-insurance provisions under the terms and conditions
of the applicable policy. The ability of each Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent on its being named
as an additional insured under any standard hazard insurance policy and under
any flood insurance policy referred to below, or upon the extent to which
information in this regard is furnished to such Servicer by Mortgagors. Each
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
may provide that the related Servicer may satisfy its obligation to cause hazard
insurance policies to be maintained by maintaining a blanket policy insuring
against hazard losses on the Mortgage Loans serviced by such Servicer.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. If the
property securing a Mortgage Loan is located in a federally designated flood
area, flood insurance will be required to be maintained in such amounts as would
be required by Fannie Mae 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.
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Title Insurance Policies
The Pooling and Servicing Agreements and the Sale and Servicing
Agreements will generally require that a title insurance policy be in effect on
each of the Mortgaged Properties and that such title insurance policy contain no
coverage exceptions, except customary exceptions generally accepted in the
mortgage banking industry.
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance
Policies; Other Realization Upon Defaulted Loan
Each Servicer will present claims to any primary insurer under any
related primary mortgage insurance policy and to the hazard insurer under any
related standard hazard insurance policy. All collections under any related
primary mortgage insurance policy or any related standard hazard insurance
policy (less any proceeds to be applied to the restoration or repair of the
related Mortgaged Property or to the reimbursement of Advances by the Servicer)
will be remitted to the Trustee or the Indenture Trustee, as applicable.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under any applicable Mortgage Pool Insurance Policy or any related
primary mortgage insurance policy, each Servicer may be required to expend its
own finds to restore the damaged property to the extent specified in the related
Prospectus Supplement, but only to the extent it determines such expenditures
are recoverable from Insurance Proceeds or Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the related Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable. If the proceeds of any liquidation of the Mortgaged
Property securing the defaulted Mortgage Loan are less than the Principal
Balance of the defaulted Mortgage Loan plus interest accrued thereon, a loss
will be realized on such Mortgage Loan, to the extent the applicable Credit
Enhancement is not sufficient, in the amount of such difference plus the
aggregate of expenses which are incurred by the Servicer in connection with such
proceedings and are reimbursable under the Pooling and Servicing Agreement or
the Sale and Servicing Agreement, as applicable. In such case there will be a
reduction in the value of the Mortgage Loans and Trust may be unable to recover
the full amount of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Security Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Securities.
Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be
entitled to a monthly servicing fee in the amount specified in the related
Prospectus Supplement. In addition to the primary compensation, a Servicer may
be permitted to retain all assumption underwriting fees and late payment
charges, to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and in connection with advancing delinquent payments. No loss
will be suffered on the Securities by reason of such expenses to the extent
claims for such expenses are paid directly under any applicable Mortgage Pool
Insurance Policy, a primary mortgage insurance policy, the special hazard
insurance policy or from other forms of Credit Enhancement. In the event,
however,
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that the defaulted Mortgage Loans are not covered by a Mortgage Pool Insurance
Policy, primary mortgage insurance policies, the Special Hazard Insurance Policy
or another form of Credit Enhancement, or claims are either not made or paid
under such policies or Credit Enhancement, or if coverage thereunder has ceased,
such a loss will occur to the extent that the proceeds from the liquidation of a
defaulted Mortgage Loan or Contract, after reimbursement of the Servicer's
expenses, are less than the Principal Balance of such defaulted Mortgage Loan.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement
for the related Series of Securities. Customary servicing functions with respect
to Mortgage Loans constituting the Mortgage Pool will be provided by the
Servicer directly or through one or more Sub-Servicers subject to supervision by
the Master Servicer. If the Master Servicer is not directly servicing the
Mortgage Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicer of its servicing responsibilities under the Pooling
and Servicing Agreement or the Sale and Servicing Agreement, as applicable, with
the Master Servicer, (ii) maintain a current data base with the payment
histories of each Mortgagor, (iii) review monthly servicing reports and data
relating to the Mortgage Pool for discrepancies and errors, and (iv) act as
backup Servicer during the term of the transaction unless the Servicer is
terminated or resigns in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Pooling and Servicing
Agreement or the Sale and Servicing Agreement, as applicable, for any Series for
which Mortgage Loans comprise the assets of a Trust. The Master Servicer will be
required to satisfy the standard established for the qualification of the Master
Servicer in the related Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable. The Master Servicer will be compensated for the
performance of its services and duties under each Pooling and Servicing
Agreement or Sale and Servicing Agreement as specified in the related Prospectus
Supplement.
THE POOLING AND SERVICING AGREEMENT
The following summary describes certain provisions which will be common
to each Pooling and Servicing Agreement. The summary does not purport to be
complete and is subject to the provisions of a particular Pooling and Servicing
Agreement. Material terms of a specific Pooling and Servicing Agreement will be
further described in the related Prospectus Supplement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the
Securities, the Depositor will assign the Mortgage Loans to the Trustee,
together with all principal and interest adjusted to the Remittance Rate,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Mortgage Loans on or after the Cut-Off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Securities to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Pooling and
Servicing Agreement. Such schedule may include information as to the Principal
Balance of each Mortgage Loan as of the Cut-Off Date, as well as information
respecting the Mortgage Rate, the scheduled monthly payment of principal and
interest as of the Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to
the Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not necessarily
recorded), evidence of title insurance, if obtained, and, if applicable, the
certificate of private mortgage insurance. In instances where recorded documents
cannot be delivered due to delays in connection with recording, the Depositor
may deliver copies thereof and deliver the original recorded documents promptly
upon receipt.
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With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Pooling and Servicing Agreement was
issued on the date of origination thereof and each such policy or binder
assurance is valid and remains in full force and effect or a legal opinion
concerning title or title search was obtained or conducted in connection with
the origination of the Mortgage Loans; (iii) at the date of initial issuance of
the Securities, the Seller has good title to the Mortgage Loans and the Mortgage
Loans are free of offsets, defenses or counterclaims; (iv) at the date of
initial issuance of the Securities, each Mortgage is a valid first lien on the
property securing the Mortgage Note (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions, and
restrictions, rights of way, easements and other matters of public record as of
the date of the recording of such Mortgage, such exceptions appearing of record
being acceptable to mortgage lending institutions generally in the area wherein
the property subject to the Mortgage is located or specifically reflected in the
appraisal obtained by the Depositor and (c) other matters to which like
properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by such Mortgage) and such
property is free of material damage and is in good repair or, with respect to a
junior lien Mortgage Loan, that such Mortgage is a valid junior lien Mortgage,
as the case may be and specifying the percentage of the Mortgage Loan Pool
comprised of junior lien Mortgage Loans; (v) at the date of initial issuance of
the Securities, no Mortgage Loan is 31 or more days delinquent (with such
exceptions as may be specified in the related Prospectus Supplement) and there
are no delinquent tax or assessment liens against the property covered by the
related Mortgage; (vi) at the date of initial issuance of the Securities, the
portion of each Mortgage Loan, if any, which in the circumstances set forth
below under "Servicing of Mortgage Loans - Primary Mortgage Insurance" should be
insured with a private mortgage insurer is so insured; and (vii) each Mortgage
Loan at the time it was made complied in all material respects with applicable
state and federal laws, including, with out limitation, usury, equal credit
opportunity and disclosure laws. The Depositor's rights against the Seller in
the event of a breach of its representations will be assigned to the Trustee for
the benefit of the Securities of such Series.
Assignment of Mortgage-Backed Securities and Other Mortgage Securities.
With respect to each Series, the Depositor will cause any Mortgage-Backed
Securities and Other Mortgage Securities included in the related Trust to be
registered in the name of the Trustee (directly or through a participant in a
depository). The Trustee (or its custodian) will have possession of any
certificated Mortgage-Backed Securities and Other Mortgage Securities. The
Trustee will not be in possession of or be assignee of record of any underlying
assets for a Mortgage-Backed Security or Other Mortgage Security. Each
Mortgage-Backed Security and Other Mortgage Security will be identified in a
schedule appearing as an exhibit to the related Agreement which may specify
certain information with respect to such security, including, as applicable, the
original principal amount, outstanding principal balance as of the Cut-Off Date,
annual pass-through rate or interest rate and maturity date and certain other
pertinent information 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
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if any other party obligated to deliver such document or cure such defect has
not done so and has not substituted or repurchased the affected Mortgage Loan or
Contract then the Depositor will cause the Seller, not later than the first date
designated for the deposit of payments into the Security Account (a "Deposit
Date") which is more than a specified number of days after such period, (a) if
so provided in the Prospectus Supplement to remove the affected Mortgage Loan
from the Trust and substitute one or more other Mortgage Loans therefor or (b)
repurchase the Mortgage Loan from the Trustee for a price equal to 100% of its
Principal Balance plus one month's interest thereon at the applicable Remittance
Rate. This repurchase and, if applicable, substitution obligation will generally
constitute the sole remedy available to the Trustee for a material defect in a
document relating to a Mortgage Loan.
The Depositor is required to cause the Seller to do either of the
following (a) cure any breach of any representation or warranty that materially
and adversely affects the interests of the Owners of the Securities in a
Mortgage Loan (each, a "Defective Mortgage Loan") within a specified number of
days of its discovery by the Depositor or its receipt of notice thereof from the
Trustee, (b) repurchase such Defective Mortgage Loan not later than the first
Deposit Date which is more than a specified number of days after such period for
a price equal to 100% of its Principal Balance plus one month's interest thereon
at the applicable Remittance Rate, or (c) if so specified in the Prospectus
Supplement, remove the affected Mortgage Loan from the Trust and substitute one
or more other mortgage loans or contracts therefor. This repurchase and, if
applicable, substitution obligation will generally constitute the sole remedies
available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
as described above, whether or not the Depositor obtains such an agreement from
the Seller which sold such Mortgage Loans.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans.
Evidence as to Compliance
The Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning the first such date that is at least a
specified number of months on and after the Cut-Off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
based on an examination of certain specified documents and records relating to
the servicing of the Depositor's mortgage loan portfolio conducted substantially
in compliance with the audit program for mortgages serviced for Fannie Mae or
FHLMC, the United States Department of Housing and Urban Development Mortgage
Audit Standards or the Uniform Single Audit Program for Mortgage Bankers or in
accordance with other standards specified in the Agreement (the "Applicable
Accounting Standards"), such firm is of the opinion that such servicing has been
conducted in compliance with the Applicable Accounting Standards except for (a)
such exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
The Trustee
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Depositor and the
Trustee acting jointly will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust relating to a
particular Series of Securities. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Pooling and Servicing Agreement shall be conferred or imposed upon the Trustee
and such separate trustee or co-trustee jointly, or, in any jurisdiction in
which the Trustee shall be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee who shall exercise and perform
such rights, powers, duties and obligations solely at the direction of the
Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Pooling and Servicing Agreement, the Securities or of any
Mortgage Asset or related document, and will not be accountable for the use or
application by the Depositor of any funds paid to the Depositor in respect of
the Securities or the related assets,
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or amounts deposited in the Security Account or deposited into the Distribution
Account. If no Event of Default has occurred, the Trustee will be required to
perform only those duties specifically required of it under the Pooling and
Servicing Agreement. However, upon receipt of the various certificates, reports
or other instruments required to be furnished to it, the Trustee will be
required to examine them to determine whether they conform to the requirements
of the Pooling and Servicing Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in such
other instances, if any, as are set forth in the Agreement. Following any
resignation or removal of the Trustee, the Depositor will be obligated to
appoint a successor Trustee. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
Administration of the Security Account
The Pooling and Servicing Agreement will require that the Security
Account be either (i) maintained with a depository institution the debt
obligations of which (or, in the case of a depository institution which is a
part of a holding company structure, the debt obligations of the holding company
of which) have a rating acceptable to each rating agency that was requested to
rate the Securities, or (ii) an account or accounts the deposits in which are
fully insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation) ("SAIF") of the FDIC. The collateral eligible to secure
amounts in the Security Account is limited to United States government
securities and other investments acceptable to the rating agencies rating such
Series of Securities, and may include one or more Securities of a Series
("Eligible Investments"). If so specified in the related Prospectus Supplement,
a Security Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments. If so specified in the related Prospectus Supplement, the
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Security Account as additional compensation. The
Servicer will deposit in the Security Account from amounts previously deposited
by it into the Servicer's Custodial Account on the related Remittance Date the
following payments and collections received or made by it on and after the
Cut-Off Date (including scheduled payments of principal and interest due on and
after the Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest, adjusted
to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicer or other person entitled thereto, as
described above;
(iv) all Insurance Proceeds, other than proceeds to be applied
to the restoration or repair of the related property or released to the
Mortgagor and net of certain amounts reimbursed to the Servicer or
other person entitled thereto, as described above;
(v) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
(vi) any Advances made as described under "Servicing of
Mortgage Loans - Advances" herein and certain other amounts required
under the Pooling and Servicing Agreement to be deposited in the
Security Account;
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(vii) all proceeds of any Mortgage Loan or property acquired
in respect thereof repurchased by the Depositor, the Seller or
otherwise as described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Security Account from any Credit Enhancement for the related Series;
and
(ix) all other amounts required to be deposited in the
Security Account pursuant to the related Pooling and Servicing
Agreement.
Reports
Concurrently with each distribution on the Securities, there will be
mailed to Owners a statement generally setting forth, to the extent applicable
to any Series, among other things:
(i) the aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest,
separately identifying the amount allocable to each class;
(iii) the aggregate Security Principal Balance of each class
of the Securities after giving effect to distributions on such Payment
Date;
(iv) the aggregate Security Principal Balance of any class of
Compound Interest Securities after giving effect to any increase in
such Principal Balance that results from the accrual of interest that
is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to any
class of Securities that was distributed to other classes of
Securities;
(vi) if any class of Securities has priority in the right to
receive Principal Prepayments, the amount of Principal Prepayments in
respect of the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage
Loans which were delinquent as to a total of two installments of
principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans
which (a) were delinquent 30-59 days, 60-89 days, and 90 days or more,
and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually (in the case of Book Entry Securities, the
above described statement and such annual information will be sent to the
Clearing Agency, which will provide such reports to the Clearing Agency
Participants in accordance with its procedures).
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Subsequent Transfer Agreement
for the transfer of additional Mortgage Loans to such Trust following the date
on which such Trust is established and the related Securities are issued. The
Trustee of a Trust may enter into Subsequent Transfer Agreements to permit the
acquisition of additional Mortgage Loans that could not be delivered by the
Depositor or have not formally completed the origination process, in each case
prior to the Delivery Date. Any Subsequent Transfer Agreement will require that
any Mortgage Loans so transferred to a Trust conform to the requirements
specified in such Subsequent Transfer Agreement. If a Subsequent Transfer
Agreement is to be utilized, the related Trustee will be required to deposit
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in the Pre-Funding Account all or a portion of the proceeds received by the
Trustee in connection with the sale of one or more classes of Securities of the
related Series; the additional Mortgage Loans will be transferred to the related
Trust in exchange for money released from the related Pre-Funding Account. The
maximum amount deposited in the Pre-Funding Account to acquire Mortgage Loans
for transfer to a Trust will not exceed 25% of the aggregate principal amount of
the Securities offered pursuant to the related Prospectus Supplement. Each
Subsequent Transfer Agreement will set a specified period during which any such
transfers must occur, which period will not exceed 90 days from the date the
Trust is established. The Subsequent Transfer Agreement or the related Agreement
will require that, if all moneys originally deposited to such Pre-Funding
Account are not so used by the end of such specified period, then any remaining
moneys will be applied as a mandatory prepayment of the related class or classes
of Securities as specified in the related Prospectus Supplement.
Servicer Events of Default
"Events of Default" under the Pooling and Servicing Agreement will
consist of (i) any failure by the Servicer to duly observe or perform in any
material respect any other of its covenants or agreements in the Agreement
materially affecting the rights of Owners which continues unremedied for a
specified number of days after the giving of written notice of such failure to
the Depositor by the Trustee or to the Servicer and the Trustee by the Owners of
Securities evidencing interests aggregating not less than 25% of the affected
class of Securities; and (ii) certain events of insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings and certain
actions by the Servicer indicating its insolvency, reorganization or inability
to pay its obligations.
Rights Upon Servicer Event of Default
As long as an Event of Default under the Pooling and Servicing
Agreement remains unremedied by the Servicer, the Trustee, or Owners of
Securities may terminate all the rights and obligations of the Servicer under
the Pooling and Servicing Agreement, whereupon the Trustee or Master Servicer,
if any, or a new Servicer appointed pursuant to the Pooling and Servicing
Agreement, will succeed to all the responsibilities, duties and liabilities of
the Servicer under the Pooling and Servicing Agreement and will be entitled to
similar compensation arrangements. Following such termination, the Depositor
shall appoint any established mortgage loan servicer satisfying the
qualification standards established in the Pooling and Servicing Agreement to
act as successor to the Servicer under the Pooling and Servicing Agreement. If
no such successor shall have been appointed within a specified number of days
following such termination, then either the Depositor or the Trustee may
petition a court of competent jurisdiction for the appointment of a successor
Servicer. Pending the appointment of a successor Servicer, the Trustee or the
Master Servicer, if any, shall act as Servicer.
The Owners of Securities will not have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect to the Pooling and
Servicing Agreement, unless they previously have given to the Trustee written
notice of default and unless the Owners of the percentage of the Securities
specified in the Prospectus Supplement have made written request to the Trustee
to institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for a specified
number of days has neglected or refused to institute any such proceedings.
However, the Trustee is under no obligation to exercise any of the trusts or
powers vested in it by the Agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation thereunder
or in relation thereto at the request, order or direction of any of the Owners,
unless such Owners have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
Amendment
A Pooling and Servicing Agreement generally may be amended by the
Depositor, the Servicer and the Trustee, without the consent of the Owners of
the Securities, to cure any ambiguity, to correct or supplement any provision
therein which may be defective or inconsistent with any other provision therein,
to take any action necessary to maintain REMIC status of any Trust as to which a
REMIC election has been made, to add any other
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provisions with respect to matters or questions arising under the Agreement
which are not materially inconsistent with the provisions of the Agreement or
for any other purpose, provided that with respect to amendments for any other
purpose such amendment will not adversely affect in any material respect the
interests of any Owners of Securities of that Series. Any such amendment shall
be deemed not to adversely affect in any material respect any Owner if there is
delivered to the Trustee written notification from each Rating Agency that such
amendment will not cause such Rating Agency to reduce its then current rating
assigned to any Class of the Securities of such Series. Notwithstanding the
foregoing, no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, collections of payments received on the related Mortgage
Assets or distributions which are required to be made on any Security without
the consent of the Owner of such Security, (ii) adversely affect in any material
respect the interests of the Owners of any class of Securities in any manner
other than as described in (i), without the consent of the Owners of Securities
of such class evidencing not less than a majority of the interests of such class
or (iii) reduce the aforesaid percentage of Securities of any class required to
consent to any such amendment, without the consent of the Owners of all
Securities of such class then outstanding. Any other amendment provisions
inconsistent with the foregoing shall be specified in the related Prospectus
Supplement.
Termination
The obligations of the Depositor, the Servicer, and the Trustee created
by the Pooling and Servicing Agreement will terminate upon the payment as
required by the Pooling and Servicing Agreement of all amounts held by the
Servicer or in the Security Account and required to be paid to them pursuant to
the Pooling and Servicing Agreement after the later of (i) the maturity or other
liquidation of the last Mortgage Asset subject thereto or the disposition of all
property acquired upon foreclosure of any such Mortgage Loan or (ii) the
repurchase by the Depositor from the Trust of all the outstanding Securities or
all remaining assets in the Trust. The Pooling and Servicing Agreement will
establish the repurchase price for the assets in the Trust and the allocation of
such purchase price among the classes of Securities. The exercise of such right
will effect early retirement of the Securities of that Series, but the
Depositor's right so to repurchase will be subject to the conditions described
in the related Prospectus Supplement. If a REMIC election is to be made with
respect to all or a portion of a Trust, there may be additional conditions to
the termination of such Trust which will be described in the related Prospectus
Supplement. In no event, however, will the trust created by the Pooling and
Servicing Agreement continue beyond the expiration of 21 years from the death of
the survivor of certain persons named in the Pooling and Servicing Agreement.
The Trustee will give written notice of termination of Pooling and Servicing the
Agreement to each Owner, and the final distribution will be made only upon
surrender and cancellation of the Securities at an office or agency of the
Trustee specified in such notice of termination.
THE INDENTURE
General
Each Series of Notes will be issued pursuant to an Indenture to be
entered into between the related Issuer and the related Trustee. Where
provisions or terms used in a particular Indenture differ from those provided
herein, a description of such provisions or terms will be included in the
related Prospectus Supplement.
The following summaries describe certain provisions of the Indenture
not described elsewhere in this Prospectus. Where particular provisions or terms
used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The description set forth below is subject to modification in the Prospectus
Supplement for a Series of Notes to describe the terms and provisions of the
particular Indenture relating to such Series of Notes.
Modification of Indenture
With the consent of the holders of not less than a majority of the
aggregate principal amount of the outstanding Notes of any Series issued under
an Indenture, the related Indenture Trustee and the related Issuer may
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execute a supplemental indenture to add provisions to, or change in any manner
or eliminate any provisions of, the Indenture with respect to such Series or
modify (except as provided below) in any manner the rights of the holders of
such Notes.
Without the consent of the holders of the Notes of such Series affected
thereby, however, no supplemental indenture shall (a) change the Payment Date of
the principal of, or interest on, any Note of such series or reduce the
principal amount thereof the Note Rate specified thereon, change the provisions
relating to the application of collections on, or the proceeds of the Mortgage
Assets to the payment of principal of or interest on the Notes, or change any
place of payment where, or the coin or currency in which, any Note of such
Series or any interest thereon is payable, or impair the right to institute suit
for the enforcement of certain provisions of the Indenture regarding payment,
(b) reduce the percentage of the aggregate principal amount of the outstanding
Notes of such Series, the consent of the holders of which is required for any
such a supplemental indenture, or the consent of the holders of which is
required for any waiver of compliance with certain provisions of the Indenture
or of certain defaults thereunder and their consequences as provided for in the
Indenture, (c) reduce the percentage of the aggregate principal amount of the
outstanding Notes of any Series to direct the Issuer to liquidate upon a Note
Event of Default (as described below), (d) modify or alter the provisions for
the Indenture except to increase any percentage specified therein or to provide
that certain other provisions of the Indenture cannot be modified or waived
without the consent of the holder of each outstanding Note affected thereby, (e)
modify any of the provisions of the Indenture in such manner as to affect the
calculation of the amount any payment of the interest and principal due on any
Note on any Payment Date or to affect the rights of the holders of Notes of such
Series to the benefits of any provisions for the mandatory redemption of the
Notes of such Series contained therein, or (f) permit the creation of any lien
ranking prior to or on the parity with the lien of the Indenture with respect to
any part of the property subject to a lien under the Indenture or terminate the
lien of the Indenture on any property at any time subject thereto or deprive the
holder of any Note of such Series of the security afforded by the lien of the
Indenture.
The related Issuer and the respective Indenture Trustee may also enter
into supplemental indentures, without obtaining the consent of the Owners of the
Notes of such Series, to cure ambiguities or make minor corrections, to evidence
the succession of another person to the Issuer or the acceptance of a successor
trustee, each in accordance with the Indenture, and to do such other things as
would not adversely affect the interests of the Owners of the Notes of such
Series.
Note Events of Default
Unless otherwise specified in the Prospectus Supplement relating to a
given Series of Notes, a "Note Event of Default" with respect to any Series of
Notes will be defined in the respective Indenture under which such Notes are
issued as: (a) unless otherwise specified in the Prospectus Supplement for such
Series, a default in the payment of interest on any Note of such Series when due
and payable; (b) unless otherwise specified in the Prospectus Supplement for
such Series, a default in the payment of principal on any Note of such Series
when due and payable; (c) a default in the observance of any covenants or
agreements of the Issuer made in the Indenture or any representations and
warranties of the Issuer made in the Indenture, the Sale and Servicing Agreement
or certain other documents, and the continuation of any such default for a
specified period after notice to the related Issuer by the Indenture Trustee or
to the related Issuer and the Indenture Trustee by the holders of a majority of
the principal amount of the Notes of such Series then outstanding; or (d)
certain events of bankruptcy, insolvency, receivership or reorganization of the
related Issuer, whether voluntary or involuntary.
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Rights Upon Note Events of Default
Unless otherwise specified in the Prospectus Supplement relating to a
given Series of Notes, in case a Note Event of Default should occur and be
continuing with respect to a Series of Notes, the Indenture Trustee may, and on
request of holders of not less than a majority in principal amount of the Notes
of such Series then outstanding shall, declare the principal of such Series of
Notes to be due and payable. Such declaration may under certain circumstances be
rescinded by the holders of a majority in principal amount of the Notes of such
Series then outstanding.
If, following a Note Event of Default, a Series of Notes has been
declared to be due and payable, the holders representing a majority in principal
amount of the Notes may, by written notice to the Issuer and Indenture Trustee,
rescind and annul the acceleration of the maturity of such Notes if the Issuer
has paid or deposited with the Indenture Trustee a sum sufficient to pay: (i)
all payments of principal of and interest on all Notes and all other amounts
that would then be due upon such Notes if the Note Event of Default giving rise
to such acceleration had not occurred; (ii) all sums paid or advanced by the
Indenture Trustee and the reasonable compensation, expenses, disbursements and
advances of the Indenture Trustee and its agents and counsel; and (iii) all Note
Events of Default, other than the nonpayment of the principal of the Notes that
has become due solely by such acceleration, have been cured or waived.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case a Note Event of Default shall occur and be
continuing, the Indenture Trustee may and at the direction of the holders of the
Notes representing a majority in principal amount of the Notes shall, upon
receipt of satisfactory indemnity and assurances, do one or more of the
following: (i) institute proceedings in its own name and as trustee of an
express trust for the collection of all amounts then payable on the Notes or
under the Indenture, whether by declaration or otherwise, enforce any judgment
obtained, and collect from the Issuer and any other obligor upon such Notes
moneys adjudged due; (ii) institute proceedings from time to time for the
complete or partial foreclosure of the Indenture with respect to the Mortgage
Assets; (iii) exercise any remedies of a secured party under the UCC and take
any other appropriate action to protect and enforce the rights and remedies of
the Indenture Trustee or the holders of the Notes; and (iv) sell the Mortgage
Assets or any portion thereof or rights or interest therein in a commercially
reasonable manner, at one or more public or private sales called and conducted
in any manner permitted by law; provided, however, that the Indenture Trustee
may not sell or otherwise liquidate the Mortgage Assets following a Note Event
of Default, unless (A) all holders of the Notes consent thereto, (B) the
proceeds of such sale or liquidation distributable to the holders of the Notes
are sufficient to discharge in full all amounts then due and unpaid upon such
Notes for principal and interest or (C) the Indenture Trustee determines that
the Mortgage Assets will not continue to provide sufficient funds for the
payment of principal of and interest on the Notes as they would have become due
if the Notes had not been declared due and payable, and the Indenture Trustee
obtains the consent of holders of 66-2/3% in principal amount of the Notes.
List of Note Owners
Unless otherwise specified in the Prospectus Supplement relating to a
given Series of Notes, three or more holders of the Notes of any Series (each of
whom has owned a Note of such Series for at lease six months) may, by written
request to the Indenture Trustee, obtain access to the list of all Note Owners
of such Series maintained by the Indenture Trustee for the purpose of
communicating with other such Note Owners with respect to their rights under the
Indenture. The Indenture Trustee may elect not to afford the requesting Note
Owners access to the list of Note Owners if it agrees to mail the desired
communication or proxy, on behalf of the requesting Note Owners, to all Note
Owners.
Annual Compliance Statement
The related Issuer will be required to file annually with the Indenture
Trustee a written statement as to the fulfillment of its obligations under the
Indenture.
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Indenture Trustee's Annual Report
The Indenture Trustee will be required to mail each year to all Owners
of Notes a brief report relating to its eligibility and qualifications to
continue as the Indenture Trustee under the Indenture, any amounts advanced by
it under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by the related Issuer to it in the Indenture Trustee's
individual capacity, the property and funds physically held by the Indenture
Trustee as such, any release, or release and substitution, of property subject
to the lien of the Indenture that has not been previously reported, any
additional Series of Notes not previously reported and any action taken by it
which materially affects the Notes and which has not been previously reported.
Satisfaction and Discharge of Indenture
The Indenture will be discharged with respect to the assets securing
the Notes of a Series upon the delivery to the Indenture Trustee for
cancellation of all of the Notes of such Series or, with certain limitations,
upon deposit with the Indenture Trustee of funds sufficient for the payment in
full of all of the Notes of such Series.
Redemption of Notes
To the extent provided in the related Prospectus Supplement, the Notes
of any Series may be (i) redeemed at the request of holders of such Notes; (ii)
redeemed at the option of the related Issuer or another party specified in the
related Prospectus Supplement; or (iii) subject to special redemption under
certain circumstances. The circumstances and terms under which the Notes of a
Series may be redeemed will be described in the related Prospectus Supplement.
Reports by Indenture Trustee to Note Owners
On each Payment Date, the Indenture Trustee will send a report to each
Note Owner setting forth, among other things, the amount of such payment
representing interest, the amount thereof, if any, representing principal and
the outstanding principal amount of an individual Note after giving effect to
the payments made on such Payment Date.
Limitation on Suits
Unless otherwise specified in the Prospectus Supplement relating to a
given Series of Notes, no Note Owners of any Series will have any right to
institute any proceedings with respect to the Indenture unless (1) such holder
has previously given written notice to the Indenture Trustee of a continuing
Note Event of Default with respect to such Series; (2) the holders of a majority
of the principal amount of the Notes of such Series then outstanding have made
written requests to the Indenture Trustee to institute proceedings in respect to
such Note Event of Default in its own name as Indenture Trustee; (3) such
holders have offered to the Indenture Trustee reasonable indemnity satisfactory
to it against the costs, expenses and liabilities to be incurred in compliance
with such request; (4) for a specified period after its receipt of such notice,
request and offer of indemnity the Indenture Trustee has failed to institute any
proceedings; and (5) no direction inconsistent with such written request has
been given to the Indenture Trustee during such period by the holders of not
less than a majority in principal amount of the Notes of such Series then
outstanding.
The Sale and Servicing Agreement
General. The conveyance and servicing of the Mortgage Loans related to
the issuance of a Series of Notes will be pursuant to a Sale and Servicing
Agreement to be entered into between the Issuer, the Seller, the Servicer, the
Depositor and the Indenture Trustee. Where provisions or terms used in a
particular Sale and Servicing Agreement differ from those provided herein, a
description of such provisions or terms will be included in the related
Prospectus Supplement.
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Assignment of Mortgage Assets. The Mortgage Loans to be included in the
related Trust will be assigned to the Indenture Trustee on behalf of the holders
of the Notes pursuant to provisions included in the related Sale and Servicing
Agreement that are substantially the same as and the Indenture Trustee with
respect to the Mortgage Loans so conveyed will be substantially similar to,
those described under "The Pooling and Servicing Agreement - Assignment of
Mortgage Assets" herein.
Evidence as to Compliance. The Indenture Trustee will receive an
opinion from a firm of independent public accountants regarding the servicing of
the Mortgage Loans which is substantially the same as described under "The
Pooling and Servicing Agreement - Evidence as to Compliance" herein.
The Indenture Trustee. The Indenture Trustee will be subject to rights
and duties under the Sale and Servicing Agreement substantially the same as
those of the Trustee described under "The Pooling and Servicing Agreement - The
Trustee."
Administration of the Security Account. The Sale and Servicing
Agreement will require that a Security Account be maintained and used in
substantially the same manner as described under "The Pooling and Servicing
Agreement - Administration of the Security Account."
Reports. The Sale and Servicing Agreement will provide that holders of
the Notes will receive reports substantially the same as those described under
"The Pooling and Servicing Agreement - Reports."
Forward Commitments; Pre-Funding. Under the Sale and Servicing
Agreement, the Indenture Trustee of a Trust may enter into Subsequent Transfer
Agreements for the transfer of additional Mortgage Loans to such Trust following
the date on which such Trust is established and the related Notes are issued in
substantially the same manner as described under "The Pooling and Servicing
Agreement - Forward Committments; Pre-Funding."
Servicer Events of Default. The "Events of Default" under the Sale and
Servicing Agreement will be substantially the same as those described under "The
Pooling and Servicing Agreement - Servicer Events of Default."
Rights Upon Servicer Event of Default. The rights upon an Event of
Default under the Sale and Servicing Agreement will be substantially the same as
described under "The Pooling and Servicing Agreement - Rights Upon Servicer
Event of Default."
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
Series of Securities will be applied to the simultaneous purchase of the
Mortgage Assets related to such Series (or to reimburse the amounts previously
used to effect such a purchase), the establishment of any Reserve Fund or
Pre-Funding Account the costs of carrying such Mortgage Assets until sale of the
Securities and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool. The Depositor does not have,
nor is it expected in the future to have, any significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the
open market or in privately negotiated transactions, which may be through or
from an affiliate. The Depositor will not receive any fees or other commissions
in connection with its acquisition of Mortgage Assets or its sale of such
Mortgage Assets to the Trust.
Neither the Depositor nor any of its affiliates will insure or
guarantee the Securities of any Series.
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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
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in its collateral. Subject to the limitations discussed below, upon default of
the tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares.
Foreclosure
Mortgages. Foreclosure of a deed of trust is generally accomplished by
a non-judicial trustee's sale under a specific provision in the deed of trust
that authorizes the trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the trustee must record a notice of default and send a copy to the
borrower-trustor or and any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, the trustee must provide
notice in some states to any other individual having an interest in the real
property, including any junior lienholders. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation. Generally, state law controls
the amount of foreclosure expenses and costs, including attorney's fees' which
may be recovered by a lender. If the deed of trust is not reinstated, a notice
of sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not protested by any of
the parties defendant. However, when the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust, accrued and unpaid interest and expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including paying real estate taxes,
obtaining casualty insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
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
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will convey title to the purchaser of the real property, subject to any existing
first mortgage or deed of trust and any other prior liens and claims. The
foreclosure of a junior mortgage or deed of trust, generally, will have an
effect on the first mortgage or deed of trust, if the senior mortgage or deed of
trust grants to the senior mortgagee or beneficiary the right to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" clause
contained in the senior mortgage or deed of trust. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are
applied pursuant to the terms of the deed of trust, which may require
application first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. In some states, any surplus money remaining may be
available to satisfy claims of the holders of junior mortgages or deeds of trust
and other junior liens and claims in order of their priority, whether or not the
mortgagor or trustee is in default, while in some states, any surplus money
remaining may be payable directly to the mortgagor or trustor. Any balance
remaining is generally payable to the mortgagor or trustor. Following the sale,
in some states the mortgagee or beneficiary following a foreclosure of a
mortgage or deed of trust may not obtain a deficiency judgment against the
mortgagor or trustor. A junior lienholder whose rights in the property are
terminated by the foreclosure by a senior lienholder will not share in the
proceeds from the subsequent disposition of the property.
Cooperative Loans. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owned by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
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
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proceeds of the sale will be applied first to pay the costs and expenses of the
sale and then to satisfy the indebtedness secured by the lender's security
interest. The recognition agreement, however, generally provides that the
lender's right to reimbursement is subject to the right of the cooperative
corporation to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness
remains unpaid, the tenant-stockholder is generally responsible for the
deficiency. See "Anti-Deficiency Legislation and Other Limitations on Lenders"
below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain of
the Mortgage Loans may be secured by mortgages or deeds of trust providing for
junior (i.e., second, third, etc.) liens on the related Mortgaged Properties
which are junior to the other mortgages or deeds of trust held by other lenders
or institutional investors. The rights of the beneficiary under a junior deed of
trust or as mortgagee under a junior mortgage are subordinate to those of the
mortgagee or beneficiary under the senior mortgage or deed of trust, including
the prior rights of the senior mortgagee or beneficiary to receive hazard
insurance and condemnation proceeds and to cause the property securing the
Mortgage Loans to be sold upon default of the mortgagor or trustor. As discussed
more fully below, a junior mortgagee or beneficiary in some states may satisfy a
defaulted senior loan in full and in some states may cure such default and bring
the senior loan current, in either event adding the amounts expended to the
balance due on the junior loan. In most states, absent a provision in the senior
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the bankruptcy is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
Other provisions typically found in the form of the mortgagee or deed
of trust generally used by most institutional lenders obligate the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property and,
when due, all encumbrances, charges and liens on the property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary typically is given the
right under the mortgage or deed of trust to perform the obligation itself at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the trustor. All sums so expended by the mortgagee or beneficiary generally
become part of the indebtedness secured by the mortgage or deed of trust.
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.
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Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular fact of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan. Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award 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
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"Garn-St. Germain Act") preempts state constitutional, statutory and case law
prohibiting the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to certain limited
exceptions. The Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disability. In other cases, courts have limited the right of the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower falling to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. Finally,
some courts have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust or mortgages receive notices in
addition to the statutory-prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
The standard forms of note, mortgage and deed of trust generally
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under any Pooling and Servicing Agreement or Sale and Servicing
Agreement, late charges (to the extent permitted by law and not waived by the
Servicer) will be retained by the Servicer as additional servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the UCC. In such event, the Trustee or the Indenture Trustee, as
applicable, will not be deemed to be a "holder in due course," within the
meaning of the UCC and may take such a mortgage note subject to certain
restrictions on its ability to foreclose and to certain contractual defenses
available to a mortgagor.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
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whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust was acquired by the Trust and cleanup costs were incurred in
respect of the Mortgaged Property, the Trust might realize a loss if such costs
were required to be paid by the Trust.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan by such borrower
(including a borrower who is a member of the National Guard or is in reserve
status at the time of the origination of the Mortgage Loan and is later called
to active duty) may not be charged interest above an annual rate of 6% during
the period of such borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such interest rate
limitation or similar limitations under state law could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans. In addition, the Relief
Act imposes limitations which would impair the ability of the Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
Any shortfalls in interest collections resulting from application of
the Relief Act could adversely affect Securities.
LEGAL INVESTMENT MATTERS
The Securities may constitute "mortgage related securities" for
purposes of SMMEA, so long as they are rated in one of the two highest rating
categories by the Rating Agency or Agencies identified in the related Prospectus
Supplement and, as such, would be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including but not limited to state-chartered savings banks, commercial banks,
saving and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or any State (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to State
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, in all States which enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any of such entities
with respect to "mortgage related securities," the Securities will constitute
legal investments for entities subject to such legislation only to the extent
provided in such legislation SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, bold or invest in any securities or require the sale or
over disposition of any securities, so long as such contractual commitment was
made or such securities were acquired prior to the enactment of such
legislation. Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida,
Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska,
New Hampshire, New York, North Carolina, Ohio, South Dakota, Utah, Virginia and
West Virginia each enacted legislation overriding the exemption afforded by
SMMEA prior to the October 4, 1991 deadline.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of the Securities.
Any 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
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in certain "high-risk mortgage securities" except under limited circumstances,
and sets forth certain investment practices deemed to be unsuitable for
regulated institutions. The NCUA issued final regulations effective December 2,
1991 that restrict and in some instances prohibit the investment by federal
credit unions in certain types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities which are issued in book entry
form.
Investors should consult their own legal advisors in determining
whether and to what extent the Securities constitute legal investments for such
investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested)
(collectively, "Plans") subject to ERISA and on persons who are fiduciaries with
respect to such Plans. Among other things, ERISA requires that the assets of
Plans be held in trust and that the trustee, or other duly authorized fiduciary,
have exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control respecting
the management or disposition of the assets of a Plan is considered to be a
fiduciary of such Plan (subject to certain exceptions not here relevant). In
addition to the imposition of general fiduciary standards of investment prudence
and diversification, ERISA prohibits a broad range of transactions involving
Plan assets and persons ("Parties in Interest") having certain specified
relationships to a Plan and imposes additional prohibitions where Parties in
Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a Plan.
(DOL Reg Section 2510.3-101). Under this regulation, the underlying assets and
properties of corporations, partnerships and certain other entities in which a
Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. In such case, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, and the underlying assets
and properties could be subject to ERISA reporting and disclosure. Certain
exceptions to the regulation may apply in the case of a Plan's investment in the
Securities, but the Depositor cannot predict in advance whether such exceptions
apply due to the factual nature of the conditions to be met. Accordingly,
because the Mortgage Loans may be deemed Plan assets of each Plan that purchases
Securities, an investment in the Securities by a Plan might give rise to a
prohibited transaction under ERISA Sections 406 and 407 and be subject to an
excise tax under Code Section 4975 unless a statutory or administrative
exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance of
such certificates. PTE 83-1 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.
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PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Owners against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan, (ii) the existence of a pool trustee who
is not an affiliate of the sponsor, and (iii) a limitation on the amount of the
payments retained by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor.
Although the Trustee or the Indenture Trustee, as applicable, for any
Series of Securities will be unaffiliated with the Depositor, there can be no
assurance that the system of insurance or subordination will meet the general or
specific conditions referred to above. In addition, the nature of a Trust's
assets or the characteristics of one or more classes of the related Series of
Securities may not be included within the scope of PTE 83-1 or any other class
exemption under ERISA. The Prospectus Supplement will provide additional
information with respect to the application of ERISA and the Code to the related
Securities.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a Series of Securities,
the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Securities must
make its own determination as to whether the general and the specific conditions
of PTE 83-1 have been satisfied or as to the availability of any other
prohibited transaction exemptions Each Plan fiduciary should also determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Securities is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Any Plan proposing to invest in Securities should consult with its
counsel to confirm that such investment will not result in a prohibited trans
action and will satisfy the other requirements of ERISA and the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Arter & Hadden LLP, special
counsel to the Depositor ("Special Counsel"), with respect to the material
federal income tax consequences of the purchase, ownership and disposition of
Securities. Opinions of counsel are not binding on the IRS, however, and there
is no assurance that the IRS could not challenge successfully the opinions of
counsel. The discussion below does not purport to address all federal income tax
consequences that may be applicable to particular categories of investors, some
of which may be subject to special rules. The authorities on which this
discussion is based are subject to change or differing interpretations, and any
such change or interpretation could apply retroactively. This discussion
reflects the applicable provisions of the Code, as well as final regulations
concerning REMICs (the "REMIC Regulations") and final regulations under Sections
1271 through 1273 and 1275 of the Code concerning debt instruments (the "OID
Regulations"). The Depositor intends to rely on the OID Regulations for all
Securities offered pursuant to this Prospectus; however, investors should be
aware that the OID Regulations do not adequately address certain issues relevant
to prepayable securities, such as the Securities. Investors should consult their
own tax advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of Securities.
The Prospectus Supplement for each Series of Securities will discuss any special
tax consideration applicable to any class of Securities of such Series, and the
discussion below is qualified by any such discussion in the related Prospectus
Supplement.
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For purposes of this opinion, where the applicable Prospectus
Supplement provides for a fixed retained yield with respect to the Mortgage
Assets underlying a Series of Securities, references to the Mortgage Assets will
be deemed to refer to that portion of the Mortgage Assets held by the Trust
which does not include the fixed retained yield.
REMIC Securities
General. With respect to a particular Series of Securities, an election
may be made to treat the Trust or one or more trusts or segregated pools of
assets therein as one or more REMICs within the meaning of Code Section 860D. A
Trust or a portion or portions thereof as to which one or more REMIC elections
will be made will be referred to as a "REMIC Pool." For purposes of this
discussion, Securities of a Series as to which one or more REMIC elections are
made are referred to as "REMIC Securities" and will consist of one or more
classes of "Regular Securities" and one class of "Residual Securities" in the
case of each REMIC Pool. Qualification as a REMIC requires ongoing compliance
with certain conditions. With respect to each Series of REMIC Securities,
Special Counsel has advised the Depositor that in their opinion, assuming (i)
the making of an appropriate election, (ii) compliance with the Agreement and
(iii) compliance with any changes in the law, including any amendments to the
Code or applicable Treasury regulations thereunder, each REMIC Pool will qualify
as a REMIC and that if a Trust qualifies as a REMIC, the tax consequences to the
Owners will be as described below. In such case, the Regular Securities will be
considered to be "regular interests" in the REMIC Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Residual Securities will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each Series of
Securities will indicate whether one or more REMIC elections with respect to the
related Trust will be made, in which event references to "REMIC" or "REMIC Pool"
herein shall be deemed to refer to each such REMIC Pool.
Status of REMIC Securities. REMIC Securities held by a mutual savings
bank or a domestic building and loan association (a "Thrift Institution") will
constitute "qualifying real property loans" within the meaning of Code Section
593(d)(1) in the same proportion that the assets of the REMIC Pool would be so
treated. REMIC Securities held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a) (19)(C) (xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C). REMIC Securities held by a real estate
investment trust (a "REIT") will constitute "real estate assets" within the
meaning of Code Section 856(c)(5)(A), and interest on the REMIC Securities will
be considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Code Section 856(c)(3)(B)
in the same proportion that, for both purposes, the assets of the REMIC Pool
would be so treated. If at all times 95% or more of the assets of the REMIC Pool
constitute qualifying assets for Thrift Institutions and REITs, the REMIC
Securities will be treated entirely as qualifying assets for such entities.
Moreover, the REMIC Regulations provide that, for purposes of Code Sections
593(d)(1) and 856(c)(5)(A), payments of principal and interest on the Mortgage
Assets that are reinvested pending distribution to holders of REMIC Securities,
constitute qualifying assets for such entities. Where two REMIC Pools are part
of a tiered structure they will be treated as one REMIC for purposes of the
tests described above respecting asset ownership of more or less than 95%.
Notwithstanding the foregoing, however, REMIC income received by a REIT owning a
residual interest in a REMIC Pool could be treated in part as non-qualifying
REIT income if the REMIC Pool holds Mortgage Assets with respect to which income
is contingent on mortgagor profits or property appreciation. In addition, if the
assets of the REMIC include buy-down Mortgage Assets, it is possible that the
percentage of such assets constituting "qualifying real property loans" or
"loans secured by an interest in real property" for purposes of Code Sections
593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required to be reduced by
the amount of the related buy-down funds. REMIC Securities held by a regulated
investment company will not constitute "government securities" within the
meaning of Code Section 851(b)(4)(A)(i). REMIC Securities held by certain
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Code Section 582(c)(i). REMIC Securities representing interests in
obligations secured by manufactured housing treated as single family residences
under Code Section 25(e)(10) will be considered interests in "qualified
mortgages" as defined in Code Section 860E(a)(3).
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Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis amount of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the Delivery
Date (which for purposes of this discussion is the date of issuance of the REMIC
Securities) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations provide
a "safe harbor" pursuant to which the de minimis requirement will be met if at
all times the aggregate adjusted basis of any nonqualified assets (i.e., assets
other than qualified mortgages and permitted investments) is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of
the Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool might be entitled to treatment as a grantor trust under the rules
described below under "Non-REMIC Securities." In that case, no entity-level tax
would be imposed on the REMIC Pool. Alternatively, the Regular Securities may
continue to be treated as debt instruments for federal income tax purposes; but
the REMIC Pool could be treated as a taxable mortgage pool (a "TMP"). If the
REMIC Pool is treated as a TMP, any residual income of the REMIC Pool (income
from the Mortgage Assets less interest and original issue discount expense
allocable to the Regular Securities and any administrative expenses of the REMIC
Pool) would be subject to corporate income tax at the REMIC Pool level. On the
other hand, an entity with multiple classes of ownership interests may be
treated as a separate association taxable as a corporation under Treasury
regulations, and the Regular Securities may be treated as equity interests
therein. The Code, however, authorizes the Treasury Department to issue
regulations that address situations where failure to meet one or more of the
requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
Taxation of Regular Securities
General. Payments received by holders of Regular Securities generally
should be accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. In general, interest, original
issue discount and market discount on a Regular Security will be treated as
ordinary income to a holder of the Regular Security (the "Regular Owner") as
they accrue, and principal payments on a Regular Security will be treated as a
return of capital to the extent of the Regular Owner's basis in the Regular
Security allocable thereto. Regular Owners must use the accrual method of
accounting with regard to Regular Securities, regardless of the method of
accounting otherwise used by such Regular Owners.
Original Issue Discount. Regular Securities may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders of
any class of Regular Securities having original issue discount generally must
include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that takes
into account the compounding of interest, in advance of receipt of the cash
attributable to such income. The Depositor anticipates that the amount of
original issue discount required to be included in a Regular Owner's income in
any taxable year will be computed as described below.
Each Regular Security (except to the extent described below with
respect to a Regular Security on which distributions of principal are made in a
single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Owner or by random lot (a "Retail
Class Security")) will be treated as a single installment obligation for
purposes of determining the original issue discount includible in a Regular
Owner's income. The total amount of original issue discount on a Regular
Security is the excess of the "stated redemption price at maturity" of the
Regular Security over its "issue price." The issue price of a Regular Security
is the first price at which a substantial amount of Regular Securities of that
class are first sold to the public. The
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Depositor will determine original issue discount by including the amount paid by
an initial Regular Owner for accrued interest that relates to a period prior to
the issue date of the Regular Security in the issue price of a Regular Security
and will include in the stated redemption price at maturity any interest paid on
the first Payment Date to the extent such interest is attributable to a period
in excess of the number of days between the issue date and such first Payment
Date. The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of stated interest if such interest distributions
constitute "qualified stated interest." Qualified stated interest generally
means stated interest that is unconditionally payable in cash or in property
(other than debt instruments of the issuer) at least annually at (i) a single
fixed rate, (ii) one or more qualified floating rates (as described below),
(iii) a fixed rate followed by one or more qualified floating rates, (iv) a
single objective rate (as described below) or (v) a fixed rate and an objective
rate that is a qualified inverse floating rate. The OID Regulations state that
interest payments are unconditionally payable only if reasonable legal remedies
exist to compel timely payment or the debt instrument otherwise provides terms
and conditions that make the likelihood of late payment (other than a late
payment that occurs within a reasonable grace period) or nonpayment a remote
contingency. Certain debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. The interest on such debt
securities will be unconditionally payable and constitute qualified stated
interest, not OID. However, absent clarification of the OID Regulations, where
debt securities do not provide for default remedies or the likelihood of late
payment or nonpayment is a remote contingency, the interest payments will be
included in the debt security's stated redemption price at maturity and taxed as
OID. Any stated interest in excess of the qualified stated interest is included
in the stated redemption price at maturity. If the amount of original issue
discount is "de minimis" as described below, the amount of original issue
discount is treated as zero, and all stated interest is treated as qualified
stated interest. Distributions of interest on Regular Securities with respect to
which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Securities includes all distributions of interest as well as principal thereon.
Moreover, if the interval between the issue date and the first Payment Date on a
Regular Security is longer than the interval between subsequent Payment Dates
(and interest paid on the first Payment Date is less than would have been earned
if the stated interest rate were applied to outstanding principal during each
day in such interval), the stated interest distributions on such Regular
Security technically do not constitute qualified stated interest. In such case a
special rule, applying solely for the purpose of determining whether original
issue discount is de minimis, provides that the interest shortfall for the long
first period (i.e., the interest that would have been earned if interest had
been paid on the first Payment Date for each day the Regular Security was
outstanding) is treated as made at a fixed rate if the value of the rate on
which the payment is based is adjusted in a reasonable manner to take into
account the length of the interval. Regular Owners should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Regular Security.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted maturity of the Regular Security is computed as the sum of the amounts
determined by multiplying the number of full years (i.e., rounding down partial
years) from the issue date until each distribution in reduction of stated
redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the assumed rate of prepayment of the
Mortgage Assets and the anticipated reinvestment rate, if any, relating to the
Regular Securities (the "Prepayment Assumption"). The Prepayment Assumption with
respect to a Series of Regular Securities will be set forth in the related
Prospectus Supplement. The holder of a debt instrument includes any de minimis
original issue discount in income pro rata as stated principal payments are
received.
Of the total amount of original issue discount on a Regular Security,
the Regular Owner generally must include in gross income for any taxable year
the sum of the "daily portions," as defined below, of the original issue
discount on the Regular Security accrued during an accrual period for each day
on which he holds the Regular Security, including the date of purchase but
excluding the date of disposition. Although not free from doubt, the
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Depositor intends to treat the monthly period ending on the day before each
Payment Date as the accrual period, rather than the monthly period corresponding
to the prior calendar month. With respect to each Regular Security, a
calculation will be made of the original issue discount that accrues during each
successive full accrual period (or shorter period from the date of original
issue) that ends on the day before the related Payment Date on the Regular
Security. For a Regular Security, original issue discount is to be calculated
initially based on a schedule of maturity dates that takes into account the
level of prepayments and an anticipated reinvestment rate that are most likely
to occur, which is expected to be based on the Prepayment Assumption. The
original issue discount accruing in a full accrual period would be the excess,
if any, of (i) the sum of (a) the present value of all of the remaining
distributions to be made on the Regular Security as of the end of that accrual
period that are included in the Regular Security's stated redemption price at
maturity and (b) the distributions made on the Regular Security during the
accrual period that are included in the Regular Security's stated redemption
price at maturity over (ii) the adjusted issue price of the Regular Security at
the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Security at the issue date, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period and (iii) the Prepayment Assumption. For these purposes, the
adjusted issue price of a Regular Security at the beginning of any accrual
period equals the issue price of the Regular Security, increased by the
aggregate amount of original issue discount with respect to the Regular Security
that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in such prior period. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Owner generally will
increase to take into account prepayments on the Regular Securities as a result
of prepayments on the Mortgage Assets or that exceed the Prepayment Assumption,
and generally will decrease (but not below zero for any period) if the
prepayments are slower than the Prepayment Assumption. In the event of a change
in circumstances that does not result in a substantially contemporaneous pro
rata prepayment, the yield and maturity of the Regular Securities are
redetermined by treating the Regular Securities as reissued on the date of the
change for an amount equal to the adjusted issue price of the Regular
Securities. To the extent specified in the applicable Prospectus Supplement, an
increase in prepayments on the Mortgage Assets with respect to a Series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
A purchaser of a Regular Security at a price greater than the issue
price also will be required to include in gross income the daily portions of the
original issue discount on the Regular Security. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Security exceeds the
sum of the issue price and the aggregate amount of original issue discount that
would have been includible in the gross income of an original holder of the
Regular Security who purchased the Regular Security at its issue price, less any
prior distributions included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for such Regular Security
(computed in accordance with the rules set forth above) for all days after the
date of purchase and ending on the date on which the remaining principal amount
of such Regular Security is expected to be reduced to zero under the Prepayment
Assumption.
A Owner may elect to include in gross income all stated interest,
original issue discount, de minimis original issue discount, market discount (as
described below under "Market Discount"), de minimis market discount and
unstated interest (as adjusted for any amortizable bond premium or acquisition
premium) currently as it accrues 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.
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Variable Rate Regular Securities. Regular Securities may provide for
interest based on a variable rate. The OID Regulations provide special rules for
variable rate instruments that meet three requirements. First, the noncontingent
principal payments may not exceed the instrument's issue price by more than a
specified amount equal to the lesser of (i) .015 multiplied by the product of
the total noncontingent payments and the weighted average maturity or (ii) 15%
of the total noncontingent principal payments. Second, the instrument must
provide for stated interest (compounded or paid at least annually) at (i) one or
more qualified floating rates, (ii) a single fixed rate followed by one or more
qualified floating rates, (iii) a single objective rate or (iv) a single fixed
rate and a single objective rate that is a qualified inverse floating rate.
Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period is set at a current value of
that rate (one occurring in the interval beginning three months before and
ending one year after the rate is first in effect on the Regular Security). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than zero but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Security to be significantly less or
more than the overall expected return on the Regular Security is considered a
qualified floating rate. An objective rate is a rate based on changes in the
price of actively traded property or an index of such prices or is a rate based
on (including multiples of) one or more qualified floating rates. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Security and is based on objective financial
information or economic information; however, a objective rate does not include
a rate based on information that is in the control of the issuer or that is
unique to the circumstances of a related party. Stated interest on a variable
rate debt instrument is qualified stated interest if the interest is
unconditionally payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a) in the case of a qualified floating
or inverse floating rate, the value, as of the issue date, of the qualified
floating inverse floating rate or (b) in the case of an objective rate (other
than a qualified inverse floating rate), a fixed rate that reflects the yield
that is reasonably expected for the debt instrument. For all other variable rate
debt instruments, the amount of interest and original issue discount accruals
are determined using the following steps. First, a fixed rate substitute for
each variable rate under the debt instrument is determined. In general, the
fixed rate substitute is a fixed rate equal to the rate of the applicable type
of variable rate as of the issue date. Second, an equivalent fixed rate debt
instrument is constructed using the fixed rate substitute(s) in lieu of the
variable rates and keeping all other terms identical. Third, the amount of
qualified stated interest and original issue discount with respect to the
equivalent fixed rate debt instrument are determined under the rules for fixed
rate debt instruments. Finally, appropriate adjustments for actual variable
rates are made during the term by increasing or decreasing the qualified stated
interest to reflect the amount actually paid during the applicable accrual
period as compared to the interest assumed to be accrued or paid under the
equivalent fixed rate debt instrument. If there is no qualified stated interest
under the equivalent fixed rate debt instrument, the adjustment is made to the
original issue discount for the period.
The application of the OID Regulations to variable rate debt
instruments is limited and may not apply to some Regular Securities having
variable rates. In that event, the provisions of regulations issued on June 11,
1996, applicable to instruments having contingent payments, may apply to those
Regular Securities. The application of those provisions to instruments such as
variable rate Regular Securities is subject to varying interpretations.
Prospective purchasers of variable rate Regular Securities are advised to
consult their tax advisers concerning the tax treatment of such Regular
Securities.
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Market Discount. A purchaser of a Regular Security also may be subject
to the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Security (i) is exceeded by the stated
redemption price at maturity of the Regular Security or (ii) in the case of a
Regular Security having original issue discount, is exceed by the sum of the
issue price of such Regular Security plus any original issue discount that would
have previously accrued thereon if held by an original Regular Owner (who
purchased the Regular Security at its issue price), in either case less any
prior distributions included in the stated redemption price at maturity of such
Regular Security. Such purchaser generally will be required to recognize accrued
market discount as ordinary income as distributions includible in the stated
redemption price at maturity of such Regular Security are received in an amount
not exceeding any such distribution. That recognition rule would apply
regardless of whether the purchaser is a cash-basis or accrual-basis taxpayer.
Such market discount would accrue in a manner to be provided in Treasury
regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Security
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Security as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Owner may elect to include market discount in income
currently as it accrues in all market discount instruments acquired by such
Regular Owner in that taxable year or thereafter, in which case the interest
deferral rule will not apply. In Revenue Procedure 92-67, the Internal Revenue
Service set forth procedures for taxpayers (1) electing under Code Section
1278(b) to include market discount in income currently, (2) electing under rules
of Code Section 1276(b) to use a constant interest rate to determine accrued
market discount on a bond where the holder of the bond is required to determine
the amount of accrued market discount at a time prior to the holder's
disposition of the bond, and (3) requesting consent to revoke an election under
Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Security will be considered to be zero if such market discount is less
than 0.25% of the remaining stated redemption price at maturity of such Regular
Security multiplied by the weighted average maturity of the Regular Security
(determined as described above under "Original Issue Discount") remaining after
the date of purchase. Treasury regulations implementing the market discount
rules have not yet been issued, and therefore investors should consult their own
tax advisors regarding the application of these rules as well as the
advisability of making any of the elections with respect thereto.
Premium. A Regular Security purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Owner holds such Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular Owner may
elect under Code Section 171 to amortize such premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Securities. This election, once made, applies to all obligations held by
the 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
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obligations such as the Regular Securities. The IRS recently published final
regulations (the "Premium Regulations") covering the amortization of bond
premiums. The Premium Regulations describe the constant yield method for
amortizing premium and provide the Regular Owner may offset the premium against
corresponding interest income only as that interest income is taken into account
under the Regular Owner's method of accounting. For instruments that may be
called or prepaid prior to maturity, a Regular Owner will be deemed to exercise
its option and an issuer will be deemed to exercise its redemption right in a
manner that maximizes the Regular Owner's yield. The Premium Regulations are
effective for debt instruments acquired on or after March 2, 1998. A Regular
Owner may elect to amortize bond premium under the Premium Regulations for 1998,
with the election applying to all the Regular Owner's debt instruments held on
January 1, 1998. Purchasers who pay a premium for their Regular Securities
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
Sale or Exchange of Regular Securities. If a Regular Owner sells or
exchanges a Regular Security, the Regular Owner will recognize gain or loss
equal to the difference, if any, between the amount received and his adjusted
basis in the Regular Security. The adjusted basis of a Regular Security
generally will equal the cost of the Regular Security to the seller, increased
by any original issue discount or market discount previously included in the
seller's gross income with respect to the Regular Security and reduced by
amounts included in the stated redemption price at maturity of the Regular
Security that were previously received by the seller and by any amortized
premium.
Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss. Gain from the disposition of a
Regular Security that might otherwise be capital gain will be treated as
ordinary income to the extent that such gain does not exceed the excess, if any,
of (i) the amount that would have been includible in the gross income of the
holder if his yield on such Regular Security were 110% of the applicable Federal
rate under Code Section 1274(d) as of the date of purchase over (ii) the amount
of income actually includible in the gross income of such holder with respect to
the Regular Security. In addition, gain or loss recognized from the sale of a
Regular Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c). Net capital gains of
individuals are subject to varying tax rates depending upon the holding period
of the Regular Security.
Taxation of Residual Securities
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Securities
("Residual Owners") and will not be taxed separately to the REMIC Pool. The
daily portions of REMIC taxable income or net loss of a Residual Owner are
determined by allocating the REMIC Pool's taxable income or net loss for each
calendar quarter ratably to each day in such quarter and by allocating such
daily portion among the Residual Owners in proportion to their respective
holdings of Residual Securities in the REMIC Pool on such day. REMIC taxable
income is generally determined in the same manner as the taxable income of an
individual using a calendar year and the accrual method of accounting, except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as 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 Securities, servicing fees on the Mortgage Assets and other
administrative expenses of the REMIC Pool, amortization of premium, if any, with
respect to the Mortgage Assets, and any tax imposed on the REMIC's income from
foreclosure property. The requirement that Residual Owners report their pro rata
share of taxable income or net loss of the REMIC Pool will continue until there
are no Securities of any class of the related Series outstanding.
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The taxable income recognized by a Residual Owner in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market discount income or
amortization of premium with respect to the Mortgage Assets, on the one hand,
and the timing of deductions for interest (including original issue discount) on
the Regular Securities, on the other hand. Because of the way REMIC taxable
income is calculated, a Residual Owner may recognize "phantom" income (i.e.,
income recognized for tax purposes in excess of income as determined under
financial accounting or economic principles) which will be matched in later
years by a corresponding tax loss or reduction in taxable income, but which
could lower the yield to Residual Owners due to the lower present value of such
future loss or reduction. For example, if an interest in the Mortgage Assets is
acquired by the REMIC Pool at a discount, and one or more of such Mortgage
Assets is prepaid, the Residual Owner may recognize taxable income without being
entitled to receive a corresponding amount of cash because (i) the prepayment
may be used in whole or in part to make distributions in reduction of principal
on the Regular Securities and (ii) the discount income on the Mortgage Loan
which is includible in the REMIC's taxable income may exceed the discount
deduction allowed to the REMIC upon such distributions on the Regular
Securities. When there is more than one class of Regular Securities that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Securities when distributions in reduction of principal are being made
in respect of earlier maturing classes of Securities to the extent that such
classes are not issued with substantial discount. If taxable income attributable
to such a mismatching is realized in general, losses would be allowed in later
years as distributions on the later classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of Regular Securities, where interest income with respect
to any given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Owners must
have sufficient other sources of cash to pay any federal, state or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income. Prospective investors should be aware, however, that a
portion of such income may be ineligible for offset by such investor's unrelated
deductions. See the discussion of "excess inclusions" below under "Treatment of
Certain Items of REMIC Income and Expense - Limitations on Offset or Exemption
of REMIC Income; Excess Inclusions." The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a Series
of Securities, may have a significant adverse effect upon the Residual Owners
after tax rate of return. In addition, a Residual Owner's taxable income during
certain periods may exceed the income reflected by such Owner for such periods
in accordance with generally accepted accounting principles. Investors should
consult their own advisors concerning the proper tax and accounting treatment of
their investment in Residual Securities.
Basis and Losses. The amount of any net loss of the REMIC Pool that may
be taken into account by the Residual Owner is limited to the adjusted basis of
the Residual Security as of the close of the quarter (or time of disposition of
the Residual Security if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Security is the amount paid for such Residual Security. Such adjusted
basis will be increased by the amount of taxable income of the REMIC Pool
reportable by the Residual Owner and decreased by the amount of loss of the
REMIC Pool reportable by the Residual Owner. A cash distribution from the REMIC
Pool also will reduce such adjusted basis (but not below zero). Any loss that is
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Owner as to whom such loss was disallowed and may be
used by such Residual Owner only to offset any income generated by the same
REMIC Pool. Residual Owners should consult their tax advisors about other
limitations on the deductibility of net losses that may apply to them.
A Residual Owner will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, such taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Securities over their life.
However, in view of the possible acceleration of the income of Residual Owners
described above under
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"Taxation of REMIC Income," the period of time over which such issue price is
effectively amortized may be longer than the economic life of the Residual
Securities.
If a Residual Security has a negative value, it is not clear whether
its issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC Pool's basis in its assets. The REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a class
of Residual Securities as having a value of less than zero for purposes of
determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of Residual
Owner (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the Mortgage Assets, the
Residual Owner will not recover a portion of such basis until termination of the
REMIC Pool unless Treasury regulations yet to be issued provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations do not so provide. See "Treatment of Certain Items of REMIC Income
and Expense - Market Discount" below regarding the basis of Mortgage Assets to
the REMIC Pool and "Sale or Exchange of Residual Securities" below regarding
possible treatment of a loss upon termination of the REMIC Pool as a capital
loss.
Mark to Market Rules. Prospective purchasers of a Residual Security
should be aware that final regulations (the "Mark to Market Regulations")
relating to the requirement that a securities dealer mark to market securities
held for sale to customers apply to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that for purposes of this
mark to market requirement, a Residual Security acquired after January 4, 1995,
is not treated as a security and thus may not be marked to market.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Securities as described above under "Taxation of
Regular Securities - Original Issue Discount" and "- Variable Rate Regular
Securities," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Assets is generally the fair market value of the Mortgage
Assets immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. In respect of
Mortgage Assets that have market discount to which Code Section 1276 applies,
the accrued portion of such market discount would be recognized currently by the
REMIC as an item of ordinary income. Market discount income generally should
accrue in the manner described above under "Taxation of Regular Securities -
Market Discount." However, the rules of Code Section 1276 concerning market
discount income will not apply in the case of Mortgage Assets originated on or
prior to July 18, 1984, if any. With respect to such Mortgage Assets market
discount is generally includible in REMIC taxable income or ordinary gross
income pro rata as principal payments are received. Under another interpretation
of the Code and relevant legislative history, market discount on such Mortgage
Assets might be required to be recognized currently by the REMIC, in the same
manner that market discount would be recognized with respect to Mortgage Assets
originated after July 18, 1984. Under that method, a REMIC would tend to
recognize market discount more rapidly than it would otherwise. In either case,
the deduction of a portion of the interest expense on the Regular Securities
allocable to such discount may be deferred until such discount is included in
income, and any gain on the sale or exchange thereof will be treated as ordinary
income to the extent of the deferred interest deductible at that time.
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Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Assets exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Assets at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in the Mortgage
Assets is the fair market value of the Mortgage Assets, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "Taxation of Regular Securities - Premium," a
person that holds a Mortgage Loan as a capital asset under Code Section 1221 may
elect under Code Section 171 to amortize premium on Mortgage Assets originated
after September 27, 1985 under a constant yield method. Amortizable bond premium
will be treated as an offset to interest income on the Mortgage Assets, rather
than as a separate deduction item. Because substantially all the mortgagors with
respect to the Mortgage Assets are expected to be individuals, Code Section 171
will not be available. Premium on Mortgage Assets may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions.
A portion of the income allocable to a Residual Security (referred to in the
Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss carryovers
of a Residual Owner, (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the Residual Owner is a pension fund
or any other organization that is subject to tax only on its unrelated business
taxable income and (iii) is not eligible for any reduction in the rate of
withholding tax in the case of a Residual Owner that is a foreign investor, as
further discussed in "Taxation of Certain Foreign Investors - Residual
Securities" below. Except as discussed below with respect to excess inclusions
from Residual Securities without "significant value." Members of an affiliated
group are treated as one corporation for purposes of applying the limitation on
offset of excess inclusion income. The Small Business Protection Act of 1996
(the "1996 Act") eliminated a special rule that permitted thrift institutions to
use net operating losses and other allowable deductions to offset their excess
inclusion income from Residual Securities with significant value for taxable
years beginning after December 31, 1995 (subject to exceptions for certain
certificates held continuously since November 1, 1995). The 1996 Act also
provides new rules affecting the determination of alternative maximum taxable
income ("AMTI") of a Residual Owner. First, AMTI is calculated without regard to
the special rule that taxable income cannot be less than excess inclusion income
for the year. Second, AMTI cannot be less than excess inclusion income for the
year. Finally, any AMTI net operating loss deduction is computed without regard
to excess inclusion income. These new rules are effective for tax years
beginning after December 31, 1986, unless a Residual Owner elects to have the
rules apply only to tax years ending after August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Securities without "significant value," for any
Residual Owner, the excess inclusion for any calendar quarter is the excess, if
any, of (i) the income of such Residual Owner for that calendar quarter from its
Residual Security over (ii) the sum of the "daily accruals" (as defined below)
for all days during the calendar quarter on which the Residual Owner holds such
Residual Security. For this purpose, the daily accruals with respect to a
Residual Security are determined by allocating to each day in the calendar
quarter its ratable portion of the product of the "adjusted issue price" (as
defined below) of the Residual Security at the beginning of the calendar quarter
and 120 percent of the "Federal long-term rate" in effect at the time the
Residual Security is issued. For this purposes the "adjusted issue price" of a
Residual Security at the beginning of any calendar quarter equals the issue
price of the Residual Security (adjusted for contributions), increased by the
amount of daily accruals for all prior quarters, and decreased (but not below
zero) by the aggregate amount of payments made on the Residual Security before
the beginning of such quarter. The Federal long-term rate is an average of
current yields on Treasury securities with a remaining term of greater than nine
years, computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Security will be treated as an excess inclusion if the
Residual Securities in the aggregate are considered not to have "significant
value." The Treasury Department has
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not yet provided regulations in this respect and the REMIC Regulations did not
adopt this rule. However, the exception from the excess inclusion rules
applicable to thrift institutions does not apply if the Residual Securities do
not have significant value. Under the REMIC Regulations, the Residual Securities
will have significant value if: (i) the aggregate of the issue prices of the
Residual Securities is at least two percent of the aggregate issue prices of all
Regular Securities and Residual Securities in the REMIC and (ii) the anticipated
weighted average life of the Residual Securities is at least 20 percent of the
REMIC's anticipated weighted average life based on the prepayment and
reinvestment assumptions used in pricing the transaction and any recognized or
permitted clean up calls or any required qualified liquidation. Although not
entirely clear, the REMIC Regulations indicate that the significant value
determination is made only on the Startup Day. The anticipated weighted average
life of a Residual Security with a principal balance and a market rate of
interest is computed by multiplying the amount of each expected principal
payment by the number of years (or portions thereof) from the Startup Day,
adding these sums and dividing by the total principal expected to be paid on
such Residual Security based on the relevant prepayment assumption and expected
reinvestment income. The anticipated weighted average life of a Residual
Security with either no specified principal balance or a principal balance and
rights to interest payments disproportionate to such principal balance, would be
computed under the formula described above but would include all payments
expected on the Residual Security instead of only the principal payments. The
anticipated weighted average life of a REMIC is a weighted average of the
anticipated weighted average lives of all classes of interest in the REMIC.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Security are to be designated as
excess inclusions in an amount corresponding to the Residual Security's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Security will be subject to the
limitations on excess inclusions described above. The REMIC Regulations do not
provide guidance on this issue.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If legal title or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal corporate income tax rate. The REMIC Regulations provide that the
anticipated excess inclusions are based on actual prepayment experience to the
date of the transfer and projected payments based on the Prepayment Assumption.
The present value discount rate equals the applicable Federal rate under Code
Section 1274(d) that would apply to a debt instrument that was issued on the
date the Disqualified Organization acquired the Residual Security and whose term
ended on the close of the last quarter in which excess inclusion was expected to
accrue with respect to the Residual Security. Such a tax generally would be
imposed on the transferor of the Residual Security, except that where such
transfer is through an agent (including a broker, nominee, or other middleman)
for a Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Security would in no event be liable for
such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a Disqualified Organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that such affidavit is false. The tax also may be waived by the
Treasury Department if the Disqualified Organization promptly disposes of the
Residual Security and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the Residual Security is actually
held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on the Pass-Through 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
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penalty of perjury that it is not a Disqualified Organization or (ii) furnishes
a social security number and states under penalties of perjury that the social
security number is that of the transferee, provided that during the period such
person is the record holder of the Residual Security, the Pass-Through Entity
does not have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a Series of Securities will provide that
neither legal title nor beneficial interest in a Residual Security may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not purchasing such Residual Securities on
behalf of a Disqualified Organization (i.e., as a broker, nominee or middleman
thereof) and is not an entity that holds REMIC residual securities as nominee to
facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (ii) the
transferor provides a statement in writing to the Depositor and the Trustee that
it has no actual knowledge that such affidavit is false. Moreover, the Agreement
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Security with respect to a Series will have
a legend referring to such restrictions on transfer, and each Residual Owner
will be deemed to have agreed, as a condition of ownership thereof, to any
amendments to the related Agreement required under the Code or applicable
Treasury regulations to effectuate the foregoing restrictions. Information
necessary to compute an applicable excise tax must be furnished to the Internal
Revenue Service and to the requesting party within 60 days of the request, and
the Depositor or the Trustee may charge a fee for computing and providing such
information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Securities are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Securities and thus
continues to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a Noneconomic Residual
Interest (defined below) to a Residual Owner (other than a Residual Owner who is
not a U.S. Person, as defined below under "Foreign Investors") is disregarded
for all federal income tax purposes unless no significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "Noneconomic Residual Interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest federal corporate income tax rate in effect for the
year in which the transfer occurs, and (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. The anticipated excess inclusions and
the present value rate are determined in the same manner as set forth above
under "Disqualified Organizations." A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and, as a result of the investigation, the transferor found that
the transferee had historically paid its debts as they came
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due and found no significant evidence to indicate that the transferor will not
continue to pay its debts as they come due in the future; and (ii) the
transferee represents to the transferor that it understands that, as the holder
of the Noneconomic Residual Interest, the transferee may incur tax liabilities
in excess of any cash flows generated by the residual interest and that the
transferee intends to pay taxes associated with holding of residual interest as
they become due. The Agreement will require the transferee of a Residual
Security to state as part of the affidavit described above under the heading
"Disqualified Organizations" that such transferee (i) has historically paid its
debts as they come due, (ii) intends to continue to pay its debts as they come
due in the future, (iii) understands that, as the holder of a Noneconomic
Residual Interest, it may incur tax liabilities in excess of any cash flows
generated by the Residual Security, and (iv) intends to pay any and all taxes
associated with holding the Residual Security as they become due. The transferor
must have no reason to believe that such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each excess inclusion, (i) the REMIC Pool will
distribute to the transferee residual interest holder an amount that will equal
at least 30% of the excess inclusions and (ii) that each such amount will be
distributed at or after the time at which the excess inclusion accrues and not
later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a Series of Securities may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust that is
subject to U.S. federal income tax regardless of the source of its income.
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Owner
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "Taxation of Residual
Securities - Basis and Losses") of such Residual Owner in such Residual Security
at the time of the sale or exchange. In addition to reporting the taxable income
of the REMIC Pool, a Residual Owner will have taxable income to the extent that
any cash distribution to the Residual Owner from the REMIC Pool exceeds such
adjusted basis on that Payment Date. Such income will be treated as gain from
the sale or exchange of the Residual Security. It is possible that the
termination of the REMIC Pool may be treated as a sale or exchange of a Residual
Owner's Residual Security, in which case, if the Residual Owner has an adjusted
basis in the Residual Security remaining when the Residual Owner's interest in
the REMIC Pool terminates, and if the Residual Owner holds such Residual
Security as a capital asset under Code Section 1221, then the Residual Owner
will recognize a capital loss at that time in the amount of such remaining
adjusted basis.
The Conference Committee Report to the 1986 Act provides that, except
as provided in Treasury regulations yet to be issued, the wash sale rules of
Code Section 1091 will apply to disposition of Residual Securities.
Consequently, losses on dispositions of Residual Securities will be disallowed
where the seller of the Residual Security, during the period beginning six
months before the sale or disposition of the Residual Security and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual Security.
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Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called "prohibited transactions", will not be part of the
calculation of income or loss includible in the federal income tax returns of
Residual Owners, but rather will be taxed directly to the REMIC Pool at a 100%
rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c) bankruptcy
or insolvency of the REMIC Pool or (d) a qualified (complete) liquidation, (ii)
the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold, (iii) the receipt of
compensation for services or (iv) the receipt of gain from disposition of cash
flow investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv), it is not a prohibited transaction to sell REMIC Pool property to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a cleanup call (generally, an optional termination to
save administrative costs when no more than a small percentage of the Regular
Securities is outstanding). The REMIC Regulations indicate that the modification
of a Mortgage Loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
Mortgage Loan, the waiver of a due-on-sale or encumbrance clause or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable rate Mortgage Loan. The REMIC Regulations also provide
that the modification of mortgage loans underlying Mortgage-Backed Securities
will not be treated as a modification of the Mortgage-Backed Securities,
provided that the trust including the Mortgage- Backed Securities was not
created to avoid prohibited transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual Owner, (iii) in
the nature of a guarantee, (iv) made to facilitate a qualified liquidation or
clean-up call and (v) as otherwise permitted in Treasury regulations yet to be
issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of three years, with possible extensions. Net income from
foreclosure property generally means (i) gain from the sale of a foreclosure
property that is inventory property and (ii) gross income from foreclosure
property other than qualifying rents and other qualifying income for a real
estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Securities and Residual Owners within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Owner for an
entire taxable year, the REMIC Pool generally will be subject to the procedural
and
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administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction or credit in a unified
administrative proceeding. The Depositor or other designated Residual Owners
will be obligated to act as "tax matters person," as defined in applicable
Treasury regulations, with respect to the REMIC Pool. If the Code or Treasury
regulations do not permit the Depositor to act as tax matters person in its
capacity as agent of the Residual Owners, the Residual Owner chosen by the
Residual Owners or such other person specified pursuant to Treasury regulations
will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Security is
not required to treat items on its return consistently with their treatment on
the REMIC Pool's return if a holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each holder of a Residual Security is required
to treat items on its return consistently with their treatment on the REMIC
Pool's return, unless the holder of a Residual Security either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC Pool. The Internal Revenue
Service may assess a deficiency resulting from a failure to comply with the
consistency requirement without instituting an administrative proceeding at the
REMIC Pool level.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Securities in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Securities, as well as holders of
Residual Securities, where such Regular Securities are issued in a manner that
is similar to pass-through certificates in a fixed investment trust. In general,
such allocable portion will be determined based on the ratio that a REMIC
Owner's income, determined on a daily basis, bears to the income of all holders
of Regular Securities and Residual Securities with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Securities (either directly
or indirectly through a grantor trust, partnership, S corporation, REMIC, or
certain other pass-through entities described in the foregoing Treasury
regulations) may have taxable income in excess of the interest income at the
pass-through rate on Regular Securities that are issued in a single class or
otherwise consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Securities.
Taxation of Certain Foreign Investors
Regular Securities. Interest, including original issue discount,
distributable to Regular Owners who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the
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person who would otherwise be required to withhold tax from such distributions
under Code Sections 1441 or 1442, with an appropriate statement, signed under
penalties of perjury, identifying the beneficial owner and stating, among other
things, that the beneficial owner of the Regular Security is a Non-U.S. Person.
If such statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated pursuant to an applicable
tax treaty or unless the interest on the Regular Security is effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Person. In the latter case, such Non-U.S. Person will be subject
to United States federal income tax at regular rates. Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Security. The term "Non-U.S. Person"
means any person who is not a U.S. Person.
Residual Securities. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Owners who are Non-U.S. Persons are
treated as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Owners qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (i) the
Mortgage Assets were issued after July 18, 1984 and (ii) the Trust fund or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Assets will not be, but regular interests in another REMIC Pool will
be, considered obligations issued in registered form. Furthermore, a Residual
Owner will not be entitled to any exemption from the 30% withholding tax (or
lower treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "Taxation of Residual Securities -
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions" above. If
the amounts paid to Residual Owners who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Securities - Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
On October 6, 1997, the IRS issued final regulations which could have
an effect on the United States' taxation of foreign investors in Regular
Securities or Residual Securities. The regulations would apply to payments after
December 31, 1999. Investors who are Non-U.S. Persons should consult their own
tax advisors regarding the specific tax consequences to them of owning Residual
Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the
sale of the Regular Securities to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and, under
certain circumstances, principal distributions) unless the Regular Owner
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the Trustee, its agent or the
broker who effected the sale of the Regular Security, or such Owner is otherwise
an exempt recipient under applicable provisions of the Code. Any amounts to be
withheld from distribution on the Regular Securities would be refunded by the
Internal Revenue Service or allowed as a credit against the Regular Owner's
federal income tax liability.
Reporting Requirements
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-exempt
and noncharitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman
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as nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Securities (including corporations, non-calendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in Internal Revenue Service Publication 938
with respect to a particular Series of Regular Securities. Holders through
nominees must request such information from the nominee. Treasury regulations
provide that information necessary to compute the accrual of any market discount
on the Regular Securities must be furnished for calendar years beginning after
1990.
The Internal Revenue Service's Form 1066 has an accompanying Schedule
Q, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Owner by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Owners,
furnished annually, if applicable, to holders of Regular Securities, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Owners, furnished annually to holders of Regular
Securities, and filed annually with the Internal Revenue Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "REMIC Securities - Status of REMIC Securities" and
" - Qualification as a REMIC" above.
Non-REMIC Securities
Special Counsel is of the opinion that if a Trust does not elect REMIC
or FASIT status and is not treated as a partnership, and if the Securities are
not treated as debt for federal tax purposes, the tax consequences to the Owners
will be as described below.
Standard Securities
General. If no election is made to treat a Trust (or a segregated pool
of assets therein) with respect to a Series of Securities as a REMIC, the Trust
may be classified as a grantor trust under subparagraph E, Part 1 of subchapter
J of the Code and not as a partnership or an association taxable as a
corporation. Where there is no fixed retained yield with respect to the Mortgage
Assets underlying the Securities of a Series, and where such Securities are not
designated as Debt Certificates, as described under "Debt Certificates," as
Stripped Securities, as described below under "Stripped Securities" below or as
Partnership Interests described under "Securities Classified as Partnership
Interests," the holder of each such "Standard Security" in such Series will be
treated as the owner of a pro rata undivided interest in the ordinary income and
corpus portions of the Trust represented by his Security and will be considered
the beneficial owner of a pro rata undivided interest in each of the Mortgage
Assets, subject to the discussion below under "Premium and Discount -
Recharacterization of Servicing Fees." Accordingly, the Owner of a Security of a
particular Series will be required to report on its federal income tax return
its pro rata share of the entire income from the Mortgage Assets, original issue
discount (if any), prepayment fees, assumption fees, and late payment charges
received by or on behalf of the Trust, in accordance with such Owner's method of
accounting. A Owner generally will be able to deduct its share of servicing fees
and all administrative and other expenses of the Trust in accordance with his
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Trust. However, investors who are individuals, estates
or trusts who own Securities, either directly or indirectly through certain
pass-through entities, will be subject to limitation with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for servicing fees and all such administrative and other
expenses of the Trust, to the extent that such deductions, in the aggregate, do
not exceed two percent of an investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an
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individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. As a result such investors holding
Securities, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Securities with respect to interest at the pass-through rate on such
Securities or discount thereon. In addition, such expenses are not deductible at
all for purposes of computing the alternative minimum tax and may cause such
investors to be subject to significant additional tax liability. Moreover, where
there is fixed retained yield with respect to the Mortgage Assets underlying a
Series of Securities or where the servicing fees are in excess of reasonable
servicing compensation, the transaction will be subject to the application of
the "stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Securities" and "Premium and Discount - Recharacterization of
Servicing Fees," respectively.
Tax Status. Subject to the discussion below, Special Counsel is of the
opinion that:
1. A Standard Security owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the real property securing the Mortgage Assets
represented by that Security is of the type described in such section.
2. A Standard Security owned by a financial institution
described in Code Section 593(a) will be considered to represent
"qualifying real property loans" within the meaning of Code Section
592(d)(1), provided that the real property securing the Mortgage Assets
represented by that Security is of the type described in such section.
3. A Standard Security owned by a real estate investment trust
will be considered to represent "real estate assets" within the meaning
of Code Section 856(C) (5) (A) to the extent that the assets of the
related Trust consist of qualified assets, and interest income on such
assets will he considered "interest on obligations secured by mortgages
on real property" within the meaning of Code Section 856(c)(3)(B).
4. A Standard Security owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related Trust
consist of "qualified mortgages" within the meaning of Code Section
860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. Code Section 593(d)(l)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer."The application of this
provision to a buy-down fund with respect to a buydown Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buydown Mortgage
Assets as "qualifying real property loans" under Code Section 593(d)(i) if the
exception of Code Section 593(d)(1)(C) is inapplicable, as "loans . . . secured
by an interest in real property" under Code Section 7701(a)(19)(C)(v), as "real
estate assets" under Code Section 856(c)(5)(A), and as "obligation[s]
principally secured by an interest in real property" under Code Section
860G(a)(3)(A), there is indirect authority supporting treatment of an investment
in a buy-down Mortgage Loan as entirely secured by real property if the fair
market value of the real property securing the loan exceeds the principal amount
of the loan at the time of issuance or acquisition, as the case may be. There is
no assurance that the treatment described above is proper. Accordingly, Owners
are urged to consult their own tax advisors concerning the effects of such
arrangements on the characterization of such Owner's investment for federal
income tax purposes.
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Premium and Discount
Owners are advised to consult with their tax advisors as to the federal
income tax treatment of premium and discount arising either upon initial
acquisition of Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Security will be determined generally as described above under "REMIC
Securities - Taxation of Regular Securities - Premium."
Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to an Owner's interest in those
Mortgage Assets as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
are applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July l, 1982, and mortgages of individuals originated after March 2, 1984. Such
original issue discount could arise by the charging of points by the originator
of the mortgages in an amount greater than a statutory de minimis exception, to
the extent that the points are not currently deductible under applicable Code
provisions or are not for services provided by the lender. It is generally not
anticipated that adjustable rate Mortgage Assets will be treated as issued with
original issue discount. However, the application of the OID Regulations to
adjustable rate mortgage loans with incentive interest rates or annual or
lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Assets
acquired by an Owner are purchased at a price equal to the then unpaid principal
amount of such Mortgage Assets, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Assets (i.e., points) will be includible by such holder.
Market Discount. Owners also will be subject to the market discount
rules to the extent that the conditions for application of those sections are
met. Market discount on the Mortgage Assets will be determined and will be
reported as ordinary income generally in the manner described above under "REMIC
Securities - Taxation of Regular Securities - Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount of
such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Securities, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Assets would be increased.
Recently issued Internal Revenue Service guidance indicates that a servicing fee
in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Assets to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Assets.
Under the rules of Code Section 1286, the separation of the right to receive
some or all of the interest payments on an obligation from the right to receive
some or all of the principal payments on the obligation would result in
treatment of such Mortgage Assets as "stripped coupons" and "stripped bonds."
While Owners would
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still be treated as owners of beneficial interests in a grantor trust for
federal income tax purposes, the corpus of such trust could be viewed as
excluding the portion of the Mortgage Assets the ownership of which is
attributed to a servicer, or as including such portion as a second class of
equitable interest. Applicable Treasury regulations treat such an arrangement as
a fixed investment trust, since the multiple classes of trust interests should
be treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, such a recharacterization should not have any significant
effect upon the timing or amount of income reported by an Owner, except that the
income reported by a cash method holder may be slightly accelerated. See
"Stripped Securities" below for a further description of the federal income tax
treatment of stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the Owners to
purchase an undivided interest in the Mortgage Assets. In such event, the
present value of such additional payments might be included in the Owner's basis
in such undivided interests for purposes of determining whether the Security was
acquired at a discount, at par, or at a premium. Under this alternative, Owners
may also be entitled to a deduction for unstated interest with respect to each
deferred payment. The Internal Revenue Service may take the position that the
specific statutory provisions of Code Section 1286 described above override the
alternative described in this paragraph. Owners are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
Sale or Exchange of Securities. Upon sale or exchange of a Security, a
Owner will recognize gain or loss equal to the difference between the amount
realized on the sale and its aggregate adjusted basis in the Mortgage Assets and
other assets represented by the Security. In general, the aggregate adjusted
basis will equal the Owner's cost for the Security, increased by the amount of
any income previously reported with respect to the Security and decreased by the
amount of any losses previously reported with respect to the Security and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Assets, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss would be capital gain or loss if the Security was held as a
capital asset.
Stripped Securities
General. Pursuant to Code Section 1286, the separation of ownership of
the right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Securities that are subject to those rules will be referred to as
"Stripped Securities." The Securities will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Securities - Recharacterization of the
Servicing Fees" above) and (iii) a class of Securities are issued in two or more
classes or subclasses representing the right to non pro rata percentages of the
interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Security (a "Stripped Owner") will
be considered to own "stripped bonds" with respect to its pro rata share of all
or a portion of the principal payments on each Mortgage Loan and/or "stripped
coupons" with respect to its pro rata share of all or a portion of the interest
payments on each Mortgage Loan, including the Stripped Security's allocable
share of the servicing fees paid, to the extent that such fees represent
reasonable compensation for services rendered. See discussion above under
"Standard Securities - Recharacterization of Servicing Fees." For this purpose
the servicing fees will be allocated to the Stripped Securities in proportion to
the respective offering price of each class (or subclass) of Stripped
Securities. The
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holder of a Stripped Security generally will be entitled to a deduction each
year in respect of the servicing fees, as described above under "Standard
Securities - General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally
as a new obligation issued (i) on the date that the stripped interest is
purchased and (ii) at a price equal to its purchase price or, if more than one
stripped interest is purchased, the share of the purchase price allocable to
such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Securities are issued with respect to a Trust
containing variable rate Mortgage Assets, the Depositor has been advised by
counsel that (i) the Trust will be treated as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation, and (ii) each Stripped Security should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286 and the regulations thereunder, Code Sections 1272 through
1275, and the OID Regulations. While under Code Section 1286 computations with
respect to Stripped Securities arguably should be made in one of the ways
described below, the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as a
single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the
treatment of a Stripped Security as a single debt instrument issued on the date
it is originated for purposes of calculating any original issue discount. The
preamble to such regulations state that such regulations are premised on the
assumption that an aggregation approach is appropriate in determining whether
original issue discount on a stripped bond or stripped coupon is de minimis. In
addition, under these regulations, a Stripped Security that represents a right
to payments of both interest and principal may be viewed either as issued with
original issue discount or market discount (as described below), at a de minimis
original issue discount, or presumably, at a premium. The preamble to such
regulations also provide that such regulations are premised on the assumption
that generally the interest component of such a Stripped Security would be
treated as stated interest under the original issue discount rules. Further, the
regulations provide that the purchaser of such a Stripped Security may be
required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Strip
Security was treated as zero under the de minimis rule or (ii) no more than 100
basis points in excess of reasonable servicing is stripped off the related
Mortgage Assets. Any such market discount would be reportable as described above
under "REMIC Securities - Taxation of Regular Securities - Market Discount,"
without regard to the de minimis rule therein.
Status of Stripped Securities. No specific legal authority exists as to
whether the character of the Stripped Securities, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Although the issue is
not free from doubt, counsel has advised the Depositor that Stripped Securities
owned by applicable holders should be considered to represent "qualifying real
property loans" within the meaning or Code Section 593(d)(1), "real estate
assets" within the meaning of Code Section 856(c)(A), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Securities should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning or Code Section 856(c)(3)(B), provided that in each
case the Mortgage Assets and interest on such Mortgage Assets qualify for such
treatment. The application of such Code provisions to buy-down Mortgage Assets
is uncertain. See "Standard Securities - Tax Status" above.
Original Issue Discount. Except as described above under "General,"
each Stripped Security will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such
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coupon) over its issue price. Original issue discount with respect to a Stripped
Security must be included in ordinary income as it accrues, in accordance with a
constant yield method that takes into account the compounding of interest, which
may be prior to the receipt of the cash attributable to such income. Counsel has
advised the Depositor that the amount of original issue discount required to be
included in the income of a Stripped Owner in any taxable year likely will be
computed generally as described above under "REMIC Securities - Taxation of
Regular Securities - Original Issue Discount" and "-Taxation of Regular
Securities - Variable Rate Regular Securities." However, with the apparent
exception of a Stripped Security issued with de minimis original issue discount,
as described above under "General," the issue price of a Stripped Security will
be the purchase price paid by each holder thereof, and the stated redemption
price at maturity will include the aggregate amount of the payments to be made
on the Stripped Security to such Stripped Owner, presumably under the Prepayment
Assumption, other than amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Owner's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by such Stripped Owner's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize
an ordinary loss equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some of
or all the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Assets are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply, treatment
of a Stripped Security under such rules depends on whether the aggregate amount
of principal payments, if any, to be made on the Stripped Security is less than
or greater than its issue price. If the aggregate principal payments are greater
than or equal to the issue price, the principal payments would be treated as a
separate installment obligation issued at a price equal to the purchase price
for the Stripped Security. In such case, original issue discount would be
calculated and accrued under the method described above without consideration of
the interest payments with respect to the Stripped Security. Such payments of
interest would be includible in the Stripped Owner's gross income in the taxable
year in which the amounts become fixed. If the aggregate amount of principal
payments to be made on the Stripped Security is less than its issue price, each
payment of principal would be treated as a return of basis. Each payment of
interest would be treated as includible in gross income to the extent of the
applicable Federal rate under Code Section 1274(d), as applied to the adjusted
basis of the Stripped Security, while amounts received in excess of the
applicable Federal rate, as applied to the adjusted basis of the Stripped
Security, would be characterized as a return of basis until the total amount of
interest payments treated as a return of basis equalled the excess of the
purchase price over the aggregate stated principal payments. Any additional
interest payments thereafter would be treated as ordinary income. While not free
from doubt uncertainty as to the payment of interest arising as a result of the
possibility of prepayment of the Mortgage Assets should not cause the rules
under the proposed contingent payment regulations to apply to interest with
respect to the Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped Owner's
adjusted basis in such Stripped Security, as described above under "REMIC
Securities - Taxation of Regular Securities - Sale or Exchange of Regular
Securities." To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Stripped Owner other than by original Stripped Owner
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
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Purchase of More Than One Class of Stripped Securities. Where an
investor purchases more than one class of Stripped Securities, it is currently
unclear whether for federal income tax purposes such classes of Stripped
Securities should be treated separately or aggregated for purposes of the rules
described above.
Because of these possible varying characterizations of Stripped
Securities and the resultant differing treatment of income recognition, Stripped
Owners are urged to consult their own tax advisors regarding the proper
treatment of Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee or the Indenture Trustee, as applicable, will furnish,
within a reasonable time after the end of each calendar year, to each Owner or
Stripped Owner at any time during such year, such information (prepared on the
basis described above) as the Trustee or the Indenture Trustee, as applicable,
deems to be necessary or desirable to enable such Owners to prepare their
federal income tax returns. Such information will include the amount of original
issue discount accrued on Securities held by persons other than Owners exempted
from the reporting requirements. The amounts required to be reported by the
Trustee or the Indenture Trustee, as applicable, may not be equal to the proper
amount of original issue discount required to be reported as taxable income by
an Owner, other than an original Owner. The Trustee or the Indenture Trustee, as
applicable, will also file such original issue discount information with the
Internal Revenue Service. If an Owner fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Owner has not reported all interest and dividend income required to be shown on
his federal income tax return, 31% backup withholding may be required in respect
of any reportable payments, as described above under "Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Assets
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442,
which apply to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or such
lower rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount or market discount recognized by the Owner on the sale
or exchange of such a Security also will be subject to federal income tax at the
same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements described above under "REMIC
Securities - Taxation of Certain Foreign Investors - Regular Securities."
Owners should be aware that the IRS issued final regulations on October
20, 1997 which could affect the United States' taxation of foreign investors in
Securities. The regulations would apply to payments after December 31, 1999.
Investors who are non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning Securities.
Debt Certificates
General. Certain Certificates ("Debt Certificates") may be issued with
the intention to treat them, for federal income tax purposes, either as (i)
non-recourse debt of the Depositor secured by the related Mortgage Assets, in
which case the related Trust will constitute only a security device which
constitutes a collateral arrangement for the issuance of secured debt and not an
entity for federal income tax purposes or (ii) debt of a partnership, in which
case the related Trust will constitute a partnership for federal income tax
purposes. Special Counsel is of the opinion that (unless otherwise limited in
the related Prospectus Supplement), for federal income tax purposes, assuming
compliance with all the provisions of the related Indenture, (i) Debt
Certificates will be
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characterized as debt issued by, and not equity in, the related Trust and (ii)
the related Trust will not be characterized as an association (or publicly
traded partnership within the meaning of Code Section 7704) taxable as a
corporation or as a taxable mortgage pool within the meaning of Code Section
7701(i). Since different criteria are used to determine the non-tax accounting
treatment of the issuance of Debt Certificates, however, the Depositor expects
to treat such transactions, for financial accounting purposes, as a transfer of
an ownership interest in the related Mortgage Assets to the related Trust and
not as the issuance of debt obligations. In this regard, it should be noted that
the IRS has issued a notice stating that, upon examination, it will scrutinize
instruments treated as debt for federal income tax purposes but as equity for
regulatory, rating agency or financial accounting purposes to determine if their
purported status as debt for federal income tax purposes is appropriate.
Assuming, as Special Counsel advises, that Debt Certificates will be treated as
indebtedness for federal income tax purposes, holders of Debt Certificates,
using their method of tax accounting, will follow the federal income tax
treatment hereinafter described.
Original Issue Discount. It is likely that the Debt Certificates will
be treated as having been issued with "original issue discount" within the
meaning of Code Section 1273(a) because interest payments on the Debt
Certificates may, in the event of certain shortfalls, be deferred for periods
exceeding one year. As a result, interest payments may not be considered
"qualified stated interest" payments.
In general, a holder of a Debt Certificate having original issue
discount must include original issue discount in ordinary income as it accrues
in advance of receipt of the cash attributable to the discount, regardless of
the method of accounting otherwise used. The amount of original issue discount
on a Debt Certificate will be computed generally as described under "REMIC
Securities - Taxation of Regular Securities - Original Issue Discount" and
"-Taxation of Regular Securities - Variable Rate Regular Securities." The
Depositor intends to report any information required with respect to the Debt
Certificates based on the OID Regulations.
Market Discount. A purchaser of a Debt Certificate may be subject to
the market discount rules of Code Sections 1276 through 1278. In general,
"market discount" is the amount by which the stated redemption price at maturity
(or, in the case of a Debt Certificate issued with original issue discount, the
adjusted issue price) of the Debt Certificate exceeds the purchaser's basis in a
Debt Certificate. The holder of a Debt Certificate that has market discount
generally will be required to include accrued market discount in ordinary income
to the extent payments includible in the stated redemption price at maturity of
such Debt Certificate are received. The amount of market discount on a Debt
Certificate will be computed generally as described under "REMIC Securities -
Taxation of Regular Securities - Market Discount."
Premium. A Debt Certificate purchased at a cost greater than its
currently outstanding stated redemption price at maturity is considered to be
purchased at a premium. A holder of a Debt Certificate who holds a Debt
Certificate as a "capital asset" within the meaning of Code Section 1221 may
elect under Code Section 171 to amortize the premium under the constant interest
method. That election will apply to all premium obligations that the holder of a
Debt Certificate acquires on or after the first day of the taxable year for
which the election is made, unless the IRS permits the revocation of the
election. In addition, it appears that the same rules that apply to the accrual
of market discount on installment obligations are intended to apply in
amortizing premium on installment obligations such as the Debt Certificates. The
treatment of premium incurred upon the purchase of a Debt Certificate will be
determined generally as described above under "REMIC Securities - Taxation of
Regular Securities - Premium."
Sale or Exchange of Debt Certificates. If a holder of a Debt
Certificate sells or exchanges a Debt Certificate, the holder of a Debt
Certificate will recognize gain or loss equal to the difference, if any, between
the amount received and the holder of a Debt Certificate's adjusted basis in the
Debt Certificate. The adjusted basis in the Debt Certificate generally will
equal its initial cost, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Debt Certificate and reduced by the payments previously received on the Debt
Certificate, other than payments of qualified stated interest, and by any
amortized premium.
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In general, except as described above with respect to market discount,
and except for certain financial institutions subject to Code Section 582(c),
any gain or loss on the sale or exchange of a Debt Certificate recognized by an
investor who holds the Debt Certificate as a capital asset (within the meaning
of Code Section 1221), will be capital gain or loss and will be long term or
short term depending on whether the Debt Certificate has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
long-term capital gains. For individual taxpayers, net capital gains are subject
to varying tax rates depending upon the holding period of the Debt Certificates.
Backup Withholding. Holders of Debt Certificates will be subject to
backup withholding rules identical to those applicable to REMIC Regular
Securities. See "REMIC Securities - Backup Withholding."
Tax Treatment of Foreign Investors. Holders of Debt Certificates who
are foreign investors will be subject to taxation in the same manner as foreign
holders of REMIC Regular Securities. See "REMIC Securities - Taxation of Certain
Foreign Investors - Regular Securities."
Notes
With respect to those Securities issued as Notes, no regulations,
published rulings or judicial decisions exist that discuss the characterization
for federal income tax purposes of instruments with terms substantially the same
as the Notes. However, Special Counsel is of the opinion that (unless otherwise
limited in the related Prospectus Supplement), for federal income tax purposes,
assuming compliance with all the provisions of the related Indenture, (i) Notes
will be characterized as debt issued by, and not equity in, the related Trust
and (ii) the related Trust will not be characterized as an association (or
publicly traded partnership within the meaning of Code Section 7704) taxable as
a corporation or as a taxable mortgage pool within the meaning of Code Section
7701(i). Assuming, as Special Counsel advises, that Notes are treated as
indebtedness for federal income tax purposes, holders of Notes, using their
method of tax accounting, will follow the same federal income tax treatment as
Debt Certificates, as described above under "Debt Certificates."
For federal income tax purposes, (i) Notes held by a thrift institution
taxed as a "mutual savings bank" or "domestic building and loan association"
will not represent interests in "qualifying real property loans" within the
meaning of Code Section 593(d)(1); (ii) Notes held by a thrift institution taxed
as a domestic building and loan association will not constitute "loans ...
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v); (iii) interest on Notes held by a real estate investment
trust will not be treated as "interest on obligations secured by mortgages on
real property or on interests in real property " within the meaning of Code
Section 856(c)(3)(B); (iv) Notes held be a real estate investment trust will not
constitute "real estate assets" or "Government securities" within the meaning of
Code Section 856(c)(5)(A); and (v) Notes held by a regulated investment company
will not constitute "Government securities" within the meaning of Code Section
851(b)(4)(A)(i).
Certificates Classified as Partnership Interests
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Securities characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such Series of Partnership Interests, Special Counsel is of the
opinion that (unless otherwise limited in the related Prospectus Supplement) the
Trust will be characterized as a partnership and not an association taxable as a
corporation or taxable mortgage pool for federal income tax purposes. The
related Prospectus Supplement will also cover any material federal income tax
consequences applicable to the Owners.
FASIT Securities
With respect to a particular Series of Securities, an election may be
made to treat the Trust or one or more trusts or segregated pools of assets
therein as one or more FASITs within the meaning of Code Section 860L. A Trust
or a portion or portions thereof as to which one or more FASIT elections will be
made will be referred to
73
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as a "FASIT Pool." For purposes of this discussion, Securities of a Series as to
which one or more FASIT elections are made are referred to as "FASIT Securities"
and will consist of one or more classes of "FASIT Regular Securities" and one
"Ownership Interest Security" in the case of each FASIT Pool. Qualification as a
FASIT requires ongoing compliance with certain conditions. With respect to each
Series of FASIT Securities, Special Counsel has advised the Depositor that in
their opinion (unless otherwise limited in the related Prospectus Supplement),
assuming (i) the making of an appropriate election, (ii) compliance with all
provisions of the related Indenture and (iii) compliance with the applicable
provisions of the law, including any amendments to the Code or applicable
Treasury regulations thereunder, each FASIT Pool will qualify as a FASIT. In
such case, the FASIT Regular Securities will be considered to be "regular
interests" in the FASIT Pool and generally will be treated for federal income
tax purposes as if they were newly originated debt instruments, and the
Ownership Interest Security will be considered to be the "ownership interest" in
the FASIT Pool. The Prospectus Supplement for each Series of Securities will
indicate whether one or more FASIT elections with respect to the related Trust
will be made and will also cover any material federal income tax consequences
applicable to the holders of FASIT Securities.
PLAN OF DISTRIBUTION
Securities are being offered hereby in Series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the Series of Securities,
including the public offering or purchase price of each class of Securities of
such Series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Securities will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Securities from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular Series of Securities will be set forth on the
cover of the Prospectus Supplement relating to such Series and the members of
the underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Securities, Underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Depositor and any profit on the resale of Securities by them may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended. The Prospectus Supplement will describe any such
compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the
sale of any Series of Securities will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Securities if any are
purchased and that the Depositor will indemnify the Underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.
RATINGS
Each class of Securities of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning Rating Agency. No person is obligated to maintain the rating on any
Security, and, accordingly, there can be no assurance that the ratings assigned
to a Security upon initial issuance will not be lowered or withdrawn by a Rating
Agency at any time thereafter. In general, ratings address credit risk and do
not represent any assessment of the likelihood or rate of principal prepayments.
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<PAGE>
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Securities of each Series including insolvency issues and certain federal income
tax matters concerning the Securities will be passed upon for the Depositor by
Arter & Hadden LLP, Washington, D.C.
FINANCIAL INFORMATION
A Trust will be formed with respect to each Series of Securities. No
Trust will have any assets or obligations prior to the issuance of the related
Series of Securities. No Trust will engage in any activities other than those
described herein or in the Prospectus Supplement. Accordingly, no financial
statement with respect to any Trust is included in this Prospectus or will be
included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not
material to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
Although the Notes of any Series will represent obligations of the
related Issuer, such obligations will be nonrecourse and the proceeds of the
assets included in the related Trust will be the sole source of payments on the
Notes of such Series. The Issuer for any Series of Notes will not have, nor be
expected in the future to have, any significant assets available for payments on
such Series of Notes other than the assets included in the related Trust.
Accordingly, the investment characteristics of a Series of Notes will be
determined by the assets included in the related Trust and will not be affected
by the identity of the obligor with respect to such Series of Notes.
Accordingly, no capitalization information or any historical or pro forma ratio
of earnings to fixed charges or any other financial information with respect to
any trust, partnership, limited liability company or corporation formed for the
purpose of issuing a Series of Notes has been or will be included herein or in
the related Prospectus Supplement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
1986 Act.............................................................50
1996 Act.............................................................58
Agreement.............................................................1
AMTI.................................................................58
Applicable Accounting Standards......................................31
Balloon Loans.........................................................7
Beneficial Owners.....................................................5
BIF..................................................................32
Book Entry Registration..............................................12
Book Entry Securities.................................................4
Certificates..........................................................1
Clearing Agency.......................................................4
Clearing Agency Participants..........................................5
Code..................................................................5
Companion Securities.................................................13
Compound Interest Securities.........................................13
Cooperative Loans....................................................16
Cooperatives..........................................................2
Credit Enhancement....................................................4
Credit Enhancer......................................................10
Custodial Account....................................................24
Cut-Off Date.........................................................12
DCR...................................................................6
Debt Certificates....................................................71
Defective Mortgage Loan..............................................31
Delivery Date........................................................11
Deposit Date.........................................................31
Depositor.............................................................1
Disqualified Organization............................................60
DOL..................................................................47
Eligible Investments.................................................32
Equity Certificates...................................................2
ERISA.................................................................5
Events of Default....................................................34
FASIT.................................................................5
FASIT Pool...........................................................74
FASIT Regular Securities.............................................74
FASIT Securities.....................................................74
Fannie Mae............................................................2
FDIC.................................................................24
FHLMC.................................................................2
Financial Guaranty Insurance Policy..................................19
Financial Guaranty Insurer...........................................19
Fitch.................................................................6
Garn-St. Germain Act.................................................45
GNMA..................................................................2
Indenture.............................................................1
Indenture Trustee.....................................................1
Insurance Paying Agent...............................................19
Insurance Proceeds...................................................24
Insured Payment......................................................19
Interest Accrual Period..............................................14
Issuer................................................................1
Liquidation Proceeds.................................................24
Loan-to-Value Ratio..................................................18
Mark to Market Regulations...........................................57
Master Servicer.......................................................1
MBS...................................................................2
MBS Agreement........................................................18
MBS Issuer...........................................................18
MBS Servicer.........................................................18
MBS Trustee..........................................................18
Monthly Advance......................................................25
Moody's...............................................................6
Mortgage Assets.......................................................2
Mortgage Loans........................................................2
Mortgage Notes.......................................................16
Mortgage Pool Insurance Policy.......................................21
Mortgage Rates.......................................................17
Mortgaged Properties.................................................16
Mortgages............................................................16
Mortgage-Backed Securities............................................2
Mortgagors...........................................................24
NCUA.................................................................24
Non-Priority Securities..............................................13
Non-U.S. Person......................................................64
Noneconomic Residual Interest........................................60
Nonrecoverable Advance...............................................25
Note Event of Default................................................36
Note Rate............................................................14
Notes.................................................................1
Notional Principal Balance...........................................14
OID Regulations......................................................48
Original Value.......................................................18
OTS..................................................................45
Owner Trustee.........................................................1
Owners................................................................3
Ownership Interest Security..........................................74
Partnership Interests................................................73
Pass-Through Entity..................................................59
Pass-Through Rate.....................................................3
Payment Date.........................................................13
Plans................................................................47
Policy Statement.....................................................46
Pool Insurer.........................................................21
Pooling and Servicing Agreement.......................................1
Premium Regulations..................................................55
Prepayment Assumption................................................51
Pre-Funding Account...................................................3
Principal Balance....................................................17
Principal Prepayments................................................14
Priority Securities..................................................13
PTE 83-1.............................................................47
Rating Agency.........................................................6
REIT.................................................................49
REMIC.................................................................5
REMIC Pool...........................................................49
REMIC Regulations....................................................48
REMIC Securities.....................................................49
Record Date..........................................................13
Regular Owner........................................................50
Regular Securities...................................................49
Relief Act...........................................................10
Remittance Date......................................................25
Remittance Rate......................................................25
Reserve Fund.........................................................23
Residual Owners......................................................55
Residual Securities..................................................49
Retail Class Security................................................50
Riegle Act............................................................9
SAIF.................................................................32
Sale and Servicing Agreement.........................................24
Scheduled Amortization Securities....................................13
Securities............................................................1
Securities Interest Rate.............................................13
Security Account.....................................................14
Security Principal Balance...........................................12
Security Register....................................................12
Security Registrar...................................................12
Seller................................................................1
Senior Securities....................................................20
Servicer..............................................................1
SMMEA.................................................................5
Special Allocation Securities........................................13
Special Counsel......................................................48
Special Hazard Insurance Policy......................................22
Special Hazard Insurer...............................................22
Standard & Poor's.....................................................6
Standard Certificate.................................................65
Stripped Owner.......................................................68
Stripped Securities..................................................68
Subordinated Securities..............................................20
A-1
<PAGE>
Page
Subsequent Transfer Agreement.........................................3
Thrift Institution...................................................49
TMP..................................................................50
Trust.................................................................1
Trust Agreement.......................................................1
Trustee...............................................................1
U.S. Person..........................................................61
UCC..................................................................42
Underwriters.........................................................74
A-2
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE DEPOSITOR SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms............................... S-1
Risk Factors................................... S-12
The Seller and Servicer........................ S-14
The Issuer..................................... S-19
The Depositor.................................. S-19
Use of Proceeds................................ S-19
The Home Equity Loan Pool...................... S-20
Prepayment and Yield Considerations............ S-31
Additional Information......................... S-36
Description of the Notes....................... S-36
The Note Insurer............................... S-43
Credit Enhancement............................. S-47
Administration................................. S-49
Federal Income Tax Consequences................ S-60
State Tax Consequences......................... S-61
ERISA Considerations........................... S-61
Ratings........................................ S-62
Legal Investment Considerations................ S-63
Underwriting................................... S-63
Report of Experts.............................. S-64
Certain Legal Matters.......................... S-64
Global Clearance, Settlement and Tax
Documentation Procedures..................... I-1
Index to Location of Principal Defined Terms... A-1
PROSPECTUS
Summary of Prospectus.......................... 1
Risk Factors................................... 7
Description of the Securities.................. 11
The Trusts..................................... 16
Credit Enhancement............................. 19
Servicing of Mortgage Loans.................... 24
The Pooling and Servicing Agreement............ 29
The Indenture.................................. 35
Use of Proceeds................................ 39
The Depositor.................................. 39
Certain Legal Aspects of the Mortgage Assets... 40
Legal Investment Matters....................... 46
ERISA Considerations........................... 47
Federal Income Tax Consequences................ 48
Plan of Distribution........................... 74
Ratings........................................ 74
Legal Matters.................................. 75
Financial Information.......................... 75
Index to Location of Principal Defined Terms... A-1
</TABLE>
================================================================================
<PAGE>
================================================================================
IMC HOME EQUITY LOAN
OWNER TRUST 1998-4
$600,000,000 ADJUSTABLE RATE
HOME EQUITY LOAN
ASSET BACKED NOTES, SERIES 1998-4,
DUE AUGUST 20, 2029
[LOGO]
IMC MORTGAGE COMPANY
SELLER AND SERVICER
IMC SECURITIES, INC.
DEPOSITOR
------------------------
PROSPECTUS SUPPLEMENT
------------------------
PAINEWEBBER INCORPORATED
BEAR, STEARNS & CO. INC.
DEUTSCHE BANK SECURITIES INC.
NOMURA SECURITIES INTERNATIONAL, INC.
JUNE 19, 1998
================================================================================
