PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 29, 1998)
$500,000,000
IMC HOME EQUITY LOAN TRUST 1998-5
IMC MORTGAGE COMPANY
[INSERT LOGO] SELLER AND SERVICER
IMC SECURITIES, INC.
DEPOSITOR
------------------------------
The IMC Home Equity Loan Pass-Through Certificates, Series 1998-5 (the
'Certificates') will consist of (i) the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the Class
A-5 Certificates, the Class A-6 Certificates and the Class A-7IO Certificates
(collectively, the 'Class A Certificates'), (ii) the Class M-1 Certificates and
the Class M-2 Certificates (collectively, the 'Mezzanine Certificates'), (iii)
the Class B Certificates (collectively with the Mezzanine Certificates, the
'Subordinate Certificates') and (iv) the residual class with respect to each
REMIC held by the Trust. Only the Class A Certificates, the Mezzanine
Certificates and the Class B Certificates (collectively, the 'Offered
Certificates') are offered hereby.
The Certificates represent undivided ownership interests in a pool of fixed
rate home equity loans (the 'Home Equity Loans') held by IMC Home Equity Loan
Trust 1998-5 (the 'Trust'), which are secured by first and second lien mortgages
or deeds of trust primarily on one- to four-family residential properties. The
Certificates also represent an undivided ownership interest in all interest and
principal due under the respective Home Equity Loans after September 1, 1998
(the 'Cut-Off Date'), security interests in the properties which secure the
related Home Equity Loans (the 'Properties'), funds on deposit in certain trust
accounts, and certain other property.
------------------------------
(continued on following page)
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
CERTIFICATES, SEE 'RISK FACTORS' BEGINNING ON PAGE S-17 HEREIN, 'PREPAYMENT AND
YIELD CONSIDERATIONS' BEGINNING ON PAGE S-32 HEREIN AND 'RISK FACTORS' BEGINNING
ON PAGE 7 IN THE PROSPECTUS.
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE
SERVICER, THE TRUSTEE, OR ANY OF THEIR AFFILIATES, EXCEPT AS DESCRIBED
HEREIN. NEITHER THE OFFERED CERTIFICATES NOR THE HOME EQUITY LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
INITIAL CERTIFICATE PASS-THROUGH PRICE TO UNDERWRITING
PRINCIPAL BALANCE RATE PUBLIC(1) DISCOUNT
<S> <C> <C> <C> <C>
Per Class A-1 Certificate.................... $175,301,000.00 Variable(3) 100.000000% 0.125%
Per Class A-2 Certificate.................... $ 63,966,000.00 5.97% 99.997344% 0.150%
Per Class A-3 Certificate.................... $ 77,267,000.00 6.20% 99.978397% 0.200%
Per Class A-4 Certificate.................... $ 54,546,000.00 6.23%(4) 99.989203% 0.250%
Per Class A-5 Certificate.................... $ 23,920,000.00 6.58%(4)(5) 99.983660% 0.325%
Per Class A-6 Certificate.................... $ 35,000,000.00 6.06%(4)(5) 99.971969% 0.300%
Per Class A-7IO Certificate.................. (6) 8.34% 18.970083% 0.082%
Per Class M-1 Certificate.................... $ 31,250,000.00 6.68%(4)(5) 99.964870% 0.450%
Per Class M-2 Certificate.................... $ 18,750,000.00 7.08%(4)(5) 99.988583% 0.650%
Per Class B Certificate...................... $ 20,000,000.00 8.47%(4)(5) 99.963300% 0.850%
Total........................................ $500,000,000.00 $506,581,070.60 $1,249,914.25
<CAPTION>
PROCEEDS TO
DEPOSITOR(1)(2)
<S> <C>
Per Class A-1 Certificate.................... 99.875000%
Per Class A-2 Certificate.................... 99.847344%
Per Class A-3 Certificate.................... 99.778397%
Per Class A-4 Certificate.................... 99.739203%
Per Class A-5 Certificate.................... 99.658660%
Per Class A-6 Certificate.................... 99.671969%
Per Class A-7IO Certificate.................. 18.888083%
Per Class M-1 Certificate.................... 99.514870%
Per Class M-2 Certificate.................... 99.338583%
Per Class B Certificate...................... 99.113300%
Total........................................ $505,331,156.35
</TABLE>
(1) Plus accrued interest (other than on the Class A-1 Certificates), if any,
from September 1, 1998.
(2) Before deducting expenses, estimated to be $425,000.
(3) The Pass-Through Rate on the Class A-1 Certificates adjusts monthly based on
LIBOR as described herein.
(4) Subject to adjustment after the Clean-Up Call Date as described herein.
(5) The Pass-Through Rate on this Class may be limited as described herein.
(6) Interest will be calculated on the basis of a Notional Principal Amount
equal to the outstanding Certificate Principal Balance of the Class A-6
Certificates until the Payment Date in March 2001.
------------------------------
The Offered Certificates are offered subject to prior sale, when, as, and if
accepted by the Underwriters and subject to the Underwriters' right to reject
orders in whole or in part. It is expected that the Offered Certificates 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 September 10,
1998. The Offered Certificates will be offered in Europe and the United States
of America.
Underwriters of the Offered Certificates
DEUTSCHE BANK SECURITIES
BEAR, STEARNS & CO. INC.
NOMURA SECURITIES INTERNATIONAL, INC.
PAINEWEBBER INCORPORATED
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS AUGUST 27, 1998
<PAGE>
(cover continued from previous page)
The Class M-1 Certificates are subordinate in right of distribution to
the Class A Certificates to the extent described herein. The Class M-2
Certificates are subordinate in right of distribution to the Class A
Certificates and the Class M-1 Certificates to the extent described herein. The
Class B Certificates are subordinate in right of distribution to the Class A
Certificates and the Mezzanine Certificates to the extent described herein. The
initial aggregate Certificate Principal Balance of the Subordinate Certificates
will equal 14.00% of the initial aggregate Certificate Principal Balance of all
of the Certificates.
The aggregate Loan Balance of the Home Equity Loans as of the
Statistical Calculation Date was $499,994,462.56 (of which approximately 89.27%
by principal balance are first liens and the remainder are second liens). The
Home Equity Loans were originated or purchased by IMC Mortgage Company (the
"Seller" and "Servicer"). The Trust will be created pursuant to a Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") to be dated as of
September 1, 1998 among the Seller, the Servicer, IMC Securities, Inc. (the
"Depositor") and The Chase Manhattan Bank, as Trustee (the "Trustee").
Distributions of principal and interest will be made to owners (the
"Owners") of the Certificates on the 20th day of each month (or, if such day is
not a business day, the next following business day) beginning on October 20,
1998 (each, a "Payment Date"). To the extent available, interest will be passed
through on each Payment Date to the Owners of the Offered Certificates based on
the related Certificate Principal Balance (as defined herein) or Notional
Principal Amount (as defined herein) in the case of the Class A-7IO Certificates
at the Pass-Through Rate applicable to such Class of Certificates, subject to
the limitations described herein. The Pass-Through Rate for each Class of
Offered Certificates (other than the Class A-1 Certificates) is set out on the
cover hereof. The Pass-Through Rate for the Class A-1 Certificates adjusts
monthly based on one-month LIBOR (as defined herein) or as otherwise described
herein. The Pass-Through Rate for the Class A-7IO Certificates is described
under "Summary of Terms -- Certificates Offered" herein. Distributions of
principal in reduction of the Certificate Principal Balances will be made on
each Payment Date in the manner and the amounts described herein.
As described further herein, the Mezzanine Certificates and Class B
Certificates may not be acquired by Plans (as defined herein). See "ERISA
Considerations" herein.
The Class A-7IO Certificates are interest-only Certificates. The yield
to investors on the Class A-7IO Certificates will be, and the yield to investors
on the other Classes of Offered Certificates sold at prices other than par may
be, extremely sensitive to the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations) on the related Home Equity
Loans, which may vary over time. See "Summary of Terms -- Nature of the Class
A-7IO Certificates" and "Prepayment and Yield Considerations" herein and "Risk
Factors" in the Prospectus.
The Trust Estate will consist primarily of two segregated asset pools,
with respect to which elections will be made to treat each as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. As
described more fully herein, all Classes of the Offered Certificates will
constitute a "regular interest" in the Upper-Tier REMIC. See "Federal Income Tax
Consequences" herein and in the Prospectus.
Prior to their issuance, there has been no market for the Offered
Certificates and there can be no assurance that one will develop, or if it does
develop, that it will provide liquidity, or that it will continue for the life
of the Offered Certificates. The Underwriters intend, but are not obligated, to
make a market in the Offered Certificates.
---------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
The Offered Certificates offered by this Prospectus Supplement will be
part of a separate series of Certificates being offered by the Depositor
pursuant to its Prospectus dated 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.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
CERTIFICATES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
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 Offered
Certificates, 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 Offered
Certificates.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
----
SUMMARY OF TERMS............................................................S-1
RISK FACTORS...............................................................S-17
THE SELLER AND SERVICER....................................................S-20
General...............................................................S-20
Credit and Underwriting Guidelines....................................S-21
Delinquency, Loan Loss and Foreclosure Information....................S-23
Year 2000 Compliance..................................................S-24
THE DEPOSITOR..............................................................S-25
USE OF PROCEEDS............................................................S-25
THE HOME EQUITY LOAN POOL..................................................S-25
General...............................................................S-25
Interest Payments on the Home Equity Loans............................S-32
PREPAYMENT AND YIELD CONSIDERATIONS........................................S-32
General...............................................................S-32
Prepayment and Yield Scenarios for Offered Certificates...............S-33
Payment Lag Feature of Fixed Rate Certificates........................S-37
Yield Sensitivity of the Class A-7IO Certificates.....................S-37
FORMATION OF THE TRUST AND TRUST PROPERTY..................................S-38
ADDITIONAL INFORMATION.....................................................S-39
DESCRIPTION OF THE OFFERED CERTIFICATES....................................S-39
General...............................................................S-39
Payment Dates.........................................................S-39
Distributions.........................................................S-40
Calculation of LIBOR..................................................S-42
Book Entry Registration of the Offered Certificates...................S-42
Assignment of Rights..................................................S-46
CREDIT ENHANCEMENT.........................................................S-46
Subordination of Subordinate Certificates.............................S-46
Application of Realized Losses........................................S-46
Application of Monthly Excess Cashflow Amounts........................S-47
THE POOLING AND SERVICING AGREEMENT........................................S-50
Covenant of the Seller to Take Certain Actions with Respect
to the Home Equity Loans in Certain Situations....................S-50
Assignment of Home Equity Loans.......................................S-51
Servicing and Sub-Servicing...........................................S-52
Removal and Resignation of Servicer...................................S-56
The Trustee...........................................................S-56
Reporting Requirements................................................S-56
Removal of Trustee for Cause..........................................S-58
Governing Law.........................................................S-58
Amendments............................................................S-58
Termination of the Trust..............................................S-59
Optional Termination..................................................S-59
FEDERAL INCOME TAX CONSEQUENCES............................................S-59
REMIC Elections.......................................................S-60
ERISA CONSIDERATIONS.......................................................S-60
RATINGS....................................................................S-63
LEGAL INVESTMENT CONSIDERATIONS............................................S-64
UNDERWRITING...............................................................S-64
CERTAIN LEGAL MATTERS......................................................S-68
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES...............................................I-1
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS................................A-1
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...................................................................15
Mortgage Loans..........................................................16
Mortgage-Backed Securities..............................................18
Other Mortgage Securities...............................................18
CREDIT ENHANCEMENT...........................................................18
SERVICING OF MORTGAGE LOANS..................................................23
Payments on Mortgage Loans..............................................24
Advances................................................................24
Collection and Other Servicing Procedures...............................25
Primary Mortgage Insurance..............................................26
Standard Hazard Insurance...............................................26
Title Insurance Policies................................................27
Claims Under Primary Mortgage Insurance Policies and
Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan.....................................27
Servicing Compensation and Payment of Expenses..........................28
Master Servicer.........................................................28
THE POOLING AND SERVICING AGREEMENT..........................................28
Assignment of Mortgage Assets...........................................28
Evidence as to Compliance...............................................30
The Trustee.............................................................30
Administration of the Security Account..................................31
Reports.................................................................32
Forward Commitments; Pre-Funding........................................32
Servicer Events of Default..............................................33
Rights Upon Servicer Event of Default...................................33
Amendment...............................................................33
Termination.............................................................34
THE INDENTURE................................................................34
General.................................................................34
Modification of Indenture ..............................................34
Note Events of Default..................................................35
Rights Upon Note Events of Default......................................35
List of Note Owners.....................................................36
Annual Compliance Statement.............................................36
Indenture Trustee's Annual Report.......................................36
Satisfaction and Discharge of Indenture.................................37
Redemption of Notes.....................................................37
Reports by Indenture Trustee to Note Owners.............................37
Limitation on Suits.....................................................37
The Sale and Servicing Agreement........................................37
USE OF PROCEEDS..............................................................38
THE DEPOSITOR................................................................38
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS.................................38
General.................................................................39
Foreclosure.............................................................39
Enforceability of Certain Provisions....................................43
Soldiers' and Sailors' Civil Relief Act.................................44
LEGAL INVESTMENT MATTERS.....................................................45
ERISA CONSIDERATIONS.........................................................45
FEDERAL INCOME TAX CONSEQUENCES..............................................47
REMIC Securities........................................................47
Non-REMIC Securities....................................................63
Debt Certificates.......................................................69
Notes...................................................................70
Certificates Classified as Partnership Interests........................71
FASIT Securities........................................................71
PLAN OF DISTRIBUTION.........................................................71
RATINGS......................................................................72
LEGAL MATTERS................................................................72
FINANCIAL INFORMATION........................................................72
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS................................A-1
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" for the location of the definitions of certain
capitalized terms.
<TABLE>
<S> <C>
Issuer: IMC Home Equity Loan Trust 1998-5 (the "Trust").
Certificates Offered: $500,000,000 IMC Home Equity Loan Pass-Through Certificates, Series 1998-5,
to be issued in the following Classes (each, a "Class") and initial Certificate
Principal Balances (each, a "Certificate Principal Balance"), set forth below:
</TABLE>
<TABLE>
<CAPTION>
Initial Certificate
Principal Balance Pass-Through Rate Class
----------------- ----------------- -----
<S> <C> <C>
$175,301,000 (1) Class A-1 Certificates
$ 63,966,000 5.97% Class A-2 Certificates
$ 77,267,000 6.20% Class A-3 Certificates
$ 54,546,000 6.23%(2) Class A-4 Certificates
$ 23,920,000 6.58%(3) Class A-5 Certificates
$ 35,000,000 6.06%(3) Class A-6 Certificates
$ 0(4) 8.34%(4) Class A-7IO Certificates
$ 31,250,000 6.68%(3) Class M-1 Certificates
$ 18,750,000 7.08%(3) Class M-2 Certificates
$ 20,000,000 8.47%(3) Class B Certificates
</TABLE>
(1) On each Payment Date, the "Class A-1
Pass-Through Rate" will be equal to the
lesser of (x) the rate equal to the London
interbank offered rate for United States
Dollar deposits ("LIBOR") (calculated as
described under "Description of the Offered
Certificates-Calculation of LIBOR" herein)
plus 0.07% per annum and (y) the weighted
average of the Coupon Rates on the Home
Equity Loans, less 0.50375% per annum (the
rate described in this clause (y), the
"Available Funds Cap").
(2) The Pass-Through Rate with respect to
the Class A-4 Certificates will equal 6.23%
for any Payment Date which occurs on or
prior to the Clean-Up Call Date and 6.73%
with respect to any Payment Date which
occurs thereafter.
(3) The Pass-Through Rate with respect to
the Class A-5, Class A-6, Class M-1, Class
M-2 and Class B Certificates will on any
Payment Date equal the lesser of (x) the
Pass-Through Rate for such Class set out
above for any Payment Date which occurs on
or prior to the Clean-Up Call Date, and with
respect to any Payment Date thereafter, the
sum of (i) the Pass-Through Rate for such
Class set out above plus (ii) 0.50% per
annum and (y) the weighted average Coupon
Rate of the Home Equity Loans less the sum
of approximately (a) 0.50375% per annum and
(b) for the first 30 Payment Dates, the
product of (1) 8.34% per annum and (2) the
Class A-7IO Notional Principal Amount
divided by the Loan Balance of the Home
Equity Loans, or thereafter, zero.
(4) Interest will be calculated on the Class
A-7IO Certificates on each Payment Date on
the basis of a "Notional Principal Amount"
equal to, for the first 30 Payment Dates the
outstanding Class A-6 Certificate Principal
Balance, as of the first day of the related
Remittance Period and, thereafter, zero.
Reference to the Notional Principal Amount
of the Class A-7IO Certificates is solely
for convenience on certain calculations and
does not represent the right to receive any
distribution allocable to principal.
The Certificates will consist of (i) the
"Class A-1 Certificates," the "Class A-2
Certificates," the "Class A-3 Certificates,"
the "Class A-4 Certificates," the "Class A-5
Certificates," the "Class A-6 Certificates"
and the "Class A-7IO Certificates"
(collectively, the "Class A Certificates"),
(ii) the "Class M-1 Certificates" and the
"Class M-2 Certificates" (collectively, the
"Mezzanine Certificates") and (iii) the
"Class B Certificates" (and together with
the Mezzanine Certificates, the "Subordinate
Certificates"). Only the Class A
Certificates, the Mezzanine Certificates and
the Class B Certificates (collectively, the
"Offered Certificates") are offered hereby.
S-1
<PAGE>
The initial aggregate Certificate Principal
Balance of the Subordinate Certificates will
equal 14.00% of the initial aggregate
Certificate Principal Balance of all
Certificates.
The Subordinate Certificates are subordinate
in right of distribution to the Class A
Certificates to the extent described herein.
The Class M-1 Certificates are subordinate
to the Class A Certificates to the extent
described herein. The Class M-2 Certificates
are subordinate to the Class A Certificates
and Class M-1 Certificates to the extent
described herein. The Class B Certificates
are subordinate to the Class A Certificates
and the Mezzanine Certificates to the extent
described herein.
On any date after the Closing Date, the
"Aggregate Certificate Principal Balance" is
the sum of the Certificate Principal Balance
of all Classes of the Offered Certificates
(other than the Class A-7IO Certificates).
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.
Trustee: The Chase Manhattan Bank, a New York banking
corporation, as trustee (the "Trustee"). The
Trustee shall receive a fee (the "Trustee
Fee") equal to 0.00375% per annum, payable
monthly at one-twelfth the annual rate of
the aggregate outstanding Loan Balance of
the Home Equity Loans.
Custodian: Bank One Trust Company, N.A., a
nationally-chartered trust company, as
Custodian (the "Custodian").
Cut-Off Date: As of the close of business on September 1,
1998 (the "Cut-Off Date").
Statistical Calculation Date: As of the close of business on August 1,
1998 (the "Statistical Calculation Date").
Closing Date: On or about September 10, 1998 (the "Closing
Date").
Description of the
Certificates Offered: The Offered Certificates represent
fractional undivided interests in the Trust
and have the rights described in the Pooling
and Servicing Agreement dated as of
September 1, 1998 among the Depositor, the
Seller, the Servicer and the Trustee (the
"Pooling and Servicing Agreement"). The
Trust assets (not all of which will be
included in a REMIC election) will include
the home equity loans (the "Home Equity
Loans"), all interest and principal due
under the respective Home Equity Loans after
the Cut-Off Date, security interests in the
properties securing such Home Equity Loans
(the "Properties"), funds on deposit in
certain trust accounts and certain other
property. See "Formation of the Trust and
Trust Property" herein.
<PAGE>
Other Certificates: In addition to the Offered Certificates, the
Trust will issue, pursuant to the Pooling
and Servicing Agreement, a residual Class of
Certificates (the "Class R Certificates")
which will represent an undivided ownership
interest in the Upper-Tier REMIC. The
Offered Certificates and the Class R
Certificates are herein referred to as the
"Certificates." Only the Offered
Certificates are offered hereby.
S-2
<PAGE>
Denominations: The Offered Certificates are issuable in
minimum denominations of an original
principal amount or Notional Principal
Amount, as applicable, of $25,000 and
multiples of $1,000 in excess thereof.
The Home Equity Loans: 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 conveyed to the Trust by the Depositor
on the Closing Date will consist of fixed
rate conventional home equity loans and the
Notes relating thereto. As of the
Statistical Calculation Date, there are
8,277 Home Equity Loans. The Home Equity
Loans as of the Statistical Calculation Date
are secured by first and second lien
mortgages or deeds of trust primarily on
one- to- four family residential properties
located in 49 states and the District of
Columbia. No Combined 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 513 loans with an aggregate Loan
Balance of $15,662,270.68 (or 3.13% of the
aggregate Loan Balance of the Home Equity
Loans as of the Statistical Calculation
Date), none of which had a Combined
Loan-to-Value Ratio 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. The Home Equity Loans are not
guaranteed by the Depositor, the Seller, the
Servicer, the Trustee or any of their
affiliates. The Home Equity Loans will be
serviced by the Servicer generally in
accordance with the standards and procedures
required by Fannie Mae for Fannie Mae
mortgage-backed securities and in accordance
with the terms of the Pooling and Servicing
Agreement.
As of the Statistical Calculation Date, the
average Loan Balance of the Home Equity
Loans was $60,407.69. The minimum and
maximum Loan Balances of the Home Equity
Loans as of the Statistical Calculation Date
were $5,000.00 and $282,318.17,
respectively. As of the Statistical
Calculation Date, the weighted average
interest rate (the "Coupon Rate") of the
Home Equity Loans was 10.85%; the Coupon
Rates of the Home Equity Loans ranged from
5.00% to 18.99%; the weighted average
Combined Loan-to-Value Ratio of the Home
Equity Loans was 77.22%; the weighted
average remaining term to maturity of the
Home Equity Loans was 249.9 months; and the
remaining terms to maturity of the Home
Equity Loans ranged from 50 months to 360
months. As of the Statistical Calculation
Date, 89.27% of the aggregate Loan Balance
of the Home Equity Loans were secured by
first mortgages and 10.73% of the aggregate
Loan Balance of the Home Equity Loans were
secured by second mortgages. As of the
Statistical Calculation Date, Home Equity
Loans containing "balloon" payments
represented approximately 35.18% of the
aggregate Loan Balance of the Home Equity
Loans. No Home Equity Loan as of the
Statistical Calculation Date will mature
later than August 1, 2028. See "The Home
Equity Loan Pool -- General" herein.
Final Scheduled Payment
Date: The Final Scheduled Payment Date for each
Class of the Offered Certificates is as set
forth below, although it is anticipated that
the actual final Payment Date for each Class
of the Offered Certificates will occur
significantly earlier than the related Final
Scheduled Payment Date. See "Prepayment and
Yield Considerations" herein.
S-3
<PAGE>
<TABLE>
<CAPTION>
Final Scheduled
Payment Date
------------
<S> <C>
Class A-1 Certificates April 22, 2013
Class A-2 Certificates August 20, 2013
Class A-3 Certificates October 20, 2020
Class A-4 Certificates September 21, 2026
Class A-5 Certificates December 20, 2029
Class A-6 Certificates December 20, 2029
Class A-7IO Certificates March 20, 2001
Class M-1 Certificates December 20, 2029
Class M-2 Certificates December 20, 2029
Class B Certificates December 20, 2029
</TABLE>
Distributions--General: On the 20th day of each month, or if such a
day is not a Business Day, then the next
succeeding Business Day, commencing in
October 1998 (each such day being a "Payment
Date"), the Trustee will be required,
subject to the availability of amounts
therefor, pursuant to the cashflow priority
hereinafter described, to distribute to the
owners (the "Owners") of each Class of
Certificates, other than the Class A-1
Certificates, of record as of the last day
of the calendar month preceding the month in
which such Payment Date occurs and to the
Owners of the Class A-1 Certificates of
record as of the day immediately preceding
such Payment Date (each such date, the
"Record Date") the applicable "Class
Distribution Amount" which shall be the sum
of (x) the related Current Interest, (y) the
related Interest Carry Forward Amount, if
any, and (z) the related Principal
Distribution Amount (each as defined below).
Such amounts shall be distributed to the
Offered Certificates in the manner described
below.
For each Payment Date, interest due with
respect to the Offered Certificates (other
than the Class A-1 Certificates) will be
interest which has accrued on the related
Certificate Principal Balance or Notional
Principal Amount, as the case may be, during
the calendar month immediately preceding the
month in which such Payment Date occurs. The
interest due with respect to the Class A-1
Certificates will be the interest which has
accrued on the Class A-1 Certificate
Principal Balance from the preceding Payment
Date (or from the Closing Date in the case
of the first Payment Date) to and including
the day prior to the current Payment Date.
Each such period relating to the accrual of
interest is the "Accrual Period" for the
related Class of Offered Certificates. All
calculations of interest on the Offered
Certificates (other than the Class A-1
Certificates) will be made on the basis of a
360-day year assumed to consist of twelve
30-day months. Calculations of interest on
the Class A-1 Certificates will be made on
the basis of a 360-day year and the actual
number of days elapsed in the related
Accrual Period.
A "Business Day" is any day other than a
Saturday or Sunday or a day on which banking
institutions in The City of New York, Tampa,
Florida or the city in which the corporate
trust office of the Trustee is located are
authorized or obligated by law or executive
order to be closed.
Interest: On each Payment Date the Interest Remittance
Amount will be distributed in the following
order of priority:
First, to the Trustee, the Trustee Fee and
any Trustee Reimbursable Expenses (as
defined in the Pooling and Servicing
Agreement);
S-4
<PAGE>
Second, to the Owners of the Class A
Certificates (including the Class A-7IO
Certificates), the related Current Interest
plus the Interest Carry Forward Amount with
respect to each Class of Class A
Certificates without any priority among such
Class A Certificates; provided, that if the
Interest Remittance Amount less the amount
paid to the Trustee as the Trustee Fee and
Trustee Reimbursable Expenses (such amount,
the "Interest Amount Available") is not
sufficient to make a full distribution of
interest with respect to all Classes of the
Class A Certificates, the Interest Amount
Available will be distributed among the
outstanding Classes of Class A Certificates
pro rata based on the aggregate amount of
interest due on each such Class, and the
amount of the shortfall will be carried
forward with accrued interest at the related
Pass-Through Rate;
Third, to the extent of the Interest Amount
Available then remaining, to the Owners of
the Class M-1 Certificates, the related
Current Interest;
Fourth, to the extent of the Interest Amount
Available then remaining, to the Owners of
the Class M-2 Certificates, the related
Current Interest;
Fifth, to the extent of the Interest Amount
Available then remaining, to the Owners of
the Class B Certificates, the related
Current Interest; and
Sixth, the amount, if any, of the Interest
Amount Available remaining in the
Certificate Account after application with
respect to the priorities set forth above is
defined as the "Monthly Excess Interest
Amount" for such Payment Date and shall be
applied as described below under "Credit
Enhancement -- Application of Monthly Excess
Cashflow Amounts" in this Summary of Terms.
"Current Interest" with respect to each
Class of Offered Certificates means, with
respect to any Payment Date the sum of (i)
the aggregate amount of interest accrued
during the preceding Accrual Period at its
applicable Pass-Through Rate on the
Certificate Principal Balance (or the
Notional Principal Amount with respect to
the Class A-7IO Certificates) of such Class
of Certificates plus (ii) the Preference
Amount as it relates to interest previously
paid on such Class of the Offered
Certificates prior to such Payment Date;
provided, however, that with respect to each
Class of Offered Certificates, Current
Interest will be reduced by such Class' pro
rata share of any Civil Relief Interest
Shortfalls (as defined in the Pooling and
Servicing Agreement).
"Interest Remittance Amount" means as of any
Monthly Remittance Date, the sum, without
duplication, of (i) all interest due during
the related Remittance Period on the Home
Equity Loans (less the Servicing Fee), (ii)
all Compensating Interest paid by the
Servicer on such Monthly Remittance Date,
(iii) the portion of any Substitution Amount
relating to interest, (iv) the portion of
any purchase price relating to interest on
any Home Equity Loan repurchased during the
related Remittance Period and (v) the
portion of Net Liquidation Proceeds relating
to interest.
The "Interest Carry Forward Amount" with
respect to any Class of the Offered
Certificates for any Payment Date is the sum
of (x) the amount, if any, by which (i) the
sum of the Current Interest for such Class
as of the immediately preceding Payment Date
and all prior unpaid Interest Carry Forward
Amounts exceeded (ii) the amount of the
actual distribution with respect to interest
made to the Owners of such Class of Offered
Certificates on such immediately preceding
Payment Date plus (y) 30 days' interest on
such amount, calculated at the related
Pass-Through Rate in effect with respect to
such Class of Offered Certificates.
S-5
<PAGE>
Principal: On each Payment Date (a) before the Stepdown
Date or (b) on or after the Stepdown Date if
a Trigger Event is in effect, Owners of the
Class A Certificates (other than the Class
A-7IO Certificates) will be entitled to
receive payment of 100% of the Principal
Distribution Amount for such Payment Date as
follows: first, to the Owners of the Class
A-6 Certificates, the Class A-6 Lockout
Distribution Amount and second, to the
Owners of the Class A-1 Certificates, the
Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates,
the Class A-5 Certificates and the Class A-6
Certificates (without regard to the Class
A-6 Lockout Distribution Amount), in that
order, in each case, until the Certificate
Principal Balance of each Class of Class A
Certificates has been reduced to zero.
On each Payment Date (a) on or after the
Stepdown Date and (b) as long as a Trigger
Event is not in effect, the Owners of all
Classes of the Offered Certificates (other
than the Class A-7IO Certificates) will be
entitled to receive payments of principal,
in the order of priority, in the amounts set
forth below and to the extent of the
Principal Distribution Amount as follows:
First, the lesser of (x) the Principal
Distribution Amount and (y) the Class A
Principal Distribution Amount shall be
distributed as follows: (i) to the Owners of
the Class A-6 Certificates, in an amount
equal to the Class A-6 Lockout Distribution
Amount and, (ii) to the Owners of the Class
A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates,
the Class A-4 Certificates, the Class A-5
Certificates and the Class A-6 Certificates
(without regard to the Class A-6 Lockout
Distribution Amount), in that order, in each
case, until the Certificate Principal
Balance of each Class of Class A
Certificates has been reduced to zero;
Second, the lesser of (x) the excess of (i)
the Principal Distribution Amount over (ii)
the amount distributed to the Owners of the
Class A Certificates in clause First above
and (y) the Class M-1 Principal Distribution
Amount shall be distributed to the Owners of
the Class M-1 Certificates, until the Class
M-1 Certificate Principal Balance has been
reduced to zero;
Third, the lesser of (x) the excess of (i)
the Principal Distribution Amount over (ii)
the sum of the amount distributed to the
Owners of the Class A Certificates in clause
First above and the amount distributed to
the Owners of the Class M-1 Certificates in
clause Second above and (y) the Class M-2
Principal Distribution Amount shall be
distributed to the Owners of the Class M-2
Certificates, until the Class M-2
Certificate Principal Balance has been
reduced to zero;
Fourth, the lesser of (x) the excess of (i)
the Principal Distribution Amount over (ii)
the sum of the amount distributed to the
Owners of the Class A Certificates pursuant
to clause First above, the amount
distributed to the Owners of the Class M-1
Certificates pursuant to clause Second above
and the amount distributed to the Owners of
the Class M-2 Certificates pursuant to
clause Third above and (y) the Class B
Principal Distribution Amount shall be
distributed to the Owners of the Class B
Certificates, until the Class B Certificate
Principal Balance has been reduced to zero;
and,
Fifth, any amount of the Principal
Remittance Amount remaining after making all
of the distributions in clauses First,
Second, Third and Fourth above shall be
included as part of the Monthly Excess
Cashflow Amount and shall be applied as
described below under "Credit Enhancement --
Application of Monthly Excess Cashflow
Amounts" in this Summary of Terms.
Notwithstanding the foregoing, in the event
that the Certificate Principal Balance of
each Class of the Class A Certificates has
been reduced to zero, all amounts of
principal that would have been distributed
to the Class A Certificates will be
distributed to the Subordinate Certificates
sequentially in the following order: Class
S-6
<PAGE>
M-1, Class M-2 and Class B. Similarly, if
the Certificate Principal Balance of the
Class M-1 Certificates has been reduced to
zero, all amounts of principal that would
have been distributed to such Class M-1
Certificates will be distributed to the
Class M-2 and Class B Certificates in that
order. Finally, if the Certificate Principal
Balance of the Class M-2 Certificates has
been reduced to zero, all amounts of
principal that would have been distributed
on such Class M-2 Certificates will be
distributed to the Class B Certificates.
Payments of principal on the Class A
Certificates shall be paid out in the order
described above, provided, however, that on
any Payment Date on which the sum of the
Certificate Principal Balance of the
Subordinate Certificates and the
Overcollateralization Amount is zero, any
amounts of principal payable to the Owners
of the Class A Certificates shall be
distributed pro rata.
The Class A-7IO Certificates are
interest-only Certificates and are not
entitled to receive distributions of
principal.
The Owners of the Class A-6 Certificates are
entitled to receive payments of the Class
A-6 Lockout Distribution Amount specified
herein; provided, that if on any Payment
Date the Class A-5 Certificate Principal
Balance is zero, the Owners of the Class A-6
Certificates will be entitled to receive the
entire Class A Principal Distribution Amount
for such Payment Date.
In addition to the following definitions,
the above discussion makes use of a number
of defined terms which are defined under
"Description of the Offered Certificates --
Distributions" herein.
"Principal Distribution Amount" means, as of
any Payment Date, the sum of (i) the
Principal Remittance Amount minus, for
Payment Dates occurring on and after the
Stepdown Date, the Overcollateralization
Release Amount, if any, and (ii) the Extra
Principal Distribution Amount, if any.
The "Class A-6 Lockout Distribution Amount"
for any Payment Date will be the product of
(i) the applicable Class A-6 Lockout
Percentage for such Payment Date and (ii)
the Class A-6 Lockout Pro Rata Distribution
Amount for such Payment Date. In no event
shall the Class A-6 Lockout Distribution
Amount exceed the outstanding Class A-6
Certificate Principal Balance.
The "Class A-6 Lockout Percentage" for each
Payment Date shall be as follows:
<TABLE>
<CAPTION>
Payment Dates Lockout Percentage
------------- ------------------
<S> <C>
October 1998 - September 2001 0%
October 2001 - September 2003 45%
October 2003 - September 2004 80%
October 2004 - September 2005 100%
October 2005 and thereafter 300%
</TABLE>
The "Class A-6 Lockout Pro Rata Distribution
Amount" for any Payment Date will be an
amount equal to the product of (x) a
fraction, the numerator of which is the
Certificate Principal Balance of the Class
A-6 Certificates immediately prior to such
Payment Date and the denominator of which is
the aggregate Certificate Principal Balance
of all Classes of the Class A Certificates
immediately prior to such Payment Date and
(y) the Class A Principal Distribution
Amount for such Payment Date.
S-7
<PAGE>
The "Remittance Period" with respect to any
Monthly Remittance Date is the period from
the second day of the month immediately
preceding such Monthly Remittance Date to
the first day of the month in which such
Monthly Remittance Date occurs. A "Monthly
Remittance Date" is any date on which funds
on deposit in the Principal and Interest
Account are remitted to the Certificate
Account, which is the 18th day of each
month, or if such day is not a Business Day,
the next preceding Business Day, commencing
in October 1998.
"Principal Remittance Amount" means as of
any Monthly Remittance Date, the sum,
without duplication, of (i) the principal
actually collected by the Servicer on the
Home Equity Loans during the related
Remittance Period, (ii) the Loan Balance of
each Home Equity Loan that was repurchased
from the Trust during the related Remittance
Period, (iii) any Substitution Amount
relating to principal delivered by the
Seller in connection with a substitution of
a Home Equity Loan during the related
Remittance Period and (iv) all Net
Liquidation Proceeds actually collected by
the Servicer during the related Remittance
Period (to the extent such Net Liquidation
Proceeds related to principal).
A "Trigger Event" has occurred with respect
to a Payment Date if the percentage obtained
by dividing (x) the principal amount of 60+
Day Delinquent Loans by (y) the aggregate
outstanding Loan Balance of the Home Equity
Loans as of the last day of the immediately
preceding Remittance Period equals or
exceeds one-half of the Senior Enhancement
Percentage.
"Stepdown Date" means the earlier to occur
of (i) the later to occur of (x) the Payment
Date in October 2001 and (y) the first
Payment Date on which the Senior Enhancement
Percentage (after taking into account
distributions of principal on such Payment
Date) is greater than or equal to the Senior
Specified Enhancement Percentage and (ii)
the Payment Date on which the Certificate
Principal Balance of the Class A
Certificates has been reduced to zero.
"Class A Principal Distribution Amount"
means as of any Payment Date (a) prior to
the Stepdown Date or with respect to which a
Trigger Event is in effect, 100% of the
Principal Distribution Amount and (b) on or
after the Stepdown Date and as long as a
Trigger Event is not in effect the excess of
(x) the aggregate Certificate Principal
Balance of the Class A Certificates
immediately prior to such Payment Date over
(y) the lesser of (A) the product of (i)
66.40% and (ii) the outstanding Loan Balance
of the Home Equity Loans as of the last day
of the related Remittance Period and (B) the
aggregate outstanding Loan Balance as of the
last day of the related Remittance Period
minus $2,500,000.
"Class M-1 Principal Distribution Amount"
means as of any Payment Date on or after the
Stepdown Date and as long as a Trigger Event
is not in effect, the excess of (x) the sum
of (i) the aggregate Certificate Principal
Balance of the Class A Certificates (after
taking into account the payment of principal
on the Class A Certificates on such Payment
Date) and (ii) the Class M-1 Certificate
Principal Balance immediately prior to such
Payment Date over (y) the lesser of (A) the
product of (i) 78.90% and (ii) the
outstanding Loan Balance of the Home Equity
Loans as of the last day of the related
Remittance Period and (B) the aggregate
outstanding Loan Balance as of the last day
of the related Remittance Period minus
$2,500,000.
"Class M-2 Principal Distribution Amount"
means as of any Payment Date on or after the
Stepdown Date and as long as a Trigger Event
is not in effect, the excess of (x) the sum
of (i) the aggregate Certificate Principal
Balance of the Class A Certificates (after
taking into account the payment of principal
on the Class A Certificates on such Payment
Date), (ii) the Class M-1 Certificate
Principal Balance (after taking into account
the payment of principal on the Class M-1
Certificates on such Payment Date) and (iii)
the Class M-2 Certificate Principal Balance
immediately prior to such Payment Date over
(y) the lesser of (A) the product of
S-8
<PAGE>
(i) 86.40% and (ii) the outstanding
aggregate Loan Balance of the Home Equity
Loans as of the last day of the related
Remittance Period and (B) the aggregate
outstanding Loan Balance as of the last day
of the related Remittance Period minus
$2,500,000.
"Class B Principal Distribution Amount"
means as of any Payment Date on or after the
Stepdown Date and as long as a Trigger Event
is not in effect, the excess of (x) the sum
of (i) the aggregate Certificate Principal
Balance of the Class A Certificates (after
taking into account the payment of principal
on the Class A Certificates on such Payment
Date), (ii) the Class M-1 Certificate
Principal Balance (after taking into account
the payment of principal on the Class M-1
Certificates on such Payment Date), (iii)
the Class M-2 Certificate Principal Balance
(after taking into account the payment of
principal on the Class M-2 Certificates on
such date) and (iv) the Class B Certificate
Principal Balance immediately prior to such
Payment Date over (y) the lesser of (A) the
product of (i) 94.40% and (ii) the
outstanding aggregate Loan Balance of the
Home Equity Loans as of the last day of the
related Remittance Period and (B) the
aggregate outstanding Loan Balance as of the
last day of the related Remittance Period
minus $2,500,000.
"Overcollateralization Amount" means as of
any Payment Date the difference between (x)
the Loan Balance of the Home Equity Loans as
of the last day of the immediately preceding
Remittance Period and (y) the Aggregate
Certificate Principal Balance (after taking
into account all distributions of principal
on such Payment Date).
"Senior Enhancement Percentage" for any
Payment Date is the percentage obtained by
dividing (x) the sum of (i) the Aggregate
Certificate Principal Balance of the Offered
Certificates (other than the most senior
Class of Certificates outstanding at such
time, counting for this purpose all of the
Class A Certificates as one Class) and (ii)
the Overcollateralization Amount, in each
case after taking into account the
distribution of the Principal Distribution
Amount on such Payment Date by (y) the
aggregate Loan Balance of the Home Equity
Loans as of the last day of the related
Remittance Period.
"Senior Specified Enhancement Percentage" on
any date of determination thereof means
33.60%.
"Extra Principal Distribution Amount" means,
as of any Payment Date, the lesser of (x)
the Monthly Excess Interest Amount for such
Payment Date and (y) the
Overcollateralization Deficiency for such
Payment Date.
"Overcollateralization Deficiency" means, as
of any Payment Date, the excess, if any, of
(x) the Targeted Overcollateralization
Amount for such Payment Date over (y) the
Overcollateralization Amount for such
Payment Date, calculated for this purpose
after taking into account the reduction on
such Payment Date of the Aggregate
Certificate Principal Balance resulting from
the distribution of the Principal Remittance
Amount (but not the Extra Principal
Distribution Amount) on such Payment Date,
but prior to taking into account any Applied
Realized Loss Amount on such Payment Date.
"Overcollateralization Release Amount"
means, as of any Payment Date, the lesser of
(x) the Principal Remittance Amount for such
Payment Date and (y) the excess of (i) the
Overcollateralization Amount for such
Payment Date, assuming that 100% of the
Principal Remittance Amount is applied on
such Payment Date to the payment of
principal on the Offered Certificates and
(ii) the Targeted Overcollateralization
Amount for such Payment Date.
Notwithstanding the foregoing, the
Overcollateralization Release Amount will be
$0 on any Payment Date if certain loss and
delinquency events are continuing on such
Payment Date as described more fully in the
Pooling and Servicing Agreement. In such
event,
S-9
<PAGE>
amounts which would otherwise be
Overcollaterization Release Amounts will be
applied to reduce the Certificate Principal
Balance of the Subordinate Certificates in
reverse order of seniority.
"Targeted Overcollateralization Amount"
means, as of any Payment Date, (x) prior to
the Stepdown Date, $14,000,000 and (y) on
and after the Stepdown Date, the greater of
(i) 5.60% of the aggregate outstanding Loan
Balance of the Home Equity Loans as of the
last day of the related Remittance Period
and (ii) $2,500,000.
"Preference Amount" means any amount
previously distributed to an Owner on an
Offered Certificate that is recoverable and
sought to be recovered as a voidable
preference by a trustee in bankruptcy under
the United States Bankruptcy Code (11
U.S.C.) as amended from time to time, in
accordance with a final nonappealable order
of a court having competent jurisdiction.
Monthly Servicing Fee: The Servicer will retain a fee (the
"Servicing Fee") equal to 0.50% per annum,
payable monthly at one-twelfth the annual
rate of the then outstanding principal
balance of each Home Equity Loan as of the
first day of each Remittance Period.
Credit Enhancement: The Credit Enhancement provided for the
benefit of the Owners of the Offered
Certificates consists of the subordination
of the Subordinate Certificates to the Class
A Certificates, the further subordination
within the Subordinate Certificates, the
priority of application of Realized Losses
and the application of Monthly Excess
Cashflow Amounts.
Subordination of Subordinate Certificates.
The rights of the Owners of the Subordinate
Certificates and the Class R Certificates to
receive distributions with respect to the
Home Equity Loans will be subordinated, to
the extent described herein, to such rights
of the Owners of the Class A Certificates.
This subordination is intended to enhance
the likelihood of regular receipt by the
Owners of the Class A Certificates of the
full amount of their scheduled monthly
payment of interest and principal and to
afford such Owners protection against
Realized Losses.
The protection afforded to the Owners of the
Class A Certificates by means of the
subordination of the Subordinate
Certificates and the Class R Certificates
will be accomplished by the preferential
right of the Owners of the Class A
Certificates to receive, prior to any
distribution being made on a Payment Date in
respect of the Subordinate Certificates and
the Class R Certificates, the amounts of
interest due them and principal available
for distribution on such Payment Date, and,
if necessary, by the right of the Owners of
the Class A Certificates to receive future
distributions of amounts that would
otherwise be payable to the Owners of the
Subordinate Certificates and the Class R
Certificates.
In addition, the rights of the Owners of the
Class M-2, Class B and Class R Certificates
to receive distributions will be
subordinated, to the extent described
herein, to such rights of the Owners of the
Class A and Class M-1 Certificates. This
subordination is intended to enhance the
likelihood of regular receipt by the Owners
of the Class A and Class M-1 Certificates of
the amount of interest due them and
principal available for distribution and to
afford such Owners with protection against
Realized Losses.
The rights of the Owners of the Class B and
Class R Certificates to receive
distributions will be subordinated in the
same manner to such rights of the Owners of
the Class A, Class M-1 and Class M-2
Certificates and the rights of Owners of the
Class R Certificates to receive
distributions will be subordinated in the
same manner to such rights of the Owners of
the Offered Certificates.
Application of Realized Losses. If a Home
Equity Loan becomes a Liquidated Loan during
a Remittance Period, the Net Liquidation
Proceeds relating thereto and
S-10
<PAGE>
allocated to principal may be less than the
Loan Balance of such Home Equity Loan. The
amount of such insufficiency is a "Realized
Loss". Realized Losses will, in effect, be
absorbed first, by the Class R Certificates
(both through the application of the Monthly
Excess Interest Amount to fund such
deficiency and through a reduction in the
Overcollateralization Amount), second, by
the Owners of the Class B Certificates,
third, by the Owners of the Class M-2
Certificates, and, fourth, by the Owners of
the Class M-1 Certificates.
To the extent that the pool of Home Equity
Loans experiences Realized Losses, such
Realized Losses will reduce the aggregate
outstanding Loan Balance of the Home Equity
Loans (i.e, a reduction in the collateral
balance will occur). Since the
Overcollateralization Amount is the excess,
if any, of the collateral balance over the
Aggregate Certificate Principal Balance,
Realized Losses will in the first instance
reduce the Overcollateralization Amount.
The Pooling and Servicing Agreement requires
that the Overcollateralization Amount be
initially increased to, and thereafter
maintained at, the Targeted
Overcollateralization Amount. This increase
and subsequent maintenance is intended to be
accomplished by the application of Monthly
Excess Interest Amounts to the funding of
the Extra Principal Distribution Amount.
Such Extra Principal Distribution Amounts,
since they are funded from interest
collections on the Home Equity Loans but are
distributed as principal on the Offered
Certificates, will increase the
Overcollateralization Amount.
If, on any Payment Date after taking into
account all Realized Losses experienced
during the prior Remittance Period and after
taking into account the distribution of
principal (including the Extra Principal
Distribution Amount) with respect to the
Offered Certificates on such Payment Date,
the Aggregate Certificate Principal Balance
exceeds the aggregate Loan Balance of the
Home Equity Loans as of the end of the
related Remittance Period (i.e., if the
level of overcollateralization is negative),
then the Certificate Principal Balance of
the Subordinate Certificates will be reduced
(in effect, "written down") such that the
level of overcollateralization is zero,
rather than negative. Such a negative level
of overcollateralization is an "Applied
Realized Loss Amount", which is applied as a
reduction in the Certificate Principal
Balance of the Subordinate Certificates in
reverse order of seniority (i.e., first
against the Class B Certificate Principal
Balance until it is reduced to zero, then
against the Class M-2 Certificate Principal
Balance until it is reduced to zero and then
against the Class M-1 Certificate Principal
Balance until it is reduced to zero). The
Pooling and Servicing Agreement does not
permit the "write down" of the Certificate
Principal Balance of any Class A
Certificate.
Once the Certificate Principal Balance of a
Class of Subordinate Certificates has been
"written down," the amount of such write
down will no longer bear interest, nor will
such amount thereafter be "reinstated" or
"written up," although the amount of such
"write down" may, on future Payment Dates be
paid to Owners of the Subordinate
Certificates which experienced the "write
down", in direct order of seniority (i.e.,
first, the Class M-1 Certificates, second,
the Class M-2 Certificates and, third, the
Class B Certificates). The source of funding
of such payments will be the amount, if any,
of the Monthly Excess Cashflow Amount
remaining on such future Payment Dates after
the funding of the Extra Principal
Distribution Amount and after the payment of
Interest Carry Forward Amounts with respect
to the Subordinate Certificates on such
Payment Date.
Application of Monthly Excess Cashflow
Amounts. The weighted average net Coupon
Rate for the Home Equity Loans is expected
to be generally higher than the weighted
average of the Pass-Through Rates on the
Offered Certificates, thus generating
certain excess interest collections which,
in the absence of losses will not be
necessary to fund interest distributions on
the Offered Certificates. The
S-11
<PAGE>
Pooling and Servicing Agreement provides
that this excess interest be applied to the
extent available, to make accelerated
payments of principal (i.e., the Extra
Principal Distribution Amount) to the Class
or Classes then entitled to receive
distributions of principal; such application
will cause the Aggregate Certificate
Principal Balance to amortize more rapidly
than the pool of Home Equity Loans,
resulting in overcollateralization.
The required level of overcollateralization
for any Payment Date is the Targeted
Overcollateralization Amount for such
Payment Date. The Targeted
Overcollateralization Amount is initially
(i.e., prior to the Stepdown Date)
$14,000,000. Since the actual level of the
Overcollateralization Amount is $0 as of the
Closing Date, in the early months of the
transaction, subject to the availability of
Monthly Excess Interest Amounts, Extra
Principal Distribution Amounts will be paid,
with the result that the
Overcollateralization Amount will increase
to the level of the Targeted
Overcollateralization Amount.
If, once the Targeted Overcollateralization
Amount has been reached, Realized Losses
occur, such Realized Losses will result in
an Overcollateralization Deficiency (since
such Realized Losses reduce the Loan Balance
of the Home Equity Loans without giving rise
to a corresponding reduction of the
Aggregate Certificate Principal Balance).
The cashflow priorities of the Trust require
that, in this situation, an Extra Principal
Distribution Amount be paid (subject to the
availability of any Monthly Excess Interest
Amount) for the purpose of re-establishing
the Overcollateralization Amount at the
then-required Targeted Overcollateralization
Amount.
On and after the Stepdown Date, the Targeted
Overcollateralization Amount is permitted to
decrease or "step-down" below the
$14,000,000 level to a level equal to 5.60%
of the then current aggregate outstanding
Loan Balance (subject to a floor of
$2,500,000). If the Targeted
Overcollateralization Amount is permitted to
"stepdown" on a Payment Date, the Pooling
and Servicing Agreement permits a portion of
the Principal Remittance Amount for such
Payment Date not to be passed through as a
distribution of principal on such Payment
Date. This has the effect of decelerating
the amortization of the Offered Certificates
relative to the aggregate outstanding Loan
Balance of the Home Equity Loans, thereby
reducing the actual level of the
Overcollateralization Amount to the new,
lower Targeted Overcollateralization Amount.
This portion of the Principal Remittance
Amount not distributed as principal on the
Certificates therefore releases
overcollateralization from the Trust. The
amount of such releases are the
Overcollateralization Release Amounts.
On any Payment Date, the sum of the Monthly
Excess Interest Amount and the
Overcollateralization Release Amount is the
"Monthly Excess Cashflow Amount", which is
required to be applied in the following
order of priority on such Payment Date:
(1) to fund the Extra Principal
Distribution Amount for such Payment
Date;
(2) to fund the Class M-1 Interest Carry
Forward Amount, if any;
(3) to fund the Class M-1 Realized Loss
Amortization Amount for such Payment
Date;
(4) to fund the Class M-2 Interest Carry
Forward Amount, if any;
(5) to fund the Class M-2 Realized Loss
Amortization Amount for such Payment
Date;
(6) to fund the Class B Interest Carry
Forward Amount, if any;
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<PAGE>
(7) to fund the Class B Realized Loss
Amortization Amount for such Payment
Date;
(8) to the Servicer to the extent of any
unreimbursed Delinquency Advances or
Servicing Advances;
(9) to the Trustee for reimbursement of
expenses of the Trustee that are not
Trustee Reimburseable Expenses; and
(10) to fund a distribution to Owners of the
Class R Certificates.
Nature of Class A-7IO
Certificates: General Character as an Interest-Only
Security. As the owners of interest-only
strip securities, the Owners of the Class
A-7IO Certificates will be entitled to
receive monthly distributions only of
interest, as described herein. Because they
will not receive any distributions of
principal, the Owners of the Class A-7IO
Certificates will be affected by
prepayments, liquidations and other
dispositions (including optional redemptions
described herein) of the Home Equity Loans
to a greater degree than will the Owners of
the other Classes of Offered Certificates.
In addition, the Notional Principal Amount
applicable to interest calculations on the
Class A-7IO Certificates is (x) through the
Payment Date in March 2001, the Certificate
Principal Balance of the Class A-6
Certificates and (y) thereafter, zero. Since
the Class A-6 Certificates will amortize in
accordance with the distribution of the
Class A-6 Lockout Distribution Amount, the
performance of the Class A-7IO Certificates
is intended to be more stable than if such
Notional Principal Amount were calculated
using the underlying Home Equity Loans
directly. However, there can be no assurance
that such will be the case.
In general, losses due to liquidations,
repurchases by the Servicer and other
dispositions of Home Equity Loans from the
Trust will have the same effect on the
Owners of the Class A-7IO Certificates as do
prepayments of principal and are
collectively referred to as "Prepayments."
Because the yield to Owners of the Class
A-7IO Certificates is more sensitive to
rates of prepayment, it is advisable for
potential investors in the Class A-7IO
Certificates to consider carefully, and to
make their own evaluation of, the effect of
any particular assumption regarding the
rates and the timing of prepayments. In
general, when interest rates decline,
prepayments in a pool of receivables such as
the Home Equity Loans will increase as
borrowers seek to refinance at lower rates.
This will have the effect of reducing the
future stream of payments available to an
owner of an interest-only security based on
such receivables pool, thus adversely
affecting such investor's yield. Conversely,
when interest rates increase, prepayments
may tend to decrease (because attractive
refinancing opportunities may not be
available) and the future stream of payments
available to such an owner of an
interest-only security may not decline as
rapidly as originally anticipated. See
"Prepayment and Yield Considerations --
Yield Sensitivity of the Class A-7IO
Certificates" herein for other factors which
may also influence prepayment rates.
Applicability of Credit Enhancement to the
Class A-7IO Certificates. As described above
under "Credit Enhancement," the Trust
includes provisions which subordinate the
distributions on the Subordinate
Certificates and the Class R Certificates
for each Payment Date for the purpose, inter
alia, of funding the full amounts due on
each Class of the Class A Certificates,
including the Class A-7IO Certificates, on
each Payment Date.
In general, the protection afforded by such
subordination and overcollateralization
features is for credit risk and not for
prepayment risk. These features do not
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<PAGE>
guarantee or insure that any particular rate
of prepayment is experienced by the Trust.
If the entire pool of Home Equity Loans were
to prepay in the initial month, with the
result that the Owners of the Class A-7IO
Certificates receive only a single month's
interest and thus suffer a nearly complete
loss on their investments, no amounts would
be available from the overcollateralization
feature to mitigate such loss.
Accrual of "Original Issue Discount." The
Class A-7IO Certificates will be issued with
"original issue discount" within the meaning
of the Code. As a result, in certain rapid
prepayment environments the effect of the
rules governing the accrual of original
issue discount may require Owners of the
Class A-7IO Certificates to accrue original
issue discount at a rate in excess of the
rate at which distributions are received by
such Owners. See "Federal Income Tax
Consequences" herein and in the Prospectus.
Book-Entry Registration of the
Offered Certificates: Each Class of the Offered Certificates will
initially be issued in book entry form.
Persons acquiring beneficial ownership
interests in such Offered Certificates
("Beneficial Owners") will hold their
interests through The Depository Trust
Company ("DTC"), in the United States, or
Cedel Bank, S.A. ("Cedel") or the Euroclear
System ("Euroclear") in Europe. Transfers
within DTC, Cedel or Euroclear, as the case
may be, will be in accordance with the usual
rules and operating procedures of the
relevant system. So long as the Offered
Certificates are Book Entry Certificates (as
defined herein), such Certificates will be
evidenced by one or more Certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one of
the European Depositaries. Cross-market
transfers between persons holding directly
or indirectly through DTC, on the one hand,
and counterparties holding directly or
indirectly through Cedel or Euroclear, on
the other, will be effected in DTC through
Citibank, N.A. ("Citibank") or The Chase
Manhattan Bank ("Chase" and together with
Citibank, the "European Depositaries"), on
the relevant depositaries of Cedel and
Euroclear, respectively, and each a
participating member of DTC or one of the
European Depositaries. The Offered
Certificates will initially be registered in
the name of Cede. The interests of the
Owners of such Certificates will be
represented by book entries on the records
of DTC and participating members thereof. No
Beneficial Owner will be entitled to receive
a definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein)
are issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Offered
Certificates reflect the rights of
Beneficial Owners only as such rights may be
exercised through DTC and its participating
organizations for so long as such Offered
Certificates are held by DTC. See "Global
Clearance, Settlement and Tax Documentation
Procedures" in Annex I attached hereto and
"Description of the Offered Certificates--
Book Entry Registration of the Offered
Certificates" herein, and "Description of
the Securities--Book Entry Registration" in
the Prospectus.
Optional Termination: The Owners of the Class R Certificates will
have the right to purchase all the Home
Equity Loans on or after the Clean-Up Call
Date. The "Clean-Up Call Date" is any
Monthly Remittance Date on which the
aggregate Loan Balance of the Home Equity
Loans has declined to 10% or less the Loan
Balance of the Home Equity Loans as of the
Cut-Off Date (the "Original Aggregate Loan
Balance"). See "The Pooling and Servicing
Agreement--Optional Termination" herein.
Ratings: It is a condition of issuance of the Offered
Certificates that each Class of the Offered
Certificates receive at least the ratings
set out below from Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's
Ratings Services, a division of the
McGraw-Hill Companies ("Standard & Poor's")
and Fitch IBCA, Inc.
("Fitch"):
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<PAGE>
<TABLE>
<CAPTION>
Class Moody's Standard & Poor's Fitch
----- ------- ----------------- -----
<S> <C> <C> <C>
A-1 through A-6 Aaa AAA AAA
A-7IO Aaa AAAr AAA
M-1 Aa2 AA AA
M-2 A2 A A+
B Baa2 BBB- BBB
</TABLE>
Moody's, Standard & Poor's and Fitch are
referred to herein collectively as the
"Rating Agencies." A security rating is not
a recommendation to buy, sell or hold
securities, and may be subject to revision
or withdrawal at any time by the assigning
entity. No Rating Agency is obligated to
maintain any rating on any Offered
Certificate, and, accordingly, there can be
no assurance that the rating assigned to any
Class of Offered Certificate upon initial
issuance thereof will not be lowered or
withdrawn at any time thereafter. See
"Ratings" herein.
Ratings of the Class A-7IO Certificates.
Ratings which are assigned to securities
such as the Class A-7IO Certificates
generally evaluate the ability of the issuer
(i.e., the Trust) to make payments, as
required by such securities. The amounts
distributable on the Class A-7IO
Certificates consist only of interest. In
general, the ratings of such Certificates
address only credit risk and not prepayment
risk. See "Ratings" and "Summary of Terms --
Nature of Class A-7IO Certificates" herein.
The "r" symbol is appended to the rating by
Standard & Poor's of the Class A-7IO
Certificates because they are interest-only
Certificates that Standard & Poor's believes
may experience high volatility or high
variability in expected returns due to
non-credit risks created by the terms of
such Certificates. The absence of an "r"
symbol in the ratings of the other Classes
of Offered Certificates should not be taken
as an indication that such Certificates will
experience no volatility or variability in
total return. See "Ratings" and "Summary of
Terms -- Nature of Class A-7IO Certificates"
herein.
Federal Tax Aspects: For federal income tax purposes, the Trust
created by the Pooling and Servicing
Agreement will consist of two segregated
asset pools (the "Lower-Tier REMIC" and the
"Upper-Tier REMIC") with respect to which
elections will be made to treat each as a
separate "real estate mortgage investment
conduit" ("REMIC"). Each Class of the
Offered Certificates will be designated as a
"regular interest" in the Upper-Tier REMIC.
The Class R Certificates will be designated
as the sole "residual interest" in the
Upper-Tier REMIC. See "Federal Income Tax
Consequences" herein.
Owners of the Offered Certificates,
including Owners that generally report
income on the cash method of accounting,
will be required to include interest on the
Offered Certificates in income in accordance
with the accrual method of accounting. In
addition, the Class A-7IO Certificates will,
and each other Class of the Offered
Certificates may, be considered to have been
issued with original issue discount or at a
premium. Any such original issue discount
will be includible in the income of the
Owner as it accrues under a method taking
into account the compounding of interest and
using the Prepayment Assumption described
herein. Premium may be deductible by the
Owner either as it accrues or when principal
is received. No representation is made as to
whether the Home Equity Loans will prepay at
the assumed rate, or any other rate. See
"Prepayment and Yield Considerations"
herein. In general, as a result of the
qualification of the Offered Certificates as
regular interests in the Upper-Tier REMIC,
the Offered Certificates will be treated as
"regular . . . interest(s) in a REMIC" under
Section 7701(a)(19)(C) of the Internal
Revenue Code of 1986, as amended (the
"Code") and "real estate assets" under
Section 856(c) of the Code in the same
proportion that the assets in the Upper-Tier
REMIC consist of qualifying assets under
such sections. In addition, interest on the
Offered Certificates will be treated as
"interest
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<PAGE>
on obligations secured by mortgages on real
property" under Section 856(c) of the Code
to the extent that such Offered Certificates
are treated as "real estate assets" under
Section 856(c) of the Code. For further
information regarding the federal income tax
consequences of investing in the Offered
Certificates, see "Federal Income Tax
Consequences" herein.
ERISA Considerations: Subject to the considerations discussed
under "ERISA Considerations" herein, the
Class A Certificates may be purchased by
employee benefit plans that are subject to
ERISA. The Subordinate Certificates may not
be purchased by employee benefit plans that
are subject to ERISA except as provided
herein. See "ERISA Considerations" herein
and in the Prospectus.
Legal Investment
Considerations: The Offered Certificates will not constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Accordingly, many
institutions with legal authority to invest
in comparably rated securities based on
first lien mortgage loans may not be legally
authorized to invest in the Offered
Certificates. See "Legal Investment
Considerations" herein.
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<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider,
among other things, the following risk factors (as well as the factors set forth
under "Risk Factors" in the Prospectus) in connection with the purchase of the
Offered Certificates.
Sensitivity to Prepayments. The Home Equity Loans may be prepaid by the
related Mortgagors in whole or in part, at any time. However, as of the
Statistical Calculation Date approximately 56.50% of the Home Equity Loans (by
Loan Balance) require the payment of a fee in connection with certain
prepayments. In addition, a substantial portion of the Home Equity Loans contain
due-on-sale provisions which, to the extent enforced by the Servicer, will
result in prepayment of such Home Equity Loans. See "Prepayment and Yield
Considerations" herein and "Certain Legal Aspects of the Mortgage
Assets--Enforceability of Certain Provisions" in the Prospectus. The rate of
prepayments on fixed rate home equity loans is sensitive to prevailing interest
rates. Generally, if prevailing interest rates fall significantly below the
interest rates on the Home Equity Loans, the Home Equity Loans are likely to be
subject to higher prepayment rates than if prevailing rates remain at or above
the interest rates on such Home Equity Loans. Conversely, if prevailing interest
rates rise significantly above the interest rates on the Home Equity Loans, the
rate of prepayments is likely to decrease.
The average life of each Class of Offered Certificates, and, if
purchased at other than par, the yields realized by Owners of the Offered
Certificates will be sensitive to levels of payment (including any payments of
principal received before the scheduled due date (the "Prepayments")) on the
Home Equity Loans. In general, the yield on a Class of Offered Certificates that
is purchased at a premium from the outstanding principal amount thereof will be
adversely affected by a higher than anticipated level of Prepayments and
enhanced by a lower than anticipated level of Prepayments. Similarly, the yield
on a Class of Offered Certificates that is purchased at a discount from the
outstanding principal amount thereof will be adversely affected by a lower than
anticipated level of Prepayments. The yields realized by Owners of the Class
A-7IO Certificates will be more sensitive to the rate of prepayment on the Home
Equity Loans. Because amounts distributable to the Owners of the Class A-7IO
Certificates consist entirely of interest, the yield to maturity of the Class
A-7IO Certificates will be sensitive to the repurchase, prepayment and default
experience of the Home Equity Loans, and prospective investors should fully
consider the associated risks, including the risk that such investors may not
fully recover their initial investment. See "Prepayment and Yield
Considerations" herein.
Trust Assets are the Only Source of Credit Enhancement. The
subordination of the Subordinate Certificates to the Class A Certificates, the
further subordination within the Subordinate Certificates, and the
overcollateralization provisions of the Trust are the sole sources of protection
against losses on the Home Equity Loans and other shortfalls in available funds.
If losses or other shortfalls exceed the protection afforded by such mechanism,
Owners of the Offered Certificates will bear their proportionate share of such
losses and shortfalls. The Certificates represent interests only in the Trust
and do not represent interests in, or obligations of the Depositor, the Seller,
the Servicer, the Trustee or any of their respective affiliates. The assets of
the Trust are the sole source of funds for distributions on the Certificates.
Subordination-Limited Protection Afforded to Class A Certificates. The
rights of the Owners of the Class M-1 Certificates to receive distributions with
respect to the Home Equity Loans will be subordinate to the rights of the
holders of the Class A Certificates to receive such distributions, the rights of
Owners of the Class M-2 Certificates to receive distributions with respect to
the Home Equity Loans will be subordinate to the rights of the Owners of the
Class A and the Class M-1 Certificates to receive such distributions and the
rights of the Owners of the Class B Certificates to receive distributions with
respect to the Home Equity Loans will be subordinate to the rights of the Owners
of the Class A, Class M-1 and Class M-2 Certificates to receive such
distributions. The subordination of the Subordinate Certificates relative to the
Class A Certificates (and of the more lower-ranking Classes of the Subordinate
Certificates to the higher-ranking Classes thereof) is intended to enhance the
likelihood of regular receipt by the Owners of the Class A Certificates (and
such higher-ranking Classes) of the full amount of the monthly distributions
allocable to them, and to afford such Owners protection against losses.
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<PAGE>
Subordination-Allocation of Losses to Subordinate Certificates. The
rights of the Owners of each Class of Subordinate Certificates to receive
distributions of principal with respect to the Home Equity Loans will be
subordinate to the rights of the Owners of the Class A Certificates to receive
such distributions and to the rights of the Owners of each higher-ranking Class
of Subordinate Certificates to receive such distributions. See "Credit
Enhancement -- Subordination of Subordinate Certificates" herein.
The yields to maturity on the Mezzanine Certificates and Class B
Certificates will be progressively more sensitive to the rate, timing and
severity of defaults on the Home Equity Loans. Investors should fully consider
the risks associated with an investment in the Mezzanine Certificates or Class B
Certificates, including the possibility that such investors may not fully
recover their initial investment as a result of Realized Losses on the Home
Equity Loans. See "Credit Enhancement-Application of Realized Losses".
The Subordinate Certificates will not be entitled to any principal
distributions until the Stepdown Date and as long as a Trigger Event is not in
effect (unless the aggregate Certificate Principal Balance of the Class A
Certificates has been reduced to zero.) As a result, the weighted average lives
of the Subordinate Certificates will be longer than would be the case if
distributions of principal were to be allocated on a pro rata basis among the
Class A and Subordinate Certificates. As a result of the longer weighted average
lives of the Subordinate Certificates, the Owners of such Certificates have a
greater risk of suffering a loss on their investments.
Nature of Collateral; Junior Liens. Because 10.73% of the aggregate
Loan Balance of the Home Equity Loans as of the Statistical Calculation Date are
secured by second liens subordinate to the rights of the mortgagee or
beneficiary under the related first mortgage or deed of trust, the proceeds from
any liquidation, insurance or condemnation proceedings with respect to such Home
Equity Loans will be available to satisfy the outstanding balance of a Home
Equity Loan only to the extent that the claims of such first mortgagee or
beneficiary have been satisfied in full, including any related foreclosure
costs. In addition, a second mortgagee may not foreclose on the property
securing a second mortgage unless it forecloses subject to the first mortgage,
in which case it must either pay the entire amount due on the first mortgage to
the first mortgagee at or prior to the foreclosure sale or undertake the
obligation to make payments on the first mortgage in the event the mortgagor is
in default thereunder. In servicing second mortgages in its portfolio, it is
generally the Servicer's practice to satisfy the first mortgage at or prior to
the foreclosure sale. The Servicer may also advance funds to keep the first
mortgage current until such time as the Servicer satisfies the first mortgage.
The Trust will have no source of funds (and may not be permitted under the REMIC
provisions of the Code) to satisfy the first mortgage or make payments due to
the first mortgagee. The Servicer generally will be required to advance such
amounts in accordance with the Pooling and Servicing Agreement. See "The Pooling
and Servicing Agreement--Servicing and Sub-Servicing" herein.
An overall decline in the residential real estate market, the general
condition of a Property, or other factors, could adversely affect the values of
the Properties such that the outstanding balances of the Home Equity Loans,
together with any senior liens on the Properties, equal or exceed the value of
the Properties. A decline in the value of a Property would affect the interest
of the Trust in the Property before having any effect on the interest of the
related first mortgagee, and could cause the Trust's interest in the Property to
be extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Home Equity Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Home Equity Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust.
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,
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<PAGE>
violations of these laws, policies and principles may limit the ability of the
Servicer to collect all or part of the principal of or interest on the Home
Equity Loans, may entitle the borrower to a refund of amounts previously paid
and, in addition, could subject the Seller to damages and administrative
enforcement. See "Certain Legal Aspects of the Mortgage Assets" in the
Prospectus.
The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
borrowers regarding the terms of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Home Equity Loans and, in addition, could subject the Seller to damages
and administrative enforcement. The Seller will be required to repurchase any
Home Equity Loans which, at the time of origination did not comply with such
federal laws or regulations. See "Certain Legal Aspects of the Mortgage Assets"
in the Prospectus.
It is possible that some of the Home Equity Loans will be subject to
the Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Riegle Act"), which incorporates the Home Ownership and Equity Protection Act
of 1994. The Riegle Act adds certain additional provisions to Regulation Z,
which is the implementing regulation of the Truth-in-Lending Act. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money home equity loans with high interest rates or high
upfront fees and charges. In general, home equity loans within the purview of
the Riegle Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which exceed
the greater of 8% of the total loan amount or $400. The provisions of the Riegle
Act apply on a mandatory basis to all home equity loans originated on or after
October 1, 1995. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the home equity loan. The Seller will represent and warrant in the Pooling and
Servicing Agreement that each Home Equity Loan was originated in compliance with
all applicable laws including the Truth-in-Lending Act, as amended.
Risk of Higher Default Rates for Home Equity Loans with Balloon
Payments. 35.18% of the aggregate Loan Balance of the Home Equity Loans as of
the Statistical Calculation Date are "balloon loans" that provide for the
payment of the unamortized Loan Balance of such Home Equity Loan in a single
payment at maturity ("Balloon Loans"). The Balloon Loans provide for equal
monthly payments, consisting of principal and interest, generally based on a
30-year amortization schedule, and a single payment of the remaining balance of
the Balloon Loan generally up to 15 years after origination. Amortization of a
Balloon Loan based on a scheduled period that is longer than the term of the
loan results in a remaining principal balance at maturity that is substantially
larger than the regular scheduled payments. The Seller does not have any
information regarding the default history or prepayment history of payments on
Balloon Loans. Because borrowers of Balloon Loans are required to make
substantial single payments upon maturity, it is possible that the default risk
associated with the Balloon Loans is greater than that associated with
fully-amortizing Home Equity Loans.
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<PAGE>
Risk of Insolvency. The Seller believes that its transfer of the Home
Equity Loans to the Depositor and the transfer of the Home Equity Loans by the
Depositor to the Trust constitutes a sale by the Seller to the Depositor and by
the Depositor to the Trust and, accordingly, that such Home Equity Loans will
not be part of the assets of the Seller or the Depositor in the event of the
insolvency of the Seller or the Depositor, as applicable and will not be
available to the creditors of the Seller or the Depositor, as applicable.
However, in the event of an insolvency of the Seller or the Depositor, it is
possible that a bankruptcy trustee or a creditor of the Seller or the Depositor
may argue that the transaction between the Seller and the Depositor or between
the Depositor and the Trust was a pledge of such Home Equity Loans in connection
with a borrowing by the Seller or the Depositor rather than a true sale. Such an
attempt, even if unsuccessful, could result in delays in distributions on the
Certificates.
On the Closing Date, the Trustee, the Seller, the Depositor and the
Rating Agencies will have received an opinion of Arter & Hadden LLP, counsel to
the Seller and the Depositor, with respect to the true sale of the Home Equity
Loans from the Seller to the Depositor and from the Depositor to the Trustee, in
form and substance satisfactory to the Rating Agencies.
THE SELLER AND SERVICER
General
The Seller and Servicer, IMC Mortgage Company, is a Florida
corporation. IMC Mortgage Company completed an initial public offering of
certain shares of its common stock on June 25, 1996 and a secondary offering of
certain shares of its common stock in April 1997. The principal executive
offices of the Seller are located at 5901 East Fowler Avenue, Tampa, Florida
33617-2362 and its telephone number is (813) 984-8801.
The Seller has been in the mortgage lending business since its
formation in 1993 and the Seller and other subsidiaries of the Seller are
engaged in originating, purchasing and servicing home equity loans secured by
first and second mortgages and deeds of trust on Properties located in 50 states
and the District of Columbia.
In September 1997, IMC Mortgage Company began servicing loans
previously serviced by Industry Mortgage Company, L.P., a Delaware limited
partnership, which 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 changes to the management and staff previously servicing the
loans for Industry Mortgage Company, L.P. In addition, there have not been any
changes made to any of the servicing procedures previously utilized by Industry
Mortgage Company, L.P.
The Seller will sell and assign each Home Equity Loan to the Depositor,
which will in turn sell and assign each Home Equity Loan to the Trust, in
consideration of the net proceeds from the sale of the Offered Certificates,
which are being offered hereby. The Seller, in its capacity as Servicer, will
also service each Home Equity Loan.
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement, in whole or in part, unless it shall have first obtained
confirmation in writing from the Rating Agencies that such assignment shall not
result in a downgrade or withdrawal of the ratings assigned to the Offered
Certificates by the respective Rating Agencies; provided, however, that any
assignee must meet the eligibility requirements for a successor servicer set
forth in the Pooling and Servicing Agreement.
The Servicer may enter into sub-servicing agreements (the
"Sub-Servicing Agreements") with qualified sub-servicers (the "Sub-Servicers")
with respect to the servicing of the Home Equity Loans. None of the
Sub-Servicing arrangements discharge the Servicer from its servicing
obligations. Each Sub-Servicing Agreement shall be terminated
S-20
<PAGE>
at such time as the Servicer resigns or is removed. See "The Pooling and
Servicing Agreement--Servicing and Sub-Servicing" herein.
The Trustee, at the direction of a majority of the Owners of the
Offered Certificates, may remove the Servicer, and the Servicer may resign, only
in accordance with the terms of the Pooling and Servicing Agreement. No removal
or resignation shall become effective until the Trustee or a successor servicer
shall have assumed the Servicer's responsibilities and obligations in accordance
therewith. Any collections received by the Servicer after removal or resignation
shall be endorsed by it to the Trustee and remitted directly to the Trustee.
Upon removal or resignation of the Servicer, the Trustee (x) may
solicit bids for a successor servicer as described in the Pooling and Servicing
Agreement and (y) until such time as a successor servicer is appointed pursuant
to the terms of the Pooling and Servicing Agreement, shall serve in the capacity
of Backup Servicer (the "Backup Servicer") subject to the right of the Trustee
to assign such duties to a party acceptable to the Owners of a majority of the
Offered Certificates. If the Trustee is unable to obtain a qualifying bid and is
prevented by law from acting as servicer, the Trustee will be required to
appoint, or petition a court of competent jurisdiction to appoint, an eligible
successor. Any successor (including the Backup Servicer) is required to be a
housing and home finance institution, bank or mortgage servicing institution
which has been designated as an approved seller-servicer by Fannie Mae or
Freddie Mac for first and second home equity loans having equity of not less
than $5,000,000 as determined in accordance with generally accepted accounting
principles, and which shall assume all or any part of the responsibilities,
duties or liabilities of the Servicer.
The Certificates will not represent an interest in or obligation of,
nor are the Home Equity Loans guaranteed by, the Depositor, the Seller, the
Servicer, except as described herein, or any of their affiliates.
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines
customarily and currently employed by the Seller with respect to home equity
loans which it originates or purchases from others. Each Home Equity Loan was
underwritten according to those guidelines. The Seller revises such guidelines
from time to time in connection with changing economic and market conditions.
In certain cases loans may be acquired or originated outside of the
criteria included in the guidelines as then in effect with the prior approval of
a pre-designated senior official of the Seller and in light of compensating
factors or other business considerations. No information is available with
respect to the portion of the Home Equity Loans as to which exceptions to the
criteria specified in the guidelines described herein were made. Substantially
all of the Home Equity Loans were acquired or originated in accordance with the
underwriting guidelines described herein or with such permitted exceptions as
are described herein.
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 ("Freddie Mac") 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.
S-21
<PAGE>
Home equity loans acquired from mortgage brokers and other lenders are
pre-approved by the Seller prior to funding, or purchased in bulk after funding,
only after each loan has been re-underwritten by the Seller in accordance with
its established underwriting guidelines. These guidelines are designed to assess
the adequacy of the real property which serves as collateral for the loan and
the borrower's ability to repay the loan. The Seller analyzes, among other
factors, the equity in the collateral, the credit history and debt-to-income
ratio of the borrower, the property type, and the characteristics of the
underlying senior mortgage, if any.
The Seller purchases and originates home equity loans with different
credit characteristics depending on the credit profiles of individual borrowers.
The Seller primarily purchases and originates fixed rate loans which fully
amortize (subject to adjustments by reason of being simple interest loans) over
a period not to exceed 30 years. The Seller also acquires and originates balloon
loans, which generally provide for scheduled amortization over 30 years, with a
due date and a balloon payment generally at the end of the fifteenth year. The
principal amount of the loans purchased or originated by the Seller generally
ranges up to a maximum of $400,000. Under current policy the Seller generally
does not acquire or originate home equity loans where the combined Loan-to-Value
Ratio exceeds 90%. The collateral securing loans acquired or originated by the
Seller is generally one- to four-family residences, including condominiums and
townhomes. The Seller accepts mobile homes or unimproved land as collateral only
in limited circumstances. The Seller does not purchase loans where any senior
mortgage contains open-end advance, negative amortization or shared appreciation
provisions.
The Seller's home equity loan program includes: (i) a full
documentation program for salaried borrowers and (ii) a non-income qualification
program for self-employed, and in limited instances, salaried borrowers. The
borrower's total monthly debt obligations (which include principal and interest
on all other mortgages, loans, charge accounts and all other scheduled
indebtedness) generally cannot exceed 50% of the borrower's monthly gross
income. Loans to substantially all borrowers who are salaried employees must be
supported by current employment information in addition to employment history.
This information for salaried borrowers is verified based on written
confirmation from employers or one or more pay-stubs, recent W-2 tax forms,
recent tax returns or telephone confirmation from the employers. For the
Seller's non-income qualification program, proof of a two year history of
self-employment in the same business plus proof of current self-employed status
is required. The Seller typically requires lower combined Loan-to-Value Ratios
with respect to loans made to self-employed borrowers.
The Seller requires that a full appraisal of the property used as
collateral for any loan that is acquired or originated be performed in
connection with the origination of the loan. These appraisals are performed by
third party, fee-based appraisers. Appraisals of substantially all of the
Properties were completed on standard Fannie Mae/Freddie Mac forms and conform
to current Fannie Mae/Freddie Mac 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.
S-22
<PAGE>
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 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.
Delinquency and Default Experience of the Servicer's Servicing
Portfolio of Home Equity Loans
<TABLE>
<CAPTION>
Six Months
Ending June 30, Year Ending December 31,
-------------------------------------------------------------------------------------------------------------------
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 140,336 $9,398,704,638 102,275 $6,956,905.062 35,390 $2,148,068,446 9,376 $535,797,748
Delinquency
Percentage (1)
30 - 59 days 2.300% 2.037% 2.598% 2.371% 3.390% 3.093% 2.613% 2.570%
60 - 89 days 0.984% 0.955% 1.438% 1.292% 1.077% 1.068% 0.672% 0.642%
90 + days 4.770% 4.443% 4.042% 3.886% 2.427% 2.616% 1.237% 1.223%
------ ------ ------ ------ ------ ------ ------ ------
Total
Delinquency 8.054% 7.434% 8.078% 7.549% 6.894% 6.777% 4.522% 4.435%
====== ====== ====== ====== ====== ====== ====== ======
Default
Percentage (2)
Foreclosure 1.942% 2.232% 1.235% 1.420% 0.863% 1.003% 0.779% 0.749%
Bankruptcy(3) 1.557% 1.522% 1.208% 1.139% 1.064% 1.069% 0.576% 0.630%
Real Estate
Owned 0.514% 0.522% 0.462% 0.441% 0.276% 0.313% 0.117% 0.160%
------ ------ ------ ------ ------ ------ ------ ------
Total Default 4.013% 4.276% 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.
S-23
<PAGE>
Loan Loss Experience on the Servicer's Servicing
Portfolio of Home Equity Loans
<TABLE>
<CAPTION>
Six Months
Ending
June 30, Year Ending December 31,
---------- ----------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average Amount Outstanding(1) $8,288,654,516 $4,315,237,578 $1,207,171,960 $294,251,859
Gross Losses(2) $9,855,267 $6,274,022 $1,581,695 $278,632
Recoveries(3) $0 $0 $1,727 $0
Net Losses(4) $9,855,267 $6,274,022 $1,579,968 $278,632
Net Losses as a Percentage of
Average Amount Outstanding(5) 0.238% 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 six months ending June 30, 1998, "Net Losses as a Percentage of
Average Amount Outstanding" was annualized by multiplying "Net Losses"
by 2 before calculating the percentage of "Average Amount Outstanding."
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.
S-24
<PAGE>
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in November
1994. The Depositor is a subsidiary of the Seller and the Servicer. The
Depositor maintains its principal offices at 5901 East Fowler Avenue, Tampa,
Florida 33617-2362. None of the Depositor, the Seller, the Servicer or any of
their affiliates will insure or guarantee distributions on the Certificates.
USE OF PROCEEDS
The Seller will sell the Home Equity Loans to the Depositor and the
Depositor will sell the Home Equity Loans to the Trust concurrently with
delivery of the Certificates. Net proceeds from the sale of the Offered
Certificates will be applied by the Depositor (i) to the purchase of the Home
Equity Loans from the Seller and (ii) to pay off extensions of credit provided
by, among others, certain of the Underwriters with respect to certain Home
Equity Loans. Such net proceeds (together with the Class R Certificates retained
by the Seller) represent the purchase price to be paid by the Trust to the
Depositor and by the Depositor to the Seller for the Home Equity Loans.
THE HOME EQUITY LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Home Equity
Loans as of the Statistical Calculation Date. The pool of Home Equity Loans
aggregated $499,994,462.56 as of the Statistical Calculation Date. 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. In addition, 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 and other home equity
loans may be substituted therefor. As of the Closing Date, the Depositor intends
that all Home Equity Loans will conform to Fannie Mae/Freddie Mac standards for
maximum loan balance. As a result of the foregoing, the statistical distribution
of characteristics for the 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.
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 (the "Loan Balance") of the related Home Equity
Loans as of the Statistical Calculation Date. The columns entitled "% of Home
Equity Loans" and "% of Aggregate Loan Balance" in the following tables may not
sum to 100% due to rounding.
The Home Equity Loans as of the Statistical Calculation Date will
consist of 8,277 fixed rate conventional home equity loans evidenced by
promissory notes (the "Notes") secured by first and second lien deeds of trust,
security deeds or mortgages, which are located in 49 states and the District of
Columbia. The Properties securing the Home Equity Loans consist primarily of
one- to- four family residential properties. The Properties may be
owner-occupied and non-owner occupied investment properties (which includes
second and vacation homes). All of the Home Equity Loans as of the Statistical
Calculation Date have a first payment date on or after September 16, 1995. Home
Equity Loans aggregating 89.27% of the aggregate Loan Balances of the Home
Equity Loans as of the Statistical Calculation Date are secured by first liens
on the related properties, and the remaining Home Equity Loans are secured by
second liens on the related properties.
S-25
<PAGE>
The Loan-to-Value Ratios shown below were calculated based upon either
the appraised values of the Properties at the time of origination (the
"Appraised Values") or the sales price. In a limited number of circumstances,
and within the Seller's underwriting guidelines, the Seller has reduced the
Appraised Value of Properties where the Properties are unique, have a high value
or where the comparables are not within 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.
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, together with the outstanding balances of any
first mortgage, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
As of the Statistical Calculation Date, the average Loan Balance of the
Home Equity Loans was $60,407.69. The minimum and maximum Loan Balances of the
Home Equity Loans as of the Statistical Calculation Date were $5,000.00 and
$282,318.17, respectively. As of the Statistical Calculation Date, the weighted
average Coupon Rate of the Home Equity Loans was 10.85%; the Coupon Rate of the
Home Equity Loans ranged from 5.00% to 18.99%; the weighted average Combined
Loan-to-Value Ratio of the Home Equity Loans was 77.22%; the weighted average
remaining term to maturity of the Home Equity Loans was 249.9 months; and the
remaining terms to maturity of the Home Equity Loans ranged from 50 months to
360 months. As of the Statistical Calculation Date, Home Equity Loans containing
"balloon" payments represented not more than 35.18% of the aggregate Loan
Balance of the Home Equity Loans. No Home Equity Loan as of the Statistical
Calculation Date will mature later than August 1, 2028.
S-26
<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>
Alabama 10 $ 798,775 0.16%
Arizona 63 3,424,552 0.68
Arkansas 22 811,785 0.16
California 84 6,688,666 1.34
Colorado 101 6,226,056 1.25
Connecticut 104 7,483,480 1.50
Delaware 37 2,254,962 0.45
District of Columbia 8 736,572 0.15
Florida 930 49,546,824 9.91
Georgia 297 16,379,240 3.28
Hawaii 6 589,285 0.12
Idaho 20 804,975 0.16
Illinois 422 27,979,219 5.60
Indiana 419 19,830,422 3.97
Iowa 41 1,956,527 0.39
Kansas 20 1,103,745 0.22
Kentucky 100 4,847,770 0.97
Louisiana 62 2,962,570 0.59
Maine 18 1,167,794 0.23
Maryland 290 19,423,326 3.88
Massachusetts 156 11,307,623 2.26
Michigan 908 53,569,894 10.71
Minnesota 51 3,512,652 0.70
Mississippi 82 3,641,874 0.73
Missouri 84 3,913,932 0.78
Montana 5 330,802 0.07
Nebraska 34 1,481,359 0.30
Nevada 24 1,612,499 0.32
New Hampshire 10 743,627 0.15
New Jersey 335 26,710,245 5.34
New Mexico 53 3,781,851 0.76
New York 848 62,786,931 12.56
North Carolina 393 23,371,279 4.67
North Dakota 2 60,897 0.01
Ohio 590 33,278,510 6.66
Oklahoma 12 384,864 0.08
Oregon 34 1,638,303 0.33
Pennsylvania 496 27,770,018 5.55
Rhode Island 31 2,096,356 0.42
South Carolina 266 15,002,860 3.00
South Dakota 2 51,080 0.01
Tennessee 366 20,765,811 4.15
Texas 115 7,626,617 1.53
Utah 48 3,302,182 0.66
Vermont 5 257,962 0.05
Virginia 137 8,203,371 1.64
Washington 20 1,232,671 0.25
West Virginia 44 2,282,515 0.46
Wisconsin 67 3,854,498 0.77
Wyoming 5 404,837 0.08
- ------- ----
Total 8,277 $499,994,463 100.00%
===== ============ =======
</TABLE>
S-27
<PAGE>
Combined Loan-to-Value Ratios
The original combined loan-to-value ratios as of the origination dates
of the Home Equity Loans (based upon appraisals made at the time of origination
thereof) (the "Combined Loan-to-Value Ratios") as of the Statistical Calculation
Date were distributed as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Range of Original CLTV's Home Equity Loans Loan Balance Loan Balance
- ------------------------ ----------------- ----------------- --------------
<S> <C> <C> <C>
10.001% to 15.000% 8 $ 178,410 0.04%
15.001 to 20.000 29 741,992 0.15
20.001 to 25.000 37 1,108,392 0.22
25.001 to 30.000 50 1,257,616 0.25
30.001 to 35.000 73 2,697,488 0.54
35.001 to 40.000 96 4,108,934 0.82
40.001 to 45.000 99 3,819,135 0.76
45.001 to 50.000 182 8,148,930 1.63
50.001 to 55.000 159 6,815,636 1.36
55.001 to 60.000 282 13,237,860 2.65
60.001 to 65.000 475 25,417,565 5.08
65.001 to 70.000 753 42,866,882 8.57
70.001 to 75.000 1,055 62,224,369 12.45
75.001 to 80.000 2,325 158,250,397 31.65
80.001 to 85.000 1,226 85,458,008 17.09
85.001 to 90.000 915 68,000,578 13.60
90.001 to 95.000 111 3,885,377 0.78
95.001 to 100.000 402 11,776,894 2.36
--- ---------- ----
Total 8,277 $499,994,463 100.00%
===== ============ =======
</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>
4.001% to 5.000% 1 $ 51,344 0.01%
6.001 to 7.000 15 1,926,129 0.39
7.001 to 8.000 41 3,982,722 0.80
8.001 to 9.000 496 39,001,151 7.80
9.001 to 10.000 1,561 115,350,965 23.07
10.001 to 11.000 2,343 150,900,566 30.18
11.001 to 12.000 1,798 102,287,240 20.46
12.001 to 13.000 1,198 54,207,817 10.84
13.001 to 14.000 575 23,740,404 4.75
14.001 to 15.000 192 6,762,791 1.35
15.001 to 16.000 44 1,448,739 0.29
16.001 to 17.000 9 205,103 0.04
17.001 to 18.000 2 99,348 0.02
18.001 to 19.000 2 30,144 0.01
- ------ ----
Total 8,277 $499,994,463 100.00%
===== ============ =======
</TABLE>
S-28
<PAGE>
Statistical Calculation Date Loan Balances
The distribution of the outstanding principal amounts of the Home
Equity Loans as of the Statistical Calculation Date was 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 $10,000.00 85 $ 742,567 0.15%
10,000.01 to 20,000.00 738 11,859,411 2.37
20,000.01 to 30,000.00 1,066 27,171,813 5.43
30,000.01 to 40,000.00 1,145 40,591,455 8.12
40,000.01 to 50,000.00 1,087 49,228,036 9.85
50,000.01 to 60,000.00 951 52,624,346 10.52
60,000.01 to 70,000.00 706 46,015,346 9.20
70,000.01 to 80,000.00 592 44,407,339 8.88
80,000.01 to 90,000.00 412 35,094,788 7.02
90,000.01 to 100,000.00 312 29,772,281 5.95
100,000.01 to 110,000.00 277 29,068,727 5.81
110,000.01 to 120,000.00 204 23,513,833 4.70
120,000.01 to 130,000.00 140 17,547,827 3.51
130,000.01 to 140,000.00 122 16,432,431 3.29
140,000.01 to 150,000.00 95 13,743,686 2.75
150,000.01 to 160,000.00 86 13,418,133 2.68
160,000.01 to 170,000.00 60 9,943,110 1.99
170,000.01 to 180,000.00 53 9,292,802 1.86
180,000.01 to 190,000.00 40 7,395,442 1.48
190,000.01 to 200,000.00 38 7,457,327 1.49
200,000.01 to 210,000.00 32 6,565,005 1.31
210,000.01 to 220,000.00 14 3,032,564 0.61
220,000.01 to 230,000.00 17 3,799,605 0.76
230,000.01 to 240,000.00 2 469,115 0.09
250,000.01 to 260,000.00 1 260,000 0.05
260,000.01 to 270,000.00 1 265,156 0.05
280,000.01 to 290,000.00 1 282,318 0.06
- ------- ----
Total 8,277 $499,994,463 100.00%
===== ============ =======
</TABLE>
S-29
<PAGE>
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> <C> <C> <C>
Single Family Detached 7,236 $432,705,304 86.54%
Two to Four Families 512 37,804,192 7.56
Single Family Attached 248 13,402,750 2.68
Condominiums 116 6,134,209 1.23
Manufactured Housing 105 5,052,997 1.01
Planned Unit Development 17 1,724,673 0.34
Townhouse 26 1,460,417 0.29
Multi-Family Residential 11 1,015,583 0.20
Mixed Use 6 694,339 0.14
- ------- ----
Total 8,277 $499,994,463 100.00%
===== ============ =======
</TABLE>
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>
0 958 $ 59,613,040 11.92%
1 2,088 126,967,568 25.39
2 2,260 135,957,236 27.19
3 1,248 75,131,673 15.03
4 738 44,727,726 8.95
5 535 32,740,672 6.55
6 to 12 429 23,945,548 4.79
13 to 24 14 623,555 0.12
25 to 36 7 287,445 0.06
- ------- ----
Total 8,277 $499,994,463 100.00%
===== ============ =======
</TABLE>
S-30
<PAGE>
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 120 352 $ 9,512,462 1.90%
121 to 180 4,521 249,927,403 49.99
181 to 240 933 52,285,830 10.46
241 to 300 79 4,409,245 0.88
301 to 360 2,392 183,859,523 36.77
----- ----------- -----
Total 8,277 $499,994,463 100.00%
===== ============ =======
</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 7,677 $469,724,430 93.95%
Non-Owner 600 30,270,033 6.05
--- ---------- ----
Total 8,277 $499,994,463 100.00%
===== ============ =======
</TABLE>
(1) Based on representations by the borrower at the time of origination of
the Home Equity Loans.
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 6,541 $446,330,518 89.27%
Second Lien 1,736 53,663,945 10.73
----- ---------- -----
Total 8,277 $499,994,463 100.00%
===== ============ =======
</TABLE>
S-31
<PAGE>
Interest Payments on the Home Equity Loans
Almost all of the Home Equity Loans 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.
There are a small number of Home Equity Loans on which interest is
charged to the Mortgagor at the Coupon Rate on the outstanding principal balance
calculated based on the number of days elapsed between receipt of the
Mortgagor's last payment through receipt of the Mortgagor's most current payment
(such Home Equity Loans, "Date-of-Payment Loans"). Such interest is deducted
from the Mortgagor's payment amount and the remainder, if any, of the payment is
applied as a reduction to the outstanding principal balance of such Note.
Although the Mortgagor is required to remit equal monthly payments on a
specified monthly payment date that would reduce the outstanding principal
balance of such Note to zero at such Note's maturity date, payments that are
made by the Mortgagor after the due date therefor would cause the outstanding
principal balance of such Note not to be reduced to zero on its maturity date.
In such a case, the Mortgagor would be required to make an additional principal
payment at the maturity date for such Note. If it were assumed that all the
Mortgagors on the Date-of-Payment Loans were to pay on the latest date possible
without the Date-of-Payment Loans being in default, the amount of such
additional principal payment would be a de minimis amount of the aggregate Loan
Balance of the Home Equity Loans. On the other hand, if a Mortgagor makes a
payment (other than a Prepayment) before the due date therefor, the reduction in
the outstanding principal balance of such Note would occur over a shorter period
of time than would have occurred had it been based on the schedule of
amortization in effect on the Cut-Off Date. Accordingly, the timing of principal
payments to the Owners of the Offered Certificates may be affected by the fact
that actual Mortgagor payments may not be made on the due date therefor.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, the Offered Certificates will relate to the rate of
payment of principal of the Home Equity Loans, including, for this purpose,
Prepayments, liquidations due to defaults, casualties and condemnations, and
repurchases of Home Equity Loans by the Seller. The Home Equity Loans may be
prepaid by the related Mortgagors, in whole or in part, at any time. However, as
of the Statistical Calculation Date approximately 56.50% of the Home Equity
Loans (by Loan Balance) require the payment of a fee in connection with certain
prepayments. The rate of payment of principal of the Home Equity Loans may also
be affected by the amount of Home Equity Loans secured by a second liens. Such
Home Equity Loans are subordinate to the rights of the mortgagee or beneficiary
under a first mortgage or deed of trust to receive proceeds from any
liquidation, insurance or condemnation proceedings available to satisfy the
outstanding balance of the related Home Equity Loan. However, since only 10.73%
of the aggregate Loan Balance of the Home Equity Loans as of the Statistical
Calculation Date are secured by second liens, the effect on the rate of payment
of principal, if any, should be minimal. The actual rate of principal
prepayments on pools of home equity loans is influenced by a variety of
economic, tax, geographic, demographic, social, legal and other factors and has
fluctuated considerably in recent years. In addition, the rate of principal
prepayments may differ among pools of home equity loans at any time because of
specific factors relating to the home equity loans in the particular pool,
including, among other things, the age of the home equity loans, the geographic
locations of the properties securing the loans and the extent of the mortgagors'
equity in such properties, and changes in the mortgagors' housing needs, job
transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home equity loans with fixed rates is affected by prevailing market
rates for home equity loans of a comparable term and risk level. When the market
interest rate is below the mortgage coupon, mortgagors may have an increased
incentive to refinance their home equity loans. Depending on prevailing market
rates, the future outlook for market rates and economic conditions generally,
S-32
<PAGE>
some mortgagors may sell or refinance mortgaged properties in order to realize
their equity in the mortgaged properties, to meet cash flow needs or to make
other investments.
In addition to the foregoing factors affecting the weighted average
life of the Offered Certificates, the overcollateralization provisions of the
Trust result in an additional reduction of the Class A Certificates relative to
the amortization of the Home Equity Loans in early months of the transaction.
The accelerated amortization is achieved by the application of the Monthly
Excess Interest Amount to the payment of the related Certificate Principal
Balance of the Offered Certificates. This creates overcollateralization which
results from the excess of the aggregate Loan Balance of the Home Equity Loans
over the Aggregate Certificate Principal Balance. Once the Target
Overcollateralization Amount is reached, the application of the Monthly Excess
Interest Amount to pay down principal will cease, unless necessary to maintain
the Overcollateralization Amount at the Target Overcollateralization Amount.
Prepayment and Yield Scenarios for Offered Certificates
As indicated above, if purchased at other than par (disregarding, for
purposes of this discussion, the effects on an investor's yield resulting from
the timing of the settlement date and those considerations discussed below under
"Payment Lag Feature of Offered Certificates"), the yield to maturity on a Class
of Offered Certificates will be affected by the rate of the payment of principal
of the Home Equity Loans. If the actual rate of payments on the Home Equity
Loans is slower than the rate anticipated by an investor who purchases a Class
of the Offered Certificates at a discount, the actual yield to such investor
will be lower than such investor's anticipated yield. If the actual rate of
payments on the Home Equity Loans is faster than the rate anticipated by an
investor who purchases a Class of the Offered Certificates at a premium, the
actual yield to such investor will be lower than such investor's anticipated
yield.
The Final Scheduled Payment Date for each Class of the Offered
Certificates is as set forth in the "Summary of Terms" hereof. These dates are
dates on which the "Initial Certificate Principal Balance" set forth in the
"Summary of Terms" hereof for the related Class of the Offered Certificates as
of the Closing Date would be reduced to zero, assuming that no Prepayments are
received on the Home Equity Loans, that scheduled monthly payments of principal
and interest on the Home Equity Loans are timely received and that no Monthly
Excess Interest Amount will be used to make accelerated payments of principal to
the Owners of the Offered Certificates. The Final Scheduled Payment Date for the
Class A-5 Certificates, Class A-6 Certificates and each Class of the Subordinate
Certificates is the sixteenth Payment Date following the Remittance Period in
which the Loan Balances of all Home Equity Loans have been reduced to zero
assuming that the Home Equity Loans pay in accordance with their terms. The
weighted average lives of the Offered Certificates are likely to be shorter than
would be the case if payments actually made on the Home Equity Loans conformed
to the foregoing assumptions, and the final Payment Dates with respect to the
Offered Certificates could occur significantly earlier than the Final Scheduled
Payment Dates because (i) Prepayments are likely to occur and (ii) the Owners of
the Class R Certificates may cause a termination of the Trust when the aggregate
outstanding Loan Balance of the Home Equity Loans is less than 10% of the
Original Aggregate Loan Balance.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of any
Class of the Offered Certificates will be influenced by the rate at which
principal of the Home Equity Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes Prepayments and liquidations due to default). Prepayments on home
equity loans are commonly measured relative to a prepayment standard or model.
The model used in this Prospectus Supplement is the prepayment
assumption (the "Prepayment Assumption") which represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of home equity loans for the life of such home equity loans. A 100%
Prepayment Assumption assumes constant prepayment rates ("CPR") of 4% per annum
of the then outstanding principal balance of the Home Equity Loans in the first
month of the life of such Home Equity Loans and an additional 1.909% (precisely
21/11ths) per annum in each month thereafter until the twelfth month. Beginning
in the thirteenth month and in each month thereafter during the life of such
Home Equity Loans, 100% Prepayment Assumption assumes a constant prepayment
S-33
<PAGE>
rate of 25% per annum each month. As used in the table below, 0% Prepayment
Assumption assumes prepayment rates equal to 0% of the Prepayment Assumption;
i.e., no prepayments. Correspondingly, 100% Prepayment Assumption assumes
prepayment rates equal to 100% of the Prepayment Assumption, and so forth. The
Prepayment Assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of home equity loans, including the Home Equity Loans. The Seller
believes that no existing statistics of which it is aware provide a reliable
basis for Owners of Offered Certificates to predict the amount or the timing of
receipt of prepayments on the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Offered Certificates (other than the Class A-7IO
Certificates) set forth in the tables. In addition, since the actual Home Equity
Loans in the Trust have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
Offered Certificates (other than the Class A-7IO Certificates) may be made
earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans consist of pools of loans with level-pay and balloon amortization
methodologies, Loan Balances, gross coupon rates, net coupon rates, original and
remaining terms of amortization, and remaining terms to maturity as applicable,
as set forth in the "Representative Loan Pools" table below, (ii) the Closing
Date for the Certificates occurs on September 10, 1998, (iii) distributions on
the Certificates are made on the 20th day of each month regardless of the day on
which the Payment Date actually occurs, commencing in October 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 Trustee Fee, (v) the Home Equity Loans'
prepayment rates are a multiple of the Prepayment Assumption, (vi) prepayments
include 30 day's interest thereon, (vii) no optional termination is exercised
(except in the case of the Weighted Average Life to Call), (viii) the "Targeted
Overcollateralization Amount" (as defined under "Credit Enhancement --
Overcollateralization Provisions") is set initially as specified in the Pooling
and Servicing Agreement and thereafter decreases in accordance with the
provisions of the Pooling and Servicing Agreement, (ix) no reinvestment income
from any Trust account is available for payment to the Owners of the
Certificates, (x) the Class A-1 Pass-Through Rate remains constant at 5.72625%
and (xi) the scheduled monthly payments of principal and interest on the Home
Equity Loans will be timely delivered on the first day of the Remittance Period
(with no defaults).
REPRESENTATIVE LOAN POOLS
<TABLE>
<CAPTION>
Original Remaining Remaining
Term of Term of Term to
Pool Loan Gross Coupon Net Coupon Amortization Amortization Maturity Amortization
Number Balance Rate Rate (in months) (in months) (in months) Method
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 63,392,253.75 11.119% 10.619% 360 359 179 Balloon
2 48,176,874.75 11.073 10.573 360 358 178 Balloon
3 64,337,675.45 11.123 10.623 360 356 175 Balloon
4 27,755,563.63 11.134 10.634 172 172 172 Level
5 55,780,370.48 11.086 10.586 173 170 170 Level
6 52,286,409.27 10.608 10.108 240 237 237 Level
7 27,348,918.89 10.709 10.209 359 359 359 Level
8 52,209,400.71 10.619 10.119 358 357 357 Level
9 49,623,649.23 10.593 10.093 358 356 356 Level
10 59,088,883.84 10.445 9.945 359 355 355 Level
---------------
Total $500,000,000.00
===============
</TABLE>
S-34
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Offered Certificates that would be outstanding after each of the
dates shown, based on a rate equal to 0%, 50%, 75%, 100%, 125% and 150% of the
Prepayment Assumption (as defined above).
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
Class A-1 Class A-2
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1999 89 63 51 37 24 11 100 100 100 100 100 100
9/20/2000 86 29 3 0 0 0 100 100 100 39 0 0
9/20/2001 82 0 0 0 0 0 100 96 1 0 0 0
9/20/2002 78 0 0 0 0 0 100 28 0 0 0 0
9/20/2003 74 0 0 0 0 0 100 0 0 0 0 0
9/20/2004 69 0 0 0 0 0 100 0 0 0 0 0
9/20/2005 64 0 0 0 0 0 100 0 0 0 0 0
9/20/2006 60 0 0 0 0 0 100 0 0 0 0 0
9/20/2007 54 0 0 0 0 0 100 0 0 0 0 0
9/20/2008 48 0 0 0 0 0 100 0 0 0 0 0
9/20/2009 41 0 0 0 0 0 100 0 0 0 0 0
9/20/2010 33 0 0 0 0 0 100 0 0 0 0 0
9/20/2011 24 0 0 0 0 0 100 0 0 0 0 0
9/20/2012 14 0 0 0 0 0 100 0 0 0 0 0
9/20/2013 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2014 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2015 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2016 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2017 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2018 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2019 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2020 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2021 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2022 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2023 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2024 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2025 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2026 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2027 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2028 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(2) 8.7 1.5 1.1 0.9 0.8 0.7 14.7 3.7 2.6 2.0 1.6 1.4
Weighted Average Life 8.7 1.5 1.1 0.9 0.8 0.7 14.7 3.7 2.6 2.0 1.6 1.4
to Call (years)(2)
<CAPTION>
Class A-3 Class A-4
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1999 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2000 100 100 100 100 80 31 100 100 100 100 100 100
9/20/2001 100 100 100 32 0 0 100 100 100 100 60 0
9/20/2002 100 100 48 0 0 0 100 100 100 98 41 0
9/20/2003 100 75 13 0 0 0 100 100 100 53 4 0
9/20/2004 100 49 0 0 0 0 100 100 84 25 0 0
9/20/2005 100 27 0 0 0 0 100 100 58 7 0 0
9/20/2006 100 15 0 0 0 0 100 100 47 3* 0 0
9/20/2007 100 2 0 0 0 0 100 100 33 0 0 0
9/20/2008 100 0 0 0 0 0 100 84 19 0 0 0
9/20/2009 100 0 0 0 0 0 100 66 7* 0 0 0
9/20/2010 100 0 0 0 0 0 100 50 0 0 0 0
9/20/2011 100 0 0 0 0 0 100 35 0 0 0 0
9/20/2012 100 0 0 0 0 0 100 21 0 0 0 0
9/20/2013 51 0 0 0 0 0 100 0 0 0 0 0
9/20/2014 44 0 0 0 0 0 100 0 0 0 0 0
9/20/2015 36 0 0 0 0 0 100 0 0 0 0 0
9/20/2016 27 0 0 0 0 0 100 0 0 0 0 0
9/20/2017 16 0 0 0 0 0 100 0 0 0 0 0
9/20/2018 7 0 0 0 0 0 100 0 0 0 0 0
9/20/2019 0 0 0 0 0 0 100 0 0 0 0 0
9/20/2020 0 0 0 0 0 0 89 0 0 0 0 0
9/20/2021 0 0 0 0 0 0 77 0 0 0 0 0
9/20/2022 0 0 0 0 0 0 64 0 0 0 0 0
9/20/2023 0 0 0 0 0 0 50 0 0 0 0 0
9/20/2024 0 0 0 0 0 0 33 0 0 0 0 0
9/20/2025 0 0 0 0 0 0 15* 0 0 0 0 0
9/20/2026 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2027 0 0 0 0 0 0 0 0 0 0 0 0
9/20/2028 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(2) 16.6 6.3 4.1 3.0 2.3 1.9 24.8 12.1 8.1 5.4 3.8 2.6
Weighted Average Life
to Call (years)(2) 16.6 6.3 4.1 3.0 2.3 1.9 24.8 12.1 8.0 5.4 3.8 2.6
</TABLE>
- -----------------------------
(1) The percentages in the following tables have been rounded to the nearest
whole number.
(2) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificate.
* Indicates that the cash flows are contingent on the optional termination
provision not being exercised.
S-35
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
Class A-5 Class A-6
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1999 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2000 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2001 100 100 100 100 100 73 100 100 100 100 100 100
9/20/2002 100 100 100 100 100 73 99 91 89 90 94 100
9/20/2003 100 100 100 100 100 22 98 83 80 79 79 83
9/20/2004 100 100 100 100 67 6* 96 73 67 61 57 56*
9/20/2005 100 100 100 100 45* 4* 94 63 53 45 39* 34*
9/20/2006 100 100 100 100* 45* 4* 86 39 26 17* 16* 20*
9/20/2007 100 100 100 87* 39* 4* 77 24 13 7* 5* 11*
9/20/2008 100 100 100 67* 28* 4* 68 14 6 2* 1* 3*
9/20/2009 100 100 100* 49* 19* 0 59 8 3* 1* 0 0
9/20/2010 100 100 91* 36* 9* 0 50 5 1* 0 0 0
9/20/2011 100 100 71* 26* 3* 0 41 3 1* 0 0 0
9/20/2012 100 100 54* 17* 0 0 32 2 0 0 0 0
9/20/2013 100 69* 23* 0 0 0 1 0 0 0 0 0
9/20/2014 100 58* 17* 0 0 0 1 0 0 0 0 0
9/20/2015 100 48* 10* 0 0 0 1 0 0 0 0 0
9/20/2016 100 39* 5* 0 0 0 1 0 0 0 0 0
9/20/2017 100 31* 1* 0 0 0 1 0 0 0 0 0
9/20/2018 100 25* 0 0 0 0 0 0 0 0 0 0
9/20/2019 100 21* 0 0 0 0 0 0 0 0 0 0
9/20/2020 100 15* 0 0 0 0 0 0 0 0 0 0
9/20/2021 100 10* 0 0 0 0 0 0 0 0 0 0
9/20/2022 100 5* 0 0 0 0 0 0 0 0 0 0
9/20/2023 100 1* 0 0 0 0 0 0 0 0 0 0
9/20/2024 100 0 0 0 0 0 0 0 0 0 0 0
9/20/2025 100* 0 0 0 0 0 0 0 0 0 0 0
9/20/2026 90* 0 0 0 0 0 0 0 0 0 0 0
9/20/2027 39* 0 0 0 0 0 0 0 0 0 0 0
9/20/2028 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(2) 28.8 17.9 14.4 11.4 8.1 4.6 11.7 7.6 6.9 6.6 6.5 6.6
Weighted Average Life
to Call (years)(2) 26.9 14.5 10.4 7.9 6.1 4.3 11.7 7.6 6.9 6.4 5.7 5.0
<CAPTION>
Class M-1 Class M-2
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
9/20/1999 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2000 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2001 100 100 100 100 100 100 100 100 100 100 100 100
9/20/2002 100 100 88 66 48 44 100 100 88 66 48 34
9/20/2003 100 100 70 48 32 21 100 100 70 48 32 21
9/20/2004 100 86 56 36 22 13* 100 86 56 36 22 13*
9/20/2005 100 73 45 26 15* 8* 100 73 45 26 15* 8*
9/20/2006 100 63 35 19* 10* 5* 100 63 35 19* 10* 0
9/20/2007 100 53 28 14* 7* 0 100 53 28 14* 5* 0
9/20/2008 100 45 22 10* 4* 0 100 45 22 10* 0 0
9/20/2009 100 38 17* 7* 0 0 100 38 17* 7* 0 0
9/20/2010 100 32 13* 5* 0 0 100 32 13* 1* 0 0
9/20/2011 100 26 10* 2* 0 0 100 26 10* 0 0 0
9/20/2012 100 22 8* 0 0 0 100 22 8* 0 0 0
9/20/2013 71 10* 1* 0 0 0 71 10* 0 0 0 0
9/20/2014 68 8* 0 0 0 0 68 8* 0 0 0 0
9/20/2015 64 7* 0 0 0 0 64 6* 0 0 0 0
9/20/2016 60 6* 0 0 0 0 60 2* 0 0 0 0
9/20/2017 55 4* 0 0 0 0 55 0 0 0 0 0
9/20/2018 50 2* 0 0 0 0 50 0 0 0 0 0
9/20/2019 47 0 0 0 0 0 47 0 0 0 0 0
9/20/2020 44 0 0 0 0 0 44 0 0 0 0 0
9/20/2021 40 0 0 0 0 0 40 0 0 0 0 0
9/20/2022 36 0 0 0 0 0 36 0 0 0 0 0
9/20/2023 31 0 0 0 0 0 31 0 0 0 0 0
9/20/2024 25 0 0 0 0 0 25 0 0 0 0 0
9/20/2025 19* 0 0 0 0 0 19* 0 0 0 0 0
9/20/2026 13* 0 0 0 0 0 13* 0 0 0 0 0
9/20/2027 6* 0 0 0 0 0 2* 0 0 0 0 0
9/20/2028 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(2) 20.9 10.3 7.5 5.8 4.9 4.5 20.9 10.2 7.5 5.8 4.8 4.3
Weighted Average Life
to Call (years)(2) 20.7 9.9 7.0 5.3 4.5 4.2 20.7 9.9 7.0 5.3 4.4 4.0
</TABLE>
- -----------------------------
(1) The percentages in the following tables have been rounded to the nearest
whole number.
(2) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificate.
* Indicates that the cash flows are contingent on the optional termination
provision not being exercised.
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PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
Class B
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
Initial 100 100 100 100 100 100
9/20/1999 100 100 100 100 100 100
9/20/2000 100 100 100 100 100 100
9/20/2001 100 100 100 100 100 100
9/20/2002 100 100 88 66 48 34
9/20/2003 100 100 70 48 32 21
9/20/2004 100 86 56 36 22 9*
9/20/2005 100 73 45 26 12* 1*
9/20/2006 100 63 35 19* 4* 0
9/20/2007 100 53 28 11* 0 0
9/20/2008 100 45 22 5* 0 0
9/20/2009 100 38 17* 0 0 0
9/20/2010 100 32 10* 0 0 0
9/20/2011 100 26 5* 0 0 0
9/20/2012 100 22 1* 0 0 0
9/20/2013 71 5* 0 0 0 0
9/20/2014 68 2* 0 0 0 0
9/20/2015 64 0 0 0 0 0
9/20/2016 60 0 0 0 0 0
9/20/2017 55 0 0 0 0 0
9/20/2018 50 0 0 0 0 0
9/20/2019 47 0 0 0 0 0
9/20/2020 44 0 0 0 0 0
9/20/2021 40 0 0 0 0 0
9/20/2022 36 0 0 0 0 0
9/20/2023 31 0 0 0 0 0
9/20/2024 25 0 0 0 0 0
9/20/2025 19* 0 0 0 0 0
9/20/2026 9* 0 0 0 0 0
9/20/2027 0 0 0 0 0 0
9/20/2028 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(2) 20.9 10.0 7.4 5.6 4.6 4.1
Weighted Average Life
to Call (years)(2) 20.7 9.9 7.0 5.3 4.4 3.9
- -----------------------------
(1) The percentages in the following tables have been rounded to the nearest
whole number.
(2) The weighted average life of the Offered Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years
from the date of issuance to the related Payment Date, (ii) adding the
results, and (iii) dividing the sum by the initial respective Certificate
Principal Balance for such Class of Offered Certificate.
* Indicates that the cash flows are contingent on the optional termination
provision not being exercised.
Payment Lag Feature of Fixed Rate Certificates
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Home Equity Loan (net of the Servicing
Fee) received by the Servicer during each Remittance Period is to be remitted to
the Trustee on or prior to the related Monthly Remittance Date while the Trustee
will not be required to distribute any such amounts to the Owners of the Offered
Certificates until the next succeeding Payment Date. As a result, the monthly
distributions to the Owners of the Offered Certificates generally reflect
Mortgagor payments during the prior Remittance Period, and the first Payment
Date will not occur until October 20, 1998. Thus, the effective yield to the
Owners of the Offered Certificates (other than the Class A-1 Certificates) will
be below that otherwise produced by the related Pass-Through Rate because the
distribution to the Owners of the Offered Certificates in respect of any given
month will not be made until on or about the 20th day of the following month.
Yield Sensitivity of the Class A-7IO Certificates
Because amounts distributable to the Owners of the Class A-7IO
Certificates consist entirely of interest, the yield to maturity of the Class
A-7IO Certificates will be sensitive to the repurchase, prepayment and default
experience of the Home Equity Loans, and prospective investors should fully
consider the associated risks, including the risk that such investors may not
fully recover their initial investment. In addition, the Notional Principal
Amount applicable to interest calculations on the Class A-7IO Certificates is
(x) through the Payment Date in March 2001, the Class A-6
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<PAGE>
Certificate Principal Balance and (y) thereafter, zero. Since the Class A-6
Certificates will amortize in accordance with the distribution of the Class A-6
Lockout Distribution Amount, the performance of the Class A-7IO Certificates is
likely to be more stable than if such Notional Principal Amount were calculated
using the underlying Home Equity Loans directly, and consequently, the yield
sensitivity of such Certificates will only be impacted at high rates of
prepayment. Based on the assumptions set forth under "Prepayment and Yield
Considerations -- Prepayment and Yield Scenarios for Offered Certificates" and
the price set forth on the cover page hereof, the pre-tax yield to maturity of
the Class A-7IO Certificates (represented on a corporate bond equivalent basis)
is 6.518% at 100% of the Prepayment Assumption. However, such yield will
decrease below this percentage for any Prepayment Assumption in excess of 196%.
In addition, at any Prepayment Assumption in excess of 223%, the pre-tax yield
to maturity of the Class A-7IO Certificates will be zero or less.
FORMATION OF THE TRUST AND TRUST PROPERTY
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement. The Seller will convey without recourse the Home Equity
Loans to the Depositor, the Depositor will convey without recourse the Home
Equity Loans to the Trust and the Trust will issue the Offered Certificates and
the Class R Certificates to the Owners thereof.
The property of the Trust shall include all (a) the Home Equity Loans
together with the related Home Equity Loan documents and the Seller's interest
in any Property which secures a Home Equity Loan and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing, (b) such
amounts as may be held by the Trustee in the Certificate Account, the Upper-Tier
Distribution Account (as defined in the Pooling and Servicing Agreement) and any
other accounts held by the Trustee for the Trust together with investment
earnings on such amounts and such amounts may be held by the Servicer in the
Principal and Interest Account, if any, exclusive of investment earnings thereon
(except as otherwise provided) whether in the form of cash, instruments,
securities or other properties and (c) proceeds of all the foregoing (including,
but not by way of limitation, all proceeds of any mortgage insurance, hazard
insurance and title insurance policy relating to the Home Equity Loans, cash
proceeds, accounts, accounts receivable, notes, drafts, acceptances, chattel
paper, checks, deposit accounts, rights to payment of any and every kind, and
other forms of obligations and receivables which at any time constitute all or
part of or are included in the proceeds of any of the foregoing) to pay the
Certificates as specified in the Pooling and Servicing Agreement (collectively,
the "Trust Estate").
The Offered Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Seller, the Servicer or any of their affiliates.
For Federal income tax purposes, the Trust Estate created by the
Pooling and Servicing Agreement will include two segregated asset pools, each of
which will be treated as a separate REMIC. The assets of the Lower-Tier REMIC
will generally consist of the Home Equity Loans. The assets of the Upper-Tier
REMIC will generally consist of the Upper-Tier Distribution Account and the
uncertificated regular interests issued by the Lower-Tier REMIC, which in the
aggregate will correspond to the Offered Certificates. In addition to the
Offered Certificates, the Trust will also issue the Class R Certificates which
will be designated as the "residual interest" in the Upper-Tier REMIC for
purposes of the Code. The Class R Certificates are not being offered hereby.
Prior to its formation the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business activity
other than acquiring, holding and collecting payments on the Home Equity Loans,
issuing the Certificates and distributing payments thereon. The Trust will not
acquire any receivables or assets other than the Home Equity Loans and the
rights appurtenant thereto, and will not have any need for additional capital
resources. To the extent that borrowers make scheduled payments under the Home
Equity Loans, the Trust will have sufficient liquidity to make distributions on
the Certificates. As the Trust does not have any operating history and will not
engage in any business activity other than issuing the Certificates and making
distributions thereon, there has not been included any historical or pro forma
ratio of earnings to fixed charges with respect to the Trust.
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<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Home Equity Loans
and the Properties is based upon the Home Equity Loans as constituted at the
close of business on the Statistical Calculation Date. Prior to the issuance of
the Offered Certificates, Home Equity Loans may be removed from the pool as a
result of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Seller deems
such removal necessary or appropriate, and other home equity loans may be
substituted therefor.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, and incorporated by reference to the
Registration Statement together with the Pooling and Servicing Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Home Equity Loans are removed
from or added to the pool as set forth in the preceding paragraph, such removal
or addition will be noted in a current report on Form 8-K.
DESCRIPTION OF THE OFFERED CERTIFICATES
General
Each Offered Certificate will represent certain undivided, fractional
ownership interests in the Trust Estate created and held pursuant to the Pooling
and Servicing Agreement, subject to the limits and the priority of distribution
described therein.
Payment Dates
On each Payment Date, the Owners of each Class of the Offered
Certificates will be entitled to receive, from amounts then on deposit in the
certificate account established and maintained by the Trustee in accordance with
the Pooling and Servicing Agreement (the "Certificate Account") and until the
related Certificate Principal Balance (or Notional Principal Amount) of such
Class of the Offered Certificates is reduced to zero, and to the extent funds
are available therefor, the related Current Interest, any Interest Carry Forward
Amount and the portion of the Principal Distribution Amount, if any, allocated
therefor as of such Payment Date, allocated among the Classes of the Offered
Certificates as described below. Distributions will be made in immediately
available funds to Owners of the Offered Certificates by wire transfer or
otherwise, to the account of such Owner at a domestic bank or other entity
having appropriate facilities therefor, if such Owner has so notified the
Trustee at least five Business Days prior to the Record Date, or by check mailed
to the address of the person entitled thereto as it appears on the register (the
"Register") maintained by the Trustee as registrar (the "Registrar"). Beneficial
Owners may experience some delay in the receipt of their payments due to the
operations of DTC. See "Risk Factors--Book Entry Registration" in the Prospectus
and "Description of the Offered Certificates--Book Entry Registration of the
Offered Certificates" herein and "Description of the Securities--Book Entry
Registration" in the Prospectus.
The Pooling and Servicing Agreement will provide that an Owner, upon
receiving the final distribution on such Owner's Certificate, will be required
to send such Certificate to the Trustee. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed canceled for all
purposes of the Pooling and Servicing Agreement.
Each Owner of record of the related Class of Offered Certificates will
be entitled to receive such Owner's Percentage Interest in the amounts due such
Class on such Payment Date. The "Percentage Interest" of an Offered Certificate
as of any date of determination will be equal to the percentage obtained by
dividing the principal balance (or notional balance) of such Offered Certificate
as of the Cut-Off Date by the Certificate Principal Balance (or Notional
Principal Amount) for the related Class of Certificates as of the Cut-Off Date.
S-39
<PAGE>
Distributions
Upon receipt, the Trustee will be required to deposit into the
Certificate Account the Interest Remittance Amount and the Principal Remittance
Amount.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of the Offered Certificates (each, a "Pass-Through Rate") as set
forth in the Summary of Terms herein under "Certificates Offered." The Class A-1
Pass-Through Rate adjusts monthly and will on each Payment Date be equal to the
lesser of (x) LIBOR plus 0.07% and (y) the Available Funds Cap.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from monies then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement with respect to interest and principal:
Interest: On each Payment Date the Interest Remittance Amount will be
distributed in the following order of priority:
First, to the Trustee, the Trustee Fee and any Trustee Reimbursable
Expenses;
Second, to the Owners of the Class A Certificates (including the Class
A-7IO Certificates), the related Current Interest plus the related
Class A Interest Carry Forward Amount with respect to each Class of
Class A Certificates without any priority among such Class A
Certificates; provided, that if the Interest Amount Available is not
sufficient to make a full distribution of interest with respect to all
Classes of the Class A Certificates, the Interest Amount Available will
be distributed among the outstanding Classes of Class A Certificates
pro rata based on the aggregate amount of interest due on each such
Class, and the amount of the shortfall will be carried forward with
accrued interest at the related Pass-Through Rate;
Third, to the extent of the Interest Amount Available then remaining,
to the Owners of the Class M-1 Certificates, the related Current
Interest;
Fourth, to the extent of the Interest Amount Available then remaining,
to the Owners of the Class M-2 Certificates, the related Current
Interest;
Fifth, to the extent of the Interest Amount Available then remaining,
to the Owners of the Class B Certificates, the related Current
Interest; and
Sixth, the Monthly Excess Interest Amount shall be applied as described
under "Credit Enhancement -- Application of Monthly Excess Cashflow
Amount."
Principal: On each Payment Date (a) before the Stepdown Date or (b) on
or after the Stepdown Date if a Trigger Event is in effect, Owners of the Class
A Certificates (other than the Class A-7IO Certificates) will be entitled to
receive payment of 100% of the Principal Distribution Amount as follows: first,
to the Owners of the Class A-6 Certificates, the Class A-6 Lockout Distribution
Amount and second, to the Owners of the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the Class
A-5 Certificates and the Class A-6 Certificates (without regard to the Class A-6
Lockout Distribution Amount), in that order, in each case, until the Certificate
Principal Balance of each Class of Class A Certificates has been reduced to
zero.
On each Payment Date (a) on or after the Stepdown Date and (b) as long
as a Trigger Event is not in effect, the Owners of all Classes of the Offered
Certificates (other than the Class A-7IO Certificates) will be entitled to
receive payments of principal, in the order of priority, in the amounts set
forth below and to the extent of the Principal Distribution Amount as follows:
S-40
<PAGE>
First, the lesser of (x) the Principal Distribution Amount and (y) the
Class A Principal Distribution Amount shall be distributed as follows:
(i) to the Owners of the Class A-6 Certificates, in an amount equal to
the Class A-6 Lockout Distribution Amount and, (ii) to the Owners of
the Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates, the Class A-5 Certificates
and the Class A-6 Certificates (without regard to the Class A-6 Lockout
Distribution Amount), in that order, in each case, until the
Certificate Principal Balance of each Class of Class A Certificates has
been reduced to zero;
Second, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the amount distributed to the Owners of the Class A
Certificates in clause First above and (y) the Class M-1 Principal
Distribution Amount shall be distributed to the Owners of the Class M-1
Certificates, until the Class M-1 Certificate Principal Balance has
been reduced to zero;
Third, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Owners of the
Class A Certificates in clause First above and the amount distributed
to the Owners of the Class M-1 Certificates in clause Second above and
(y) the Class M-2 Principal Distribution Amount shall be distributed to
the Owners of the Class M-2 Certificates, until the Class M-2
Certificate Principal Balance has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount over (ii) the sum of the amount distributed to the Owners of the
Class A Certificates pursuant to clause First above, the amount
distributed to the Owners of the Class M-1 Certificates pursuant to
clause Second above and the amount distributed to the Owners of the
Class M-2 Certificates pursuant to clause Third above and (y) the Class
B Principal Distribution Amount shall be distributed to the Owners of
the Class B Certificates, until the Class B Certificate Principal
Balance has been reduced to zero; and,
Fifth, any amount of the Principal Remittance Amount remaining after
making all of the distributions in clauses First, Second, Third and
Fourth above shall be included as part of the Monthly Excess Cashflow
Amount as described under "Credit Enhancement -- Application of Monthly
Excess Cashflow Amounts" in the Summary of Terms.
Notwithstanding the foregoing, in the event that the Certificate
Principal Balances of all of the Class A Certificates have been reduced to zero,
all amounts of principal that would have been distributed to such Class A
Certificates will be distributed to the Subordinate Certificates sequentially in
the following order: Class M-1, Class M-2 and Class B. Similarly, if the
Certificate Principal Balance of the Class M-1 Certificates has been reduced to
zero, all amounts of principal that would have been distributed to such Class
M-1 Certificates will be distributed to the Class M-2 and Class B Certificates
in that order. Finally, if the Certificate Principal Balance of the Class M-2
Certificates has been reduced to zero, all amounts of principal that would have
been distributed on such Class M-2 Certificates will be distributed to the Class
B Certificates.
Payments of principal on the Class A Certificates shall be paid out in
the order described above, provided, however, that on any Payment Date on which
the sum of the Certificate Principal Balance of the Subordinate Certificates and
the Overcollateralization Amount is zero, any amounts of principal payable to
the Owners of the Class A Certificates on such Payment Date shall be distributed
pro rata.
The Owners of the Class A-6 Certificates are entitled to receive
payments of the Class A-6 Lockout Distribution Amount specified herein;
provided, that if on any Payment Date the Class A-5 Certificate Principal
Balance is zero, the Owners of the Class A-6 Certificates will be entitled to
receive the entire Class A Principal Distribution Amount for such Payment Date.
S-41
<PAGE>
Calculation of LIBOR
On each LIBOR Determination Date (as defined below), the Trustee will
determine LIBOR for the next Accrual Period for the Class A-1 Certificates.
"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
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 (commencing on the first day of such Accrual Period).
"LIBOR Determination Date" means, with respect to the Accrual Period
for the October 1998 Payment Date, One-Month LIBOR on the second London business
day preceeding the Closing Date, and for any Accrual Period thereafter, the
second London business day preceding the commencement of such Accrual Period
(or, in the case of the first Accural Period, the second London business day
preceding the Closing Date). For purposes of determining LIBOR, a "London
business day" is any day on which dealings in deposits of United States dollars
are transacted in the London interbank market.
"Telerate Page 3750" means the display page currently so designated on
the Bridge Telerate (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market.
Book Entry Registration of the Offered Certificates
The Offered Certificates will originally be issued as book entry
Certificates (the "Book Entry Certificates"). Persons acquiring beneficial
ownership interests in such Book Entry Certificates ("Beneficial Owners") may
elect to hold their Book Entry Certificates directly through DTC in the United
States, or Cedel or Euroclear (in Europe) if they are participants of such
system ("Participants"), or indirectly through organizations which are
Participants. The Book Entry Certificates will be issued in one or more
certificates per class of Offered Certificates which in the aggregate equal the
principal balance of such Offered Certificates and will initially be registered
in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear will hold
omnibus positions on behalf of their Participants through customers' securities
accounts in Cedel's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank will act as
depositary for Cedel and Chase will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book Entry Certificates in minimum denominations representing principal amounts
of $25,000 and in multiples of $1,000 in excess thereof. Except as described
below, no Beneficial Owner will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only "Owner" of
such Book Entry Certificates will be Cede & Co., as nominee of DTC. Beneficial
Owners will not be Owners as that term is used in the Pooling and Servicing
Agreement. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
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<PAGE>
The Beneficial Owner's ownership of a Book Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Cedel and Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book Entry Certificates are similarly required to make book entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Offered Certificates, by book entry
transfer, through DTC for the account of the purchasers of such Offered
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Offered Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant Cedel or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Federal Income Tax
Consequences -- REMIC Securities -- Taxation of Certain Foreign Investors" and
- -- "Backup Withholding" in the Prospectus and "Global Clearance, Settlement and
Tax Documentation Procedures -- Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I attached 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
S-43
<PAGE>
procedures for same day funds settlement applicable to DTC. Cedel Participants
and Euroclear Participants may not deliver instructions directly to the European
Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC Participant
in the Book Entry Certificates, whether held for its own account or as a nominee
for another person. In general, beneficial ownership of Book Entry Certificates
will be subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Cedel Bank, S.A. was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more than
five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institut Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear Securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and 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
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to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants, and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions on the Book Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the Book
Entry Certificates that it represents and to each Financial Intermediary for
which it acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the Beneficial Owners of the Book Entry Certificates that it
represents.
Under a book entry format, Beneficial Owners of the Book Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distribution with respect to
Book Entry Certificates held through Cedel or Euroclear will be credited to the
cash accounts of Cedel Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC can
only act on behalf of Financial Intermediaries, the ability of a Beneficial
Owner to pledge Book Entry Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book Entry Certificates, may be limited due to the lack of physical
certificates for such Book Entry Certificates. In addition, issuance of the Book
Entry Certificates in book entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust provided by the Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book Entry Certificates under the Pooling and Servicing Agreement
on behalf of a Cedel Participant or Euroclear Participant only at the direction
of one or more Financial Intermediaries to whose DTC accounts the Book Entry
Certificates are credited, to the extent that such actions are taken on behalf
of Financial Intermediaries whose holdings include such Book Entry Certificates.
Cedel or the Euroclear Operator, as the case may be, will take any action
permitted to be taken by an Owner under the Pooling and Servicing Agreement on
behalf of a Cedel Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Offered Certificates which conflict with actions taken with respect to other
Offered Certificates.
Definitive Certificates will be issued to Beneficial Owners of the Book
Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC or
the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Offered Certificates, advises the
Trustee in writing that the continuation of a book entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
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Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of Certificates among Participants of DTC, Cedel and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part of
its right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above.
CREDIT ENHANCEMENT
Subordination of Subordinate Certificates
The rights of the Owners of the Subordinate Certificates and the Class
R Certificates to receive distributions with respect to the Home Equity Loans
will be subordinated, to the extent described herein, to such rights of the
Owners of the Class A Certificates. This subordination is intended to enhance
the likelihood of regular receipt by the Owners of the Class A Certificates of
the full amount of their scheduled monthly payment of interest and principal and
to afford such Owners protection against Realized Losses.
The protection afforded to the Owners of the Class A Certificates by
means of the subordination of the Subordinate Certificates and the Class R
Certificates will be accomplished by the preferential right of the Owners of the
Class A Certificates to receive, prior to any distribution being made on a
Payment Date in respect of the Subordinate Certificates and the Class R
Certificates, the amounts of interest due them and principal available for
distribution on such Payment Date, and, if necessary, by the right of the Owners
of the Class A Certificates to receive future distributions of amounts that
would otherwise be payable to the Owners of the Subordinate Certificates and the
Class R Certificates.
In addition, the rights of the Owners of the Class M-2, Class B and
Class R Certificates to receive distributions will be subordinated, to the
extent described herein, to such rights of the Owners of the Class A and Class
M-1 Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the Owners of the Class A and Class M-1 Certificates of the
amount of interest due them and principal available for distribution and to
afford such Owners with protection against Realized Losses.
The rights of the Owners of the Class B and Class R Certificates to
receive distributions will be subordinated in the same manner to such rights of
the Owners of the Class A, Class M-1 and Class M-2 Certificates and the rights
of Owners of the Class R Certificates to receive distributions will be
subordinated in the same manner to such rights of the Owners of the Offered
Certificates.
Application of Realized Losses
If a Home Equity Loan becomes a Liquidated Loan during a Remittance
Period, the Net Liquidation Proceeds relating thereto and allocated to principal
may be less than the Loan Balance of such Home Equity Loan. The amount of such
insufficiency is a Realized Loss. Realized Losses will, in effect, be absorbed
first, by the Class R Certificates (both through the application of the Monthly
Excess Interest Amount to fund such deficiency and through a reduction in the
Overcollateralization Amount), second, by the Owners of the Class B
Certificates, third, by the Owners of the Class M-2 Certificates, and, fourth,
by the Owners of the Class M-1 Certificates.
To the extent that the pool of Home Equity Loans experiences Realized
Losses, such Realized Losses will reduce the aggregate outstanding Loan Balance
of the Home Equity Loans, i.e, a reduction in the collateral balance will occur.
Since the Overcollateralization Amount is the excess, if any, of the collateral
balance over the Aggregate
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Certificate Principal Balance, Realized Losses, to the extent experienced, will
in the first instance reduce the Overcollateralization Amount.
The Pooling and Servicing Agreement requires that the
Overcollateralization Amount be initially increased to, and thereafter
maintained at, the Targeted Overcollateralization Amount. This increase and
subsequent maintenance is intended to be accomplished by the application of
Monthly Excess Interest Amounts to the funding of the Extra Principal
Distribution Amount. Such Extra Principal Distribution Amounts, since they are
funded from interest collections on the Home Equity Loans but are distributed as
principal on the Offered Certificates, will increase the Overcollateralization
Amount.
If, on any Payment Date after taking into account all Realized Losses
experienced during the prior Remittance Period and after taking into account the
distribution of principal (including the Extra Principal Distribution Amount)
with respect to the Offered Certificates on such Payment Date, the Aggregate
Certificate Principal Balance exceeds the aggregate Loan Balance of the Home
Equity Loans as of the end of the related Remittance Period (i.e. if the level
of overcollateralization is negative), then the Certificate Principal Balance of
the Subordinate Certificates will be reduced (in effect, "written down") such
that the level of overcollateralization is zero, rather than negative. Such a
negative level of overcollateralization is an Applied Realized Loss Amount,
which is applied as a reduction in the Certificate Principal Balance of the
Subordinate Certificates in reverse order of seniority (i.e., first against the
Class B Certificate Principal Balance until it is reduced to zero, then against
the Class M-2 Certificate Principal Balance until it is reduced to zero and then
against the Class M-1 Certificate Principal Balance until it is reduced to
zero). The Pooling and Servicing Agreement does not permit the "write down" of
the Certificate Principal Balance of any Class A Certificate.
Once the Certificate Principal Balance of a Class of Subordinate
Certificates has been "written down," the amount of such write down will no
longer bear interest, nor will such amount thereafter be "reinstated" or
"written up," although the amount of such "write down" may, on future Payment
Dates be paid to Owners of the Subordinate Certificates which experienced the
"write down", in direct order of seniority (i.e., first, the Class M-1
Certificates, second, the Class M-2 Certificates and, third, the Class B
Certificates). The source of funding of such payments will be the amount, if
any, of the Monthly Excess Cashflow Amount remaining on such future Payment
Dates after the funding of the Extra Principal Distribution Amount and after the
payment of Interest Carry Forward Amounts with respect to the Subordinate
Certificates on such Payment Date.
Application of Monthly Excess Cashflow Amounts
The weighted average net Coupon Rate for the Home Equity Loans is
expected to be generally higher than the weighted average of the Pass-Through
Rates on the Offered Certificates, thus generating certain excess interest
collections which, in the absence of losses will not be necessary to fund
interest distributions on the Offered Certificates. The Pooling and Servicing
Agreement provides that this excess interest be applied to the extent available,
to make accelerated payments of principal (i.e., the Extra Principal
Distribution Amount) to the Class or Classes then entitled to receive
distributions of principal; such application will cause the Aggregate
Certificate Principal Balance to amortize more rapidly than the pool of Home
Equity Loans, resulting in overcollateralization.
The required level of overcollateralization for any Payment Date is the
Targeted Overcollateralization Amount for such Payment Date. The Targeted
Overcollateralization Amount is initially (i.e., prior to the Stepdown Date)
$14,000,000. Since the actual level of the Overcollateralization Amount is $0 as
of the Closing Date, in the early months of the transaction, subject to the
availability of Monthly Excess Interest Amounts, Extra Principal Distribution
Amounts will be paid, with the result that the Overcollateralization Amount will
increase to the level of the Targeted Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount has been reached,
Realized Losses occur, such Realized Losses will result in an
Overcollateralization Deficiency (since such Realized Losses reduce the Loan
Balance of the Home Equity Loans without giving rise to a corresponding
reduction of the Aggregate Certificate Principal Balance). The cashflow
priorities of the Trust require that, in this situation, an Extra Principal
Distribution Amount be paid
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(subject to the availability of any Monthly Excess Interest Amount) for the
purpose of re-establishing the Overcollateralization Amount at the then-required
level of the Targeted Overcollateralization Amount.
On and after the Stepdown Date, the Targeted Overcollateralization
Amount is permitted to decrease or "stepdown," below the $14,000,000 level to a
level equal to 5.60% of the then current aggregate outstanding Loan Balance
(subject to a floor of $2,500,000). If the Targeted Overcollateralization Amount
is permitted to "step-down" on a Payment Date, the Pooling and Servicing
Agreement permits a portion of the Principal Remittance Amount for such Payment
Date not to be passed through as a distribution of principal on such Payment
Date. This has the effect of decelerating the amortization of the Offered
Certificates relative to the aggregate outstanding Loan Balance of the Home
Equity Loans, thereby reducing the actual level of the Overcollateralization
Amount to the new, lower Targeted Overcollateralization Amount. This portion of
the Principal Remittance Amount not distributed as principal on the Certificates
therefore releases overcollateralization from the Trust. The amount of such
releases are the Overcollateralization Release Amounts.
On any Payment Date, the sum of the Monthly Excess Interest Amount and
the Overcollateralization Release Amount is the Monthly Excess Cashflow Amount,
which is required to be applied in the following order of priority on such
Payment Date:
(1) to fund the Extra Principal Distribution Amount for such Payment
Date;
(2) to fund the Class M-1 Interest Carry Forward Amount, if any;
(3) to fund the Class M-1 Realized Loss Amortization Amount for such
Payment Date;
(4) to fund the Class M-2 Interest Carry Forward Amount, if any;
(5) to fund the Class M-2 Realized Loss Amortization Amount for such
Payment Date;
(6) to fund the Class B Interest Carry Forward Amount, if any;
(7) to fund the Class B Realized Loss Amortization Amount for such
Payment Date;
(8) to the Servicer to the extent of any unreimbursed Delinquency
Advances or Servicing Advances;
(9) to the Trustee for reimbursement of expenses of the Trustee that
are not Trustee Reimbursable Expenses; and
(10) to fund a distribution to Owners of the Class R Certificates.
The Certificate Principal Balance of any Class of the Class A
Certificates is the Initial Certificate Principal Balance of such Class as
reduced by all amounts actually distributed to the Owners of such Class of Class
A Certificates on all prior Payment Dates.
"Class B Applied Realized Loss Amount" means, as to any Payment Date,
the lesser of (x) the Class B Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such Payment
Date, but prior to the application of the Class B Applied Realized Loss Amount,
if any, on such Payment Date) and (y) the Applied Realized Loss Amount as of
such Payment Date.
"Class B Certificate Principal Balance" means, as of any date of
determination, the Original Class B Certificate Principal Balance as reduced by
the sum of (x) all amounts actually distributed to the Owners of the Class B
Certificates
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on all prior Payment Dates on account of principal and (y) the aggregate,
cumulative amount of Class B Applied Realized Loss Amounts on all prior Payment
Dates.
"Class B Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class B Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount, the Class M-1 Realized
Loss Amortization Amount, the Class M-2 Realized Loss Amortization Amount, the
Class M-1 Interest Carry Forward Amount, the Class M-2 Interest Carry Forward
Amount and the Class B Interest Carry Forward Amount in each case for such
Payment Date.
"Class M-1 Applied Realized Loss Amount" means, as to any Payment Date,
the lesser of (x) the Class M-1 Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such Payment
Date, but prior to the application of the Class M-1 Applied Realized Loss
Amount, if any, on such Payment Date) and (y) the excess of (i) the Applied
Realized Loss Amount as of such Payment Date over (ii) the sum of the Class M-2
Applied Realized Loss Amount and the Class B Applied Realized Loss Amount, in
each case as of such Payment Date.
"Class M-1 Certificate Principal Balance" means, as of any date of
determination, the Original Class M-1 Certificate Principal Balance as reduced
by the sum of (x) all amounts actually distributed to the Owners of the Class
M-1 Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Class M-1 Applied Realized Loss Amounts on all
prior Payment Dates.
"Class M-1 Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class M-1 Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount and the Class M-1
Interest Carry Forward Amount for such Payment Date.
"Class M-2 Applied Realized Loss Amount" means, as to any Payment Date,
the lesser of (x) the Class M-2 Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such Payment
Date, but prior to the application of the Class M-2 Applied Realized Loss
Amount, if any, on such Payment Date) and (y) the excess of (i) the Applied
Realized Loss Amount as of such Payment Date over (ii) the sum of the Class B
Applied Realized Loss Amount and the Class M-1 Applied Realized Loss Amount, in
each case as of such Payment Date.
"Class M-2 Certificate Principal Balance" means, as of any date of
determination, the Original Class M-2 Certificate Principal Balance as reduced
by the sum of (x) all amounts actually distributed to the Owners of the Class
M-2 Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Class M-2 Applied Realized Loss Amounts on all
prior Payment Dates.
"Class M-2 Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class M-2 Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount, the Class M-1 Realized
Loss Amortization Amount, the Class M-2 Interest Carry Forward Amount for such
Payment Date.
"Unpaid Realized Loss Amount" means for any Class of the Subordinate
Certificates and as to any Payment Date, the excess of (x) the aggregate
cumulative amount of related Applied Realized Loss Amounts with respect to such
Class for all prior Payment Dates over (y) the aggregate, cumulative amount of
related Realized Loss Amortization Amounts with respect to such Class for all
prior Payment Dates.
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THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
Covenant of the Seller to Take Certain Actions with Respect to the Home Equity
Loans in Certain Situations
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, the Seller, any Sub-Servicer, any Owner, the Custodian or the
Trustee that the representations and warranties set forth in the Pooling and
Servicing Agreement are untrue in any material respect as of the Closing Date
with the result that the interests of the Owners are materially and adversely
affected, the party discovering such breach is required to give prompt written
notice to the other parties.
Upon the earliest to occur of the Seller's discovery, its receipt of
notice of breach from any of the other parties or such time as a situation
resulting from an existing statement which is untrue materially and adversely
affects the interests of the Owners, the Seller will be required promptly to
cure such breach in all material respects or the Seller shall on or prior to the
second Monthly Remittance Date next succeeding such discovery, such receipt of
notice or such time (i) substitute in lieu of each Home Equity Loan which has
given rise to the requirement for action by the Seller a "Qualified Replacement
Mortgage" (as such is defined in the Pooling and Servicing Agreement) and
deliver an amount equal to the excess, if any, of the Loan Balance of the Home
Equity Loan being replaced over the outstanding principal balance of the
replacement Home Equity Loan plus interest (the "Substitution Amount") to the
Trustee on behalf of the Trust as part of the Monthly Remittance remitted by the
Servicer on such Monthly Remittance Date or (ii) purchase such Home Equity Loan
from the Trust at a purchase price equal to the Loan Purchase Price (as defined
below) thereof. Notwithstanding any provision of the Pooling and Servicing
Agreement to the contrary, with respect to any Home Equity Loan which is not in
default or as to which no default is imminent, no such repurchase or
substitution will be made unless the Seller obtains for the Trustee, at the
Seller's expense, an opinion of counsel experienced in federal income tax
matters to the effect that such a repurchase or substitution would not
constitute a Prohibited Transaction for the Trust or otherwise subject the Trust
to tax and would not jeopardize the status of either the Upper-Tier REMIC or the
Lower-Tier REMIC (other than the Non-REMIC Accounts) as a REMIC (a "REMIC
Opinion") addressed to the Trustee. The Seller shall also deliver an Officer's
Certificate to the Trustee concurrently with the delivery of a Qualified
Replacement Mortgage stating that such Home Equity Loan meets the requirements
of a Qualified Replacement Mortgage and that all other conditions to the
substitution thereof have been satisfied. Any Home Equity Loan as to which
repurchase or substitution was delayed pursuant to the Pooling and Servicing
Agreement shall be repurchased or substituted for (subject to compliance with
the provisions of the Pooling and Servicing Agreement) upon the earlier of (a)
the occurrence of a default or imminent default with respect to such Home Equity
Loan and (b) receipt by the Trustee of a REMIC Opinion. In connection with any
breach of a representation, warranty or covenant or defect in documentation
giving rise to such repurchase or substitution obligation, the Seller agrees
that it shall, at its expense, furnish the Trustee either a REMIC Opinion or an
opinion of counsel rendered by independent counsel that the effects described in
a REMIC Opinion may occur as a result of any such repurchase or substitution.
The obligation of the Seller to so substitute or repurchase any Home Equity Loan
as to which a representation of warranty is untrue in any material respect and
has not been remedied constitutes the sole remedy available to the Owners and
the Trustee.
"Loan Purchase Price" means an amount equal to the Loan Balance of such
Home Equity Loan as of the date of purchase (assuming that the Monthly
Remittance Amount remitted by the Servicer on such Monthly Remittance Date has
already been remitted), plus all accrued and unpaid interest on such Home Equity
Loan at the Coupon Rate to but not including the Monthly Remittance Date in the
Remittance Period of such purchase together with (without duplication) the
aggregate amount of (i) all unreimbursed Delinquency Advances and Servicing
Advances theretofore made with respect to such Home Equity Loan, (ii) all
Delinquency Advances which the Servicer has theretofore failed to remit with
respect to such Home Equity Loan and (iii) all reimbursed Delinquency Advances
to the extent that such reimbursement is not made from the Mortgagor or from
Liquidation Proceeds from the respective Home Equity Loan.
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Assignment of Home Equity Loans
The Seller on the Closing Date will transfer, assign, set over and
otherwise convey without recourse to the Depositor and the Depositor will
transfer, assign, set over and otherwise convey without recourse to the Trustee
in trust for the benefit of the Owners all its respective right, title and
interest of the Seller in and to each Home Equity Loan and all its right, title
and interest in and to principal and interest due on each such Home Equity Loan
after the Cut-Off Date; provided, however, that the Seller will reserve and
retain all its right, title and interest in and to principal (including
Prepayments received on or before the Cut-Off Date) and interest due on each
Home Equity Loan on or prior to the Cut-Off Date (whether or not received on or
prior to the Cut-Off Date). Purely as a protective measure and not to be
construed as contrary to the parties' intent that the transfer on the Closing
Date is a sale, the Seller has also been deemed to have granted to the Depositor
and the Depositor has also been deemed to have granted to the Trustee a security
interest in the Trust Estate in the event that the transfer of the Trust Estate
is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Home Equity Loans
on the Closing Date, the Seller will be required to:
(i) deliver without recourse to the Custodian on behalf of the
Trustee on the Closing Date with respect to each Home Equity Loan
identified in the related Schedule of Home Equity Loans (A) the
original Notes, endorsed in blank or to the order of the Trustee, (B)
(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 Trustee, if any, including warehousing
assignments, if recorded, (D) originals of all assumption and
modification agreements, if any and (E) either: (1) the original
Mortgage, with evidence of recording thereon (if such original Mortgage
has been returned to Seller from the applicable recording office) or a
copy (if such original Mortgage has not been returned to Seller from
the applicable recording office) of the Mortgage certified as a true
copy by the closing agent or the Seller or (2) a copy of the Mortgage
certified by the public recording office in those instances where the
original recorded Mortgage has been lost or retained by the recording
office;
(ii) cause, within 60 days following the Closing Date,
assignments of the Mortgages to "The Chase Manhattan Bank, as Trustee
of IMC Home Equity Loan Trust 1998-5 under the Pooling and Servicing
Agreement dated as of September 1, 1998" to be submitted for recording
in the appropriate jurisdictions; provided, however, that the Seller
shall not be required to prepare any assignment of Mortgage for a
Mortgage with respect to which the original recording information has
not yet been received from the recording office until such information
is received; provided, further, that the Seller shall not be required
to record an assignment of a Mortgage (except upon the occurrence of
certain triggers specified in the Pooling and Servicing Agreement) if
the Seller furnishes to the Trustee and the Rating Agencies, on or
before the Closing Date, at the Seller's expense, an opinion of counsel
with respect to the relevant jurisdiction that such recording is not
required to perfect the Trustee's interests in the related Mortgages
Loans (in form satisfactory to the Trustee and the Rating Agencies);
and
(iii) deliver the title insurance policy, the original
Mortgages and such recorded assignments, together with originals or
duly certified copies of any and all prior assignments (other than
unrecorded warehouse assignments), to the Custodian on behalf of the
Trustee within 15 days of receipt thereof by the Seller (but in any
event, with respect to any Mortgage as to which original recording
information has been made available to the Seller, within one year
after the Closing Date.
The Trustee will agree, for the benefit of the Owners, to cause the
Custodian to review each File within 45 days after the Closing Date (or the date
of receipt of any documents delivered to the Trustee after the Closing Date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
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If the Custodian on behalf of the Trustee during such 45-day period
finds any document constituting a part of a File which is not properly executed,
has not been received, is unrelated to the Home Equity Loans or that any Home
Equity Loan does not conform in a material respect to the description thereof as
set forth in the Schedule of Home Equity Loans, the Custodian on behalf of the
Trustee will be required to promptly notify the Depositor, the Seller and the
Owners. The Seller will agree in the Pooling and Servicing Agreement to use
reasonable efforts to remedy a material defect in a document constituting part
of a File of which it is so notified by the Custodian on behalf of the Trustee.
If, however, within 90 days after such notice to it respecting such defect the
Seller shall not have remedied the defect and the defect materially and
adversely affects the interest in the related Home Equity Loan of the Owners,
the Seller will be required on the next succeeding Monthly Remittance Date to
(or will cause an affiliate of the Seller to) (i) substitute in lieu of such
Home Equity Loan a Qualified Replacement Mortgage and deliver the Substitution
Amount to the Trustee on behalf of the Trust as part of the Monthly Remittance
remitted by the Servicer on such Monthly Remittance Date or (ii) purchase such
Home Equity Loan at a purchase price equal to the Loan Purchase Price thereof,
which purchase price shall be delivered to the Trust along with the Monthly
Remittance remitted by the Servicer on such Monthly Remittance Date.
In addition to the foregoing, the Custodian on behalf of the Trustee
has agreed to make a review during the 12th month after the Closing Date
indicating the current status of the exceptions previously indicated on the Pool
Certification (the "Final Certification"). After delivery of the Final
Certification, the Custodian, on behalf of the Trustee and the Servicer shall
monitor no less frequently than monthly the then current status of exceptions,
until all such exceptions have been eliminated.
Servicing and Sub-Servicing
The Servicer is required to service the Home Equity Loans in accordance
with the Pooling and Servicing Agreement, the terms of the respective Home
Equity Loans, and the servicing standards set forth in 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 Pooling and Servicing Agreement and the effect of such
amendment would be to impose upon the Servicer any material additional costs or
other burdens relating to such servicing obligations, the Servicer may, at its
option, determine not to comply with such amendment in accordance with the
servicing standards set forth in the Pooling and Servicing Agreement.
The Servicer may retain from the interest portion of each monthly
payment, the Servicing Fee. In addition, the Servicer will be entitled to retain
additional servicing compensation in the form of prepayment charges, release
fees, bad check charges, assumption fees, late payment charges, prepayment
penalties, or any other servicing-related fees, Net Liquidation Proceeds not
required to be deposited in the Principal and Interest Account pursuant to the
Pooling and Servicing Agreement, and similar items.
The Servicer is required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Home Equity Loans,
and, to the extent such procedures are consistent with the Pooling and Servicing
Agreement and the terms and provisions of any applicable insurance policy, to
follow collection procedures for all Home Equity Loans at least as rigorous as
those described in the 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 Trustee, at one or more depository institutions a principal and interest
account maintained as a trust account in the trust department of such
institution (the "Principal and Interest Account"). All funds in the Principal
and Interest Account are required to be held (i) uninvested, or (ii) invested in
Eligible Investments (as defined in the Pooling and Servicing Agreement). Any
investment of funds
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in the Principal and Interest Account must mature or be withdrawable at par on
or prior to the immediately succeeding Monthly Remittance Date. Any investment
earnings on funds held in the Principal and Interest Account are for the account
of, and any losses therein are also for the account of, and must be promptly
replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest
Account, within one business day following receipt, all principal and interest
due on the Home Equity Loans after the Cut-Off Date, including any Prepayments
received after the Cut-Off Date, the proceeds of any liquidation of a Home
Equity Loan net of expenses and unreimbursed Delinquency Advances ("Net
Liquidation Proceeds"), any income from REO Properties and Delinquency Advances,
but net of (i) Net Liquidation Proceeds to the extent that such Net Liquidation
Proceeds exceed the sum of (a) the Loan Balance of the related Home Equity Loan
immediately prior to liquidation, (b) accrued and unpaid interest on such Home
Equity Loan (net of the Servicing Fee) to the date of such liquidation and (c)
any Realized Losses during the related Remittance Period, (ii) principal
(including Prepayments) collected and interest due on the Home Equity Loans on
or prior to the Cut-Off Date, (iii) reimbursements for Delinquency Advances, and
(iv) reimbursement for amounts deposited in the Principal and Interest Account
representing payments of principal and/or interest on a Note by a Mortgagor
which are subsequently returned by a depository institution as unpaid (all such
net amounts being referred to herein as the "Daily Collections").
The Servicer may make withdrawals for its own account from the
Principal and Interest Account in the following order and only for the following
purposes:
(i) on each Monthly Remittance Date, to pay itself the
Servicing Fee;
(ii) to withdraw investment earnings on amounts on deposit in
the Principal and Interest Account;
(iii) to withdraw amounts that have been deposited to the
Principal and Interest Account in error;
(iv) to reimburse itself for unrecovered Delinquency Advances
and for any excess interest collected from a Mortgagor; and
(v) to clear and terminate the Principal and Interest
Account following the termination of the Trust.
The Servicer will remit to the Trustee for deposit in the Certificate
Account the Daily Collections allocable to a Remittance Period not later than
the related Monthly Remittance Date, and Loan Purchase Prices and Substitution
Amounts two Business Days following the related repurchase or substitution, as
the case may be.
On each Monthly Remittance Date, the Servicer shall be required to
remit to the Trustee for deposit to the Certificate Account out of the
Servicer's own funds any delinquent payment of interest with respect to each
Delinquent Home Equity Loan, which payment was not received on or prior to the
related Monthly Remittance Date and was not theretofore advanced by the
Servicer. Such amounts of the Servicer's own funds so deposited are "Delinquency
Advances." The Servicer may reimburse itself on any Business Day for any
Delinquency Advances paid from the Servicer's own funds, from collections on any
Home Equity Loan that are not required to be distributed on the Payment Date
occurring during the month in which such reimbursement is made (such amount to
be replaced on future dates to the extent necessary) or from the Certificate
Account out of the Monthly Excess Cashflow Amount.
Notwithstanding the foregoing, in the event that the Servicer
determines in its reasonable business judgment in accordance with the servicing
standards of the Pooling and Servicing Agreement that any proposed Delinquency
Advance if made would not be recoverable, the Servicer shall not be required to
make such Delinquency Advances with respect to such Home Equity Loan. To the
extent that the Servicer previously has made Delinquency Advances with respect
to a Home Equity Loan that the Servicer subsequently determines to be
nonrecoverable, the Servicer shall be
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entitled to reimbursement for such aggregate unreimbursed Delinquency Advances
as provided above. The Servicer shall give written notice of such determination
as to why such amount is or would be nonrecoverable to the Trustee.
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, (i) expenditures in connection with a foreclosed Home Equity
Loan prior to the liquidation thereof, including, without limitation,
expenditures for real estate property taxes, hazard insurance premiums, property
restoration or preservation ("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and (iii) the cost
of the management and liquidation of Property acquired in satisfaction of the
related Mortgage, except to the extent that the Servicer in its reasonable
business judgment determines that any such proposed amount would not be
recoverable. Such costs and expenses will constitute "Servicing Advances". The
Servicer may recover a Servicing Advance to the extent permitted by the Home
Equity Loans or, if not theretofore recovered from the Mortgagor on whose behalf
such Servicing Advance was made, from Liquidation Proceeds realized upon the
liquidation of the related Home Equity Loan or from certain amounts on deposit
in the Certificate Account as provided in the Pooling and Servicing Agreement.
Except as provided above, in no case may the Servicer recover Servicing Advances
from the principal and interest payments on any other Home Equity Loan.
A full month's interest at the related Coupon Rate will be due on the
outstanding Loan Balance of each Home Equity Loan as of the beginning of each
Remittance Period. If a prepayment in full of a Home Equity Loan or a Prepayment
of at least six times a Mortgagor's Monthly Payment occurs during any calendar
month, any difference between the interest collected from the Mortgagor in
connection with such payoff and the full month's interest at the related Coupon
Rate that would be due on the related due date for such Home Equity Loan (such
difference, the "Compensating Interest") (but not in excess of the aggregate
Servicing Fee for the related Remittance Period), will be required to be
deposited to the Principal and Interest Account (or if such difference is an
excess, the Servicer shall retain such excess) on the next succeeding Monthly
Remittance Date by the Servicer and shall be included in the Monthly Remittance
Amount to be made available to the Trustee on the next succeeding Monthly
Remittance Date. The Servicer shall not be entitled to reimbursement for amounts
paid as Compensating Interest.
In accordance with the terms of the Pooling and Servicing Agreement,
the Servicer will have the right and the option, but not the obligation, to
purchase for its own account Home Equity Loans which become delinquent as to
three consecutive monthly installments or any Home Equity Loan as to which
enforcement proceedings have been brought by the Servicer; provided, however,
that the Servicer may not purchase any such Home Equity Loan unless the Servicer
has delivered to the Trustee, at the Servicer's expense, an opinion of counsel
delivered to the Trustee to the effect that such a purchase would not constitute
a Prohibited Transaction for the Trust or otherwise subject the Trust to tax and
would not jeopardize the status of either the Upper-Tier REMIC or the Lower-Tier
REMIC (other than the Non-REMIC Accounts) as a REMIC. The purchase price for any
such Home Equity Loan is equal to the Loan Purchase Price thereof, which
purchase price shall be deposited in the Principal and Interest Account.
The Servicer is required to cause to be liquidated any Home Equity Loan
relating to a Property as to which ownership has been effected in the name of
the Servicer on behalf of the Trust and which has not been liquidated within 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 Pooling and Servicing
Agreement to accept applications of Mortgagors for consent to (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Properties. No application for approval may be considered by the
Servicer unless: (a) the provisions of the related Note and Mortgage have been
complied with; (b) the loan-to-value ratio and debt-to-income ratio after any
release do not exceed the loan-to-value ratio and debt-to-income ratio,
respectively, of such Note on the Cut-Off Date provided that
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the loan-to-value ratio shall be permitted to be increased by an amount not to
exceed 5%; and (c) the lien priority of the related Mortgage is not affected.
The Servicer shall not agree to any modification, waiver or amendment
of any provision of any Home Equity Loan unless, in the Servicer's good faith
judgment, such modification, waiver or amendment would minimize the loss that
might otherwise be experienced with respect to such Home Equity Loan and only in
the event of a default with respect to such Home Equity Loan or in the event
that a 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 Scheduled Payment Date of the latest Class of Offered Certificates
remaining in the Trust. Notwithstanding anything set forth in the Pooling and
Servicing Agreement to the contrary, the Servicer shall be permitted to modify,
waive or amend any provision of a Home Equity Loan if required by statute or a
court of competent jurisdiction to do so.
The Servicer shall provide written notice to the Trustee prior to the
execution of any modification, waiver or amendment of any provision of any Home
Equity Loan and shall deliver to the Custodian, on behalf of the Trustee for
deposit in the related File, an original counterpart of the agreement relating
to such modification, waiver or amendment, promptly following the execution
thereof.
As noted under "The Seller and Servicer -- General" herein, the
Servicer will be permitted under the Pooling and Servicing Agreement to enter
into Sub-Servicing Agreements for any servicing and administration of Home
Equity Loans with any institution that (x) is in compliance with the laws of
each state necessary to enable it to perform its obligations under such
Sub-Servicing Agreement, (y) has experience servicing home equity loans that are
similar to the Home Equity Loans and (z) has equity of not less than $5,000,000
(as determined in accordance with generally accepted accounting principles).
No Sub-Servicing arrangements discharge the Servicer from its servicing
obligations. Notwithstanding any Sub-Servicing Agreement, the Servicer will not
be relieved of its obligations under the Pooling and Servicing Agreement and the
Servicer will be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Home Equity
Loans. The Servicer shall be entitled to enter into any agreement with a
Sub-Servicer for indemnification of the Servicer by such Sub-Servicer and
nothing contained in such Sub-Servicing Agreement shall be deemed to limit or
modify the Pooling and Servicing Agreement.
The Servicer (except the Trustee if it is required to succeed the
Servicer under the Pooling and Servicing Agreement) has agreed to indemnify and
hold the Trustee and each Owner harmless against any and all claims, losses,
penalties, fines, forfeitures, legal fees and related costs, judgments, and any
other costs, fees and expenses that the Trustee and any Owner may sustain in any
way related to the failure of the Servicer to perform its duties and service the
Home Equity Loans in compliance with the terms of the Pooling and Servicing
Agreement. The Servicer shall immediately notify the Trustee and each Owner if a
claim is made by a third party with respect to the Pooling and Servicing
Agreement, and the Servicer shall assume the defense of any such claim and pay
all expenses in connection therewith, including reasonable counsel fees, and
promptly pay, discharge and satisfy any judgment or decree which may be entered
against the Servicer, the Trustee and/or Owner in respect of such claim. The
Trustee shall reimburse the Servicer from amounts otherwise distributable on the
Class R Certificates for all amounts advanced by it pursuant to the preceding
sentence, except when a final nonappealable adjudication determines that the
claim relates directly to the failure of the Servicer to perform its duties in
compliance with the Pooling and Servicing Agreement. The indemnification
provisions shall survive the termination of the Pooling and Servicing Agreement
and the payment of the outstanding Certificates.
The Servicer will be required to deliver to the Trustee and the Rating
Agencies on or before April 30 of each year, commencing in 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 Pooling and Servicing Agreement has been made under such
officers' supervision, and (b) to the best of such officers' knowledge, based on
such review, the Servicer has fulfilled all its obligations under the Pooling
and Servicing Agreement for such year, or, if there has
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been a default in the fulfillment of all such obligation, specifying each such
default known to such officers and the nature and status thereof including the
steps being taken by the Servicer to remedy such default and (ii) a letter or
letters of a firm of independent, nationally recognized certified public
accountants reasonably acceptable to the Trustee stating that such firm has
examined the Servicer's overall servicing operations in accordance with the
requirements of the Uniform Single Attestation Program for Mortgage Bankers, and
stating such firm's conclusions relating thereto.
Removal and Resignation of Servicer
The Trustee, at the direction of a majority of the Owners of the
Offered Certificates, will have the right, pursuant to the Pooling and Servicing
Agreement, to remove the Servicer upon the occurrence of certain events
(collectively, the "Servicer Termination Events") including, without limitation:
(a) certain acts of bankruptcy or insolvency on the part of the Servicer; (b)
certain failures on the part of the Servicer to perform its obligations under
the Pooling and Servicing Agreement (including certain performance tests related
to the delinquency rate and cumulative losses of the Home Equity Loan Pool); (c)
the failure to cure material breaches of the Servicer's representations in the
Pooling and Servicing Agreement; or (d) certain mergers or other combinations of
the Servicer with another entity.
The Servicer is not permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Servicer so
causing such conflict being of a type and nature carried on by the Servicer on
the date of the Pooling and Servicing Agreement. Any such determination
permitting the resignation of the Servicer is required to be evidenced by an
opinion of counsel to such effect which shall be delivered, and reasonably
acceptable, to the Trustee.
Upon removal or resignation of the Servicer, the Trustee may (A)
solicit bids for a successor servicer as described in the Pooling and Servicing
Agreement and (B) until such time as a successor Servicer is appointed pursuant
to the terms of the Pooling and Servicing Agreement, shall serve in the capacity
of Backup Servicer. The Trustee, if it is unable to obtain a qualifying bid and
is prevented by law from acting as servicer, will be required to appoint, or
petition a court of competent jurisdiction to appoint, any housing and home
finance institution, bank or mortgage servicing institution designated as an
approved seller-servicer by Freddie Mac or Fannie Mae, having equity of not less
than $5,000,000, and acceptable to a majority of the Owners of the Offered
Certificates as the successor to the Servicer in the assumption of all or any
part of the responsibilities, duties or liabilities of the Servicer.
No removal or resignation of the Servicer will become effective until
the Backup Servicer or a successor servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
The Trustee
The Chase Manhattan Bank, a New York banking corporation, having its
principal corporate trust office at 450 West 33rd Street, New York, New York
10001, will be named as Trustee under the Pooling and Servicing Agreement.
Reporting Requirements
On each Payment Date the Trustee will be required to report in writing
(based on information provided to the Trustee by the Servicer) to each Owner and
the Rating Agencies:
i) the amount of the distribution with respect each Class of
Certificates (based on a Certificate in the original principal amount
of $1,000);
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ii) the amount of such distributions allocable to principal on
the Home Equity Loans, separately identifying the aggregate amount of
any prepayments in full or Prepayments or other recoveries of principal
included therein and any Extra Principal Distribution Amount;
iii) the amount of such distribution allocable to interest on
the Home Equity Loans (based on a Certificate in the original principal
amount of $1,000);
iv) the Interest Carry-Forward Amount for each Class;
v) the principal amount of each Class of Offered Certificate
(based on a Certificate in the original principal amount of $1,000)
which will be Outstanding after giving effect to any payment of
principal on such Payment Date;
vi) the aggregate Loan Balance of all Home Equity Loans after
giving effect to any payment of principal on such Payment Date;
vii) based upon information furnished by the Seller such
information as may be required by Section 6049(d)(7)(C) of the Code and
the regulations promulgated thereunder to assist the Owners in
computing their market discount;
viii) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution;
ix) the weighted average Coupon Rate of the Home Equity
Loans;
x) LIBOR relating to such Payment Date;
xi) whether a Trigger Event or Subordinated Trigger Event
is in effect;
xii) the Senior Enhancement Percentage;
xiii) the Overcollateralization Amount; and
xiv) the amount of any Applied Realized Loss Amount, Realized
Loss Amortizations Amount and Unpaid Realized Loss Amount for each
Class as of the close of such Payment Date.
Certain obligations of the Trustee to provide information to the Owners
are conditioned upon such information being received from the Servicer.
In addition, on the Business Day preceding each Payment Date the
Trustee will be required to distribute to each Owner and the Rating Agencies,
together with the information described above, the following information
prepared by the Servicer and furnished to the Trustee for such purpose:
(a) the number and aggregate principal balances of Home Equity
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent, (iii) 90
or more days delinquent, as of the close of business on the last day of
the calendar month immediately preceding the Payment Date, (iv) the
numbers and aggregate Loan Balances of all Home Equity Loans as of such
Payment Date and (v) the percentage that each of the amounts
represented by clauses (i), (ii) and (iii) represent as a percentage of
the respective amounts in clause (iv);
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(b) the status and the number and dollar amounts of all Home
Equity Loans in foreclosure proceedings as of the close of business on
the last day of the calendar month immediately preceding such Payment
Date;
(c) the number of Mortgagors and the Loan Balances of (i) the
related Mortgages involved in bankruptcy proceedings as of the close of
business on the last day of the calendar month immediately preceding
such Payment Date and (ii) Home Equity Loans that are "balloon" loans;
(d) the existence and status of any Properties as to which
title has been taken in the name of, or on behalf of the Trustee, as of
the close of business of the last day of the calendar month immediately
preceding the Payment Date;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the close
of business on the last day of the calendar month immediately preceding
the Payment Date;
(f) the amount of cumulative Realized Losses since the Closing
Date, the current period Realized Losses (each as defined in the
Pooling and Servicing Agreement) and any other loss percentages as
required by the Pooling and Servicing Agreement; and
(g) the aggregate Loan Balances of 60+ Day Delinquent Loans.
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case
(i) the Seller or (ii) the Owners of a majority of the Percentage Interests
represented by the Offered Certificates or, if there are no Offered Certificates
then Outstanding, by a majority of the Percentage Interests represented by the
Class R Certificates, may appoint a successor trustee.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
Amendments
The Trustee, the Depositor, the Seller and the Servicer may, at any
time and from time to time and without notice to or the consent of the Owners,
amend the Pooling and Servicing Agreement, and the Trustee will be required to
consent to such amendment, for the purposes of (i) if accompanied by an
approving opinion of counsel experienced in federal income tax matters, removing
the restriction against the transfer of a Class R Certificate to a Disqualified
Organization (as such term is defined in the Code), (ii) complying with the
requirements of the Code including any amendments necessary to maintain the
REMIC status of either the Lower-Tier REMIC or the Upper-Tier REMIC, (iii)
curing any ambiguity, (iv) correcting or supplementing any provisions therein
which are inconsistent with any other provisions therein, or (v) for any other
purpose, provided that in the case of clause (v), such amendment shall not
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adversely affect in any material respect any Owner. Any such amendment shall be
deemed not to adversely affect in any material respect any Owner if there is
delivered to the Trustee written notification from each Rating Agency that such
amendment will not cause such Rating Agency to reduce its then current rating
assigned to any Class of the Offered Certificates. Notwithstanding anything to
the contrary, no such amendment shall (a) change in any manner the amount of, or
delay the timing of, payments which are required to be distributed to any Owner
without the consent of the Owner of such Certificate or (b) change the
percentages of Percentage Interest which are required to consent to any such
amendments, without the consent of the Owners of all Certificates of the Class
or Classes affected then Outstanding.
The Trustee will be required to furnish written notification of the
substance of any such amendments to each Owner in the manner set forth in the
Pooling and Servicing Agreement.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the payment to the Owners of all Certificates from amounts of all
amounts required to be paid to such Owners upon the later to occur of (a) the
final payment or other liquidation (or any advance made with respect thereto) of
the last Home Equity Loan, (b) the disposition of all property acquired in
respect of any Home Equity Loan remaining in the Trust Estate and (c) at any
time when a Qualified Liquidation (as defined in the Pooling and Servicing
Agreement) of the Trust Estate is effected as described below. To effect a
termination pursuant to clause (c) above, the Owners of all Certificates then
outstanding will be required (i) unanimously to direct the Trustee on behalf of
the Lower-Tier REMIC to adopt a plan of complete liquidation, as contemplated by
Section 860F(a)(4) of the Code and (ii) to furnish to the Trustee an opinion of
counsel experienced in federal income tax matters acceptable to the Trustee to
the effect that such liquidation constitutes a Qualified Liquidation.
Optional Termination
By Owners of Class R Certificates. At their option, the Owners of a
majority of the Percentage Interest represented by the Class R Certificates then
Outstanding may on any Monthly Remittance Date after the Clean-Up Call Date
purchase from the Trust all (but not fewer than all) remaining Home Equity
Loans, in whole only, and other property acquired by foreclosure, deed in lieu
of foreclosure, or otherwise then constituting the Trust Estate, and thereby
effect early retirement of the Certificates. The proceeds from any such
termination may not be sufficient to distribute the full amount to which each
Class of Certificates is entitled if the purchase price is based in part on the
appraised value of any REO property underlying the Home Equity Loans and such
appraisal value is less than principal balance of the related Home Equity Loans.
Termination Upon Loss of REMIC Status. Following a final determination
by the Internal Revenue Service or by a court of competent jurisdiction, in
either case from which no appeal is taken within the permitted time for such
appeal, or if any appeal is taken, following a final determination of such
appeal from which no further appeal can be taken, to the effect that either the
Lower-Tier REMIC or the Upper-Tier REMIC does not and will no longer qualify as
a "REMIC" pursuant to Section 860D of the Code (the "Final Determination"), at
any time on or after the date which is 30 calendar days following such Final
Determination, the Owners of a majority in Percentage Interests represented by
the Offered Certificates then Outstanding may direct the Trustee on behalf of
the Trust to adopt a plan of complete liquidation, as contemplated by Section
860F(a)(4) of the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following section discusses certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Offered Certificates. Such section must be considered only in connection
with "Federal Income Tax Consequences" in the Prospectus. The discussion herein
and in the Prospectus is based upon laws, regulations, rulings and decisions now
in effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some
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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 Offered Certificates.
REMIC Elections
The Trust (other than the Non-REMIC Accounts) will consist of two
segregated asset pools with respect to which elections will be made to treat
each as a separate REMIC for federal income tax purposes. The Lower-Tier REMIC
will issue several uncertificated subclasses of non-voting interests (the
"Lower-Tier REMIC Regular Interests"), which will be designated as the regular
interests in the Lower-Tier REMIC and the uncertificated "Lower-Tier REMIC
Residual Class", which will be designated as the residual interest in the
Lower-Tier REMIC. The assets of the Lower-Tier REMIC will consist of the Home
Equity Loans and all other property in the Trust Estate except for the property
in the Trust Estate allocated to the Upper-Tier REMIC and the Non-REMIC
Accounts. The Upper-Tier REMIC will issue the Offered Certificates all of which
will be designated as regular interests in the Upper-Tier REMIC, and the Class R
Certificate which will be designated as the residual interest in the Upper-Tier
REMIC. The assets of the Upper-Tier REMIC will consist of the Lower-Tier REMIC
Regular Interests and the Upper-Tier Distribution Account. See "Formation of the
Trust and Trust Property" herein.
Qualification as a REMIC requires ongoing compliance with certain
conditions. Arter & Hadden LLP, special tax counsel, is of the opinion that, for
federal income tax purposes, assuming (i) the REMIC elections are made and (ii)
compliance with the Pooling and Servicing Agreement, each of the Upper-Tier
REMIC and the Lower-Tier REMIC will be treated as a REMIC, the Offered
Certificates will be treated as "regular interests" in the Upper-Tier REMIC, the
Class R Certificate will be treated as the sole "residual interest" in the
Upper-Tier REMIC, the Lower-Tier REMIC Regular Interests will be treated as
"regular interests" in the Lower-Tier REMIC, and the uncertificated Lower-Tier
REMIC Residual Class will be the sole "residual interest" in the Lower-Tier
REMIC. Except as indicated below and in the Prospectus, for federal income tax
purposes, regular interests in a REMIC are treated as debt instruments issued by
such REMIC on the date on which those interests are created, and not as
ownership interests in such REMIC or its assets. Owners of the Offered
Certificates that otherwise report income under a cash method of accounting will
be required to report income with respect to such Offered Certificates under an
accrual method.
The prepayment assumption for each Class of the Offered Certificates
for calculating original issue discount is 100% of the related Prepayment
Assumption. No representation is made as to the actual rate at which the Home
Equity Loans will prepay. See "Prepayment and Yield Considerations -- Prepayment
and Yield Scenarios for Offered Certificates" herein.
As a result of the qualification of the Lower-Tier REMIC and the
Upper-Tier REMIC as REMICs, the Trust will not be subject to federal income tax
except with respect to (i) income from prohibited transactions, (ii) "net income
from foreclosure property" and (iii) certain contributions to the Trust after
the Closing Date (see "Federal Income Tax Consequences" in the Prospectus). The
total income of the Trust (exclusive of any income that is taxed at the REMIC
level) will be taxable to the Beneficial Owners of the Certificates.
Under the laws of New York State and New York City, an entity that is
treated for federal income tax purposes as a REMIC generally is exempt from
entity level taxes imposed by those jurisdictions. This exemption does not
apply, however, to the income on the Offered Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and
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assets of such plans may be invested in the Certificates without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under section 401(a) of the Code and exempt from taxation under section 501(a)
of the Code is subject to the prohibited transaction rules set forth in section
503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a
Plan from engaging in certain transactions ("prohibited transactions") involving
a Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust may be deemed to hold plan
assets by reason of a Plan's investment in a Certificate; such plan assets would
include an undivided interest in the Home Equity Loans and any other assets held
by the Trust. In such an event, persons providing services with respect to the
assets of the Trust, may be parties in interest, subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA (and of Section 4975 of the
Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
One such exception applies if the class of equity interests in question
is (i) "widely held", (ii) freely transferable, and (iii) sold as part of an
offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition the regulation provides that if at all times more than
75% of the value of classes of equity interests in the Trust are held by
investors other than benefit plan investors (which is defined as including plans
subject to ERISA, government plans and individual retirement accounts), the
investing Plan's assets will not include any of the underlying assets of the
Trust.
The DOL has issued to Deutsche Bank Securities Inc. an individual
prohibited transaction exemption from certain of the prohibited transaction
rules of ERISA (the "Exemption"), with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemption. The loans covered by the
Exemption include home equity loans such as the Home Equity Loans.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arms-length transaction
with an unrelated party;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
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(3) the certificates acquired by the Plan have received a
rating at the time of such acquisition that is one of the three highest
generic rating categories from either Standard & Poor's Ratings
Services, Moody's, Duff & Phelps Credit Rating Co. ("D&P") or Fitch;
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the certificates
represents not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the
Depositor pursuant to the assignment of the loans to the Trust Estate
represents not more than the fair market value of such loans; the sum
of all payments made to and retained by the Trustee and the Servicer
represents not more than reasonable compensation for such person's
services under the Pooling and Servicing Agreement and reimbursement of
such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of an acquisition in connection with the initial
issuance of certificates, at least fifty percent of each class of certificates
in which Plans have invested is acquired by persons independent of the
Restricted Group; (ii) the Plan's investment in certificates of any class does
not exceed twenty-five percent of all of the certificates of that class
outstanding at the time of the acquisition; and (iii) immediately after the
acquisition, no more than twenty-five percent of the assets of the Plan with
respect to which such person is a fiduciary are invested in certificates
representing an interest in one or more trusts containing assets sold or
serviced by the same entity. The Exemption does not apply to Plans sponsored by
the Depositor, the Underwriters, the Trustee, the Servicer, any obligor with
respect to Home Equity Loans included in the Trust Estate constituting more than
five percent of the aggregate unamortized principal balance of the assets in the
Trust Estate, or any affiliate of such parties (the "Restricted Group").
The exemptions do not apply to the initial purchase, the holding or the
subsequent resale of the Mezzanine Certificates and Class B Certificates because
such Certificates are subordinate to certain other Classes of Certificates.
Accordingly, Plans may not purchase the Mezzanine Certificates or Class B
Certificates, except that any insurance company may purchase such Certificates
with assets of its general account if the exemptive relief granted by the DOL
for transactions involving insurance company general accounts in Prohibited
Transaction Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995) ("PTCE 95-60")
is available with respect to such investment. Any insurance company proposing to
purchase such Certificates for its general account should consider whether such
relief would be available. Pursuant to PTCE 95-60 certain representations or
opinions must be made to qualify. By the transferee's acceptance of the
Mezzanine Certificates or Class B Certificates such transferee will be deemed to
have represented that either (i) it is not a Plan and is not acquiring such
Certificate with the assets of a Plan or (ii) such transferee and its
acquisition of such Certificates comply with the requirements in PTCE 95-60. In
the event that such representations are violated, the transferee must provide
the opinions provided for under PTCE 95-60 or any attempted transfers or
acquisitions shall be void and of no effect.
In addition, as of the date hereof, there is no single Home Equity Loan
included in the Trust Estate that constitutes more than five percent of the
aggregate unamortized principal balance of the assets of the Trust Estate.
Before purchasing a Class A Certificate based on the Exemption, however, a
fiduciary of a Plan should itself confirm (1) that such Certificate constitutes
a "certificate" for purposes of the Exemption and (2) that the specific
conditions and other requirements set forth in the Exemption would be satisfied.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption
and the potential consequences in their specific circumstances, prior to making
an investment in the Offered Certificates. Moreover, each Plan fiduciary should
determine whether under the general
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fiduciary standards of investment procedure and diversification an investment in
the Offered Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
In addition to the matters described above, purchasers of an Offered
Certificate that are insurance companies should consult with their counsel with
respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust and Savings Bank, 114 S.Ct. 517 (1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers using insurance company general account
assets should determine whether the decision affects their ability to make
purchases of the Offered Certificates.
RATINGS
It is a condition of the issuance of the Offered Certificates that the
Offered Certificates receive at least the ratings from the Rating Agencies as
follows:
Class Moody's Standard & Poor's Fitch
A-1 through A-6 Aaa AAA AAA
A-7IO Aaa AAAr AAA
M-1 Aa2 AA AA
M-2 A2 A A+
B Baa2 BBB- BBB
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, Standard & Poor's, 26
Broadway, New York, New York 10004 and Fitch, One State Street Plaza, 33rd
Floor, New York, New York 10004. Such ratings will be the views only of such
Rating Agencies. There is no assurance that any such ratings will continue for
any period of time or that such ratings will not be revised or withdrawn. Any
such revision or withdrawal of such ratings may have an adverse effect on the
market price of the Offered Certificates. A security rating is not a
recommendation to buy, sell or hold securities.
The ratings assigned by Fitch to pass-through certificates address the
likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Fitch's ratings address the structural and legal aspects
associated with the Certificates, including the nature of the underlying loans
and the credit quality of the credit support provider. Fitch's ratings on home
equity pass-through Certificates do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that Owners might suffer a lower than anticipated yield or that
investors in the Class A-7IO Certificates may not fully recover their
investment.
The ratings of Moody's on home equity pass-through certificates address
the likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Moody's rating opinions address the structural and legal
issues and tax-related aspects associated with the Certificates, including the
nature of the underlying home equity loans and the credit quality of the credit
support provider, if any. Moody's ratings on pass-through certificates do not
represent any assessment of the likelihood that principal prepayments may differ
from those originally anticipated.
Ratings which are assigned to securities such as the Class A-7IO
Certificates generally evaluate the ability of the seller (i.e., the Trust) to
make payments, as required by such securities. The amounts distributable on the
Class A-7IO Certificates consist only of interest. In general, the ratings
address credit risk and not prepayment risk. If all of the Home Equity Loans
were to prepay in the initial month, with the result that investors in the Class
A-7IO Certificates receive only a single month's interest and thus suffer a
nearly complete loss of their investment, all amounts "due" to
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such Owners will nevertheless have been paid, and such result is consistent with
the "Aaa/AAAr/AAA" ratings received on the Class A-7IO Certificates.
The "r" symbol is appended to the rating by Standard & Poor's of Class
A-7IO Certificates because they are interest-only Certificates that Standard &
Poor's believes may experience high volatility or high variability in expected
returns due to non-credit risks created by the terms of such Certificates. The
absence of an "r" symbol in the rating of the other Classes of Offered
Certificates should not be taken as an indication that such Certificates will
experience no volatility or variability in total return.
The ratings of Moody's, Standard & Poor's and Fitch do not address the
possibility that, as a result of principal prepayments, certificateholders may
receive a lower than anticipated yield.
The ratings of the Certificates should be evaluated independently from
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency.
The Depositor has not requested a rating of the Certificates offered
hereby by any rating agency other than Moody's, Standard & Poor's and Fitch and
the Depositor has not provided information relating to the Certificates offered
hereby or the Home Equity Loans to any rating agency other than Moody's,
Standard & Poor's and Fitch. However, there can be no assurance as to whether
any other rating agency will rate the Certificates offered hereby or, if another
rating agency rates such Certificates, what rating would be assigned to such
Certificates by such rating agency. Any such unsolicited rating assigned by
another rating agency to the Certificates offered hereby may be lower than the
rating assigned to such Certificates by any of Moody's, Standard & Poor's and
Fitch.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Certificates will not constitute "mortgage related
securities" for purposes of SMMEA. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first lien mortgage
loans may not be legally authorized to invest in the Offered Certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Offered Certificates (the "Underwriting Agreement"),
the Depositor has agreed to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters has severally agreed to purchase,
the principal amount of the Offered Certificates set forth opposite its name
below:
Class A-1 Certificates
Underwriters Principal Amount
------------ ----------------
Deutsche Bank Securities Inc. $ 43,825,250
Bear, Stearns & Co. Inc. 43,825,250
Nomura Securities International, Inc. 43,825,250
PaineWebber Incorporated 43,825,250
----------
Total $175,301,000
============
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Class A-2 Certificates
Underwriters Principal Amount
------------ ----------------
Deutsche Bank Securities Inc. $15,991,500
Bear, Stearns & Co. Inc. 15,991,500
Nomura Securities International, Inc. 15,991,500
PaineWebber Incorporated 15,991,500
----------
Total $63,966,000
===========
Class A-3 Certificates
Underwriters Principal Amount
------------- ----------------
Deutsche Bank Securities Inc. $19,316,750
Bear, Stearns & Co. Inc. 19,316,750
Nomura Securities International, Inc. 19,316,750
PaineWebber Incorporated 19,316,750
-----------
Total $77,267,000
===========
Class A-4 Certificates
Underwriters Principal Amount
------------ ----------------
Deutsche Bank Securities Inc. $13,636,500
Bear, Stearns & Co. Inc. 13,636,500
Nomura Securities International, Inc. 13,636,500
PaineWebber Incorporated 13,636,500
----------
Total $54,546,000
===========
Class A-5 Certificates
Underwriters Principal Amount
------------ ----------------
Deutsche Bank Securities Inc. $ 5,980,000
Bear, Stearns & Co. Inc. 5,980,000
Nomura Securities International, Inc. 5,980,000
PaineWebber Incorporated 5,980,000
---------
Total $23,920,000
===========
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Class A-6 Certificates
Underwriters Principal Amount
------------ ----------------
Deutsche Bank Securities Inc. $ 8,750,000
Bear, Stearns & Co. Inc. 8,750,000
Nomura Securities International, Inc. 8,750,000
PaineWebber Incorporated 8,750,000
---------
Total $35,000,000
===========
Class A-7IO Certificates
Underwriter Percentage Interest
----------- --------------------
Deutsche Bank Securities Inc. 25%
Bear, Stearns & Co. Inc. 25%
Nomura Securities International, Inc. 25%
PaineWebber Incorporated 25%
---
Total 100%
====
No principal payments are distributed with respect to the Class A-7IO
Certificates. Interest will be distributed and calculated on the basis of the
Notional Principal Amount.
Class M-1 Certificates
Underwriters Principal Amount
------------ ----------------
Deutsche Bank Securities Inc. $ 7,812,500
Bear, Stearns & Co. Inc. 7,812,500
Nomura Securities International, Inc. 7,812,500
PaineWebber Incorporated 7,812,500
---------
Total $31,250,000
===========
Class M-2 Certificates
Underwriters Principal Amount
------------- ----------------
Deutsche Bank Securities Inc. $ 4,687,500
Bear, Stearns & Co. Inc. 4,687,500
Nomura Securities International, Inc. 4,687,500
PaineWebber Incorporated 4,687,500
---------
Total $18,750,000
===========
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Class B Certificates
Underwriters Principal Amount
------------- ----------------
Deutsche Bank Securities Inc. $ 5,000,000
Bear, Stearns & Co. Inc. 5,000,000
Nomura Securities International, Inc. 5,000,000
PaineWebber Incorporated 5,000,000
---------
Total $20,000,000
===========
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Offered
Certificates offered hereby, if any are purchased. The Depositor has been
advised by the Underwriters that they propose initially to offer the Offered
Certificates to the public at the respective offering prices set forth on the
cover page hereof and to certain dealers at such price less a concession not in
excess of the respective amounts set forth in the table below (expressed as a
percentage of the related Certificate Principal Balance). The Underwriters may
allow and such dealers may reallow a discount not in excess of the respective
amounts set forth in the table below to certain other dealers.
Selling Reallowance
Class Concession Discount
- ----- ---------- ------------
A-1..................................... 0.0750% 0.0525%
A-2..................................... 0.0900% 0.0630%
A-3..................................... 0.1200% 0.0840%
A-4..................................... 0.1500% 0.1050%
A-5..................................... 0.1950% 0.1365%
A-6..................................... 0.1800% 0.1260%
A-7IO................................... 0.0492% 0.0344%
M-1..................................... 0.2700% 0.1890%
M-2..................................... 0.3900% 0.2730%
B....................................... 0.5100% 0.3570%
After the initial public offering, such prices, concessions 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, as amended (the
"Exchange Act"). Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Offered Certificates in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling concession
from a syndicate member when the Offered Certificates originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Offered Certificates to
be higher than it would otherwise be in the absence of such transactions. These
transactions, if commenced, may be discontinued at any time.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
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CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller by Arter & Hadden LLP,
Washington, D.C. Certain legal matters relating to insolvency issues and certain
federal income tax matters concerning the Certificates will be passed upon for
the Seller and the Depositor by Arter & Hadden LLP. Certain legal matters
relating to the validity of the issuance of the Certificates will be passed upon
for the Underwriters by Stroock & Stroock & Lavan LLP, New York, New York.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
$500,000,000 IMC Home Equity Loan Pass-Through Certificates, Series 1998-5 (the
"Global Securities") will be available only in book entry form. Investors in the
Global Securities may hold such Global Securities through any of DTC, Cedel or
Euroclear. The Global Securities will be tradeable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed securities issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
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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 either a 360-day year comprised
of 30-day month's or the actual number of days in such accrual period and a year
assumed to consist of 360 days, as applicable. For transactions settling on the
31st of the month, payment will include interest accrued to and excluding the
first day of the following month. Payment will then be made by the Relevant
Depositary to the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis either a
360-day year comprised of 30-day month's or of the actual number of days in such
accrual period and a year assumed to consist to 360 days, as applicable. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of Cedel Participant or Euroclear Participant
the following day, and receipt of the cash proceeds in the Cedel Participant's
or Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
Cedel Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt of
the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Cedel Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
I-2
<PAGE>
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), 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
I-3
<PAGE>
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-4
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
-----
Accrual Period.......................................................S-4
Aggregate Certificate Principal Balance..............................S-2
Applied Realized Loss Amount........................................S-11
Appraised Values....................................................S-26
Available Funds Cap..................................................S-1
Backup Servicer.....................................................S-21
Balloon Loans.......................................................S-19
Beneficial Owners...................................................S-14
Book-Entry Certificates.............................................S-42
Cede................................................................S-14
Cedel...............................................................S-14
Cedel Participants..................................................S-44
Certificate Account.................................................S-39
Certificate Principal Balance........................................S-1
Chase Manhattan Bank................................................S-14
Citibank, N.A.......................................................S-14
Class................................................................S-1
Class A Certificates.................................................S-1
Class A Principal Distribution Amount................................S-8
Class A-1 Certificates...............................................S-1
Class A-1 Pass-Through Rate..........................................S-1
Class A-2 Certificates...............................................S-1
Class A-3 Certificates...............................................S-1
Class A-4 Certificates...............................................S-1
Class A-5 Certificates...............................................S-1
Class A-6 Certificates...............................................S-1
Class A-6 Lockout Distribution Amount................................S-7
Class A-6 Lockout Percentage.........................................S-7
Class A-6 Lockout Pro Rata Distribution Amount.......................S-7
Class A-7IO Certificates.............................................S-1
Class B Applied Realized Loss Amount................................S-48
Class B Certificate Principal Balance...............................S-48
Class B Certificates.................................................S-1
Class B Principal Distribution Amount................................S-9
Class B Realized Loss Amortization Amount...........................S-49
Class Distribution Amount............................................S-4
Class M-1 Realized Loss Amortization Amount.........................S-49
Class M-1 Applied Realized Loss Amount..............................S-49
Class M-1 Certificate Principal Balance.............................S-49
Class M-1 Certificates...............................................S-1
Class M-1 Principal Distribution Amount..............................S-8
Class M-2 Applied Realized Loss Amount..............................S-49
Class M-2 Certificate Principal Balance.............................S-49
Class M-2 Certificates...............................................S-1
Class M-2 Principal Distribution Amount..............................S-8
Class M-2 Realized Loss Amortization Amount.........................S-49
Class R Certificates.................................................S-2
Clean-Up Call Date..................................................S-14
Closing Date.........................................................S-2
Code................................................................S-15
Combined Loan-to-Value Ratios.......................................S-28
Compensating Interest...............................................S-54
Cooperative.........................................................S-44
Coupon Rate..........................................................S-3
CPR.................................................................S-33
Current Interest.....................................................S-5
Custodian............................................................S-2
Cut-Off Date.........................................................S-2
D&P.................................................................S-62
Daily Collections...................................................S-53
Date-of-Payment Loans...............................................S-32
Definitive Certificate..............................................S-42
Delinquency Advances................................................S-53
Depositor............................................................S-2
DOL.................................................................S-61
DTC.................................................................S-14
DTC Participants....................................................S-44
ERISA...............................................................S-60
Euroclear...........................................................S-14
Euroclear Operator..................................................S-44
Euroclear Participants..............................................S-44
Euroclear System....................................................S-14
European Depositaries...............................................S-42
Exchange Act........................................................S-67
Exemption...........................................................S-61
Extra Principal Distribution Amount..................................S-9
FannieMae...........................................................S-21
Final Determination.................................................S-59
Financial Intermediary..............................................S-43
Fitch...............................................................S-14
FNMA Guide..........................................................S-52
Freddie Mac.........................................................S-21
Home Equity Loans....................................................S-2
Interest Amount Available............................................S-5
Interest Carry Forward Amount........................................S-5
Interest Remittance Amount...........................................S-5
LIBOR................................................................S-1
LIBOR Determination Date............................................S-42
Loan Balance........................................................S-25
Loan Purchase Price.................................................S-50
Lower-Tier REMIC....................................................S-15
Mezzanine Certificates...............................................S-1
Monthly Excess Cashflow Amount......................................S-12
Monthly Remittance Date..............................................S-8
Moody's.............................................................S-14
Mortgagor...........................................................S-32
Net Liquidation Proceeds............................................S-53
Notes...............................................................S-25
Notional Principal Amount............................................S-1
Offered Certificates.................................................S-1
Original Aggregate Loan Balance.....................................S-14
Overcollateralization Amount.........................................S-9
Overcollateralization Deficiency.....................................S-9
Overcollateralization Release Amount.................................S-9
Owners...............................................................S-4
Participants........................................................S-42
Payment Date.........................................................S-4
Percentage Interest.................................................S-39
Plans...............................................................S-60
Pooling and Servicing Agreement......................................S-2
Preference Amount...................................................S-10
Prepayment Assumption...............................................S-33
Prepayments.........................................................S-17
Preservation Expenses...............................................S-54
Principal and Interest Account......................................S-52
Principal Distribution Amount........................................S-7
Principal Remittance Amount..........................................S-8
Properties...........................................................S-2
Qualified Replacement Mortgage......................................S-50
Rating Agencies.....................................................S-15
REMIC...............................................................S-15
REMIC Opinion.......................................................S-50
Realized Loss.......................................................S-11
Record Date..........................................................S-4
Reference Banks.....................................................S-42
Register............................................................S-39
Registrar...........................................................S-39
Relevant Depositary.................................................S-42
Remittance Period....................................................S-8
Restricted Group....................................................S-62
Riegle Act..........................................................S-19
Rules...............................................................S-43
Seller...............................................................S-2
Senior Enhancement Percentage........................................S-9
Senior Specified Enhancement Percentage..............................S-9
Servicer.............................................................S-2
Servicer Termination Events.........................................S-56
Servicing Advance...................................................S-54
Servicing Fee.......................................................S-10
SMMEA...............................................................S-16
Standard & Poor's...................................................S-14
Statistical Calculation Date.........................................S-2
Stepdown Date........................................................S-8
Subordinate Certificates.............................................S-1
Substitution Amount.................................................S-50
Sub-Servicers.......................................................S-20
Sub-Servicing Agreements............................................S-20
Targeted Overcollateralization Amount...............................S-10
Telerate Page 3750..................................................S-42
Terms and Conditions................................................S-44
Trigger Event........................................................S-8
Trust................................................................S-1
Trust Estate........................................................S-38
Trustee..............................................................S-2
Trustee Fee..........................................................S-2
Underwriters........................................................S-64
Unpaid Realized Loss Amount.........................................S-49
Upper-Tier REMIC....................................................S-15
Weighted average life...............................................S-33
160804.1D
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.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS...................................................... 1
RISK FACTORS............................................................... 7
DESCRIPTION OF THE SECURITIES.............................................. 11
General...................................................... 11
Classes of Securities........................................ 12
Distributions of Principal and Interest...................... 13
Book Entry Registration...................................... 15
List of Owners of Securities................................. 15
THE TRUSTS................................................................. 15
Mortgage Loans............................................... 16
Mortgage-Backed Securities................................... 18
Other Mortgage Securities.................................... 18
CREDIT ENHANCEMENT......................................................... 18
SERVICING OF MORTGAGE LOANS................................................ 23
Payments on Mortgage Loans................................... 24
Advances..................................................... 24
Collection and Other Servicing Procedures.................... 25
Primary Mortgage Insurance................................... 26
Standard Hazard Insurance.................................... 26
Title Insurance Policies..................................... 27
Claims Under Primary Mortgage Insurance Policies and
Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan.......................... 27
Servicing Compensation and Payment of Expenses............... 28
Master Servicer.............................................. 28
THE POOLING AND SERVICING AGREEMENT........................................ 28
Assignment of Mortgage Assets................................ 28
Evidence as to Compliance.................................... 30
The Trustee.................................................. 30
Administration of the Security Account....................... 31
Reports...................................................... 32
Forward Commitments; Pre-Funding............................. 32
Servicer Events of Default................................... 33
Rights Upon Servicer Event of Default........................ 33
Amendment.................................................... 33
Termination.................................................. 34
THE INDENTURE.............................................................. 34
General...................................................... 34
Modification of Indenture.................................... 34
Note Events of Default....................................... 35
Rights Upon Note Events of Default........................... 35
List of Note Owners.......................................... 36
Annual Compliance Statement.................................. 36
Indenture Trustee's Annual Report............................ 36
Satisfaction and Discharge of Indenture...................... 37
Redemption of Notes.......................................... 37
Reports by Indenture Trustee to Note Owners.................. 37
Limitation on Suits.......................................... 37
The Sale and Servicing Agreement............................. 37
USE OF PROCEEDS............................................................ 38
THE DEPOSITOR.............................................................. 38
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
ASSETS....................................................... 38
General...................................................... 39
Foreclosure.................................................. 39
Enforceability of Certain Provisions......................... 43
Soldiers' and Sailors' Civil Relief Act...................... 44
LEGAL INVESTMENT MATTERS................................................... 45
ERISA CONSIDERATIONS....................................................... 45
FEDERAL INCOME TAX CONSEQUENCES............................................ 47
REMIC Securities............................................. 47
Non-REMIC Securities......................................... 63
Debt Certificates69 Notes.................................... 70
Certificates Classified as Partnership Interests............. 71
FASIT Securities............................................. 71
PLAN OF DISTRIBUTION....................................................... 71
RATINGS.................................................................... 72
LEGAL MATTERS.............................................................. 72
FINANCIAL INFORMATION...................................................... 72
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS...............................A-1
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular Series of Securities and to
the 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 evidenced by certificated
or noncertificated interests (the "Equity
Certificates") issued under the Trust
Agreement, which, unless otherwise
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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 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,
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may be entitled to receive interest at a fixed
rate or a rate that is subject to change from
time to time; (vii) may accrue interest, with
such accrued interest added to the principal or
notional amount of the Securities, and no
payments being made thereon until certain other
classes of the Series have been paid in full;
and (viii) as to Securities entitled to
distributions allocable to interest, may be
entitled to distributions allocable to interest
only after the occurrence of events specified
in the Prospectus Supplement and may accrue
interest until such events occur, in each case
as specified in the related Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over
time, or otherwise as specified in the related
Prospectus Supplement.
Distributions on
the Securities............... The related Prospectus Supplement will specify
(i) whether distributions on the Securities
entitled thereto will be made monthly,
quarterly, semi-annually or at other intervals
and dates out of the payments received in
respect of the Mortgage Assets included in the
related Trust and other assets, if any, pledged
for the benefit of the related holders of the
Securities (the "Owners"); (ii) the amount
allocable to payments of principal and interest
on any Payment Date; and (iii) whether all
distributions will be made pro rata to Owners
of Securities of the class entitled thereto.
The aggregate original principal balance of the
Securities will equal the aggregate
distributions allocable to principal that such
Securities will be entitled to receive; the
Securities will have an aggregate original
principal balance equal to or less than the
aggregate unpaid principal balance of the
related Mortgage Assets (plus amounts held in a
Pre-Funding Account, if any) as of the first
day of the month of creation of the Trust; and
the Securities will bear interest in the
aggregate at a rate (the "Pass-Through Rate")
equal to the interest rate borne by the related
Mortgage Assets net of servicing fees and any
other specified amounts.
Pre-Funding Account............ A Trust may enter into an agreement (each, a
"Subsequent Transfer Agreement") with the
Depositor whereby the Depositor will agree to
transfer additional Mortgage Assets to such
Trust following the date on which such Trust is
established and the related Securities are
issued. Any Subsequent Transfer Agreement will
require that any Mortgage Loans so transferred
conform to the requirements specified in such
Subsequent Transfer Agreement. If a Subsequent
Transfer Agreement is to be utilized, the
related Trustee will be required to deposit in
a segregated account (each, a "Pre-Funding
Account") all or a portion of the proceeds
received by the Trustee in connection with the
sale of one or more classes of Securities of
the related Series; subsequently, the
additional Mortgage Assets will be transferred
to the related Trust in exchange for money
released to the Depositor from the related
Pre-Funding Account. The maximum amount
deposited in the Pre-Funding Account to acquire
Mortgage Loans for transfer to a Trust will not
exceed 25% of the aggregate principal amount of
the Securities offered pursuant to the related
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
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remaining moneys will be applied as a mandatory
prepayment of a class or classes of Securities
as specified in the related Prospectus
Supplement.
Optional Termination........... The Servicer, the Seller, the Depositor, or, if
specified in the related Prospectus Supplement,
the Owners of a related class of Securities or
a credit enhancer may at their respective
options effect early retirement of a Series of
Securities through the purchase of the Mortgage
Assets in the related Trust. See "The Pooling
and Servicing Agreement - Termination" and "The
Indenture - Redemption of Notes" herein.
Mandatory Termination.......... The Trustee, the Servicer or certain other
entities specified in the related Prospectus
Supplement may be required to effect early
retirement of a Series of Securities by
soliciting competitive bids for the purchase of
the assets of the related Trust or otherwise.
See "Pooling and Servicing Agreement -
Termination" and "The Indenture - Rights Upon
Note Events of Default" herein.
Advances....................... The Servicer of the Mortgage Loans will be
obligated (but only to the extent set forth in
the related Prospectus Supplement) to advance
delinquent installments of principal and/or
interest (less applicable servicing fees) on
the Mortgage Loans in a Trust. Any such
obligation to make advances may be limited to
amounts due to the Owners of Securities of the
related Series, to amounts deemed to be
recoverable from late payments or liquidation
proceeds, to specified periods or to any
combination thereof, in each case as specified
in the related Prospectus Supplement. Any such
advance will be recoverable as specified in the
related Prospectus Supplement. See "Servicing
of Mortgage Loans" herein.
Credit Enhancement............. If specified in the related Prospectus
Supplement, a Series of Securities, or certain
classes within such Series, may have the
benefit of one or more types of credit
enhancement ("Credit Enhancement") including
but not limited to overcollateralization, cross
support, mortgage pool insurance, special
hazard insurance, financial guaranty insurance
policies, a bankruptcy bond, reserve funds,
other insurance, guaranties and similar
instruments and arrangements. Credit
Enhancement also may be provided in the form of
subordination of one or more classes of
Securities in a Series under which losses are
first allocated to any Subordinated Securities
up to a specified limit. The protection against
losses afforded by any such Credit Enhancement
will be limited as described in the related
Prospectus Supplement. See "Credit Enhancement"
herein.
Book Entry Registration........ Securities of one or more classes of a Series
may be issued in book entry form ("Book Entry
Securities") in the name of a clearing agency
(a "Clearing Agency") registered with the
Securities and Exchange Commission, or its
nominee. Transfers and pledges of Book Entry
Securities may be made only through entries on
the books of the Clearing 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
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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 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
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one of their four highest rating categories;
provided, however, that one or more classes of
Subordinated Securities and Residual Securities
need not be so rated. A security rating is not
a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time. No person is obligated
to maintain any rating on any Security, and,
accordingly, there can be no assurance that the
ratings assigned to any class of Securities
upon initial issuance thereof will not be
lowered or withdrawn by a Rating Agency at any
time thereafter. If a rating of any class of
Securities of a Series is revised or withdrawn,
the liquidity of such class of Securities may
be adversely affected. In general, the ratings
address credit risk and do not represent any
assessment of the likelihood or rate of
principal prepayments. See "Risk Factors"
herein and "Ratings" in the related Prospectus
Supplement.
Risk Factors................... Investment in the Securities will be subject to
one or more risk factors, including declines in
the value of Mortgaged Properties, prepayment
of Mortgage Loans, higher risks of defaults on
particular types of Mortgage Loans, limitations
on security for the Mortgage Loans, limitations
on credit enhancement and various other
factors. See "Risk Factors" herein and in the
related Prospectus Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors in connection with the purchase of the Securities:
Limited Liquidity. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Securities of such
Series. The market value of the Securities will fluctuate with changes in
prevailing rates of interest. Consequently, the sale of Securities in any market
that may develop may be at a discount from the Securities' par value or purchase
price. Owners of Securities generally have no right to request redemption of
Securities, and the Securities are subject to redemption only under the limited
circumstances described in the related Prospectus Supplement. In addition, the
Securities will not be listed on any securities exchange.
Declining Real Estate Market; Geographic Concentration. If the
residential real estate market in general or a regional or local area where
Mortgage Assets for a Trust are concentrated should experience an overall
decline in property values, or a significant downturn in economic conditions,
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. See "The Trusts -
Mortgage Loans" herein.
Limited Obligations. The Securities will not represent an interest in
or obligation of the Depositor. The Securities of each Series will not be
insured or guaranteed by any government agency or instrumentality, the
Depositor, any Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment
experience on Mortgage Loans constituting or underlying the Mortgage Assets will
affect the average life of each class of Securities relating to a Trust.
Prepayments may be influenced by a variety of economic, geographic, social and
other factors, including changes in interest rate levels. In general, if
mortgage interest rates fall, the rate of prepayment would be expected to
increase. Conversely, if mortgage interest rates rise, the rate of prepayment
would be expected to decrease. Other factors affecting prepayment of mortgage
loans include changes in housing needs, job transfers, unemployment and
servicing decisions. See "Prepayment and Yield Considerations" in the related
Prospectus Supplement. In addition, investors in the Securities should be aware
that the Servicer, the Seller, or, if specified in the related Prospectus
Supplement, the Owners of a Class of Securities or a credit enhancer may at
their respective options effect early retirement of a Series of Securities
through the purchase of Mortgage Assets from the related Trust. See "The Pooling
and Servicing Agreement - Termination" and "The Indenture - Redemption of Notes"
herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
A portion of the aggregate principal balance of the Mortgage Loans at any time
may be "balloon loans" that provide for the payment of the unamortized principal
balance of such Mortgage Loan in a single payment at maturity ("Balloon Loans").
Such Balloon Loans provide for equal monthly payments, consisting of principal
and interest, generally based on a 30-year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
Limited Assets. Owners of Securities of each Series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such Series (which assets may be subject to
release from such pledge prior to payment in full of the Securities), for the
payment of principal of, and interest on, that Series of Securities. If the
assets comprising the Trust are insufficient to make payments on such
Securities, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Securities of a Series in the priority specified in the related
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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.
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
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and other factors may also have the effect of reducing the value of the
Mortgaged Property from the value at the time the junior lien Mortgage Loan was
originated and, as a result, may reduce the likelihood that, in the event of a
default by the borrower, liquidation or other proceeds will be sufficient to
satisfy the junior lien Mortgage Loan after satisfaction of any senior liens and
the payment of any liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loans at
the time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
State and Federal Regulations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures and require
licensing of the Seller and the Servicer. In addition, most states have other
laws, public policies and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the origination, servicing and collection of the Mortgage Loans. See
"Certain Legal Aspects of the Mortgage Assets" herein.
The Mortgage Loans may also be subject to federal laws, including: (i)
the Truth in Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act, in the extension of credit;
(iii) the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to borrowers regarding the
settlement and servicing of the Mortgage Loans; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience; and (v) the Federal Trade Commission Preservation
of Consumer's Claims and Defense Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act amended the Truth in Lending Act, which in turn led to certain
additional provisions being added to Regulation Z, the implementing regulation
of the Truth in Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates on high up-front fees and changes. In general,
mortgage loans within the purview of the Riegle Act have annual percentage rates
over 10% greater than the yield on Treasury Securities of comparable maturity
and/or fees and points which exceed the greater of 8% of the total loan amount
or $400. The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. The provisions can impose
specific statutory liabilities upon creditors who fail to comply with their
provisions and may affect the enforceability of the related loans. In addition,
any assignee of the creditor would generally be subject to all claims and
defenses that the consumer could assert against the creditor, including, without
limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer to collect all or part of the
principal of or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Servicer
to damages and administrative sanctions. If the Servicer is unable to collect
all or part of the principal or interest on any Mortgage Loans because of a
violation of the aforementioned laws, public policies or general principles of
equity, distributions or payments to Owners of realized proceeds of the assets
in the related Trust may be delayed, or such proceeds may not be sufficient to
repay all amounts owed 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
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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 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
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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 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
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"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 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
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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 will be made by check or money
order mailed to the person entitled thereto at the address appearing in the
Security Register or, if specified in the Prospectus Supplement, in the case of
Securities that are of a certain minimum denomination as specified in the
Prospectus Supplement, upon written request by the Owner of a Security, by wire
transfer or by such other means as are agreed upon with the person entitled
thereto; provided, however, that the final distribution in retirement of the
Securities (other than Book Entry Securities) will be made only upon
presentation and surrender of the Securities at the office or agency of the
Trustee specified in the notice of such final distribution. With respect to Book
Entry Securities, such payments will be made as described below under "Book
Entry Registration".
Distributions will be made out of, and only to the extent of, funds in
a separate account established and maintained for the benefit of the Securities
of the related Series (the "Security Account" with respect to such Series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments specified herein and in the Prospectus
Supplement, and all income or other gain from such investments will be deposited
in the related Security Account and may be available to make payments on the
Securities of the applicable Series on the next succeeding Payment Date or pay
after amounts owed by the Trust.
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Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement relating to a given Series of Securities, each Class of 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.
Unscheduled Distributions. The Securities of a Series may be subject to
receipt of distributions before the next scheduled Payment Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, such unscheduled distributions will be made on the
Securities of a Series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Security
Account for such Series on the next related Payment Date, together with, if
applicable, any amounts available to be withdrawn from any related Reserve Fund
or from any other Credit Enhancement provided for such Series, may be
insufficient to make required distributions on the Securities on such Payment
Date. The amount of any such unscheduled distribution that is allocable to
principal will not exceed the amount that would otherwise have been required to
be distributed as principal on the Securities on the next Payment Date and will
include interest at the applicable Security Interest Rate (if any) on the amount
of the unscheduled distribution allocable to principal for the period and to the
date specified in the Prospectus Supplement.
All distributions allocable to principal in any unscheduled
distribution will be made in the same priority and manner as distributions of
principal on the Securities would have been made on the next Payment Date except
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as otherwise stated in the related Prospectus Supplement, and, with respect to
Securities of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the Trustee 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 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.
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The Securities of each Series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information respecting
the Mortgage Assets is not known at the time the related Series of Securities
initially are offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific information
will be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Securities. A copy of the Pooling and Servicing Agreement or the Indenture, 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.
The Mortgage Loans will be "conventional" mortgage loans, that is they
will not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a Series of Securities
will be payable either on the first day of each month or on different scheduled
days throughout each month, and the interest will be calculated either on a
simple-interest or accrual method as described in the related Prospectus
Supplement. When a full principal amount is paid on a Mortgage Loan during a
month, the mortgagor is generally charged interest only on the days of the month
actually elapsed up to the date of such prepayment, at a daily interest rate
that is applied to the principal amount of the Mortgage Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for a
Series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index, a rate
that is fixed for a period of time or under certain
circumstances and followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes
to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the
principal of a Mortgage Loan for such periods and under such
circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the specified mortgage rate for
a period of time or for the life of the Mortgage Loan with the
amount of any difference contributed from funds supplied by
the seller of the Mortgaged Property or another source.
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(b) Principal may be payable on a level debt service
basis to fully amortize the Mortgage Loan over its term, may
be calculated on the basis of an amortization schedule that is
longer than the original term to maturity or on an interest
rate that is different from the interest rate on the Mortgage
Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the
principal may be due on maturity. Principal may include
interest that has been deferred and added to the principal
balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be
fixed for the life of the Mortgage Loan, may increase over a
specified period of time or may change from period to period.
Mortgage Loans may include limits on periodic increases or
decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of the
Mortgage Loan or may decline over time, and may be prohibited
for the life of the Mortgage Loan or for certain periods
("lockout periods"). Certain Mortgage Loans may permit
prepayments after expiration of the applicable lockout period
and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may
permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The Mortgage
Loans may include "due-on-sale" clauses which permit the
mortgagee to demand payment of the entire Mortgage Loan in
connection with the sale or certain transfers of the related
mortgaged property. Other Mortgage Loans may be assumable by
persons meeting the then applicable underwriting standards of
the Servicer, or as may be required by any applicable
government program.
(e) Another type of mortgage loan described in the
Prospectus Supplement.
With respect to a Series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due or 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.
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Mortgage-Backed Securities
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that
is, not guaranteed or insured by the United States or any agency or
instrumentality thereof) mortgage participations, mortgage pass-through
certificates or other mortgage-backed securities or (ii) certificates insured or
guaranteed by FHLMC or 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 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
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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.
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.
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In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Securities on any Payment Date
may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Payment Date, on each Payment Date for specified
periods, or on each Payment Date until the balance in the Reserve Fund has
reached a specified amount and, following payments from the Reserve Fund to
Owners of Senior Securities or otherwise, thereafter to the extent necessary to
restore the balance in the Reserve Fund to required levels, in each case as
specified in the Prospectus Supplement. If so specified in the Prospectus
Supplement, amounts on deposit in the Reserve Fund may be released to the
Depositor or the Owners of any class of Securities at the times and under the
circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of
Subordinate Securities and Subordinated Securities may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement. As
between classes of Subordinated Securities, payments with respect to Senior
Securities on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Securities relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Securities. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the aggregate principal
balance of the related Mortgage Loans, or a group thereof, over the principal
balance of the related class of Securities. Such acceleration may continue for
the life of the related Securities, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
Series may be evidenced by separate classes of related Series of Securities. In
such case, Credit Enhancement may be provided by a cross-support feature which
may require that distributions be made with respect to Securities evidencing
beneficial ownership of one or more asset groups prior to distributions to
Subordinated Securities evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of Credit Enhancement may apply concurrently to two or more
separate Trusts for a separate Series of Securities. If applicable, the
Prospectus Supplement will identify the Trusts to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trusts.
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
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Mortgage Pool Insurance Policy (the "Pool Insurer") for the period of time
specified in the related Prospectus Supplement. A Mortgage Pool Insurance
Policy, however, is not a blanket policy against loss, because claims thereunder
may only be made respecting particular defaulted Mortgage Loans and only upon
satisfaction of certain conditions precedent set forth in such policy as
described in the related Prospectus Supplement. The Mortgage Pool Insurance
Policies, if any, will not cover loss due to a failure to pay or denial of a
claim under a primary mortgage insurance policy, irrespective of the reason
therefor. The related Prospectus Supplement will describe the terms of any
applicable Mortgage Pool Insurance Policy and will set forth certain information
with respect to the related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may not insure against
loss sustained by reason of a default arising from, among other things, (i)
fraud or negligence in the origination or servicing of a Mortgage Loan,
including misrepresentation by the Mortgagor or persons involved in the
origination thereof or (ii) failure to construct a Mortgaged Property in
accordance with plans and specifications. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to one of the
foregoing events might result in a breach of a representation of the Seller and
in such event might give rise to an obligation on the part of the Seller to
purchase the defaulted Mortgage Loan if the breach materially and adversely
affects the interests of the Owners of the Securities and cannot be cured by the
Seller.
The original amount of coverage under any Mortgage Pool Insurance
Policy will be reduced over the life of such Securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The amount of claims paid
will generally include certain expenses incurred with respect to the applicable
Mortgage Loans as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. See "Certain Legal Aspects of the Mortgage Assets
- - Foreclosure" herein. Accordingly, if aggregate net claims paid under any
Mortgage Pool Insurance Policy reach the original policy limit, coverage under
that Mortgage Pool Insurance Policy will be exhausted and any further losses
will be borne by one or more classes of Securities unless otherwise covered by
another form of Credit Enhancement, as specified in the Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the Mortgaged
Property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy may not
provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans - Standard Hazard Insurance", the hazard policies concerning the
Mortgage Loans typically exclude from coverage physical damage resulting from a
number of causes and even when the damage is covered, may afford recoveries
which are significantly less than the full replacement cost of such losses. Even
if special hazard insurance is applicable as specified in the Prospectus
Supplement, no coverage in respect of special hazard losses will cover all
risks, and the amount of any such coverage will be limited. See "Special Hazard
Insurance" below. As a result, certain hazard risks will not be insured against
and will therefore be borne by Owners of the Securities, unless otherwise
covered by another form of Credit Enhancement, as specified in the Prospectus
Supplement.
Special Hazard Insurance. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage) not covered by
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under flood insurance policies, if any,
covering the Mortgaged Properties, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "Servicing of Mortgage Loans - Standard Hazard Insurance." Any Special
Hazard Insurance Policy may not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the Mortgaged Property is located in a federally designated flood area),
chemical contamination and certain other risks. Aggregate claims under each
Special Hazard Insurance Policy will be limited as described in the related
Prospectus Supplement. Any Special Hazard Insurance Policy may also provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
Mortgaged Property has been kept in force and other protection and preservation
expenses have been paid.
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Subject to the foregoing limitations, any Special Hazard Insurance
Policy generally will provide that, where there has been damage to property
securing a foreclosed Mortgage Loan (title to which has been acquired by the
insured) and to the extent such damage is not covered by the hazard insurance
policy or flood insurance policy, if any, maintained with respect to such
Mortgage Loan, the issuer of the Special Hazard Insurance Policy (the "Special
Hazard Insurer") will pay the lesser of (i) the cost of repair or replacement of
such property or (ii) upon transfer of the property to the special hazard
insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure, plus
accrued interest to the date of claim settlement and certain expenses incurred
with respect to such property. If the unpaid principal balance plus accrued
interest and certain expenses is paid by the Special Hazard Insurer, the amount
of further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the property. Any
amount paid as the cost of repair or replacement of the property will also
reduce coverage by such amount. Restoration of the property with the proceeds
described under (i) above will satisfy the condition under any applicable
Mortgage Pool Insurance Policy that the property be restored before a claim
under such Mortgage Pool Insurance Policy may be validly presented with respect
to the defaulted Mortgage Loan secured by such property. The payment described
under (ii) above will render unnecessary presentation of a claim in respect of
such Mortgage Loan under any related Mortgage Pool Insurance Policy. Therefore,
so long as a Mortgage Pool Insurance Policy remains in effect, the payment by
the Special Hazard Insurer under a Special Hazard Insurance Policy of the cost
of repair or replacement or the unpaid principal balance of the Mortgage Loan
plus accrued interest and certain expenses will not affect the total insurance
proceeds but will affect the relative amounts of coverage remaining under any
related Special Hazard Insurance Policy and any related Mortgage Pool Insurance
Policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the property securing the related
Mortgage Loan at an amount less than the then outstanding principal balance of
such Mortgage Loan. The amount of the secured debt could be reduced to such
value and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the property by the bankruptcy court. In
addition, certain other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including the reduction in monthly payments
required to be made by the borrower. See "Certain Legal Aspects of the Mortgage
Assets" herein. If so provided in the related Prospectus Supplement, the
Depositor will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") for proceedings with respect to borrowers under the
Bankruptcy Code. The bankruptcy bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal of and
interest on a Mortgage Loan or a reduction by such court of the principal amount
of a Mortgage Loan and will cover certain unpaid interest on the amount of such
a principal reduction from the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement. Such amount will be reduced by
payments made under such bankruptcy bond in respect of the related Mortgage
Loans and will not be restored.
If specified in the related Prospectus Supplement, other forms of
Credit Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
Reserve Funds. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date in
one or more accounts (each, a "Reserve Fund") established and maintained with
the Trustee or the Indenture Trustee, as applicable. Such cash and the principal
and interest payments on such other investments will be used to enhance the
likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust, to pay the expenses of
the Trust or for such other purposes specified in the Prospectus Supplement.
Whether or not the Depositor has any obligation to make such a deposit, certain
amounts to which the Owners of Subordinated Securities, if any, would otherwise
be entitled may instead be deposited into the Reserve Fund from time to time and
in the amounts as specified in the Prospectus
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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 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.
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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.
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.
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Collection and Other Servicing Procedures
Each Servicer will service the Mortgage Loans pursuant to guidelines
established in the related Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable.
The Servicer will be responsible for making reasonable efforts to
collect all payments called for under the Mortgage Loans. The Servicer will be
obligated to follow such normal practices and procedures as it deems necessary
or advisable to realize upon a defaulted Mortgage Loan. In this regard, the
Servicer may (directly or through a local assignee) sell the property at a
foreclosure or trustee's sale, negotiate with the Mortgagor for a deed in lieu
of foreclosure or, in the event a deficiency judgment is available against the
Mortgagor or other person (see "Certain Legal Aspects of the Mortgage Assets -
Foreclosure - Anti-Deficiency Legislation and Other Limitations on Lenders" for
a description of the limited availability of deficiency judgments), foreclose
against such property and proceed for the deficiency against the appropriate
person. The amount of the ultimate net recovery (including the proceeds of any
Mortgage Pool Insurance Policy or other applicable Credit Enhancement), after
reimbursement to the Servicer of its expenses incurred in connection with the
liquidation of any such defaulted Mortgage Loan and prior unreimbursed advances
of principal and interest with respect thereto will be deposited in the Security
Account when realized and will be distributed to Owners of Securities on the
next Payment Date following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the Trust's ability to sell and realize the value of
those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)
(2)) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Code Section 216(b)(1) is allowed a deduction for amounts
paid or accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to its tenant-stockholders
under Code Section 216(a) with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies as a cooperative housing corporation, however, the likelihood
that such a failure would be permitted to continue over a period of years
appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be restricted
by law, for any reason, from enforcing such a "due-on-sale" clause, the Servicer
may enter into an assumption and modification agreement with the person to whom
such 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
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assumption agreement will be retained by the Servicer as additional servicing
compensation. For a description of circumstances in which the Servicer may be
unable to enforce "due-on-sale" clauses, see "Certain Legal Aspects of the
Mortgage Assets - Foreclosure - Enforceability of Certain Provisions" herein. In
connection with any such assumption, the Mortgage Rate borne by the related
Mortgage Note may not be decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to mortgagors any amounts determined to be overages and to
pay interest to Mortgagors on balances in such account or accounts to the extent
required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will
be required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
Primary Mortgage Insurance
Mortgage Loans that the Depositor acquires will generally not have
primary mortgage insurance. If obtained, the primary mortgage insurance policies
will not insure against certain losses which may be sustained in the event of a
personal bankruptcy of the mortgagor under a Mortgage Loan.
Standard Hazard Insurance
The Servicer will be required to cause to be maintained for each
Mortgage Loan a standard hazard insurance policy. The coverage of such policy is
required to be in an amount not less than the maximum insurable value of the
improvements securing such Mortgage Loan from time to time or the principal
balance owing on such Mortgage Loan from time to time, whichever is less. In all
events, such coverage shall be in an amount sufficient to ensure avoidance of
the applicability of the co-insurance provisions under the terms and conditions
of the applicable policy. The ability of each Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent on its being named
as an additional insured under any standard hazard insurance policy and under
any flood insurance policy referred to below, or upon the extent to which
information in this regard is furnished to such Servicer by Mortgagors. Each
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
may provide that the related Servicer may satisfy its obligation to cause hazard
insurance policies to be maintained by maintaining a blanket policy insuring
against hazard losses on the Mortgage Loans serviced by such Servicer.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. If the
property securing a Mortgage Loan is located in a federally designated flood
area, flood insurance will be required to be maintained in such amounts as would
be required by 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
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residential properties securing the Mortgage Loans appreciate in value over
time, the effect of coinsurance in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
Title Insurance Policies
The Pooling and Servicing Agreements and the Sale and Servicing
Agreements will generally require that a title insurance policy be in effect on
each of the Mortgaged Properties and that such title insurance policy contain no
coverage exceptions, except customary exceptions generally accepted in the
mortgage banking industry.
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance
Policies; Other Realization Upon Defaulted Loan
Each Servicer will present claims to any primary insurer under any
related primary mortgage insurance policy and to the hazard insurer under any
related standard hazard insurance policy. All collections under any related
primary mortgage insurance policy or any related standard hazard insurance
policy (less any proceeds to be applied to the restoration or repair of the
related Mortgaged Property or to the reimbursement of Advances by the Servicer)
will be remitted to the Trustee or the Indenture Trustee, as applicable.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under any applicable Mortgage Pool Insurance Policy or any related
primary mortgage insurance policy, each Servicer may be required to expend its
own finds to restore the damaged property to the extent specified in the related
Prospectus Supplement, but only to the extent it determines such expenditures
are recoverable from Insurance Proceeds or Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the 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.
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Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be
entitled to a monthly servicing fee in the amount specified in the related
Prospectus Supplement. In addition to the primary compensation, a Servicer may
be permitted to retain all assumption underwriting fees and late payment
charges, to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and in connection with advancing delinquent payments. No loss
will be suffered on the Securities by reason of such expenses to the extent
claims for such expenses are paid directly under any applicable Mortgage Pool
Insurance Policy, a primary mortgage insurance policy, the special hazard
insurance policy or from other forms of Credit Enhancement. In the event,
however, that the defaulted Mortgage Loans are not covered by a Mortgage Pool
Insurance Policy, primary mortgage insurance policies, the Special Hazard
Insurance Policy or another form of Credit Enhancement, or claims are either not
made or paid under such policies or Credit Enhancement, or if coverage
thereunder has ceased, such a loss will occur to the extent that the proceeds
from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's expenses, are less than the Principal Balance of
such defaulted Mortgage Loan.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement
for the related Series of Securities. Customary servicing functions with respect
to Mortgage Loans constituting the Mortgage Pool will be provided by the
Servicer directly or through one or more 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
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Mortgage Rate, the scheduled monthly payment of principal and interest as of the
Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to
the Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not necessarily
recorded), evidence of title insurance, if obtained, and, if applicable, the
certificate of private mortgage insurance. In instances where recorded documents
cannot be delivered due to delays in connection with recording, the Depositor
may deliver copies thereof and deliver the original recorded documents promptly
upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Pooling and Servicing Agreement was
issued on the date of origination thereof and each such policy or binder
assurance is valid and remains in full force and effect or a legal opinion
concerning title or title search was obtained or conducted in connection with
the origination of the Mortgage Loans; (iii) at the date of initial issuance of
the Securities, the Seller has good title to the Mortgage Loans and the Mortgage
Loans are free of offsets, defenses or counterclaims; (iv) at the date of
initial issuance of the Securities, each Mortgage is a valid first lien on the
property securing the Mortgage Note (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions, and
restrictions, rights of way, easements and other matters of public record as of
the date of the recording of such Mortgage, such exceptions appearing of record
being acceptable to mortgage lending institutions generally in the area wherein
the property subject to the Mortgage is located or specifically reflected in the
appraisal obtained by the Depositor and (c) other matters to which like
properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by such Mortgage) and such
property is free of material damage and is in good repair or, with respect to a
junior lien Mortgage Loan, that such Mortgage is a valid junior lien Mortgage,
as the case may be and specifying the percentage of the Mortgage Loan Pool
comprised of junior lien Mortgage Loans; (v) at the date of initial issuance of
the Securities, no Mortgage Loan is 31 or more days delinquent (with such
exceptions as may be specified in the related Prospectus Supplement) and there
are no delinquent tax or assessment liens against the property covered by the
related Mortgage; (vi) at the date of initial issuance of the Securities, the
portion of each Mortgage Loan, if any, which in the circumstances set forth
below under "Servicing of Mortgage Loans - Primary Mortgage Insurance" should be
insured with a private mortgage insurer is so insured; and (vii) each Mortgage
Loan at the time it was made complied in all material respects with applicable
state and federal laws, including, with out limitation, usury, equal credit
opportunity and disclosure laws. The Depositor's rights against the Seller in
the event of a breach of its representations will be assigned to the Trustee for
the benefit of the Securities of such Series.
Assignment of Mortgage-Backed Securities and Other Mortgage Securities.
With respect to each Series, the Depositor will cause any Mortgage-Backed
Securities and Other Mortgage Securities included in the related Trust to be
registered in the name of the Trustee (directly or through a participant in a
depository). The Trustee (or its custodian) will have possession of any
certificated Mortgage-Backed Securities and Other Mortgage Securities. The
Trustee will not be in possession of or be assignee of record of any underlying
assets for a Mortgage-Backed Security or Other Mortgage Security. Each
Mortgage-Backed Security and Other Mortgage Security will be identified in a
schedule appearing as an exhibit to the related Agreement which may specify
certain information with respect to such security, including, as applicable, the
original principal amount, outstanding principal balance as of the Cut-Off Date,
annual pass-through rate or interest rate and maturity date and certain other
pertinent information 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
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prior to the transfer of the related securities to the Trustee, the Depositor
had good title to, and was the sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans. The Trustee will review
the documents delivered to it with respect to the Mortgage Loans included in the
related Trust. If any document is not delivered or is found to be defective in
any material respect and the Depositor or the related Seller, if so required
cannot deliver such document or cure such defect within the period specified in
the related Prospectus Supplement after notice thereof (which the Trustee will
undertake to give within the period specified in the related Prospectus
Supplement), and if any other party obligated to deliver such document or cure
such defect has not done so and has not substituted or repurchased the affected
Mortgage Loan or Contract then the Depositor will cause the Seller, not later
than the first date designated for the deposit of payments into the Security
Account (a "Deposit Date") which is more than a specified number of days after
such period, (a) if so provided in the Prospectus Supplement to remove the
affected Mortgage Loan from the Trust and substitute one or more other Mortgage
Loans therefor or (b) repurchase the Mortgage Loan from the Trustee for a price
equal to 100% of its Principal Balance plus one month's interest thereon at the
applicable Remittance Rate. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedy available to the Trustee
for a material defect in a document relating to a Mortgage Loan.
The Depositor is required to cause the Seller to do either of the
following (a) cure any breach of any representation or warranty that materially
and adversely affects the interests of the Owners of the Securities in a
Mortgage Loan (each, a "Defective Mortgage Loan") within a specified number of
days of its discovery by the Depositor or its receipt of notice thereof from the
Trustee, (b) repurchase such Defective Mortgage Loan not later than the first
Deposit Date which is more than a specified number of days after such period for
a price equal to 100% of its Principal Balance plus one month's interest thereon
at the applicable Remittance Rate, or (c) if so specified in the Prospectus
Supplement, remove the affected Mortgage Loan from the Trust and substitute one
or more other mortgage loans or contracts therefor. This repurchase and, if
applicable, substitution obligation will generally constitute the sole remedies
available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
as described above, whether or not the Depositor obtains such an agreement from
the Seller which sold such Mortgage Loans.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans.
Evidence as to Compliance
The Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning the first such date that is at least a
specified number of months on and after the Cut-Off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
based on an examination of certain specified documents and records relating to
the servicing of the Depositor's mortgage loan portfolio conducted substantially
in compliance with the audit program for mortgages serviced for 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
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unqualified to perform certain acts, singly upon such separate trustee or
co-trustee who shall exercise and perform such rights, powers, duties and
obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Pooling and Servicing Agreement, the Securities or of any
Mortgage Asset or related document, and will not be accountable for the use or
application by the Depositor of any funds paid to the Depositor in respect of
the Securities or the related assets, or amounts deposited in the Security
Account or deposited into the Distribution Account. If no Event of Default has
occurred, the Trustee will be required to perform only those duties specifically
required of it under the Pooling and Servicing Agreement. However, upon receipt
of the various certificates, reports or other instruments required to be
furnished to it, the Trustee will be required to examine them to determine
whether they conform to the requirements of the Pooling and Servicing Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in such
other instances, if any, as are set forth in the Agreement. Following any
resignation or removal of the Trustee, the Depositor will be obligated to
appoint a successor Trustee. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
Administration of the Security Account
The Pooling and Servicing Agreement will require that the Security
Account be either (i) maintained with a depository institution the debt
obligations of which (or, in the case of a depository institution which is a
part of a holding company structure, the debt obligations of the holding company
of which) have a rating acceptable to each rating agency that was requested to
rate the Securities, or (ii) an account or accounts the deposits in which are
fully insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation) ("SAIF") of the FDIC. The collateral eligible to secure
amounts in the Security Account is limited to United States government
securities and other investments acceptable to the rating agencies rating such
Series of Securities, and may include one or more Securities of a Series
("Eligible Investments"). If so specified in the related Prospectus Supplement,
a Security Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments. If so specified in the related Prospectus Supplement, the
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Security Account as additional compensation. The
Servicer will deposit in the Security Account from amounts previously deposited
by it into the Servicer's Custodial Account on the related Remittance Date the
following payments and collections received or made by it on and after the
Cut-Off Date (including scheduled payments of principal and interest due on and
after the Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal,
including Principal Prepayments and, if specified in the
related Prospectus Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest,
adjusted to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicer or other person entitled thereto,
as described above;
(iv) all Insurance Proceeds, other than proceeds to
be applied to the restoration or repair of the related
property or released to the Mortgagor and net of certain
amounts reimbursed to the Servicer or other person entitled
thereto, as described above;
(v) all condemnation awards or settlements which are
not released to the Mortgagor in accordance with normal
servicing procedures;
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(vi) any Advances made as described under "Servicing
of Mortgage Loans - Advances" herein and certain other amounts
required under the Pooling and Servicing Agreement to be
deposited in the Security Account;
(vii) all proceeds of any Mortgage Loan or property
acquired in respect thereof repurchased by the Depositor, the
Seller or otherwise as described above or under "Termination"
below;
(viii) all amounts, if any, required to be deposited
in the Security Account from any Credit Enhancement for the
related Series; and
(ix) all other amounts required to be deposited in
the Security Account pursuant to the related Pooling and
Servicing Agreement.
Reports
Concurrently with each distribution on the Securities, there will be
mailed to Owners a statement generally setting forth, to the extent applicable
to any Series, among other things:
(i) the aggregate amount of such distribution
allocable to principal, separately identifying the amount
allocable to each class;
(ii) the amount of such distribution allocable to
interest, separately identifying the amount allocable to each
class;
(iii) the aggregate Security Principal Balance of
each class of the Securities after giving effect to
distributions on such Payment Date;
(iv) the aggregate Security Principal Balance of any
class of Compound Interest Securities after giving effect to
any increase in such Principal Balance that results from the
accrual of interest that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable
to any class of Securities that was distributed to other
classes of Securities;
(vi) if any class of Securities has priority in the
right to receive Principal Prepayments, the amount of
Principal Prepayments in respect of the related Mortgage
Assets;
(vii) the aggregate Principal Balance and number of
Mortgage Loans which were delinquent as to a total of two
installments of principal and interest; and
(viii) the aggregate Principal Balances of Mortgage
Loans which (a) were delinquent 30-59 days, 60-89 days, and 90
days or more, and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually (in the case of Book Entry Securities, the
above described statement and such annual information will be sent to the
Clearing Agency, which will provide such reports to the Clearing Agency
Participants in accordance with its procedures).
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Subsequent Transfer Agreement
for the transfer of additional Mortgage Loans to such Trust following the date
on which such Trust is established and the related Securities are issued. The
Trustee of a Trust may enter into Subsequent Transfer Agreements to permit the
acquisition of additional Mortgage Loans that could not be delivered by the
Depositor or have not formally completed the origination process, in each case
prior to the Delivery Date. Any Subsequent Transfer Agreement will require that
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any Mortgage Loans so transferred to a Trust conform to the requirements
specified in such Subsequent Transfer Agreement. If a Subsequent Transfer
Agreement is to be utilized, the related Trustee will be required to deposit in
the 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 execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of,
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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General
Mortgages. The Mortgage Loans will be secured either by deeds of trust
or mortgages. A mortgage creates a lien upon the real property encumbered by the
mortgage. It is not prior to liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust formally has three
parties, the borrower-homeowner called the trustor (similar to a mortgager), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust and generally with a
power of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust or mortgage
and, in some cases, the directions of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans.
The private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and or underlying land, as is generally the case, the cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such tenant-stockholder's
pro rata share of the cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a cooperative and accompanying occupancy rights is
financed through a cooperative share loan evidenced by a promissory note and
secured by a security interest in the occupancy agreement or proprietary lease
and in the related cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the cooperative shares is filed in the appropriate state and local offices
to perfect the lenders interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the 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
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notice of default and notice of sale. In addition, the trustee must provide
notice in some states to any other individual having an interest in the real
property, including any junior lienholders. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation. Generally, state law controls
the amount of foreclosure expenses and costs, including attorney's fees' which
may be recovered by a lender. If the deed of trust is not reinstated, a notice
of sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not protested by any of
the parties defendant. However, when the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust, accrued and unpaid interest and expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including paying real estate taxes,
obtaining casualty insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust
cures the default and state law allows it to reinstate or redeem by paying the
full amount of the senior mortgage or deed of trust, then in those states the
amount paid so to cure or redeem generally becomes a part of the indebtedness
secured by the junior mortgage or deed of trust. See "Junior Liens; Rights of
Senior Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages and may be subject to
mechanic's and materialman's liens in some states. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the sheriff or
trustee will convey title to the purchaser of the real property, subject to any
existing first mortgage or deed of trust and any other prior liens and claims.
The foreclosure of a junior mortgage or deed of trust, generally, will have an
effect on the first mortgage or deed of trust, if the senior mortgage or deed of
trust grants to the senior mortgagee or beneficiary the right to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" 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
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balance remaining is generally payable to the mortgagor or trustor. Following
the sale, in some states the mortgagee or beneficiary following a foreclosure of
a mortgage or deed of trust may not obtain a deficiency judgment against the
mortgagor or trustor. A junior lienholder whose rights in the property are
terminated by the foreclosure by a senior lienholder will not share in the
proceeds from the subsequent disposition of the property.
Cooperative Loans. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owned by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. The recognition agreement, however, generally
provides that the lender's right to reimbursement is subject to the right of the
cooperative corporation to receive sums due under the proprietary lease or
occupancy agreement. If there are proceeds remaining, the lender must account to
the tenant-stockholder for the surplus. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. See "Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
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
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below, a junior mortgagee or beneficiary in some states may satisfy a defaulted
senior loan in full and in some states may cure such default and bring the
senior loan current, in either event adding the amounts expended to the balance
due on the junior loan. In most states, absent a provision in the senior
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the bankruptcy is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
Other provisions typically found in the form of the mortgagee or deed
of trust generally used by most institutional lenders obligate the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property and,
when due, all encumbrances, charges and liens on the property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary typically is given the
right under the mortgage or deed of trust to perform the obligation itself at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the trustor. All sums so expended by the mortgagee or beneficiary generally
become part of the indebtedness secured by the mortgage or deed of trust
Right of Redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property following
foreclosure. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser from
the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent 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
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through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular fact of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan. Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Enforceability of Certain Provisions
Certain of the Mortgage Loans will contain due-on-sale clauses. These
clauses permit the lender to accelerate the maturity of a loan if the borrower
sells, transfers, or conveys the property. The enforceability of these clauses
was the subject of legislation or litigation in many states, and in some cases
the enforceability of these clauses was limited or denied. However, the Garn-St.
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act")
preempts state constitutional, statutory and case law prohibiting the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions. The
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor 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
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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
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.
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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 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
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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.
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
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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.
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
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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).
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.
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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 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
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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 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.
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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.
An Owner may elect to include in gross income all stated interest,
original issue discount, de minimis original issue discount, market discount (as
described below under "Market Discount"), de minimis market discount and
unstated interest (as adjusted for any amortizable bond premium or acquisition
premium) currently as it accrues using the constant yield to maturity method. If
this election is made, the holder is treated as satisfying the requirements for
making the elections with respect to amortization of premium and current
inclusion of market discount, each as described under "Premium" and "Market
Discount" below.
Variable Rate Regular Securities. Regular Securities may provide for
interest based on a variable rate. The OID Regulations provide special rules for
variable rate instruments that meet three requirements. First, the noncontingent
principal payments may not exceed the instrument's issue price by more than a
specified amount equal to the lesser of (i) .015 multiplied by the product of
the total noncontingent payments and the weighted average maturity or (ii) 15%
of the total noncontingent principal payments. Second, the instrument must
provide for stated interest (compounded or paid at least annually) at (i) one or
more qualified floating rates, (ii) a single fixed rate followed by one or more
qualified floating rates, (iii) a single objective rate or (iv) a single fixed
rate and a single objective rate that is a qualified inverse floating rate.
Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period is set at a current value of
that rate (one occurring in the interval beginning three months before and
ending one year after the rate is first in effect on the Regular Security). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than zero but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Security to be significantly less or
more than the overall expected return on the Regular Security is considered a
qualified floating rate. An objective rate is a rate based on changes in the
price of actively traded property or an index of such prices or is a rate based
on (including multiples of) one or more qualified floating rates. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Security and is based on objective financial
information or economic information; however, a objective rate does not include
a rate based on information that is in the control of the issuer or that is
unique to the circumstances of a related party. Stated interest on a variable
rate debt instrument is qualified stated interest if the interest is
unconditionally payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a) in the case of a qualified floating
or inverse floating rate, the value, as of the issue date, of the qualified
floating inverse floating rate or (b) in the case of an objective rate (other
than a qualified inverse floating rate), a fixed rate that reflects the yield
that is reasonably expected for the debt instrument. For all other variable rate
debt
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instruments, the amount of interest and original issue discount accruals are
determined using the following steps. First, a fixed rate substitute for each
variable rate under the debt instrument is determined. In general, the fixed
rate substitute is a fixed rate equal to the rate of the applicable type of
variable rate as of the issue date. Second, an equivalent fixed rate debt
instrument is constructed using the fixed rate substitute(s) in lieu of the
variable rates and keeping all other terms identical. Third, the amount of
qualified stated interest and original issue discount with respect to the
equivalent fixed rate debt instrument are determined under the rules for fixed
rate debt instruments. Finally, appropriate adjustments for actual variable
rates are made during the term by increasing or decreasing the qualified stated
interest to reflect the amount actually paid during the applicable accrual
period as compared to the interest assumed to be accrued or paid under the
equivalent fixed rate debt instrument. If there is no qualified stated interest
under the equivalent fixed rate debt instrument, the adjustment is made to the
original issue discount for the period.
The application of the OID Regulations to variable rate debt
instruments is limited and may not apply to some Regular Securities having
variable rates. In that event, the provisions of regulations issued on June 11,
1996, applicable to instruments having contingent payments, may apply to those
Regular Securities. The application of those provisions to instruments such as
variable rate Regular Securities is subject to varying interpretations.
Prospective purchasers of variable rate Regular Securities are advised to
consult their tax advisers concerning the tax treatment of such Regular
Securities.
Market Discount. A purchaser of a Regular Security also may be subject
to the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Security (i) is exceeded by the stated
redemption price at maturity of the Regular Security or (ii) in the case of a
Regular Security having original issue discount, is exceed by the sum of the
issue price of such Regular Security plus any original issue discount that would
have previously accrued thereon if held by an original Regular Owner (who
purchased the Regular Security at its issue price), in either case less any
prior distributions included in the stated redemption price at maturity of such
Regular Security. Such purchaser generally will be required to recognize accrued
market discount as ordinary income as distributions includible in the stated
redemption price at maturity of such Regular Security are received in an amount
not exceeding any such distribution. That recognition rule would apply
regardless of whether the purchaser is a cash-basis or accrual-basis taxpayer.
Such market discount would accrue in a manner to be provided in Treasury
regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Security
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Security as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Owner may elect to include market discount in income
currently as it accrues in all market discount instruments acquired by such
Regular Owner in that taxable year or thereafter, in which case the interest
deferral rule will not apply. In Revenue Procedure 92-67, the Internal Revenue
Service set forth procedures for taxpayers (1) electing under Code Section
1278(b) to include market discount in income currently, (2) electing under rules
of Code Section 1276(b) to use a constant interest rate to determine accrued
market discount on a bond where the holder of the bond is required to determine
the amount of accrued market discount at a time prior to the holder's
disposition of the bond, and (3) requesting consent to revoke an election under
Code Section 1278(b).
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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 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
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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.
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
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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 "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
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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.
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
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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 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
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inclusions that are allocable to the interest in the Pass-Through Entity during
the period such interest is held by such Disqualified Organization and (ii) the
highest marginal federal corporate income tax rate. Such tax would be deductible
from the ordinary gross income of the Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that (i) states under penalty of perjury that
it is not a Disqualified Organization or (ii) furnishes a social security number
and states under penalties of perjury that the social security number is that of
the transferee, provided that during the period such person is the record holder
of the Residual 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
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conducted, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation, the
transferor found that the transferee had historically paid its debts as they
came due and found no significant evidence to indicate that the transferor will
not continue to pay its debts as they come due in the future; and (ii) the
transferee represents to the transferor that it understands that, as the holder
of the Noneconomic Residual Interest, the transferee may incur tax liabilities
in excess of any cash flows generated by the residual interest and that the
transferee intends to pay taxes associated with holding of residual interest as
they become due. The Agreement will require the transferee of a Residual
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 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
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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 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
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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 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
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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. An Owner generally will be able to deduct its share of servicing
fees and all administrative and other expenses of the Trust in accordance with
his method of accounting, provided that such amounts are reasonable compensation
for services rendered to that Trust. However, investors who are individuals,
estates or trusts who own Securities, either directly or indirectly through
certain pass-through entities, will be subject to limitation with respect to
certain itemized deductions described in Code Section 67, including deductions
under Code Section 212 for servicing fees and all such administrative and other
expenses of the Trust, to the extent that such deductions, in the aggregate, do
not exceed two percent of an investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000, adjusted yearly for
inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. As a result such investors holding
Securities, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate 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
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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.
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."
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Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to an Owner's interest in those
Mortgage Assets as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
are applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July l, 1982, and mortgages of individuals originated after March 2, 1984. Such
original issue discount could arise by the charging of points by the originator
of the mortgages in an amount greater than a statutory de minimis exception, to
the extent that the points are not currently deductible under applicable Code
provisions or are not for services provided by the lender. It is generally not
anticipated that adjustable rate Mortgage Assets will be treated as issued with
original issue discount. However, the application of the OID Regulations to
adjustable rate mortgage loans with incentive interest rates or annual or
lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Assets
acquired by an Owner are purchased at a price equal to the then unpaid principal
amount of such Mortgage Assets, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Assets (i.e., points) will be includible by such holder.
Market Discount. Owners also will be subject to the market discount
rules to the extent that the conditions for application of those sections are
met. Market discount on the Mortgage Assets will be determined and will be
reported as ordinary income generally in the manner described above under "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 still be treated as owners of beneficial interests in a
grantor trust for federal income tax purposes, the corpus of such trust could be
viewed as excluding the portion of the Mortgage Assets the ownership of which is
attributed to a servicer, or as including such portion as a second class of
equitable interest. Applicable Treasury regulations treat such an arrangement as
a fixed investment trust, since the multiple classes of trust interests should
be treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, such a recharacterization should not have any significant
effect upon the timing or amount of income reported by an Owner, except that the
income reported by a cash method holder may be slightly accelerated. See
"Stripped Securities" below for a further description of the federal income tax
treatment of stripped bonds and stripped coupons.
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In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the Owners to
purchase an undivided interest in the Mortgage Assets. In such event, the
present value of such additional payments might be included in the Owner's basis
in such undivided interests for purposes of determining whether the Security was
acquired at a discount, at par, or at a premium. Under this alternative, Owners
may also be entitled to a deduction for unstated interest with respect to each
deferred payment. The Internal Revenue Service may take the position that the
specific statutory provisions of Code Section 1286 described above override the
alternative described in this paragraph. Owners are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
Sale or Exchange of Securities. Upon sale or exchange of a Security, an
Owner will recognize gain or loss equal to the difference between the amount
realized on the sale and its aggregate adjusted basis in the Mortgage Assets and
other assets represented by the Security. In general, the aggregate adjusted
basis will equal the Owner's cost for the Security, increased by the amount of
any income previously reported with respect to the Security and decreased by the
amount of any losses previously reported with respect to the Security and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Assets, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss would be capital gain or loss if the Security was held as a
capital asset.
Stripped Securities
General. Pursuant to Code Section 1286, the separation of ownership of
the right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Securities that are subject to those rules will be referred to as
"Stripped Securities." The Securities will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Securities - Recharacterization of the
Servicing Fees" above) and (iii) a class of Securities are issued in two or more
classes or subclasses representing the right to non pro rata percentages of the
interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Security (a "Stripped Owner") will
be considered to own "stripped bonds" with respect to its pro rata share of all
or a portion of the principal payments on each Mortgage Loan and/or "stripped
coupons" with respect to its pro rata share of all or a portion of the interest
payments on each Mortgage Loan, including the Stripped Security's allocable
share of the servicing fees paid, to the extent that such fees represent
reasonable compensation for services rendered. See discussion above under
"Standard Securities - Recharacterization of Servicing Fees." For this purpose
the servicing fees will be allocated to the Stripped Securities in proportion to
the respective offering price of each class (or subclass) of Stripped
Securities. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"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
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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 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
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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.
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
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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 an 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 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
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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.
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
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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 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
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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.
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.
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Accordingly, no capitalization information or any historical or pro forma ratio
of earnings to fixed charges or any other financial information with respect to
any trust, partnership, limited liability company or corporation formed for the
purpose of issuing a Series of Notes has been or will be included herein or in
the related Prospectus Supplement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
1986 Act............................................................ 48
1996 Act............................................................ 56
Agreement........................................................... 1
AMTI................................................................ 56
Applicable Accounting Standards..................................... 30
Balloon Loans....................................................... 7
Beneficial Owners................................................... 4
BIF................................................................. 31
Book Entry Registration............................................. 11
Book Entry Securities............................................... 4
Certificates........................................................ 1
Clearing Agency..................................................... 4
Clearing Agency Participants........................................ 4
Code................................................................ 5
Companion Securities................................................ 13
Compound Interest Securities........................................ 12
Cooperative Loans................................................... 16
Cooperatives........................................................ 2
Credit Enhancement.................................................. 4
Credit Enhancer..................................................... 10
Custodial Account................................................... 24
Cut-Off Date........................................................ 12
DCR................................................................. 5
Debt Certificates................................................... 69
Defective Mortgage Loan............................................. 30
Delivery Date....................................................... 11
Deposit Date........................................................ 30
Depositor........................................................... 1
Disqualified Organization........................................... 58
DOL................................................................. 46
Eligible Investments................................................ 31
Equity Certificates................................................. 1
ERISA............................................................... 5
Events of Default................................................... 33
FASIT............................................................... 5
FASIT Pool.......................................................... 71
FASIT Regular Securities............................................ 71
FASIT Securities.................................................... 71
Fannie Mae.......................................................... 2
FDIC................................................................ 24
FHLMC............................................................... 2
Financial Guaranty Insurance Policy................................. 19
Financial Guaranty Insurer.......................................... 19
Fitch............................................................... 5
Garn-St. Germain Act................................................ 43
GNMA................................................................ 2
Indenture........................................................... 1
Indenture Trustee................................................... 1
Insurance Paying Agent.............................................. 19
Insurance Proceeds.................................................. 23
Insured Payment..................................................... 19
Interest Accrual Period............................................. 14
Issuer.............................................................. 1
Liquidation Proceeds................................................ 23
Loan-to-Value Ratio................................................. 17
Mark to Market Regulations.......................................... 55
Master Servicer..................................................... 1
MBS................................................................. 2
MBS Agreement....................................................... 18
MBS Issuer.......................................................... 18
MBS Servicer........................................................ 18
MBS Trustee......................................................... 18
Monthly Advance..................................................... 24
Moody's............................................................. 5
Mortgage Assets..................................................... 2
Mortgage Loans...................................................... 2
Mortgage Notes...................................................... 16
Mortgage Pool Insurance Policy...................................... 20
Mortgage Rates...................................................... 17
Mortgaged Properties................................................ 16
Mortgages........................................................... 16
Mortgage-Backed Securities.......................................... 2
Mortgagors.......................................................... 23
NCUA................................................................ 24
Non-Priority Securities............................................. 13
Non-U.S. Person..................................................... 62
Noneconomic Residual Interest....................................... 58
Nonrecoverable Advance.............................................. 24
Note Event of Default............................................... 35
Note Rate........................................................... 14
Notes............................................................... 1
Notional Principal Balance.......................................... 14
OID Regulations..................................................... 47
Original Value...................................................... 17
OTS................................................................. 43
Owner Trustee....................................................... 1
Owners.............................................................. 3
Ownership Interest Security......................................... 71
Partnership Interests............................................... 71
Pass-Through Entity................................................. 57
Pass-Through Rate................................................... 3
Payment Date........................................................ 13
Plans............................................................... 45
Policy Statement.................................................... 45
Pool Insurer........................................................ 21
Pooling and Servicing Agreement..................................... 1
Premium Regulations................................................. 53
Prepayment Assumption............................................... 50
Pre-Funding Account................................................. 3
Principal Balance................................................... 17
Principal Prepayments............................................... 14
Priority Securities................................................. 13
PTE 83-1............................................................ 46
Rating Agency....................................................... 5
REIT................................................................ 48
REMIC............................................................... 5
REMIC Pool.......................................................... 47
REMIC Regulations................................................... 47
REMIC Securities.................................................... 47
Record Date......................................................... 13
Regular Owner....................................................... 49
Regular Securities.................................................. 47
Relief Act.......................................................... 10
Remittance Date..................................................... 24
Remittance Rate..................................................... 24
Reserve Fund........................................................ 22
Residual Owners..................................................... 53
Residual Securities................................................. 47
Retail Class Security............................................... 49
Riegle Act.......................................................... 9
SAIF................................................................ 31
Sale and Servicing Agreement........................................ 23
Scheduled Amortization Securities................................... 13
Securities.......................................................... 1
Securities Interest Rate............................................ 12
Security Account.................................................... 13
Security Principal Balance.......................................... 11
Security Register................................................... 11
Security Registrar.................................................. 12
Seller.............................................................. 1
Senior Securities................................................... 19
Servicer............................................................ 1
SMMEA............................................................... 5
Special Allocation Securities....................................... 13
Special Counsel..................................................... 47
Special Hazard Insurance Policy..................................... 21
Special Hazard Insurer.............................................. 22
Standard & Poor's................................................... 5
Standard Certificate................................................ 63
Stripped Owner...................................................... 66
Stripped Securities................................................. 66
Subordinated Securities............................................. 19
A-1
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Subsequent Transfer Agreement....................................... 3
Thrift Institution.................................................. 47
TMP................................................................. 48
Trust............................................................... 1
Trust Agreement..................................................... 1
Trustee............................................................. 1
U.S. Person......................................................... 59
UCC................................................................. 41
Underwriters........................................................ 71
A-2
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE DEPOSITOR SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms............................... S-1
Risk Factors................................... S-17
The Seller and Servicer........................ S-20
The Depositor.................................. S-25
Use of Proceeds................................ S-25
The Home Equity Loan Pool...................... S-25
Prepayment and Yield Considerations............ S-32
Formation of the Trust and Trust Property...... S-38
Additional Information......................... S-39
Description of the Offered Certificates........ S-39
Credit Enhancement............................. S-46
The Pooling and Servicing Agreement............ S-50
Federal Income Tax Consequences................ S-59
ERISA Considerations........................... S-60
Ratings........................................ S-63
Legal Investment Considerations................ S-64
Underwriting................................... S-64
Certain Legal Matters.......................... S-68
Global Clearance, Settlement and Tax
Documentation Procedures..................... I-1
Index to Location of Principal Defined Terms... A-1
PROSPECTUS
Summary of Prospectus.......................... 1
Risk Factors................................... 7
Description of the Securities.................. 11
The Trusts..................................... 15
Credit Enhancement............................. 18
Servicing of Mortgage Loans.................... 23
The Pooling and Servicing Agreement............ 28
The Indenture.................................. 34
Use of Proceeds................................ 38
The Depositor.................................. 38
Certain Legal Aspects of the Mortgage Assets... 38
Legal Investment Matters....................... 45
ERISA Considerations........................... 45
Federal Income Tax Consequences................ 47
Plan of Distribution........................... 71
Ratings........................................ 72
Legal Matters.................................. 72
Financial Information.......................... 72
Index to Location of Principal Defined Terms... A-1
</TABLE>
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<PAGE>
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$500,000,000
IMC HOME EQUITY
LOAN TRUST 1998-5
[INSERT LOGO]
IMC MORTGAGE COMPANY
SELLER AND SERVICER
IMC SECURITIES, INC.
DEPOSITOR
------------------------
PROSPECTUS SUPPLEMENT
------------------------
DEUTSCHE BANK SECURITIES
BEAR, STEARNS & CO. INC.
NOMURA SECURITIES
INTERNATIONAL, INC.
PAINEWEBBER INCORPORATED
AUGUST 27, 1998
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