PROSPECTUS SUPPLEMENT
- ---------------------
(To Prospectus Dated August 18, 1997)
$1,000,000,000
IMC HOME EQUITY LOAN TRUST 1998-1
IMC MORTGAGE COMPANY
[LOGO] Seller and Servicer
IMC SECURITIES, INC.
Depositor
---------------------
The IMC Home Equity Loan Pass-Through Certificates, Series 1998-1 (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 1998-1 (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
March 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-18 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, EXCEPT AS DESCRIBED HEREIN, OR ANY OF THEIR AFFILIATES. NEITHER THE
OFFERED CERTIFICATES NOR THE HOME EQUITY LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
====================================================================================================================================
Initial Certificate Pass-Through Price to Underwriting Proceeds to
Principal Balance Rate Public (1) Discount Depositor(1)(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Class A-1 Certificate... $334,270,000.00 Variable (3) 100.00000% 0.125% 99.87500%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-2 Certificate... $137,610,000.00 6.31% 99.99027% 0.150% 99.84027%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-3 Certificate... $151,170,000.00 6.41% 99.99421% 0.200% 99.79421%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-4 Certificate... $101,640,000.00 6.60%(4) 99.98029% 0.250% 99.73029%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-5 Certificate... $70,310,000.00 6.95%(4) 99.96180% 0.325% 99.63680%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-6 Certificate... $70,000,000.00 6.52%(4) 99.97834% 0.300% 99.67834%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class A-7IO Certificate. (5) 8.25% 18.75598% 0.084% 18.67198%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class M-1 Certificate... $47,500,000.00 7.03%(4) 99.96548% 0.400% 99.56548%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class M-2 Certificate... $45,000,000.00 7.38%(4) 99.98782% 0.625% 99.36282%
- ------------------------------------------------------------------------------------------------------------------------------------
Per Class B Certificate..... $42,500,000.00 7.87%(4) 99.97977% 0.825% 99.15477%
- ------------------------------------------------------------------------------------------------------------------------------------
Total .......... $1,000,000,000.00 $1,013,014,514.39 $2,499,875.00 $1,010,514,639.39
====================================================================================================================================
</TABLE>
(1) Plus accrued interest (other than on the Class A-1 Certificates), if any,
from March 1, 1998.
(2) Before deducting expenses, estimated to be $725,000.
(3) The Pass-Through Rate on the Class A-1 Certificates adjusts monthly based
on LIBOR as described herein.
(4) The Pass-Through Rate on this Class may be limited and is subject to
adjustment after the Clean-Up Call Date, if outstanding, as described
herein.
(5) 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 September 2000.
---------------------
The Offered Certificates are offered subject to prior sale, when, as, and
if accepted by the Underwriters and subject to the Underwriters' right to reject
orders in whole or in part. It is expected that the Offered Certificates will be
delivered in book-entry form only through the Same-Day Funds Settlement System
of The Depository Trust Company, Cedel Bank, S.A. and the Euroclear System on or
about March 11, 1998. The Offered Certificates will be offered in Europe and the
United States of America.
Underwriters of the Offered Certificates
(other than the Class A-7IO Certificates)
Bear, Stearns & Co. Inc.
PaineWebber Incorporated
Deutsche Morgan Grenfell
J.P. Morgan & Co.
Underwriter of the Class A-7IO Certificates
Bear, Stearns & Co. Inc.
The date of this Prospectus Supplement is February 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 approximately 13.50% of the initial aggregate Certificate Principal
Balance of all of the Certificates.
The Original Aggregate Loan Balance of the Home Equity Loans as of the
Cut-Off Date was $750,376,572.42 (of which approximately 89.41% 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 March 1,
1998 among the Seller, the Servicer, the Depositor and The Chase Manhattan Bank,
as Trustee (the "Trustee").
The Pooling and Servicing Agreement provides that additional Home
Equity Loans (the "Subsequent Home Equity Loans") may be purchased by the Trust
from the Depositor from time to time on or before April 30, 1998 from funds on
deposit in the Pre-Funding Account. On the Closing Date (as defined below), an
aggregate cash amount of approximately $249,623,427.58 (the "Pre-Funded Amount")
will be deposited with the Trustee in the Pre-Funding Account to be used to
acquire Subsequent Home Equity Loans for the Trust.
Distributions of principal and interest will be made to holders (the
"Owners") of the Certificates on the 20th day of each month (or, if such day is
not a business day, the next following business day) beginning April 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 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.
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 August 18, 1997, of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein, and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full.
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-18
THE SELLER AND SERVICER.....................................................S-21
General................................................................S-21
Credit and Underwriting Guidelines.....................................S-22
Delinquency, Loan Loss and Foreclosure Information.....................S-24
THE DEPOSITOR...............................................................S-26
USE OF PROCEEDS.............................................................S-26
THE HOME EQUITY LOAN POOL...................................................S-26
General................................................................S-26
Conveyance of Subsequent Home Equity Loans.............................S-31
Interest Payments on the Home Equity Loans.............................S-32
PREPAYMENT AND YIELD CONSIDERATIONS.........................................S-32
General................................................................S-32
Mandatory Prepayment...................................................S-33
Prepayment and Yield Scenarios for Offered Certificates................S-33
Payment Lag Feature of Offered Certificates............................S-38
Yield Sensitivity of the Class A-7IO Certificates......................S-38
FORMATION OF THE TRUST AND TRUST PROPERTY...................................S-39
ADDITIONAL INFORMATION......................................................S-40
DESCRIPTION OF THE OFFERED CERTIFICATES.....................................S-40
General................................................................S-40
Payment Dates..........................................................S-40
Distributions..........................................................S-41
Calculation of LIBOR...................................................S-43
Pre-Funding Account....................................................S-43
Capitalized Interest Account...........................................S-43
Book Entry Registration of the Offered Certificates....................S-44
Assignment of Rights...................................................S-47
CREDIT ENHANCEMENT..........................................................S-47
Subordination of Subordinate Certificates..............................S-47
Application of Realized Losses.........................................S-48
Application of Monthly Excess Cashflow Amounts.........................S-48
THE POOLING AND SERVICING AGREEMENT.........................................S-51
Covenant of the Seller to Take Certain Actions with Respect to
the Home Equity Loans in Certain Situations........................S-51
Assignment of Home Equity Loans........................................S-52
Servicing and Sub-Servicing............................................S-53
Removal and Resignation of Servicer....................................S-56
The Trustee............................................................S-57
Reporting Requirements.................................................S-57
Removal of Trustee for Cause...........................................S-59
Governing Law..........................................................S-59
Amendments.............................................................S-59
Termination of the Trust...............................................S-59
Optional Termination...................................................S-60
FEDERAL INCOME TAX CONSEQUENCES.............................................S-60
REMIC Elections........................................................S-60
ERISA CONSIDERATIONS........................................................S-61
RATINGS.....................................................................S-64
LEGAL INVESTMENT CONSIDERATIONS.............................................S-65
UNDERWRITING................................................................S-66
CERTAIN LEGAL MATTERS.......................................................S-69
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES................................................I-1
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................................A-1
<PAGE>
Prospectus
Page
----
SUMMARY OF PROSPECTUS........................................................ 1
RISK FACTORS................................................................. 7
DESCRIPTION OF THE SECURITIES................................................ 11
General................................................................. 11
Classes of Securities................................................... 12
Distributions of Principal and Interest................................. 13
Book Entry Registration................................................. 15
List of Owners of Securities............................................ 15
THE TRUSTS................................................................... 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...................................... 36
List of Note Owners..................................................... 36
Annual Compliance Statement............................................. 36
Indenture Trustee's Annual Report....................................... 37
Satisfaction and Discharge of Indenture................................. 37
Redemption of Notes..................................................... 37
Reports by Indenture Trustee to Note Owners............................. 37
Limitation on Suits..................................................... 37
The Sale and Servicing Agreement........................................ 37
USE OF PROCEEDS.............................................................. 38
THE DEPOSITOR................................................................ 38
CERTAIN LEGAL ASPECTS OF THE
MORTGAGE ASSETS......................................................... 38
General................................................................. 38
Foreclosure..............................................................39
Enforceability of Certain Provisions.................................... 43
Soldiers' and Sailors' Civil Relief Act................................. 44
LEGAL INVESTMENT MATTERS..................................................... 44
ERISA CONSIDERATIONS......................................................... 45
FEDERAL INCOME TAX CONSEQUENCES.............................................. 46
Federal Income Tax Consequences For REMIC
Securities.......................................................... 47
Taxation of Regular Securities.......................................... 48
Taxation of Residual Securities......................................... 53
Treatment of Certain Items of REMIC Income
and Expense......................................................... 55
Tax-Related Restrictions on Transfer of Residual
Securities.......................................................... 57
Sale or Exchange of a Residual Security................................. 59
Taxes That May Be Imposed on the REMIC
Pool................................................................ 59
Liquidation of the REMIC Pool........................................... 60
Administrative Matters.................................................. 60
Limitations on Deduction of Certain Expenses............................ 61
Taxation of Certain Foreign Investors................................... 61
Backup Withholding...................................................... 62
Reporting Requirements.................................................. 62
Federal Income Tax Consequences for Securities
as to Which No REMIC Election Is Made............................... 63
Standard Securities..................................................... 63
Premium and Discount.................................................... 64
Stripped Securities..................................................... 66
Reporting Requirements and Backup
Withholding......................................................... 68
Taxation of Certain Foreign Investors................................... 68
Debt Certificates....................................................... 69
Notes................................................................... 70
Taxation of Securities Classified as Partnership
Interests........................................................... 71
PLAN OF DISTRIBUTION......................................................... 71
RATINGS...................................................................... 71
LEGAL MATTERS................................................................ 72
FINANCIAL INFORMATION........................................................ 72
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................................A-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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.
Issuer: IMC Home Equity Loan Trust 1998-1 (the "Trust").
Certificates
Offered: $1,000,000,000 IMC Home Equity Loan Pass-Through
Certificates, Series 1998-1, to be issued in the following
Classes (each, a "Class") and original Certificate Principal
Balances (each, a "Certificate Principal Balance"), set
forth below:
Initial Certificate Pass-Through
Principal Balance Rate Class
----------------- ---- -----
$334,270,000 (1) Class A-1 Certificates
$137,610,000 6.31% Class A-2 Certificates
$151,170,000 6.41% Class A-3 Certificates
$101,640,000 6.60%(2) Class A-4 Certificates
$ 70,310,000 6.95%(3) Class A-5 Certificates
$ 70,000,000 6.52%(3) Class A-6 Certificates
$ 0(4) 8.25%(4) Class A-7IO Certificates
$ 47,500,000 7.03%(3) Class M-1 Certificates
$ 45,000,000 7.38%(3) Class M-2 Certificates
$ 42,500,000 7.87%(3) Class B Certificates
(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 0.11% 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 on any Payment Date equal the lesser of
(x) 6.60% 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) 8.25% per annum and (2) the Class A-7IO
Notional Principal Amount divided by the Loan Balance of the
Home Equity Loans, or thereafter, zero.
(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) 8.25% 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 13.50% of the initial
aggregate Certificate Principal Balance of all Certificates.
The Subordinate Certificates are subordinate in right of
distribution to the Class A Certificates to the extent
described herein. The Class M-1 Certificates are subordinate
to the Class A Certificates to the extent described herein.
The Class M-2 Certificates are subordinate to the Class A
Certificates and Class M-1 Certificates to the extent
described herein. The Class B Certificates are subordinate
to the Class A Certificates and the Mezzanine Certificates
to the extent described herein.
On any date after the Closing Date, the "Aggregate
Certificate Principal Balance" is the sum of the Certificate
Principal Balance of all Classes of the Offered Certificates
(other than the Class A-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: BankBoston, N.A., a national banking association, as
Custodian (the "Custodian").
Cut-Off Date: As of the close of business on March 1, 1998 (the "Cut-Off
Date").
Closing Date: On or about March 11, 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 March 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 the
Non-REMIC Accounts and certain other property. See
"Formation of the Trust and Trust Property" herein.
On the Closing Date, the Pre-Funded Amount (as defined
herein) will be deposited in a trust account in the name of
the Trustee (the "Pre-Funding Account"). It is intended that
additional Home Equity Loans satisfying the criteria
specified in the Pooling and Servicing Agreement (the
"Subsequent Home Equity Loans") will be purchased by the
Trust from the Depositor from time to time on or before
April 30, 1998 from funds on deposit in the Pre-Funding
Account. As a result, the aggregate principal balance of the
Home Equity Loans will increase by an amount equal to the
aggregate principal balance of the Subsequent Home Equity
Loans so purchased and the amount in the Pre-Funding Account
will decrease proportionately.
S-2
<PAGE>
As described below, on the Closing Date, cash will be
deposited in the name of the Trustee in the Capitalized
Interest Account (as defined herein). Funds in the
Capitalized Interest Account will be applied by the Trustee
to cover shortfalls in interest during the Funding Period
(as described herein under "Capitalized Interest Account")
on the Offered Certificates attributable to the provisions
allowing for purchase of Subsequent Home Equity Loans after
the Cut-Off Date.
Other
Certificates: In addition to the Offered Certificates, 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.
Denominations: The Offered Certificates are issuable in minimum
denominations of an original principal amount or Notional
Principal Amount, as applicable, of $25,000 and multiples of
$1,000 in excess thereof.
The Home Equity
Loans: The Home Equity Loans to be conveyed to the Trust by the
Depositor on the Closing Date (the "Initial Home Equity
Loans") will consist of fixed rate conventional home equity
loans and the Notes relating thereto. As of the Cut-Off
Date, there are 13,050 Initial Home Equity Loans. The
Initial Home Equity Loans are secured by first and second
lien mortgages or deeds of trust primarily on one- to- four
family residential properties located in 50 states and the
District of Columbia. No Combined Loan-to-Value Ratio (based
upon appraisals made at the time of origination of the
related Home Equity Loan) relating to any Initial Home
Equity Loan exceeded 90% as of the Cut-Off Date except for
966 loans with an aggregate Loan Balance of $29,785,455.10
(or 3.97% of the aggregate Loan Balance of the Initial Home
Equity Loans), which had a Combined Loan-to-Value Ratio not
greater than 100%. None of the Initial Home Equity Loans are
insured by pool mortgage insurance policies and no
significant portion of the Initial Home Equity Loans are
insured by primary mortgage insurance policies. The Home
Equity Loans are not guaranteed by the Depositor, the
Seller, the Servicer, the Trustee or any of their
affiliates. The Home Equity Loans will be serviced by the
Servicer generally in accordance with the standards and
procedures required by Fannie Mae for Fannie Mae
mortgage-backed securities and in accordance with the terms
of the Pooling and Servicing Agreement.
As of the Cut-Off Date, the average Loan Balance of the
Initial Home Equity Loans was $57,500.12. The minimum and
maximum Loan Balances of the Initial Home Equity Loans as of
the Cut-Off Date were $5,053.18 and $214,577.56,
respectively. The weighted average interest rate (the
"Coupon Rate") of the Initial Home Equity Loans as of the
Cut-Off Date was 11.21%; the Coupon Rates of the Initial
Home Equity Loans ranged from 6.50% to 18.00%; the weighted
average Combined Loan-to-Value Ratio of the Initial Home
Equity Loans was 75.85%; the weighted average remaining term
to maturity of the Initial Home Equity Loans was 242 months;
and the remaining terms to maturity of the Initial Home
Equity Loans ranged from 29 months to 360 months. As of the
Cut-Off Date, 89.41% of the aggregate Loan Balance of the
Initial Home Equity Loans were secured by first mortgages
and 10.59% of the aggregate Loan Balance of the Initial Home
Equity Loans were secured by second mortgages. Initial Home
Equity Loans containing "balloon" payments represented
approximately 38.08% of the aggregate Loan Balance of the
Initial Home Equity Loans. No Initial Home Equity Loan will
mature later than March 1, 2028. See "The Home Equity Loan
Pool -- Initial Home Equity Loans" 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
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related Final Scheduled Payment Date. See "Prepayment and
Yield Considerations" herein.
Final Scheduled
Payment Date
------------
Class A-1 Certificates December 20, 2012
Class A-2 Certificates December 20, 2012
Class A-3 Certificates April 20, 2018
Class A-4 Certificates March 20, 2025
Class A-5 Certificates June 20, 2029
Class A-6 Certificates June 20, 2029
Class A-7IO Certificates September 20, 2000
Class M-1 Certificates June 20, 2029
Class M-2 Certificates June 20, 2029
Class B Certificates June 20, 2029
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 April 20, 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 holders
(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;
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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, (v) any
amounts required to be applied from the Capitalized Interest
Account and (vi) 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.
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Principal: On each Payment Date (a) before the Stepdown Date or (b)
with respect to which a Trigger Event is in effect, Owners
of the Class A Certificates (other than the Class A-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
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<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:
Payment Dates Lockout Percentage
------------- ------------------
April 1998 - March 2001 0%
April 2001 - March 2003 45%
April 2003 - March 2004 80%
April 2004 - March 2005 100%
April 2005 and thereafter 300%
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.
The "Remittance Period" with respect to any Monthly
Remittance Date is the period from the second day of the
month immediately preceding such Monthly
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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
April 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, (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) and (v) any
amount remaining in the Pre-Funding Account following the
Funding Period.
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 April 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) 68.70% 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 $5,000,000.
"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 the
Class A Principal Distribution Amount on such Payment Date)
and (ii) the Class M-1 Certificate Principal Balance
immediately prior to such Payment Date over (y) the lesser
of (A) the product of (i) 78.20% 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 $5,000,000.
"Class M-2 Principal Distribution Amount" means as of any
Payment Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of
(i) the aggregate Certificate Principal Balance of the Class
A Certificates (after taking into account the payment of the
Class A Principal Distribution Amount on such Payment Date),
(ii) the Class M-1 Certificate Principal Balance (after
taking into account the payment of the Class M-1 Principal
Distribution Amount on such Payment Date) and (iii) the
Class M-2 Certificate Principal Balance immediately prior to
such Payment Date over (y) the lesser of
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(A) the product of (i) 87.20% 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 $5,000,000.
"Class B Principal Distribution Amount" means as of any
Payment Date on or after the Stepdown Date and as long as a
Trigger Event is not in effect, the excess of (x) the sum of
(i) the aggregate Certificate Principal Balance of the Class
A Certificates (after taking into account the payment of the
Class A Principal Distribution Amount on such Payment Date),
(ii) the Class M-1 Certificate Principal Balance (after
taking into account the payment of the Class M-1 Principal
Distribution Amount on such Payment Date), (iii) the Class
M-2 Certificate Principal Balance (after taking into account
the payment of the Class M-2 Principal Distribution Amount
on such date) and (iv) the Class B Certificate Principal
Balance immediately prior to such Payment Date over (y) the
lesser of (A) the product of (i) 95.70% 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 $5,000,000.
"Overcollateralization Amount" means as of any Payment Date
the difference between (x) the Loan Balance of the Home
Equity Loans as of the last day of the immediately preceding
Remittance Period and (y) the Aggregate Certificate
Principal Balance (after taking into account all
distributions of principal on such Payment Date).
"Senior Enhancement Percentage" for any Payment Date is the
percentage obtained by dividing (x) the sum of (i) the
aggregate Certificate Principal Balance of the Subordinate
Certificates and (ii) the Overcollateralization Amount, in
each case after taking into account the distribution of the
Principal Distribution Amount on such Payment Date by (y)
the aggregate Loan Balance of the Home Equity Loans as of
the last day of the related Remittance Period.
"Senior Specified Enhancement Percentage" on any date of
determination thereof means 31.30%.
"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,
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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, $21,500,000
and (y) on and after the Stepdown Date, the greater of (i)
4.30% of the aggregate outstanding Loan Balance of the Home
Equity Loans as of the last day of the related Remittance
Period and (ii) $5,000,000.
"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
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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
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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) $21,500,000.
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 $21,500,000 level to a level equal to
4.30% of the then current aggregate outstanding Loan Balance
(subject to a floor of $5,000,000). 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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(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 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 September 2000, the Class A-6
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
intended to be more stable than if such Notional Principal
Amount were calculated using the underlying Home Equity
Loans directly. However, there can be no assurance that such
will be the case. Because there are 13,050 Initial Home
Equity Loans, the prepayment experience of any one Home
Equity Loan will not be material to an investor's overall
return.
In general, losses due to liquidations, repurchases by the
Servicer and other dispositions of Home Equity Loans from
the Trust will have the same effect on the Owners of the
Class A-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 will tend to
decrease (because attractive refinancing opportunities are
not available) and the future stream of payments available
to such an owner of an interest-only security may not
decline as rapidly as originally anticipated. 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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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.
Pre-Funding
Account: On the Closing Date, an aggregate cash amount (the
"Pre-Funded Amount") of approximately $249,623,427.58 will
be deposited in the Pre-Funding Account. During the period
(the "Funding Period") from the Closing Date until the
earliest to occur of (i) the date on which the Pre-Funded
Amount is reduced to $100,000 or less, (ii) the occurrence
of a "Servicer Termination Event" (as defined in the Pooling
and Servicing Agreement) or (iii) April 30, 1998, the
Pre-Funded Amount will be maintained in the Pre-Funding
Account. The Pre-Funded Amount will be reduced during the
Funding Period by the amount thereof used to purchase
Subsequent Home Equity Loans in accordance with the Pooling
and Servicing Agreement. Subsequent Home Equity Loans
purchased on any date (each, a "Subsequent Transfer Date")
must satisfy the criteria set forth in the Pooling and
Servicing Agreement. See "The Home Equity Loan Pool--
Conveyance of Subsequent Home Equity Loans" herein. Any
Pre-Funded Amount remaining at the end of the Funding Period
will be distributed to the Owners of the Offered
Certificates (other than the Class A-7IO Certificates) then
entitled to receive payments of principal on the Payment
Date immediately following the end of the Funding Period,
thus resulting in a partial principal prepayment of such
Offered Certificates as specified herein under "Description
of the Offered Certificates--Distributions." All interest
and other investment earnings on amounts on deposit in the
Pre-Funding Account will be deposited in the Capitalized
Interest Account and, to the extent required by the Pooling
and Servicing Agreement, then deposited into the Certificate
Account. The Pre-Funding Account will not be an asset of
either the Lower-Tier REMIC or the Upper-Tier REMIC.
Capitalized
Interest
Account: On the Closing Date, cash will be deposited in a trust
account (the "Capitalized Interest Account") in the name of,
and maintained by, the Trustee on behalf of the Owners of
the Offered Certificates. The amount on deposit in the
Capitalized Interest Account, including reinvestment income
thereon, will be used by the Trustee on each Payment Date
during and immediately after the Funding Period to fund the
excess, if any, of (x) the interest accruing on the
outstanding Pre-Funded Amount as of the end of the related
Remittance Period at a rate equal to (i) the weighted
average of the Pass-Through Rates on the Offered
Certificates (except for the Class A-7IO Certificates) and
(ii) the Current Interest on the Class A-7IO Certificates
expressed as a percentage of the Aggregate Certificate
Principal Balance over (y) the amount of any reinvestment
income on monies on deposit in the Pre-Funding Account. Such
amounts on deposit will be so applied by the Trustee on each
Payment Date during and immediately following the end of the
Funding Period to fund such excess, if any. Any amounts
remaining in the Capitalized Interest Account not needed for
such purpose will be paid to the depositor of such funds
immediately after the end of the Funding Period. The
Capitalized Interest Account will not be an asset of either
the Lower-Tier REMIC or the Upper-Tier REMIC.
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Mandatory
Prepayment of
Certificates: It is intended that the principal amount of Subsequent Home
Equity Loans sold to the Trust will require application of
substantially all of the original Pre-Funded Amount and it
is not intended that there will be any material amount of
principal prepaid to the Owners of the Offered Certificates
from the Pre-Funding Account. In the event that the
Depositor is unable to sell Subsequent Home Equity Loans to
the Trust in an amount equal to the Pre-Funded Amount,
principal prepayments to Owners of the Class or Classes of
Offered Certificates (other than the Class A-7IO
Certificates) then entitled to receive payments of principal
will occur no later than the Payment Date immediately
following the end of the Funding Period in an amount equal
to the Pre-Funded Amount remaining at the end of the Funding
Period.
Book-Entry
Registration
of the Offered
Certificates: Each Class of the Offered Certificates will initially be
issued in book-entry form. Persons acquiring beneficial
ownership interests in such Offered Certificates
("Beneficial Owners") may elect to hold their interests
through The Depository Trust Company ("DTC"), in the United
States, or Cedel Bank, S.A. ("Cedel") or the Euroclear
System ("Euroclear") in Europe. Transfers within DTC, Cedel
or Euroclear, as the case may be, will be in accordance with
the usual rules and operating procedures of the relevant
system. So long as the Offered Certificates are Book-Entry
Certificates (as defined herein), such Certificates will be
evidenced by one or more Certificates registered in the name
of Cede & Co. ("Cede"), as the nominee of DTC or one of the
European Depositaries. Cross-market transfers between
persons holding directly or indirectly through DTC, on the
one hand, and counterparties holding directly or indirectly
through Cedel or Euroclear, on the other, will be effected
in DTC through Citibank, N.A. ("Citibank") or The Chase
Manhattan Bank ("Chase" and together with Citibank, the
"European Depositaries"), on the relevant depositaries of
Cedel and Euroclear, respectively, and each a participating
member of DTC or one of the European Depositaries. The
Offered Certificates will initially be registered in the
name of Cede. The interests of the Owners of such
Certificates will be represented by book-entries on the
records of DTC and participating members thereof. No
Beneficial Owner will be entitled to receive a definitive
certificate representing such person's interest, except in
the event that Definitive Certificates (as defined herein)
are issued under the limited circumstances described herein.
All references in this Prospectus Supplement to any Offered
Certificates reflect the rights of Beneficial Owners only as
such rights may be exercised through DTC and its
participating organizations for so long as such Offered
Certificates are held by DTC. See "Description of the
Offered Certificates--Book-Entry Registration of the Offered
Certificates" herein, and "Description of the
Certificates--Book Entry Registration" in the Prospectus.
Optional
Termination: The Owners of the Class R Certificates will have the right
to purchase all the Home Equity Loans on the "Clean-Up Call
Date" occurring on any Monthly Remittance Date when the
aggregate Loan Balance of the Home Equity Loans has declined
to 10% or less of the sum of (x) the Original Aggregate Loan
Balance plus (y) the original Pre-Funded Amount (such sum,
the "Maximum Collateral Amount"). See "The Pooling and
Servicing Agreement--Optional Termination" herein.
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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"):
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 Baa3 BBB- BBB
Moody's, Standard & Poor's and Fitch are referred to herein
collectively as the "Rating Agencies." A security rating is
not a recommendation to buy, sell or hold securities, and
may be subject to revision or withdrawal at any time by the
assigning entity. See "Ratings" herein.
Ratings of the Class A-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, exclusive of the
Pre-Funding Account and the Capitalized Interest Account
(such accounts collectively, the "Non-REMIC Accounts")
created by the Pooling and Servicing Agreement will consist
of two segregated asset pools (the "Upper-Tier REMIC" and
the "Lower-Tier REMIC") with respect to which elections will
be made to treat each as a separate "real estate mortgage
investment conduit" ("REMIC"). Each Class of the Offered
Certificates will be designated as a "regular interest" in
the Upper-Tier REMIC. The Class R Certificates will be
designated as the sole "residual interest" in the Upper-Tier
REMIC. See "Certain Federal Income Tax Consequences" herein.
Owners of the Offered Certificates, including Owners that
generally report income on the cash method of accounting,
will be required to include interest on the Offered
Certificates in income in accordance with the accrual method
of accounting. In addition, the Class A-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
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Certificates as regular interests in the Upper-Tier REMIC,
the Offered Certificates will be treated as "regular . . .
interest(s) in a REMIC" under Section 7701(a)(19)(C) of the
Internal Revenue Code of 1986, as amended (the "Code") and
"real estate assets" under Section 856(c) of the Code in the
same proportion that the assets in the Upper-Tier REMIC
consist of qualifying assets under such sections. In
addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on
real property" under Section 856(c) of the Code to the
extent that such Offered Certificates are treated as "real
estate assets" under Section 856(c) of the Code. For further
information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Federal Income
Tax Consequences" herein.
ERISA
Considerations: Subject to the considerations discussed under "ERISA
Considerations" herein, the Class A Certificates may be
purchased by employee benefit plans that are subject to
ERISA. The Subordinate Certificates may not be purchased by
employee benefit plans that are subject to ERISA except as
provided herein. See "ERISA Considerations" herein and in
the Prospectus.
Legal Investment
Considerations: The Offered Certificates will not constitute "mortgage
related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"). Accordingly, many
institutions with legal authority to invest in comparably
rated securities based on first home equity loans may not
be legally authorized to invest in the Offered
Certificates. See "Legal Investment Considerations" herein.
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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, approximately 64%
of the Initial Home Equity Loans (by Loan Balance) require the payment of a fee
in connection with certain prepayments. In addition, a substantial portion of
the Initial 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 the Home Equity Loans.
Conversely, if prevailing interest rates rise significantly above the interest
rates on the Home Equity Loans, the rate of prepayments is likely to decrease.
The average life of each Class of Offered Certificates, and, if
purchased at other than par, the yields realized by Owners of the Offered
Certificates will be sensitive to levels of payment (including prepayments of
the Home Equity Loans (the "Prepayments")) on the Home Equity Loans. In general,
the yield on a Class of Offered Certificates that is purchased at a premium from
the outstanding principal amount thereof will be adversely affected by a higher
than anticipated level of Prepayments and enhanced by a lower than anticipated
level. 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. 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.
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
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Owners of the Class A Certificates to receive such distributions and to the
rights of the Owners of each higher-ranking Class of Subordinate Certificates to
receive such distributions. See "Credit Enhancement -- Subordination of
Subordinate Certificates" herein.
The yields to maturity on the Mezzanine Certificates and Class B
Certificates will be progressively more sensitive to the rate, timing and
severity of defaults on the Home Equity Loans. Investors should fully consider
the risks associated with an investment in the Mezzanine Certificates or Class B
Certificates, including the possibility that such investors may not fully
recover their initial investment as a result of Realized Losses on the Home
Equity Loans. See "Credit Enhancement-Application of Realized Losses".
The Subordinate Certificates will not be entitled to any principal
distributions until at least the Stepdown Date and during the continuation of a
Trigger Event (unless the aggregate Certificate Principal Balance of the Class A
Certificates has been reduced to zero.) As a result, the weighted average lives
of the Subordinate Certificates will be longer than would be the case if
distributions of principal were to be allocated on a pro rata basis among the
Class A and Subordinate Certificates. As a result of the longer weighted average
lives of the Subordinate Certificates, the Owners of such Certificates have a
greater risk of suffering a loss on their investments.
Nature of Collateral; Junior Liens. Because 10.59% of the aggregate
Loan Balance of the Initial Home Equity Loans are secured by second liens
subordinate to the rights of the mortgagee or beneficiary under the related
first mortgage or deed of trust, the proceeds from any liquidation, insurance or
condemnation proceedings with respect to such Home Equity Loans will be
available to satisfy the outstanding balance of a Home Equity Loan only to the
extent that the claims of such first mortgagee or beneficiary have been
satisfied in full, including any related foreclosure costs. In addition, a
second mortgagee may not foreclose on the property securing a second mortgage
unless it forecloses subject to the first mortgage, in which case it must either
pay the entire amount due on the first mortgage to the first mortgagee at or
prior to the foreclosure sale or undertake the obligation to make payments on
the first mortgage in the event the mortgagor is in default thereunder. In
servicing second mortgages in its portfolio, it is generally the Servicer's
practice to satisfy the first mortgage at or prior to the foreclosure sale. The
Servicer may also advance funds to keep the first mortgage current until such
time as the Servicer satisfies the first mortgage. The Trust will have no source
of funds (and may not be permitted under the REMIC provisions of the Code) to
satisfy the first mortgage or make payments due to the first mortgagee. The
Servicer generally will be required to advance such amounts in accordance with
the Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreement--Servicing and Sub-Servicing" herein.
An overall decline in the residential real estate market, the general
condition of a Property, or other factors, could adversely affect the values of
the Properties such that the outstanding balances of the Home Equity Loans,
together with any senior liens on the Properties, equal or exceed the value of
the Properties. A decline in the value of a Property would affect the interest
of the Trust in the Property before having any effect on the interest of the
related first mortgagee, and could cause the Trust's interest in the Property to
be extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Home Equity Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Home Equity Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust.
The Subsequent Home Equity Loans and the Pre-Funding Account. Any
conveyance of Subsequent Home Equity Loans is subject to the following
conditions, among others (i) each such Subsequent Home Equity Loan must satisfy
the representations and warranties specified in the agreement pursuant to which
such Subsequent Home Equity Loans are transferred to the Trust (each, a
"Subsequent Transfer Agreement") and in the Pooling and Servicing Agreement;
(ii) the Depositor will not select such Subsequent Home Equity Loans in a manner
adverse to the interest of the Owners of the Offered Certificates; (iii) the
Depositor will deliver certain opinions of counsel with respect to the validity
of the conveyance of such Subsequent Home Equity Loans; (iv) each Subsequent
Home Equity Loan will be a fixed rate Home Equity Loan; and (v) as of each
cut-off date (each, a "Subsequent Cut-Off Date") applicable thereto, the Home
Equity Loans at that time, including the Subsequent Home Equity Loans to be
conveyed by the Depositor as of such Subsequent Cut-Off Date, will satisfy the
criteria set forth in the Pooling and Servicing Agreement, as described herein
under "The Home Equity Loan Pool--Conveyance of Subsequent Home Equity Loans."
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To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Home Equity Loans by the
Trust for inclusion in the Trust by the end of the Funding Period, the Owners of
the Class or Classes of Offered Certificates (other than the Class A-7IO
Certificates) then entitled to receive payments of principal will receive a
prepayment of principal in an amount equal to the Pre-Funded Amount remaining in
the Pre-Funding Account on the Payment Date immediately following the Funding
Period. The Depositor intends that the principal amount of Subsequent Home
Equity Loans sold to the Trust will require the application of substantially all
amounts on deposit in the Pre-Funding Account and that therefore there will be
no material principal prepayment to the Owners of any Class of the Offered
Certificates.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. However, Subsequent Home Equity
Loans may have been originated or purchased by the Seller using credit criteria
different from those which were applied to the Initial Home Equity Loans and may
be of a different credit quality. Following the transfer of Subsequent Home
Equity Loans to the Trust, it is anticipated that the aggregate characteristics
of the Home Equity Loans then held in the Trust will not vary significantly from
those of the Initial Home Equity Loans. See "The Home Equity Loan
Pool--Conveyance of Subsequent Home Equity Loans" herein.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Seller. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Home Equity Loans. The Seller will be required
to repurchase any Home Equity Loans which, at the time of origination, did not
comply with applicable federal and state laws and regulations. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Home Equity Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Seller to damages and
administrative enforcement. See "Certain Legal Aspects of the Mortgage Assets"
in the Prospectus.
The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
borrowers regarding the terms of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Home Equity Loans and, in addition, could subject the Seller to damages
and administrative enforcement. The Seller will be required to repurchase any
Home Equity Loans which, at the time of origination did not comply with such
federal laws or regulations. See "Certain Legal Aspects of the Mortgage Assets"
in the Prospectus.
It is possible that some of the Home Equity Loans will be subject to
the Riegle Community Development and Regulatory Improvement Act of 1994 (the
"Riegle Act"), which incorporates the Home Ownership and Equity Protection Act
of 1994. The Riegle Act adds certain additional provisions to Regulation Z,
which is the implementing regulation of the Truth-in-Lending Act. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money home equity loans with high interest rates or high
upfront fees and charges. In general, home equity loans within the purview of
the Riegle Act have annual percentage rates over 10% 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
S-20
<PAGE>
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. 38.08% of the aggregate Loan Balance of the Initial Home Equity Loans
are "balloon loans" that provide for the payment of the unamortized Loan Balance
of such Home Equity Loan in a single payment at maturity ("Balloon Loans"). The
Balloon Loans provide for equal monthly payments, consisting of principal and
interest, generally based on a 30-year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally up to 15 years
after origination. Amortization of a Balloon Loan based on a scheduled period
that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Seller does not have any information regarding the default history
or prepayment history of payments on Balloon Loans. Because borrowers of Balloon
Loans are required to make substantial single payments upon maturity, it is
possible that the default risk associated with the Balloon Loans is greater than
that associated with fully-amortizing Home Equity Loans.
Risk of Insolvency. The Seller believes that its transfer of the Home
Equity Loans to the Depositor and the transfer of the Home Equity Loans by the
Depositor to the Trust constitutes a sale by the Seller to the Depositor and by
the Depositor to the Trust and, accordingly, that such Home Equity Loans will
not be part of the assets of the Seller or the Depositor in the event of the
insolvency of the Seller or the Depositor, as applicable and will not be
available to the creditors of the Seller or the Depositor, as applicable.
However, in the event of an insolvency of the Seller or the Depositor, it is
possible that a bankruptcy trustee or a creditor of the Seller or the Depositor
may argue that the transaction between the Seller and the Depositor or between
the Depositor and the Trust was a pledge of such Home Equity Loans in connection
with a borrowing by the Seller or the Depositor rather than a true sale. Such an
attempt, even if unsuccessful, could result in delays in distributions on the
Certificates.
On the Closing Date, the Trustee, the Seller, the Depositor and the
Rating Agencies will have received an opinion of Arter & Hadden 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 is a subsidiary of IMC Mortgage Company and an affiliate of
the Depositor. Consequently, information on loans serviced prior to September
1997 was generated by Industry Mortgage Company, L.P. and not by IMC Mortgage
Company. The transfer of servicing to IMC Mortgage Company is part of an ongoing
effort to consolidate mortgage banking functions of the Seller and Servicer.
Since both IMC Mortgage Company and Industry Mortgage Company, L.P. have the
same management and staff, such transfer 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.
S-21
<PAGE>
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 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 FHLMC
for first and second home equity loans having equity of not less than $5,000,000
as determined in accordance with generally accepted accounting principles, and
which shall assume all or any part of the responsibilities, duties or
liabilities of the Servicer.
The Certificates will not represent an interest in or obligation of,
nor are the Home Equity Loans guaranteed by, the Depositor, the Seller, the
Servicer, except as described herein, or any of their affiliates.
Credit and Underwriting Guidelines
The following is a description of the underwriting guidelines
customarily and currently employed by the Seller with respect to home equity
loans which it originates or purchases from others. Each Home Equity Loan was
underwritten according to those guidelines. The Seller revises such guidelines
from time to time in connection with changing economic and market conditions.
In certain cases loans may be acquired or originated outside of the
criteria included in the guidelines as then in effect with the prior approval of
a pre-designated senior official of the Seller and in light of compensating
factors or other business considerations. No information is available with
respect to the portion of the Home Equity Loans as to which exceptions to the
criteria specified in the guidelines described herein were made. Substantially
all of the Home Equity Loans were acquired or originated in accordance with the
underwriting guidelines described herein or with such permitted exceptions as
are described herein.
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
S-22
<PAGE>
Mortgage Corporation ("FHLMC") and those standards typically applied by banks
and other primary lending institutions, particularly with regard to a
prospective borrower's credit history.
The Seller acquires and originates home equity loans through its
principal office in Tampa, Florida and full-service branch offices in
Cincinnati, Ohio, Ft. Washington, Pennsylvania, Lincoln, Rhode Island and Cherry
Hill, New Jersey. In addition, the Seller maintains retail branch offices
throughout the United States and acquires home equity loans from a referral
network of mortgage lenders and brokers, banks and other referral sources, which
may include one or more affiliates of the Seller.
Home equity loans acquired from mortgage brokers and other lenders are
pre-approved by the Seller prior to funding, or purchased in bulk after funding,
only after each loan has been re-underwritten by the Seller in accordance with
its established underwriting guidelines. These guidelines are designed to assess
the adequacy of the real property which serves as collateral for the loan and
the borrower's ability to repay the loan. The Seller analyzes, among other
factors, the equity in the collateral, the credit history and debt-to-income
ratio of the borrower, the property type, and the characteristics of the
underlying senior mortgage, if any.
The Seller purchases and originates home equity loans with different
credit characteristics depending on the credit profiles of individual borrowers.
The Seller primarily purchases and originates fixed rate loans which fully
amortize (subject to adjustments by reason of being simple interest loans) over
a period not to exceed 30 years. The Seller also acquires and originates balloon
loans, which generally provide for scheduled amortization over 30 years, with a
due date and a balloon payment generally at the end of the fifteenth year. The
principal amount of the loans purchased or originated by the Seller generally
ranges up to a maximum of $400,000. Under current policy the Seller generally
does not acquire or originate home equity loans where the combined Loan-to-Value
Ratio exceeds 90%. The collateral securing loans acquired or originated by the
Seller is generally one- to four-family residences, including condominiums and
townhomes. The Seller accepts mobile homes or unimproved land as collateral only
in limited circumstances. The Seller does not purchase loans where any senior
mortgage contains open-end advance, negative amortization or shared appreciation
provisions.
The Seller's home equity loan program includes: (i) a full
documentation program for salaried borrowers and (ii) a non-income qualification
program for self-employed, and in limited instances, salaried borrowers. The
borrower's total monthly debt obligations (which include principal and interest
on all other mortgages, loans, charge accounts and all other scheduled
indebtedness) generally cannot exceed 50% of the borrower's monthly gross
income. Loans to substantially all borrowers who are salaried employees must be
supported by current employment information in addition to employment history.
This information for salaried borrowers is verified based on written
confirmation from employers or one or more pay-stubs, recent W-2 tax forms,
recent tax returns or telephone confirmation from the employers. For the
Seller's non-income qualification program, proof of a two year history of
self-employment in the same business plus proof of current self-employed status
is required. The Seller typically requires lower combined Loan-to-Value Ratios
with respect to loans made to self-employed borrowers.
The Seller requires that a full appraisal of the property used as
collateral for any loan that is acquired or originated be performed in
connection with the origination of the loan. These appraisals are performed by
third party, fee-based appraisers. Appraisals of substantially all of the
Properties were completed on standard Fannie Mae/FHLMC forms and conform to
current Fannie Mae/FHLMC secondary market requirements for residential property
appraisals. Each such appraisal includes, among other things, an inspection of
the exterior of the subject property, photographs of two or more different views
of the property and data from sales within the preceding 12 months of similar
properties within the same general location as the subject property.
A credit report by an independent, nationally recognized credit
repository agency reflecting the applicant's credit history is required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, garnishments, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records.
Certain laws protect loan applicants by offering them a period of time
after loan documents are signed, termed the rescission period, during which the
applicant has the right to cancel the loan. The rescission period must have
expired prior to the funding of the loan and may not be waived by the applicant
except as permitted by law.
S-23
<PAGE>
The Seller requires title insurance coverage issued by an approved ALTA
or CLTA title insurance company on all property securing home equity loans it
originates or purchases. The loan originator and its assignees are generally
named as the insured. Title insurance policies indicate the lien position of the
home equity loan and protect the Seller against loss if the title or lien
position is not indicated. The applicant is also required to secure hazard and,
in certain instances, flood insurance in an amount sufficient to cover the new
loan and any senior mortgage.
Delinquency, Loan Loss and Foreclosure Information
In September 1997, the Servicer began servicing loans previously
serviced by its subsidiary, Industry Mortgage Company, L.P. IMC Mortgage Company
and Industry Mortgage Company, L.P. have the same management and staff and
therefore the transfer of servicing 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 generated by Industry
Mortgage Company, L.P. However, because the total amount of loans originated or
purchased by IMC Mortgage Company and its subsidiaries has increased over these
periods as a result of new originations, the total amount of loans serviced as
of the end of any indicated period will include many loans which will not have
been outstanding long enough to give rise to some or all of the indicated
periods of delinquencies. In addition, the information in the tables below has
not been adjusted to eliminate the effect of the significant growth in the size
of Industry Mortgage Company, L.P.'s home equity loan portfolio during the
periods shown. Accordingly, loss and delinquency as percentages of aggregate
principal balance of home equity loans serviced for each period would be higher
than those shown if a group of home equity loans were artificially isolated at a
point in time and the information showed the activity only in that isolated
group. As a result, the historical delinquency experience and loan loss
information set forth below may not be indicative of the future performance of
the home equity loans. The columns in the following tables may not total exactly
due to rounding.
S-24
<PAGE>
Delinquency and Default Experience of the Servicer's Servicing
Portfolio of Home Equity Loans
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
1997 1996 1995
---- ---- ----
Number of Dollar Number of Dollar Number of Dollar
Loans Amount Loans Amount Loans Amount
<S> <C> <C> <C> <C> <C> <C>
Portfolio At 102,275 $6,956,905,062 35,390 $2,148,068,446 9,376 $535,797,748
Delinquency
Percentage (1)
30 - 59 days 2.598% 2.371% 3.390% 3.093% 2.613% 2.570%
60 - 89 days 1.438% 1.292% 1.077% 1.068% 0.672% 0.642%
90 + days 4.042% 3.886% 2.427% 2.616% 1.237% 1.223%
----- ----- ----- ----- ----- -----
Total
Delinquency 8.078% 7.549% 6.894% 6.777% 4.522% 4.435%
===== ===== ===== ===== ===== =====
Default
Percentage (2)
Foreclosure 1.235% 1.420% 0.863% 1.003% 0.779% 0.749%
Bankruptcy(3) 1.208% 1.139% 1.064% 1.069% 0.576% 0.630%
Real Estate
Owned 0.462% 0.441% 0.276% 0.313% 0.117% 0.160%
----- ----- ----- ----- ----- -----
Total Default 2.904% 3.000% 2.204% 2.385% 1.472% 1.539%
===== ===== ===== ===== ===== =====
</TABLE>
- -----------------
(1) The delinquency percentage represents the number and dollar value
of account balances contractually past due, including home equity
loans in foreclosure or bankruptcy but exclusive of real estate
owned.
(2) The default percentage represents the number and dollar value of account
balances on home equity loans in foreclosure, bankruptcy or real estate
owned.
(3) The bankruptcy percentage represents all home equity loans that are in
bankruptcy regardless of delinquency status.
Loan Loss Experience on the Servicer's Servicing
Portfolio of Home Equity Loans
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average Amount Outstanding(1) $4,315,237,578 $1,207,171,9 $294,251,85
60 9
Gross Losses(2) $6,274,022 $1,581,695 $278,632
Recoveries(3) $0 $1,727 $0
Net Losses(4) $6,274,022 $1,579,968 $278,632
Net Losses as a Percentage of 0.145% 0.131% 0.095%
Average
Amount Outstanding
</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."
S-25
<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 Initial Home Equity Loans to the Depositor and
the Depositor will sell the Initial Home Equity Loans to the Trust concurrently
with delivery of the Certificates. Net proceeds from the sale of the Offered
Certificates will be applied by the Depositor (i) to the purchase of the Initial
Home Equity Loans from the Seller, (ii) to pay off extensions of credit provided
by, among others, certain of the Underwriters with respect to certain Home
Equity Loans, (iii) to the deposit of the Pre-Funded Amount in the Pre-Funding
Account and (iv) to the deposit of certain amounts in the Capitalized Interest
Account. Such net proceeds less the Pre-Funded Amount and the amount deposited
in the Capitalized Interest Account will (together with the Class R Certificates
retained by the Seller) represent the purchase price to be paid by the Trust to
the Depositor and by the Depositor to the Seller for the Home Equity Loans.
THE HOME EQUITY LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Initial Home
Equity Loans as of the Cut-Off Date. Subsequent Home Equity Loans are intended
to be purchased by the Trust from the Depositor from time to time on or before
April 30, 1998 from funds on deposit in the Pre-Funding Account. The Initial
Home Equity Loans and the Subsequent Home Equity Loans are referred to
collectively as the "Home Equity Loans." The Subsequent Home Equity Loans to be
purchased by the Trust will be sold by the Seller to the Depositor and then by
the Depositor to the Trust.
This subsection describes generally certain characteristics of the
Initial Home Equity Loans. Unless otherwise noted, all statistical percentages
in this Prospectus Supplement are measured by the aggregate principal balance
(the "Loan Balance") of the related Initial Home Equity Loans as of the Cut-Off
Date. The columns entitled "% of Initial Home Equity Loans" and "% of Aggregate
Loan Balance" in the following tables may not sum to 100% due to rounding.
The Initial Home Equity Loans to be transferred by the Depositor to the
Trust on the Closing Date will consist of 13,050 fixed rate conventional home
equity loans evidenced by promissory notes (the "Notes") secured by first and
second lien deeds of trust, security deeds or mortgages, which are located in 50
states and the District of Columbia. The Properties securing the Home Equity
Loans consist primarily of one- to- four family residential properties. The
Properties may be owner-occupied and non-owner occupied investment properties
(which includes second and vacation homes). All of the Initial Home Equity Loans
have a first payment date on or after August 16, 1993. Initial Home Equity Loans
aggregating 89.41% of the aggregate Loan Balances of the Home Equity Loans as of
the Cut-Off Date (the "Original Aggregate Loan Balance") are secured by first
liens on the related properties, and the remaining Initial Home Equity Loans are
secured by second liens on the related properties.
The Loan-to-Value Ratios shown below were calculated based upon either
the appraised values of the Properties at the time of origination (the
"Appraised Values") or the sales price. In a limited number of circumstances,
and within the Seller's underwriting guidelines, the Seller has reduced the
Appraised Value of Properties where the Properties are unique, have a high value
or where the comparables are not within Fannie Mae guidelines. The purpose for
making these reductions is to value the Properties more conservatively than
would otherwise be the case if the appraisal were accepted as written.
S-26
<PAGE>
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, together with the outstanding balances of any
first mortgage, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans was $57,500.12. The minimum and maximum Loan Balances of the
Initial Home Equity Loans as of the Cut-Off Date were $5,053.18 and $214,577.56,
respectively. The weighted average Coupon Rate of the Initial Home Equity Loans
was 11.21%; the Coupon Rate of the Initial Home Equity Loans ranged from 6.50%
to 18.00%; the weighted average Combined Loan-to-Value Ratio of the Initial
Home Equity Loans was 75.85%; the weighted average remaining term to maturity of
the Initial Home Equity Loans was 242 months; and the remaining terms to
maturity of the Initial Home Equity Loans ranged from 29 months to 360 months.
Initial Home Equity Loans containing "balloon" payments represented not more
than 38.08% of the aggregate Loan Balance of the Initial Home Equity Loans. No
Initial Home Equity Loan will mature later than March 1, 2028.
S-27
<PAGE>
Geographic Distribution of Properties
The geographic distribution of the Initial Home Equity Loans by state,
as of the Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ------------
<S> <C> <C> <C>
Alabama 53 $ 3,332,249.28 0.44%
Alaska 3 156,664.56 0.02
Arizona 136 6,896,247.95 0.92
Arkansas 39 1,739,251.42 0.23
California 162 11,435,993.55 1.52
Colorado 201 13,576,288.65 1.81
Connecticut 161 10,674,176.28 1.42
Delaware 51 2,829,488.85 0.38
District of Columbia 71 5,216,497.68 0.70
Florida 1,502 81,146,288.26 10.81
Georgia 527 28,949,222.11 3.86
Hawaii 12 1,343,633.87 0.18
Idaho 25 1,337,141.35 0.18
Illinois 751 45,012,080.55 6.00
Indiana 523 23,096,037.69 3.08
Iowa 41 1,642,458.13 0.22
Kansas 47 1,984,543.86 0.26
Kentucky 81 4,379,752.70 0.58
Louisiana 73 2,895,302.92 0.39
Maine 17 968,306.03 0.13
Maryland 551 34,431,262.17 4.59
Massachusetts 252 15,534,503.68 2.07
Michigan 942 47,850,712.07 6.38
Minnesota 90 5,742,730.81 0.77
Mississippi 93 4,344,748.77 0.58
Missouri 140 5,813,735.30 0.77
Montana 12 768,638.38 0.10
Nebraska 22 878,487.74 0.12
Nevada 61 3,775,098.88 0.50
New Hampshire 20 964,509.34 0.13
New Jersey 418 30,034,537.27 4.00
New Mexico 80 5,045,560.69 0.67
New York 1,582 123,513,903.90 16.46
North Carolina 531 27,486,755.90 3.66
North Dakota 8 376,742.29 0.05
Ohio 766 39,456,912.57 5.26
Oklahoma 54 2,292,007.68 0.31
Oregon 67 3,678,302.39 0.49
Pennsylvania 836 44,042,682.51 5.87
Rhode Island 50 3,439,797.01 0.46
South Carolina 303 13,447,537.12 1.79
South Dakota 2 113,095.34 0.02
Tennessee 654 35,157,786.98 4.69
Texas 359 17,002,215.02 2.27
Utah 123 8,082,634.15 1.08
Vermont 11 587,479.71 0.08
Virginia 286 14,936,963.58 1.99
Washington 106 5,697,385.58 0.76
West Virginia 82 3,562,214.55 0.47
Wisconsin 66 3,284,338.12 0.44
Wyoming 7 421,667.26 0.06
------ --------------- ------
Total 13,050 $750,376,572.42 100.00%
====== =============== ======
</TABLE>
S-28
<PAGE>
Combined Loan-to-Value Ratios
The original combined loan-to-value ratios as of the origination dates
of the Initial Home Equity Loans (based upon appraisals made at the time of
origination thereof) (the "Combined Loan-to-Value Ratios") as of the Cut-Off
Date were distributed as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
Range of Original CLTV's Home Equity Loans Loan Balance Loan Balance
- ------------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
5.01 to 10.00% 7 $ 78,130.44 0.01%
10.01 to 15.00 24 526,210.06 0.07
15.01 to 20.00 43 964,667.09 0.13
20.01 to 25.00 65 1,868,865.97 0.25
25.01 to 30.00 102 3,269,881.04 0.44
30.01 to 35.00 118 4,080,739.46 0.54
35.01 to 40.00 158 5,987,096.69 0.80
40.01 to 45.00 194 7,720,138.56 1.03
45.01 to 50.00 314 13,785,501.22 1.84
50.01 to 55.00 325 15,514,251.36 2.07
55.01 to 60.00 553 25,402,828.06 3.39
60.01 to 65.00 890 47,691,089.90 6.36
65.01 to 70.00 1,300 70,435,500.33 9.39
70.01 to 75.00 1,861 108,871,231.23 14.51
75.01 to 80.00 3,537 240,277,961.55 32.02
80.01 to 85.00 1,471 94,603,621.82 12.61
85.01 to 90.00 1,122 79,513,402.53 10.60
90.01 to 95.00 207 7,904,962.86 1.05
95.01 to 100.00 759 21,880,492.24 2.92
------ --------------- ------
Total 13,050 $750,376,572.42 100.00%
====== =============== =======
</TABLE>
Cut-Off Date Coupon Rates
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans as of the Cut-Off Date were distributed as follows:
<TABLE>
<CAPTION>
Range of Number of Initial Aggregate % of Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
<S> <C> <C> <C>
6.001 to 7.000% 17 $ 1,769,194.50 0.24%
7.001 to 8.000 67 6,051,117.25 0.81
8.001 to 9.000 440 37,967,681.38 5.06
9.001 to 10.000 1,942 143,500,465.65 19.12
10.001 to 11.000 3,206 207,785,543.22 27.69
11.001 to 12.000 3,011 168,595,052.01 22.47
12.001 to 13.000 2,088 97,956,192.90 13.05
13.001 to 14.000 1,373 55,856,982.51 7.44
14.001 to 15.000 676 23,598,648.74 3.14
15.001 to 16.000 165 5,819,264.65 0.78
16.001 to 17.000 54 1,253,979.38 0.17
17.001 to 18.000 11 222,450.23 0.03
------ --------------- ------
Total 13,050 $750,376,572.42 100.00%
====== =============== ======
</TABLE>
S-29
<PAGE>
Cut-Off Date Loan Balances
The distribution of the outstanding principal amounts of the Initial
Home Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Cut-Off Date Number of Initial Aggregate % of Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Up to $ 25,000.00 2,555 $ 46,945,948.56 6.26%
25,000.01 to 50,000.00 4,600 171,731,821.98 22.89
50,000.01 to 75,000.00 2,705 166,401,937.10 22.18
75,000.01 to 100,000.00 1,385 120,184,766.54 16.02
100,000.01 to 125,000.00 850 94,543,646.96 12.60
125,000.01 to 150,000.00 455 62,116,611.37 8.28
150,000.01 to 175,000.00 257 41,570,044.88 5.54
175,000.01 to 200,000.00 172 32,081,753.54 4.28
200,000.01 to 225,000.00 71 14,800,041.49 1.97
-- ------------- ----
Total 13,050 $750,376,572.42 100.00%
====== =============== ======
</TABLE>
Types of Mortgaged Properties
The Properties securing the Initial Home Equity Loans as of the Cut-Off
Date were of the property types as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
Property Types Home Equity Loans Loan Balance Loan Balance
- -------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Single Family Detached 11,665 $658,556,854.06 87.76%
Two- to Four-Family 815 61,900,837.70 8.25
Single Family Attached 226 12,088,099.07 1.61
Condominium 203 10,004,783.77 1.33
Manufactured Housing 63 3,070,370.97 0.41
Townhouse 41 1,956,382.31 0.26
Multi-Family 25 1,944,839.83 0.26
Planned Unit Development 11 700,459.72 0.09
Mixed Use 1 153,944.97 0.02
------ --------------- ------
Total 13,050 $750,376,572.42 100.00%
====== =============== ======
</TABLE>
Distribution of Months Since Origination
The distribution of the number of months since the date of origination
of the Initial Home Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Months Number of Initial Aggregate % of Aggregate
Since Origination Home Equity Loans Loan Balance Loan Balance
- ----------------- ----------------- ------------ ------------
<S> <C> <C> <C>
0 to 1 352 $ 19,717,941.34 2.63%
2 to 12 12,564 724,171,005.27 96.51
13 to 24 133 6,431,675.96 0.86
25 or more 1 55,949.85 0.01
------ --------------- ----
Total 13,050 $750,376,572.42 100.00%
====== =============== ======
</TABLE>
S-30
<PAGE>
Distribution of Remaining Term to Maturity
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Months Remaining Number of Initial Aggregate % of Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
- ----------- ----------------- ------------ ------------
<S> <C> <C> <C>
Up to 120 543 $ 14,650,302.77 1.95%
121 to 180 7,712 402,946,805.70 53.70
181 to 240 1,505 78,813,788.55 10.50
241 to 300 84 4,790,259.43 0.64
301 to 360 3,206 249,175,415.96 33.21
----- -------------- -----
Total 13,050 $750,376,572.42 100.00%
====== =============== =======
</TABLE>
Occupancy Status(1)
The occupancy status of the Properties securing the Initial Home Equity
Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied 12,069 $700,227,583.59 93.32%
Investor Owned 942 47,528,118.00 6.33
Vacation/Second Home 39 2,620,870.83 0.35
-- ------------ ----
Total 13,050 $750,376,572.42 100.00%
====== =============== =======
</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 Initial Home Equity Loans as of the Cut-Off
Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Aggregate % of Aggregate
Lien Position Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
First Lien 10,223 $670,937,916.49 89.41%
Second Lien 2,827 79,438,655.93 10.59
----- ------------- -----
Total 13,050 $750,376,572.42 100.00%
====== =============== ======
</TABLE>
Conveyance of Subsequent Home Equity Loans
The Pooling and Servicing Agreement permits the Trust to acquire
Subsequent Home Equity Loans in aggregate principal balance equal to the
Pre-Funded Amount. Accordingly, the statistical characteristics of the Home
Equity Loans will vary as of each Subsequent Cut-Off Date upon the acquisition
of Subsequent Home Equity Loans, but the Seller does not expect such variance to
be material.
The obligation of the Trust to purchase a Subsequent Home Equity Loan
on a Subsequent Transfer Date for assignment to the Home Equity Loan Pool is
subject, among other factors, to the following requirements: (i) the ratings
S-31
<PAGE>
on the Offered Certificates shall not have been downgraded by any Rating Agency;
(ii) such Subsequent Home Equity Loan may not be 30 or more days contractually
delinquent as of the related Subsequent Cut-Off Date (except that Subsequent
Home Equity Loans representing not more than 2.00% of the aggregate Loan Balance
of the Subsequent Home Equity Loans may not be more than 60 days Delinquent as
of the related Subsequent Cut-Off Date); (iii) such Subsequent Home Equity Loan
will be a fixed rate Home Equity Loan; (iv) the original term to maturity of
such Subsequent Home Equity Loan may not exceed 30 years; (v) such Subsequent
Home Equity Loan will have a Coupon Rate of not less than 8.375%; and (vi)
following the purchase of such Subsequent Home Equity Loan by the Trust, the
Home Equity Loans (including the Subsequent Home Equity Loans) (a) will have a
weighted average Coupon Rate of at least 11.10%, (b) will have a weighted
average combined Loan-to-Value Ratio of not more than 76.50%; (c) will not have
Balloon Loans representing more than 40.00% by aggregate principal balance; (d)
will have no more than 11.50% Home Equity Loans which are second liens; (e) will
have at least 91% Home Equity Loans which are owner occupied; (f) will have no
Home Equity Loan that is a first lien with an original Loan Balance in excess of
$227,150; and (g) will have no Home Equity Loan that is a second lien with an
original Loan Balance in excess of $113,575 and a combined original principal
balance of the first and second lien in excess of $227,150.
Interest Payments on the Home Equity Loans
A substantial majority of the Initial Home Equity Loans provide that
interest is charged to the obligor (the "Mortgagor") thereunder, and payments
are due from such Mortgagors, as of a scheduled day of each month which is fixed
at the time of origination. Scheduled monthly payments made by the Mortgagors on
the Home Equity Loans either earlier or later than the scheduled due dates
thereof will not affect the amortization schedule or the relative application of
such payments to principal and interest.
There are a number of Home Equity Loans on which interest is charged to
the Mortgagor at the Coupon Rate on the outstanding principal balance calculated
based on the number of days elapsed between receipt of the Mortgagor's last
payment through receipt of the Mortgagor's most current payment (such Home
Equity Loans, "Date-of-Payment Loans"). Such interest is deducted from the
Mortgagor's payment amount and the remainder, if any, of the payment is applied
as a reduction to the outstanding principal balance of such Note. Although the
Mortgagor is required to remit equal monthly payments on a specified monthly
payment date that would reduce the outstanding principal balance of such Note to
zero at such Note's maturity date, payments that are made by the Mortgagor after
the due date therefor would cause the outstanding principal balance of such Note
not to be reduced to zero on its maturity date. In such a case, the Mortgagor
would be required to make an additional principal payment at the maturity date
for such Note. If it were assumed that all the Mortgagors on the Date-of-Payment
Loans were to pay on the latest date possible without the Date-of-Payment Loans
being in default, the amount of such additional principal payment would be a de
minimis amount of the aggregate Loan Balance of the Home Equity Loans. On the
other hand, if a Mortgagor makes a payment (other than a Prepayment) before the
due date therefor, the reduction in the outstanding principal balance of such
Note would occur over a shorter period of time than would have occurred had it
been based on the schedule of amortization in effect on the Cut-Off Date.
Accordingly, the timing of principal payments to the Owners of the Offered
Certificates may be affected by the fact that actual Mortgagor payments may not
be made on the due date therefor.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, the Offered Certificates will relate to the rate of
payment of principal of the Home Equity Loans, including, for this purpose,
Prepayments, liquidations due to defaults, casualties and condemnations, and
repurchases of Home Equity Loans by the Seller. The Home Equity Loans may be
prepaid by the related Mortgagors, in whole or in part, at any time. However,
approximately 64% of the Initial 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 10.59% of the aggregate Loan Balance of the
Initial Home Equity Loans are secured by second
S-32
<PAGE>
liens, the effect on the rate of payment of principal, if any, should be
minimal. The actual rate of principal prepayments on pools of home equity loans
is influenced by a variety of economic, tax, geographic, demographic, social,
legal and other factors and has fluctuated considerably in recent years. In
addition, the rate of principal prepayments may differ among pools of home
equity loans at any time because of specific factors relating to the home equity
loans in the particular pool, including, among other things, the age of the home
equity loans, the geographic locations of the properties securing the loans and
the extent of the mortgagors' equity in such properties, and changes in the
mortgagors' housing needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home equity loans with fixed rates is affected by prevailing market
rates for home equity loans of a comparable term and risk level. When the market
interest rate is below the mortgage coupon, mortgagors may have an increased
incentive to refinance their home equity loans. Depending on prevailing market
rates, the future outlook for market rates and economic conditions generally,
some mortgagors may sell or refinance mortgaged properties in order to realize
their equity in the mortgaged properties, to meet cash flow needs or to make
other investments.
In addition to the foregoing factors affecting the weighted average
life of the Offered Certificates, the overcollateralization provisions of the
Trust result in an additional reduction of the Class A Certificates relative to
the amortization of the Home Equity Loans in early months of the transaction.
The accelerated amortization is achieved by the application of the Monthly
Excess Interest Amount to the payment of the related Certificate Principal
Balance of the Offered Certificates. This creates overcollateralization which
results from the excess of the aggregate Loan Balance of the Home Equity Loans
over the Aggregate Certificate Principal Balance. Once the Target
Overcollateralization Amount is reached, the application of the Monthly Excess
Interest Amount to pay down principal will cease, unless necessary to maintain
the Overcollateralization Amount at the Target Overcollateralization Amount.
Mandatory Prepayment
In the event that prior to the end of the Funding Period the Depositor
is unable to sell Subsequent Home Equity Loans to the Trust in an amount equal
to the Pre-Funded Amount, the Owners of the Class or Classes of Offered
Certificates (other than the Class A-7IO Certificates) then entitled to receive
payments of principal will receive a partial prepayment on the Payment Date
immediately following the end of the Funding Period in an amount equal to the
Pre-Funded Amount remaining at the end of the Funding Period.
The Depositor intends to use substantially all of the amount on deposit
in the Pre-Funding Account to purchase Subsequent Home Equity Loans such that no
material amount of principal is expected to be prepaid at the end of the Funding
Period.
Prepayment and Yield Scenarios for 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 thirteenth Payment Date following the Remittance Period in
which the Loan Balances of all Home Equity Loans (including
S-33
<PAGE>
Subsequent Home Equity Loans) have been reduced to zero assuming that the Home
Equity Loans pay in accordance with their terms. The weighted average lives of
the Offered Certificates are likely to be shorter than would be the case if
payments actually made on the Home Equity Loans conformed to the foregoing
assumptions, and the final Payment Dates with respect to the Offered
Certificates could occur significantly earlier than the Final Scheduled Payment
Dates because (i) Prepayments are likely to occur and (ii) the Owners of the
Class R Certificates may cause a termination of the Trust when the aggregate
outstanding Loan Balance of the Home Equity Loans is less than 10% of the
Maximum Collateral Amount thereof.
"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 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 March 11, 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 April 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 other than the Pre-Funding Account, which accrues on the funds
therein based on the Assumed Delivery of Home Equity Loans set forth below, (x)
the Class A-1 Pass-Through Rate remains constant at approximately 5.7975% 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).
S-34
<PAGE>
REPRESENTATIVE LOAN POOLS
<TABLE>
<CAPTION>
Original Remaining Remaining Assumed
Gross Term of Term of Term to Delivery of
Pool Loan Coupon Net Coupon Amortization Amortization Maturity Amortization Home Equity
Number Balance Rate Rate (in months) (in months) (in months) Method Loans
------ ------- ---- ---- ----------- ----------- ----------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 11,821,997.18 11.351% 10.851% 114 112 112 Level Closing Date
2 114,366,602.48 11.614 11.114 180 177 177 Level Closing Date
3 75,600,245.26 10.876 10.376 240 238 238 Level Closing Date
4 4,512,070.94 10.781 10.281 298 296 296 Level Closing Date
5 257,127,752.64 10.840 10.340 360 357 357 Level Closing Date
6 286,571,331.50 11.432 10.932 360 357 177 Balloon Closing Date
7 3,940,665.73 11.351 10.851 114 114 114 Level April 1998
8 38,122,200.83 11.614 11.114 180 180 180 Level April 1998
9 25,200,081.75 10.876 10.376 240 240 240 Level April 1998
10 1,504,023.65 10.781 10.281 298 298 298 Level April 1998
11 85,709,250.88 10.840 10.340 360 360 360 Level April 1998
12 95,523,777.16 11.432 10.932 360 360 180 Balloon April 1998
</TABLE>
S-35
<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
3/20/1999 91 65 52 38 25 12 100 100 100 100 100 100
3/20/2000 87 28 1 0 0 0 100 100 100 40 0 0
3/20/2001 84 0 0 0 0 0 100 91 3 0 0 0
3/20/2002 80 0 0 0 0 0 100 28 0 0 0 0
3/20/2003 75 0 0 0 0 0 100 0 0 0 0 0
3/20/2004 70 0 0 0 0 0 100 0 0 0 0 0
3/20/2005 65 0 0 0 0 0 100 0 0 0 0 0
3/20/2006 60 0 0 0 0 0 100 0 0 0 0 0
3/20/2007 55 0 0 0 0 0 100 0 0 0 0 0
3/20/2008 49 0 0 0 0 0 100 0 0 0 0 0
3/20/2009 42 0 0 0 0 0 100 0 0 0 0 0
3/20/2010 35 0 0 0 0 0 100 0 0 0 0 0
3/20/2011 26 0 0 0 0 0 100 0 0 0 0 0
3/20/2012 17 0 0 0 0 0 100 0 0 0 0 0
3/20/2013 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2014 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2015 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2016 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2017 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2018 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2019 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2020 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2021 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2022 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2023 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2024 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2025 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2026 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2027 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2028 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(2) 8.9 1.5 1.1 0.9 0.8 0.7 14.8 3.7 2.6 2.0 1.6 1.4
Weighted Average Life
to Call (years)(2) 8.9 1.5 1.1 0.9 0.8 0.7 14.8 3.7 2.6 2.0 1.6 1.4
</TABLE>
<TABLE>
<CAPTION>
Class A-3 Class A-4
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
3/20/1999 100 100 100 100 100 100 100 100 100 100 100 100
3/20/2000 100 100 100 100 83 33 100 100 100 100 100 100
3/20/2001 100 100 100 33 0 0 100 100 100 100 58 0
3/20/2002 100 100 47 0 0 0 100 100 100 93 30 0
3/20/2003 100 76 10 0 0 0 100 100 100 42 0 0
3/20/2004 100 48 0 0 0 0 100 100 76 10 0 0
3/20/2005 100 25 0 0 0 0 100 100 46 0 0 0
3/20/2006 100 11 0 0 0 0 100 100 33 0 0 0
3/20/2007 100 0 0 0 0 0 100 95 17 0 0 0
3/20/2008 100 0 0 0 0 0 100 75 2 0 0 0
3/20/2009 100 0 0 0 0 0 100 55 0 0 0 0
3/20/2010 100 0 0 0 0 0 100 37 0 0 0 0
3/20/2011 100 0 0 0 0 0 100 20 0 0 0 0
3/20/2012 100 0 0 0 0 0 100 6 0 0 0 0
3/20/2013 76 0 0 0 0 0 100 0 0 0 0 0
3/20/2014 32 0 0 0 0 0 100 0 0 0 0 0
3/20/2015 24 0 0 0 0 0 100 0 0 0 0 0
3/20/2016 14 0 0 0 0 0 100 0 0 0 0 0
3/20/2017 4 0 0 0 0 0 100 0 0 0 0 0
3/20/2018 0 0 0 0 0 0 91 0 0 0 0 0
3/20/2019 0 0 0 0 0 0 81 0 0 0 0 0
3/20/2020 0 0 0 0 0 0 70 0 0 0 0 0
3/20/2021 0 0 0 0 0 0 57 0 0 0 0 0
3/20/2022 0 0 0 0 0 0 44 0 0 0 0 0
3/20/2023 0 0 0 0 0 0 29 0 0 0 0 0
3/20/2024 0 0 0 0 0 0 13 0 0 0 0 0
3/20/2025 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2026 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2027 0 0 0 0 0 0 0 0 0 0 0 0
3/20/2028 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(2)15.9 6.2 4.1 3.0 2.3 2.0 23.4 11.4 7.3 5.0 3.6 2.6
Weighted Average Life
to Call (years)(2) 15.9 6.2 4.1 3.0 2.3 2.0 23.4 11.4 7.3 5.0 3.6 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.
S-36
<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
3/20/1999 100 100 100 100 100 100 100 100 100 100 100 100
3/20/2000 100 100 100 100 100 100 100 100 100 100 100 100
3/20/2001 100 100 100 100 100 72 100 100 100 100 100 100
3/20/2002 100 100 100 100 100 68 99 92 89 90 92 99
3/20/2003 100 100 100 100 82 23 98 83 80 78 77 80
3/20/2004 100 100 100 100 51 9 97 74 67 61 57 54
3/20/2005 100 100 100 84 34 6 94 63 53 45 38 33
3/20/2006 100 100 100 77 34 6 86 39 26 17 14 18
3/20/2007 100 100 100 62 28 6 78 24 13 7 4 8
3/20/2008 100 100 100 48 20 5 69 14 6 2 1 1
3/20/2009 100 100 82 35 14 0 61 9 3 1 0 0
3/20/2010 100 100 65 26 7 0 53 5 1 0 0 0
3/20/2011 100 100 51 19 2 0 44 3 1 0 0 0
3/20/2012 100 100 40 12 0 0 36 2 0 0 0 0
3/20/2013 100 58 20 2 0 0 0 0 0 0 0 0
3/20/2014 100 39 10 0 0 0 0 0 0 0 0 0
3/20/2015 100 32 6 0 0 0 0 0 0 0 0 0
3/20/2016 100 26 3 0 0 0 0 0 0 0 0 0
3/20/2017 100 21 1 0 0 0 0 0 0 0 0 0
3/20/2018 100 17 0 0 0 0 0 0 0 0 0 0
3/20/2019 100 13 0 0 0 0 0 0 0 0 0 0
3/20/2020 100 9 0 0 0 0 0 0 0 0 0 0
3/20/2021 100 6 0 0 0 0 0 0 0 0 0 0
3/20/2022 100 3 0 0 0 0 0 0 0 0 0 0
3/20/2023 100 1 0 0 0 0 0 0 0 0 0 0
3/20/2024 100 0 0 0 0 0 0 0 0 0 0 0
3/20/2025 92 0 0 0 0 0 0 0 0 0 0 0
3/20/2026 63 0 0 0 0 0 0 0 0 0 0 0
3/20/2027 30 0 0 0 0 0 0 0 0 0 0 0
3/20/2028 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(2)28.4 16.8 13.3 10.3 7.3 4.6 11.8 7.6 6.9 6.5 6.4 6.5
Weighted Average Life
to Call (years)(2) 26.9 14.7 10.5 7.7 5.8 4.2 11.8 7.6 6.9 6.3 5.7 5.1
</TABLE>
<TABLE>
<CAPTION>
Class M-1 Class M-2
Payment Date 0% 50% 75% 100% 125% 150% 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ---- -- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100 100 100
3/20/1999 100 100 100 100 100 100 100 100 100 100 100 100
3/20/2000 100 100 100 100 100 100 100 100 100 100 100 100
3/20/2001 100 100 100 100 100 100 100 100 100 100 100 100
3/20/2002 100 100 89 66 48 34 100 100 89 66 48 34
3/20/2003 100 100 71 49 33 21 100 100 71 49 33 21
3/20/2004 100 86 57 36 22 13 100 86 57 36 22 13
3/20/2005 100 74 45 26 15 8 100 74 45 26 15 8
3/20/2006 100 63 36 19 10 5 100 63 36 19 10 1
3/20/2007 100 54 28 14 7 0 100 54 28 14 5 0
3/20/2008 100 45 22 10 4 0 100 45 22 10 0 0
3/20/2009 100 38 17 7 0 0 100 38 17 7 0 0
3/20/2010 100 32 14 5 0 0 100 32 14 2 0 0
3/20/2011 100 27 11 2 0 0 100 27 11 0 0 0
3/20/2012 100 22 8 0 0 0 100 22 8 0 0 0
3/20/2013 84 12 3 0 0 0 84 12 0 0 0 0
3/20/2014 64 8 0 0 0 0 64 8 0 0 0 0
3/20/2015 60 7 0 0 0 0 60 5 0 0 0 0
3/20/2016 56 5 0 0 0 0 56 2 0 0 0 0
3/20/2017 52 4 0 0 0 0 52 0 0 0 0 0
3/20/2018 47 1 0 0 0 0 47 0 0 0 0 0
3/20/2019 44 0 0 0 0 0 44 0 0 0 0 0
3/20/2020 41 0 0 0 0 0 41 0 0 0 0 0
3/20/2021 37 0 0 0 0 0 37 0 0 0 0 0
3/20/2022 33 0 0 0 0 0 33 0 0 0 0 0
3/20/2023 29 0 0 0 0 0 29 0 0 0 0 0
3/20/2024 24 0 0 0 0 0 24 0 0 0 0 0
3/20/2025 19 0 0 0 0 0 19 0 0 0 0 0
3/20/2026 13 0 0 0 0 0 13 0 0 0 0 0
3/20/2027 6 0 0 0 0 0 4 0 0 0 0 0
3/20/2028 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(2)20.6 10.3 7.6 5.9 4.9 4.5 20.6 10.2 7.6 5.8 4.8 4.3
Weighted Average Life
to Call (years)(2) 20.3 10.0 7.0 5.4 4.5 4.2 20.3 10.0 7.0 5.4 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.
S-37
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL
BALANCE(1)
Class B
Payment Date 0% 50% 75% 100% 125% 150%
-- --- --- ---- ---- ----
Initial 100 100 100 100 100 100
3/20/1999 100 100 100 100 100 100
3/20/2000 100 100 100 100 100 100
3/20/2001 100 100 100 100 100 100
3/20/2002 100 100 89 66 48 34
3/20/2003 100 100 71 49 33 20
3/20/2004 100 86 57 36 21 8
3/20/2005 100 74 45 26 11 0
3/20/2006 100 63 36 17 3 0
3/20/2007 100 54 28 9 0 0
3/20/2008 100 45 22 4 0 0
3/20/2009 100 38 15 0 0 0
3/20/2010 100 32 9 0 0 0
3/20/2011 100 27 4 0 0 0
3/20/2012 100 22 1 0 0 0
3/20/2013 84 6 0 0 0 0
3/20/2014 64 0 0 0 0 0
3/20/2015 60 0 0 0 0 0
3/20/2016 56 0 0 0 0 0
3/20/2017 52 0 0 0 0 0
3/20/2018 47 0 0 0 0 0
3/20/2019 44 0 0 0 0 0
3/20/2020 41 0 0 0 0 0
3/20/2021 37 0 0 0 0 0
3/20/2022 33 0 0 0 0 0
3/20/2023 29 0 0 0 0 0
3/20/2024 24 0 0 0 0 0
3/20/2025 17 0 0 0 0 0
3/20/2026 8 0 0 0 0 0
3/20/2027 0 0 0 0 0 0
3/20/2028 0 0 0 0 0 0
Weighted Average Life
to Maturity (years)(2) 20.5 10.0 7.3 5.6 4.6 4.0
Weighted Average Life
to Call (years)(2) 20.3 10.0 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.
Payment Lag Feature of Offered Certificates
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Home Equity Loan (net of the Servicing
Fee) received by the Servicer during each Remittance Period is to be remitted to
the Trustee on or prior to the related Monthly Remittance Date while the Trustee
will not be required to distribute any such amounts to the Owners of the Offered
Certificates until the next succeeding Payment Date. As a result, the monthly
distributions to the Owners of the Offered Certificates generally reflect
Mortgagor payments during the prior Remittance Period, and the first Payment
Date will not occur until April 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 September 2000, the Class A-6 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 extremely high rates
of prepayment.
S-38
<PAGE>
The following table sets forth percentages for the sensitivity of the
Class A-7IO Certificates to prepayments based on the modeling assumptions set
forth above.
Pre-Tax Yield to Maturity (1)--
Sensitivity of the Class A-7IO Certificates to Prepayments
<TABLE>
<CAPTION>
Percentage of the Prepayment Assumption
100% 150% 175% 200% 225% 250%
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
At a Price of 18.62500%(2) 7.033% 7.033% 7.033% 7.033% 3.039% -7.714%
At a Price of 18.68750%(2) 6.766% 6.766% 6.766% 6.766% 2.769% -7.991%
At a Price of 18.75000%(2) 6.500% 6.500% 6.500% 6.500% 2.500% -8.268%
At a Price of 18.81250%(2) 6.236% 6.236% 6.236% 6.236% 2.233% -8.542%
At a Price of 18.87500%(2) 5.973% 5.973% 5.973% 5.973% 1.967% -8.815%
</TABLE>
- --------------------
(1) Represented on a corporate bond equivalent basis.
(2) As a percent of the Notional Principal Amount as of the Cut-Off Date.
Accrued interest will be added to such price after calculating the
yields set forth in the table.
The yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flow to be paid on the Class A-7IO Certificates would cause the
discounted present value of such assumed cash flows to equal the assumed
purchase price of the Class A-7IO Certificates plus accrued interest and by
converting such monthly rates to corporate bond equivalent rates. Such
calculations do not take into account variations that may occur in the interest
rates at which investors may be able to reinvest funds received by them as
distributions on the Class A-7IO Certificates.
The Home Equity Loans will not necessarily have the characteristics
assumed above, and there can be no assurance that (i) the Home Equity Loans will
prepay at any of the rates shown in the table or at any other particular rate or
will prepay proportionately, (ii) the pre-tax yield on the Class A-7IO
Certificates will correspond to any of the pre-tax yields shown above or (iii)
the purchase price of the Class A-7IO Certificates will be equal to any of the
purchase prices assumed.
FORMATION OF THE TRUST AND TRUST PROPERTY
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement. The Seller will convey without recourse the Home Equity
Loans to the Depositor, the Depositor will convey without recourse the Home
Equity Loans to the Trust and the Trust will issue the Offered Certificates and
the Class R Certificates to the Owners thereof.
The property of the Trust shall include all (a) the Home Equity Loans
together with the related Home Equity Loan documents and the Seller's interest
in any Property which secures a Home Equity Loan and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing, (b) such
amounts as may be held by the Trustee in the Certificate Account, the Upper-Tier
Distribution Account (as defined in the Pooling and Servicing Agreement), the
Pre-Funding Account, the Capitalized Interest Account and any other accounts
held by the Trustee for the Trust together with investment earnings on such
amounts and such amounts may be held by the Servicer in the Principal and
Interest Account, if any, exclusive of investment earnings thereon (except as
otherwise provided) whether in the form of cash, instruments, securities or
other properties and (c) proceeds of all the foregoing (including, but not by
way of limitation, all proceeds of any mortgage insurance, hazard insurance and
title insurance policy relating to the Home Equity Loans, cash proceeds,
accounts, accounts receivable, notes, drafts, acceptances, chattel paper,
checks, deposit accounts, rights to payment of any and every kind, and other
forms of obligations and receivables which at any time constitute all or part of
or are included in the proceeds of any of the foregoing) to pay the Certificates
as specified in the Pooling and Servicing Agreement (collectively, the "Trust
Estate").
The Offered Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Seller, the Servicer or any of their affiliates.
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
S-39
<PAGE>
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.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Home
Equity Loans and the Properties is based upon the Initial Home Equity Loans as
constituted at the close of business on the Cut-Off Date. Prior to the issuance
of the Offered Certificates, Initial Home Equity Loans may be removed from the
pool as a result of incomplete documentation or non-compliance with
representations and warranties set forth in the Pooling and Servicing Agreement,
if the Seller deems such removal necessary or appropriate. The Subsequent Home
Equity Loans will be added to the pool after the issuance of the Offered
Certificates.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, and incorporated by reference to the
Registration Statement together with the Pooling and Servicing Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates and within 15 days of the addition of any
Subsequent Home Equity Loans. In the event Home Equity Loans are removed from or
added to, or Subsequent Home Equity Loans are added to, the pool as set forth in
the preceding paragraph, such removal or addition will be noted in a current
report on Form 8-K.
DESCRIPTION OF THE OFFERED CERTIFICATES
General
Each Offered Certificate will represent certain undivided, fractional
ownership interests in the Trust Estate created and held pursuant to the Pooling
and Servicing Agreement, subject to the limits and the priority of distribution
described therein.
Payment Dates
On each Payment Date, the Owners of each Class of the Offered
Certificates will be entitled to receive, from amounts then on deposit in the
certificate account established and maintained by the Trustee in accordance with
the Pooling and Servicing Agreement (the "Certificate Account") and until the
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 Certificates--Book Entry
Registration" in the Prospectus.
S-40
<PAGE>
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.
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 0.11% and (y) the Available Funds Cap. The "Expense Fee
Rate" will equal the sum of the per annum rates at which the Servicing Fee, the
Trustee Fee and any Trustee Reimbursable Expenses (as defined in the Pooling and
Servicing Agreement) are calculated.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from monies then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement with respect to interest and principal:
Interest: On each Payment Date the Interest Remittance Amount will be
distributed in the following order of priority:
First, to the Trustee, the Trustee Fee and any Trustee Reimbursable
Expenses;
Second, to the Owners of the Class A Certificates (including the Class
A-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)
with respect to which 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,
S-41
<PAGE>
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 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
S-42
<PAGE>
Owners of the Class A-6 Certificates will be entitled to receive the entire
Class A Principal Distribution Amount for such Payment Date.
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.
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 any Accrual Period,
the second London business day preceding the commencement of such Accrual Period
(or, in the case of the first Accural Period, the second London business day
preceding the Closing Date). For purposes of determining LIBOR, a "London
business day" is any day on which dealings in deposits of United States dollars
are transacted in the London interbank market.
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices).
"Reference Banks" means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market.
Pre-Funding Account
On the Closing Date, the Pre-Funded Amount will be deposited in the
Pre-Funding Account, which account shall be in the name of and maintained by the
Trustee and shall be part of the Trust. During the Funding Period, the
Pre-Funded Amount will be maintained in the Pre-Funding Account. The Pre-Funded
Amount will be reduced during the Funding Period by the amount thereof used to
purchase Subsequent Home Equity Loans in accordance with the Pooling and
Servicing Agreement. Any Pre-Funded Amount remaining at the end of the Funding
Period will be distributed to the Owners of the applicable Class or Classes of
Offered Certificates (other than the Class A-7IO Certificates) then entitled to
receive principal payments on the Payment Date immediately following the end of
the Funding Period in reduction of the Certificate Principal Balance of such
Owner's Certificates, thus resulting in a partial principal prepayment of such
Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments. All interest and any other investment earnings on amounts
on deposit in the Pre-Funding Account will be deposited in the Capitalized
Interest Account and, to the extent required by the Pooling and Servicing
Agreement, then deposited in the Certificate Account prior to each Payment Date
during the Funding Period. The Pre-Funding Account will not be an asset of
either the Lower-Tier REMIC or the Upper-Tier REMIC.
Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust. The amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon, will be used by the Trustee on
each Payment Date during and immediately after the Funding Period to fund the
excess, if any, of (x) the interest accruing on the outstanding Pre-Funded
Amount as of the end of the related Remittance Period at a rate equal to (i) the
weighted average of the Pass-
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Through Rates on the Offered Certificates (except for the Class A-7IO
Certificates) and (ii) the Current Interest on the Class A-7IO Certificates
expressed as a percentage of the Aggregate Certificate Principal Balance over
(y) the amount of any reinvestment income on monies on deposit in the
Pre-Funding Account; such amounts on deposit will be so applied by the Trustee
on each Payment Date during and immediately following the end of the Funding
Period to fund such excess, if any. Any amounts remaining in the Capitalized
Interest Account at the end of the Funding Period and not needed for such
purpose will be paid to the depositor of such funds immediately after the
Funding Period.
Amounts on deposit in the Capitalized Interest Account will be invested
in Eligible Investments. The Capitalized Interest Account will not be an asset
of the Lower-Tier REMIC or the Upper-Tier REMIC.
Book Entry Registration of the Offered Certificates
The Offered Certificates will originally be book-entry Certificates
(the "Book-Entry Certificates"). Persons acquiring beneficial ownership
interests in such Book-Entry Certificates ("Beneficial Owners") may elect to
hold their Book-Entry Certificates directly through DTC in the United States, or
Cedel or Euroclear (in Europe) if they are participants of such system
("Participants"), or indirectly through organizations which are Participants.
The Book-Entry Certificates will be issued in one or more certificates per class
of Offered Certificates which in the aggregate equal the principal balance of
such Offered Certificates and will initially be registered in the name of Cede &
Co., the nominee of DTC. Cedel and 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.
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
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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 -- Taxation of Certain Foreign Investors" and -- "Backup
Withholding" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures -- Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, 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
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simultaneous transfers of securities and cash. Transactions may now be settled
in any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York (the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear Securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
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
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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.
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
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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 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.
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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)
$21,500,000. 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 level of the Targeted Overcollateralization Amount.
On and after the Stepdown Date, the Targeted Overcollateralization
Amount is permitted to decrease or "stepdown," below the $21,500,000 level to a
level equal to 4.30% of the then current aggregate outstanding Loan Balance
(subject to a floor of $5,000,000). 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.
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"Class B Applied Realized Loss Amount" means, as to any Payment Date,
the lesser of (x) the Class B Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such Payment
Date, but prior to the application of the Class B Applied Realized Loss Amount,
if any, on such Payment Date) and (y) the Applied Realized Loss Amount as of
such Payment Date.
"Class B Certificate Principal Balance" means, as of any date of
determination, the Original Class B Certificate Principal Balance as reduced by
the sum of (x) all amounts actually distributed to the Owners of the Class B
Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Class B Applied Realized Loss Amounts on all
prior Payment Dates.
"Class B Realized Loss Amortization Amount" means, as of any Payment
Date, the lesser of (x) the Class B Unpaid Realized Loss Amount as of such
Payment Date and (y) the excess of (i) the Monthly Excess Cashflow Amount over
(ii) the sum of the Extra Principal Distribution Amount, the Class M-1 Realized
Loss Amortization Amount, the Class M-2 Realized Loss Amortization Amount, the
Class M-1 Interest Carry Forward Amount, the Class M-2 Interest Carry Forward
Amount and the Class B Interest Carry Forward Amount in each case for such
Payment Date.
"Class M-1 Applied Realized Loss Amount" means, as to any Payment Date,
the lesser of (x) the Class M-1 Certificate Principal Balance (after taking into
account the distribution of the Principal Distribution Amount on such Payment
Date, but prior to the application of the Class M-1 Applied Realized Loss
Amount, if any, on such Payment Date) and (y) the excess of (i) the Applied
Realized Loss Amount as of such Payment Date over (ii) the sum of the Class 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 Initial Home Equity Loan and all its
right, title and interest in and to principal and interest due on each such
Initial Home Equity Loan after the Cut-Off Date; provided, however, that the
Seller will reserve and retain all its right, title and interest in and to
principal (including Prepayments received on or before the Cut-Off Date) and
interest due on each Initial Home Equity Loan on or prior to the Cut-Off Date
(whether or not received on or prior to the Cut-Off Date). Purely as a
protective measure and not to be construed as contrary to the parties' intent
that the transfer on the Closing Date is a sale, the Seller has also been deemed
to have granted to the Depositor and the Depositor has also been deemed to have
granted to the Trustee a security interest in the Trust Estate in the event that
the transfer of the Trust Estate is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Initial Home
Equity Loans on the Closing Date and the Subsequent Home Equity Loans on each
Subsequent Transfer Date, the Seller will be required to:
(i) deliver without recourse to BankBoston, N.A. (the
"Custodian") on behalf of the Trustee on the Closing Date with respect
to each Initial Home Equity Loan or on each Subsequent Transfer Date
with respect to each Subsequent Home Equity Loan identified in the
related Schedule of Home Equity Loans (A) the original Notes, endorsed
in blank or to the order of the Trustee, (B) (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 with
respect to the Initial Home Equity Loans, or Subsequent Transfer Date
with respect to Subsequent Home Equity Loans, assignments of the
Mortgages to "The Chase Manhattan Bank, as Trustee of IMC Home Equity
Loan Trust 1998-1 under the Pooling and Servicing Agreement dated as of
March 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 with
respect to the Initial Home Equity Loans or on each Subsequent Transfer
Date with respect to the Subsequent Home Equity Loans, at the Seller's
expense, an opinion of counsel with respect to the relevant
jurisdiction that such recording is not required to perfect the
Trustee's interests in the related Mortgages Loans (in form
satisfactory to the Trustee and the Rating Agencies);
(iii) deliver the title insurance policy, the original
Mortgages and such recorded assignments, together with originals or
duly certified copies of any and all prior assignments (other than
unrecorded warehouse assignments), to the Custodian on behalf of the
Trustee within 15 days of receipt thereof by the Seller (but in any
event, with respect to any Mortgage as to which original recording
information has been made available to the Seller, within one year
after the Closing Date with respect to the Initial Home Equity Loans,
or each Subsequent Transfer Date with respect to the Subsequent Home
Equity Loans); and
(iv) furnish to the Trustee and the Rating Agencies, at the
Seller's expense, an opinion of counsel with respect to the sale and
perfection of all Subsequent Home Equity Loans delivered to the Trust
in form and substance satisfactory to the Trustee and the Rating
Agencies.
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The Trustee will agree, for the benefit of the Owners, to cause the
Custodian to review each File within 45 days after the Closing Date or
Subsequent Transfer Date (or the date of receipt of any documents delivered to
the Trustee after the Closing Date or Subsequent Transfer Date) to ascertain
that all required documents (or certified copies of documents) have been
executed and received.
If the Custodian on behalf of the Trustee during such 45-day period
finds any document constituting a part of a File which is not properly executed,
has not been received, is unrelated to the Home Equity Loans or that any Home
Equity Loan does not conform in a material respect to the description thereof as
set forth in the Schedule of Home Equity Loans, the Custodian on behalf of the
Trustee will be required to promptly notify the Depositor, the Seller and the
Owners. The Seller will agree in the Pooling and Servicing Agreement to use
reasonable efforts to remedy a material defect in a document constituting part
of a File of which it is so notified by the Custodian on behalf of the Trustee.
If, however, within 90 days after such notice to it respecting such defect the
Seller shall not have remedied the defect and the defect materially and
adversely affects the interest in the related Home Equity Loan of the Owners,
the Seller will be required on the next succeeding Monthly Remittance Date to
(or will cause an affiliate of the Seller to) (i) substitute in lieu of such
Home Equity Loan a Qualified Replacement Mortgage and deliver the Substitution
Amount to the Trustee on behalf of the Trust as part of the Monthly Remittance
remitted by the Servicer on such Monthly Remittance Date or (ii) purchase such
Home Equity Loan at a purchase price equal to the Loan Purchase Price thereof,
which purchase price shall be delivered to the Trust along with the Monthly
Remittance remitted by the Servicer on such Monthly Remittance Date.
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,
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or (ii) invested in Eligible Investments (as defined in the Pooling and
Servicing Agreement). Any investment of funds in the Principal and Interest
Account must mature or be withdrawable at par on or prior to the immediately
succeeding Monthly Remittance Date. Any investment earnings on funds held in the
Principal and Interest Account are for the account of, and any losses therein
are also for the account of, and must be promptly replenished by, the Servicer.
The Servicer is required to deposit to the Principal and Interest
Account, within one business day following receipt, all principal and interest
due on the Home Equity Loans after the Cut-Off Date, including any Prepayments
received after the Cut-Off Date, the proceeds of any liquidation of a Home
Equity Loan net of expenses and unreimbursed Delinquency Advances ("Net
Liquidation Proceeds"), any income from REO Properties and Delinquency Advances,
but net of (i) Net Liquidation Proceeds to the extent that such Net Liquidation
Proceeds exceed the sum of (a) the Loan Balance of the related Home Equity Loan
immediately prior to liquidation, (b) accrued and unpaid interest on such Home
Equity Loan (net of the Servicing Fee) to the date of such liquidation and (c)
any Realized Losses during the related Remittance Period, (ii) principal
(including Prepayments) collected and interest due on the Home Equity Loans on
or prior to the Cut-Off Date, (iii) reimbursements for Delinquency Advances, and
(iv) reimbursement for amounts deposited in the Principal and Interest Account
representing payments of principal and/or interest on a Note by a Mortgagor
which are subsequently returned by a depository institution as unpaid (all such
net amounts being referred to herein as the "Daily Collections").
The Servicer may make withdrawals for its own account from the
Principal and Interest Account in the following order and only for the following
purposes:
(i) on each Monthly Remittance Date, to pay itself the
Servicing Fee;
(ii) to withdraw investment earnings on amounts on deposit
in the Principal and Interest Account;
(iii) to withdraw amounts that have been deposited to the
Principal and Interest Account in error;
(iv) to reimburse itself for unrecovered Delinquency
Advances and for any excess interest collected from a Mortgagor; and
(v) to clear and terminate the Principal and Interest
Account following the termination of the Trust.
The Servicer will remit to the Trustee for deposit in the Certificate
Account the Daily Collections allocable to a Remittance Period not later than
the related Monthly Remittance Date, and Loan Purchase Prices and Substitution
Amounts two Business Days following the related repurchase or substitution, as
the case may be.
On each Monthly Remittance Date, the Servicer shall be required to
remit to the Trustee for deposit to the Certificate Account out of the
Servicer's own funds any Delinquent payment of interest with respect to each
Delinquent Home Equity Loan, which payment was not received on or prior to the
related Monthly Remittance Date and was not theretofore advanced by the
Servicer. Such amounts of the Servicer's own funds so deposited are "Delinquency
Advances." The Servicer may reimburse itself on any Business Day for any
Delinquency Advances paid from the Servicer's own funds, from collections on any
Home Equity Loan that are not required to be distributed on the Payment Date
occurring during the month in which such reimbursement is made (such amount to
be replaced on future dates to the extent necessary) or from the Certificate
Account out of the Monthly Excess Cashflow Amount.
Notwithstanding the foregoing, in the event that the Servicer
determines in its reasonable business judgment in accordance with the servicing
standards of the Pooling and Servicing Agreement that any proposed Delinquency
Advance if made would not be recoverable, the Servicer shall not be required to
make such Delinquency Advances with respect to such Home Equity Loan. To the
extent that the Servicer previously has made Delinquency Advances with respect
to a Home Equity Loan that the Servicer subsequently determines to be
nonrecoverable, the Servicer shall be entitled to reimbursement for such
aggregate unreimbursed Delinquency Advances as provided above. The Servicer
shall give written notice of such determination as to why such amount is or
would be nonrecoverable to the Trustee.
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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 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 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;
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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 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
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insolvency on the part of the Servicer; (b) certain failures on the part of the
Servicer to perform its obligations under the Pooling and Servicing Agreement
(including certain performance tests related to the delinquency rate and
cumulative losses of the Home Equity Loan Pool); (c) the failure to cure
material breaches of the Servicer's representations in the Pooling and Servicing
Agreement; or (d) certain mergers or other combinations of the Servicer with
another entity.
The Servicer is not permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Servicer so
causing such conflict being of a type and nature carried on by the Servicer on
the date of the Pooling and Servicing Agreement. Any such determination
permitting the resignation of the Servicer is required to be evidenced by an
opinion of counsel to such effect which shall be delivered, and reasonably
acceptable, to the Trustee.
Upon removal or resignation of the Servicer, the Trustee may (A)
solicit bids for a successor servicer as described in the Pooling and Servicing
Agreement and (B) until such time as a successor Servicer is appointed pursuant
to the terms of the Pooling and Servicing Agreement, shall serve in the capacity
of Backup Servicer. The Trustee, if it is unable to obtain a qualifying bid and
is prevented by law from acting as servicer, will be required to appoint, or
petition a court of competent jurisdiction to appoint, any housing and home
finance institution, bank or mortgage servicing institution designated as an
approved seller-servicer by FHLMC or 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);
ii) the amount of such distributions allocable to principal on
the Home Equity Loans, separately identifying the aggregate amount of
any prepayments in full or Prepayments or other recoveries of principal
included therein and any Pre-Funded Amounts distributed as a prepayment
(based on a Certificate in the original principal amount of $1,000) and
any Extra Principal Distribution Amount;
iii) the amount of such distribution allocable to interest on
the Home Equity Loans (based on a Certificate in the original principal
amount of $1,000);
iv) the Interest Carry-Forward Amount for each Class;
v) the principal amount of each Class of Offered Certificate
(based on a Certificate in the original principal amount of $1,000)
which will be Outstanding after giving effect to any payment of
principal on such Payment Date;
vi) the aggregate Loan Balance of all Home Equity Loans after
giving effect to any payment of principal on such Payment Date;
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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;
xiv) the amount of any Applied Realized Loss Amount, Realized
Loss Amortizations Amount and Unpaid Realized Loss Amount for each
Class as of the close of such Payment Date; and
xv) for the Payment Dates during and immediately following the
Funding Period, the total remaining Pre-Funded Amount in the
Pre-Funding Account.
Certain obligations of the Trustee to provide information to the Owners
are conditioned upon such information being received from the Servicer.
In addition, on the Business Day preceding each Payment Date the
Trustee will be required to distribute to each Owner and the Rating Agencies,
together with the information described above, the following information
prepared by the Servicer and furnished to the Trustee for such purpose:
(a) the number and aggregate principal balances of Home Equity
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent, (iii) 90
or more days delinquent, as of the close of business on the last day of
the calendar month immediately preceding the Payment Date, (iv) the
numbers and aggregate Loan Balances of all Home Equity Loans as of such
Payment Date and (v) the percentage that each of the amounts
represented by clauses (i), (ii) and (iii) represent as a percentage of
the respective amounts in clause (iv);
(b) the status and the number and dollar amounts of all Home
Equity Loans in foreclosure proceedings as of the close of business on
the last day of the calendar month immediately preceding such Payment
Date;
(c) the number of Mortgagors and the Loan Balances of (i) the
related Mortgages involved in bankruptcy proceedings as of the close of
business on the last day of the calendar month immediately preceding
such Payment Date and (ii) Home Equity Loans that are "balloon" loans;
(d) the existence and status of any Properties as to which
title has been taken in the name of, or on behalf of the Trustee, as of
the close of business of the last day of the calendar month immediately
preceding the Payment Date;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the close
of business on the last day of the calendar month immediately preceding
the Payment Date;
(f) the amount of cumulative Realized Losses 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
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(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
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.
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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
Upper-Tier REMIC or the Lower-Tier REMIC does not and will no longer qualify as
a "REMIC" pursuant to Section 860D of the Code (the "Final Determination"), at
any time on or after the date which is 30 calendar days following such Final
Determination, the Owners of a majority in Percentage Interests represented by
the Offered Certificates then Outstanding may direct the Trustee on behalf of
the Trust to adopt a plan of complete liquidation, as contemplated by Section
860F(a)(4) of the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following section discusses certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Offered Certificates. Such section must be considered only in connection
with "Federal Income Tax Consequences" in the Prospectus. The discussion herein
and in the Prospectus is based upon laws, regulations, rulings and decisions now
in effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
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 Lower-Tier
REMIC and the Upper-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 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
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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 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
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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 Bear, Stearns & Co. 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;
(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").
On July 21, 1997, the DOL published in the Federal Register amendments
to the Exemptions ("PTE 97-34"), which extend exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendments generally allow Mortgage Loans supporting payments
to Owners, and having a principal amount equal to no more than 25% of the total
principal amount of the Certificates being offered by the Trust, to be
transferred to the Trust within a funding period no longer than 90 days or three
months following the Closing Date instead of requiring that all such Mortgage
Loans be either identified or transferred on or before the Closing Date. The
relief will apply to the purchase, sale and holding of the Class A Certificates,
provided that the following general conditions are met:
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(1) the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being offered
("Pre-Funding Limit") does not exceed 25%;
(2) all Subsequent Home Equity Loans meet the same terms and
conditions for eligibility as the original Home Equity Loans used to
create the Trust, which terms and conditions have been approved by the
Rating Agencies;
(3) the transfer of such Subsequent Home Equity Loans to the
Trust during the Funding Period does not result in the Certificates to
be covered by the Exemptions receiving a lower credit rating from a
Rating Agency upon termination of the Funding Period than the rating
that was obtained at the time of the initial issuance of the
Certificates by the Trust;
(4) solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "Average Interest Rate")
for all of the Home Equity Loans and Subsequent Home Equity Loans in
the Trust at the end of the Funding Period is not more than 100 basis
points lower than the Average Interest Rate for the Home Equity Loans
which were transferred to the Trust on the Closing Date;
(5) either: (i) the characteristics of the Subsequent Home
Equity Loans are monitored by an insurer or other credit support
provider which is independent of the Company; or (ii) an independent
accountant retained by the Company provides the Company with a letter
(with copies provided to the Rating Agencies, the Underwriters and the
Trustee) stating whether or not the characteristics of the Subsequent
Home Equity Loans conform to the characteristics described in the
Prospectus or Prospectus Supplement and/or Pooling and Servicing
Agreement. In preparing such letter, the independent accountant must
use the same type of procedures as were applicable to the Home Equity
Loans which were transferred to the Trust as of the Closing Date;
(6) the Funding Period ends no later than three months or 90
days after the Closing Date or earlier in certain circumstances if the
Pre-Funding Account falls below the minimum level specified in the
Pooling and Servicing Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and/or
Capitalized Interest Account used in connection with the pre-funding
may be invested only in investments which are permitted by the Rating
Agencies and; (i) are direct obligations of, or obligations fully
guaranteed as to timely payment of principal and interest by, the
United States or any agency or instrumentality thereof (provided that
such obligations are backed by the full faith and credit of the United
States); or (ii) have been rated (or the obligor has been rated) in one
of the three highest generic rating categories by such Rating Agency;
(8) the Prospectus or Prospectus Supplement describes: (i) any
Pre-Funding Account and/or Capitalized Interest Account; (ii) the
duration of the Funding Period; (iii) the percentage and/or dollar
amount of the Pre-Funding Limit for the Funding Period that will be
remitted to Owners as repayments of principal; and (iv) that the
amounts remaining in the Pre-Funding Account at the end of the Funding
Period will be remitted to Owners as repayments of principal; and
(9) the Pooling and Servicing Agreement describes the
permitted investments for the Pre- Funding Account and/or Capitalized
Interest Account and, if not disclosed in the Prospectus or Prospectus
Supplement, the terms and conditions for eligibility of Subsequent Home
Equity Loans.
It is believed that all of the conditions for exemptive relief under
the amendments to the Exemptions with respect to pre-funding have been or will
be satisfied.
The exemptions do not apply to the initial purchase, the holding or the
subsequent resale of the Mezzanine Certificates and Class B Certificates because
such Certificates are subordinate to certain other Classes of Certificates.
Accordingly, Plans may not purchase the Mezzanine Certificates or Class B
Certificates, except that any insurance company may purchase such Certificates
with assets of its general account if the exemptive relief granted by the DOL
for transactions involving insurance company general accounts in Prohibited
Transaction Exemption 95-60, 60 Fed. Reg.
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35925 (July 12, 1995) ("PTCE 95-60") is available with respect to such
investment. Any insurance company proposing to purchase such Certificates for
its general account should consider whether such relief would be available.
Pursuant to PTCE 95-60 certain representations or opinions must be made to
qualify. By the transferee's acceptance of the Mezzanine Certificates or Class B
Certificates such transferee will be deemed to have represented that either (i)
it is not a Plan and is not acquiring such Certificate with the assets of a Plan
or (ii) such transferee and its acquisition of such Certificates comply with the
requirements in PTCE 95-60. In the event that such representations are violated,
the transferee must provide the opinions provided for under PTCE 95-60 or any
attempted transfers or acquisitions shall be void and of no effect.
In addition, as of the date hereof, there is no single Home Equity Loan
included in the Trust Estate that constitutes more than five percent of the
aggregate unamortized principal balance of the assets of the Trust Estate.
Before purchasing a Class A Certificate based on the Exemption, however, a
fiduciary of a Plan should itself confirm (1) that such Certificate constitutes
a "certificate" for purposes of the Exemption and (2) that the specific
conditions and other requirements set forth in the Exemption would be satisfied.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
as amended by PTE 97-34, and the potential consequences in their specific
circumstances, prior to making an investment in the Offered Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Offered Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
In addition to the matters described above, purchasers of an Offered
Certificate that are insurance companies should consult with their counsel with
respect to the recent United States Supreme Court case interpreting the
fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co.
v. Harris Trust and Savings Bank 114 S.Ct. 517 (1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers using insurance company general account
assets should determine whether the decision affects their ability to make
purchases of the Offered Certificates.
RATINGS
It is a condition of the issuance of the Offered Certificates that the
Offered Certificates receive at least the ratings from the Rating Agencies as
follows:
<TABLE>
<CAPTION>
Class Moody's Standard & Poor's Fitch
----- ------- ----------------- -----
<S> <C> <C> <C>
A-1 through A-6 Aaa AAA AAA
A-7IO Aaa AAAr AAA
M-1 Aa2 AA AA+
M-2 A2 A A+
B Baa3 BBB- BBB
</TABLE>
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, Standard & Poor's, 26
Broadway, New York, New York 10004 and Fitch, One State Street Plaza, 33rd
Floor, New York, New York 10004. Such ratings will be the views only of such
rating agencies. There is no assurance that such ratings will continue for any
period of time or that such ratings will not be revised or withdrawn. Any such
revision or withdrawal of such ratings may have an adverse effect on the market
price of the Offered Certificates. A security rating is not a recommendation to
buy, sell or hold securities.
The ratings assigned by Fitch to pass-through certificates address the
likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Fitch's ratings address the structural and legal aspects
associated with the Certificates, including the nature of the underlying loans
and the credit quality of the credit support provider. Fitch's ratings on home
equity pass-through Certificates do not represent any assessment of the
likelihood or rate of
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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 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 home equity
loans may not be legally authorized to invest in the Offered Certificates.
S-65
<PAGE>
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
------------ ----------------
Bear, Stearns & Co. Inc. $100,281,000
PaineWebber Incorporated 100,281,000
Deutsche Morgan Grenfell Inc. 66,854,000
J.P. Morgan Securities Inc. 66,854,000
------------
Total $334,270,000
============
Class A-2 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $ 41,283,000
PaineWebber Incorporated 41,283,000
Deutsche Morgan Grenfell Inc. 27,522,000
J.P. Morgan Securities Inc. 27,522,000
------------
Total $137,610,000
============
Class A-3 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $ 45,351,000
PaineWebber Incorporated 45,351,000
Deutsche Morgan Grenfell Inc. 30,234,000
J.P. Morgan Securities Inc. 30,234,000
------------
Total $151,170,000
============
Class A-4 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $ 30,492,000
PaineWebber Incorporated 30,492,000
Deutsche Morgan Grenfell Inc. 20,328,000
J.P. Morgan Securities Inc. 20,328,000
------------
Total $101,640,000
============
S-66
<PAGE>
Class A-5 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $ 21,093,000
PaineWebber Incorporated 21,093,000
Deutsche Morgan Grenfell Inc. 14,062,000
J.P. Morgan Securities Inc. 14,062,000
------------
Total $ 70,310,000
============
Class A-6 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $ 21,000,000
PaineWebber Incorporated 21,000,000
Deutsche Morgan Grenfell Inc. 14,000,000
J.P. Morgan Securities Inc. 14,000,000
------------
Total $ 70,000,000
============
Class A-7IO Certificates
Underwriter Percentage Interest
----------- -------------------
Bear, Stearns & Co. Inc. 100.00%
======
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. Bear, Stearns & Co. Inc. is the sole underwriter with
respect to the Class A-7IO Certificates.
Class M-1 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $ 14,250,000
PaineWebber Incorporated 14,250,000
Deutsche Morgan Grenfell Inc. 9,500,000
J.P. Morgan Securities Inc. 9,500,000
------------
Total $ 47,500,000
============
Class M-2 Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $ 13,500,000
PaineWebber Incorporated 13,500,000
Deutsche Morgan Grenfell Inc. 9,000,000
J.P. Morgan Securities Inc. 9,000,000
-------------
Total $ 45,000,000
============
S-67
<PAGE>
Class B Certificates
Underwriters Principal Amount
------------ ----------------
Bear, Stearns & Co. Inc. $ 12,750,000
PaineWebber Incorporated 12,750,000
Deutsche Morgan Grenfell Inc. 8,500,000
J.P. Morgan Securities Inc. 8,500,000
------------
Total $ 42,500,000
============
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..................................... 0.075% 0.050%
A-2..................................... 0.100% 0.070%
A-3..................................... 0.125% 0.085%
A-4..................................... 0.150% 0.100%
A-5..................................... 0.200% 0.150%
A-6..................................... 0.175% 0.125%
A-7IO................................... 0.050% 0.035%
M-1..................................... 0.250% 0.175%
M-2..................................... 0.375% 0.275%
B....................................... 0.500% 0.350%
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.
S-68
<PAGE>
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.
S-69
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
$1,000,000,000 IMC Home Equity Loan Pass-Through Certificates, Series 1998-1
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold such Global Securities through any of DTC,
Cedel or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedel and Euroclear (in such capacity)
and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed securities issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities
I-1
<PAGE>
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.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
I-2
<PAGE>
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Note Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate the income of which is includible in gross income for United States tax
purposes, regardless of its source or a trust if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust. The term "Non-U.S. Person" means any
person who is not a U.S. Person. This summary does not deal with all aspects of
U.S. Federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
I-3
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
<S> <C>
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
Average Interest Rate..........................................................................................S-63
Backup Servicer................................................................................................S-22
Balloon Loans..................................................................................................S-21
Beneficial Owners..............................................................................................S-15
Book-Entry Certificates........................................................................................S-44
Capitalized Interest Account...................................................................................S-14
Cede...........................................................................................................S-15
Cedel..........................................................................................................S-15
Cedel Participants.............................................................................................S-45
Certificate Account............................................................................................S-40
Certificate Principal Balance...................................................................................S-1
Chase Manhattan Bank...........................................................................................S-15
Citibank, N.A..................................................................................................S-15
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-50
Class B Certificate Principal Balance..........................................................................S-50
Class B Certificates............................................................................................S-1
Class B Principal Distribution Amount...........................................................................S-9
Class B Realized Loss Amortization Amount......................................................................S-50
Class Distribution Amount.......................................................................................S-4
Class M-1 Realized Loss Amortization Amount....................................................................S-50
Class M-1 Applied Realized Loss Amount.........................................................................S-50
Class M-1 Certificate Principal Balance........................................................................S-50
Class M-1 Certificates..........................................................................................S-1
Class M-1 Principal Distribution Amount.........................................................................S-8
Class M-2 Applied Realized Loss Amount.........................................................................S-50
Class M-2 Certificate Principal Balance........................................................................S-50
Class M-2 Certificates..........................................................................................S-1
Class M-2 Principal Distribution Amount.........................................................................S-8
Class M-2 Realized Loss Amortization Amount....................................................................S-50
Class R Certificates............................................................................................S-3
Clean-Up Call Date.............................................................................................S-15
Closing Date....................................................................................................S-2
Code...........................................................................................................S-17
Combined Loan-to-Value Ratios..................................................................................S-29
Compensating Interest..........................................................................................S-55
Cooperative....................................................................................................S-46
Coupon Rate.....................................................................................................S-3
CPR............................................................................................................S-34
Current Interest................................................................................................S-5
Custodian.......................................................................................................S-2
Cut-Off Date....................................................................................................S-2
D&P............................................................................................................S-62
Daily Collections..............................................................................................S-54
Date-of-Payment Loans..........................................................................................S-32
Definitive Certificate.........................................................................................S-44
Delinquency Advances...........................................................................................S-54
Depositor.......................................................................................................S-2
DOL............................................................................................................S-61
DTC............................................................................................................S-15
DTC Participants...............................................................................................S-45
ERISA..........................................................................................................S-61
Euroclear......................................................................................................S-15
Euroclear Operator.............................................................................................S-46
Euroclear Participants.........................................................................................S-45
Euroclear System...............................................................................................S-15
European Depositaries..........................................................................................S-44
Exchange Act...................................................................................................S-68
Exemption......................................................................................................S-62
Expense Fee Rate...............................................................................................S-41
Extra Principal Distribution Amount.............................................................................S-9
FannieMae......................................................................................................S-22
FHLMC..........................................................................................................S-23
Final Determination............................................................................................S-60
Financial Intermediary.........................................................................................S-44
Fitch..........................................................................................................S-16
FNMA Guide.....................................................................................................S-53
Funding Period.................................................................................................S-14
Home Equity Loans...............................................................................................S-2
Initial Home Equity Loans.......................................................................................S-3
Interest Amount Available.......................................................................................S-5
Interest Carry Forward Amount...................................................................................S-5
Interest Remittance Amount......................................................................................S-5
LIBOR...........................................................................................................S-1
LIBOR Determination Date.......................................................................................S-43
Loan Balance...................................................................................................S-26
Loan Purchase Price............................................................................................S-51
Lower-Tier REMIC...............................................................................................S-16
Maximum Collateral Amount......................................................................................S-15
Mezzanine Certificates..........................................................................................S-1
Monthly Excess Cashflow Amount.................................................................................S-12
Monthly Remittance Date.........................................................................................S-8
Moody's........................................................................................................S-16
Mortgagor......................................................................................................S-32
Net Liquidation Proceeds.......................................................................................S-54
Non-REMIC Accounts.............................................................................................S-16
</TABLE>
A - 1
<PAGE>
<TABLE>
<S> <C>
Notes..........................................................................................................S-26
Notional Principal Amount.......................................................................................S-1
Offered Certificates............................................................................................S-1
Original Aggregate Loan Balance................................................................................S-26
Overcollateralization Amount....................................................................................S-9
Overcollateralization Deficiency................................................................................S-9
Overcollateralization Release Amount............................................................................S-9
Owners..........................................................................................................S-4
Participants...................................................................................................S-44
Payment Date....................................................................................................S-4
Percentage Interest............................................................................................S-41
Plans..........................................................................................................S-61
Pooling and Servicing Agreement.................................................................................S-2
Preference Amount..............................................................................................S-10
Prepayment Assumption..........................................................................................S-34
Prepayments....................................................................................................S-18
Preservation Expenses..........................................................................................S-55
Pre-Funded Amount..............................................................................................S-14
Pre-Funding Account.............................................................................................S-2
Pre-Funding Limit..............................................................................................S-63
Principal and Interest Account.................................................................................S-53
Principal Distribution Amount...................................................................................S-7
Principal Remittance Amount.....................................................................................S-8
Properties......................................................................................................S-2
Qualified Replacement Mortgage.................................................................................S-51
Rating Agencies................................................................................................S-16
REMIC Opinion..................................................................................................S-51
Realized Loss..................................................................................................S-11
Record Date.....................................................................................................S-4
Register.......................................................................................................S-40
Registrar......................................................................................................S-40
Relevant Depositary............................................................................................S-44
Remittance Period...............................................................................................S-7
Restricted Group...............................................................................................S-62
Riegle Act.....................................................................................................S-20
Rules..........................................................................................................S-44
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-55
Servicing Fee..................................................................................................S-10
SMMEA..........................................................................................................S-17
Standard & Poor's..............................................................................................S-16
Stepdown Date...................................................................................................S-8
Subordinate Certificates........................................................................................S-1
Subsequent Cut-Off Date........................................................................................S-19
Subsequent Home Equity Loans....................................................................................S-2
Subsequent Transfer Agreement..................................................................................S-19
Subsequent Transfer Date.......................................................................................S-14
Substitution Amount............................................................................................S-51
Sub-Servicers..................................................................................................S-22
Sub-Servicing Agreements.......................................................................................S-22
Targeted Overcollateralization Amount..........................................................................S-10
Telerate Page 3750.............................................................................................S-43
Terms and Conditions...........................................................................................S-46
Trigger Event...................................................................................................S-8
Trust...........................................................................................................S-1
Trust Estate...................................................................................................S-39
Trustee.........................................................................................................S-2
Trustee Fee.....................................................................................................S-2
Underwriters...................................................................................................S-66
Unpaid Realized Loss Amount....................................................................................S-50
Upper-Tier REMIC...............................................................................................S-16
Weighted average life..........................................................................................S-34
</TABLE>
A - 2
<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 August 18, 1997.
<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-Trustee's Annual Report" and "-Reports by Trustee to Note Owners"
herein. If specified in the related Prospectus Supplement, a Series of
Securities may be issuable in book-entry form. In such event, the related
Securities will be registered in the name of a Clearing Agency (as defined
herein) and, therefore, the Clearing Agency will be the Owner for purposes
hereof. All reports will be provided to the Clearing Agency, which in turn will
provide such reports to its Clearing Agency Participants (as defined herein).
Such Clearing Agency Participants will then forward such reports to the
beneficial owners of Securities. See "Description of the Securities-Book-Entry
Registration" herein. The Depositor will file or cause to be filed with the
Commission such periodic reports with respect to each Trust as are required
under the Exchange Act and the rules and regulations of the Commission
thereunder. It is the Depositor's intent to suspend filing such reports as soon
as such reports are no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Securities of such Trust offered hereby shall be deemed to be
incorporated by reference into this Prospectus when delivered with respect to
such Trust. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to IMC Securities, Inc., 5901 East Fowler Avenue, Tampa, Florida
33617-2362 (telephone number (813) 984-8801).
<PAGE>
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
<TABLE>
<CAPTION>
Page Page
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<S> <C> <C> <C>
SUMMARY OF PROSPECTUS. . . . . . . . . . . . . . . . . . . .1 CERTAIN LEGAL ASPECTS OF THE MORTGAGE
ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . 38
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . .7 General . . . . . . . . . . . . . . . . . . . . . . . 38
Foreclosure . . . . . . . . . . . . . . . . . . . . . 39
DESCRIPTION OF THE SECURITIES. . . . . . . . . . . . . . . 11 Enforceability of Certain Provisions. . . . . . . . . 43
General . . . . . . . . . . . . . . . . . . . . . . . 11 Soldiers' and Sailors' Civil Relief Act . . . . . . . 44
Classes of Securities . . . . . . . . . . . . . . . . 12
Distributions of Principal and Interest . . . . . . . 13 LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . 44
Book Entry Registration . . . . . . . . . . . . . . . 15
List of Owners of Securities. . . . . . . . . . . . . 15 ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . 45
THE TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . 15 FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . . 46
Mortgage Loans. . . . . . . . . . . . . . . . . . . . 16 Federal Income Tax Consequences For REMIC
Mortgage-Backed Securities. . . . . . . . . . . . . . 18 Securities . . . . . . . . . . . . . . . . . . . . . 47
Other Mortgage Securities . . . . . . . . . . . . . . 18 Taxation of Regular Securities. . . . . . . . . . . . 48
Taxation of Residual Securities . . . . . . . . . . . 53
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . 18 Treatment of Certain Items of REMIC Income and
Expense. . . . . . . . . . . . . . . . . . . . . . . 55
SERVICING OF MORTGAGE LOANS. . . . . . . . . . . . . . . . 23 Tax-Related Restrictions on Transfer of Residual
Payments on Mortgage Loans. . . . . . . . . . . . . . 24 Securities . . . . . . . . . . . . . . . . . . . . . 57
Advances. . . . . . . . . . . . . . . . . . . . . . . 24 Sale or Exchange of a Residual Security . . . . . . . 59
Collection and Other Servicing Procedures . . . . . . 25 Taxes That May Be Imposed on the REMIC Pool . . . . . 59
Primary Mortgage Insurance. . . . . . . . . . . . . . 26 Liquidation of the REMIC Pool . . . . . . . . . . . . 60
Standard Hazard Insurance . . . . . . . . . . . . . . 26 Administrative Matters. . . . . . . . . . . . . . . . 60
Title Insurance Policies. . . . . . . . . . . . . . . 27 Limitations on Deduction of Certain Expenses. . . . . 61
Claims Under Primary Mortgage Insurance Policies Taxation of Certain Foreign Investors . . . . . . . . 61
and Standard Hazard Insurance Policies; Other Backup Withholding. . . . . . . . . . . . . . . . . . 62
Realization Upon Defaulted Loan. . . . . . . . . . . 27 Reporting Requirements. . . . . . . . . . . . . . . . 62
Servicing Compensation and Payment of Expenses. . . . 28 Federal Income Tax Consequences for Securities as
Master Servicer . . . . . . . . . . . . . . . . . . . 28 to Which No REMIC Election Is Made. . . . . . . . .63
Standard Securities . . . . . . . . . . . . . . . . . 63
THE POOLING AND SERVICING AGREEMENT. . . . . . . . . . . . 28 Premium and Discount. . . . . . . . . . . . . . . . . 64
Assignment of Mortgage Assets . . . . . . . . . . . . 28 Stripped Securities . . . . . . . . . . . . . . . . . 66
Evidence as to Compliance . . . . . . . . . . . . . . 30 Reporting Requirements and Backup Withholding . . . . 68
The Trustee . . . . . . . . . . . . . . . . . . . . . 30 Taxation of Certain Foreign Investors . . . . . . . . 68
Administration of the Security Account. . . . . . . . 31 Debt Certificates . . . . . . . . . . . . . . . . . . 69
Reports . . . . . . . . . . . . . . . . . . . . . . . 32 Notes . . . . . . . . . . . . . . . . . . . . . . . . 70
Forward Commitments; Pre-Funding. . . . . . . . . . . 32 Taxation of Certificates Classified as Partnership
Servicer Events of Default. . . . . . . . . . . . . . 33 Interests. . . . . . . . . . . . . . . . . . . . . . 71
Rights Upon Servicer Event of Default . . . . . . . . 33
Amendment . . . . . . . . . . . . . . . . . . . . . . 33 PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . 71
Termination . . . . . . . . . . . . . . . . . . . . . 34
RATINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 71
THE INDENTURE. . . . . . . . . . . . . . . . . . . . . . . 34
General . . . . . . . . . . . . . . . . . . . . . . . 34 LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . 72
Modification of Indenture . . . . . . . . . . . . . . 34
Note Events of Default. . . . . . . . . . . . . . . . 35 FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . 72
Rights Upon Note Events of Default. . . . . . . . . . 36
List of Note Owners . . . . . . . . . . . . . . . . . 36 INDEX TO LOCATION OF PRINCIPAL DEFINED
Annual Compliance Statement . . . . . . . . . . . . . 36 TERMS . . . . . . . . . . . . . . . . . . . . . . . . . .A-1
Indenture Trustee's Annual Report . . . . . . . . . . 37
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
</TABLE>
<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.
<TABLE>
<S> <C>
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
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
evidenced by certificated or noncertificated interests (the "Equity
Certificates") issued under the Trust Agreement, which, unless otherwise
specified in the Prospectus Supplement, are not offered hereby. The
Notes will represent nonrecourse obligations solely of the Issuer, and the
proceeds of the related Trust will be the sole source of payments on the
Notes, except as described herein under "Credit Enhancement" and in the
related Prospectus Supplement.
Trust Assets . . . . . . . . . The assets of a Trust will be mortgage-related assets (the "Mortgage
Assets") consisting of one or more of the following types of assets:
A. The Mortgage Loans . . . . "Mortgage Loans" may include: (i) conventional (i.e., not insured or
guaranteed by any governmental agency) Mortgage Loans secured by
one-to-four family residential properties; (ii) Mortgage Loans secured by
security interests in shares issued by private, non-profit, cooperative
housing corporations ("Cooperatives") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives' buildings; and, (iii)
Mortgage Loans secured by junior liens on the related mortgaged
properties, including home improvement retail installment contracts. See
"The Trusts - Mortgage Loans" herein.
B. Mortgage-
Backed Securities. . . . "Mortgage-Backed Securities" (or "MBS") may include (i) private (that
is, not guaranteed or insured by the United States or any agency or
instrumentality thereof) mortgage participations, mortgage pass-through
certificates or other mortgage-backed securities or (ii) certificates insured
or guaranteed by Federal Home Loan Mortgage Corporation ("FHLMC")
or FannieMae ("FannieMae") or Government National Mortgage
Association ("GNMA"). See "The Trusts - Mortgage-Backed Securities"
herein.
C. Other Mortgage Assets. . . . Trust assets may also include reinvestment income, reserve funds, cash
accounts, insurance policies (including financial guaranty insurance
policies and surety bonds), guaranties, letters of credit or similar types of
credit support or enhancement as described in the related Prospectus
Supplement.
The related Prospectus Supplement for a Series of Securities will describe
the Mortgage Assets to be included in the Trust for such Series.
The Securities . . . . . . . . The Securities of any Series may be issued in one or more classes, as
specified in the Prospectus Supplement. One or more classes of
Securities of each Series (i) may be entitled to receive distributions
allocable only to principal, only to interest or to any combination thereof;
(ii) may be entitled to receive distributions only of prepayments of
principal throughout the lives of the Securities or during specified
periods; (iii) may be subordinated in the right to receive distributions of
scheduled payments of principal, prepayments of principal, interest or any
combination thereof to one or more other classes of Securities of such
Series throughout the lives of the Securities or during specified periods;
(iv) may be entitled to receive such distributions only after the occurrence
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
of events specified in the Prospectus Supplement; (v) may be entitled to
receive distributions in accordance with a schedule or formula or on the
basis of collections from designated portions of the assets in the related
Trust; (vi) as to Securities entitled to distributions allocable to interest,
may be entitled to receive interest at a fixed rate or a rate that is subject
to change from time to time; (vii) may accrue interest, with such accrued
interest added to the principal or notional amount of the Securities, and no
payments being made thereon until certain other classes of the Series have
been paid in full; and (viii) as to Securities entitled to distributions
allocable to interest, may be entitled to distributions allocable to interest
only after the occurrence of events specified in the Prospectus
Supplement and may accrue interest until such events occur, in each case
as specified in the related Prospectus Supplement. The timing and
amounts of such distributions may vary among classes, over time, or
otherwise as specified in the related Prospectus Supplement.
Distributions on
the Securities . . . . . . . The related Prospectus Supplement will specify (i) whether distributions
on the Securities entitled thereto will be made monthly, quarterly,
semi-annually or at other intervals and dates out of the payments received
in respect of the Mortgage Assets included in the related Trust and other
assets, if any, pledged for the benefit of the related holders of the
Securities (the "Owners"); (ii) the amount allocable to payments of
principal and interest on any Payment Date; and (iii) whether all
distributions will be made pro rata to Owners of Securities of the class
entitled thereto.
The aggregate original principal balance of the Securities will equal the
aggregate distributions allocable to principal that such Securities will be
entitled to receive; the Securities will have an aggregate original principal
balance equal to or less than the aggregate unpaid principal balance of the
related Mortgage Assets (plus amounts held in a Pre-Funding Account,
if any) as of the first day of the month of creation of the Trust; and the
Securities will bear interest in the aggregate at a rate (the "Pass-Through
Rate") equal to the interest rate borne by the related Mortgage Assets net
of servicing fees and any other specified amounts.
Pre-Funding Account. . . . . . A Trust may enter into an agreement (each, a "Subsequent Transfer
Agreement") with the Depositor whereby the Depositor will agree to
transfer additional Mortgage Assets to such Trust following the date on
which such Trust is established and the related Securities are issued. Any
Subsequent Transfer Agreement will require that any Mortgage Loans so
transferred conform to the requirements specified in such Subsequent
Transfer Agreement. If a Subsequent Transfer Agreement is to be
utilized, the related Trustee will be required to deposit in a segregated
account (each, a "Pre-Funding Account") all or a portion of the proceeds
received by the Trustee in connection with the sale of one or more classes
of Securities of the related Series; subsequently, the additional Mortgage
Assets will be transferred to the related Trust in exchange for money
released to the Depositor from the related Pre-Funding Account. The
maximum amount deposited in the Pre-Funding Account to acquire
Mortgage Loans for transfer to a Trust will not exceed 25% of the
</TABLE>
3
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<TABLE>
<S> <C>
aggregate principal amount of the Securities offered pursuant to the
related Prospectus Supplement. Each Subsequent Transfer Agreement
will set a specified period during which any such transfers must occur,
which period will not exceed 90 days from the date the Trust is
established. If all moneys originally deposited to such Pre-Funding
Account are not used by the end of such specified period, then any
remaining moneys will be applied as a mandatory prepayment of a class
or classes of Securities as specified in the related Prospectus Supplement.
Optional Termination . . . . . The Servicer, the Seller, the Depositor, or, if specified in the related
Prospectus Supplement, the Owners of a related class of Securities or a
credit enhancer may at their respective options effect early retirement of
a Series of Securities through the purchase of the Mortgage Assets in the
related Trust. See "The Pooling and Servicing Agreement - Termination"
and "The Indenture - Redemption of Notes" herein.
Mandatory Termination. . . . . The Trustee, the Servicer or certain other entities specified in the related
Prospectus Supplement may be required to effect early retirement of a
Series of Securities by soliciting competitive bids for the purchase of the
assets of the related Trust or otherwise. See "Pooling and Servicing
Agreement - Termination" and "The Indenture - Rights Upon Note
Events of Default" herein.
Advances . . . . . . . . . . . The Servicer of the Mortgage Loans will be obligated (but only to the
extent set forth in the related Prospectus Supplement) to advance
delinquent installments of principal and/or interest (less applicable
servicing fees) on the Mortgage Loans in a Trust. Any such obligation to
make advances may be limited to amounts due to the Owners of Securities
of the related Series, to amounts deemed to be recoverable from late
payments or liquidation proceeds, to specified periods or to any
combination thereof, in each case as specified in the related Prospectus
Supplement. Any such advance will be recoverable as specified in the
related Prospectus Supplement. See "Servicing of Mortgage Loans"
herein.
Credit Enhancement . . . . . . If specified in the related Prospectus Supplement, a Series of Securities,
or certain classes within such Series, may have the benefit of one or more
types of credit enhancement ("Credit Enhancement") including but not
limited to overcollateralization, cross support, mortgage pool insurance,
special hazard insurance, financial guaranty insurance policies, a
bankruptcy bond, reserve funds, other insurance, guaranties and similar
instruments and arrangements. Credit Enhancement also may be provided
in the form of subordination of one or more classes of Securities in a
Series under which losses are first allocated to any Subordinated
Securities up to a specified limit. The protection against losses afforded
by any such Credit Enhancement will be limited as described in the
related Prospectus Supplement. See "Credit Enhancement" herein.
Book Entry Registration. . . . Securities of one or more classes of a Series may be issued in book entry
form ("Book Entry Securities") in the name of a clearing agency (a
"Clearing Agency") registered with the Securities and Exchange
Commission, or its nominee. Transfers and pledges of Book Entry
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Securities may be made only through entries on the books of the Clearing
Agency in the name of brokers, dealers, banks and other organizations
eligible to maintain accounts with the Clearing Agency ("Clearing
Agency Participants") or their nominees. Transfers and pledges by
purchasers and other beneficial owners of Book Entry Securities
("Beneficial Owners") other than Clearing Agency Participants may be
effected only through Clearing Agency Participants. All references to the
Owners of Securities shall mean Beneficial Owners to the extent
Beneficial Owners may exercise their rights through a Clearing Agency.
Except as otherwise specified in this Prospectus or a related Prospectus
Supplement, the term "Owners" shall be deemed to include Beneficial
Owners. See "Risk Factors - Book Entry Registration" and "Description
of the Securities - Book Entry Registration" herein.
Federal Income Tax
Consequences. . . . . . . . Federal income tax consequences will depend on, among other factors,
whether one or more elections are made to treat a Trust or specified
portions thereof as a "real estate mortgage investment conduit"
("REMIC") under the Internal Revenue Code of 1986, as amended (the
"Code"), or, if no REMIC election is made, whether the Securities are
considered to be debt obligations, Standard Securities, Stripped Securities
or Partnership Interests. The related Prospectus Supplement for each
Series of Securities will specify whether a REMIC election will be made.
See "Federal Income Tax Consequences" herein and in the related
Prospectus Supplement.
ERISA Considerations . . . . . A fiduciary of any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or the
Code should carefully review with its own legal advisors whether the
purchase or holding of Securities could give rise to a transaction
prohibited or otherwise impermissible under ERISA or the Code. Certain
classes of Securities may not be transferred unless the Trustee or the
Indenture Trustee and the Depositor are furnished with a letter of
representation or an opinion of counsel to the effect that such transfer will
not result in a violation of the prohibited transaction provisions of ERISA
and the Code and will not subject the Trustee or the Indenture Trustee, the
Depositor or the Servicer to additional obligations. See "Description of
the Securities - General" herein and "ERISA Considerations" herein and
in the related Prospectus Supplement.
Legal Investment Matters . . . . Securities that constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") will
be so described in the related Prospectus Supplement. Securities that are
not so qualified may not be legal investments for certain types of
institutional investors, subject, in any case, to any other regulations which
may govern investments by such institutional investors. See "Legal
Investment Matters" herein and in the related Prospectus Supplement.
Use of Proceeds. . . . . . . . Substantially all the net proceeds from the sale of a Series of Securities
will be applied to the simultaneous purchase of the Mortgage Assets
included in the related Trust (or to reimburse the amounts previously used
to effect such purchase), the costs of carrying the Mortgage Assets until
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sale of the Securities and to pay other expenses. See "Use of Proceeds"
herein.
Rating . . . . . . . . . . . . It is a condition to the issuance of each class of Securities that each class
of the Securities of such Series be rated by one or more of Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services
("Standard & Poor's"), Duff & Phelps Credit Rating Co. ("DCR") and
Fitch Investors Service, Inc. ("Fitch" and each of Fitch, Moody's, DCR
and Standard & Poor's, a "Rating Agency") in one of their four highest
rating categories; provided, however, that one or more classes of
Subordinated Securities and Residual Securities need not be so rated. A
security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time. No person is
obligated to maintain any rating on any Security, and, accordingly, there
can be no assurance that the ratings assigned to any class of Securities
upon initial issuance thereof will not be lowered or withdrawn by a Rating
Agency at any time thereafter. If a rating of any class of Securities of a
Series is revised or withdrawn, the liquidity of such class of Securities
may be adversely affected. In general, the ratings address credit risk and
do not represent any assessment of the likelihood or rate of principal
prepayments. See "Risk Factors" herein and "Ratings" in the related
Prospectus Supplement.
Risk Factors . . . . . . . . . Investment in the Securities will be subject to one or more risk factors,
including declines in the value of Mortgaged Properties, prepayment of
Mortgage Loans, higher risks of defaults on particular types of Mortgage
Loans, limitations on security for the Mortgage Loans, limitations on
credit enhancement and various other factors. See "Risk Factors" herein
and in the related Prospectus Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the following risk
factors in connection with the purchase of the Securities:
Limited Liquidity. There will be no market for the Securities of any Series
prior to the issuance thereof, and there can be no assurance that a secondary
market will develop or, if it does develop, that it will provide liquidity of
investment or will continue for the life of the Securities of such Series. The
market value of the Securities will fluctuate with changes in prevailing rates
of interest. Consequently, the sale of Securities in any market that may develop
may be at a discount from the Securities' par value or purchase price. Owners of
Securities generally have no right to request redemption of Securities, and the
Securities are subject to redemption only under the limited circumstances
described in the related Prospectus Supplement. In addition, the Securities will
not be listed on any securities exchange.
Declining Real Estate Market; Geographic Concentration. If the residential
real estate market in general or a regional or local area where Mortgage Assets
for a Trust are concentrated should experience an overall decline in property
values, or a significant downturn in economic conditions, rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. See "The Trusts - Mortgage Loans"
herein.
Limited Obligations. The Securities will not represent an interest in or
obligation of the Depositor. The Securities of each Series will not be insured
or guaranteed by any government agency or instrumentality, the Depositor, any
Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment experience on
Mortgage Loans constituting or underlying the Mortgage Assets will affect the
average life of each class of Securities relating to a Trust. Prepayments may be
influenced by a variety of economic, geographic, social and other factors,
including changes in interest rate levels. In general, if mortgage interest
rates fall, the rate of prepayment would be expected to increase. Conversely, if
mortgage interest rates rise, the rate of prepayment would be expected to
decrease. Other factors affecting prepayment of mortgage loans include changes
in housing needs, job transfers, unemployment and servicing decisions. See
"Prepayment and Yield Considerations" in the related Prospectus Supplement. In
addition, investors in the Securities should be aware that the Servicer, the
Seller, or, if specified in the related Prospectus Supplement, the Owners of a
Class of Securities or a credit enhancer may at their respective options effect
early retirement of a Series of Securities through the purchase of Mortgage
Assets from the related Trust. See "The Pooling and Servicing
Agreement-Termination" and "The Indenture - Redemption of Notes" herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments. A
portion of the aggregate principal balance of the Mortgage Loans at any time may
be "balloon loans" that provide for the payment of the unamortized principal
balance of such Mortgage Loan in a single payment at maturity ("Balloon Loans").
Such Balloon Loans provide for equal monthly payments, consisting of principal
and interest, generally based on a 30-year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
Limited Assets. Owners of Securities of each Series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such Series (which assets may be subject to
release from such pledge prior to payment in full of the Securities), for the
payment of principal of, and interest on, that Series of Securities. If the
assets comprising the Trust are insufficient to make payments on such
Securities, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will 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 - Federal Income Tax Consequences for REMIC Securities,"
"- Taxation of Regular Securities - Variable Rate Regular Securities," "Federal
Income Tax Consequences - Federal Income Tax Consequences for Securities as to
Which No REMIC Election Is Made - Standard Securities," and "Federal Income Tax
Consequences - Premium and Discount" and "- Stripped Securities" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Securities may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Securities may be reduced to the extent that some investors are
unwilling to hold Securities in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Securities may be limited due
to lack of a physical certificate. Beneficial Owners of Book Entry Securities
may, in certain cases, experience delay in the receipt of payments of principal
and interest because such payments will be forwarded by the Trustee to the
Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Securities are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Securities may be impaired.
The Status of the Mortgage Assets in the Event of Bankruptcy of the Seller.
The Seller and the Depositor intend that the transfers of the Mortgage Assets
from the Seller to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, the Seller were to become a debtor under the federal
bankruptcy code, it is possible that a creditor, trustee-in-bankruptcy or
receiver of the Seller may argue that the sale thereof by the Seller is a pledge
rather than a sale. This position, if argued or accepted by a court, could
result in a delay in or reduction of distributions on the related Securities.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior (i.e.,
second, third, etc.) liens are subordinate to the rights of the beneficiaries
under the related senior deeds of trust or senior mortgages, a 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
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senior mortgagees. A rise in interest rates over a period of time, the general
condition of a Mortgaged Property and other factors may also have the effect of
reducing the value of the Mortgaged Property from the value at the time the
junior lien Mortgage Loan was originated and, as a result, may reduce the
likelihood that, in the event of a default by the borrower, liquidation or other
proceeds will be sufficient to satisfy the junior lien Mortgage Loan after
satisfaction of any senior liens and the payment of any liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
State and Federal Regulations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures and require
licensing of the Seller and the Servicer. In addition, most states have other
laws, public policies and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the origination, servicing and collection of the Mortgage Loans. See
"Certain Legal Aspects of the Mortgage Assets" herein.
The Mortgage Loans may also be subject to federal laws, including: (i) the
Truth in Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act, in the extension of credit;
(iii) the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to borrowers regarding the
settlement and servicing of the Mortgage Loans; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience; and (v) the Federal Trade Commission Preservation
of Consumer's Claims and Defense Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights.
It is possible that some of the Mortgage Loans will be subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle Act")
which incorporates the Home Ownership and Equity Protection Act of 1994. The
Riegle Act amended the Truth in Lending Act, which in turn led to certain
additional provisions being added to Regulation Z, the implementing regulation
of the Truth in Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates on high up-front fees and changes. In general,
mortgage loans within the purview of the Riegle Act have annual percentage rates
over 10% greater than the yield on Treasury Securities of comparable maturity
and/or fees and points which exceed the greater of 8% of the total loan amount
or $400. The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. The provisions can impose
specific statutory liabilities upon creditors who fail to comply with their
provisions and may affect the enforceability of the related loans. In addition,
any assignee of the creditor would generally be subject to all claims and
defenses that the consumer could assert against the creditor, including, without
limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer to collect all or part of the principal of or
interest on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. If the Servicer is unable to collect all or part of
the principal or interest on any Mortgage Loans because of a violation of the
aforementioned laws, public policies or general principles of equity,
distributions or payments to Owners of realized proceeds of the assets in the
related Trust may be delayed, or such proceeds may not be sufficient to repay
all amounts owed 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
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or the ability of the Depositor or the Issuer to withdraw or replace Mortgage
Loans if such violation breaches a representation or warranty contained in the
related Pooling and Servicing Agreement, Sale and Servicing Agreement or
Indenture, as applicable.
Limitations on Interest Payments and Foreclosures. Generally, under the terms
of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief
Act"), or similar state legislation, a Mortgagor who enters military service
after the origination of the related Mortgage Loan (including a Mortgagor who is
a member of the National Guard or is in reserve status at the time of the
origination of the Mortgage Loan and is later called to active duty) may not be
charged interest (including fees and charges) above an annual rate of 6% during
the period of such Mortgagor's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such action could
have an effect, for an indeterminate period of time, on the ability of the
related Servicer to collect full amounts of interest on certain of the Mortgage
Loans. In addition, the Relief Act imposes limitations that would impair the
ability of the related Servicer to foreclose on an affected Mortgage Loan during
the Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
Limited Nature of Ratings. It is a condition to the issuance of the
Securities that each class of offered Securities be rated in one of the four
highest rating categories by one or more of Moody's, Standard & Poor's DCR or
Fitch. See "Summary of Prospectus-Ratings" herein. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to maintain the rating on any
Security, and, accordingly, there can be no assurance that the ratings assigned
to any class of Securities on the date on which such Securities are initially
issued will not be lowered or withdrawn by a Rating Agency at any time
thereafter. In the event any rating is revised or withdrawn, the liquidity of
the related Securities may be adversely affected. Issuance of any of the
Securities in book-entry form may reduce the liquidity of such Securities in the
secondary trading market because investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates. The rating of
Securities credit enhanced through external credit enhancement such as a letter
of credit, financial guaranty insurance policy or mortgage pool insurance will
depend primarily on the creditworthiness of the issuer of such external credit
enhancement device (a "Credit Enhancer"). Any reduction in the rating assigned
to the claims-paying ability of the related Credit Enhancer below the rating
initially given to the related Securities would likely result in a reduction in
the rating of the Securities. See "Ratings" in the Prospectus Supplement.
Funds Available for Redemptions at the Request of Note Owners. With respect
to any Series of Notes for which the related Prospectus Supplement provides for
redemptions of such Notes at the request of Note Owners, there can be no
assurance that amounts available for such redemptions for such Notes will be
sufficient to permit such Notes to be redeemed within a reasonable time after
redemption is requested, for reasons including the following:
(i) Scheduled principal payments on the related Mortgage Loans
generally will be minimal in the early years and will increase in the later
years of such Mortgage Loans. As a result, funds available to be applied to
redemptions at the request of Note Owners, may be expected to be limited in
the early years and to increase during the later years of each Series.
Accordingly, the availability of funds for redemptions of Notes of any
Series at the request of Note Owners will depend largely upon the rates of
prepayment of the related Mortgage Loans.
(ii) Prepayments of principal on Mortgage Loans are less likely to
occur during periods of higher interest rates when it is more likely that
requests for redemption by Note Owners will be made. During periods in
which prevailing interest rates are higher than the interest rate paid on
Notes that may be redeemed at the request of Note Owners, greater numbers
of such Notes are expected to be tendered for redemption in order to take
advantage of the higher interest rates payable on other investments then
available. During such periods, there will likely also be a reduction in
the rate of prepayments on the related Mortgage Loans, thus limiting the
funds available to satisfy requested redemption by Note Owners.
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(iii) As specified in the related Prospectus Supplement, certain Note
Owners, such as personal representatives of deceased Note Owners, may have
certain priorities as to redemption at the request of Note Owners.
DESCRIPTION OF THE SECURITIES
Each Trust will be created pursuant to an Agreement entered into among the
Depositor, the Trustee or Indenture Trustee, the Owner Trustee, if any, the
Master Servicer, if any, and the Servicer. The provisions of each Agreement will
vary depending upon the nature of the Securities to be issued thereunder and the
nature of the related Trust. Securities which represent beneficial interests in
the Trust will be issued pursuant to the Pooling and Servicing Agreement similar
to the form filed as an Exhibit to the Registration Statement of which this
Prospectus is a part. Securities which represent debt obligations of the Trust
will be issued pursuant to an Indenture between the Trust and the Indenture
Trustee. The following summaries and the summaries set forth under "The Pooling
and Servicing Agreement" and "The Indenture" describe certain provisions
relating to each Series of Securities. THE PROSPECTUS SUPPLEMENT FOR A SERIES OF
SECURITIES WILL DESCRIBE THE SPECIFIC PROVISIONS RELATING TO SUCH SERIES. The
Depositor will provide Owners of Securities, without charge, on written request
a copy of the Pooling and Servicing Agreement or the Indenture and the Trust
Agreement, as applicable, for the related Series. Requests should be addressed
to IMC Securities, Inc., 5901 East Fowler Avenue, Tampa, Florida 33617-2362. The
Pooling and Servicing Agreement or the Indenture and the Trust Agreement, as
applicable, relating to a Series of Securities will be filed with the Securities
and Exchange Commission within 15 days after the date of issuance of such Series
of Securities (the "Delivery Date").
The Securities of a Series will be entitled to payment only from the assets
of the Trust and any other assets pledged for the benefit of the Securities and
will not be entitled to payments in respect of the assets included in any other
trust fund established by the Depositor. The Securities will not represent
obligations of the Depositor, the Trustee or the Indenture Trustee, the Owner
Trustee, if any, the Master Servicer, if any, any Servicer or any affiliate
thereof and will not be guaranteed by any governmental agency. See "The Trusts"
herein.
The Mortgage Assets relating to a Series of Securities will not be insured or
guaranteed by any governmental entity and, to the extent that delinquent
payments on or losses in respect of defaulted Mortgage Assets, are not advanced
or paid from any applicable Credit Enhancement, such delinquencies may result in
delays in the distribution of payments on, or losses allocated to one or more
classes of Securities of such Series.
General
The Securities of each Series will be issued either in book entry form or in
fully registered form. The Securities of a given Series will evidence undivided
beneficial interests in the assets of the related Trust specified in the related
Prospectus Supplement. The Notes of a given Series will represent non-recourse
obligations of the related Issuer, secured by the assets in the related Trust,
and the proceeds of such assets will be in the sole source of payments on such
Notes. The minimum original denomination of each class of Securities will be
specified in the related Prospectus Supplement. The original "Security Principal
Balance" of each Security will equal the aggregate distributions or payments
allocable to principal to which such Security is entitled and distributions
allocable to interest on each Security that is not entitled to distributions
allocable to principal will be calculated based on the "Notional Principal
Balance" of such Security. The Notional Principal Balance of a Security will not
evidence an interest in or entitlement to distributions allocable to principal
but will be used solely for convenience in expressing the calculation of
interest and for certain other purposes.
Except as described below under "Book Entry Registration" with respect to
Book Entry Securities, the Securities of each Series will be transferable and
exchangeable on a "Security Register" to be maintained at the corporate trust
office or such other office or agency maintained for such purposes by the
Trustee or the Indenture Trustee, as applicable. The Trustee or the Indenture
Trustee, as applicable, will be appointed initially as the "Security Registrar"
and no service charge will be made for any registration of transfer or exchange
of Securities, but payment of a sum sufficient to cover any tax or other
governmental charge may be required.
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Under current law the purchase and holding of certain classes of Securities
may result in "prohibited transactions" within the meaning of ERISA and the
Code. See "ERISA Considerations" herein and in the related Prospectus
Supplement. Transfer of Securities of such a class will not be registered unless
the transferee (i) executes a representation letter stating that it is not, and
is not purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the Trustee or the Indenture
Trustee and the Depositor that the purchase of Securities of such a class by or
on behalf of such plan, account or arrangement is permissible under applicable
law and will not subject the Trustee or the Indenture Trustee, the Servicer or
the Depositor to any obligation or liability in addition to those undertaken in
the Pooling and Servicing Agreement or the Indenture, as applicable.
As to each Series of Certificates, one or more elections may be made to treat
the related Trust or designated portions thereof as a REMIC for federal income
tax purposes. The related Prospectus Supplement will specify whether a REMIC
election is to be made. Alternatively, the Agreement for a Series may provide
that a REMIC election may be made at the discretion of the Depositor or the
Servicer and may only be made if certain conditions are satisfied. See "Federal
Income Tax Considerations" herein. As to any such Series, the terms and
provisions applicable to the making of a REMIC election, as well as any material
federal income tax consequences to Owners of Certificates not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the "residual interests" in the related REMIC, as
defined in the Code. All other classes of Securities in such a Series will
constitute "regular interests" in the related REMIC, as defined in the Code. As
to each Series with respect to which a REMIC election is to be made, the
Servicer, the Trustee, an Owner of Residual Securities or another person as
specified in the related Prospectus Supplement will be obligated to take all
actions required in order to comply with applicable laws and regulations and
will be obligated to pay any prohibited transaction taxes. The person so
specified will be entitled to reimbursement for any such payment.
Classes of Securities
Each Series of Securities will be issued in one or more classes which will
evidence the beneficial ownership in the assets of the Trust that are allocable
to (i) principal of such class of Securities and (ii) interest on such
Securities. If specified in the Prospectus Supplement, one or more classes of a
Series of Securities may evidence beneficial ownership interests in separate
groups of assets included in the related Trust.
The Securities will have an aggregate original Security Principal Balance
equal to the aggregate unpaid principal balance of the Mortgage Assets (plus,
amounts held in a Pre-Funding Account, if any) as of the time and day prior to
creation of the Trust specified in the related Prospectus Supplement (the
"Cut-Off Date") after deducting payments of principal due before the Cut-Off
Date and will bear interest at rates which, on a weighted basis, will be equal
to the Pass-Through Rate. The Pass-Through Rate will equal the weighted average
rate of interest borne by the related Mortgage Assets, net of the aggregate
servicing fees, amounts allocated to the residual interests and any other
amounts as are specified in the Prospectus Supplement. The original Security
Principal Balance (or Notional Principal Balance) of the Securities of a Series
and the interest rate on the classes of such Securities will be determined in
the manner specified in the Prospectus Supplement.
Each class of Securities that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) by reference to an
index, or (c) otherwise (each, a "Security Interest Rate"). One or more classes
of Securities may provide for interest that accrues but is not currently payable
("Compound Interest Securities"). With respect to any class of Compound Interest
Securities, any interest that has accrued but is not paid on a given Payment
Date will be added to the aggregate Security Principal Balance of such class of
Securities on that Payment Date.
A Series of Securities may include one or more classes entitled only to
distributions or payments (i) allocable to interest, (ii) allocable to principal
(and allocable as between scheduled payments of principal and Principal
Prepayments, as defined below), or (iii) allocable to both principal (and
allocable as between scheduled payments of principal and Principal Prepayments)
and interest. A Series of Securities may consist of one or more classes as to
which distributions or payments will be allocated (i) on the basis of
collections from designated portions of the assets of the Trust, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence
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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.
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
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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 as otherwise
stated in the related Prospectus Supplement, and, with respect to Securities of
the same class, unscheduled distributions of principal will be made on a pro
rata basis. Notice of any unscheduled distribution will be given by the Trustee
or the Indenture Trustee prior to the date of such distribution.
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Book Entry Registration
Securities may be issued as Book Entry Securities and held in the name of a
Clearing Agency registered with the Securities and Exchange Commission or its
nominee. Transfers and pledges of Book Entry Securities may be made only through
entries on the books of the Clearing Agency in the name of Clearing Agency
Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Securities.
Purchasers and other Beneficial Owners may not hold Book Entry Securities
directly but may hold, transfer or pledge their ownership interest in the
Securities only through Clearing Agency Participants. Furthermore, Beneficial
Owners will receive all payments of principal and interest with respect to the
Securities and, if applicable, may request redemption of Securities, only
through the Clearing Agency and the Clearing Agency Participants. Beneficial
Owners will not be registered Owners of Securities or be entitled to receive
definitive certificates representing their ownership interest in the Securities
except under the limited circumstances, if any, described in the related
Prospectus Supplement. See "Risk Factors - Book Entry Registration" herein.
If Securities of a Series are issued as Book Entry Securities, the Clearing
Agency will be required to make book entry transfers among Clearing Agency
Participants, to receive and transmit payments of principal and interest with
respect to the Securities of such Series, and to receive and transmit requests
for redemption with respect to such Securities. Clearing Agency Participants
with whom Beneficial Owners have accounts with respect to such Book Entry
Securities will be similarly required to make book entry transfers and receive
and transmit payments and redemption requests on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not be
registered Owners of Securities and will not possess physical certificates, a
method will be provided whereby Beneficial Owners may receive payments, transfer
their interests, submit redemption requests and receive the reports provided
herein.
List of Owners of Securities
Upon written request of a specified number or percentage interests of Owners
of Securities of record of a Series of Securities for purposes of communicating
with other Owners of Securities with respect to their rights as Owners of
Securities, the Trustee or the Indenture Trustee will afford such Owners access
during business hours to the most recent list of Owners of Securities of that
Series held by the Trustee or the Indenture Trustee. With respect to Book Entry
Securities, the only named Owner on the Security Register will be the Clearing
Agency.
The Pooling and Servicing Agreement or the Indenture, as applicable, will not
provide for the holding of any annual or other meetings of Owners of Securities.
THE TRUSTS
The Trust for a Series of Securities will consist of: (i) the Mortgage Assets
(subject, if specified in the related Prospectus Supplement, to certain
exclusions, such as a portion of the mortgage interest rate being retained by
the Seller and not sold to the Trust) received on and after the related Cut-Off
Date; (ii) all payments (subject, if specified in the related Prospectus
Supplement, to certain exclusions, such as the retention by the Seller of
payments due and accrued before the related Cut-Off Date but collected after
such Cut-Off Date) in respect of such Mortgage Assets, which may be adjusted, to
the extent specified in the related Prospectus Supplement, in the case of
interest payments on Mortgage Assets, to the Security Interest Rate; (iii) if
specified in the Prospectus Supplement, reinvestment income on such payments;
(iv) with respect to a Trust that includes Mortgage Loans all property acquired
by foreclosure or deed in lieu of foreclosure with respect to any such Mortgage
Loan; (v) certain rights of the Trustee or the Indenture Trustee, the Depositor
and the Servicer under any insurance policies, hazard insurance or surety bonds
required to be maintained in respect of the related Mortgage Assets; and (vi) if
so specified in the Prospectus Supplement, one or more forms of Credit
Enhancement.
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The Securities of each Series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information respecting
the Mortgage Assets is not known at the time the related Series of Securities
initially are offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific information
will be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Securities. A copy of the Pooling and Servicing Agreement or the Indenture, as
applicable, with respect to each Series of Securities will be attached to the
Form 8-K and will be available for inspection at the corporate trust office of
the Trustee or the Indenture Trustee specified in the related Prospectus
Supplement. A schedule of the Mortgage Assets relating to each Series of
Securities, will be attached to the related Pooling and Servicing Agreement or
Indenture, as applicable delivered to the Trustee or the Indenture Trustee upon
delivery of such Securities.
Mortgage Loans
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans will
be within the broad classifications of single family mortgage loans, defined
generally as loans on residences containing one to four dwelling units. If
specified in the Prospectus Supplement, the Mortgage Loans may include
cooperative apartment loans ("Cooperative Loans") secured by security interests
in shares issued by Cooperatives and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings, or the Mortgage Loans may be secured by junior
liens on the related mortgaged properties, including home improvement retail
installment contracts. The Mortgaged Properties securing the Mortgage Loans may
include investment properties and vacation and second homes. Each Mortgage Loan
will be selected by the Depositor for inclusion in the Trust from among those
acquired by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans.
The Mortgage Loans will be "conventional" mortgage loans, that is they will
not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a Series of Securities
will be payable either on the first day of each month or on different scheduled
days throughout each month, and the interest will be calculated either on a
simple-interest or accrual method as described in the related Prospectus
Supplement. When a full principal amount is paid on a Mortgage Loan during a
month, the mortgagor is generally charged interest only on the days of the month
actually elapsed up to the date of such prepayment, at a daily interest rate
that is applied to the principal amount of the Mortgage Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for a
Series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a)Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a period of
time or under certain circumstances and followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a Mortgage Loan for such periods and under such
circumstances as may be specified in the related Prospectus Supplement.
Mortgage Loans may provide for the payment of interest at a rate lower than
the specified mortgage rate for a period of time or for the life of the
Mortgage Loan with the amount of any difference contributed from funds
supplied by the seller of the Mortgaged Property or another source.
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(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the basis of
an amortization schedule that is longer than the original term to maturity
or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity. Principal may include interest that has been deferred
and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time or
may change from period to period. Mortgage Loans may include limits on
periodic increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ("lockout periods"). Certain Mortgage Loans may permit prepayments
after expiration of the applicable lockout period and may require the
payment of a prepayment fee in connection with any such subsequent
prepayment. Other Mortgage Loans may permit prepayments without payment of
a fee unless the prepayment occurs during specified time periods. The
Mortgage Loans may include "due-on-sale" clauses which permit the mortgagee
to demand payment of the entire Mortgage Loan in connection with the sale
or certain transfers of the related mortgaged property. Other Mortgage
Loans may be assumable by persons meeting the then applicable underwriting
standards of the Servicer, or as may be required by any applicable
government program.
(e) Another type of mortgage loan described in the Prospectus
Supplement.
With respect to a Series for which the related Trust includes Mortgage Loans,
the related Prospectus Supplement may specify, among other things, information
regarding the interest rates (the "Mortgage Rates"), the average Principal
Balance and the aggregate Principal Balance, the years of origination and
original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due before the Cut-Off Date, reduced by all principal payments,
including principal payments advanced pursuant to the related Agreement,
previously distributed with respect to such Mortgage Loan and reported as
allocable to principal.
The "Loan-to-Value Ratio" of any Mortgage Loan will be determined by dividing
the amount of the Mortgage Loan by the Original Value (defined below) of the
related Mortgaged Property. The "principal amount" of the Mortgage Loan, for
purposes of computation of the Loan-to-Value Ratio of any Mortgage Loan, will
include any part of an origination fee that has been financed. In some
instances, it may also include amounts which the seller or some other party to
the transaction has paid to the mortgagee, such as minor reductions in the
purchase price made at the closing. The "Original Value" of a Mortgage Loan is
(a) in the case of any purchase money Mortgage Loan, the lesser of (i) the value
of the mortgaged property, based on an appraisal thereof and (ii) the selling
price, and (b) otherwise the value of the mortgaged property, based on an
appraisal thereof.
There can be no assurance that the Original Value will reflect actual real
estate values during the term of a Mortgage Loan. If the residential real estate
market should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Loans become equal to or greater
than the values of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions (which may or may not affect real estate values) may affect the
timely and ultimate payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
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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 FannieMae or GNMA.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/ or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Securities described herein. Distributions in respect
of the MBS will be made by the MBS Servicer or the MBS Trustee on the dates
specified in the related Prospectus Supplement. The MBS Issuer or the MBS
Servicer or another person specified in the related Prospectus Supplement may
have the right or obligation to repurchase or substitute assets underlying the
MBS after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Securities under "Credit Enhancement" may have
been provided with respect to the MBS. The type, characteristics and amount of
such credit enhancement, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a Series of Securities that evidence interests
in MBS will specify, to the extent available, (i) the aggregate approximate
initial and outstanding principal amount and type of the MBS to be included in
the Trust, (ii) the original and remaining term to stated maturity of the MBS,
if applicable, (iii) the pass-through or bond rate of the MBS or the formula for
determining such rates, (iv) the payment characteristics of the MBS, (v) the MBS
Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a description of the
credit support, if any, (vii) the circumstances under which the stated
underlying mortgage loans, or the MBS themselves may be purchased prior to their
maturity, (viii) the terms on which mortgage loans may be substituted for those
originally underlying the MBS, (ix) the servicing fees payable under the MBS
Agreement, (x) to the extent available to the Depositor, information in respect
of the underlying mortgage loans, and (xi) the characteristics of any cash flow
agreements that relate to the MBS.
Other Mortgage Securities
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, single-family mortgage loans on real property or mortgage-backed
securities, including residual interests in issuances of collateralized mortgage
obligations or mortgage pass-through certificates. Any Other Mortgage Securities
that are privately placed securities will not be included in a Trust until such
time as such privately placed securities would be freely transferrable pursuant
to Rule 144A of the Securities Act of 1933, as amended. Further (i) such
privately placed securities will have been acquired in the secondary market and
not pursuant to an initial offering thereof and (ii) the underlying issuer of
such securities will not be affiliated with the Depositor and will not have an
interest in the Trust. The Prospectus Supplement for a Series of Securities will
describe any Other Mortgage Securities to be included in the Trust for such
Series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with respect to
one or more classes of a Series of Securities or with respect to the assets in
the related Trust. Credit Enhancement may be in the form
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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
Indenture, as applicable, the Financial Guaranty Insurer may be subrogated to
the rights of Owners to receive payments under the Securities to the extent of
any payment by such Financial Guaranty Insurer under the related Financial
Guaranty Insurance Policy.
Subordination. Distributions in respect of scheduled principal, interest or
any combination thereof otherwise payable to one or more classes of Securities
of such Series (the "Subordinated Securities") may be paid to one or more other
classes of such Series (the "Senior Securities") under the circumstances and to
the extent provided in the Prospectus Supplement. If specified in the Prospectus
Supplement, delays in receipt of scheduled payments on the Mortgage Assets and
losses on defaulted Mortgage Assets will be borne first by the various classes
of Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the limitations
specified in the Prospectus Supplement. The aggregate distributions in respect
of delinquent payments on the Mortgage Assets over the lives of the Securities
or at any time, the aggregate losses in respect of defaulted Mortgage Assets
which must be borne by the Subordinated Securities by virtue of subordination
and the amount of the distributions otherwise distributable to the Subordinated
Securities that will be distributable to Owners of Senior Securities on any
Payment Date may be limited as specified in the Prospectus Supplement. If
aggregate distributions in respect of delinquent payments on the Mortgage Assets
or aggregate losses in respect of such Mortgage Assets were to exceed the total
amounts payable and available for distribution to Owners of Subordinated
Securities or, if applicable, were to exceed the specified maximum amount,
Owners of Senior Securities could experience losses on the Securities.
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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 Indenture, as applicable, will agree to use
its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to supervise the filing of claims thereunder
to the issuer of such Mortgage
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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
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Prospectus Supplement. Any cash in any Reserve Fund and the proceeds of any
other instrument upon maturity will be invested in Eligible Investments. If a
letter of credit is deposited with the Trustee or the Indenture Trustee, as
applicable, such letter of credit will be irrevocable. Any instrument deposited
therein will name the Trustee or the Indenture Trustee, as applicable, as a
beneficiary and will be issued by an entity acceptable to each rating agency
that rates the Securities. Additional information with respect to such
instruments deposited in the Reserve Funds may be set forth in the Prospectus
Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Fund for distribution with respect to
the Securities for the purposes, in the manner and at the times specified in the
Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Securities, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Securities are entitled to receive amounts
deposited in various accounts held by the Trustee or the Indenture Truste, as
applicable, upon the terms specified in the Prospectus Supplement. Such
arrangements may be in lieu of any obligation of the Servicer or the Seller to
advance delinquent installments in respect of the Mortgage Loans. See "Servicing
of Mortgage Loans - Advances" herein.
SERVICING OF MORTGAGE LOANS
With respect to each Series of Securities, the related Mortgage Loans will be
serviced by a sole servicer or by a master servicer with various sub-servicers
pursuant to, or as provided for in, the related Pooling and Servicing Agreement
or any Sale and Servicing Agreement (a "Sale and Servicing Agreement") entered
into among the Servicer, the Depositor, the Issuer and the Indenture Trustee.
The Prospectus Supplement for each Series will specify the servicer and the
master servicer, if any, for such Series.
The Depositor will require that the Servicer have adequate servicing
experience, where appropriate, and financial stability, generally including a
net worth requirement of no less than $10,000,000 (to be specified in the
related Pooling and Servicing Agreement or Sale and Servicing Agreement) as well
as satisfaction of certain other criteria. The Servicer is required to be a
FannieMae-approved servicer of conventional mortgage loans.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee or the Indenture
Trustee, as applicable, maintenance of applicable standard hazard insurance or
primary mortgage insurance policies, attempting to cure delinquencies,
supervising foreclosures, management of Mortgaged Properties under certain
circumstances, and maintaining accounting records relating to the Mortgage Loans
and, if specified in the related Prospectus Supplement, maintenance of escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance, and other
items required to be paid by the Mortgagor pursuant to the Mortgage Loan. Each
Servicer will also be obligated to make advances in respect of delinquent
installments on Mortgage Loans as described more fully under "- Payments on
Mortgage Loans" and "- Advances" below and in respect of certain taxes and
insurance premiums not paid on a timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified in the
related Prospectus Supplement. Each Servicer will also generally be entitled to
collect and retain, as part of its servicing compensation, late payment charges
and assumption underwriting fees. Each Servicer will be reimbursed from proceeds
of one or more of the insurance policies described herein ("Insurance Proceeds")
or from proceeds received in connection with the liquidation of defaulted
Mortgage Loans ("Liquidation Proceeds") for certain expenditures pursuant to the
related 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 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 FannieMae in connection with its mortgage loan purchase program.
The Depositor may also purchase special hazard insurance against certain of the
uninsured risks described above. See "Credit Enhancement - Special Hazard
Insurance".
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 Agreement. If the proceeds of any liquidation of the Mortgaged Property
securing the defaulted Mortgage Loan are less than the Principal Balance of the
defaulted Mortgage Loan plus interest accrued thereon, a loss will be realized
on such Mortgage Loan, to the extent the applicable Credit Enhancement is not
sufficient, in the amount of such difference plus the aggregate of expenses
which are incurred by the Servicer in connection with such proceedings and are
reimbursable under the Pooling and Servicing Agreement or the Sale and Servicing
Agreement, as applicable. In such case there will be a reduction in the value of
the Mortgage Loans and Trust may be unable to recover the full amount of
principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage Loan
can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Security Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Securities.
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Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be entitled to a
monthly servicing fee in the amount specified in the related Prospectus
Supplement. In addition to the primary compensation, a Servicer may be permitted
to retain all assumption underwriting fees and late payment charges, to the
extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and in connection with advancing delinquent payments. No loss
will be suffered on the Securities by reason of such expenses to the extent
claims for such expenses are paid directly under any applicable Mortgage Pool
Insurance Policy, a primary mortgage insurance policy, the special hazard
insurance policy or from other forms of Credit Enhancement. In the event,
however, that the defaulted Mortgage Loans are not covered by a Mortgage Pool
Insurance Policy, primary mortgage insurance policies, the Special Hazard
Insurance Policy or another form of Credit Enhancement, or claims are either not
made or paid under such policies or Credit Enhancement, or if coverage
thereunder has ceased, such a loss will occur to the extent that the proceeds
from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's expenses, are less than the Principal Balance of
such defaulted Mortgage Loan.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement for
the related Series of Securities. Customary servicing functions with respect to
Mortgage Loans constituting the Mortgage Pool will be provided by the Servicer
directly or through one or more SubServicers subject to supervision by the
Master Servicer. If the Master Servicer is not directly servicing the Mortgage
Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicer of its servicing responsibilities under the Pooling
and Servicing Agreement or the Sale and Servicing Agreement, as applicable, with
the Master Servicer, (ii) maintain a current data base with the payment
histories of each Mortgagor, (iii) review monthly servicing reports and data
relating to the Mortgage Pool for discrepancies and errors, and (iv) act as
backup Servicer during the term of the transaction unless the Servicer is
terminated or resigns in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Pooling and Servicing Agreement or
the Sale and Servicing Agreement, as applicable, for any Series for which
Mortgage Loans comprise the assets of a Trust. The Master Servicer will be
required to satisfy the standard established for the qualification of the Master
Servicer in the related Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable. The Master Servicer will be compensated for the
performance of its services and duties under each Pooling and Servicing
Agreement or Sale and Servicing Agreement as specified in the related Prospectus
Supplement.
THE POOLING AND SERVICING AGREEMENT
The following summary describes certain provisions which will be common to
each Pooling and Servicing Agreement. The summary does not purport to be
complete and is subject to the provisions of a particular Pooling and Servicing
Agreement. Material terms of a specific Pooling and Servicing Agreement will be
further described in the related Prospectus Supplement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the Securities,
the Depositor will assign the Mortgage Loans to the Trustee, together with all
principal and interest adjusted to the Remittance Rate, subject to exclusions
specified in the Prospectus Supplement, due on or with respect to such Mortgage
Loans on or after the CutOff Date. The Trustee will, concurrently with such
assignment, execute, countersign and deliver the Securities to the Depositor in
exchange for the Mortgage Loans. Each Mortgage Loan will be identified in a
schedule appearing as an exhibit to the Pooling and Servicing Agreement. Such
schedule may include information as to the Principal Balance of each Mortgage
Loan as of the CutOff Date, as well as information respecting the
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Mortgage Rate, the scheduled monthly payment of principal and interest as of the
CutOff Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to the
Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not necessarily
recorded), evidence of title insurance, if obtained, and, if applicable, the
certificate of private mortgage insurance. In instances where recorded documents
cannot be delivered due to delays in connection with recording, the Depositor
may deliver copies thereof and deliver the original recorded documents promptly
upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the Depositor
will cause to be delivered to the Trustee, the related original Cooperative note
endorsed to the order of the Trustee, the original security agreement, the
proprietary lease or occupancy agreement, the recognition agreement, an executed
financing agreement and the relevant stock certificate and related blank stock
powers. The Depositor will file in the appropriate office an assignment and a
financing statement evidencing the Trustee's security interest in each
Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Pooling and Servicing Agreement was
issued on the date of origination thereof and each such policy or binder
assurance is valid and remains in full force and effect or a legal opinion
concerning title or title search was obtained or conducted in connection with
the origination of the Mortgage Loans; (iii) at the date of initial issuance of
the Securities, the Seller has good title to the Mortgage Loans and the Mortgage
Loans are free of offsets, defenses or counterclaims; (iv) at the date of
initial issuance of the Securities, each Mortgage is a valid first lien on the
property securing the Mortgage Note (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions, and
restrictions, rights of way, easements and other matters of public record as of
the date of the recording of such Mortgage, such exceptions appearing of record
being acceptable to mortgage lending institutions generally in the area wherein
the property subject to the Mortgage is located or specifically reflected in the
appraisal obtained by the Depositor and (c) other matters to which like
properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by such Mortgage) and such
property is free of material damage and is in good repair or, with respect to a
junior lien Mortgage Loan, that such Mortgage is a valid junior lien Mortgage,
as the case may be and specifying the percentage of the Mortgage Loan Pool
comprised of junior lien Mortgage Loans; (v) at the date of initial issuance of
the Securities, no Mortgage Loan is 31 or more days delinquent (with such
exceptions as may be specified in the related Prospectus Supplement) and there
are no delinquent tax or assessment liens against the property covered by the
related Mortgage; (vi) at the date of initial issuance of the Securities, the
portion of each Mortgage Loan, if any, which in the circumstances set forth
below under "Servicing of Mortgage Loans - Primary Mortgage Insurance" should be
insured with a private mortgage insurer is so insured; and (vii) each Mortgage
Loan at the time it was made complied in all material respects with applicable
state and federal laws, including, with out limitation, usury, equal credit
opportunity and disclosure laws. The Depositor's rights against the Seller in
the event of a breach of its representations will be assigned to the Trustee for
the benefit of the Securities of such Series.
Assignment of Mortgage-Backed Securities and Other Mortgage Securities. With
respect to each Series, the Depositor will cause any Mortgage-Backed Securities
and Other Mortgage Securities included in the related Trust to be registered in
the name of the Trustee (directly or through a participant in a depository). The
Trustee (or its custodian) will have possession of any certificated
Mortgage-Backed Securities and Other Mortgage Securities. The Trustee will not
be in possession of or be assignee of record of any underlying assets for a
Mortgage-Backed Security or Other Mortgage Security. Each Mortgage-Backed
Security and Other Mortgage Security will be identified in a schedule appearing
as an exhibit to the related Agreement which may specify certain information
with respect to such security, including, as applicable, the original principal
amount, outstanding principal balance as of the CutOff Date, annual pass-through
rate or interest rate and maturity date and certain other pertinent information
for each such security. The Depositor will represent and warrant to the Trustee,
among other things, the information contained in such schedule is true and
correct and that immediately prior to
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the transfer of the related securities to the Trustee, the Depositor had good
title to, and was the sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans. The Trustee will review the
documents delivered to it with respect to the Mortgage Loans included in the
related Trust. If any document is not delivered or is found to be defective in
any material respect and the Depositor or the related Seller, if so required
cannot deliver such document or cure such defect within the period specified in
the related Prospectus Supplement after notice thereof (which the Trustee will
undertake to give within the period specified in the related Prospectus
Supplement), and if any other party obligated to deliver such document or cure
such defect has not done so and has not substituted or repurchased the affected
Mortgage Loan or Contract then the Depositor will cause the Seller, not later
than the first date designated for the deposit of payments into the Security
Account (a "Deposit Date") which is more than a specified number of days after
such period, (a) if so provided in the Prospectus Supplement to remove the
affected Mortgage Loan from the Trust and substitute one or more other Mortgage
Loans therefor or (b) repurchase the Mortgage Loan from the Trustee for a price
equal to 100% of its Principal Balance plus one month's interest thereon at the
applicable Remittance Rate. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedy available to the Trustee
for a material defect in a document relating to a Mortgage Loan.
The Depositor is required to cause the Seller to do either of the following
(a) cure any breach of any representation or warranty that materially and
adversely affects the interests of the Owners of the Securities in a Mortgage
Loan (each, a "Defective Mortgage Loan") within a specified number of days of
its discovery by the Depositor or its receipt of notice thereof from the
Trustee, (b) repurchase such Defective Mortgage Loan not later than the first
Deposit Date which is more than a specified number of days after such period for
a price equal to 100% of its Principal Balance plus one month's interest thereon
at the applicable Remittance Rate, or (c) if so specified in the Prospectus
Supplement, remove the affected Mortgage Loan from the Trust and substitute one
or more other mortgage loans or contracts therefor. This repurchase and, if
applicable, substitution obligation will generally constitute the sole remedies
available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
as described above, whether or not the Depositor obtains such an agreement from
the Seller which sold such Mortgage Loans.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans.
Evidence as to Compliance
The Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning the first such date that is at least a
specified number of months on and after the CutOff Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
based on an examination of certain specified documents and records relating to
the servicing of the Depositor's mortgage loan portfolio conducted substantially
in compliance with the audit program for mortgages serviced for FannieMae or
FHLMC, the United States Department of Housing and Urban Development Mortgage
Audit Standards or the Uniform Single Audit Program for Mortgage Bankers or in
accordance with other standards specified in the Agreement (the "Applicable
Accounting Standards"), such firm is of the opinion that such servicing has been
conducted in compliance with the Applicable Accounting Standards except for (a)
such exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
The Trustee
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Depositor and the
Trustee acting jointly will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust relating to a
particular Series of Securities. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Pooling and Servicing Agreement shall be conferred or imposed upon the Trustee
and such 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
CutOff Date (including scheduled payments of principal and interest due on and
after the CutOff Date but received before the CutOff Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest, adjusted to the
Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to
the Servicer or other person entitled thereto, as described above;
(iv) all Insurance Proceeds, other than proceeds to be applied to the
restoration or repair of the related property or released to the Mortgagor
and net of certain amounts reimbursed to the Servicer or other person
entitled thereto, as described above;
(v) all condemnation awards or settlements which are not released to
the Mortgagor in accordance with normal servicing procedures;
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(vi) any Advances made as described under "Servicing of Mortgage Loans
- Advances" herein and certain other amounts required under the Pooling and
Servicing Agreement to be deposited in the Security Account;
(vii) all proceeds of any Mortgage Loan or property acquired in
respect thereof repurchased by the Depositor, the Seller or otherwise as
described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the Security
Account from any Credit Enhancement for the related Series; and
(ix) all other amounts required to be deposited in the Security
Account pursuant to the related Pooling and Servicing Agreement.
Reports
Concurrently with each distribution on the Securities, there will be mailed
to Owners a statement generally setting forth, to the extent applicable to any
Series, among other things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each class;
(iii) the aggregate Security Principal Balance of each class of the
Securities after giving effect to distributions on such Payment Date;
(iv) the aggregate Security Principal Balance of any class of Compound
Interest Securities after giving effect to any increase in such Principal
Balance that results from the accrual of interest that is not yet
distributable thereon;
(v) if applicable, the amount otherwise distributable to any class of
Securities that was distributed to other classes of Securities;
(vi) if any class of Securities has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments in respect of
the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage Loans
which were delinquent as to a total of two installments of principal and
interest; and
(viii) the aggregate Principal Balances of Mortgage Loans which (a)
were delinquent 30-59 days, 60-89 days, and 90 days or more, and (b) were
in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually (in the case of Book Entry Securities, the
above described statement and such annual information will be sent to the
Clearing Agency, which will provide such reports to the Clearing Agency
Participants in accordance with its procedures).
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Subsequent Transfer Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on which
such Trust is established and the related Securities are issued. The Trustee of
a Trust may enter into Subsequent Transfer Agreements to permit the acquisition
of additional Mortgage Loans that could not be delivered by the Depositor or
have not formally completed the origination process, in each case prior to the
Delivery Date. Any Subsequent Transfer Agreement will require that
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any Mortgage Loans so transferred to a Trust conform to the requirements
specified in such Subsequent Transfer Agreement. If a Subsequent Transfer
Agreement is to be utilized, the related Trustee will be required to deposit in
the Purchase Account all or a portion of the proceeds received by the Trustee in
connection with the sale of one or more classes of Securities of the related
Series; the additional Mortgage Loans will be transferred to the related Trust
in exchange for money released from the related PreFunding Account. The maximum
amount deposited in the PreFunding Account to acquire Mortgage Loans for
transfer to a Trust will not exceed 25% of the aggregate principal amount of the
Securities offered pursuant to the related Prospectus Supplement. Each
Subsequent Transfer Agreement will set a specified period during which any such
transfers must occur, which period will not exceed 90 days from the date the
Trust is established. The Subsequent Transfer Agreement or the related Agreement
will require that, if all moneys originally deposited to such PreFunding Account
are not so used by the end of such specified period, then any remaining moneys
will be applied as a mandatory prepayment of the related class or classes of
Securities as specified in the related Prospectus Supplement.
Servicer Events of Default
"Events of Default" under the Pooling and Servicing Agreement will consist of
(i) any failure by the Servicer to duly observe or perform in any material
respect any other of its covenants or agreements in the Agreement materially
affecting the rights of Owners which continues unremedied for a specified number
of days after the giving of written notice of such failure to the Depositor by
the Trustee or to the Servicer and the Trustee by the Owners of Securities
evidencing interests aggregating not less than 25% of the affected class of
Securities; and (ii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain actions
by the Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
Rights Upon Servicer Event of Default
As long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied by the Servicer, the Trustee, or Owners of Securities may
terminate all the rights and obligations of the Servicer under the Pooling and
Servicing Agreement, whereupon the Trustee or Master Servicer, if any, or a new
Servicer appointed pursuant to the Pooling and Servicing Agreement, will succeed
to all the responsibilities, duties and liabilities of the Servicer under the
Pooling and Servicing Agreement and will be entitled to similar compensation
arrangements. Following such termination, the Depositor shall appoint any
established mortgage loan servicer satisfying the qualification standards
established in the Pooling and Servicing Agreement to act as successor to the
Servicer under the Pooling and Servicing Agreement. If no such successor shall
have been appointed within a specified number of days following such
termination, then either the Depositor or the Trustee may petition a court of
competent jurisdiction for the appointment of a successor Servicer. Pending the
appointment of a successor Servicer, the Trustee or the Master Servicer, if any,
shall act as Servicer.
The Owners of Securities will not have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect to the Pooling and
Servicing Agreement, unless they previously have given to the Trustee written
notice of default and unless the Owners of the percentage of the Securities
specified in the Prospectus Supplement have made written request to the Trustee
to institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for a specified
number of days has neglected or refused to institute any such proceedings.
However, the Trustee is under no obligation to exercise any of the trusts or
powers vested in it by the Agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation thereunder
or in relation thereto at the request, order or direction of any of the Owners,
unless such Owners have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
Amendment
A Pooling and Servicing Agreement generally may be amended by the Depositor,
the Servicer and the Trustee, without the consent of the Owners of the
Securities, to cure any ambiguity, to correct or supplement any provision
therein which may be defective or inconsistent with any other provision therein,
to take any action necessary to maintain REMIC status of any Trust as to which a
REMIC election has been made, to add any other
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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 51% of the aggregate
principal amount of the outstanding Notes of any Series issued under an
Indenture, the related Indenture Trustee and the related Issuer may execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the
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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 holder of each outstanding Note of such Series
affected thereby, however, no supplemental indenture shall (a) change the final
Payment Date of the principal of, or any installment of interest on, any Note of
such series or reduce the principal amount thereof the Note Rate specified
thereon (except as provided in the related Indenture with respect to Notes that
have an adjustable Note Rate), the redemption price with respect thereto or the
earliest date on which any Notes of such Series may be redeemed at the option of
the related Issuer, or change any place of payment where, or the coin or
currency in which, any Note of such Series or any interest thereon is payable,
or impair the right to institute suit for the enforcement of certain provisions
of the Indenture regarding payment, (b) reduce the percentage of the aggregate
principal amount of the outstanding Notes of such Series, the consent of the
holders of which is required for any such a supplemental indenture, or the
consent of the holders of which is required for any waiver of compliance with
certain provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture, (c) modify the provisions of the
Indenture specifying the circumstances under which such a supplemental indenture
may not change the provisions of the Indenture without the consent of the
holders of each outstanding Note of such Series affected thereby, or the
provisions of the Indenture with respect to certain remedies available in a Note
Event of Default (as described below), except to increase any percentage
specified therein or to provide that certain other provisions of the Indenture
cannot be modified or waived without the consent of the holder of each
outstanding Note affected thereby, (d) modify or alter the provisions for the
Indenture regarding the voting of Notes held by the related Issuer or an
affiliate of the related Issuer, (e) permit the creation of any lien ranking
prior to or on the parity with the lien of the Indenture with respect to any
part of the property subject to a lien under the Indenture or terminate the lien
of the Indenture on any property at any time subject thereto or deprive the
holder of any Note of such Series of the security afforded by the lien of the
Indenture, or (f) modify any of the provisions of the Indenture in such manner
as to affect the rights of the holders of Notes of such Series to the benefits
of any provisions for the redemption at the request of holders of Notes of such
Series contained therein.
The related Issuer and the respective Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of the Owners of the
Notes of such Series, to cure ambiguities or make minor corrections, to provide
for the issuance of Notes in bearer or registered form or for the conversion of
any outstanding Notes to or from bearer form and to do such other things as
would not adversely affect the interests of the Owners of the Notes of such
Series.
Note Events of Default
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Notes, a "Note Event of Default" with respect to any Series of Notes
will be defined in the respective Indenture under which such Notes are issued
as: (a) unless otherwise specified in the Prospectus Supplement for such Series,
a default in the payment of interest on any Note of such Series when and as due
and such failure continues for a period of two days; (b) a failure to pay the
Notes of such Series in full on or before the date specified as the final
scheduled Payment Date in the related Prospectus Supplement; (c) a default in
the observance of certain negative covenants in the Indenture or in the
observance of certain covenants relating to redemptions of Notes of such Series;
(d) a default in the observance of any other covenants of the Indenture, and the
continuation of any such default for a specified period after notice to the
related Issuer by the Indenture Trustee or to the related Issuer and the
Indenture Trustee by the holders of at least 25% in principal amount of the
Notes of such Series then outstanding; (e) any representation or warranty made
by the related Issuer in the Indenture or in any security delivered pursuant
thereto having been incorrect in a material respect as of the time made, and the
circumstance in respect of which such representation or warranty is incorrect
not having been cured within a specified period after notice thereof is given to
the related Issuer by the Indenture Trustee or by the holders of at least 25% in
principal amount of the Notes of such Series then outstanding; or (f) certain
events of bankruptcy, insolvency, receivership or reorganization of the related
Issuer.
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Rights Upon Note Events of Default
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Notes, in case a Note Event of Default should occur and be continuing
with respect to a Series of Notes, the Indenture Trustee may, and on request of
holders of not less than 51% in principal amount of the Notes of such Series
then outstanding shall, declare the principal of such Series of Notes to be due
and payable. Such declaration may under certain circumstances be rescinded by
the holders of a majority in principal amount of the Notes of such Series then
outstanding.
If, following a Note Event of Default, a Series of Notes has been declared to
be due and payable, the Indenture Trustee may, in its discretion (provided that
the holders of the Notes of such Series have not directed the Trustee to sell
the assets included in the related Trust) refrain from selling such assets and
continue to apply all amounts received on such assets to payments due on the
Notes of such Series in accordance with their terms, notwithstanding the
acceleration of the maturity of such Notes. The Indenture Trustee, however, must
sell the assets included in the related Trust for such Series if collections in
respect of such assets are determined to be insufficient to make all scheduled
payments on Notes of such Series, in which case payments will be made on the
Notes in the same manner as described in the next sentence with regard to
instances in which such assets are sold. In addition, upon a Note Event of
Default the Indenture Trustee may, in its discretion (provided that, unless the
Note Event of Default relates to a default in payment of principal or interest,
the Indenture Trustee must receive the consent of the holders of all outstanding
Notes of such Series, and certain other conditions must be met), sell the assets
included in the related Trust Estate for such Series, in which event the Notes
of such Series will be payable pro rata out of the collections on, or the
proceeds from the sale of, such assets and any overdue installments of interest
on the Notes will, to the extent permitted by applicable law, bear interest at
the highest stated interest rate borne by any Note of such Series.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case a Note Event of Default shall occur and be
continuing, the Indenture Trustee shall be under no obligation to exercise any
of the rights and powers under the Indenture at the request or direction of any
of the Note Owners unless such Note Owners have offered to the Indenture Trustee
reasonable security or indemnity satisfactory to it against the costs, expenses
and liabilities which might be incurred by it in compliance with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority in principal
amount of the outstanding Notes of a Series shall have the right to direct the
time, method, and place of conducting any proceeding or any remedy available to
the Indenture Trustee or exercising any trust or power conferred on the
Indenture Trustee with respect to the Notes of such Series; and the holders of a
majority in principal amount of the Notes of a Series then outstanding may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of the holder of each outstanding Note affected thereby.
List of Note Owners
Unless otherwise specified in the prospectus Supplement relating to a given
Series of Notes, three or more holders of the Notes of any Series (each of whom
has owned a Note of such Series for at lease six months) may, by written request
to the Indenture Trustee, obtain access to the list of all Note Owners of such
Series maintained by the Indenture Trustee for the purpose of communicating with
other such Note Owners with respect to their rights under the Indenture. The
Indenture Trustee may elect not to afford the requesting Note Owners access to
the list of Note Owners if it agrees to mail the desired communication or proxy,
on behalf of the requesting Note Owners, to all Note Owners.
Annual Compliance Statement
The related Issuer will be required to file annually with the Indenture
Trustee a written statement as to the fulfillment of its obligations under the
Indenture.
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Indenture Trustee's Annual Report
The Indenture Trustee will be required to mail each year to all Owners of
Notes a brief report relating to its eligibility and qualifications to continue
as the Indenture Trustee under the Indenture, any amounts advanced by it under
the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by the related Issuer to it in the Indenture Trustee's
individual capacity, the property and funds physically held by the Indenture
Trustee as such, any release, or release and substitution, of property subject
to the lien of the Indenture that has not been previously reported, any
additional Series of Notes not previously reported and any action taken by it
which materially affects the Notes and which has not been previously reported.
Satisfaction and Discharge of Indenture
The Indenture will be discharged with respect to the assets securing the
Notes of a Series upon the delivery to the Indenture Trustee for cancellation of
all of the Notes of such Series or, with certain limitations, upon deposit with
the Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of such Series.
Redemption of Notes
To the extent provided in the related Prospectus Supplement, the Notes of any
Series may be (i) redeemed at the request of holders of such Notes; (ii)
redeemed at the option of the related Issuer or another party specified in the
related Prospectus Supplement; or (iii) subject to special redemption under
certain circumstances. The circumstances and terms under which the Notes of a
Series may be redeemed will be described in the related Prospectus Supplement.
Reports by Indenture Trustee to Note Owners
On each Payment Date, the Indenture Trustee will send a report to each Note
Owner setting forth, among other things, the amount of such payment representing
interest, the amount thereof, if any, representing principal and the outstanding
principal amount of an individual Note after giving effect to the payments made
on such Payment Date.
Limitation on Suits
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Notes, no Note Owners of any Series will have any right to institute
any proceedings with respect to the Indenture unless (1) such holder has
previously given written notice to the Indenture Trustee of a continuing Note
Event of Default with respect to such Series; (2) the holders of at least 25% in
principal amount of the Notes of such Series then outstanding have made written
requests to the Indenture Trustee to institute proceedings in respect to such
Note Event of Default in its own name as Indenture Trustee; (3) such holders
have offered to the Indenture Trustee reasonable indemnity satisfactory to it
against the costs, expenses and liabilities to be incurred in compliance with
such request; (4) for a specified period after its receipt of such notice,
request and offer of indemnity the Indenture Trustee has failed to institute any
proceedings; and (5) no direction inconsistent with such written request has
been given to the Indenture Trustee during such period by the holders of not
less than 51% in principal amount of the Notes of such Series then outstanding.
The Sale and Servicing Agreement
General. The conveyance and servicing of the Mortgage Loans related to the
issuance of a Series of Notes will be pursuant to a Sale and Servicing Agreement
to be entered into between the Issuer, a seller, the Servicer, the Depositor and
the Indenture Trustee. Where provisions or terms used in a particular Sale and
Servicing Agreement differ from those provided herein, a description of such
provisions or terms will be included in the related Prospectus Supplement.
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Assignment of Mortgage Assets. The Mortgage Loans to be included in the
related Trust will be assigned to the Indenture Trustee on behalf of the holders
of the Notes pursuant to provisions included in the related Sale and Servicing
Agreement that are substantially the same as and the Indenture Trustee with
respect to the Mortgage Loans so conveyed will be substantially similar to,
those described under "The Pooling and Servicing Agreement - Assignment of
Mortgage Assets" herein.
Evidence as to Compliance. The Indenture Trustee will receive an opinion from
a firm of independent public accountants regarding the servicing of the Mortgage
Loans which is substantially the same as described under "The Pooling and
Servicing Agreement - Evidence as to Compliance" herein.
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.
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.
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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 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
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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 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
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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 "AntiDeficiency Legislation and Other Limitations on Lenders"
below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain of the
Mortgage Loans may be secured by mortgages or deeds of trust providing for
junior (i.e., second, third, etc.) liens on the related Mortgaged Properties
which are junior to the other mortgages or deeds of trust held by other lenders
or institutional investors. The rights of the beneficiary under a junior deed of
trust or as mortgagee under a junior mortgage are subordinate to those of the
mortgagee or beneficiary under the senior mortgage or deed of trust, including
the prior rights of the senior mortgagee or beneficiary to receive hazard
insurance and condemnation proceeds and to cause the property securing the
Mortgage Loans to be sold upon default of the mortgagor or trustor. As discussed
more fully below, a junior mortgagee or beneficiary in some states may satisfy a
defaulted senior loan in full and in some states may cure such default and bring
the senior loan current, in either event adding the amounts expended to the
balance due on the junior loan. In most states, absent a provision in the senior
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional lenders
generally confer on the mortgagee or beneficiary the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with any condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the bankruptcy is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the
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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 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
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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 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
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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.
LEGAL INVESTMENT MATTERS
The Securities may constitute "mortgage related securities" for purposes of
SMMEA, so long as they are rated in one of the two highest rating categories by
the Rating Agency or Agencies identified in the related Prospectus Supplement
and, as such, would be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including but
not limited to statechartered savings banks, commercial banks, saving and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or any State (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to State regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Under SMMEA, in all
States which enacted legislation prior to October 4, 1991 specifically limiting
the legal investment
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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 bookentry
form.
Investors should consult their own legal advisors in determining whether and
to what extent the Securities constitute legal investments for such investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively, "Plans")
subject to ERISA and on persons who are fiduciaries with respect to such Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant). In addition to the imposition
of general fiduciary standards of investment prudence and diversification, ERISA
prohibits a broad range of transactions involving Plan assets and persons
("Parties in Interest") having certain specified relationships to a Plan and
imposes additional prohibitions where Parties in Interest are fiduciaries with
respect to such Plan.
The United States Department of Labor (the "DOL") has issued regulations
concerning the definition of what constitutes the assets of a Plan. (DOL Reg
Section 2510.3-101). Under this regulation, the underlying assets and properties
of corporations, partnerships and certain other entities in which a Plan makes
an "equity" investment could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances. In such case, the fiduciary making such
an investment for the Plan could be deemed to have delegated his or her asset
management responsibility, and the underlying assets and properties could be
subject to ERISA reporting
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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 Truste, as applicable, for any Series
of Securities will be unaffiliated with the Depositor, there can be no assurance
that the system of insurance or subordination will meet the general or specific
conditions referred to above. In addition, the nature of a Trust's assets or the
characteristics of one or more classes of the related Series of Securities may
not be included within the scope of PTE 83-1 or any other class exemption under
ERISA. The Prospectus Supplement will provide additional information with
respect to the application of ERISA and the Code to the related Securities.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a Series of Securities,
the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Securities must make its
own determination as to whether the general and the specific conditions of PTE
83-1 have been satisfied or as to the availability of any other prohibited
transaction exemptions Each Plan fiduciary should also determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Any Plan proposing to invest in Securities should consult with its counsel to
confirm that such investment will not result in a prohibited trans action and
will satisfy the other requirements of ERISA and the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Arter & Hadden, special counsel to
the Depositor with respect to the material federal income tax consequences of
the purchase, ownership and disposition of Securities.
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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.
Federal Income Tax Consequences For REMIC Securities
General. With respect to a particular Series of Securities, an election may
be made to treat the Trust or one or more trusts or segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A Trust
or a portion or portions thereof as to which one or more REMIC elections will be
made will be referred to as a "REMIC Pool." For purposes of this discussion,
Securities of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Securities" and will consist of one or more classes of
"Regular Securities" and one class of "Residual Securities" in the case of each
REMIC Pool. Qualification as a REMIC requires ongoing compliance with certain
conditions. With respect to each Series of REMIC Securities, Arter & Hadden,
special counsel to the Depositor, has advised the Depositor that in their
opinion, assuming (i) the making of an appropriate election, (ii) compliance
with the Agreement and (iii) compliance with any changes in the law, including
any amendments to the Code or applicable Treasury regulations thereunder, each
REMIC Pool will qualify as a REMIC and that if a Trust qualifies as a REMIC, the
tax consequences to the Owners will be as described below. In such case, the
Regular Securities will be considered to be "regular interests" in the REMIC
Pool and generally will be treated for federal income tax purposes as if they
were newly originated debt instruments, and the Residual Securities will be
considered to be "residual interests" in the REMIC Pool. The Prospectus
Supplement for each Series of Securities will indicate whether one or more REMIC
elections with respect to the related Trust will be made, in which event
references to "REMIC" or "REMIC Pool" herein shall be deemed to refer to each
such REMIC Pool.
Status of REMIC Securities. REMIC Securities held by a mutual savings bank or
a domestic building and loan association (a "Thrift Institution") will
constitute "qualifying real property loans" within the meaning of Code Section
593(d)(1) in the same proportion that the assets of the REMIC Pool would be so
treated. REMIC Securities held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a) (19)(C) (xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C). REMIC Securities held by a real estate
investment trust (a "REIT") will constitute "real estate assets" within the
meaning of Code Section 856(c)(5)(A), and interest on the REMIC Securities will
be considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Code Section 856(c)(3)(B)
in the same proportion that, for both purposes, the assets of the REMIC Pool
would be so treated. If at all times 95% or more of the assets of the REMIC Pool
constitute qualifying assets for Thrift Institutions and REITs, the REMIC
Securities will be treated entirely as qualifying assets for such entities.
Moreover, the REMIC Regulations provide that, for purposes of Code Sections
593(d)(1) and 856(c)(5)(A), payments of principal and interest on the Mortgage
Assets that are reinvested pending distribution to holders of REMIC Securities,
constitute qualifying
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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 in "Federal Income Tax Consequences for Securities as to Which No
REMIC Election Is Made." In that case, no entity-level tax would be imposed on
the REMIC Pool. Alternatively, the Regular Securities may continue to be treated
as debt instruments for federal income tax purposes; but the REMIC Pool could be
treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is treated as a
TMP, any residual income of the REMIC Pool (income from the Mortgage Assets less
interest and original issue discount expense allocable to the Regular Securities
and any administrative expenses of the REMIC Pool) would be subject to corporate
income tax at the REMIC Pool level. On the other hand, an entity with multiple
classes of ownership interests may be treated as a separate association taxable
as a corporation under Treasury regulations, and the Regular Securities may be
treated as equity interests therein. The Code, however, authorizes the Treasury
Department to issue regulations that address situations where failure to meet
one or more of the requirements for REMIC status occurs inadvertently and in
good faith, and disqualification of the REMIC Pool would occur absent regulatory
relief. Investors should be aware, however, that the Conference Committee Report
to the Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
Taxation of Regular Securities
General. Payments received by holders of Regular Securities generally should
be accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. In general, interest, original
issue discount and market discount on a Regular Security will be treated as
ordinary income to a holder of the Regular Security (the "Regular Owner") as
they accrue, and principal payments on a Regular Security will be treated as a
return of capital to the extent of the Regular Owner's basis in the Regular
Security allocable thereto. Regular Owners must use the accrual method of
accounting with regard to Regular Securities, regardless of the method of
accounting otherwise used by such Regular Owners.
Original Issue Discount. Regular Securities may be issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any class
of Regular Securities having original issue discount
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generally must include original issue discount in ordinary income for federal
income tax purposes as it accrues, in accordance with a constant interest method
that takes into account the compounding of interest, in advance of receipt of
the cash attributable to such income. The Depositor anticipates that the amount
of original issue discount required to be included in a Regular Owner's income
in any taxable year will be computed as described below.
Each Regular Security (except to the extent described below with respect to a
Regular Security on which distributions of principal are made in a single
installment or upon an earlier distribution by lot of a specified principal
amount upon the request of a Regular Owner or by random lot (a "Retail Class
Security")) will be treated as a single installment obligation for purposes of
determining the original issue discount includible in a Regular Owner's income.
The total amount of original issue discount on a Regular Security is the excess
of the "stated redemption price at maturity" of the Regular Security over its
"issue price." The issue price of a Regular Security is the first price at which
a substantial amount of Regular Securities of that class are first sold to the
public. The Depositor will determine original issue discount by including the
amount paid by an initial Regular Owner for accrued interest that relates to a
period prior to the issue date of the Regular Security in the issue price of a
Regular Security and will include in the stated redemption price at maturity any
interest paid on the first Payment Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Payment Date. The stated redemption price at maturity of a
Regular Security always includes the original principal amount of the Regular
Security, but generally will not include distributions of stated interest if
such interest distributions constitute "qualified stated interest." Qualified
stated interest generally means stated interest that is unconditionally payable
in cash or in property (other than debt instruments of the issuer) at least
annually at (i) a single fixed rate, (ii) one or more qualified floating rates
(as described below), (iii) a fixed rate followed by one or more qualified
floating rates, (iv) a single objective rate (as described below) or (v) a fixed
rate and an objective rate that is a qualified inverse floating rate. The OID
Regulations state that interest payments are unconditionally payable only if
reasonable legal remedies exist to compel timely payment or the debt instrument
otherwise provides terms and conditions that make the likelihood of late payment
(other than a late payment that occurs within a reasonable grace period) or
nonpayment a remote contingency. Certain debt securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such debt securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where debt securities do not provide for default remedies or the likelihood of
late payment or nonpayment is a remote contingency, the interest payments will
be included in the debt security's stated redemption price at maturity and taxed
as OID. Any stated interest in excess of the qualified stated interest is
included in the stated redemption price at maturity. If the amount of original
issue discount is "de minimis" as described below, the amount of original issue
discount is treated as zero, and all stated interest is treated as qualified
stated interest. Distributions of interest on Regular Securities with respect to
which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Securities includes all distributions of interest as well as principal thereon.
Moreover, if the interval between the issue date and the first Payment Date on a
Regular Security is longer than the interval between subsequent Payment Dates
(and interest paid on the first Payment Date is less than would have been earned
if the stated interest rate were applied to outstanding principal during each
day in such interval), the stated interest distributions on such Regular
Security technically do not constitute qualified stated interest. In such case a
special rule, applying solely for the purpose of determining whether original
issue discount is de minimis, provides that the interest shortfall for the long
first period (i.e., the interest that would have been earned if interest had
been paid on the first Payment Date for each day the Regular Security was
outstanding) is treated as made at a fixed rate if the value of the rate on
which the payment is based is adjusted in a reasonable manner to take into
account the length of the interval. Regular Owners should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Regular Security.
Under a de minimis rule, original issue discount on a Regular Security will
be considered to be zero if such original issue discount is less than 0.25% of
the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted maturity of the Regular Security is computed as the sum of the amounts
determined by multiplying the number of full years (i.e., rounding down partial
years) from the issue date until each distribution in reduction of stated
redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security.
Although currently unclear, it appears that the
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schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Assets and the anticipated
reinvestment rate, if any, relating to the Regular Securities (the "Prepayment
Assumption"). The Prepayment Assumption with respect to a Series of Regular
Securities will be set forth in the related Prospectus Supplement. The holder of
a debt instrument includes any de minimis original issue discount in income pro
rata as stated principal payments are received.
Of the total amount of original issue discount on a Regular Security, the
Regular Owner generally must include in gross income for any taxable year the
sum of the "daily portions," as defined below, of the original issue discount on
the Regular Security accrued during an accrual period for each day on which he
holds the Regular Security, including the date of purchase but excluding the
date of disposition. Although not free from doubt, the Depositor intends to
treat the monthly period ending on the day before each Payment Date as the
accrual period, rather than the monthly period corresponding to the prior
calendar month. With respect to each Regular Security, a calculation will be
made of the original issue discount that accrues during each successive full
accrual period (or shorter period from the date of original issue) that ends on
the day before the related Payment Date on the Regular Security. For a Regular
Security, original issue discount is to be calculated initially based on a
schedule of maturity dates that takes into account the level of prepayments and
an anticipated reinvestment rate that are most likely to occur, which is
expected to be based on the Prepayment Assumption. The original issue discount
accruing in a full accrual period would be the excess, if any, of (i) the sum of
(a) the present value of all of the remaining distributions to be made on the
Regular Security as of the end of that accrual period that are included in the
Regular Security's stated redemption price at maturity and (b) the distributions
made on the Regular Security during the accrual period that are included in the
Regular Security's stated redemption price at maturity over (ii) the adjusted
issue price of the Regular Security at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Security at the issue date, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular Security
at the beginning of any accrual period equals the issue price of the Regular
Security, increased by the aggregate amount of original issue discount with
respect to the Regular Security that accrued in all prior accrual periods and
reduced by the amount of distributions included in the Regular Security's stated
redemption price at maturity that were made on the Regular Security in such
prior period. The original issue discount accruing during any accrual period (as
determined in this paragraph) will then be divided by the number of days in the
period to determine the daily portion of original issue discount for each day in
the period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Owner generally will
increase to take into account prepayments on the Regular Securities as a result
of prepayments on the Mortgage Assets or that exceed the Prepayment Assumption,
and generally will decrease (but not below zero for any period) if the
prepayments are slower than the Prepayment Assumption. In the event of a change
in circumstances that does not result in a substantially contemporaneous pro
rata prepayment, the yield and maturity of the Regular Securities are
redetermined by treating the Regular Securities as reissued on the date of the
change for an amount equal to the adjusted issue price of the Regular
Securities. To the extent specified in the applicable Prospectus Supplement, an
increase in prepayments on the Mortgage Assets with respect to a Series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
A purchaser of a Regular Security at a price greater than the issue price
also will be required to include in gross income the daily portions of the
original issue discount on the Regular Security. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Security exceeds the
sum of the issue price and the aggregate amount of original issue discount that
would have been includible in the gross income of an original holder of the
Regular Security who purchased the Regular Security at its issue price, less any
prior distributions included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for such Regular Security
(computed in accordance with the rules set forth above) for all days after 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.
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A Owner may elect to include in gross income all stated interest, original
issue discount, de minimis original issue discount, market discount (as
described below under "Market Discount"), de minimis market discount and
unstated interest (as adjusted for any amortizable bond premium or acquisition
premium) currently as it accrues using the constant yield to maturity method. If
this election is made, the holder is treated as satisfying the requirements for
making the elections with respect to amortization of premium and current
inclusion of market discount, each as described under "Premium" and "Market
Discount" below.
Variable Rate Regular Securities. Regular Securities may provide for interest
based on a variable rate. The OID Regulations provide special rules for variable
rate instruments that meet three requirements. First, the noncontingent
principal payments may not exceed the instrument's issue price by more than a
specified amount equal to the lesser of (i) .015 multiplied by the product of
the total noncontingent payments and the weighted average maturity or (ii) 15%
of the total noncontingent principal payments. Second, the instrument must
provide for stated interest (compounded or paid at least annually) at (i) one or
more qualified floating rates, (ii) a single fixed rate followed by one or more
qualified floating rates, (iii) a single objective rate or (iv) a single fixed
rate and a single objective rate that is a qualified inverse floating rate.
Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period is set at a current value of
that rate (one occurring in the interval beginning three months before and
ending one year after the rate is first in effect on the Regular Security). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than zero but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Security to be significantly less or
more than the overall expected return on the Regular Security is considered a
qualified floating rate. An objective rate is a rate based on changes in the
price of actively traded property or an index of such prices or is a rate based
on (including multiples of) one or more qualified floating rates. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Security and is based on objective financial
information or economic information; however, a objective rate does not include
a rate based on information that is in the control of the issuer or that is
unique to the circumstances of a related party. Stated interest on a variable
rate debt instrument is qualified stated interest if the interest is
unconditionally payable in cash or property at least annually.
In general, the determination of original issue discount and qualified stated
interest on a variable rate debt instrument is made by converting the debt
instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a) in the case of a qualified floating
or inverse floating rate, the value, as of the issue date, of the qualified
floating inverse floating rate or (b) in the case of an objective rate (other
than a qualified inverse floating rate), a fixed rate that reflects the yield
that is reasonably expected for the debt instrument. For all other variable rate
debt instruments, the amount of interest and original issue discount accruals
are determined using the following steps. First, a fixed rate substitute for
each variable rate under the debt instrument is determined. In general, the
fixed rate substitute is a fixed rate equal to the rate of the applicable type
of variable rate as of the issue date. Second, an equivalent fixed rate debt
instrument is constructed using the fixed rate substitute(s) in lieu of the
variable rates and keeping all other terms identical. Third, the amount of
qualified stated interest and original issue discount with respect to the
equivalent fixed rate debt instrument are determined under the rules for fixed
rate debt instruments. Finally, appropriate adjustments for actual variable
rates are made during the term by increasing or decreasing the qualified stated
interest to reflect the amount actually paid during the applicable accrual
period as compared to the interest assumed to be accrued or paid under the
equivalent fixed rate debt instrument. If there is no qualified stated interest
under the equivalent fixed rate debt instrument, the adjustment is made to the
original issue discount for the period.
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The application of the OID Regulations to variable rate debt instruments is
limited and may not apply to some Regular Securities having variable rates. In
that event, the provisions of regulations issued on June 11, 1996, applicable to
instruments having contingent payments, may apply to those Regular Securities.
The application of those provisions to instruments such as variable rate Regular
Securities is subject to varying interpretations. Prospective purchasers of
variable rate Regular Securities are advised to consult their tax advisers
concerning the tax treatment of such Regular Securities.
Market Discount. A purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Security (i) is exceeded by the stated
redemption price at maturity of the Regular Security or (ii) in the case of a
Regular Security having original issue discount, is exceed by the sum of the
issue price of such Regular Security plus any original issue discount that would
have previously accrued thereon if held by an original Regular Owner (who
purchased the Regular Security at its issue price), in either case less any
prior distributions included in the stated redemption price at maturity of such
Regular Security. Such purchaser generally will be required to recognize accrued
market discount as ordinary income as distributions includible in the stated
redemption price at maturity of such Regular Security are received in an amount
not exceeding any such distribution. That recognition rule would apply
regardless of whether the purchaser is a cash-basis or accrual-basis taxpayer.
Such market discount would accrue in a manner to be provided in Treasury
regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Security
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Security as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Owner may elect to include market discount in income
currently as it accrues in all market discount instruments acquired by such
Regular Owner in that taxable year or thereafter, in which case the interest
deferral rule will not apply. In Revenue Procedure 92-67, the Internal Revenue
Service set forth procedures for taxpayers (1) electing under Code Section
1278(b) to include market discount in income currently, (2) electing under rules
of Code Section 1276(b) to use a constant interest rate to determine accrued
market discount on a bond where the holder of the bond is required to determine
the amount of accrued market discount at a time prior to the holder's
disposition of the bond, and (3) requesting consent to revoke an election under
Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a Regular
Security will be considered to be zero if such market discount is less than
0.25% of the remaining stated redemption price at maturity of such Regular
Security multiplied by the weighted average maturity of the Regular Security
(determined as described above under "Original Issue Discount") remaining after
the date of purchase. Treasury regulations implementing the market discount
rules have not yet been issued, and therefore investors should consult their own
tax advisors regarding the application of these rules as well as the
advisability of making any of the elections with respect thereto.
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
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between payments on the Regular Securities. This election, once made, applies to
all obligations held by the taxpayer at the beginning of the first taxable year
to which such section applies and to all taxable debt obligations thereafter
acquired and is binding on such taxpayer in all subsequent years. The Conference
Committee Report to the 1986 Act indicates a Congressional intent that the same
rules that apply to the accrual of market discount on installment obligations
will also apply to amortizing bond premium under Code Section 171 on installment
obligations such as the Regular Securities. On June 27, 1996, the IRS published
proposed regulations (the "Proposed Premium Regulations") covering the
amortization of bond premiums. The Proposed Premium Regulations describe the
constant yield method for amortizing premium and provide the Regular Owner may
offset the premium against corresponding interest income only as that interest
income is taken into account under the Regular Owner's method of accounting. For
instruments that may be called or prepaid prior to maturity, a Regular Owner
will be deemed to exercise its option and an issuer will be deemed to exercise
its redemption right in a manner that maximizes the Regular Owner's yield. The
Proposed Premium Regulations are proposed to be effective for debt instruments
acquired on or after the date 60 days after final regulations are issued. A
Regular Owner may elect to amortize bond premium under the Proposed Premium
Regulations for the taxable year containing the effective date, with the
election applying to all the Regular Owner's debt instruments held on the first
day of that taxable year. The Proposed Premium Regulations are subject to
further administrative action before becoming effective, if at all, and may be
modified before their becoming effective. Purchasers who pay a premium for their
Regular Securities should consult their tax advisors regarding the election to
amortize premium and the method to be employed.
Sale or Exchange of Regular Securities. If a Regular Owner sells or exchanges
a Regular Security, the Regular Owner will recognize gain or loss equal to the
difference, if any, between the amount received and his adjusted basis in the
Regular Security. The adjusted basis of a Regular Security generally will equal
the cost of the Regular Security to the seller, increased by any original issue
discount or market discount previously included in the seller's gross income
with respect to the Regular Security and reduced by amounts included in the
stated redemption price at maturity of the Regular Security that were previously
received by the seller and by any amortized premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss. Gain from the disposition of a
Regular Security that might otherwise be capital gain will be treated as
ordinary income to the extent that such gain does not exceed the excess, if any,
of (i) the amount that would have been includible in the gross income of the
holder if his yield on such Regular Security were 110% of the applicable Federal
rate under Code Section 1274(d) as of the date of purchase over (ii) the amount
of income actually includible in the gross income of such holder with respect to
the Regular Security. In addition, gain or loss recognized from the sale of a
Regular Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c). Net capital gains of
individuals are subject to varying tax rates depending upon the holding period
of the Regular Security.
Taxation of Residual Securities
Taxation of REMIC Income. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in determining
the federal taxable income of holders of Residual Securities ("Residual Owners")
and will not be taxed separately to the REMIC Pool. The daily portions of REMIC
taxable income or net loss of a Residual Owner are determined by allocating the
REMIC Pool's taxable income or net loss for each calendar quarter ratably to
each day in such quarter and by allocating such daily portion among the Residual
Owners in proportion to their respective holdings of Residual Securities in the
REMIC Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility of
investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to taxexempt
income will apply. REMIC taxable income generally means the REMIC Pool's gross
income, including interest, original issue discount income and market discount
income, if any, on the Mortgage Assets, plus income on reinvestment of cashflows
and reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Securities, servicing fees on the Mortgage
Assets and other administrative expenses of the REMIC Pool,
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amortization of premium, if any, with respect to the Mortgage Assets, and any
tax imposed on the REMIC's income from foreclosure property. The requirement
that Residual Owners report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Securities of any class of
the related Series outstanding.
The taxable income recognized by a Residual Owner in any taxable year will be
affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market discount income or
amortization of premium with respect to the Mortgage Assets, on the one hand,
and the timing of deductions for interest (including original issue discount) on
the Regular Securities, on the other hand. Because of the way REMIC taxable
income is calculated, a Residual Owner may recognize "phantom" income (i.e.,
income recognized for tax purposes in excess of income as determined under
financial accounting or economic principles) which will be matched in later
years by a corresponding tax loss or reduction in taxable income, but which
could lower the yield to Residual Owners due to the lower present value of such
future loss or reduction. For example, if an interest in the Mortgage Assets is
acquired by the REMIC Pool at a discount, and one or more of such Mortgage
Assets is prepaid, the Residual Owner may recognize taxable income without being
entitled to receive a corresponding amount of cash because (i) the prepayment
may be used in whole or in part to make distributions in reduction of principal
on the Regular Securities and (ii) the discount income on the Mortgage Loan
which is includible in the REMIC's taxable income may exceed the discount
deduction allowed to the REMIC upon such distributions on the Regular
Securities. When there is more than one class of Regular Securities that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Securities when distributions in reduction of principal are being made
in respect of earlier maturing classes of Securities to the extent that such
classes are not issued with substantial discount. If taxable income attributable
to such a mismatching is realized in general, losses would be allowed in later
years as distributions on the later classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of Regular Securities, where interest income with respect
to any given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Owners must
have sufficient other sources of cash to pay any federal, state or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income. Prospective investors should be aware, however, that a
portion of such income may be ineligible for offset by such investor's unrelated
deductions. See the discussion of "excess inclusions" below under "Limitations
on Offset or Exemption of REMIC Income; Excess Inclusions." The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a Series of Securities, may have a significant adverse effect
upon the Residual Owners aftertax rate of return. In addition, a Residual
Owner's taxable income during certain periods may exceed the income reflected by
such Owner for such periods in accordance with generally accepted accounting
principles. Investors should consult their own advisors concerning the proper
tax and accounting treatment of their investment in Residual Securities.
Basis and Losses. The amount of any net loss of the REMIC Pool that may be
taken into account by the Residual Owner is limited to the adjusted basis of the
Residual Security as of the close of the quarter (or time of disposition of the
Residual Security if earlier), determined without taking into account the net
loss for the quarter. The initial adjusted basis of a purchaser of a Residual
Security is the amount paid for such Residual Security. Such adjusted basis will
be increased by the amount of taxable income of the REMIC Pool reportable by the
Residual Owner and decreased by the amount of loss of the REMIC Pool reportable
by the Residual Owner. A cash distribution from the REMIC Pool also will reduce
such adjusted basis (but not below zero). Any loss that is disallowed on account
of this limitation may be carried over indefinitely with respect to the Residual
Owner as to whom such loss was disallowed and may be used by such Residual Owner
only to offset any income generated by 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
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their life. However, in view of the possible acceleration of the income of
Residual Owners described above under "Taxation of REMIC Income," the period of
time over which such issue price is effectively amortized may be longer than the
economic life of the Residual Securities.
If a Residual Security has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC Pool's basis in its assets. The REMIC Regulations do
not address whether residual interests could have a negative basis and a
negative issue price. The Depositor does not intend to treat a class of Residual
Securities as having a value of less than zero for purposes of determining the
bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of Residual Owner
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Assets, the
Residual Owner will not recover a portion of such basis until termination of the
REMIC Pool unless Treasury regulations yet to be issued provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations do not so provide. See "Treatment of Certain Items of REMIC Income
and Expense - Market Discount" below regarding the basis of Mortgage Assets to
the REMIC Pool and "Sale or Exchange of Residual Securities" below regarding
possible treatment of a loss upon termination of the REMIC Pool as a capital
loss.
Mark to Market Rules. Prospective purchasers of a Residual Security should be
aware that on December 24, 1996, the Internal Revenue Service issued final
regulations (the "Mark to Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark to market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that for purposes of this
mark to market requirement, a Residual Security acquired after January 4, 1995,
is not treated as a security and thus may not be marked to market.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for original
issue discount will be determined in the same manner as original issue discount
income on Regular Securities as described above under "Taxation of Regular
Securities - Original Issue Discount" and "Variable Rate Regular Securities,"
without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Assets if, in general, the basis of the REMIC Pool in such Mortgage
Assets is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Assets is generally the fair market value of the Mortgage Assets
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. In respect of Mortgage Assets
that have market discount to which Code Section 1276 applies, the accrued
portion of such market discount would be recognized currently by the REMIC as an
item of ordinary income. Market discount income generally should accrue in the
manner described above under "Taxation of Regular Securities - Market Discount."
However, the rules of Code Section 1276 concerning market discount income will
not apply in the case of Mortgage Assets originated on or prior to July 18,
1984, if any. With respect to such Mortgage Assets market discount is generally
includible in REMIC taxable income or ordinary gross income pro rata as
principal payments are received. Under another interpretation of the Code and
relevant legislative history, market discount on such Mortgage Assets might be
required to be recognized currently by the REMIC, in the same manner that market
discount would be recognized 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
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to the amount of such excess. As stated above,the REMIC Pool's basis in the
Mortgage Assets is the fair market value of the Mortgage Assets, based on the
aggregate of the issue prices of the regular and residual interests in the REMIC
Pool immediately after the transfer thereof to the REMIC Pool. In a manner
analogous to the discussion above under "Taxation of Regular Securities -
Premium," a person that holds a Mortgage Loan as a capital asset under Code
Section 1221 may elect under Code Section 171 to amortize premium on Mortgage
Assets originated after September 27, 1985 under a constant yield method.
Amortizable bond premium will be treated as an offset to interest income on the
Mortgage Assets, rather than as a separate deduction item. Because substantially
all the mortgagors with respect to the Mortgage Assets are expected to be
individuals, Code Section 171 will not be available. Premium on Mortgage Assets
may be deductible in accordance with a reasonable method regularly employed by
the holder thereof. The allocation of such premium pro rata among principal
payments should be considered a reasonable method; however, the Internal Revenue
Service may argue that such premium should be allocated in a different manner,
such as allocating such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions. A
portion of the income allocable to a Residual Security (referred to in the Code
as an "excess inclusion") for any calendar quarter, with an exception discussed
below for certain thrift institutions, will be subject to federal income tax in
all events. Thus, for example, an excess inclusion (i) cannot, except as
described below, be offset by any unrelated losses or loss carryovers of a
Residual Owner, (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the Residual Owner is a pension fund
or any other organization that is subject to tax only on its unrelated business
taxable income and (iii) is not eligible for any reduction in the rate of
withholding tax in the case of a Residual Owner that is a foreign investor, as
further discussed in "Taxation of Certain Foreign Investors - Residual
Securities" below. Except as discussed below with respect to excess inclusions
from Residual Securities without "significant value." Members of an affiliated
group are treated as one corporation for purposes of applying the limitation on
offset of excess inclusion income. The Small Business Protection Act of 1996
(the "1996 Act") eliminated a special rule that permitted thrift institutions to
use net operating losses and other allowable deductions to offset their excess
inclusion income from Residual Securities with significant value for taxable
years beginning after December 31, 1995 (subject to exceptions for certain
certificates held continuously since November 1, 1995). The 1996 Act also
provides new rules affecting the determination of alternative maximum taxable
income ("AMTI") of a Residual Owner. First, AMTI is calculated without regard to
the special rule that taxable income cannot be less than excess inclusion income
for the year. Second, AMTI cannot be less than excess inclusion income for the
year. Finally, any AMTI net operating loss deduction is computed without regard
to excess inclusion income. These new rules are effective for tax years
beginning after December 31, 1986, unless a Residual Owner elects to have the
rules apply only to tax years ending after August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Securities without "significant value," for any
Residual Owner, the excess inclusion for any calendar quarter is the excess, if
any, of (i) the income of such Residual Owner for that calendar quarter from its
Residual Security over (ii) the sum of the "daily accruals" (as defined below)
for all days during the calendar quarter on which the Residual Owner holds such
Residual Security. For this purpose, the daily accruals with respect to a
Residual Security are determined by allocating to each day in the calendar
quarter its ratable portion of the product of the "adjusted issue price" (as
defined below) of the Residual Security at the beginning of the calendar quarter
and 120 percent of the "Federal long-term rate" in effect at the time the
Residual Security is issued. For this purposes the "adjusted issue price" of a
Residual Security at the beginning of any calendar quarter equals the issue
price of the Residual Security (adjusted for contributions), increased by the
amount of daily accruals for all prior quarters, and decreased (but not below
zero) by the aggregate amount of payments made on the Residual Security before
the beginning of such quarter. The Federal long-term rate is an average of
current yields on Treasury securities with a remaining term of greater than nine
years, computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an exception
to the general rule described above, the entire amount of income accruing on a
Residual Security will be treated as an excess inclusion if the Residual
Securities in the aggregate are considered not to have "significant value." The
Treasury Department has 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
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of all Regular Securities and Residual Securities in the REMIC and (ii) the
anticipated weighted average life of the Residual Securities is at least 20
percent of the REMIC's anticipated weighted average life based on the prepayment
and reinvestment assumptions used in pricing the transaction and any recognized
or permitted clean up calls or any required qualified liquidation. Although not
entirely clear, the REMIC Regulations indicate that the significant value
determination is made only on the Startup Day. The anticipated weighted average
life of a Residual Security with a principal balance and a market rate of
interest is computed by multiplying the amount of each expected principal
payment by the number of years (or portions thereof) from the Startup Day,
adding these sums and dividing by the total principal expected to be paid on
such Residual Security based on the relevant prepayment assumption and expected
reinvestment income. The anticipated weighted average life of a Residual
Security with either no specified principal balance or a principal balance and
rights to interest payments disproportionate to such principal balance, would be
computed under the formula described above but would include all payments
expected on the Residual Security instead of only the principal payments. The
anticipated weighted average life of a REMIC is a weighted average of the
anticipated weighted average lives of all classes of interest in the REMIC.
Under Treasury regulations to be promulgated, a portion of the dividends paid
by a REIT which owns a Residual Security are to be designated as excess
inclusions in an amount corresponding to the Residual Security's allocable share
of the excess inclusions. Similar rules apply in the case of regulated
investment companies, common trust funds and cooperatives. Thus, investors in
such entities which own a Residual Security will be subject to the limitations
on excess inclusions described above. The REMIC Regulations do not provide
guidance on this issue.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If legal title or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal corporate income tax rate. The REMIC Regulations provide that the
anticipated excess inclusion are based on actual prepayment experience to the
date of the transfer and projected payments based on the Prepayment Assumption.
The present value discount rate equals the applicable Federal rate under Code
Section 1274(d) that would apply to a debt instrument that was issued on the
date the Disqualified Organization acquired the Residual Security and whose term
ended on the close of the last quarter in which excess inclusion was expected to
accrue with respect to the Residual Security. Such a tax generally would be
imposed on the transferor of the Residual Security, except that where such
transfer is through an agent (including a broker, nominee, or other middleman)
for a Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Security would in no event be liable for
such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a Disqualified Organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that such affidavit is false. The tax also may be waived by the
Treasury Department if the Disqualified Organization promptly disposes of the
Residual Security and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the Residual Security is actually
held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
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.
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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 Final REMIC Regulations, a transfer of a Noneconomic Residual Interest
(defined below) to a Residual Owner (other than a Residual Owner who is not a
U.S. Person, as defined below under "Foreign Investors") is disregarded for all
federal income tax purposes unless no significant purpose of the transfer is to
impede the assessment or collection of tax. A residual interest in a REMIC
(including a residual interest with a positive value at issuance) is a
"Noneconomic Residual Interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest federal corporate income tax rate in effect for the
year in which the transfer occurs, and (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. The anticipated excess inclusions and
the present value rate are determined in the same manner as set forth above
under "Disqualified Organizations." A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and, as a result of the investigation, the transferor found that
the transferee had historically paid its debts as they came due and found 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
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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 him from the REMIC Pool exceeds such adjusted basis on that
Payment Date. Such income will be treated as gain from the sale or exchange of
the Residual Security. It is possible that the termination of the REMIC Pool may
be treated as a sale or exchange of a Residual Owner's Residual Security, in
which case, if the Residual Owner has an adjusted basis in his Residual Security
remaining when his interest in the REMIC Pool terminates, and if he holds such
Residual Security as a capital asset under Code Section 1221, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to disposition of Residual Securities. Consequently,
losses on dispositions of Residual Securities will be disallowed where the
seller of the Residual Security, during the period beginning six months before
the sale or disposition of the Residual Security and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Security.
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
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REMIC Pool or (d) a qualified (complete) liquidation, (ii) the receipt of income
from assets that are not the type of mortgages or investments that the REMIC
Pool is permitted to hold, (iii) the receipt of compensation for services or
(iv) the receipt of gain from disposition of cash flow investments other than
pursuant to a qualified liquidation. Notwithstanding (i) and (iv), it is not a
prohibited transaction to sell REMIC Pool property to prevent a default on
Regular Securities as a result of a default on qualified mortgages or to
facilitate a cleanup call (generally, an optional termination to save
administrative costs when no more than a small percentage of the Securities is
outstanding). The REMIC Regulations indicate that the modification of a Mortgage
Loan generally will not be treated as a disposition if it is occasioned by a
default or reasonably foreseeable default, an assumption of the Mortgage Loan,
the waiver of a dueonsale or encumbrance clause or the conversion of an interest
rate by a mortgagor pursuant to the terms of a convertible adjustable rate
Mortgage Loan. The REMIC Regulations also provide that the modification of
mortgage loans underlying MortgageBacked Securities will not be treated as a
modification of the MortgageBacked Securities, provided that the trust including
the was not created to avoid prohibited transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general, the REMIC
Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual Owner, (iii) in
the nature of a guarantee, (iv) made to facilitate a qualified liquidation or
clean-up call and (v) as otherwise permitted in Treasury regulations yet to be
issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of two years, with possible extensions. Net income from
foreclosure property generally means (i) gain from the sale of a foreclosure
property that is inventory property and (ii) gross income from foreclosure
property other than qualifying rents and other qualifying income for a real
estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation, within
the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC Pool's
assets (other than cash) within a 90-day period beginning on the date of the
adoption of the plan of liquidation, the REMIC Pool will recognize no gain or
loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Securities and Residual Owners within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Owner for an entire
taxable year, the REMIC Pool generally will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction or credit in a unified
administrative proceeding. The Depositor or other designated Residual Owners
will be obligated to act as "tax matters person," as defined in applicable
Treasury regulations, with respect to the REMIC Pool. If the Code or applicable
Treasury regulations do not permit the Depositor to act as tax matters person in
its capacity as agent of the Residual Owners, the Residual Owner chosen by the
Residual Owners or such other person specified pursuant to Treasury regulations
will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Security is not
required to treat items on its return consistently with their treatment on the
REMIC Pool's return if a holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each holder of a Residual Security is required
to treat items on its return
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consistently with their treatment on the REMIC Pool's return, unless the holder
of a Residual Security either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Pool. The Service may assess a deficiency resulting from a
failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC Pool level.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Securities in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Securities, as well as holders of
Residual Securities, where such Regular Securities are issued in a manner that
is similar to 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 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
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(i) the Mortgage Assets were issued after July 18, 1984 and (ii) the Trust fund
or segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Security relates, consists of obligations issued
in "registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Assets will not be, but regular interests in another REMIC Pool will
be, considered obligations issued in registered form. Furthermore, a Residual
Owner will not be entitled to any exemption from the 30% withholding tax (or
lower treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "Taxation of Residual Securities -
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions." If the
amounts paid to Residual Owners who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Securities - Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
On April 22, 1996, the IRS issued proposed regulations which, if adopted in
final form, could have an effect on the United States' taxation of foreign
investors in Regular Securities or Residual Securities. The proposed regulations
would apply to payments after December 31, 1997. Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning Residual Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Owner complies with
certain reporting and/or certification procedures, including the provision of
its taxpayer identification number to the Trustee, its agent or the broker who
effected the sale of the Regular Security, or such Owner is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Owner's federal
income tax liability.
Reporting Requirements
Reports of accrued interest and original issue discount will be made annually
to the Internal Revenue Service and to individuals, estates, non-exempt and
noncharitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular Series of Regular
Securities. Holders through nominees must request such information from the
nominee. Treasury regulations provide that information necessary to compute the
accrual of any market discount on the Regular Securities must be furnished for
calendar years beginning after 1990.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Owner by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
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Treasury regulations require that, in addition to the foregoing requirements,
information must be furnished quarterly to Residual Owners, furnished annually,
if applicable, to holders of Regular Securities, and filed annually with the
Internal Revenue Service concerning Code Section 67 expenses (see "Limitations
on Deduction of Certain Expenses" above) allocable to such holders. Furthermore,
under such regulations, information must be furnished quarterly to Residual
Owners, furnished annually to holders of Regular Securities, and filed annually
with the Internal Revenue Service concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under "Federal Income
Tax Consequences for REMIC Securities," above."
FEDERAL INCOME TAX CONSEQUENCES FOR SECURITIES AS TO WHICH NO REMIC ELECTION IS
MADE
Arter & Hadden, special counsel to the Depositor, is of the opinion that if a
Trust does not elect REMIC status and is not treated as a partnership, and if
the Securities are not treated as debt for federal tax purposes, the tax
consequences to the Owners will be as described below.
Standard Securities
General. If no election is made to treat a Trust (or a segregated pool of
assets therein) with respect to a Series of Securities as a REMIC, the Trust may
be classified as a grantor trust under subparagraph E, Part 1 of subchapter J of
the Code and not as a partnership or an association taxable as a corporation.
Where there is no fixed retained yield with respect to the Mortgage Assets
underlying the Securities of a Series, and where such Securities are not
designated as Debt Certificates, as described under "Debt Certificates," as
Stripped Securities, as described below under "Stripped Securities" or as
Partnership Interests described under "Taxation of Securities Classified as
Partnership Interests," the holder of each such "Standard Security" in such
Series will be treated as the owner of a pro rata undivided interest in the
ordinary income and corpus portions of the Trust represented by his Security and
will be considered the beneficial owner of a pro rata undivided interest in each
of the Mortgage Assets, subject to the discussion below under
"Recharacterization of Servicing Fees." Accordingly, the Owner of a Security of
a particular Series will be required to report on its federal income tax return
its pro rata share of the entire income from the Mortgage Assets, original issue
discount (if any), prepayment fees, assumption fees, and late payment charges
received by or on behalf of the Trust, in accordance with such Owner's method of
accounting. A Owner generally will be able to deduct its share of servicing fees
and all administrative and other expenses of the Trust in accordance with his
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Trust. However, investors who are individuals, estates
or trusts who own Securities, either directly or indirectly through certain
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 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, Arter & Hadden, special
counsel to the Depositor, is of the opinion that:
1. A Standard Security owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest
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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 buy-down Mortgage Loan is uncertain, but may require that a
taxpayer's investment in a buy-down Mortgage Loan be reduced by the buy-down
fund. As to the treatment of buy-down Mortgage Assets as "qualifying real
property loans" under Code Section 593(d)(i) if the exception of Code Section
593(d)(1)(C) is inapplicable, as "loans . . . secured "by an interest in real
property" under Code Section 7701(a)(19)(C)(v), as "real estate assets" under
Code Section 856(c)(5)(A), and as "obligation[s] principally secured by an
interest in real property" under Code Section 860G(a)(3)(A), there is indirect
authority supporting treatment of an investment in a buy-down Mortgage Loan as
entirely secured by real property if the fair market value of the real property
securing the loan exceeds the principal amount of the loan at the time of
issuance or acquisition, as the case may be. There is no assurance that the
treatment described above is proper. Accordingly, Owners are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Owner's investment for federal income tax purposes.
Premium and Discount
Owners are advised to consult with their tax advisors as to the federal
income tax treatment of premium and discount arising either upon initial
acquisition of Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Security
will be determined generally as described above under "- Taxation of Regular
Securities - Premium."
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.
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Original issue discount must generally be reported as ordinary gross income
as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Assets
acquired by an Owner are purchased at a price equal to the then unpaid principal
amount of such Mortgage Assets, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Assets (i.e., points) will be includible by such holder.
Market Discount. Owners also will be subject to the market discount rules to
the extent that the conditions for application of those sections are met. Market
discount on the Mortgage Assets will be determined and will be reported as
ordinary income generally in the manner described above under "- Taxation of
Regular Securities - Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to Servicers
were deemed to exceed reasonable servicing compensation, the amount of such
excess would be nondeductible under Code Section 162 or 212. In this
regard,there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Securities, the reasonableness of servicing compensation should be
determined on a weighted average or loan by loan basis. If a loanbyloan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Assets would be increased. Recently
issued Internal Revenue Service guidance indicates that a servicing fee in
excess of reasonable compensation ("excess servicing") will cause the Mortgage
Assets to be treated under the "stripped bond" rules. Such guidance provides
safe harbors for servicing deemed to be reasonable and requires taxpayers to
demonstrate that the value of servicing fees in excess of such amounts is not
greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a servicer
that receives excess servicing fees would be viewed as retaining an ownership
interest in a portion of the interest payments on the Mortgage Assets. Under the
rules of Code Section 1286, the separation of the right to receive some or all
of the interest payments on an obligation from the right to receive some or all
of the principal payments on the obligation would result in treatment of such
Mortgage Assets as "stripped coupons" and "stripped bonds." While Owners would
still be treated as owners of beneficial interests in a grantor trust for
federal income tax purposes, the corpus of such trust could be viewed as
excluding the portion of the Mortgage Assets the ownership of which is
attributed to a servicer, or as including such portion as a second class of
equitable interest. Applicable Treasury regulations treat such an arrangement as
a fixed investment trust, since the multiple classes of trust interests should
be treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, such a recharacterization should not have any significant
effect upon the timing or amount of income reported by an Owner, except that the
income reported by a cash method holder may be slightly accelerated. See
"Stripped Securities" below for a further description of the federal income tax
treatment of stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees paid to
the servicers are deemed to exceed reasonable compensation for servicing could
be treated as deferred payments of purchase price by the Owners to purchase an
undivided interest in the Mortgage Assets. In such event, the present value of
such additional payments might be included in the Owner's basis in such
undivided interests for purposes of determining whether the Security was
acquired at a discount, at par, or at a premium. Under this alternative, Owners
may also be entitled to a deduction for unstated interest with respect to each
deferred payment. The Internal Revenue Service may take the position that the
specific statutory provisions of Code Section 1286 described above override the
alternative described in this paragraph. Owners are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
Sale or Exchange of Securities. Upon sale or exchange of a Security, a Owner
will recognize gain or loss equal to the difference between the amount realized
on the sale and its aggregate adjusted basis in the Mortgage
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Assets and other assets represented by the Security. In general, the aggregate
adjusted basis will equal the Owner's cost for the Security, increased by the
amount of any income previously reported with respect to the Security and
decreased by the amount of any losses previously reported with respect to the
Security and the amount of any distributions received thereon. Except as
provided above with respect to market discount on any Mortgage Assets, and
except for certain financial institutions subject to the provisions of Code
Section 582(c), any such gain or loss would be capital gain or loss if the
Security was held as a capital asset.
Stripped Securities
General. Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Securities that are subject to those rules will be referred to as
"Stripped Securities." The Securities will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Securities - Recharacterization of the
Servicing Fees" above) and (iii) a class of Securities are issued in two or more
classes or subclasses representing the right to non pro rata percentages of the
interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Security (a "Stripped Owner") will be
considered to own "stripped bonds" with respect to its pro rata share of all or
a portion of the principal payments on each Mortgage Loan and/or "stripped
coupons" with respect to its pro rata share of all or a portion of the interest
payments on each Mortgage Loan, including the Stripped Security's allocable
share of the servicing fees paid, to the extent that such fees represent
reasonable compensation for services rendered. See discussion above under
"Standard Securities - Recharacterization of Servicing Fees." For this purpose
the servicing fees will be allocated to the Stripped Securities in proportion to
the respective offering price of each class (or subclass) of Stripped
Securities. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"- Federal Income Tax Consequences for Securities as to Which No REMIC Election
is Made - Standard Securities - General," subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as a
new obligation issued (i) on the date that the stripped interest is purchased
and (ii) at a price equal to its purchase price or, if more than one stripped
interest is purchased, the share of the purchase price allocable to such
stripped interest. Each stripped interest generally will have original issue
discount equal to the excess of its stated redemption price at maturity (or, in
the case of a stripped coupon, the amount payable on the due date of such
coupon) over its issue price. Although the treatment of Stripped Securities for
federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Securities are issued with respect to a Trust
containing variablerate Mortgage Assets, the Depositor has been advised by
counsel that (i) the Trust will be treated as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation, and (ii) each Stripped Security should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286 and the regulations thereunder, Code Sections 1272 through
1275, and the OID Regulations. While under Code Section 1286 computations with
respect to Stripped Securities arguably should be made in one of the ways
described below, the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as a
single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the treatment of
a Stripped Security as a single debt instrument issued on the date it is
originated for purposes of calculating any original issue discount. The preamble
to such regulations state that such regulations are premised on the assumption
that an aggregation approach is appropriate in determining whether original
issue discount on a stripped bond or stripped coupon is de minimis. In addition,
under these regulations, a Stripped Security that represents a right to payments
of both
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interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or presumably, at a premium. The preamble to such regulations also
provide that such regulations are premised on the assumption that generally the
interest component of such a Stripped Security would be treated as stated
interest under the original issue discount rules. Further, the regulations
provide that the purchaser of such a Stripped Security may be required to
account for any discount as market discount rather than original issue discount
if either (i) the initial discount with respect to the Strip Security was
treated as zero under the de minimis rule or (ii) no more than 100 basis points
in excess of reasonable servicing is stripped off the related Mortgage Assets.
Any such market discount would be reportable as described above under "Federal
Income Tax Consequences for REMIC Securities - Taxation of Regular Securities -
Market Discount," without regard to the de minimis rule therein.
Status of Stripped Securities. No specific legal authority exists as to
whether the character of the Stripped Securities, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Although the issue is
not free from doubt, counsel has advised the Depositor that Stripped Securities
owned by applicable holders should be considered to represent "qualifying real
property loans" within the meaning or Code Section 593(d)(1), "real estate
assets" within the meaning of Code Section 856(c)(A), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Securities should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning or Code Section 856(c)(3)(B), provided that in each
case the Mortgage Assets and interest on such Mortgage Assets qualify for such
treatment. The application of such Code provisions to buy-down Mortgage Assets
is uncertain. See "- Federal Income Tax Consequences for Securities as to Which
No REMIC Election is Made" and "- Standard Securities - Tax Status" above.
Original Issue Discount. Except as described above under "- General," each
Stripped Security will be considered to have been issued (i) on the date that
the stripped interest is purchased and (ii) at a price equal to its purchase
price or, if more than one stripped interest is purchased, the share of the
purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. Original issue
discount with respect to a Stripped Security must be included in ordinary income
as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Counsel has advised the Depositor that the
amount of original issue discount required to be included in the income of a
Stripped Owner in any taxable year likely will be computed generally as
described above under "Federal Income Tax Consequences for REMIC Securities -
Taxation of Regular Securities - Original Issue Discount" and "- Variable Rate
Regular Securities." However, with the apparent exception of a Stripped Security
issued with de minimis original issue discount, as described above under
"- General," the issue price of a Stripped Security will be the purchase price
paid by each holder thereof, and the stated redemption price at maturity will
include the aggregate amount of the payments to be made on the Stripped Security
to such Stripped Owner, presumably under the Prepayment Assumption, other than
amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Owner's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by such Stripped Owner's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize
an ordinary loss equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some of or all
the interest payments with respect to the Stripped Securities will not be made
if the Mortgage Assets are prepaid could lead to the interpretation that such
interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply, treatment
of a Stripped Security under such rules depends on whether the aggregate amount
of principal payments, if any, to be made on the Stripped Security is less than
or greater than its issue price. If the
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aggregate principal payments are greater than or equal to the issue price, the
principal payments would be treated as a separate installment obligation issued
at a price equal to the purchase price for the Stripped Security. In such case,
original issue discount would be calculated and accrued under the method
described above without consideration of the interest payments with respect to
the Stripped Security. Such payments of interest would be includible in the
Stripped Owner's gross income in the taxable year in which the amounts become
fixed. If the aggregate amount of principal payments to be made on the Stripped
Security is less than its issue price, each payment of principal would be
treated as a return of basis. Each payment of interest would be treated as
includible in gross income to the extent of the applicable Federal rate under
Code Section 1274(d), as applied to the adjusted basis of the Stripped Security,
while amounts received in excess of the applicable Federal rate, as applied to
the adjusted basis of the Stripped Security, would be characterized as a return
of basis until the total amount of interest payments treated as a return of
basis equalled the excess of the purchase price over the aggregate stated
principal payments. Any additional interest payments thereafter would be treated
as ordinary income. While not free from doubt uncertainty as to the payment of
interest arising as a result of the possibility of prepayment of the Mortgage
Assets should not cause the rules under the proposed contingent payment
regulations to apply to interest with respect to the Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped Owner's
adjusted basis in such Stripped Security, as described above under "Federal
Income Tax Consequences for REMIC Securities - Taxation of Regular Securities -
Sale or Exchange of Regular Securities." To the extent that a subsequent
purchaser's purchase price is exceeded by the remaining payments on the Stripped
Securities, such subsequent purchaser will be required for federal income tax
purposes to accrue and report such excess as if it were original issue discount
in the manner described above. It is not clear for this purpose whether the
assumed prepayment rate that is to be used in the case of a Stripped Owner other
than by original Stripped Owner should be the Prepayment Assumption or a new
rate based on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. Where an investor
purchases more than one class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Stripped Owners are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee or the Indenture Trustee, as applicable, will furnish, within a
reasonable time after the end of each calendar year, to each Owner or Stripped
Owner at any time during such year, such information (prepared on the basis
described above) as the Trustee or the Indenture Trustee, as applicable, deems
to be necessary or desirable to enable such Owners to prepare their federal
income tax returns. Such information will include the amount of original issue
discount accrued on Securities held by persons other than Owners exempted from
the reporting requirements. The amounts required to be reported by the Trustee
or the Indenture Trustee, as applicable, may not be equal to the proper amount
of original issue discount required to be reported as taxable income by an
Owner, other than an original Owner. The Trustee or the Indenture Trustee, as
applicable, will also file such original issue discount information with the
Internal Revenue Service. If an Owner fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Owner has not reported all interest and dividend income required to be shown on
his federal income tax return, 31% backup withholding may be required in respect
of any reportable payments, as described above under "- Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Assets that are
issued on or before July 18, 1984, interest or original issue discount paid by
the person required to withhold tax under Code Section 1441 or 1442, which apply
to nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be
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subject to 30% United States withholding tax, or such lower rate as may be
provided for interest by an applicable tax treaty. Accrued original issue
discount or market discount recognized by the Owner on the sale or exchange of
such a Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid by
the Trustee or other withholding agent to a Non-U.S. Person evidencing ownership
interest in Mortgage Assets issued after July 18, 1984 will be "portfolio
interest" and will be treated in the manner, and such persons will be subject to
the same certification requirements described above under "- Taxation of
Certain Foreign Investors - Regular Securities."
Owners should be aware that the IRS issued proposed regulations on April 22,
1996 which, if adopted in final form, could affect the United States' taxation
of foreign investors in Securities. The proposed regulations would apply to
payments after December 31, 1997. Investors who are non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to them
of owning Securities.
Debt Certificates
General. Certain Certificates ("Debt Certificates") may be issued with the
intention to treat them, for federal income tax purposes, either as (i)
nonrecourse debt of the Depositor secured by the related Mortgage Assets, in
which case the related Trust will constitute only a security device which
constitutes a collateral arrangement for the issuance of secured debt and not an
entity for federal income tax purposes or (ii) debt of a partnership, in which
case the related Trust will constitute a partnership for federal income tax
purposes. Arter & Hadden, special counsel to the Depositor, is of the opinion
that (unless otherwise limited in the related Prospectus Supplement), for
federal income tax purposes, assuming compliance with all the provisions of the
related Indenture, (i) Debt Certificates will be characterized as debt issued
by, and not equity in, the related Trust and (ii) the related Trust will not be
characterized as an association (or publicly traded partnership within the
meaning of Code Section 7704) taxable as a corporation or as a taxable mortgage
pool within the meaning of Code Section 7701(i). Since different criteria are
used to determine the nontax accounting treatment of the issuance of Debt
Certificates, however, the Depositor expects to treat such transactions, for
financial accounting purposes, as a transfer of an ownership interest in the
related Mortgage Assets to the related Trust and not as the issuance of debt
obligations. In this regard, it should be noted that the IRS has issued a notice
stating that, upon examination, it will scrutinize instruments treated as debt
for federal income tax purposes but as equity for regulatory, rating agency or
financial accounting purposes to determine if their purported status as debt for
federal income tax purposes is appropriate. Assuming, as Arter & Hadden advises,
that Debt Certificates will be treated as indebtedness for federal income tax
purposes, holders of Debt Certificates, using their method of tax accounting,
will follow the federal income tax treatment hereinafter described.
Original Issue Discount. It is likely that the Debt Certificates will be
treated as having been issued with "original issue discount" within the meaning
of Code Section 1273(a) because interest payments on the Debt Certificates may,
in the event of certain shortfalls, be deferred for periods exceeding one year.
As a result, interest payments may not be considered "qualified stated interest"
payments.
In general, a holder of a Debt Certificate having original issue discount
must include original issue discount in ordinary income as it accrues in advance
of receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Debt
Certificate will be computed generally as described under "- Federal Income Tax
Consequences for REMIC Securities" and "Taxation of Regular Securities -
Original Issue Discount" and "- Variable Rate Regular Securities." The Depositor
intends to report any information required with respect to the Debt Certificates
based on the OID Regulations.
Market Discount. A purchaser of a Debt Certificate may be subject to the
market discount rules of Code Sections 1276 through 1278. In general, "market
discount" is the amount by which the stated redemption price at maturity (or, in
the case of a Debt Certificate issued with original issue discount, the adjusted
issue price) of the Debt Certificate exceeds the purchaser's basis in a Debt
Certificate. The holder of a Debt Certificate that has market discount generally
will be required to include accrued market discount in ordinary income to the
extent payments includible in the stated redemption price at maturity of such
Debt Certificate are received. The amount
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of market discount on a Debt Certificate will be computed generally as described
under "Federal Income Tax Consequences for REMIC Securities" and "- Taxation of
Regular Securities - Market Discount."
Premium. A Debt Certificate purchased at a cost greater than its currently
outstanding stated redemption price at maturity is considered to be purchased at
a premium. A holder of a Debt Certificate who holds a Debt Certificate as a
"capital asset" within the meaning of Code Section 1221 may elect under Code
Section 171 to amortize the premium under the constant interest method. That
election will apply to all premium obligations that the holder of a Debt
Certificate acquires on or after the first day of the taxable year for which the
election is made, unless the IRS permits the revocation of the election. In
addition, it appears that the same rules that apply to the accrual of market
discount on installment obligations are intended to apply in amortizing premium
on installment obligations such as the Debt Certificates. The treatment of
premium incurred upon the purchase of a Debt Certificate will be determined
generally as described above under "Taxation of Regular Securities Premium."
Sale or Exchange of Debt Certificates. If a holder of a Debt Certificate
sells or exchanges a Debt Certificate, the holder of a Debt Certificate will
recognize gain or loss equal to the difference, if any, between the amount
received and the holder of a Debt Certificate's adjusted basis in the Debt
Certificate. The adjusted basis in the Debt Certificate generally will equal its
initial cost, increased by any original issue discount or market discount
previously included in the seller's gross income with respect to the Debt
Certificate and reduced by the payments previously received on the Debt
Certificate, other than payments of qualified stated interest, and by any
amortized premium.
In general, except as described above with respect to market discount, and
except for certain financial institutions subject to Code Section 582(c), any
gain or loss on the sale or exchange of a Debt Certificate recognized by an
investor who holds the Debt Certificate as a capital asset (within the meaning
of Code Section 1221), will be capital gain or loss and will be long-term or
shortterm depending on whether the Debt Certificate has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
longterm capital gains. For individual taxpayers, net capital gains are subject
to varying tax rates depending upon the holding period of the Debt Certificates.
Backup Withholding. Holders of Debt Certificates will be subject to backup
withholding rules identical to those applicable to REMIC Regular Securities. See
"Federal Income Tax Consequences For REMIC Securities Backup Withholding."
Tax Treatment of Foreign Investors. Holders of Debt Certificates who are
foreign investors will be subject to taxation in the same manner as foreign
holders of REMIC Regular Securities. See "Federal Income Tax Consequences For
REMIC Securities Taxation of Certain Foreign Investors Regular Securities."
Notes
With respect to those Securities issued as Notes, no regulations, published
rulings or judicial decisions exist that discuss the characterization for
federal income tax purposes of instruments with terms substantially the same as
the Notes. However, Arter & Hadden, special counsel to the Depositor, is of the
opinion that (unless otherwise limited in the related Prospectus Supplement),
for federal income tax purposes, assuming compliance with all the provisions of
the related Indenture, (i) Notes will be characterized as debt issued by, and
not equity in, the related Trust and (ii) the related Trust will not be
characterized as an association (or publicly traded partnership within the
meaning of Code Section 7704) taxable as a corporation or as a taxable mortgage
pool within the meaning of Code Section 7701(i). Assuming, as Arter & Hadden
advises, that Notes are treated as indebtedness for federal income tax purposes,
holders of Notes, using their method of tax accounting, will follow the same
federal income tax treatment as Debt Certificates, as described above under
"Federal Income Tax Consequences Federal Income Tax Consequences for Securities
as to Which No REMIC Election Is Made Debt Certificates."
For federal income tax purposes, (i) Notes held by a thrift institution taxed
as a "mutual savings bank" or "domestic building and loan association" will not
represent interests in "qualifying real property loans" within the meaning of
Code Section 593(d)(1); (ii) Notes held by a thrift institution taxed as a
domestic building and loan
70
<PAGE>
association will not constitute "loans ... secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v); (iii) interest
on Notes held by a real estate investment trust will not be treated as "interest
on obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B); (iv) Notes held be a
real estate investment trust will not constitute "real estate assets" or
"Government securities" within the meaning of Code Section 856(c)(5)(A); and (v)
Notes held by a regulated investment company will not constitute "Government
securities" within the meaning of Code Section 851(b)(4)(A)(i).
Taxation of Certificates Classified as Partnership Interests
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Securities characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such Series of Partnership Interests, Arter & Hadden, special counsel
to the Depositor, is of the opinion that (unless otherwise limited in the
related Prospectus Supplement) the Trust will be characterized as a partnership
and not an association taxable as a corporation or taxable mortgage pool for
federal income tax purposes. The related Prospectus Supplement will also cover
any material federal income tax consequences applicable to the Owners.
PLAN OF DISTRIBUTION
Securities are being offered hereby in Series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the Series of Securities,
including the public offering or purchase price of each class of Securities of
such Series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Securities will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Securities from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular Series of Securities will be set forth on the
cover of the Prospectus Supplement relating to such Series and the members of
the underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Securities, Underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Depositor and any profit on the resale of Securities by them may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended. The Prospectus Supplement will describe any such
compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the sale of
any Series of Securities will provide that the obligations of the Underwriters
will be subject to certain conditions precedent, that the Underwriters 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
71
<PAGE>
will not be lowered or withdrawn by a Rating Agency at any time thereafter. In
general, ratings address credit risk and do not represent any assessment of the
likelihood or rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Securities of each Series including insolvency issues and certain federal income
tax matters concerning the Securities will be passed upon for the Depositor by
Arter & Hadden, Washington, D.C.
FINANCIAL INFORMATION
A Trust will be formed with respect to each Series of Securities. No Trust
will have any assets or obligations prior to the issuance of the related Series
of Securities. No Trust will engage in any activities other than those described
herein or in the Prospectus Supplement. Accordingly, no financial statement with
respect to any Trust is included in this Prospectus or will be included in the
Prospectus Supplement.
The Depositor has determined that its financial statements are not material
to the offering made hereby.
A Prospectus Supplement and the related Form 8K (which will be incorporated
by reference to the Registration Statement) may contain financial statements of
the related Credit Enhancer, if any.
Although the Notes of any Series will represent obligations of the related
Issuer, such obligations will be nonresource and the proceeds of the assets
included in the related Trust will be the sole source of payments on the Notes
of such Series. The Issuer for any Series of Notes will not have, nor be
expected in the future to have, any significant assets available for payments on
such Series of Notes other than the assets included in the related Trust.
Accordingly, the investment characteristics of a Series of Notes will be
determined by the assets included in the related Trust and will not be affected
by the identity of the obligor with respect to such Series of Notes.
Accordingly, no capitalization information or any historical or pro forma ratio
of earnings to fixed charges or any other financial information with respect to
any trust, partnership, limited liability company or corporation formed for the
purpose of issuing a Series of Notes has been or will be included herein or in
the related Prospectus Supplement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
Page Page
--- --
<S> <C> <C> <C>
1986 Act . . . . . . . . . . . . . . . . . . . . . . 48 Non-Priority Securities. . . . . . . . . . . . . . . . . 13
1996 Act . . . . . . . . . . . . . . . . . . . . . . 56 Non-U.S. Person. . . . . . . . . . . . . . . . . . . . . 61
Agreement. . . . . . . . . . . . . . . . . . . . . . 1 Noneconomic Residual Interest. . . . . . . . . . . . . . 58
AMTI . . . . . . . . . . . . . . . . . . . . . . . . 56 Nonrecoverable Advance . . . . . . . . . . . . . . . . . 24
Applicable Accounting Standards. . . . . . . . . . . 30 Note Event of Default. . . . . . . . . . . . . . . . . . 35
Balloon Loans. . . . . . . . . . . . . . . . . . . . 7 Note Rate. . . . . . . . . . . . . . . . . . . . . . . . 14
Beneficial Owners. . . . . . . . . . . . . . . . . . 5 Notes. . . . . . . . . . . . . . . . . . . . . . . . . . .1
BIF. . . . . . . . . . . . . . . . . . . . . . . . . 31 Notional Principal Balance . . . . . . . . . . . . . . . 14
Book Entry Registration. . . . . . . . . . . . . . . 11 OID Regulations. . . . . . . . . . . . . . . . . . . . . 47
Book Entry Securities. . . . . . . . . . . . . . . . 4 Original Value . . . . . . . . . . . . . . . . . . . . . 17
Certificates . . . . . . . . . . . . . . . . . . . . 1 OTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Clearing Agency. . . . . . . . . . . . . . . . . . . 4 Owner Trustee. . . . . . . . . . . . . . . . . . . . . . 1
Clearing Agency Participants . . . . . . . . . . . . 5 Owners . . . . . . . . . . . . . . . . . . . . . . . . . 3
Code . . . . . . . . . . . . . . . . . . . . . . . . 5 Partnership Interests. . . . . . . . . . . . . . . . . . 71
Companion Securities . . . . . . . . . . . . . . . . 13 Pass-Through Entity. . . . . . . . . . . . . . . . . . . 58
Compound Interest Securities . . . . . . . . . . . . 12 Pass-Through Rate. . . . . . . . . . . . . . . . . . . . 3
Cooperative Loans. . . . . . . . . . . . . . . . . . 16 Payment Date . . . . . . . . . . . . . . . . . . . . . . 13
Cooperatives . . . . . . . . . . . . . . . . . . . . 2 Plans. . . . . . . . . . . . . . . . . . . . . . . . . . 45
Credit Enhancement . . . . . . . . . . . . . . . . . 4 Policy Statement . . . . . . . . . . . . . . . . . . . . 45
Credit Enhancer. . . . . . . . . . . . . . . . . . . 10 Pool Insurer . . . . . . . . . . . . . . . . . . . . . . 21
Custodial Account. . . . . . . . . . . . . . . . . . 24 Pooling and Servicing Agreement. . . . . . . . . . . . . 1
Cut-Off Date . . . . . . . . . . . . . . . . . . . . 12 Prepayment Assumption. . . . . . . . . . . . . . . . . . 50
DCR. . . . . . . . . . . . . . . . . . . . . . . . . .6 Pre-Funding Account. . . . . . . . . . . . . . . . . . . 3
Debt Certificates. . . . . . . . . . . . . . . . . . 69 Principal Balance. . . . . . . . . . . . . . . . . . . . 17
Defective Mortgage Loan. . . . . . . . . . . . . . . 30 Principal Prepayments. . . . . . . . . . . . . . . . . . 14
Delivery Date. . . . . . . . . . . . . . . . . . . . 11 Priority Securities. . . . . . . . . . . . . . . . . . . 13
Deposit Date . . . . . . . . . . . . . . . . . . . . 30 Proposed Premium Regulations . . . . . . . . . . . . . . 53
Depositor. . . . . . . . . . . . . . . . . . . . . . 1 PTE 83-1 . . . . . . . . . . . . . . . . . . . . . . . . 46
Disqualified Organization. . . . . . . . . . . . . . 58 Rating Agency. . . . . . . . . . . . . . . . . . . . . . 6
DOL. . . . . . . . . . . . . . . . . . . . . . . . . 45 REIT . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Eligible Investments . . . . . . . . . . . . . . . . 31 REMIC. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Equity Certificates. . . . . . . . . . . . . . . . . 2 REMIC Pool . . . . . . . . . . . . . . . . . . . . . . . 47
ERISA. . . . . . . . . . . . . . . . . . . . . . . . 5 REMIC Regulations. . . . . . . . . . . . . . . . . . . . 47
Events of Default. . . . . . . . . . . . . . . . . . 33 REMIC Securities . . . . . . . . . . . . . . . . . . . . 47
FDIC . . . . . . . . . . . . . . . . . . . . . . . . 24 Record Date. . . . . . . . . . . . . . . . . . . . . . . 13
FHLMC. . . . . . . . . . . . . . . . . . . . . . . . 2 Regular Owner. . . . . . . . . . . . . . . . . . . . . . 48
Financial Guaranty Insurance Policy. . . . . . . . . 19 Regular Securities . . . . . . . . . . . . . . . . . . . 47
Financial Guaranty Insurer . . . . . . . . . . . . . 19 Relief Act . . . . . . . . . . . . . . . . . . . . . . . 10
Fitch. . . . . . . . . . . . . . . . . . . . . . . . 6 Remittance Date. . . . . . . . . . . . . . . . . . . . . 24
FNMA . . . . . . . . . . . . . . . . . . . . . . . . 2 Remittance Rate. . . . . . . . . . . . . . . . . . . . . 24
Garn-St. Germain Act . . . . . . . . . . . . . . . . 43 Reserve Fund . . . . . . . . . . . . . . . . . . . . . . 22
GNMA . . . . . . . . . . . . . . . . . . . . . . . . 2 Residual Owners. . . . . . . . . . . . . . . . . . . . . 53
Indenture. . . . . . . . . . . . . . . . . . . . . . 1 Residual Securities. . . . . . . . . . . . . . . . . . . 47
Indenture Trustee. . . . . . . . . . . . . . . . . . 1 Retail Class Security. . . . . . . . . . . . . . . . . . 49
Insurance Paying Agent . . . . . . . . . . . . . . . 19 Riegle Act . . . . . . . . . . . . . . . . . . . . . . . 9
Insurance Proceeds . . . . . . . . . . . . . . . . . 23 SAIF . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Insured Payment. . . . . . . . . . . . . . . . . . . 19 Sale and Servicing Agreement . . . . . . . . . . . . . . 23
Interest Accrual Period. . . . . . . . . . . . . . . 14 Scheduled Amortization Securities. . . . . . . . . . . . 13
Issuer . . . . . . . . . . . . . . . . . . . . . . . .1 Securities . . . . . . . . . . . . . . . . . . . . . . . 1
Liquidation Proceeds . . . . . . . . . . . . . . . . 23 Securities Interest Rate . . . . . . . . . . . . . . . . 12
Loan-to-Value Ratio. . . . . . . . . . . . . . . . . 17 Security Account . . . . . . . . . . . . . . . . . . . . 13
Mark to Market Regulations . . . . . . . . . . . . . 55 Security Principal Balance . . . . . . . . . . . . . . . 11
Master Servicer. . . . . . . . . . . . . . . . . . . 1 Security Register. . . . . . . . . . . . . . . . . . . . 11
MBS. . . . . . . . . . . . . . . . . . . . . . . . . 2 Security Registrar . . . . . . . . . . . . . . . . . . . 11
MBS Agreement. . . . . . . . . . . . . . . . . . . . 18 Seller . . . . . . . . . . . . . . . . . . . . . . . . . 1
MBS Issuer . . . . . . . . . . . . . . . . . . . . . 18 Senior Securities. . . . . . . . . . . . . . . . . . . . 19
MBS Servicer . . . . . . . . . . . . . . . . . . . . 18 Servicer . . . . . . . . . . . . . . . . . . . . . . . . 1
MBS Trustee. . . . . . . . . . . . . . . . . . . . . 18 SMMEA. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Monthly Advance. . . . . . . . . . . . . . . . . . . 24 Special Allocation Securities. . . . . . . . . . . . . . 13
Moody's. . . . . . . . . . . . . . . . . . . . . . . 6 Special Hazard Insurance Policy. . . . . . . . . . . . . 21
Mortgage Assets. . . . . . . . . . . . . . . . . . . 2 Special Hazard Insurer . . . . . . . . . . . . . . . . . 22
Mortgage Loans . . . . . . . . . . . . . . . . . . . 2 Standard & Poor's. . . . . . . . . . . . . . . . . . . . .6
Mortgage Notes . . . . . . . . . . . . . . . . . . . 16 Standard Certificate . . . . . . . . . . . . . . . . . . 63
Mortgage Pool Insurance Policy . . . . . . . . . . . 20 Stripped Owner . . . . . . . . . . . . . . . . . . . . . 66
Mortgage Rates . . . . . . . . . . . . . . . . . . . 17 Stripped Securities. . . . . . . . . . . . . . . . . . . 66
Mortgaged Properties . . . . . . . . . . . . . . . . 16 Subordinated Securities. . . . . . . . . . . . . . . . . 19
Mortgages. . . . . . . . . . . . . . . . . . . . . . 16 Subsequent Transfer Agreement. . . . . . . . . . . . . . .3
Mortgage-Backed Securities . . . . . . . . . . . . . 2 Thrift Institution . . . . . . . . . . . . . . . . . . . 47
Mortgagors . . . . . . . . . . . . . . . . . . . . . 23 TMP. . . . . . . . . . . . . . . . . . . . . . . . . . . 48
NCUA . . . . . . . . . . . . . . . . . . . . . . . . 24 Trust. . . . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>
A-1
<PAGE>
Trust Agreement. . . . . . . . . . . . . . . . . . . 1
Trustee. . . . . . . . . . . . . . . . . . . . . . . 1
U.S. Person. . . . . . . . . . . . . . . . . . . . . 59
UCC. . . . . . . . . . . . . . . . . . . . . . . . . 41
Underwriters . . . . . . . . . . . . . . . . . . . . 71
A-2
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or by the Underwriters. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that information herein is correct as
of any time subsequent to the date hereof or that there has been no change in
the affairs of the Depositor since such date.
----------
TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Summary............................................................ S-1
Risk Factors ...................................................... S-18
The Seller and Servicer............................................ S-21
The Depositor...................................................... S-26
Use of Proceeds.................................................... S-26
The Home Equity Loan Pool.......................................... S-26
Prepayment and Yield Considerations................................ S-32
Formation of the Trust and Trust Property.......................... S-39
Additional Information............................................. S-40
Description of the Offered Certificates............................ S-40
Credit Enhancement................................................. S-47
The Pooling and Servicing Agreement................................ S-51
Federal Income Tax Consequences.................................... S-60
ERISA Considerations............................................... S-61
Ratings............................................................ S-64
Legal Investment Considerations.................................... S-65
Underwriting....................................................... S-66
Certain Legal Matters.............................................. S-69
Global Clearance, Settlement and Tax Documentation Procedures...... I-1
Index to Location of Principal Defined Terms....................... A-1
PROSPECTUS
Summary of Prospectus.............................................. 1
Risk Factors....................................................... 7
Description of the Securities...................................... 11
The Trusts......................................................... 15
Credit Enhancement................................................. 18
Servicing of Mortgage Loans........................................ 23
The Pooling and Servicing Agreement................................ 28
The Indenture...................................................... 34
Use of Proceeds.................................................... 38
The Depositor...................................................... 38
Certain Legal Aspects of the Mortgage Assets....................... 38
Legal Investment Matters........................................... 44
ERISA Considerations............................................... 45
Federal Income Tax Consequences.................................... 46
Plan of Distribution............................................... 71
Ratings............................................................ 71
Legal Matters...................................................... 72
Financial Information.............................................. 72
Index to Location of Principal Defined Terms....................... A-1
================================================================================
<PAGE>
================================================================================
$1,000,000,000
IMC HOME EQUITY LOAN
TRUST 1998-1
[LOGO]
IMC MORTGAGE COMPANY
Seller and Servicer
IMC SECURITIES, INC.
Depositor
-----------
PROSPECTUS SUPPLEMENT
-----------
Bear, Stearns & Co. Inc.
PaineWebber Incorporated
Deutsche Morgan Grenfell
J.P. Morgan & Co.
February 27, 1998
================================================================================
