<PAGE>
Prospectus supplement to prospectus dated February 24, 2000
$173,476,000
ACCREDITED MORTGAGE LOAN TRUST 2000-1
ASSET-BACKED NOTES, SERIES 2000-1
$53,047,000 7.94% CLASS A-1 NOTES
$120,429,000 VARIABLE-RATE CLASS A-2 NOTES
ACCREDITED-Registered Trademark-
HOME LENDERS
ACCREDITED HOME LENDERS, INC.
SPONSOR AND MASTER SERVICER
-------------------------
YOU SHOULD READ THE SECTION ENTITLED "RISK FACTORS" STARTING ON PAGE S-6 OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE 15 OF THE ACCOMPANYING PROSPECTUS AND CONSIDER
THESE FACTORS BEFORE MAKING A DECISION TO INVEST IN THE NOTES.
The notes represent non recourse obligations of the trust only and are not
interests in or obligations of any other person.
Neither the notes nor the mortgage loans will be insured or guaranteed by any
governmental agency or instrumentality.
THE TRUST FUND --
- - The trust fund consists primarily of two groups of residential mortgage
loans. One group contains first or second lien fixed-rate mortgage
loans, and the other group contains first lien adjustable-rate mortgage
loans.
THE NOTES --
- - Each class of notes will be backed primarily by a pledge of one of the
two groups of mortgage loans.
CREDIT ENHANCEMENT --
- - The notes will be unconditionally and irrevocably guaranteed as to the
timely payment of interest and as to specified payments of principal
pursuant to the terms of a note insurance policy to be issued by
[LOGO] FSA
- - Some of the mortgage loans will be covered by a primary mortgage
insurance policy.
- - The notes will be cross-collateralized to a limited extent.
- - Excess interest will be used to create, increase and maintain a
required level of over-collateralization for each class of notes.
<TABLE>
<CAPTION>
===================================================================================================================================
ORIGINAL NOTE INTEREST PRICE TO THE UNDERWRITING PROCEEDS TO THE FINAL STATED
CLASS PRINCIPAL BALANCE RATE (1) PUBLIC (2) DISCOUNT SPONSOR (3) MATURITY DAT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
A-1 ............. $53,047,000 7.94% 99.984375% 0.35% $52,853,047 February 25, 2030
----------------------------------------------------------------------------------------------------------------------------------
A-2 ............. $120,429,000 Libor + 0.32% 100% 0.35% $120,007,499 February 25, 2030
----------------------------------------------------------------------------------------------------------------------------------
Total ............ $173,476,000 $607,166 $172,860,545
==================================================================================================================================
</TABLE>
(1) The interest rate on the Class A-2 Notes is subject to an available funds
cap. The interest rates on the Class A-1 Notes and the Class A-2 Notes
will increase after the clean-up call date for that class of notes.
(2) Plus in the case of the Class A-1 Notes, interest accrued from February 1,
2000.
(3) The proceeds to the sponsor were calculated without taking into account
the expenses of this offering, which are estimated to be approximately
$435,000.00.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------
LEHMAN BROTHERS
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS FEBRUARY 24, 2000.
<PAGE>
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the notes in two separate documents
that provide progressively more detail:
- the accompanying prospectus, which provides general information,
some of which may not apply to your series of notes, and
- this prospectus supplement, which describes the specific terms of
your series of notes.
If the accompanying prospectus contemplates multiple options, you
should rely on the information in this prospectus supplement as to the
applicable option.
We cannot sell the notes to you unless you have received both this
prospectus supplement and the accompanying prospectus.
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the notes and with respect to their unsold allotments or
subscriptions. In addition, all dealers selling the notes will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further information concerning a particular topic. The following table of
contents provides the pages on which these captions are located.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary.............................................S-1
Risk Factors........................................S-6
Transaction Overview...............................S-10
Formation of the Trust and Issuance of the
Trust Certificates...........................S-10
Sale and Servicing of the Mortgage Loans........S-10
Issuance of the Notes...........................S-10
Issuance of the Note Insurance Policy...........S-11
The Mortgage Loans.................................S-11
General.........................................S-11
The Primary Mortgage Insurance Policy...........S-12
The Fixed-Rate Group............................S-13
The Adjustable-Rate Group.......................S-21
Conveyance of Subsequent Mortgage Loans.........S-32
The Sponsor and the Master Servicer................S-33
General.........................................S-33
Underwriting....................................S-34
Delinquency and Loan Loss Experience............S-37
The Subservicer and the Backup Servicer............S-37
The Subservicer.................................S-38
The Backup Servicer.............................S-38
The Owner Trustee..................................S-39
The Indenture Trustee..............................S-39
Description of the Notes and the Trust
Certificates....................................S-39
Book-Entry Notes................................S-40
Assignment and Pledge of Initial Mortgage
Loans........................................S-40
Assignment and Pledge of Subsequent
Mortgage Loans...............................S-41
Delivery of Mortgage Loan Documents.............S-41
Representations and Warranties of the Sponsor...S-43
Payments on the Mortgage Loans..................S-44
Capitalized Interest Accounts...................S-46
Payments of Interest............................S-46
Calculation of LIBOR............................S-47
Payments of Principal...........................S-47
Flow of Funds...................................S-48
Over-collateralization Provisions...............S-49
Cross-collateralization Provisions..............S-49
The Note Insurance Policy.......................S-50
Events of Default...............................S-50
Reports to Noteholders..........................S-51
Mandatory Prepayment on the Notes...............S-52
Optional Clean-up Call on the Notes.............S-52
Amendment.......................................S-52
Termination.....................................S-53
Servicing of the Mortgage Loans....................S-53
Servicing Fees and Other Compensation and
Payment of Expenses..........................S-53
Delinquency Advances, Servicing Advances
and Compensating Interest....................S-53
Soldiers' and Sailors' Civil Relief Act of
1940 Interest Shortfalls.....................S-54
Optional Purchase of Delinquent Mortgage
Loans........................................S-55
Servicer Reports................................S-55
Collection and Other Servicing Procedures.......S-56
Removal and Resignation of the Master
Servicer.....................................S-56
Controlling Party Rights of the Note Insurer....S-57
The Note Insurance Policy..........................S-58
The Note Insurer...................................S-61
The Note Insurer................................S-61
Reinsurance.....................................S-61
Ratings.........................................S-62
Capitalization..................................S-62
Incorporation of Certain Documents by
Reference....................................S-63
Insurance Regulation............................S-63
Prepayment and Yield Consequences..................S-64
Final Payment Dates.............................S-65
Modeling Assumptions............................S-65
Material Federal Income Tax Consequences...........S-70
Treatment of the Notes..........................S-70
ERISA Consequences.................................S-72
Legal Investment...................................S-73
Plan of Distribution...............................S-73
Incorporation of Information by Reference..........S-74
Additional Information.............................S-74
Experts............................................S-75
Legal Matters......................................S-75
Ratings............................................S-75
Glossary...........................................S-76
Annex I............................................S-84
Index to Financial Statements.......................A-1
Report of Independent Auditors......................A-2
Balance Sheet.......................................A-3
Notes to Balance Sheet..............................A-4
</TABLE>
ii
<PAGE>
SUMMARY
THIS SECTION GIVES A BRIEF SUMMARY OF THE INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT. THE SUMMARY DOES NOT INCLUDE ALL OF THE IMPORTANT
INFORMATION ABOUT THE NOTES. WE ENCOURAGE YOU TO REVIEW CAREFULLY THE MORE
DETAILED INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND IN THE ATTACHED
PROSPECTUS.
CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT ARE DEFINED UNDER THE
CAPTION "GLOSSARY."
<TABLE>
<S> <C>
ISSUER.................................Accredited Mortgage Loan Trust 2000-1.
SPONSOR AND MASTER SERVICER............Accredited Home Lenders, Inc.
INDENTURE TRUSTEE......................Norwest Bank Minnesota, National
Association.
OWNER TRUSTEE..........................Wilmington Trust Company.
SUBSERVICER AND BACKUP SERVICER........Advanta Mortgage Corp. USA.
NOTE INSURER...........................Financial Security Assurance Inc.
PRIMARY MORTGAGE INSURANCE
PROVIDER...............................Mortgage Guaranty Insurance Corporation.
CUT-OFF DATE...........................Close of business on January 31, 2000.
CLOSING DATE...........................On or about February 29, 2000.
PAYMENT DATES..........................The 25th day of each month, or if such
day is not a business day, on the next
business day, beginning on March 27,
2000.
RECORD DATES...........................The record date for the Class A-1 Notes
will be the last business day of the
month before the applicable payment date
occurs, or, in the case of the March 27,
2000 payment date, the closing date. The
record date for the Class A-2 Notes will
be the business day immediately before
each payment date.
THE NOTES..............................Class A-1 Notes and Class A-2 Notes. The
Class A-1 Notes will be secured by the
mortgage loans in the fixed-rate group.
The Class A-2 Notes will be secured by
the mortgage loans in the
adjustable-rate group. Each group will
constitute a separate sub-trust of the
trust.
TRUST CERTIFICATES.....................The trust will also issue a class of
trust certificates representing the
entire beneficial ownership interest in
the trust. The trust certificates are
not offered by this prospectus
supplement.
PAYMENTS OF INTEREST...................On each payment date, each class of notes
is entitled to receive:
- CURRENT INTEREST. The amount of
interest that accrued during the
related accrual period for that
class on the
S-1
<PAGE>
outstanding principal balance of
that class, at the note rate for
that class, reduced by the amounts
described under "Description of the
Notes and the Trust Certificates"
in this prospectus supplement, and
- UNPAID INTEREST SHORTFALLS. Any
interest that was due on a prior
payment date that was not paid,
together with interest on that
previously unpaid amount.
ACCRUAL PERIOD. The accrual period for
the Class A-1 Notes is the calendar
month preceding the payment date. The
accrual period for the Class A-2 Notes
is the period from and including the
prior payment date (or, in the case of
the March 27, 2000 payment date, from
the closing date) to but excluding the
current payment date.
Interest will accrue on the Class A-1
Notes on the basis of a 360-day year
consisting of twelve 30-day months.
Interest will accrue on the Class A-2
Notes on the basis of a 360-day year and
the actual number of days elapsed in the
accrual period.
PAYMENTS OF PRINCIPAL..................On each payment date, each class of
notes is entitled to receive
distributions of principal. The amount
of principal payable with respect to
each class of notes will be paid in
accordance with the priority of
distributions described in this
prospectus supplement and will generally
consist of the following amounts:
- scheduled payments of principal due
from the second day of the prior
month to and including the first day
of the current month, known as the
DUE PERIOD,
- prepayments in fullreceived from the
sixteenth day of the prior month to
and including the fifteenth day of
the current month, known as the
PREPAYMENT PERIOD,
- partial prepayments and other
unscheduled payments of principal on
the mortgage loans received during
the prior calendar month,
plus, any accelerated principal
payments, funded from excess interest,
which will be paid to the extent needed
to reach and maintain the required level
of over-collateralization.
Shortfalls in collections on the
mortgage loans and failure of the note
insurer to perform its obligations under
the note insurance policy may result in
your receiving less than what is owed to
you.
WE REFER YOU TO "DESCRIPTION OF THE
NOTES AND THE TRUST CERTIFICATES --
PAYMENTS OF PRINCIPAL" IN THIS
PROSPECTUS
</TABLE>
S-2
<PAGE>
SUPPLEMENT FOR MORE INFORMATION REGARDING
THE AMOUNT OF PRINCIPAL THE NOTES ARE
ENTITLED TO RECEIVE ON EACH PAYMENT DATE.
CREDIT ENHANCEMENT.....................The credit enhancement provided for the
benefit of the holders of the notes
consists solely of:
- over-collateralization,
- cross-collateralization,
- a reserve account,
- the primary mortgage insurance
policy, and
- the note insurance policy.
The note insurance policy will guaranty
to the holders of the notes:
- payment of current interest due on
each payment date,
- payment of an amount equal to the
excess of the principal balance of
all of the notes over the principal
balance of all of the mortgage loans
plus the amounts on deposit in the
pre-funding accounts. This amount
will be paid as principal, pro rata
to each class of notes, based upon
the relative level of
under-collateralization of each
class, and
- payment of the outstanding principal
balance of the notes on
February 25, 2030.
The note insurance policy does not cover
Class A-2 Available Funds Cap
Carry-Forward Amounts.
THE MORTGAGE LOANS.....................The mortgage loans will be secured by
first or second mortgages or deeds of
trust on residential properties. The
mortgage loans will be segregated into
two sub-trusts, or groups: a group of
fixed-rate mortgage loans and a group of
adjustable-rate mortgage loans. The
mortgage loans will consist of loans
used to purchase a new home, to
refinance an existing mortgage loan, to
consolidate debt, and/or to obtain cash
proceeds by borrowing against the
mortgagor's equity in the property. The
trust will purchase the initial mortgage
loans on the closing date and the
subsequent mortgage loans during the
pre-funding period.
The group of fixed-rate initial mortgage
loans consists of 521 mortgage loans
with an aggregate Cut-off Date Principal
Balance of $40,197,785.31 and the group
of adjustable-rate
S-3
<PAGE>
initial mortgage loans consists of 784
mortgage loans with an aggregate Cut-off
Date Principal Balance of
$90,937,472.89.
PRE-FUNDING ACCOUNTS AND THE
CAPITALIZED INTEREST ACCOUNTS..........The aggregate principal balance of the
mortgage loans in each group purchased
by the trust on the closing date will be
less than the principal balance of the
related notes on the closing date. The
amount of the difference, plus the
amount of any initial over-
collateralization, will be taken from
the proceeds of the sale of the notes,
placed in a pre-funding account for each
group and used for the purchase of
subsequent mortgage loans by the trust
after the closing date.
On the closing date, the sponsor will
deposit cash in a capitalized interest
account for each group which will be
used to cover shortfalls in interest on
the related class of notes attributable
to the pre-funding feature.
MANDATORY PREPAYMENT OF PRINCIPAL
FROM MONIES IN THE
PRE-FUNDING ACCOUNTS..............To the extent the trust does not fully
use amounts in either pre-funding
account to purchase subsequent
mortgage loans for the related group
by March 31, 2000, the trust will
apply the remaining amounts as a
prepayment of principal on the related
notes on the April 25, 2000 payment
date. Although no assurance is
possible, the trust anticipates that a
substantial amount of the money
initially deposited in the pre-funding
accounts will be used to purchase
subsequent mortgage loans with respect
to the related group, and that there
will be no material amount of
principal prepaid on the notes from
amounts in either pre-funding account.
SERVICING..............................The subservicer will agree to perform
certain of the servicing obligations of
the master servicer under the
transaction documents, but this will not
relieve the master servicer of its
servicing obligations. The master
servicer cannot terminate the
subservicer without the consent of the
note insurer.
ADVANCING..............................The master servicer will be required to
advance amounts representing delinquent
payments of scheduled principal and
interest, as well as expenses to
preserve and to protect the value of
collateral, in each case to the extent
considered recoverable. The backup
servicer will be obligated to make these
advances in the event that the master
servicer does not do so. Reimbursement
of these advances is senior to payments
to noteholders.
OPTIONAL TERMINATION BY
THE SPONSOR.......................The sponsor may, at its option,
terminate the sub-trust with respect to
the fixed-rate mortgage loans on any
payment date when the outstanding
principal balance of the Class A-1 Notes
S-4
<PAGE>
is equal to or less than 10% of the
original principal balance of the Class
A-1 Notes. Similarly, the sponsor may,
at its option, terminate the sub-trust
with respect to the adjustable-rate
mortgage loans on any payment date when
the outstanding principal balance of the
Class A-2 Notes is equal to or less than
10% of the original principal balance of
the Class A-2 Notes. In addition, the
sponsor has the option to terminate the
entire trust on any payment date when
the aggregate outstanding principal
balance of the notes is equal to or less
than 10% of the original aggregate
principal balance of the notes.
ERISA CONSEQUENCES.....................Subject to the conditions and
considerations described in this
prospectus supplement and in the
accompanying prospectus, the notes may
be purchased by pension, profit-sharing
and other employee benefit plans, as
well as individual retirement accounts
and Keogh plans, and by persons
investing on behalf of or with plan
assets of such plans.
FEDERAL INCOME TAX STATUS..............It is the opinion of Brown & Wood LLP,
special federal tax counsel to the trust
and counsel to the underwriter, that for
federal income tax purposes:
- the notes will be characterized as
indebtedness, and
- the trust will not be characterized
as an association, or a publicly
traded partnership, taxable as a
corporation or a taxable mortgage
pool.
Each noteholder, by the acceptance of
a note, will agree to treat the notes
as indebtedness.
LEGAL INVESTMENT.......................The Class A-1 Notes will not be
"mortgage related securities" under the
Secondary Mortgage Market Enhancement
Act of 1984. As of the end of the
pre-funding period, the Class A-2 Notes
will be "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984.
RATINGS................................In order to be issued, the notes must be
rated "AAA" by Standard & Poor's Rating
Services, a division of The McGraw-Hill
Companies, Inc. and "Aaa" by Moody's
Investors Service taking into account
the note insurance policy issued with
respect to the notes. These ratings may
be lowered, qualified or withdrawn by
the rating agencies.
S-5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE NOTES INVOLVES SIGNIFICANT RISKS. BEFORE YOU DECIDE TO
INVEST IN THE NOTES, WE RECOMMEND THAT YOU CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS AND THE RISK FACTORS DISCUSSED UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 12 OF THE PROSPECTUS.
CERTAIN FEATURES OF THE MORTGAGE LOANS MAY RESULT IN LOSSES OR CASH FLOW
SHORTFALLS
There are a number of features of the mortgage loans that create additional
risk of loss, including the following:
- THE BORROWERS HAVE LESS THAN PERFECT CREDIT AND MAY BE MORE LIKELY TO
DEFAULT. The sponsor's underwriting standards are less restrictive
than those of Fannie Mae or Freddie Mac with respect to a borrower's
credit history and other factors. A derogatory credit history or a
lack of credit history will not necessarily prevent the sponsor from
making a loan but may reduce the size and the loan-to-value ratio of
the loan the sponsor will make. As a result of these less restrictive
standards, the trust may experience higher rates of delinquencies,
defaults and, if the note insurer fails to perform its obligations
under the note insurance policy, losses than if the mortgage loans
were underwritten in a more traditional manner.
- NEWLY ORIGINATED MORTGAGE LOANS MAY BE MORE LIKELY TO DEFAULT WHICH
MAY CAUSE LOSSES. Defaults on mortgage loans tend to occur at higher
rates during the early years of the mortgage loans. Substantially all
of the mortgage loans will have been originated within 12 months prior
to the sale to the trust. As a result, the trust may experience higher
rates of default and, if the note insurer fails to perform its
obligations under the note insurance policy, losses than if the
mortgage loans had been outstanding for a longer period of time.
- BALLOON LOANS MAY HAVE HIGHER RATES OF DEFAULT WHICH MAY CAUSE LOSSES.
Based on the aggregate Cut-off Date Principal Balance of the initial
mortgage loans, approximately 21.71% of the mortgage loans in the
fixed-rate group are balloon loans and approximately 0.13% of the
mortgage loans in the adjustable-rate group are balloon loans. A
balloon loan has monthly payments that will not fully pay off the loan
balance by the maturity date. As a result, the borrower usually will
have to refinance the balloon loan, in order to pay the amount due. If
the borrower is unable to repay the unpaid principal amount of a
balloon loan on its maturity date, the master servicer will not be
obligated to advance that amount. Instead, the master servicer will be
obligated to advance an amount equal to the assumed monthly payment
that would have been due on the balloon loans based upon the original
amortization schedule for those loans. If the borrower is unable to
repay the loan balance by its maturity date or refinance the balloon
loan, you will suffer a loss if the collateral for such loan is
insufficient, the other forms of credit enhancement are insufficient
to cover such loss and the note insurer fails to perform its
obligations under the note insurance policy. Neither the master
servicer nor the sponsor will be obligated to refinance a balloon
loan. SEE "RISK FACTORS-- 'BALLOON' LOANS MAY EXPERIENCE HIGHER RATES
OF DELINQUENCIES AND LOSSES" IN THE PROSPECTUS.
- DEFAULTS ON SECOND LIEN MORTGAGE LOANS MAY RESULT IN MORE SEVERE
LOSSES. Based on the aggregate Cut-off Date Principal Balance of the
initial mortgage loans, approximately 6.18% of the initial mortgage
loans in the fixed-rate group and none of the mortgage loans in the
adjustable-rate group are secured by second liens on the related
property. If a borrower on a mortgage loan secured by a second lien
defaults, the trust's rights to proceeds on liquidation of the related
property are subordinate to the rights of the holder of the first lien
on the related property. There may not be enough proceeds to pay both
the first lien and the second
S-6
<PAGE>
lien, and, if the note insurer fails to performs its obligations under
the note insurance policy, the trust would suffer a loss. SEE "RISK
FACTORS -- JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES
AND LOSSES" IN THE PROSPECTUS.
- THE CONCENTRATION OF MORTGAGE LOANS IN SPECIFIC GEOGRAPHIC AREAS MAY
INCREASE THE RISK OF LOSS. Economic conditions in the states where
borrowers reside may affect the delinquency, loss and foreclosure
experience of the trust with respect to the mortgage loans. Based on
the aggregate Cut-off Date Principal Balance of the mortgage loans,
approximately 21.58%, 9.25%, and 7.11% of the mortgage loans in the
fixed-rate group are secured by properties in California, Ohio and
Florida, respectively, and approximately 32.80%, 9.81%, 5.32% and
5.32% of the mortgage loans in the adjustable-rate group are secured
by properties in California, Ohio, Colorado and Indiana, respectively.
These states may suffer economic problems or reductions in market
values for residential properties that are not experienced in other
states. Because of the concentration of mortgage loans in these
states, if the note insurer fails to perform its obligations under the
note insurance policy, those types of problems may have a greater
effect on the notes than if borrowers and properties were more spread
out in different geographic areas.
YOUR YIELD TO MATURITY MAY BE REDUCED BY PREPAYMENTS AND DEFAULTS
The pre-tax yield to maturity on your investment is uncertain and will
depend on a number of factors, including the following:
- PREPAYMENTS ON FIXED-RATE MORTGAGE LOANS. The mortgage loans allow the
borrowers to prepay the loans in full or in part at any time. However,
substantially all of the mortgage loans have prepayment fee clauses
pursuant to which prepayment fees are chargeable on certain
prepayments occurring during the first one to five years after
origination, generally if the amount prepaid in any twelve-month
period exceeds 20% of the original principal balance of the mortgage
loan. These fees may discourage borrowers from prepaying their
mortgage loans during the prepayment fee period and, accordingly,
affect the rate of prepayment of such mortgage loans even in a
declining interest rate environment.
The rate of prepayments on fixed-rate mortgage loans is sensitive to
prevailing interest rates. If prevailing interest rates fall
significantly below the mortgage interest rates on the mortgage loans,
the mortgage loans are likely to be subject to higher prepayment rates
than if prevailing interest rates remain at or above the mortgage
interest rates on the mortgage loans. Conversely, if prevailing
interest rates rise significantly above the mortgage interest rates on
the mortgage loans, the rate of prepayments is likely to decrease. The
weighted average lives of the Class A-1 Notes and, if purchased at
other than par, the yields realized by owners of the Class A-1 Notes,
will be sensitive to rates of payment of principal on the mortgage
loans. The yield on a Class A-1 Note that is purchased at a premium
from its outstanding principal amount may be adversely affected by
higher than anticipated levels of prepayments on the mortgage loans.
Conversely, the yield on a Class A-1 Note that is purchased at a
discount from its outstanding principal amount may be adversely
affected by lower than anticipated levels of prepayments on the
mortgage loans.
- PREPAYMENTS ON ADJUSTABLE-RATE MORTGAGE LOANS. The mortgage loans in
the adjustable-rate group are all adjustable-rate mortgage loans which
have fixed-rates of interest for the first two years ("2/28 loans") or
three years ("3/27 loans") after origination and then convert to
adjustable rates. This type of adjustable-rate mortgage loan is
commonly referred to as a hybrid mortgage loan. Substantially all of
the adjustable-rate mortgage loans also have prepayment fees as
described above for the fixed-rate mortgage loans. The prepayment
S-7
<PAGE>
experience on the adjustable-rate loans may differ from the prepayment
experience on fixed-rate mortgage loans due to provisions which
provide for conversion to an adjustable mortgage interest rate,
periodic coupon reset caps and a maximum mortgage interest rate. In
particular, hybrid mortgage loans may be subject to higher prepayment
rates as they approach the date they are scheduled to convert to an
adjustable-rate mortgage loan. As a hybrid mortgage loan approaches
its initial adjustment date, the borrower may become more likely to
refinance that loan to avoid an increase in the loan rate, even if
fixed-rate mortgage loans are only available at rates that are
slightly lower or higher than the mortgage interest rate before
adjustment.
- INADEQUATE AMOUNT OF SUBSEQUENT MORTGAGE LOANS WILL AFFECT TIMING AND
RATE OF RETURN ON YOUR INVESTMENT. If the amount of subsequent
mortgage loans purchased for a group is less than the amount in the
related pre-funded account, you will receive a prepayment of principal
on the April 25, 2000 payment date if you own notes related to that
group. The types of mortgage loans that can be purchased as subsequent
mortgage loans for each group are similar to the initial mortgage
loans for each group and the designation of any subsequent mortgage
loan to a loan group will be made by the sponsor so that the
statistical characteristics of each group as shown in this prospectus
supplement will not be materially changed by the addition of
subsequent mortgage loans.
- YOU MAY BE UNABLE TO REINVEST DISTRIBUTIONS IN COMPARABLE INVESTMENTS.
Asset-backed securities, like the notes, usually produce more returns
of principal to investors when market interest rates fall below the
mortgage interest rates on the mortgage loans and produce less returns
of principal when market interest rates rise above the mortgage
interest rates on the mortgage loans. If borrowers refinance their
mortgage loans as a result of lower interest rates, you will receive
an unanticipated payment of principal. As a result, you are likely to
receive more money to reinvest at a time when other investments
generally are producing a lower yield than that on the notes, and are
likely to receive less money to reinvest when other investments
generally are producing a higher yield than that on the notes. You
will bear the risk that the timing and amount of distributions on your
notes will prevent you from attaining your desired yield.
- LIMITATIONS ON NOTE RATES WILL AFFECT YOUR YIELD TO MATURITY. The
Class A-2 Notes have a note rate which is based on one-month London
interbank offered rates of major banks or "LIBOR" and is subject to a
rate cap. The mortgage loans in the adjustable-rate group have
mortgage interest rates based on six-month LIBOR, subject to initial
fixed-rate periods of two years or three years. Since the base index
for the mortgage interest rate on the adjustable-rate mortgage loans
differs from the base index for the note rate on the Class A-2 Notes,
the weighted average mortgage interest rate on the adjustable-rate
mortgage loans could be less than the note rate, in which case the
note rate would be capped based on that lower rate. This cap would
reduce the amount of interest you, as an investor in this class of
notes, will receive. Any shortfall in interest on the Class A-2 Notes
due to this cap is not covered by the note insurance policy, but will
be paid out of amounts, if any, which otherwise would be paid to the
holders of the trust certificates. However, if the full amount of such
shortfall is not paid, such unpaid amounts will be carried forward to
subsequent payment dates.
THE TRUST ASSETS ARE THE ONLY SOURCE OF PAYMENTS ON THE NOTES
All distributions on the notes will be made from payments by borrowers
under the mortgage loans or payments under the note insurance policy or, in the
case of certain mortgage loans, the primary mortgage insurance policy. The trust
has no other assets to make distributions on the notes. Certain of the mortgage
S-8
<PAGE>
loans are not insured or guaranteed by any person, and the remainder of the
mortgage loans are not insured or guaranteed other than by the primary mortgage
insurance policy which covers losses up to specified levels on those mortgage
loans. The trust is the only person that is obligated to make distributions on
the notes. The notes are not insured by any governmental agency.
BANKRUPTCY OF THE MASTER SERVICER, THE BACKUP SERVICER OR THE SUBSERVICER MAY
AFFECT PAYMENTS ON THE NOTES AND SERVICING OF THE MORTGAGE LOANS
In the event of a bankruptcy or insolvency of Accredited Home Lenders,
Inc., as master servicer, or of Advanta Mortgage Corp. USA, as subservicer and
backup servicer, the bankruptcy trustee or receiver may have the power to
prevent Norwest Bank Minnesota, National Association, as indenture trustee, or
the noteholders from appointing a successor master servicer, subservicer or
backup servicer. Regardless of whether a successor master servicer, subservicer
or backup servicer is appointed, any termination of Accredited Home Lenders,
Inc., as master servicer or of Advanta Mortgage Corp. USA as backup servicer or
subservicer (whether due to bankruptcy or insolvency or otherwise) could
adversely affect the servicing of the mortgage loans, including the delinquency
experience of the mortgage loans.
THE NOTES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS
The notes are not suitable investments for any investor that requires a
regular or predictable schedule of payments or payment on any specific date. The
notes are complex investments that should be considered only by investors who,
either alone or with their financial, tax and legal advisors, have the expertise
to analyze the prepayment, reinvestment, default and market risk, the tax
consequences of an investment, and the interaction of these factors.
THE NOTE INSURER MAY, UNDER CERTAIN CIRCUMSTANCES, CALL THE NOTES
The note insurance policy will be issued pursuant to an insurance agreement
among the note insurer, the sponsor and the trust. So long as the note insurer
is not in default in its obligations under the note insurance policy and no
insolvency event has occurred with respect to the note insurer, the note insurer
will be the "controlling party." As a controlling party, the note insurer will
be entitled to exercise certain rights without the consent of the noteholders,
including the right to accelerate the notes upon the occurrence of an event of
default. The insurance agreement provides for "events of default" thereunder,
which include certain portfolio performance tests as well as breaches of certain
covenants or representations or warranties. Events of default under the
insurance agreement constitute events of default under the indenture, and
accordingly, the note insurer as controlling party has the right to call the
notes on any payment date as to which such an insurance agreement event of
default has occurred and is continuing. As a result, investors, although they
will be paid in full (other than, in the case of the Class A-2 Notes, Class A-2
Available Funds Cap Carry-Forward Amounts) in connection with such a call, may
prematurely lose the benefit of their investment in the notes. In addition, if
the note insurer exercises this call option, the yield on the notes that are
purchased at a premium from their outstanding principal amount may be adversely
affected.
S-9
<PAGE>
TRANSACTION OVERVIEW
FORMATION OF THE TRUST AND ISSUANCE OF THE TRUST CERTIFICATES
The trust will be formed pursuant to the terms of a trust agreement, dated
as of February 1, 2000, between the owner trustee and the sponsor and the filing
of a certificate of trust with the Secretary of State of the State of Delaware.
Under the trust agreement, the trust will also issue a class of trust
certificates evidencing the entire beneficial ownership interest in the trust.
The trust estate will consist of:
- the mortgage loans, together with the mortgage files relating thereto,
- all scheduled collections on the mortgage loans and proceeds thereof
due after February 1, 2000 and all unscheduled collections on the
mortgage loans and proceeds thereof received on or after February 1,
2000,
- the underlying mortgaged properties which secure the mortgage loans as
from time to time are identified as REO property and collections
thereon and proceeds thereof,
- assets that are deposited in the accounts, including the pre-funding
accounts, the capitalized interest accounts and the reserve account,
- rights under the primary mortgage insurance policy and all other
insurance policies required to be maintained pursuant to the sale and
servicing agreement and any insurance proceeds thereof,
- proceeds upon the liquidation of any mortgage loans, and
- released mortgaged property proceeds.
In addition, the sponsor will cause the note insurer to issue the note
insurance policy under which the note insurer will guarantee payments to the
holders of the notes as described in this prospectus supplement.
SALE AND SERVICING OF THE MORTGAGE LOANS
The mortgage loans have been originated or purchased by the sponsor
pursuant to its underwriting guidelines, as described under "THE SPONSOR AND THE
MASTER SERVICER." The sponsor will sell the mortgage loans to the trust pursuant
to a sale and servicing agreement, dated as of February 1, 2000, among the
trust, the indenture trustee, the sponsor, the master servicer and the backup
servicer. The master servicer will service the mortgage loans pursuant to the
terms of the sale and servicing agreement. Pursuant to a subservicing agreement
between the master servicer and the subservicer, the subservicer will agree to
perform certain servicing obligations of the master servicer under the sale and
servicing agreement. This agreement will not relieve the master servicer of its
servicing obligations under the sale and servicing agreement.
ISSUANCE OF THE NOTES
Pursuant to the terms of an indenture, dated as of February 1, 2000,
between the trust and the indenture trustee, the trust will pledge the trust
estate to the indenture trustee, for the benefit of the holders of the notes and
the note insurer, and issue the notes.
S-10
<PAGE>
ISSUANCE OF THE NOTE INSURANCE POLICY
The note insurer will issue the note insurance policy pursuant to the terms
of an insurance and indemnity agreement, dated as of February 1, 2000, among the
note insurer, the trust and the sponsor.
THE MORTGAGE LOANS
GENERAL
Each mortgage loan in the trust will be assigned to either the fixed-rate
group or the adjustable-rate group. Each of the mortgage loans in the fixed-rate
group has a fixed mortgage interest rate secured by either a first or second
lien on the mortgaged property. Each mortgage loan in the adjustable-rate group
has an adjustable mortgage interest rate secured by a first lien on the
mortgaged property. The Class A-1 Notes will be secured by the mortgage loans
contained or to be contained in the fixed-rate group, and the Class A-2 Notes
will be secured by the mortgage loans contained or to be contained in the
adjustable-rate group.
The mortgage loans were made for the purpose of purchasing a new home,
refinancing an existing mortgage loan, consolidating debt and/or obtaining cash
proceeds by borrowing against the borrower's equity in the mortgaged property.
Substantially all of the mortgage loans are secured by first or second liens on
single family residences, which may be detached, part of a one- to four-family
dwelling, a condominium unit or a unit in a planned unit development. The
mortgaged properties may be owner-occupied or nonowner-occupied investment
properties.
Subsequent mortgage loans are intended to be purchased by the trust from
time to time after the closing date and on or before March 31, 2000 from funds
on deposit in the pre-funding accounts. These subsequent mortgage loans to be
purchased by the trust, if available, have been or will be originated or
purchased by the sponsor and sold by the sponsor to the trust. In addition,
mortgage loans may also be added to the trust on the closing date; these loans
are not reflected in the statistical information presented in this prospectus
supplement. The indenture will provide that the mortgage loans, following the
conveyance of the subsequent mortgage loans, must in the aggregate conform to
certain specified characteristics described below under "-- CONVEYANCE OF
SUBSEQUENT MORTGAGE LOANS."
The statistical information presented in this prospectus supplement is
computed based on the Cut-off Date Principal Balance of the initial mortgage
loans. All percentages are calculated based on the aggregate Cut-off Date
Principal Balance of the initial mortgage loans in the related group.
The aggregate Cut-off Date Principal Balance of the fixed-rate group
mortgage loans was $40,197,785.31 and the aggregate Cut-off Date Principal
Balance of the adjustable-rate group mortgage loans was $90,937,472.89.
Additional fixed- and adjustable-rate group mortgage loans are expected to be
delivered by March 31, 2000. The sponsor expects that by March 31, 2000, the
aggregate principal balance of the mortgage loans to be conveyed to the trust
during the pre-funding period will represent approximately $13,384,851.19 in
mortgage loans in the fixed-rate group and approximately $30,279,890.61 in
mortgage loans in the adjustable-rate group, reduced, in each case, by the
principal balance of additional fixed-rate mortgage loans and adjustable-rate
mortgage loans conveyed to the trust on the closing date.
As of the Cut-off Date, with respect to the mortgage loans in the
fixed-rate group, no mortgage loan had a remaining term to maturity greater than
30 years, no mortgage loan was 30 or more days delinquent, each of the mortgage
loans was an "actuarial" loan, approximately 93.82% of the mortgage loans by
aggregate Cut-off Date Principal Balance were secured by first liens on the
related mortgaged properties, and approximately 6.18% of the mortgage loans by
aggregate Cut-off Date Principal Balance were secured by second liens on the
related mortgaged properties. As of the Cut-off Date, with respect to the
mortgage loans in the adjustable-rate group, no mortgage loan had a remaining
term to maturity of greater than 30 years, no
S-11
<PAGE>
mortgage loan was 30 or more days delinquent, each of the mortgage loans was an
"actuarial" loan, and 100% of the mortgage loans were secured by first liens on
the related mortgaged properties.
As of the Cut-off Date, with respect to the mortgage loans in the
fixed-rate group, the weighted average combined loan-to-value ratio was 77.49%,
the weighted average interest rate of the mortgage loans was 10.708% per annum,
the weighted average remaining term to maturity was 306 months, with
approximately 1 month of seasoning and 93.82% of the mortgage loans by aggregate
Cut-off Date Principal Balance were secured by first priority liens. As of the
Cut-off Date, with respect to the mortgage loans in the adjustable-rate group,
the weighted average loan-to-value ratio of the mortgage loans was 78.77%, the
weighted average interest rate was 10.109% per annum, the weighted average
remaining term to maturity was 359 months, with approximately 1 month of
seasoning and 100% of the mortgage loans were secured by first priority liens.
Approximately 99.81% of the mortgage loans by aggregate Cut-off Date
Principal Balance in the fixed-rate group and approximately 99.59% of the
mortgage loans by aggregate Cut-off Date Principal Balance in the
adjustable-rate group impose a prepayment fee for early full or partial
prepayments during a period ranging from one to five years from the date of
origination. These prepayment fees are generally calculated as a specified
percentage of, or a specified number of months of interest, at the related
mortgage interest rate, on the original principal balance of the mortgage loan,
the outstanding principal balance of the mortgage loan, or a specified
percentage of the amount prepaid.
The CLTVs described in this prospectus supplement were calculated based
upon the lesser of (1) the appraised values of the related mortgaged properties
at the time of origination and (2) the purchase prices of the related mortgaged
properties in the case of any mortgaged property purchased with a mortgage loan
(or purchased within the twelve months preceding origination of the mortgage
loan.) No assurance can be given that such values have remained or will remain
at the levels that existed on the dates of origination of the related mortgage
loans. If property values decline such that the outstanding principal balances
of the mortgage loans, together with the outstanding principal balances of any
first liens, become equal to or greater than the value of the mortgaged
properties, investors may experience a loss.
THE PRIMARY MORTGAGE INSURANCE POLICY
THE POLICY. As of the Cut-off Date, 233 fixed-rate mortgage loans with an
aggregate Cut-off Date Principal Balance of $22,076,345.89 (54.92% of the
fixed-rate group) and 464 adjustable-rate mortgage loans with an aggregate
Cut-off Date Principal Balance of $59,043,369.71 (64.93% of the adjustable-rate
group) are insured by Mortgage Guaranty Insurance Corporation pursuant to a
primary mortgage insurance policy. In addition, some of the subsequent mortgage
loans having a CLTV in excess of 75% may also be covered by the primary mortgage
insurance policy. The amount of coverage provided by the primary mortgage
insurance policy varies on a loan-by-loan basis based upon the original
loan-to-value ratio of the mortgage loan. The primary mortgage insurance policy
provides for the payment to Mortgage Guaranty Insurance Corporation of certain
initial and renewal premiums with respect to each primary mortgage loan covered
by the policy, at rates calculated under the policy. Coverage of each mortgage
loan under the primary mortgage insurance policy is conditioned upon timely
payment to Mortgage Guaranty Insurance Corporation of such premiums. On each
payment date, the indenture trustee will make a payment, from amounts on deposit
in the related payment account, to Mortgage Guaranty Insurance Corporation which
will cover such premium.
Unless otherwise agreed by the primary mortgage insurance provider and the
note insurer, the primary mortgage insurance policy is required to remain in
force with respect to each mortgage loan covered by the primary mortgage
insurance policy until the principal balance of such covered mortgage loan (1)
is paid in full or (2) has amortized down to a level that results in a specified
loan-to-value ratio for such mortgage loan.
S-12
<PAGE>
The foregoing description of the primary mortgage insurance policy is only
a brief outline and does not purport to summarize or describe all of the
provisions, terms and conditions of the primary mortgage insurance policy. For a
more complete description of these provisions, terms and conditions, reference
is made to the primary mortgage insurance policy, a copy of which is available
upon request from the indenture trustee.
THE PRIMARY MORTGAGE INSURANCE PROVIDER. Mortgage Guaranty Insurance
Corporation is the primary mortgage insurance provider. Mortgage Guaranty
Insurance Corporation is a wholly-owned subsidiary of MGIC Investment
Corporation. As of February 15, 2000, Mortgage Guaranty Insurance Corporation
had ratings on its claims-paying ability of "AA+" from Standard and Poor's
Rating Services, a division of The McGraw-Hill Companies, Inc. and "Aa2" from
Moody's Investors Service. The rating agency issuing the claims-paying ability
rating can withdraw or change its rating at any time. For further information
regarding Mortgage Guaranty Insurance Corporation, investors are directed to
MGIC Investment Corporation's periodic reports filed with the Securities and
Exchange Commission, which are publicly available.
THE FIXED-RATE GROUP
The following section describes the statistical characteristics of the
initial mortgage loans in the fixed-rate group. Unless otherwise noted, all
statistical percentages in this section are approximate and are measured by the
aggregate Cut-off Date Principal Balance of the applicable mortgage loans in
relation to the aggregate Cut-off Date Principal Balance of all of the mortgage
loans in the fixed-rate group.
As of the Cut-off Date, the mortgage loans in the fixed-rate group had the
following characteristics:
- The aggregate Cut-off Date Principal Balance was $40,197,785.31,
- there were 521 mortgage loans under which the related mortgaged
properties are located in 39 states,
- the minimum Cut-off Date Principal Balance was $11,898.00, the maximum
Cut-off Date Principal Balance was $349,905.28, and the average
Cut-off Date Principal Balance was $77,155.06,
- the mortgage interest rates ranged from 8.500% to 14.990% per annum,
and the weighted average mortgage interest rate was approximately
10.708% per annum,
- the original terms to stated maturity ranged from 120 months to 360
months and the weighted average original term to stated maturity was
approximately 307 months,
- the remaining terms to stated maturity ranged from 119 months to 360
months and the weighted average remaining term to stated maturity was
approximately 306 months,
- approximately 78.29% of the mortgage loans require monthly payments of
principal that will fully amortize these mortgage loans by their
respective maturity dates, and approximately 21.71% of the mortgage
loans are balloon loans,
- the CLTVs ranged from 10.53% to 90.00% and the weighted average CLTV
was approximately 77.49%,
- the age of the mortgage loans ranged from 0 months to 15 months and
the weighted average age was approximately 1 month,
S-13
<PAGE>
- approximately 93.82% of mortgage loans are secured by first liens, and
approximately 6.18% of mortgage loans are secured by second liens, and
- approximately 21.58%, 9.25% and 7.11% of the mortgage loans are
secured by mortgaged properties located in the States of California,
Ohio and Florida, respectively.
On or prior to March 31, 2000, the trust is expected to purchase, subject
to availability, subsequent mortgage loans to be added to the fixed-rate group.
The maximum aggregate principal balance of subsequent mortgage loans that may be
purchased is $13,384,851.19, reduced by the principal balance of additional
fixed-rate mortgage loans conveyed to the trust on the closing date.
The following tables set forth certain information with respect to the
initial mortgage loans in the fixed-rate group based on the aggregate Cut-off
Date Principal Balance of the applicable mortgage loans in relation to the
aggregate Cut-off Date Principal Balance of the mortgage loans in the fixed-rate
group. Due to rounding, the percentages shown may not precisely total 100.00%.
S-14
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona 1 $ 56,780.29 0.14%
Arkansas 1 297,386.78 0.74
California 88 8,672,679.09 21.58
Colorado 5 355,694.92 0.88
Connecticut 11 838,983.87 2.09
Delaware 1 120,000.00 0.30
District of Columbia 2 184,109.61 0.46
Florida 44 2,856,329.08 7.11
Georgia 16 1,159,599.72 2.88
Hawaii 9 1,618,441.76 4.03
Idaho 5 225,881.18 0.56
Illinois 25 1,404,613.55 3.49
Indiana 30 1,825,617.19 4.54
Kansas 6 349,730.27 0.87
Kentucky 8 379,621.22 0.94
Louisiana 4 213,122.92 0.53
Maryland 13 1,208,106.41 3.01
Massachusetts 2 204,011.19 0.51
Michigan 28 1,617,064.66 4.02
Minnesota 2 149,109.71 0.37
Mississippi 2 89,329.51 0.22
Missouri 14 742,719.06 1.85
Montana 1 $50,103.01 0.12
Nebraska 4 242,540.57 0.60
New Jersey 5 465,541.80 1.16
New Mexico 2 106,524.62 0.27
New York 19 1,948,870.74 4.85
North Carolina 7 827,295.38 2.06
Ohio 53 3,718,701.91 9.25
Oklahoma 5 218,329.88 0.54
Oregon 8 644,541.90 1.60
Pennsylvania 17 1,518,010.93 3.78
Rhode Island 6 404,608.85 1.01
Tennessee 34 1,978,442.08 4.92
Texas 9 581,887.46 1.45
Utah 2 214,164.95 0.53
Virginia 13 1,190,067.72 2.96
Washington 14 1,230,193.61 3.06
Wisconsin 5 289,027.91 0.72
------------ --------------- --------------
Total 521 $40,197,785.31 100.00%
------------ --------------- --------------
------------ ----------------- --------------
</TABLE>
S-15
<PAGE>
DISTRIBUTION OF CUT-OFF DATE PRINCIPAL BALANCES
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
RANGE OF CUT-OFF DATE NUMBER OF CUT-OFF DATE CUT-OFF DATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00 48 $ 947,156.60 2.36%
25,000.01 - 50,000.00 151 5,854,435.12 14.56
50,000.01 - 75,000.00 138 8,648,306.19 21.51
75,000.01 - 100,000.00 67 5,873,806.60 14.61
100,000.01 - 150,000.00 66 8,102,000.18 20.16
150,000.01 - 200,000.00 26 4,439,417.59 11.04
200,000.01 - 250,000.00 13 2,913,474.86 7.25
250,000.01 - 300,000.00 10 2,761,434.39 6.87
300,000.01 - 350,000.00 2 657,753.78 1.64
-------------- ----------------- -----------------
Total 521 $40,197,785.31 100.00%
-------------- ----------------- -----------------
-------------- ----------------- -----------------
</TABLE>
DISTRIBUTION OF CLTV RATIOS
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
CLTV RANGE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
10.01 - 15.00% 1 $ 29,963.53 0.07%
15.01 - 20.00 2 45,000.00 0.11
20.01 - 25.00 2 42,918.53 0.11
25.01 - 30.00 3 105,466.93 0.26
30.01 - 35.00 4 77,396.20 0.19
35.01 - 40.00 5 222,233.20 0.55
40.01 - 45.00 8 316,142.41 0.79
45.01 - 50.00 8 462,181.45 1.15
50.01 - 55.00 12 558,391.14 1.39
55.01 - 60.00 19 944,227.45 2.35
60.01 - 65.00 35 1,756,845.88 4.37
65.01 - 70.00 52 3,677,559.45 9.15
70.01 - 75.00 70 5,035,323.18 12.53
75.01 - 80.00 192 15,193,359.22 37.80
80.01 - 85.00 47 4,474,069.04 11.13
85.01 - 90.00 61 7,256,707.70 18.05
-------------- ----------------- -----------------
Total 521 $40,197,785.31 100.00%
-------------- ----------------- -----------------
-------------- ----------------- -----------------
</TABLE>
S-16
<PAGE>
DISTRIBUTION OF GROSS INTEREST RATES
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
RANGE OF GROSS NUMBER OF CUT-OFF DATE CUT-OFF DATE
INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ ---------------- ----------------- -----------------
<S> <C> <C> <C>
8.001 - 8.500% 4 $ 508,717.49 1.27%
8.501 - 9.000 17 2,090,130.60 5.20
9.001 - 9.500 29 3,487,050.67 8.67
9.501 - 10.000 89 8,740,172.07 21.74
10.001 - 10.500 66 5,129,794.17 12.76
10.501 - 11.000 91 7,201,810.07 17.92
11.001 - 11.500 52 3,731,159.26 9.28
11.501 - 12.000 60 4,016,387.61 9.99
12.001 - 12.500 33 1,897,223.31 4.72
12.501 - 13.000 33 1,617,255.20 4.02
13.001 - 13.500 23 802,453.41 2.00
13.501 - 14.000 15 631,676.89 1.57
14.001 - 14.500 5 170,260.86 0.42
14.501 - 15.000 4 173,693.70 0.43
---------------- --------------- -----------------
Total 521 $40,197,785.31 100.00%
---------------- --------------- -----------------
---------------- --------------- -----------------
</TABLE>
DISTRIBUTION OF ORIGINAL TERMS TO MATURITY
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
RANGE OF ORIGINAL TERMS NUMBER OF CUT-OFF DATE CUT-OFF DATE
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------ ---------------- ----------------- ------------------
<S> <C> <C> <C>
115 - 120 5 $ 77,520.08 0.19%
175 - 180 181 10,903,896.14 27.13
235 - 240 14 1,212,724.46 3.02
355 - 360 321 28,003,644.63 69.66
---------------- ----------------- ------------------
Total 521 $40,197,785.31 100.00%
---------------- ----------------- ------------------
---------------- ----------------- ------------------
</TABLE>
S-17
<PAGE>
DISTRIBUTION OF REMAINING TERMS TO MATURITY
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
RANGE OF REMAINING TERMS NUMBER OF CUT-OFF DATE CUT-OFF DATE
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
115 - 120 5 $ 77,520.08 0.19%
169 - 174 2 77,783.48 0.19
175 - 180 179 10,826,112.66 26.93
235 - 240 14 1,212,724.46 3.02
343 - 348 1 142,817.75 0.36
355 - 360 320 27,860,826.88 69.31
-------------- ----------------- -----------------
Total 521 $40,197,785.31 100.00%
-------------- ----------------- -----------------
-------------- ----------------- -----------------
</TABLE>
DISTRIBUTION BY LIEN STATUS
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
LIEN STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------ ---------------- ------------------ ------------------
<S> <C> <C> <C>
First Lien 460 $37,713,626.12 93.82%
Second Lien 61 2,484,159.19 6.18
---------------- ------------------ ------------------
Total 521 $40,197,785.31 100.00%
---------------- ------------------ ------------------
---------------- ------------------ ------------------
</TABLE>
DISTRIBUTION BY AMORTIZATION TYPE
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
AMORTIZATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Fully Amortizing 382 $31,472,648.55 78.29%
Partially Amortizing/
Balloon Loans 139 8,725,136.76 21.71
-------------- ----------------- -----------------
Total 521 $40,197,785.31 100.00%
-------------- ----------------- -----------------
-------------- ----------------- -----------------
</TABLE>
S-18
<PAGE>
DISTRIBUTION BY OCCUPANCY STATUS
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Owner-Occupied 454 $36,608,956.88 91.07%
Nonowner-Occupied 67 3,588,828.43 8.93
-------------- ----------------- ------------------
Total 521 $40,197,785.31 100.00%
-------------- ----------------- ------------------
-------------- ----------------- ------------------
</TABLE>
DISTRIBUTION BY PROPERTY TYPE
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family Detached 437 $33,357,870.49 82.98%
2-4 Family 35 2,417,206.39 6.01
PUD 21 2,451,413.74 6.10
Condo 21 1,420,772.06 3.53
Single-Family Attached 6 495,697.65 1.23
Multifamily 1 54,824.98 0.14
-------------- ----------------- -----------------
Total 521 $40,197,785.31 100.00%
-------------- ----------------- -----------------
-------------- ----------------- -----------------
</TABLE>
DISTRIBUTION OF SEASONING
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
MONTHS ELAPSED NUMBER OF CUT-OFF DATE CUT-OFF DATE
SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
0 221 $15,293,655.17 38.05%
1 - 3 294 24,447,549.87 60.82
4 - 6 4 258,937.54 0.64
7 - 9 1 54,824.98 0.14
13 - 15 1 142,817.75 0.36
-------------- ----------------- ------------------
Total 521 $40,197,785.31 100.00%
-------------- ----------------- ------------------
-------------- ----------------- ------------------
</TABLE>
S-19
<PAGE>
PREPAYMENT FEE TERM
FIXED-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
PREPAYMENT FEE NUMBER OF CUT-OFF DATE CUT-OFF DATE
TERM (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0 1 $ 77,740.74 0.19%
12 27 2,436,295.67 6.06
18 1 24,994.90 0.06
24 14 948,445.58 2.36
36 109 8,218,748.20 20.45
42 1 40,393.52 0.10
48 1 136,520.61 0.34
60 367 28,314,646.09 70.44
-------------- --------------- -----------------
Total 521 $40,197,785.31 100.00%
-------------- --------------- -----------------
-------------- --------------- -----------------
</TABLE>
S-20
<PAGE>
THE ADJUSTABLE-RATE GROUP
The following section describes the statistical characteristics of the
initial mortgage loans in the adjustable-rate group. Unless otherwise noted, all
statistical percentages in this section are approximate and are measured by the
aggregate Cut-off Date Principal Balance of the applicable mortgage loans in
relation to the aggregate Cut-off Date Principal Balance of all of the mortgage
loans in the adjustable-rate group.
As of the Cut-off Date, the mortgage loans in the adjustable-rate group had
the following characteristics:
- the aggregate Cut-off Date Principal Balance was $90,937,472.89,
- there were 784 mortgage loans under which the related mortgaged
properties are located in 41 states,
- the minimum Cut-off Date Principal Balance was $13,125.00, the maximum
Cut-off Date Principal Balance was $571,768.99 and the average Cut-off
Date Principal Balance was $115,991.67,
- the mortgage interest rates ranged from 8.000% to 13.250% per annum,
and the weighted average mortgage interest rate was approximately
10.109% per annum,
- the gross margins ranged from 4.990% to 10.125% and the weighted
average gross margin was approximately 6.542%,
- the weighted average periodic cap for the first adjustment date was
approximately 1.502% and the weighted average periodic cap for
subsequent adjustment dates was approximately 1.499%,
- the maximum rates ranged from 15.000% to 20.250% per annum and the
weighted average maximum rate was approximately 17.106% per annum,
- the minimum rates ranged from 6.000% to 13.250% per annum and the
weighted average minimum rate was approximately 10.099% per annum,
- the original terms to stated maturity ranged from 180 months to 360
months and the weighted average original term to stated maturity was
approximately 360 months,
- the remaining terms to stated maturity ranged from 177 months to 360
months and the weighted average remaining term to stated maturity was
approximately 359 months,
- the age of the mortgage loans ranged from 0 months to 9 months and the
weighted average age of the mortgage loans was approximately 1 month,
- approximately 58.49% of the mortgage loans were 2/28 loans and
approximately 41.51% of the mortgage loans were 3/27 loans,
- approximately 99.87% of the mortgage loans require monthly payments of
principal that will fully amortize these mortgage loans by their
respective maturity dates, and approximately 0.13% of the mortgage
loans of the mortgage loans are balloon loans,
- the LTVs ranged from 19.28% to 90.00% and the weighted average LTV was
approximately 78.77%,
S-21
<PAGE>
- all of the mortgage loans are secured by first liens, and
- approximately 32.80%, 9.81%, 5.32% and 5.32% of the mortgage loans are
secured by mortgaged properties located in the States of California,
Ohio, Colorado and Indiana, respectively.
On or prior to March 31, 2000, the trust is expected to purchase, subject
to availability, subsequent mortgage loans to be added to the adjustable-rate
group. The maximum aggregate principal balance of subsequent mortgage loans that
may be purchased is approximately $30,279,890.61, reduced by the principal
balance of additional adjustable-rate mortgage loans conveyed to the trust on
the closing date.
The following tables set forth certain information with respect to the
initial mortgage loans in the adjustable-rate group based on the aggregate
Cut-off Date Principal Balance of the applicable mortgage loans in relation to
the aggregate Cut-off Date Principal Balance of the mortgage loans in the
adjustable-rate group. Due to rounding, the percentages shown may not precisely
total 100.00%.
S-22
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona 8 $ 1,052,397.21 1.16%
California 186 29,822,956.38 32.80
Colorado 35 4,842,115.49 5.32
Connecticut 17 2,672,373.72 2.94
Delaware 2 184,785.06 0.20
District of Columbia 5 466,085.10 0.51
Florida 11 1,005,258.77 1.11
Georgia 21 2,220,921.26 2.44
Idaho 2 120,726.06 0.13
Illinois 31 3,167,024.13 3.48
Indiana 59 4,841,102.00 5.32
Iowa 1 71,963.68 0.08
Kentucky 12 1,177,771.72 1.30
Louisiana 2 183,450.00 0.20
Maryland 11 1,466,349.90 1.61
Massachusetts 10 1,452,137.67 1.60
Michigan 44 3,490,755.06 3.84
Minnesota 11 1,035,093.51 1.14
Missouri 21 1,501,057.51 1.65
Montana 2 151,490.72 0.17
Nebraska 2 170,927.40 0.19
Nevada 4 395,400.33 0.43
New Hampshire 2 173,949.57 0.19
New Jersey 7 1,051,301.29 1.16
New Mexico 11 1,022,466.36 1.12
New York 1 299,874.20 0.33
North Carolina 17 1,395,332.49 1.53
North Dakota 1 89,910.00 0.10
Ohio 94 8,919,749.70 9.81
Oklahoma 3 136,539.73 0.15
Oregon 27 3,216,495.52 3.54
Pennsylvania 18 1,900,524.87 2.09
Rhode Island 4 417,292.35 0.46
South Carolina 1 112,500.00 0.12
Tennessee 24 2,510,239.04 2.76
Texas 20 1,842,400.04 2.03
Utah 3 499,908.32 0.55
Virginia 3 337,489.30 0.37
Washington 37 4,484,068.59 4.93
Wisconsin 12 882,847.46 0.97
Wyoming 2 152,441.38 0.17
-------------- ----------------- -----------------
Total 784 $ 90,937,472.89 100.00%
-------------- ----------------- -----------------
-------------- ----------------- -----------------
</TABLE>
S-23
<PAGE>
DISTRIBUTION OF LOAN-TO-VALUE RATIOS
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
LOAN-TO-VALUE RANGE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------ --------------------- ------------------------ -------------------------
<S> <C> <C> <C>
15.01 - 20.00% 2 $ 97,972.08 0.11%
20.01 - 25.00 1 15,000.00 0.02
25.01 - 30.00 2 94,971.42 0.10
30.01 - 35.00 3 144,926.64 0.16
35.01 - 40.00 3 171,921.17 0.19
40.01 - 45.00 6 351,299.86 0.39
45.01 - 50.00 3 213,392.30 0.23
50.01 - 55.00 7 507,126.97 0.56
55.01 - 60.00 22 1,910,383.29 2.10
60.01 - 65.00 38 3,962,398.37 4.36
65.01 - 70.00 61 6,316,114.30 6.95
70.01 - 75.00 112 12,491,698.62 13.74
75.01 - 80.00 352 40,392,563.72 44.42
80.01 - 85.00 48 6,565,384.24 7.22
85.01 - 90.00 124 17,702,319.91 19.47
--------------------- ------------------------ ------------------------
Total 784 $ 90,937,472.89 100.00%
--------------------- ------------------------ ------------------------
--------------------- ------------------------ ------------------------
</TABLE>
MORTGAGE INTEREST RATES
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
RANGE OF MORTGAGE NUMBER OF CUT-OFF DATE CUT-OFF DATE
INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ --------------------- ------------------------------ --------------------------
<S> <C> <C> <C>
7.501 - 8.000% 1 $ 84,942.97 0.09%
8.001 - 8.500 5 1,038,693.44 1.14
8.501 - 9.000 66 9,194,190.73 10.11
9.001 - 9.500 101 13,321,161.80 14.65
9.501 - 10.000 217 26,638,571.86 29.29
10.001 - 10.500 116 15,031,948.66 16.53
10.501 - 11.000 137 14,832,322.85 16.31
11.001 - 11.500 75 6,277,055.57 6.90
11.501 - 12.000 43 2,963,636.12 3.26
12.001 - 12.500 13 715,606.31 0.79
12.501 - 13.000 8 604,042.58 0.66
13.001 - 13.500 2 235,300.00 0.26
--------------------- ------------------------------ --------------------------
Total 784 $ 90,937,472.89 100.00%
--------------------- ------------------------------ --------------------------
--------------------- ------------------------------ --------------------------
</TABLE>
S-24
<PAGE>
RANGE OF MAXIMUM MORTGAGE INTEREST RATES
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
RANGE OF MAXIMUM MORTGAGE NUMBER OF CUT-OFF DATE CUT-OFF DATE
INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------- --------------------- --------------------- ---------------------------
<S> <C> <C> <C>
14.751 - 15.000% 1 $ 84,942.97 0.09%
15.001 - 15.250 1 395,162.86 0.43
15.251 - 15.500 4 643,530.58 0.71
15.501 - 15.750 15 2,015,849.35 2.22
15.751 - 16.000 51 7,178,341.38 7.89
16.001 - 16.250 32 4,658,422.34 5.12
16.251 - 16.500 70 8,708,106.36 9.58
16.501 - 16.750 91 11,156,521.96 12.27
16.751 - 17.000 126 15,482,049.90 17.02
17.001 - 17.250 49 6,078,347.36 6.68
17.251 - 17.500 67 9,076,117.26 9.98
17.501 - 17.750 64 6,760,265.71 7.43
17.751 - 18.000 73 8,072,057.14 8.88
18.001 - 18.250 40 3,210,676.35 3.53
18.251 - 18.500 34 2,898,496.36 3.19
18.501 - 18.750 23 1,650,745.09 1.82
18.751 - 19.000 20 1,312,891.03 1.44
19.001 - 19.250 7 410,663.25 0.45
19.251 - 19.500 6 304,943.06 0.34
19.501 - 19.750 5 491,374.52 0.54
19.751 - 20.000 3 112,668.06 0.12
20.001 - 20.250 2 235,300.00 0.26
--------------------- --------------------- ---------------------------
Total 784 $ 90,937,472.89 100.00%
--------------------- --------------------- ---------------------------
--------------------- --------------------- ---------------------------
</TABLE>
S-25
<PAGE>
RANGE OF MINIMUM MORTGAGE INTEREST RATES
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF MINIMUM MORTGAGE INTEREST RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------------- ------------------- ----------------------- ----------------------
<S> <C> <C> <C>
5.751 - 6.000% 1 $ 167,882.86 0.18%
7.751 - 8.000 1 84,942.97 0.09
8.001 - 8.250 1 395,162.86 0.43
8.251 - 8.500 4 643,530.58 0.71
8.501 - 8.750 15 2,015,849.35 2.22
8.751 - 9.000 51 7,178,341.38 7.89
9.001 - 9.250 32 4,658,422.34 5.12
9.251 - 9.500 69 8,662,739.46 9.53
9.501 - 9.750 91 11,156,521.96 12.27
9.751 - 10.000 126 15,482,049.90 17.02
10.001 - 10.250 48 5,910,464.50 6.50
10.251 - 10.500 68 9,121,484.16 10.03
10.501 - 10.750 64 6,760,265.71 7.43
10.751 - 11.000 73 8,072,057.14 8.88
11.001 - 11.250 40 3,210,676.35 3.53
11.251 - 11.500 34 2,898,496.36 3.19
11.501 - 11.750 23 1,650,745.09 1.82
11.751 - 12.000 20 1,312,891.03 1.44
12.001 - 12.250 7 410,663.25 0.45
12.251 - 12.500 6 304,943.06 0.34
12.501 - 12.750 5 491,374.52 0.54
12.751 - 13.000 3 112,668.06 0.12
13.001 - 13.250 2 235,300.00 0.26
------------------- ---------------------- ----------------------
Total 784 $ 90,937,472.89 100.00%
------------------- ---------------------- ----------------------
------------------- ---------------------- ----------------------
</TABLE>
S-26
<PAGE>
RANGE OF GROSS MARGINS
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- --------------------- ------------------------- -------------------------
<S> <C> <C> <C>
4.751 - 5.000% 2 $ 140,260.95 0.15%
5.001 - 5.250 14 1,746,065.05 1.92
5.251 - 5.500 50 6,553,747.34 7.21
5.501 - 5.750 39 4,686,613.23 5.15
5.751 - 6.000 105 14,971,509.64 16.46
6.001 - 6.250 68 8,669,328.38 9.53
6.251 - 6.500 82 9,973,600.02 10.97
6.501 - 6.750 75 8,782,337.84 9.66
6.751 - 7.000 110 13,098,178.94 14.40
7.001 - 7.250 59 6,467,599.72 7.11
7.251 - 7.500 110 10,704,281.89 11.77
7.501 - 7.750 19 1,347,369.25 1.48
7.751 - 8.000 21 1,728,068.70 1.90
8.001 - 8.250 12 870,835.92 0.96
8.251 - 8.500 1 116,216.74 0.13
8.501 - 8.750 9 465,845.22 0.51
8.751 - 9.000 5 350,067.87 0.38
9.751 - 10.000 2 217,546.19 0.24
10.001 - 10.250 1 48,000.00 0.05
--------------------- ------------------------- -------------------------
Total 784 $ 90,937,472.89 100.00%
--------------------- ------------------------- -------------------------
--------------------- ------------------------- -------------------------
</TABLE>
S-27
<PAGE>
MONTH AND YEAR OF NEXT RATE CHANGE DATE
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
MONTH AND YEAR AGGREGATE % OF AGGREGATE
OF NEXT RATE NUMBER OF CUT-OFF DATE CUT-OFF DATE
CHANGE DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------- -------------------- ------------------------- ----------------------
<S> <C> <C> <C>
May 2001 1 $ 45,366.90 0.05%
July 2001 1 50,312.46 0.06
September 2001 1 170,425.92 0.19
October 2001 1 99,863.04 0.11
November 2001 2 113,159.44 0.12
December 2001 47 4,373,851.17 4.81
January 2002 220 25,407,676.60 27.94
February 2002 213 21,912,204.00 24.10
March 2002 12 1,015,050.00 1.12
August 2002 1 74,198.15 0.08
November 2002 6 453,560.60 0.50
December 2002 41 5,693,567.60 6.26
January 2003 131 18,174,115.61 19.99
February 2003 99 12,564,609.40 13.82
March 2003 8 789,512.00 0.87
-------------------- ------------------------- ----------------------
Total 784 $ 90,937,472.89 100.00%
-------------------- ------------------------- ----------------------
-------------------- ------------------------- ----------------------
</TABLE>
DISTRIBUTION OF ORIGINAL TERMS TO MATURITY
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
RANGE OF ORIGINAL TERMS NUMBER OF CUT-OFF DATE CUT-OFF DATE
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- -------------------- ---------------------- --------------------
<S> <C> <C> <C>
175 - 180 2 $ 160,164.84 0.18%
355 - 360 782 90,777,308.05 99.82
-------------------- ---------------------- --------------------
Total 784 $ 90,937,472.89 100.00%
-------------------- ---------------------- --------------------
-------------------- ---------------------- --------------------
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF REMAINING TERMS TO MATURITY
ADJUSTABLE-RATE GROUP
AGGREGATE % OF AGGREGATE
RANGE OF REMAINING TERMS NUMBER OF CUT-OFF DATE CUT-OFF DATE
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------- ---------------------- ----------------------- ------------------------
<S> <C> <C> <C>
175 - 180 2 $ 160,164.84 0.18%
349 - 354 3 169,877.51 0.19
355 - 360 779 90,607,430.54 99.64
---------------------- ----------------------- ------------------------
Total 784 $ 90,937,472.89 100.00%
---------------------- ----------------------- ------------------------
---------------------- ----------------------- ------------------------
</TABLE>
S-28
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF CUT-OFF DATE PRINCIPAL BALANCES
ADJUSTABLE-RATE GROUP
AGGREGATE % OF AGGREGATE
RANGE OF NUMBER OF CUT-OFF DATE CUT-OFF DATE
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------- -------------------- ------------------------ ----------------------------
<S> <C> <C> <C>
$ 0.01 - 25,000.00 11 $ 213,146.67 0.23%
25,000.01 - 50,000.00 86 3,421,501.30 3.76
50,000.01 - 75,000.00 171 10,810,201.48 11.89
75,000.01 - 100,000.00 143 12,655,705.93 13.92
100,000.01 - 150,000.00 196 23,969,753.22 26.36
150,000.01 - 200,000.00 83 14,428,370.49 15.87
200,000.01 - 250,000.00 46 10,262,180.18 11.28
250,000.01 - 300,000.00 23 6,355,990.93 6.99
300,000.01 - 350,000.00 17 5,507,432.27 6.06
350,000.01 - 400,000.00 6 2,281,659.91 2.51
450,000.01 - 500,000.00 1 459,761.52 0.51
550,000.01 - 600,000.00 1 571,768.99 0.63
-------------------- ------------------------ ----------------------------
Total 784 $ 90,937,472.89 100.00%
-------------------- ------------------------ ----------------------------
-------------------- ------------------------ ----------------------------
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY AMORTIZATION TYPE
ADJUSTABLE-RATE GROUP
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
AMORTIZATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- -------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Fully Amortizing 783 $ 90,817,038.62 99.87%
Partially Amortizing/
Balloon Loans 1 120,434.27 0.13
-------------------- ------------------------ ----------------------------
Total 784 $ 90,937,472.89 100.00%
-------------------- ------------------------ ----------------------------
-------------------- ------------------------ ----------------------------
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY OCCUPANCY STATUS
ADJUSTABLE-RATE GROUP
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- -------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Owner-Occupied 692 $ 84,710,696.21 93.15%
Nonowner-Occupied 92 6,226,776.68 6.85
-------------------- ------------------------ ------------------------
Total 784 $ 90,937,472.89 100.00%
-------------------- ------------------------ ------------------------
-------------------- ------------------------ ------------------------
</TABLE>
S-29
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION BY PROPERTY TYPE
ADJUSTABLE-RATE GROUP
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ------------------ ------------------------ -----------------------
<S> <C> <C> <C>
Single-Family Detached 635 $ 72,946,176.80 80.22%
PUD 52 7,646,296.74 8.41
2-4 Family 57 6,091,210.98 6.70
Condo 36 3,788,124.79 4.17
Single-Family Attached 3 415,351.12 0.46
Multifamily 1 50,312.46 0.06
------------------ ------------------------ -----------------------
Total 784 $ 90,937,472.89 100.00%
------------------ ------------------------ -----------------------
------------------ ------------------------ -----------------------
</TABLE>
DISTRIBUTION OF SEASONING
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
AGGREGATE % OF AGGREGATE
MONTHS ELAPSED SINCE NUMBER OF CUT-OFF DATE CUT-OFF DATE
ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------- --------------------- ----------------------- ------------------------
<S> <C> <C> <C>
0 333 $ 36,313,867.97 39.93%
1 - 6 449 54,527,925.56 59.96
7 - 12 2 95,679.36 0.11
--------------------- ------------------------ ------------------------
Total 784 $ 90,937,472.89 100.00%
--------------------- ------------------------ ------------------------
--------------------- ------------------------ ------------------------
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE LOAN TYPES
ADJUSTABLE-RATE GROUP
AGGREGATE % OF AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- ------------------- --------------------------- -------------------------
<S> <C> <C> <C>
2/28 Loans 498 $ 53,187,909.53 58.49%
3/27 Loans 286 37,749,563.36 41.51
------------------- --------------------------- -------------------------
Total 784 $ 90,937,472.89 100.00%
------------------- --------------------------- -------------------------
------------------- --------------------------- -------------------------
</TABLE>
S-30
<PAGE>
<TABLE>
<CAPTION>
PREPAYMENT FEE TERM
ADJUSTABLE-RATE GROUP
PREPAYMENT AGGREGATE % OF AGGREGATE
FEE PENALTY TERM NUMBER OF CUT-OFF DATE CUT-OFF DATE
(MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- --------------------- ------------------------ ----------------------------
<S> <C> <C> <C>
0 2 $ 371,837.88 0.41%
12 13 2,060,306.75 2.27
18 2 483,922.81 0.53
24 165 21,141,971.42 23.25
30 2 374,914.68 0.41
36 459 52,842,277.10 58.11
60 141 13,662,242.25 15.02
--------------------- ------------------------ ----------------------------
Total 784 $ 90,937,472.89 100.00%
--------------------- ------------------------ ----------------------------
--------------------- ------------------------ ----------------------------
</TABLE>
S-31
<PAGE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
In addition to the initial mortgage loans, the sponsor expects to
deliver subsequent mortgage loans that will have been originated on or after
January 1, 2000 but before March 31, 2000. It is expected that the principal
amount of such subsequent mortgage loans will be approximately $13,384,851.19
for the fixed-rate group and $30,279,890.61 for the adjustable-rate group,
reduced, in each case, by the principal balance of additional fixed-rate
mortgage loans and adjustable-rate mortgage loans to be conveyed to the trust on
the closing date. The mortgage loans to be added to the trust on the closing
date are not reflected in the statistical information presented in this
prospectus supplement. Accordingly, the statistical characteristics of the
mortgage loans in the fixed-rate group and the adjustable-rate group will vary
upon the acquisition of the subsequent mortgage loans and the inclusion of
additional mortgage loans, however, such characteristics will not vary by more
than 5%.
The obligation of the trust to purchase the subsequent mortgage loans
on any subsequent transfer date during the pre-funding period are subject to the
following requirements, among others:
- no subsequent mortgage loan may be more than 30 days
contractually delinquent;
- the original term to stated maturity of each subsequent
mortgage loan may not exceed 30 years for fully amortizing
loans and 15 years for "balloon loans";
- each subsequent mortgage loan will have an initial interest
rate of not less than 8.50% per annum for fixed-rate mortgage
loans and an initial interest rate of not less than 8.00% per
annum for adjustable-rate mortgage loans;
- the subsequent mortgage loans in the fixed-rate group will
have a weighted average interest rate of at least 10.74% per
annum and the subsequent mortgage loans in the adjustable-rate
group will have a weighted average interest rate of at least
10.11% per annum;
- each subsequent mortgage loan will have a CLTV less than or
equal to 90.00% and the weighted average CLTV after addition
of subsequent mortgage loans will be less than or equal to
78.00%;
- no more than 6.70% of the subsequent mortgage loans in the
adjustable-rate group and 17.80% of the subsequent mortgage
loans in the fixed-rate group will be categorized as
nonowner-occupied properties;
- subsequent mortgage loans will have a weighted average
debt-to-income ratio no greater than 39.20% for fixed-rate
mortgage loans and no greater than 41.70% for adjustable-rate
mortgage loans;
- subsequent mortgage loans will have a weighted average credit
score of not less than 595 for fixed-rate mortgage loans and a
weighted average credit score of not less than 600 for
adjustable-rate mortgage loans;
- no less than 85.00% of the subsequent mortgage loans in the
fixed-rate group with an LTV greater than 75.00% and which
conform to the primary mortgage insurance provider's
eligibility criteria will be covered by the primary mortgage
insurance policy;
S-32
<PAGE>
- no less than 91.00% of the subsequent mortgage loans in the
adjustable-rate group with an LTV greater than 75.00% and
which conform to the primary mortgage insurance provider's
eligibility criteria will be covered by the primary mortgage
insurance policy;
- at least 76.00% of the subsequent mortgage loans in the
adjustable-rate mortgage loans and 80.00% in the fixed-rate
mortgage group must be underwritten pursuant to the sponsor's
"full documentation" guidelines;
- each subsequent mortgage loan in the adjustable-rate mortgage
group will use six-month LIBOR as the required index;
- none of the subsequent mortgage loans in the adjustable rate
group will be balloon loans;
- no subsequent mortgage loans in the adjustable-rate mortgage
group will have a next rate adjustment date more than 36
months after the related cut-off date or be a second lien
mortgage loan; and
- the weighted average margin of the mortgage loans in the
adjustable-rate group, after taking into account the
subsequent mortgage loans transferred to that group, should be
equal to or greater than 6.54% and none of the subsequent
mortgage loans will have a margin less than 5.75%.
In addition to the individual mortgage loan groups, the characteristics
of the aggregate subsequent mortgage loan portfolio will conform to the
following guidelines after each delivery:
- at least 81.70% of the subsequent mortgage loans will be
single-family properties and not more than 6.70% of such
mortgage loans will be two- to four-family properties;
- none of the subsequent mortgage loans will have a principal
balance in excess of $450,000; and
- the subsequent mortgage loans must be underwritten or
re-underwritten as applicable, in accordance with the
sponsor's origination guidelines described in this prospectus
supplement.
In addition, the transfer of subsequent mortgage loans to the trust on
the closing date are subject to the approval of the note insurer, who may also,
in its discretion, approve subsequent mortgage loans not meeting the foregoing
requirements.
THE SPONSOR AND THE MASTER SERVICER
GENERAL
Accredited Home Lenders, Inc. is a privately held California
corporation engaged in the business of originating, acquiring, servicing and
selling first and subordinate lien mortgage loans secured primarily by one-to
four-family residential properties.
Accredited's principal business strategy is to originate mortgage loans
to individuals whose credit histories do not conform to credit criteria
established by Fannie Mae or Freddie Mac. Such loans are commonly referred to as
"subprime" or "B and C" mortgage loans and typically have higher rates of
interest and/or are subject to higher origination fees or "points" than
"conforming" mortgage loans which are eligible for Freddie Mac and Fannie Mae
programs.
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Accredited originates mortgage loans primarily through the "wholesale"
method of mortgage loan origination. Under the "wholesale" method, Accredited
funds mortgage loans to borrowers who are the clients of mortgage brokers or
other mortgage lending institutions which do not offer all of the loan programs
offered by Accredited. Accredited currently employs over 175 account
representatives who are located in more than 30 states and the District of
Columbia and are responsible for establishing and maintaining relationships
with, and promoting Accredited's products and services to, such brokers and
lenders. Loan applications are processed and underwritten by teams of loan
specialists which are assigned to specific geographic regions and work closely
with the account representatives located in their respective region. Teams are
located at Accredited's San Diego headquarters or at one of its regional
processing centers in Cincinnati, Ohio; Atlanta, Georgia; Warwick, Rhode Island;
Bethesda, Maryland; and Anaheim, California. Accredited's regional processing
centers enable superior service by providing region-specific expertise and
working hours that match those of their brokers. The majority of Accredited's
account representatives make their sales calls in person at their brokers'
offices, but Accredited has also developed a successful wholesale telemarketing
operation under which account representatives located at the San Diego
headquarters establish and maintain telephone relationships with mortgage
brokers across the nation.
On a smaller scale, Accredited makes "retail" originations directly to
borrowers through direct mail solicitations and telemarketing, and is
experimenting with retail branch offices and other retail origination
techniques. Accredited also purchases closed loans on a loan-by-loan or "flow"
basis from smaller mortgage lenders, and makes "bulk" purchase pools of loans
when appropriate opportunities are presented.
Accredited's total annual mortgage loan production has increased
steadily from $190 million in 1996 to $300 million in 1997, $600 million in
1998, and $1.1 billion in 1999.
Accredited was incorporated on May 14, 1990, and commenced operations
in September of that year. As of January 31, 2000, Accredited had over 500
employees, over 200 of which were located at Accredited's San Diego
headquarters, which presently occupies approximately 31,000 square feet of
leased space in a 116,000 square foot building. Accredited's headquarters are
located at 15030 Avenue of Science, Suite 100, San Diego, California 92128, and
its telephone number is (858) 676-2100.
The notes will not represent an interest in or obligation of, nor are
the mortgage loans guaranteed by the sponsor or the master servicer, nor will
the mortgage loans be insured or guaranteed by the Federal Deposit Insurance
Corporation or any other governmental agency or instrumentality.
UNDERWRITING
Each mortgage loan originated or acquired by Accredited is underwritten
prior to loan closing, or re-underwritten after loan closing but prior to
purchase by Accredited, in accordance with Accredited's underwriting guidelines.
Accredited's underwriting process is intended to assess a loan applicant's
credit standing and repayment ability and the value and adequacy of the real
property security as collateral for the proposed loan. All underwriting and
re-underwriting is performed by Accredited's underwriting personnel, and
Accredited does not delegate underwriting authority to any broker, correspondent
or other mortgage loan provider.
All of Accredited's prospective mortgage brokers and correspondents are
subjected to a pre-approval process, including verification that all required
licenses are current, and are required to sign agreements pursuant to which they
represent and warrant compliance with Accredited's underwriting guidelines and
all applicable laws and regulations. Accredited periodically reviews each of its
mortgage
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broker's and correspondent's performance relative to issues disclosed by
Accredited's quality control review, and discontinues relationships with
unacceptable performers.
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. At least one credit report
on each applicant from an independent, nationally recognized credit reporting
company is required. The credit report typically contains information relating
to such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcies,
repossessions, or judgments. All derogatory credit items occurring within the
preceding two years and all credit inquiries within the preceding 90 days must
be addressed by the applicant to the satisfaction of Accredited.
A full appraisal of the property proposed to be pledged as collateral
is required in connection with the origination of each loan. Appraisals are
performed by licensed, third-party, fee-based appraisers and include, among
other things, an inspection of the exterior and interior of the subject
property. Appraisals are also required to address neighborhood conditions, site
and zoning status and the condition and value of improvements. Following each
appraisal, the appraiser prepares a report which includes a reproduction costs
analysis (when appropriate) based on the current cost of constructing a similar
home and market value analysis based on recent sales of comparable homes in the
area. Appraisals generally conform to the Uniform Standards of Professional
Appraisal Practice and must be on forms acceptable to Freddie Mac and Fannie
Mae. Every appraisal is reviewed by a non-affiliated appraisal review firm or by
Accredited's Appraisal Review Department or a qualified underwriter before the
mortgage loan is closed.
Accredited's mortgage loans are underwritten pursuant to "Full
Documentation," "Lite Documentation," or "1003 Stated" programs. Under each of
the programs, Accredited reviews the loan applicant's source of income,
calculates the amount of income from sources indicated on the loan application
or similar documentation, reviews the credit history of the applicant,
calculates debt service-to-income ratios to determine the applicant's ability to
repay the loan, reviews the type and use of the property being financed and
reviews the property for compliance with Accredited's standards. Accredited's
underwriting standards are applied in a standardized manner which complies with
applicable federal and state laws and regulations.
Accredited's guidelines require verification of the income of each
applicant and the source of funds (if any) required to be deposited by the
applicant into escrow under Accredited's various programs as follows. Under the
Full Documentation program, applicants are generally required to submit the last
two pay stubs and written verification of income signed by the employer, Forms
W-2 or 1040 and, in the case of self-employed applicants, Forms 1120 and profit
and loss statements, in each case covering the preceding two years. Under the
Lite Documentation program, applicants are generally required to submit a
year-to-date pay stub or personal bank statements and, in the case of
self-employed applicants, profit and loss statements, in each case covering at
least the preceding six months. Under the 1003 Stated program, applicants are
evaluated based upon income as stated in the mortgage loan application. Under
all programs, Accredited may verify by telephone employment, business or income,
and self-employed applicants may be required to submit a business license.
Verification of the source of funds (if any) required to be paid by the
applicant at closing is generally required under all documentation programs in
the form of a standard verification of deposit, two months' consecutive bank
statements or other acceptable documentation. Twelve months' mortgage payment or
rental history must be verified by the related lender or landlord. If
appropriate compensating factors exist, Accredited may waive certain
documentation requirements or standards for individual applicants.
The loan-to-value and debt service-to-income ratios which Accredited
will allow are based upon applicants' respective credit histories in accordance
with the categories and general criteria set forth in the
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following table ("1003" refers to Accredited's 1003 Stated program; "PT" means
property type; "O/O" means owner-occupied; "N/O/O" means nonowner-occupied;
"SFR" means single-family residence; "PUD" means planned unit development; "2-4"
and "3-4" refer to two- to four- and three-to four-unit residential dwellings,
respectively; and "Lite" refers to Accredited's Lite Documentation program):
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE MAXIMUM
CREDIT DELINQUENCIES DURING LAST CONSUMER MAXIMUM DEBT SERVICE TO
LEVEL YEAR CREDIT/BANKRUPTCIES LOAN-TO-VALUE RATIOS INCOME RATIOS
- --------- ---------------------------- --------------------- ----------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
PT O/O N/O/O
---- ---- -----
A One 30-day (none allowed for Excellent credit for SFR 90%* 80% 45%** - 55%
1003 or N/O/O with a last two yrs. w/only PUD/
loan-to-value ratio over 70%) minor derogatory Condo 85% 80%
items. 2 Unit 85% 80%
Three yrs. 3-4 85% 75%
reestablished Lite 80% 75%
excellent credit 1003 80% 70%
since bankruptcy
w/satisfactory
explanation.
A- Two 30-day (rolling 30-day Good credit for last SFR 90% 80% 45%** - 55%
delinquencies counted as one) yr. Two yrs. PUD/
reestablished Condo 85% 75%
excellent credit 2 Unit 85% 75%
since bankruptcy. 3-4 80% 75%
Lite 80% 75%
1003 80% 70%
B Four 30-day or one 60-day Satisfactory credit SFR 80% 70% 50%** - 55%
and two 30-day (rolling for last yr. Two PUD/
delinquencies counted as one) yrs. reestablished Condo 80% 70%
good credit since 2-4 80% 70%
bankruptcy. Lite 75% 70%
1003 75% 65%
C Twelve 30-day or three Fair credit for last SFR 80% 65% 55%**
30-day and one 60-day or two yr. One yr. PUD/
60-day and one 90-day reestablished Condo 75% 65%
satisfactory credit 2-4 70% 65%
since bankruptcy. Lite 70% 60%
1003 70% 60%
C- Current foreclosures and Poor credit. Any SFR 65% 60% 55%**
bankruptcies considered bankruptcy must be PUD/
discharged with loan. Condo 65% 60%
2-4 65% 60%
Lite 70% 60%
1003 N/A N/A
</TABLE>
** The ratio may be increased by 5% (up to the indicated maximum) for each 10%
that the loan-to-value ratio is below its indicated maximum.
Accredited performs a post-funding quality control review to monitor
and evaluate Accredited's loan origination policies and procedures. The quality
control department is separate from the corporate underwriting department, and
reports directly to a member of senior management.
At least 10% of all loan originations and purchases are subjected to a
full quality control re-underwriting and review, the results of which are
reported to senior management on a monthly basis. Discrepancies noted by the
audit are analyzed and corrective actions are instituted. A typical quality
control review currently includes: (a) obtaining a new drive-by appraisal for
each property; (b) running a new credit report from a different credit report
agency; (c) reviewing loan applications for completeness, signatures, and for
consistency with other processing documents; (d) obtaining new written
verification of income and employment; (e) obtaining new written verification of
mortgage to re-verify any outstanding mortgages; and (f) analyzing the
underwriting and program selection decisions. The quality control process is
updated from time to time as Accredited's policies and procedures change.
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DELINQUENCY AND LOAN LOSS EXPERIENCE
Historically, Accredited has sold substantially all of its mortgage
loan production in the secondary mortgage market on a "servicing released"
basis. In late 1998, Accredited began performing the delinquency collection and
default resolution functions on its warehouse inventory of loans held for sale
and on a pool of loans securitized by Accredited in 1996. In addition, in
mid-1999, Accredited began retaining such servicing functions on loans sold into
a facility under which Accredited also retains a residual interest in future
payments on the loans. However, Accredited's delinquency, bankruptcy,
foreclosure and default experience from these activities is insufficient for
purposes of estimating the future delinquency and loss experience of the
mortgage loans being sold to the trust, and there could be no assurance that
such delinquency and loss experience would correspond to the delinquency and
loss experience of mortgage loans being sold to the trust.
Accordingly, no such information is presented in this prospectus supplement.
THE SUBSERVICER AND THE BACKUP SERVICER
The information below concerning the subservicer has been provided to
the sponsor by the subservicer. Neither the sponsor, the indenture trustee, the
owner trustee, the underwriter nor any of their respective affiliates has made
any independent investigation of such information.
Advanta Mortgage Corp. USA ("Advanta") will act as the subservicer and
backup servicer of the mortgage loans pursuant to the subservicing agreement and
the sale and servicing agreement, respectively. Advanta is an indirect
subsidiary of Advanta Corp., a Delaware corporation ("Advanta Corp."), a
publicly traded company based in Springhouse, Pennsylvania with assets as of
September 30, 1999 in excess of $3.5 billion.
Advanta Corp., through its subsidiaries (including Advanta), had
managed assets (including mortgage loans) in excess of $12.2 billion as of
September 30, 1999.
As of September 30, 1999, Advanta and its subsidiaries were servicing
approximately 110,471 closed-end fixed-rate and adjustable-rate mortgage loans
that were originated or purchased and re-underwritten by Advanta or its
affiliates representing an aggregate outstanding principal balance of
approximately $7.5 billion, and approximately 157,164 mortgage loans which were
not originated or purchased by Advanta or its affiliates but are being serviced
for third parties on a contract servicing basis representing an aggregate
outstanding principal balance of approximately $10.5 billion.
On January 22, 1999, Fleet Financial Group, Inc. and some of its
affiliates ("Fleet") filed a complaint (the "Complaint") against Advanta Corp.
and some of its subsidiaries (but not including Advanta) in Delaware Chancery
Court bringing a lawsuit relating to the transaction between Advanta Corp. and
some of its affiliates and Fleet, which closed on February 20, 1998. Pursuant to
the transaction, Advanta Corp. contributed substantially all of its consumer
credit card business to a limited liability company controlled by Fleet (the
"Fleet Transaction"). The lawsuit centers around post-closing adjustments and
other matters relating to the Fleet Transaction. Fleet seeks damages of
approximately $141 million.
On February 16, 1999, Advanta Corp. filed an answer to the Complaint
denying the material allegations of the Complaint. Advanta Corp. also filed
counterclaims against Fleet seeking damages of approximately $101 million from
Fleet. Although the outcome of this litigation cannot be determined, Advanta
Corp. does not expect this litigation to have a material adverse effect on the
financial position or future operating results of Advanta Corp. or Advanta.
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This prospectus supplement contains forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. Additional risks that may affect Advanta
Corp.'s performance are detailed in Advanta Corp.'s filings with the Securities
and Exchange Commission, including in its most recent Annual Report on Form 10-K
and its Quarterly Reports on Form 10-Q.
The ability of Advanta Corp.'s subsidiaries to honor their financial
and other obligations is to some extent influenced by the financial condition of
Advanta Corp. Such obligations of Advanta, insofar as they relate to the trust
with respect to the mortgage loans, primarily consist of Advanta's limited
advancing obligation and its obligation to perform certain servicing functions
relating to the mortgage loans. To the extent that Advanta's ability to perform
such obligations is adversely affected, the mortgage loans may experience an
increased level of delinquencies and losses.
The notes will not represent an interest in or obligation of, nor are
the mortgage loans guaranteed by, Advanta or Advanta Corp. Additional
information with respect to Advanta and Advanta Corp. is available in the
various reports filed by Advanta and Advanta Corp. with the Securities and
Exchange Commission. The mortgage loans will also not be insured or guaranteed
by the FDIC or any other governmental agency or instrumentality.
THE SUBSERVICER
Pursuant to a subservicing agreement between the master servicer and
the subservicer, the subservicer will perform certain loan administration
functions relating to the mortgage loans, including but not limited to loan
boarding, payment processing, investor accounting, administering loan payoffs
and reconveyances, maintenance of hazard insurance on the mortgaged properties,
tax monitoring, and customer service. In addition, the subservicer will be
responsible for investor reporting and for aggregating data generated by it and
data provided to the subservicer by the master servicer for purposes of
reporting to the indenture trustee. Unless it becomes the successor master
servicer, the subservicer will not be responsible for servicing functions to be
performed directly by the master servicer, including without limitation, the
collection of delinquent accounts and the resolution of defaulted loans,
including forbearance, modification, foreclosures and REO management and
liquidation, and administration of the primary mortgage insurance policy. The
terms and conditions of the subservicing agreement are consistent with and do
not violate the provisions of the sale and servicing agreement. Such
subservicing agreement does not relieve the master servicer from any of its
obligations to service the mortgage loans in accordance with the terms and
conditions of the sale and servicing agreement.
The master servicer, with the consent of the note insurer, or the note
insurer, if an "event of default" has occurred under the subservicing agreement,
may remove the subservicer. If the subservicer is removed or resigns, the
successor to the subservicer, which may be the master servicer or another
subservicer, will be designated by the master servicer with the consent of the
note insurer. The note insurer has the right to appoint a successor subservicer
if the master servicer fails to do so or the note insurer and the master
servicer cannot agree on a successor subservicer. In addition, the subservicer
may be removed in connection with a transfer of the master servicing obligation
other than to the backup servicer.
THE BACKUP SERVICER
Upon the removal or resignation of the master servicer, the backup
servicer has agreed to become the successor master servicer, subject to the note
insurer's consent. The backup servicer is obligated to maintain certain
servicing records to permit it to assume the role of master servicer in an
efficient manner should the need arise. The backup servicer, if it becomes
successor master servicer, will be subject to all
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the responsibilities and duties of the master servicer, including making
Delinquency Advances and Servicing Advances unless it determines reasonably and
in good faith that such advances would not be recoverable. The backup servicer,
as successor master servicer will not be liable for any actions of any master
servicer prior to it. Advanta may resign or be removed by the note insurer as
backup servicer in the event it is removed or resigns as subservicer. If the
backup servicer is removed or resigns, the successor backup servicer, if any,
will be designated by the master servicer with the consent of the note insurer
and with the consent of the rating agencies rating the transaction. The note
insurer has the right to appoint a successor backup servicer if the master
servicer fails to do so or the note insurer and the master servicer cannot agree
on a successor backup servicer.
If a backup servicer is not in place at the time the master servicer is
removed or resigns and the note insurer fails to select a successor master
servicer, the indenture trustee may solicit bids for a successor master servicer
and, pending the appointment of a successor master servicer as a result of
soliciting such bids, will be required to serve as master servicer. If the
indenture trustee is unable to obtain a qualifying bid and the note insurer
fails to select another successor master servicer, the indenture trustee will be
required to appoint, or petition a court of competent jurisdiction to appoint,
an eligible successor. Any successor master servicer is required to be a housing
and home finance institution, bank or mortgage servicing institution which has
been designated as an approved seller-servicer by Fannie Mae or Freddie Mac,
having equity of not less than $5,000,000 as determined in accordance with
generally accepted accounting principles, which is acceptable to the note
insurer and which shall assume all of the responsibilities, duties or
liabilities of the master servicer.
The backup servicer will receive a fee equal to 0.03% per annum with
respect to each mortgage loan on each payment date as compensation for standing
by to act as successor master servicer. If the backup servicer becomes the
successor master servicer, the backup servicer will be entitled to the same
servicing compensation as the master servicer plus the backup servicing fee. SEE
"SERVICING OF THE MORTGAGE LOANS -- SERVICING FEES AND OTHER COMPENSATION AND
PAYMENT OF EXPENSES" HEREIN.
THE OWNER TRUSTEE
Wilmington Trust Company, a Delaware banking corporation, has its
corporate trust offices located at Rodney Square North, 1100 North Market
Street, Ninth Floor, Wilmington, Delaware 19890. The owner trustee will perform
limited administrative functions on behalf of the trust pursuant to the trust
agreement. The owner trustee's duties are limited solely to its express
obligations under the trust agreement.
THE INDENTURE TRUSTEE
Norwest Bank Minnesota, National Association, has offices at Sixth
Street and Marquette Avenue, Minneapolis, Minnesota 55479 and 11000 Broken Land
Parkway, Columbia, Maryland 21044. The indenture trustee will act as initial
authenticating agent, paying agent and note registrar pursuant to the terms of
the indenture.
DESCRIPTION OF THE NOTES AND THE TRUST CERTIFICATES
Capitalized terms used in this prospectus supplement are defined under
the caption "Glossary."
On the closing date, the trust will issue the Class A-1 Notes and the
Class A-2 Notes pursuant to the indenture. Each Class A-1 Note represents a debt
obligation of the trust secured by a pledge of the portion of the trust estate
consisting of the fixed-rate group mortgage loans. Each Class A-2 Note
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represents a debt obligation of the trust secured by a pledge of the portion of
the trust estate consisting of the adjustable-rate group mortgage loans.
Pursuant to the trust agreement, the trust will also issue a class of
trust certificates, representing the entire beneficial ownership interest in the
trust. The trust certificates will represent the entire beneficial ownership
interest in both groups of mortgage loans and will be held by the sponsor. The
trust certificates may not be transferred without the consent of the note
insurer and compliance with the transfer provisions of the trust agreement.
The notes will be issued only in book-entry form, in denominations of
$25,000 initial principal balance and integral multiples of $1,000 in excess
thereof, except that one note of each class may be issued in a different amount.
The notes are available in book-entry form only, through the facilities of The
Depository Trust Company or "DTC".
BOOK-ENTRY NOTES
The notes are sometimes referred to in this prospectus supplement as
"book-entry notes." The book-entry notes will be issued in one or more notes
which equal the aggregate principal balance of the notes and will initially be
registered in the name of Cede & Co., which will be the "holder" of the notes,
as the nominee of DTC. Persons acquiring beneficial ownership interests in the
notes will hold their notes through DTC in the United States or Clearstream,
Luxembourg (formerly known as Cedel) or the Euroclear System in Europe, if they
are participants of such systems, or indirectly through organizations which are
participants in such systems. Clearstream, Luxembourg and Euroclear System will
hold omnibus positions on behalf of their participants through customers'
securities accounts in Clearstream, Luxembourg's and Euroclear System'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, N.A. will act as depositary for Clearstream, Luxembourg
and The Chase Manhattan Bank will act as depositary for Euroclear System.
Investors may hold such beneficial interests in the book-entry notes in
minimum denominations representing principal amounts of $25,000 and in integral
multiples of $1,000 in excess thereof. Except as described in the prospectus
under "DESCRIPTION OF THE SECURITIES -- DEFINITIVE SECURITIES," no beneficial
owner will be entitled to receive a physical or definitive note representing
such note. Unless and until definitive notes are issued, it is anticipated that
the only "holder" of such notes will be Cede & Co., as nominee of DTC.
Beneficial owners will not be "holders" or "noteholders" as those terms are used
in the indenture and the sale and servicing agreement. Beneficial owners are
only permitted to exercise their rights indirectly through participants and DTC.
FOR INFORMATION WITH RESPECT TO TAX DOCUMENTATION PROCEDURES RELATING TO THE
NOTES, SEE "ANNEX I - GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES" ATTACHED TO THIS PROSPECTUS SUPPLEMENT.
None of the trust, the owner trustee, the sponsor, the master servicer,
the backup servicer, the subservicer, the note insurer or the indenture trustee
will have any responsibility for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the book-entry
notes held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
ASSIGNMENT AND PLEDGE OF INITIAL MORTGAGE LOANS
Pursuant to the sale and servicing agreement, the sponsor will sell,
transfer, assign, set over and otherwise convey without recourse to the trust,
all right, title and interest in and to each initial mortgage loan, including
all scheduled payments of principal and interest due after, the close of
business on
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February 1, 2000. The sponsor will not convey, and the sponsor reserves and
retains all its right, title and interest in and to, (x) scheduled payments of
principal and interest due on each mortgage loan on or prior to February 1, 2000
and (y) principal prepayments in full, curtailments (i.e., partial prepayments)
and unscheduled recoveries of principal received on each such mortgage loan
prior to February 1, 2000.
Pursuant to the indenture, the trust will pledge to the indenture
trustee in trust for the benefit of the holders of the notes and the note
insurer, all right, title and interest in and to the mortgage loans, as
collateral security for the notes.
ASSIGNMENT AND PLEDGE OF SUBSEQUENT MORTGAGE LOANS
On the closing date, approximately $13,384,851.19 will be deposited in
the pre-funding account with respect to the Class A-1 Notes and approximately
$30,279,890.61 will be deposited in the pre-funding account with respect to the
Class A-2 Notes from the proceeds of the sale of the Class A-1 Notes and the
Class A-2 Notes, respectively, and will be used to acquire subsequent mortgage
loans for inclusion in the related sub-trust. The pre-funding accounts will be
in the name of and maintained by the indenture trustee and will be part of the
assets of the related sub-trust. The trust may acquire subsequent mortgage loans
with the funds on deposit in the related pre-funding account at any time during
the period from the closing date until the earliest of:
- the date on which the amount on deposit in the related
pre-funding account is less than $100,000,
- the date on which an event of default occurs under the terms
of the sale and servicing agreement, the indenture or the
insurance agreement, and
- the close of business on March 31, 2000.
The sponsor expects that the amounts originally deposited in each
pre-funding account will be reduced to less than $100,000 by March 31, 2000. To
the extent funds in the pre-funding accounts are not used to purchase subsequent
mortgage loans by March 31, 2000 or the occurrence of one of the other events
specified above, such funds will be used to prepay the principal of the related
class of notes on the following payment date.
DELIVERY OF MORTGAGE LOAN DOCUMENTS
In connection with the sale, transfer, assignment or pledge of the
mortgage loans to the trust, the sponsor will deliver or cause to be delivered
to the indenture trustee, on or prior to the closing date, and with respect to
the subsequent mortgage loans, on the applicable subsequent transfer date, the
following documents with respect to each mortgage loan which constitute the
mortgage file:
(a) the original mortgage note, endorsed without recourse in blank
by the sponsor, including all intervening endorsements showing
a complete chain of endorsement;
(b) the related original mortgage with evidence of recording
indicated thereon or, in certain limited circumstances, a copy
thereof certified by the applicable recording office, the
sponsor or the sponsor's closing agent in connection with the
closing of the mortgage loan;
(c) the recorded intervening mortgage assignment(s), if any, or
copies thereof certified by the applicable recording office,
the sponsor or the sponsor's closing agent in connection with
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the closing of the mortgage loan, showing a complete chain of
assignment from the originator of the related mortgage loan to
the sponsor -- which assignment may, at the sponsor's option,
be combined with the assignment referred to in clause (d)
below;
(d) a mortgage assignment in recordable form, which, if acceptable
for recording in the relevant jurisdiction, may be included in
a blanket assignment or assignments, of each mortgage from the
sponsor to the indenture trustee;
(e) originals of all assumption, modification and substitution
agreements in those instances where the terms or provisions of
a mortgage or mortgage note have been modified or such
mortgage or mortgage note has been assumed; and
(f) an original title insurance policy or a copy of the
preliminary title report, binder or commitment therefor,
together with a certificate from the sponsor that the original
mortgage has been delivered for recordation to the title
insurance company that issued such preliminary title report,
binder or commitment.
Pursuant to the indenture, the indenture trustee agrees to execute and
deliver on or prior to the closing date, or, with respect to subsequent mortgage
loans, on or prior to the related subsequent transfer date, an acknowledgment of
receipt of the original mortgage note, item (a) above, with respect to each of
the mortgage loans, with any exceptions noted. The indenture trustee agrees, for
the benefit of the holders of the notes and the note insurer, to review, or
cause to be reviewed, each mortgage file within sixty days after the closing
date or the subsequent transfer date, as applicable -- or, with respect to any
Qualified Substitute Mortgage Loan, within sixty days after the receipt by the
indenture trustee thereof -- and to deliver a certification generally to the
effect that, as to each mortgage loan listed in the schedule of mortgage loans:
- all documents required to be delivered to it pursuant to the
indenture are in its possession,
- each such document has been reviewed by it and has not been
mutilated, damaged, torn or otherwise physically altered,
appears regular on its face and relates to such mortgage loan,
and
- based on its examination and only as to the foregoing
documents, certain information set forth on the schedule of
mortgage loans accurately reflects the information set forth
in the mortgage file delivered on such date.
If the indenture trustee, during the process of reviewing the mortgage
files, finds any document constituting a part of a mortgage file to be defective
in any material respect, the indenture trustee shall promptly so notify the
master servicer, the backup servicer, the subservicer, the sponsor and the note
insurer in writing with details thereof. The sponsor agrees to use reasonable
efforts to cause to be remedied a material defect in a document constituting
part of a mortgage file of which it is so notified by the indenture trustee. If,
however, within sixty days after the indenture trustee's notice of such defect,
the sponsor has not caused the defect to be remedied and the defect materially
and adversely affects the value of the related mortgage loan or the interest of
the holders of the notes or the interests of the note insurer in the related
mortgage loan, the sponsor will either (a) substitute in lieu of such mortgage
loan a Qualified Substitute Mortgage Loan and, if the then outstanding principal
balance of such Qualified Substitute Mortgage Loan is less than the principal
balance of such mortgage loan as of the date of such substitution plus accrued
and unpaid interest thereon, deliver to the master servicer a substitution
adjustment equal to the amount of any such shortfall or (b) purchase such
mortgage loan at a purchase price equal to the outstanding principal balance of
such mortgage loan as of the date of purchase, plus the greater of (x) all
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accrued and unpaid interest thereon and (y) thirty days' interest thereon,
computed at the related mortgage interest rate, net of the master servicing fee
if the master servicer is effecting the repurchase, plus the amount of any
unreimbursed Delinquency Advances and Servicing Advances. The purchase price
will be deposited in the collection account after deducting therefrom any
amounts received in respect of such repurchased mortgage loan or loans and being
held in the collection account for future payment to the extent such amounts
have not yet been applied to principal or interest on such mortgage loan. In the
event a defective mortgage loan is liquidated before it is repurchased by the
sponsor, the sponsor is obligated to pay any realized losses with respect to
such defective mortgage loan. The obligation of the sponsor to repurchase or
substitute for a defective mortgage loan is the sole remedy regarding any
defects in the mortgage file available to the indenture trustee or the
noteholders.
REPRESENTATIONS AND WARRANTIES OF THE SPONSOR
The sponsor will represent, among other things, with respect to each
mortgage loan, as of the closing date or the subsequent transfer date, as
applicable, the following:
1. the information set forth in the schedule of mortgage loans with
respect to each mortgage loan is true and correct;
2. all of the original or certified documentation constituting the
mortgage files, including all material documents related thereto, has been or
will be delivered to the indenture trustee, on the closing date or the
subsequent transfer date, as applicable;
3. the mortgaged property consists of a single parcel of real property
upon which is erected a detached one- to four-family dwelling, an individual
condominium unit in a low-rise condominium, or an individual unit in a planned
unit development;
4. each mortgage loan at the time it was made complied with, and each
mortgage loan at all times was serviced in compliance with, in each case, in all
material respects, applicable state and federal laws and regulations, including,
without limitation, usury, equal credit opportunity, consumer credit,
truth-in-lending and disclosure laws;
5. each mortgage is a valid first or second lien on a fee simple, or
its equivalent under applicable state law, or leasehold estate in the real
property securing the amount owed by the mortgagor under the mortgage note
subject only to,
- the lien of current real property taxes and assessments which
are not delinquent,
- any related first mortgage loan,
- covenants, conditions and restrictions, rights of way,
easements and other matters of public record as of the date of
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 in connection with the origination of the related
mortgage loan obtained by the sponsor or related originator,
and
- 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;
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6. immediately prior to the transfer and assignment by the sponsor to
the trust, the sponsor had good title to, and was the sole owner of each
mortgage loan, free of any interest of any other person, and the sponsor has
transferred all right, title and interest in each mortgage loan to the trust;
7. each mortgage loan conforms, and all such mortgage loans in the
aggregate conform, to the description thereof set forth in this prospectus
supplement; and
8. all of the mortgage loans were originated in accordance with the
underwriting criteria set forth in this prospectus supplement.
Pursuant to the sale and servicing agreement, upon the discovery by any
holder of the notes, the sponsor, the master servicer, the backup servicer, the
subservicer, the note insurer, or the indenture trustee of a breach of any of
the representations and warranties contained in the sale and servicing agreement
which materially and adversely affects the value of the related mortgage loan or
the interests of the holders of the notes or the interests of the note insurer
in the related mortgage loan, the sponsor will have a period of sixty days to
effect a cure. If the breach is not cured within the sixty-day period, the
sponsor will either (a) substitute for such mortgage loan a Qualified Substitute
Mortgage Loan or (b) purchase such mortgage loan from the trust. The same
procedures and limitations that are set forth above for the substitution or
purchase of a defective mortgage loan as a result of deficient documentation
will apply to the substitution or purchase of a mortgage loan as a result of a
breach of a representation or warranty in the sale and servicing agreement that
materially and adversely affects the interests of the noteholders or the note
insurer. In the event a mortgage loan with respect to which a representation or
warranty has been breached is liquidated before it is repurchased by the
sponsor, the sponsor must pay any realized losses with respect to such mortgage
loan.
In addition, the sponsor will be obligated to indemnify the trust, the
master servicer, the subservicer, the backup servicer, the owner trustee, the
indenture trustee, the holders of the notes and the note insurer for any
third-party claims arising out of a breach by the sponsor of representations or
warranties regarding the mortgage loans. The obligation of the sponsor to cure
such breach or to substitute or purchase any mortgage loan and to indemnify
constitute the sole remedies respecting a material breach of any such
representation or warranty to the holders of the notes, the trust, the indenture
trustee, the subservicer, the backup servicer, and the note insurer.
PAYMENTS ON THE MORTGAGE LOANS
The master servicer is obligated to establish and maintain a separate
collection account, which will generally be (a) an account maintained with a
depository institution or trust company whose long-term unsecured debt
obligations are rated by each rating agency rating this offering in the highest
rating at the time of any deposit therein or (b) trust accounts maintained with
a depository institution acceptable to each rating agency rating this offering
and the note insurer. The master servicer may direct any depository institution
maintaining the collection account to invest the funds in the collection account
in one or more eligible investments that mature, unless payable on demand, no
later than the business day preceding the date on which the master servicer is
required to transfer the servicer remittance amount from the collection account
into the payment account, as described below.
The master servicer is obligated to deposit or cause to be deposited in
the collection account in accordance with the time frame set forth in the sale
and servicing agreement, amounts representing the following payments received
and collections made by it after the Cut-off Date, other than in respect of
scheduled monthly payments on the initial mortgage loans due on a due date
occurring on or prior to February 1, 2000:
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- all payments on account of principal of the mortgage loans,
including scheduled principal payments, full and partial
principal prepayments and prepayment penalties collected in
connection therewith;
- all payments on account of interest on the mortgage loans;
- all Liquidation Proceeds;
- all Insurance Proceeds and claims payments received in respect
of the primary mortgage insurance policy;
- all Net REO Proceeds;
- all other amounts required to be deposited in the collection
account pursuant to the sale and servicing agreement; and
- any amounts required to be deposited in connection with net
losses realized on investments of funds in the collection
account.
The indenture trustee will be obligated to set up a payment account
with respect to each class of notes into which the master servicer will deposit
or cause to be deposited the servicer remittance amount on the third business
day preceding the payment date, the "servicer remittance date."
The servicer remittance amount for a servicer remittance date is equal
to the sum, without duplication, of:
- all scheduled collections of principal of and interest on the
mortgage loans collected by the master servicer during the
related Due Period,
- all partial prepayments of principal and other amounts
collected on account of principal, including Net REO Proceeds,
Net Liquidation Proceeds and Insurance Proceeds, if any,
collected by the master servicer during the previous calendar
month,
- all principal prepayments in full, including prepayment
penalties, collected by the master servicer during the related
Prepayment Period,
- all Delinquency Advances made by the master servicer or
subservicer with respect to payments due to be received on the
mortgage loans during the related Due Period, and
- any other amounts required to be placed in the collection
account by the master servicer pursuant to the sale and
servicing agreement,
but excluding the following:
(a) amounts received on a mortgage loan, other than timely
scheduled payments of principal and interest, and including
late payments, Liquidation Proceeds, and Insurance Proceeds,
to the extent the master servicer has previously made an
unreimbursed Delinquency Advance or a Servicing Advance with
regard to such mortgage loan;
(b) for such servicer remittance date, the aggregate servicing
fees, including the backup servicing fee;
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(c) all net income from eligible investments that is held in the
collection account for the account of the master servicer;
(d) all amounts actually recovered by the master servicer in
respect of late fees, assumption fees and similar fees;
(e) Net Foreclosure Profits;
(f) all amounts previously advanced by the master servicer or
subservicer as Delinquency Advances or Servicing Advances that
are determined in good faith by the master servicer to be
unrecoverable from the proceeds of the particular mortgage
loan to which they relate; and
(g) certain other amounts which are reimbursable to the master
servicer, as provided in the sale and servicing agreement.
The amounts described above may be withdrawn by the master servicer or
the subservicer from the collection account on or prior to each servicer
remittance date.
CAPITALIZED INTEREST ACCOUNTS
On the closing date, the sponsor will deposit approximately $62,531.13
in the capitalized interest account with respect to the Class A-1 Notes and
approximately $98,528.87 in the capitalized interest account with respect to the
Class A-2 Notes. These amounts will be used, as necessary, by the indenture
trustee during the pre-funding period to make up for interest shortfalls that
may arise in the event that interest collected on the related group of mortgage
loans, together with investment earnings on the related pre-funding account, are
insufficient to pay all of the interest due on the related class of notes and
expenses during that period. Any amounts remaining in the capitalized interest
account which are not used to make up this shortfall will be paid directly to
the sponsor on the payment date immediately following the end of the pre-funding
period.
Amounts on deposit in the capitalized interest accounts will be
invested in permitted investments as described in the indenture. All such
permitted investments are required to mature no later than the business day
prior to the March 2000 payment date.
PAYMENTS OF INTEREST
On each payment date, each class of notes is entitled to receive:
- CURRENT INTEREST. The amount of interest that accrued during
the related accrual period for that class on the outstanding
principal balance of that class at the note rate for that
class, reduced by the sum of (a) the Civil Relief Act Interest
Shortfalls for that class and (b) Net Prepayment Interest
Shortfalls for that class.
- UNPAID INTEREST SHORTFALLS. Any interest that was due on a
prior payment date that was not paid, together with interest
on that previously unpaid amount.
With respect to the Class A-2 Notes, interest payable to the holders of
the Class A-2 Notes on any payment date may be capped by the application of the
Class A-2 Available Funds Cap Rate. In such event, the excess of any interest
calculated at the Class A-2 Formula Note Rate over the interest calculated at
the Class A-2 Available Funds Cap Rate will not be covered by the note insurance
policy.
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The accrual period for the Class A-1 Notes is the calendar month
preceding the payment date. The accrual period for the Class A-2 Notes is the
period from and including the prior payment date (or, in the case of the March
27, 2000 payment date, from the closing date) to but excluding the current
payment date. Interest will accrue on the Class A-1 Notes on the basis of a
360-day year consisting of twelve 30-day months. Interest will accrue on the
Class A-2 Notes on the basis of a 360-day year and the actual number of days
elapsed in the accrual period.
CALCULATION OF LIBOR
The London interbank offered rate ("LIBOR") with respect to any payment
date will be determined by the indenture trustee and will equal the posted rate
for United States dollar deposits for one month that appears on Telerate Page
3750 as of 11:00 a.m., London time, on the second LIBOR Business Day prior to
the immediately preceding payment date (or, in the case of the first payment
date, February 25, 2000). If no such posted rate appears, LIBOR will be
determined on the basis of the offered quotation of the reference banks (which
shall be four major banks that are engaged in transactions in the London
interbank market) identified in the indenture for United States dollar deposits
for one month to prime banks in the London interbank market as of 11:00 a.m.,
London time, on such date. If fewer than two reference banks provide such
offered quotations on that date, LIBOR will be calculated as the offered rate
that one or more leading banks in The City of New York selected by the indenture
trustee (after consultation with the master servicer) are quoting as of 11:00
a.m., New York City time, on such date to leading European banks for United
States dollar deposits for one month; provided, however, that if such banks are
not quoting as described above, LIBOR will be equal to the value calculated for
the immediately preceding payment date. In any event, LIBOR is calculated as the
arithmetic mean (rounded, if necessary, to the nearest 1/100th of a percent
(0.0001), with 5/1,000th of a percent (0.000005) rounded upwards) of all such
quotations, and "LIBOR Business Day" is a day on which banking institutions in
the City of London, England, are not required or authorized by law to be closed.
PAYMENTS OF PRINCIPAL
On each payment date, the holders of each class of notes will receive a
payment of principal in the aggregate amount, (such aggregate amount, the
"Principal Payment Amount" for that class) equal to the sum of :
(i) the Base Principal Payment Amount for that class and
payment date;
(ii) the Over-collateralization Deficit allocable to that
class, but only to the extent that it can be funded on such payment
date from Excess Interest available from both groups, as described
below in "-- FLOW Of FUNDS", or amounts, if any available from the
reserve account;
(iii) such class' pro rata portion of any Remaining
Over-collateralization Deficit on such payment date, to the extent
funded by the note insurer as an Insured Payment; and
(iv) the Over-collateralization Increase Amount for that
class, but only to the extent it can be funded on that payment date
from Excess Interest available from the related group.
An amount equal to the Principal Payment Amount with respect to each
class of notes will be paid to the holders of that class of notes until the note
principal balance of that class has been reduced to zero.
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FLOW OF FUNDS
On each payment date, the indenture trustee, based solely on the loan
level information received from the master servicer in the servicer remittance
report prior to that payment date, will make payments in respect of each group
of mortgage loans to the holders of the related class of notes and reimbursement
to the note insurer under the insurance agreement, to the extent of funds,
including any Insured Payments, on deposit in the related payment account, as
follows:
(a) to the indenture trustee, the indenture trustee fee for that
payment date and any payments with respect to indemnification
due to the indenture trustee, to the owner trustee, the owner
trustee fee for that payment date; to the note insurer, the
note insurer premium for that payment date; and to the primary
mortgage insurance provider, the premium due, if any, in each
case, with respect to the related class of notes;
(b) from amounts then on deposit in the related payment account,
the Interest Payment Amount for the related class of notes;
(c) from amounts then on deposit in the related payment account,
the Base Principal Payment Amount for the related class of
notes;
(d) from amounts then on deposit in the related payment account,
the allocable portion of the Over-collateralization Deficit,
if any, for the related class of notes;
(e) from amounts then on deposit in the related payment account,
to the holders of the other class of notes, the Shortfall
Amount for such other class;
(f) from amounts then on deposit in the related payment account,
to the note insurer the Reimbursement Amount with respect to
the related class of notes as of such payment date;
(g) from amounts then on deposit in the related payment account,
to the note insurer, the Reimbursement Amount for the other
class of notes as of such payment date;
(h) from amounts then on deposit in the related payment account,
the Over-collateralization Increase Amount for the related
class of notes;
(i) from amounts then on deposit in the related payment account,
to the reserve account, the amount necessary for the balance
of that account to equal the applicable Specified Reserve
Amount;
(j) with respect to the Class A-2 Notes only, from amounts then on
deposit in the related payment account, to the holders of the
Class A-2 Notes, the Class A-2 Available Funds Cap
Carry-Forward Amount;
(k) from amounts then on deposit in the related payment account to
the master servicer, any amount due to it with respect to the
related group; and
(l) following the making by the indenture trustee of all
allocations, transfers and disbursements described above, to
the holders of the trust certificates, the amount remaining on
such payment date in the each payment account, if any.
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OVER-COLLATERALIZATION PROVISIONS
OVER-COLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. Any Excess
Interest with respect to a group of mortgage loans, remaining after payment of
items (a) through (g) in "-- FLOW OF FUNDS" above will be applied on each
payment date as an accelerated payment of principal on the related class of
notes but only to a limited extent. The application of this amount as a payment
of principal will accelerate the amortization of a class of notes relative to
the amortization of the related group of mortgage loans, thus creating or
increasing over-collateralization.
Under certain circumstances, the required level of the Specified
Over-collateralization Amount with respect to the mortgage loans is permitted to
decrease or "step down" on a payment date in the future. If, on any payment
date, as a result of such a step down or otherwise, the Over-collateralization
Amount with respect to a group of mortgage loans is higher than is required,
then the amount of principal equal to the excess which would otherwise be paid
to the holders of the related class of notes on such payment date will not be
paid through as principal on that class of notes. This has the effect of
decelerating the amortization of the related class of notes relative to the
amortization of such group of mortgage loans, and of reducing the
Over-collateralization Reduction Amount. The amounts of principal not paid
through as principal are the Over-collateralization Reduction Amount.
Under certain circumstances, the required over-collateralization amount
may be increased, which will result in additional distributions of Excess
Interest and acceleration of the related class of notes.
The sale and servicing agreement does not require that the amount of
any Liquidated Loan Loss be paid to the holders of the related class of notes on
the payment date which immediately follows the event of loss; i.e., the sale and
servicing agreement does not require the current recovery of losses. However,
the occurrence of a Liquidated Loan Loss will reduce the Over-collateralization
Amount with respect to that group of mortgage loans, which, to the extent that
such reduction causes the Over-collateralization Amount to be less than the
Specified Over-collateralization Amount applicable to the related payment date,
will require the payment of an Over-collateralization Increase Amount on such
payment date, or, if insufficient funds are available on such payment date, on
subsequent payment dates, until the Over-collateralization Amount equals the
related Specified Over-collateralization Amount. The effect of the foregoing is
to allocate losses to the holders of the trust certificates by reducing, or
eliminating entirely, payments of Excess Interest and Over-collateralization
Reduction Amounts which such holder would otherwise receive.
CROSS-COLLATERALIZATION PROVISIONS
The cross-collateralization provisions of the transaction are limited
to the payment, from the funds available from one group of mortgage loans, of
certain fees and premiums, credit losses, interest shortfalls and amounts due
the note insurer with respect to the other group, but only after meeting the
minimum funding needs of the first group. Excess Interest will not be used to
build the over-collateralization level of the other class to its respective
required level.
CROSS-COLLATERALIZATION PAYMENTS. On each payment date, available
Excess Interest from one group of mortgage loans, if any, will be paid to the
holders of the class of notes relating to the other group of mortgage loans to
the extent of the Shortfall Amount for that other group.
RESERVE ACCOUNT. The notes will also have the benefit of a reserve
account. On each payment date, available Excess Interest from a group of
mortgage loans after payment of the Over-collateralization Increase Amount for
that group and payment date, if any, will be paid into the reserve account until
the funds on deposit in the reserve account equal the Specified Reserve Amount.
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Funds on deposit in the reserve account on a payment date will be used
to fund Shortfall Amounts, to the extent that there is insufficient Excess
Interest available on that payment date to fund those shortfalls.
In the event the sub-trust for a group of mortgage loans is terminated
pursuant to the optional clean-up call, while the other sub-trust remains
outstanding, no additional amounts of Excess Interest from the terminated
sub-trust will be available to fund Shortfall Amounts or to fund the reserve
account, in either case for the benefit of the class of notes relating to the
other sub-trust.
THE NOTE INSURANCE POLICY
The indenture requires the indenture trustee to make a claim for an
Insured Payment under the note insurance policy not later than the second
business day prior to any payment date as to which the indenture trustee has
determined that a Remaining Over-collateralization Deficit will exist for the
purpose of applying the proceeds of such Insured Payment as a payment of
principal to the holders of the notes on such payment date. Remaining
Over-collateralization Deficits are calculated on an aggregate basis for both
mortgage loan groups considered together. The note insurer has the option on any
payment date to make a payment of principal, including in respect of Liquidated
Loan Losses, up to the amount that would have been payable to the holders of the
notes if sufficient funds were available therefor. Additionally, under the terms
of the indenture, the note insurer will have the option to cause Excess Interest
to be applied without regard to any limitation upon the occurrence of certain
trigger events, or in the event of an "event of default" under the insurance
agreement. However, investors in the notes should realize that, under extreme
loss or delinquency scenarios, they may temporarily receive no payments of
principal. Moreover, with respect to any payment date occurring on a date when
an event of default under the insurance agreement has occurred and is continuing
or a date on or after the first date on which a claim is made under the note
insurance policy, the note insurer at its sole option, may pay any or all of the
outstanding principal balance of the notes.
EVENTS OF DEFAULT
Upon the occurrence of an event of default, the indenture trustee may,
with the consent of the note insurer, or shall at the direction of the note
insurer or upon the direction of noteholders representing at least 51% of the
aggregate principal balance of the notes, together with the prior written
consent of the note insurer, declare the aggregate outstanding principal balance
of all the notes to be due and payable together with all accrued and unpaid
interest thereon without presentment, demand, protest or other notice of any
kind, all of which are waived by the trust. Such declaration may be rescinded by
the note insurer or noteholders representing at least 51% of the aggregate
principal balance of the notes, together with the prior written consent of the
note insurer. An event of default, wherever used herein, means any one of the
following events:
1. the trust fails to pay or causes to be paid to the indenture
trustee, for the benefit of the holders of the notes, on any payment date, all
or part of any Interest Payment Amount due on the notes on such payment date; or
2. the trust fails to pay or cause to be paid to the indenture trustee,
for the benefit of the holders of the notes, (x) on any payment date an amount
equal to the Base Principal Payment Amount due on the outstanding notes on such
payment date, to the extent that sufficient funds are on deposit in the
collection account or (y) on the final stated maturity date for any class of
notes, the aggregate outstanding principal balance of the related class of
notes; or
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3. the trust is in breach or default in the due observance of any one
or more of the negative covenants under the indenture, and the breach or default
continues beyond any applicable grace period; or
4. the trust consents to the appointment of a custodian, receiver,
trustee or liquidator, or other similar official, of itself, or of a substantial
part of its property, or shall admit in writing its inability to pay its debts
generally as they come due, or a court of competent jurisdiction shall determine
that the trust is generally not paying its debts as they come due, or the trust
shall make a general assignment for the benefit of creditors; or
5. the trust files a voluntary petition in bankruptcy or a voluntary
petition or an answer seeking reorganization in a proceeding under any
bankruptcy laws, as now or hereafter in effect, or an answer admitting the
material allegation of a petition filed against the trust in any such
proceeding, or the trust, by voluntary petition, answer or consent, seeks relief
under the provisions of any now existing or future bankruptcy or other similar
law providing for the reorganization or winding-up of debtors, or providing for
an agreement, composition, extension or adjustment with its creditors; or
6. an order, judgment or decree is entered in any proceeding by any
court of competent jurisdiction appointing, without the consent, express or
legally implied, of the trust, a custodian, receiver, trustee or liquidator, or
other similar official, of the trust or any substantial part of its property, or
sequestering any substantial part of its respective property, and any such
order, judgment or decree or appointment or sequestration shall remain in force
undismissed, unstayed or unvacated for a period of ninety days after the date of
entry thereof; or
7. a petition against the trust in a proceeding under applicable
bankruptcy laws or other insolvency laws, as now or hereafter in effect, is
filed and is not stayed, withdrawn or dismissed within ninety days thereafter,
or if, under the provisions of any law providing for reorganization or
winding-up of debtors which may apply to the trust, any court of competent
jurisdiction assumes jurisdiction, custody or control of the trust or any
substantial part of its property, and such jurisdiction, custody or control
remains in force unrelinquished, unstayed or unterminated for a period of ninety
days; or
8. The occurrence of an event of default under the insurance agreement.
REPORTS TO NOTEHOLDERS
Pursuant to the indenture, on each payment date the indenture trustee
will make available to the master servicer, the note insurer, the backup
servicer, the subservicer and each holder of a note or a trust certificate a
written remittance report containing information including, without limitation,
the amount of the payment on such payment date, the amount of such payment
allocable to principal and allocable to interest, the aggregate outstanding
principal balance of the notes as of such payment date, the amount of any
Insured Payment included in such payment on such payment date and such other
information as required by the indenture.
The indenture trustee will make the monthly report (and, at its option,
any additional files containing the same information in an alternative format)
available each month to noteholders and other parties via the indenture
trustee's internet website and its fax-on-demand service. The indenture
trustee's fax-on-demand service may be accessed by calling (301) 815-6610. The
indenture trustee's internet website shall initially be located at
"WWW.CTSLINK.COM". Assistance in using the website or the fax-on-demand service
can be obtained by calling the indenture trustee's customer service desk at
(301) 815-6600. Parties that are unable to use the above distribution options
are entitled to have a paper copy mailed to them via first class mail by calling
the customer service desk and indicating such. The indenture trustee shall have
the right to change the way payment date statements are distributed in order
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to make such distribution more convenient and/or more accessible to the above
parties and the indenture trustee will provide timely and adequate notification
to all above parties regarding any such changes.
MANDATORY PREPAYMENT ON THE NOTES
Each class of notes will be partially prepaid on the payment date
immediately following the end of the pre-funding period to the extent that any
amount remains on deposit in the related pre-funding account on that payment
date. Although no assurance can be given, it is anticipated that the principal
amount of subsequent mortgage loans sold to the trust with respect to each group
will require the application of substantially all of the amount in the related
pre-funding account and that there should be no material amount of principal
prepaid on the notes from the related pre-funding account. However, it is
unlikely that the sponsor will be able to deliver subsequent mortgage loans for
each group with an aggregate principal balance identical to the original
pre-funded amount for that group.
OPTIONAL CLEAN-UP CALL ON THE NOTES
The sponsor may, at its option, terminate the sub-trust with respect to
the fixed-rate mortgage loans on any payment date when the outstanding principal
balance of the Class A-1 Notes is equal to or less than 10% of the original
principal balance of the Class A-1 Notes or terminate the sub-trust with respect
to the adjustable-rate mortgage loans on any payment date when the outstanding
principal balance of the Class A-2 Notes is equal to or less than 10% of the
original principal balance of the Class A-2 Notes. The sponsor also has the
option to terminate the entire trust on any payment date when the aggregate
outstanding principal balance of the notes is equal to or less than 10% of the
original aggregate principal balance of the notes. If the sponsor calls any
class of notes, the sponsor must deposit into the related payment account an
amount equal to the aggregate outstanding principal balance of the related class
of notes, plus all accrued and unpaid interest thereon including shortfalls of
interest carry-forward amounts (including, with respect to a call of the Class
A-2 Notes, any Class A-2 Available Funds Cap Carry-Forward Amount) at the
related note rate through the end of the accrual period preceding the final
payment date, together with all amounts due and owing the note insurer.
AMENDMENT
The indenture may be amended from time to time by the trust and the
indenture trustee by written agreement, upon the prior written consent of the
note insurer, without notice to, or consent of, the holder of the notes, to cure
any ambiguity, to correct or supplement any provisions in the indenture that may
be defective or inconsistent with any other provision thereto, to comply with
any changes in the Internal Revenue Code, or to make any other provisions with
respect to matters or questions arising under the indenture which shall not be
inconsistent with the provisions of the indenture. However, any such action
shall not, as evidenced by (i) an opinion of counsel delivered to, but not
obtained at the expense of, the indenture trustee or (ii) a letter from each
rating agency rating this offering confirming that such amendment will not cause
the reduction, qualification or withdrawal of the then-current ratings of the
notes or adversely affect in any material respect the interests of any holder of
the notes. In addition, no such amendment shall change the rights or obligations
of any other party to the indenture without the consent of such party.
The indenture may be amended from time to time by the trust and the
indenture trustee with the consent of the note insurer, and the holders of the
majority of the percentage interest of the notes affected thereby for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the indenture or of modifying in any manner the rights of
the holders; PROVIDED, HOWEVER, that no such amendment shall reduce in any
manner the amount of, or delay the timing of, payments received on mortgage
loans which are required to be paid on any note without the consent of the
holder of
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each note or reduce the percentage for each class whose holders are required
to consent to any such amendment without the consent of the holders of 100%
of each class of notes affected thereby.
The sale and servicing agreement contains substantially similar
restrictions regarding amendment.
TERMINATION
The trust will terminate upon: (i) the payment to the noteholders of
all amounts required to be paid to the noteholders and (ii) the payment to
the note insurer of all amounts required to be paid to the note insurer
pursuant to the insurance agreement after the latest to occur of (a) the
clean-up call, (b) the final payment or other liquidation of the last
mortgage loan or (c) the disposition of all property acquired in respect of
any mortgage loan remaining in the trust estate.
SERVICING OF THE MORTGAGE LOANS
Accredited Home Lenders, Inc. will act as master servicer of the
mortgage loans. Advanta Mortgage Corp. USA will act as subservicer and backup
servicer of the mortgage loans. SEE "THE SPONSOR AND THE MASTER SERVICER" AND
"THE BACKUP SERVICER AND THE SUBSERVICER" HEREIN. The master servicer and the
subservicer will be required to use the same care as they customarily employ
in servicing and administering mortgage loans for their own accounts, in
accordance with accepted mortgage servicing practices of prudent lending
institutions, and giving due consideration to the reliance of the note
insurer and the holders of the notes on them.
All references to "servicer" in the accompanying prospectus should
be read to be references to the "master servicer" described in this
prospectus supplement.
SERVICING FEES AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its activities as master servicer under the sale
and servicing agreement, the master servicer will be entitled with respect to
each mortgage loan to the master servicing fee, which will be payable monthly
from amounts on deposit in the collection account. The master servicing fee
will be an amount equal to interest at the master servicing fee rate for a
mortgage loan on the outstanding principal balance of that mortgage loan. The
master servicing fee rate with respect to each mortgage loan will be 0.47%
per annum. In addition, the master servicer will be entitled to receive, as
additional servicing compensation, to the extent permitted by applicable law
and the related mortgage notes, any late payment charges, assumption or
similar items other than prepayment penalties. The master servicer or
subservicer will also be entitled to withdraw from the collection account any
net interest or other income earned on deposits therein. The master servicer
will pay all expenses incurred by it in connection with its servicing
activities under the sale and servicing agreement, including payment of
servicing compensation to the subservicer, and will not be entitled to
reimbursement therefor except as specifically provided in the sale and
servicing agreement.
DELINQUENCY ADVANCES, SERVICING ADVANCES AND COMPENSATING INTEREST
DELINQUENCY ADVANCES. The master servicer is required to make
Delinquency Advances on each servicer remittance date, subject to the master
servicer's determination that such advance would be recoverable. Such
Delinquency Advances by the master servicer are reimbursable to the master
servicer subject to certain conditions and restrictions, and are intended to
provide sufficient funds for the payment of scheduled interest and principal
to the holders of the notes in circumstances where no ultimate loss is
expected. Notwithstanding the master servicer's good faith determination that
a Delinquency Advance was recoverable when made, if such Delinquency Advance
becomes a nonrecoverable advance, the
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master servicer will be entitled to reimbursement therefor from any
collections on any mortgage loans prior to distributions to the noteholders.
SEE "DESCRIPTION OF THE NOTES AND THE TRUST CERTIFICATES -- PAYMENTS ON THE
MORTGAGE LOANS" HEREIN.
SERVICING ADVANCES. The master servicer is required to advance
amounts with respect to the mortgage loans, subject to the master servicer's
determination that such advance would be recoverable and that a prudent
mortgage lender would make a similar advance if it or an affiliate owned the
related mortgage loan, constituting "out-of-pocket" costs and expenses
relating to:
- the preservation, restoration and protection of the mortgaged
property, including real estate taxes and insurance premiums,
- collection, enforcement and judicial proceedings, including
foreclosures and liquidations,
- expenditures relating to the purchase or maintenance of a
first lien not included in the trust estate on the mortgaged
property,
- conservation, management, and liquidation of any REO Property,
and
- certain other customary amounts described in the sale and
servicing agreement.
These Servicing Advances by the master servicer are reimbursable to
the master servicer subject to certain conditions and restrictions. In the
event that, notwithstanding the master servicer's good faith determination at
the time such Servicing Advance was made that it would be recoverable from
the related mortgage loan, such Servicing Advance becomes a nonrecoverable
advance, the master servicer will be entitled to reimbursement therefor from
any collections on any mortgage loans prior to distributions to the
noteholders.
COMPENSATING INTEREST. On or prior to the third business day
preceding the payment date, the master servicer is required to remit to the
indenture trustee a payment of Compensating Interest in respect of Prepayment
Interest Shortfalls and shall not have the right to reimbursement therefor.
The master servicer shall not be required to pay Compensating Interest with
respect to partial prepayments, and it shall not be required to pay
Compensating Interest in excess of the master servicing fee it receives for
the related period. Prepayment Interest Shortfalls experienced by a mortgage
loan group in excess of Compensating Interest paid by the master servicer
with respect to that group is the Net Prepayment Interest Shortfall, which
will be deducted from the Current Interest amount due with respect to the
related class of notes on the related payment date.
The master servicer's obligation to make Delinquency Advances and
Servicing Advances may be delegated to the subservicer subject to the master
servicer's obligation to reimburse the subservicer on a current basis and, if
such reimbursement does not occur, the subservicer is entitled to
reimbursement out of the assets of the trust to the same extent as the master
servicer.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940 INTEREST SHORTFALLS
The reduction, if any, in interest payable on the mortgage loans in
the applicable group attributable to the application of the Soldiers' and
Sailors' Civil Relief Act of 1940 will reduce the amount of Current Interest
due to the holders of the Class A-1 Notes or the Class A-2 Notes,
respectively. The amount of such shortfall will not be covered by the note
insurance policy.
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OPTIONAL PURCHASE OF DELINQUENT MORTGAGE LOANS
The sponsor, has the option, but is not obligated, to purchase from
the trust any mortgage loan ninety days or more delinquent at a purchase
price equal to the outstanding principal balance thereof as of the date of
purchase, plus all accrued and unpaid interest on such principal balance,
computed at the related mortgage interest rate -- plus the amount of any
unreimbursed Delinquency Advances and Servicing Advances with respect to such
mortgage loan in accordance with the provisions specified in the sale and
servicing agreement. However, after the sponsor has purchased delinquent
mortgage loans with an aggregate principal balance of more than 1% of the sum
of (x) the aggregate original principal balance of the mortgage loans held by
the trust on the closing date and (y) the amount on deposit in the
pre-funding accounts on the closing date, then, notwithstanding the
foregoing, the sponsor can only purchase the mortgage loan or loans that have
been delinquent for the longest period of time, until the sponsor has
purchased delinquent mortgage loans with an aggregate principal balance equal
to 3% of the sum of (x) the aggregate original principal balance of the
mortgage loans held by the trust on the closing date and (y) the amount on
deposit in the pre-funding accounts on the closing date. Thereafter, the
sponsor may only purchase delinquent mortgage loans with the prior consent of
the note insurer.
SERVICER REPORTS
By 3:00 p.m. eastern time on the second business day following the
fifteenth day of each month, the master servicer is required to deliver to
the note insurer, the backup servicer and the indenture trustee, a servicer
remittance report setting forth the loan level information necessary for the
indenture trustee to make the payments set forth under "--FLOW OF FUNDS" in
this prospectus supplement.
The master servicer is required to deliver to the sponsor, the note
insurer, the indenture trustee, the backup servicer, and the rating agencies,
not later than April 30th of each year, starting in 2001, an officer's
certificate stating that,
- a review of the activities of the master servicer during the
preceding calendar year and of performance under the sale and
servicing agreement has been made under such officer's
supervision, and
- to the best of such officer's knowledge, based on such review,
the master servicer has fulfilled all its obligations under
the sale and servicing agreement for that year, or, if there
has been a default in the fulfillment of any such obligation,
specifying the default known to the officer and its status as
well as the steps being taken by the master servicer to remedy
the default.
Not later than April 30th of each year, the master servicer, at its
expense, is required to cause to be delivered to the sponsor, note insurer,
the indenture trustee, the backup servicer and the rating agencies from a
firm of independent certified public accountants, who may also render other
services to the master servicer or the subservicer, a statement to the effect
that such firm has examined certain documents and records relating to the
servicing of the mortgage loans during the preceding calendar year, or such
longer period from the closing date to the end of the following calendar
year, and that, on the basis of such examination conducted substantially in
compliance with generally accepted auditing standards and the requirements of
the Uniform Single Attestation Program for Mortgage Bankers or the Audit
Guide for Audits of HUD Approved Nonsupervised Mortgages, such servicing has
been conducted in compliance with the sale and servicing agreement except for
such significant exceptions or errors in records that, in the opinion of such
firm, generally accepted auditing standards and the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Guide for Audits of HUD
Approved Nonsupervised Mortgages require it to report, in which case such
exceptions and errors shall be so reported.
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COLLECTION AND OTHER SERVICING PROCEDURES
The master servicer will be responsible for making reasonable
efforts to collect all payments called for under the mortgage loans and will,
consistent with the sale and servicing agreement, follow such collection
procedures as it follows with respect to loans held for its own account which
are comparable to the mortgage loans. Consistent with the above, the master
servicer may, in its discretion, waive any late payment charge and arrange
with a mortgagor a schedule for the liquidation of delinquencies, subject to
the provisions of the sale and servicing agreement.
If a mortgaged property has been or is about to be conveyed by the
mortgagor, the master servicer will be obligated 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 applicable law. If it
reasonably believes it may be restricted for any reason from enforcing such a
"due-on-sale" clause, the master 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.
Any fee collected by the master servicer for entering into an
assumption agreement will be retained by the master servicer or the
subservicer as additional servicing compensation. In connection with any such
assumption, the mortgage interest rate borne by the mortgage note relating to
each mortgage loan may not be decreased. For a description of circumstances
in which the master servicer may be unable to enforce "due-on-sale" clauses,
SEE "CERTAIN LEGAL ASPECTS OF LOANS -- MORTGAGES -- DUE-ON-SALE CLAUSES IN
MORTGAGE LOANS" IN THE ACCOMPANYING PROSPECTUS.
REMOVAL AND RESIGNATION OF THE MASTER SERVICER
The note insurer may, pursuant to the sale and servicing agreement,
remove the master servicer upon the occurrence and continuation beyond the
applicable cure period of an event described in clauses (g) or (i) below, and
the indenture trustee, only at the direction of the note insurer or at the
direction of the holders of notes representing a majority of the aggregate
outstanding principal balance of the notes and, with the consent of the note
insurer, may remove the master servicer upon the occurrence and continuation
beyond the applicable cure period of an event described in clause (a), (b),
(c), (d), (e), (f) or (h) below. Each of the following constitutes a
"servicer event of default":
(a) any failure by the master servicer to remit to the indenture
trustee any payment required to be made by the master servicer
under the terms of the sale and servicing agreement, other
than Servicing Advances covered by clause (b) below, which
continues unremedied for one business day after the date upon
which written notice of such failure, requiring the same to be
remedied, shall have been given to the master servicer and the
note insurer by the indenture trustee or to the master
servicer and the indenture trustee by the holders of notes
representing at least 25% of the aggregate outstanding
principal balance of the affected class of the notes or by the
note insurer; or
(b) the failure by the master servicer to make any required
Servicing Advance which failure continues unremedied for a
period of thirty days after the date on which written notice
of such failure, requiring the same to be remedied, shall have
been given to the master servicer by the indenture trustee or
to the master servicer and the indenture trustee by the note
insurer or the holders of notes representing at least 25% of
the aggregate outstanding principal balance of the affected
class of notes or by the note insurer; or
(c) any failure on the part of the master servicer duly to observe
or perform in any material respect any other of the covenants
or agreements on the part of the master servicer
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contained in the sale and servicing agreement, or the
failure of any representation and warranty set forth in the
sale and servicing agreement, which continues unremedied for
a period of thirty days after the date on which written
notice of such failure, requiring the same to be remedied,
shall have been given to the master servicer by the
indenture trustee, or to the master servicer and the
indenture trustee by the holders of notes evidencing
percentage interests of at least 25% of the affected class
of notes or by the note insurer; or
(d) a decree or order of a court or agency or supervisory
authority having jurisdiction in an involuntary case under any
present or future federal or state bankruptcy, insolvency or
similar law or for the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the master servicer
and such decree or order shall have remained in force,
undischarged or unstayed for a period of ninety days; or
(e) the master servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or
similar proceedings of or relating to the master servicer or
of or relating to all or substantially all of the master
servicer's property; or
(f) the master servicer shall admit in writing its inability
generally to pay its debts as they become due, file a petition
to take advantage of any applicable insolvency or
reorganization statute, make an assignment for the benefit of
its creditors, or voluntarily suspend payment of its
obligations; or
(g) the delinquency or loss experience of the mortgage loans
exceeds certain levels specified in the sale and servicing
agreement; or
(h) the occurrence of an "event of default" under the indenture;
or
(i) the note insurer shall notify the indenture trustee of any
"event of default" under the insurance agreement.
Except to permit Advanta Mortgage Corp. USA to act as subservicer,
the master servicer may not assign its obligations under the sale and
servicing agreement nor resign from the obligations and duties thereby
imposed on it except by the consent of the note insurer, or upon the
determination that the master servicer's duties thereunder are no longer
permissible under applicable law. No such resignation will become effective
until a successor has assumed the master servicer's responsibilities and
obligations in accordance with the sale and servicing agreement.
CONTROLLING PARTY RIGHTS OF THE NOTE INSURER
The right of the note insurer to remove the master servicer and to
exercise other powers or rights to consent described in this prospectus
supplement will be in effect so long as the note insurer does not default in
its obligations under the note insurance policy and certain insolvency events
do not occur with respect to the note insurer.
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THE NOTE INSURANCE POLICY
The following summary of the terms of the note insurance policy does
not purport to be complete and is qualified in its entirety by reference to the
note insurance policy. A form of the note insurance policy may be obtained, upon
request, from the sponsor.
Simultaneously with the issuance of the notes, the note insurer will
deliver the note insurance policy to the indenture trustee, for the benefit of
the holders of the notes. Under the note insurance policy, the note insurer will
irrevocably and unconditionally guarantee payment on each payment date to the
indenture trustee, for the benefit of the holders of the notes, of the Insured
Amount with respect to the related class of notes calculated in accordance with
the original terms of the notes when issued and without regard to any amendment
or modification of the notes or the indenture except amendments or modifications
to which the note insurer has given its prior written consent. In addition, with
respect to any payment date occurring on a date when an event of default under
the insurance agreement has occurred and is continuing or a date on or after the
first date on which a claim is made under the note insurance policy, the note
insurer at its sole option, may pay any or all of the outstanding principal
balance of the notes.
Civil Relief Act Shortfalls and Class A-2 Available Funds Cap
Carry-Forward Amounts will not be covered by payments under the note insurance
policy.
Payment of claims under the note insurance policy will be made by the
note insurer following receipt by the note insurer of the appropriate notice for
payment on the later to occur of (a) 12:00 noon, New York City time, on the
second business day following receipt of such notice for payment, and (b) 12:00
noon, New York City time, on the relevant payment date.
If any payment of an amount guaranteed by the note insurer pursuant to
the note insurance policy is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the note insurer will pay
such amount out of the funds of the note insurer on the later of:
- the date when due to be paid pursuant to the order referred to
below, or
- the first to occur of,
- the fourth business day following receipt by
the note insurer from the indenture trustee
of (A) a certified copy of the order of the
court or other governmental body which
exercised jurisdiction to the effect that a
holder is required to return principal or
interest paid with respect to a note during
the term of the note insurance policy
because such payments were avoidable
preferences under applicable bankruptcy law,
(B) a certificate of the holder(s) that the
order has been entered and is not subject to
any stay, and (C) an assignment duly
executed and delivered by the holder(s), in
such form as is reasonably required by the
note insurer and provided to the holder(s)
by the note insurer, irrevocably assigning
to the note insurer all rights and claims of
the holder(s) relating to or arising under
the notes against the debtor which made such
preference payment or otherwise with respect
to such preference payment, or
- the date of receipt by the note insurer from
the indenture trustee of the items referred
to in clauses (A), (B) and (C) above if, at
least four business days prior to such date
of receipt, the note insurer shall have
received written notice from
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the indenture trustee that such items were
to be delivered on such date and such date
was specified in such notice.
Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the order and not to the
indenture trustee or any holder directly (unless a holder has previously paid
such amount to the receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in the order, in which case such payment shall be disbursed to
the indenture trustee for payment to such holder upon proof of such payment
reasonably satisfactory to the note insurer).
The terms "receipt" and "received," with respect to the note insurance
policy, means actual delivery to the note insurer and to its fiscal agent
appointed by the note insurer at its option, if any, prior to 12:00 p.m., New
York City time, on a business day; delivery either on a day that is not a
business day or after 12:00 p.m., New York City time, shall be deemed to be
receipt on the next succeeding business day. If any notice or certificate given
under the note insurance policy by the indenture trustee is not in proper form
or is not properly completed, executed or delivered, it shall be deemed not to
have been received, and the note insurer or the fiscal agent shall promptly so
advise the indenture trustee and the indenture trustee may submit an amended
notice.
Under the note insurance policy, "business day" means any day other
than a Saturday or Sunday or a day on which banking institutions in the City of
New York, New York or the States of New York, Minnesota, Maryland or California
are authorized or obligated by law or executive order to be closed. The note
insurer's obligations under the note insurance policy to make Insured Payments
shall be discharged to the extent funds are transferred to the indenture trustee
as provided in the note insurance policy, whether or not such funds are properly
applied by the indenture trustee.
The note insurer shall be subrogated to the rights of each holder to
receive payments of principal and interest on the notes to the extent of any
payment by the note insurer under the note insurance policy. To the extent the
note insurer makes Insured Payments, either directly or indirectly, as by paying
through the indenture trustee, to the holders of notes, the note insurer will be
subrogated to the rights of the holders, as applicable, with respect to such
Insured Payment and shall be deemed to the extent of the payments so made to be
a registered holder for purposes of payment.
Claims under the note insurance policy will rank equally with any other
unsecured debt and unsubordinated obligations of the note insurer except for
certain obligations in respect of tax and other payments to which preference is
or may become afforded by statute. Claims against the note insurer under the
note insurance policy constitute pari passu claims against the general assets of
the note insurer. The terms of the note insurance policy cannot be modified or
altered by any other agreement or instrument, or by the merger, consolidation or
dissolution of the trust. The note insurance policy is governed by the laws of
the State of New York. The note insurance policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
To the fullest extent permitted by applicable law, the note insurer
agrees under the note insurance policy not to assert, and waives, for the
benefit of each holder, all its rights, whether by counterclaim, setoff or
otherwise, and defenses, including, without limitation, the defense of fraud,
whether acquired by subrogation, assignment or otherwise, to the extent that
such rights and defenses may be available to the note insurer to avoid payment
of its obligations under the note insurance policy in accordance with the
express provisions of the note insurance policy.
Pursuant to the terms of the indenture, unless a note insurer default
exists, the note insurer shall be deemed to be the holder of the notes for all
purposes, other than with respect to payment on the notes, will be entitled to
exercise all rights of the holders thereunder, without the consent of such
holders, and
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the holders may exercise such rights only with the prior written consent of the
note insurer. In addition, so long as a note insurer default does not exist, the
note insurer will, as a third-party beneficiary to the indenture and the sale
and servicing agreement, have, among others, the following rights:
- the right to give notices of breach or to terminate the rights
and obligations of the master servicer under the sale and
servicing agreement in the event of a servicer event of
default and to institute proceedings against the master
servicer;
- the right to consent to or direct any waivers of defaults by
the master servicer;
- the right to remove the indenture trustee upon an indenture
trustee event of default pursuant to the indenture;
- the right to require the seller to repurchase mortgage loans
for breach of representation and warranty or defect in
documentation; and
- the right to direct foreclosures upon the failure of the
master servicer to do so in accordance with the sale and
servicing agreement.
The note insurer's consent will be required prior to, among other
things, (x) the removal of the indenture trustee, (y) the appointment of any
successor indenture trustee or master servicer or (z) any amendment to the
indenture or the sale and servicing agreement.
The sponsor, the master servicer, and the note insurer will enter into
the insurance agreement pursuant to which the sponsor, and the master servicer
will agree to reimburse, with interest, the note insurer for amounts paid
pursuant to claims under the note insurance policy; provided, the payment
obligations shall be non-recourse obligations with respect to the sponsor and
the master servicer and shall be payable only from monies available for such
payment in accordance with the provisions of the indenture. The sponsor will
further agree to pay the note insurer all reasonable charges and expenses which
the note insurer may pay or incur in connection with the performance of its
obligations and to indemnify the note insurer against certain liabilities.
Except to the extent provided therein, amounts owing under the insurance
agreement will be payable solely from the trust estate. An "event of default"
under the insurance agreement will constitute an event of default under the
indenture and a servicer event of default under the sale and servicing
agreement. An event of default under the insurance agreement will allow the note
insurer, among other things, to direct the indenture trustee to terminate the
master servicer. An "event of default" under the insurance agreement includes:
- the sponsor's or the master servicer's failure to pay when due
any amount owed under the insurance agreement or certain other
documents,
- the inaccuracy or incompleteness in any material respect of
any representation or warranty of the sponsor or the master
servicer in the insurance agreement, the sale and servicing
agreement or certain other documents,
- the sponsor's or the master servicer's failure to perform or
to comply with any covenant or agreement in the insurance
agreement, the sale and servicing agreement and certain other
documents,
- a finding or ruling by a governmental authority or agency that
the insurance agreement, the sale and servicing agreement or
certain other documents are not binding on the sponsor or the
master servicer,
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- the sponsor's or the master servicer's failure to pay its
debts in general or the occurrence of certain events of
insolvency or bankruptcy with respect to the sponsor or the
master servicer,
- the occurrence of certain "performance test violations"
designed to measure the performance of the mortgage loans, and
- a claim for payment is made on the policy.
THE NOTE INSURER
The following information has been obtained from Financial Security
Assurance Inc. and has not been verified by the sponsor, the master servicer, or
the underwriter. No representation or warranty is made by the sponsor, the
master servicer, the subservicer, the backup servicer or the underwriter as to
the accuracy or completeness of such information.
THE NOTE INSURER
Financial Security Assurance Inc. is a monoline insurance company
incorporated in 1984 under the laws of the State of New York. Financial Security
Assurance Inc. is licensed to engage in the financial guaranty insurance
business in all 50 states, the District of Columbia and Puerto Rico.
Financial Security Assurance Inc. and its subsidiaries are engaged in
the business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities -- thereby enhancing the credit rating of those
securities -- in consideration for the payment of a premium to the insurer.
Financial Security Assurance Inc. and its subsidiaries principally insure
asset-backed, collateralized and municipal securities. Asset-backed securities
are generally supported by residential or commercial mortgage loans, consumer or
trade receivables, securities or other assets having an ascertainable cash flow
or market value. Collateralized securities include public utility first mortgage
bonds and sale/leaseback obligation bonds. Municipal securities consist largely
of general obligation bonds, special revenue bonds and other special obligations
of state and local governments. Financial Security Assurance Inc. insures both
newly issued securities sold in the primary market and outstanding securities
sold in the secondary market that satisfy Financial Security Assurance Inc.'s
underwriting criteria.
Financial Security Assurance Inc. is a wholly-owned subsidiary of
Financial Security Assurance Holdings Ltd., a New York Stock Exchange listed
company. Major shareholders of Financial Security Assurance Holdings Ltd.
include White Mountains Insurance Group, Inc., MediaOne Capital Corporation, The
Tokio Marine and Fire Insurance Co., Ltd. and XL Capital Ltd. No shareholder of
Financial Security Assurance Holdings Ltd. is obligated to pay any debt of
Financial Security Assurance Inc. or any claim under any insurance policy issued
by Financial Security Assurance Inc. or to make any additional contribution to
the capital of Financial Security Assurance Inc.
The principal executive offices of Financial Security Assurance Inc.
are located at 350 Park Avenue, New York, New York 10022, and its telephone
number at that location is (212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by Financial Security
Assurance Inc. or its domestic or Bermuda operating insurance company
subsidiaries are generally reinsured among such companies on an agreed-upon
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<PAGE>
percentage substantially proportional to their respective capital, surplus and
reserves, subject to applicable statutory risk limitations. In addition,
Financial Security Assurance Inc. reinsures a portion of its liabilities under
certain of its financial guaranty insurance policies with other reinsurers under
various treaties and on a transaction-by-transaction basis. Such reinsurance is
utilized by Financial Security Assurance Inc. as a risk management device and to
comply with statutory and rating agency requirements; it does not alter or limit
Financial Security Assurance Inc.'s obligations under any financial guaranty
insurance policy.
RATINGS
Financial Security Assurance Inc.'s insurance financial strength is
rated "Aaa" by Moody's. Financial Security Assurance Inc.'s insurer financial
strength is rated "AAA" by Standard & Poor's and Standard & Poor's (Australia)
Pty. Ltd. Financial Security Assurance Inc.'s claims-paying ability is rated
"AAA" by Fitch IBCA, Inc. and Japan Rating and Investment Information, Inc. Such
ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
CAPITALIZATION
The following table sets forth the capitalization of Financial Security
Assurance Inc. and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of September 30, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
UNAUDITED
(IN THOUSANDS)
-------------------
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance
premiums).................................................... $550,165
Surplus Notes..................................................... 120,000
Minority Interest................................................. 22,002
Shareholder's Equity:
Common Stock................................................. 15,000
Additional Paid-In Capital................................... 706,117
Accumulated Other Comprehensive Loss
(net of deferred income taxes)......................... (23,005)
Accumulated Earnings......................................... 450,593
----------
Total Shareholder's Equity........................................ $1,148,705
----------
Total Deferred Premium Revenue, Surplus Notes,
Minority Interest and Shareholder's Equity................... $1,840,872
----------
----------
</TABLE>
For further information concerning Financial Security Assurance Inc.,
see the Consolidated Financial Statements of Financial Security Assurance Inc.
and Subsidiaries, and the notes thereto, incorporated by reference in this
prospectus supplement. The Consolidated Financial Statements of Financial
Security Assurance Inc. and Subsidiaries are included as exhibits to the annual
report on Form 10-K and Quarterly Reports on Form 10-Q that are filed with the
Securities and Exchange Commission by Financial Security Assurance Holdings Ltd.
and may be reviewed at the EDGAR website maintained by the Securities and
Exchange Commission and at Financial Security Assurance Holdings Ltd.'s website,
http://www.FSA.com. Copies of the statutory quarterly and annual statements
filed with the State of New
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<PAGE>
York Insurance Department by Financial Security Assurance Inc. are available
upon request to the State of New York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under "Incorporation of
Information by Reference" in this prospectus supplement, the consolidated
financial statements of Financial Security Assurance Inc. included in or as
exhibits to the following documents, which have been filed with the Securities
and Exchange Commission by Financial Security Assurance Holdings Ltd.
("Holdings"), are hereby incorporated by reference in this prospectus
supplement: (a) the Annual Report on Form 10-K, as amended, for the year ended
December 31, 1998 and (b) the Quarterly Report on Form 10-Q for the period ended
September 30, 1999.
All financial statements of Financial Security Assurance Inc. included
in documents filed by Holdings under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the notes
shall be deemed to be incorporated by reference into this prospectus supplement
and to be a part of this prospectus supplement from the respective dates of
filing the documents.
The sponsor will, without charge to any person to whom this prospectus
supplement is delivered, upon oral or written request of that person, deliver a
copy of any or all of the foregoing financial statements incorporated by
reference. Request for copies should be directed to the sponsor at 15030 Avenue
of Science, Suite 100, San Diego, California 92128.
The sponsor, on behalf of the trust, will undertake, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the trust's annual report under Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 and each filing of the financial statements of
the note insurer included in or as an exhibit to the annual report of Holdings
filed under Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934 that is incorporated by reference in the registration statement, as defined
in the prospectus, will be deemed to be a new registration statement relating to
the securities offered by this prospectus supplement, and the offering of the
securities at that time will be deemed to be the initial bona fide offering
thereof.
INSURANCE REGULATION
Financial Security Assurance Inc. is licensed and subject to regulation
as a financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, Financial Security Assurance Inc. and
its subsidiaries are subject to regulation by insurance laws of the various
other jurisdictions in which they are licensed to do business. As a financial
guaranty insurance corporation licensed to do business in the State of New York,
Financial Security Assurance Inc. is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions -- "single risks" -- and
the volume of transactions -- "aggregate risks" -- that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable to
non-life insurance companies such as Financial Security Assurance Inc.,
regulate, among other things, permitted investments, payment of dividends,
transactions with affiliates, mergers, consolidations, acquisitions or sales of
assets and incurrence of liability for borrowings.
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<PAGE>
PREPAYMENT AND YIELD CONSEQUENCES
The weighted average life of, and, if purchased at other than par,
the yield to maturity on, a note will be directly related to the rate of
payment of principal of the related mortgage loans, including for this
purpose voluntary payment in full of mortgage loans prior to stated maturity,
liquidations due to defaults, casualties and condemnations, and repurchases
of or substitutions for mortgage loans by the sponsor or master servicer as
required or permitted under the indenture or the sale and servicing agreement.
The actual rate of principal prepayments on groups of mortgage 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 groups of
mortgage loans at any time because of specific factors relating to the
mortgage loans in the particular group, including, among other things, the
age of the mortgage 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.
To the extent that the amounts in the pre-funding accounts with
respect to the fixed-rate group and the adjustable-rate group, respectively,
have not been fully applied to the purchase of subsequent mortgage loans for
the related group by the trust by the end of the pre-funding period, the
holders of the related class of notes will receive on the first payment date
following the termination of the pre-funding period, a prepayment of
principal in an amount equal to the lesser of (1) a portion of the pre-funded
amount remaining in the related pre-funding account and (2) the outstanding
principal balance of that class of notes.
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. In general, if prevailing
interest rates fall significantly below the interest rates of certain
mortgage loans at the time of origination, such mortgage loans may be subject
to higher prepayment rates than if prevailing rates remain at or above those
at the time such mortgage loans were originated. Conversely, if prevailing
interest rates rise appreciably above the interest rates of certain mortgage
loans at the time of origination, such mortgage loans may experience a lower
prepayment rate than if prevailing rates remain at or below those at the time
such mortgage loans were originated. However, there can be no assurance that
the mortgage loans will conform to the prepayment experience of conventional
mortgage loans or to any past prepayment experience or any published
prepayment forecast. No assurance can be given as to the level of prepayments
that the mortgage loans in the trust estate will experience.
The prepayment behavior of the 2/28 and 3/27 mortgage loans may
differ from that of the fixed-rate mortgage loans. As a 2/28 or 3/27 mortgage
loan approaches its initial adjustment date, the borrower may become more
likely to refinance such mortgage loan to avoid an increase in the interest
rate, even if fixed-rate mortgage loans are only available at rates that are
slightly lower or higher than the interest rate before adjustment. The
existence of the applicable periodic rate cap, maximum rates and minimum
rates also may affect the likelihood of prepayments resulting from
refinancings. In addition, the delinquency and loss experience on the
mortgage loans in the adjustable-rate group may differ from that on the
mortgage loans in the fixed-rate group because the amount of the monthly
payments on the mortgage loans in the adjustable-rate group are subject to
adjustment on each adjustment date.
As indicated above, if purchased at other than par, the yield to
maturity on a note will be affected by the rate of the payment of principal
on the related mortgage loans. If the actual rate of payments on the related
mortgage loans is slower than the rate anticipated by an investor who
purchases a note at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of payments
on the related mortgage loans is faster than the rate anticipated by an
investor who
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<PAGE>
purchases a note at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield.
FINAL PAYMENT DATES
The final stated maturity date is expected to be February 25, 2030
for the Class A-1 Notes and for the Class A-2 Notes. The weighted average
life of the notes is likely to be shorter than would be the case if payments
actually made on the related mortgage loans conformed to the following
assumptions, and the final payment date with respect to any class of the
notes could occur significantly earlier than the final stated maturity date
because:
- prepayments, including, for this purpose, prepayments
attributable to foreclosure, liquidation, repurchase and the
like, on mortgage loans are likely to occur,
- the over-collateralization provisions of the transaction
result in the application of Excess Interest to the payment
of principal, and
- the sponsor may, at its option as described in this prospectus
supplement:
- call the Class A-1 Notes when the outstanding
principal balance of the Class A-1 Notes is equal to or
less than 10% of the original principal balance of the
Class A-1 Notes,
- call the Class A-2 Notes when the outstanding
principal balance of the Class A-2 Notes is equal to or
less than 10% of the original principal balance of the
Class A-2 Notes, or
- call the notes when the aggregate outstanding
principal balance of the notes is equal or less than 10%
of the original aggregate principal balance of the notes.
MODELING ASSUMPTIONS
The following tables, addressing the percentage of original note
principal balances and the weighted average lives of the notes, have been
prepared on the basis of the following modeling assumptions:
- the related mortgage loans prepay at the indicated percentage
of the prepayment assumption as set forth in the tables below,
- payments on the notes are received in cash on the 25th day of
each month, regardless of the day on which the payment date
actually occurs, commencing in March 2000,
- no defaults or delinquencies in, or modifications, waivers or
amendments respecting the payment by the mortgagors of
principal and interest on the mortgage loans occur,
- scheduled payments are assumed to be received on the first day
of each month commencing in March 2000, or as set forth below,
and prepayments represent payments in full of individual
mortgage loans and are assumed to be received on the fifteenth
day of each month, commencing in March 2000, or as set forth
below, and include thirty days' interest thereon,
- no optional termination is exercised except with respect to
the weighted average lives to call,
- the notes are issued on February 29, 2000,
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<PAGE>
- the Specified Over-collateralization Amount for each group is
as set forth in the indenture,
- on each payment date, all Excess Interest for each group is
applied to build up over-collateralization necessary to
satisfy the Specified Over-collateralization Amount for each
group,
- the levels of six-month LIBOR and one-month LIBOR remains
constant at 6.32% and 5.88%, respectively,
- the subsequent mortgage loans described below each accrue
interest at the related mortgage interest rate during the
one-month pre-funding period,
- all of the amounts in each pre-funding account is used to
acquire the subsequent mortgage loans for the related group on
March 31, 2000;
- the information with respect to the subsequent mortgage loans
is as of March 31, 2000; scheduled payments are assumed to be
received on the first day of each month commencing in April
2000 and prepayments represent payments in full of individual
mortgage loans and are assumed to be received on the fifteenth
day of each month, commencing in April 2000, and include
thirty days' interest thereon,
- with respect to the adjustable-rate mortgage loans (initial
and subsequent), following the initial adjustment date, the
ongoing periodic rate cap will be 1.50%,
- the initial mortgage loans in the fixed-rate group consist of
6 mortgage loans and the initial mortgage loans in the
adjustable-rate group consist of 8 mortgage loans having the
following respective characteristics:
<TABLE>
<CAPTION>
FIXED-RATE GROUP
Remaining
Mortgage Original Term Term to Original
PMI Principal Interest to Maturity Maturity Amortizing Term
Coverage Balance Rate (in months) (in months) (in months)
- ----------- -------------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
No $ 1,681,202.07 11.269% 178 177 178
No $11,867,104.52 10.849% 354 353 354
No $ 4,573,132.83 12.003% 180 179 359
Yes $ 575,077.39 10.441% 180 179 180
Yes $17,349,264.57 10.267% 356 355 356
Yes $ 4,152,003.93 10.530% 180 179 360
</TABLE>
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<PAGE>
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
Original
Current Original Term to Remaining
Mortgage Amortizing Maturity Term to
Principal Interest Term (in Maturity
PMI Coverage Balance Rate (in months) months) (in months)
- ----------- -------------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
No $11,693,528.57 10.468% 359 359 358
No $ 8,535,264.00 10.665% 360 360 360
No $ 7,266,973.61 10.437% 360 360 359
No $ 4,398,337.00 10.681% 360 360 360
Yes $18,567,126.96 9.887% 360 360 359
Yes $14,391,990.00 9.942% 360 360 360
Yes $17,128,468.35 9.735% 360 359 357
Yes $ 8,955,784.40 10.004% 360 360 360
</TABLE>
<TABLE>
<CAPTION>
Months
Minimum Maximum Until Next
Mortgage Mortgage Gross Initial Rate
Interest Interest Margin Periodic Adjustment
Rate Rate % Cap Date
- ----------- ---------- --------- ---------- -----------
<C> <C> <C> <C> <C>
10.394% 17.450% 6.801% 1.522% 23
10.665% 17.665% 7.030% 1.500% 24
10.437% 17.437% 6.680% 1.500% 35
10.681% 17.681% 7.064% 1.500% 36
9.887% 16.887% 6.461% 1.497% 23
9.942% 16.942% 6.439% 1.500% 24
9.735% 16.735% 6.178% 1.500% 35
10.004% 17.004% 6.403% 1.500% 36
</TABLE>
the subsequent mortgage loans in the fixed-rate group consist of 6
mortgage loans and the subsequent mortgage loans in the adjustable-rate
group consist of 4 mortgage loans having the following respective
characteristics:
<TABLE>
<CAPTION>
FIXED-RATE GROUP
Original
Mortgage Original Term Remaining Term Amortizing
PMI Principal Interest to Maturity to Maturity Term
Coverage Balance Rate (in months) (in months) (in months)
- ------------ ----------- ---------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
No $ 559,797.99 11.269% 180 180 180
No $3,951,447.25 10.849% 360 360 360
No $1,522,738.18 12.003% 180 180 360
Yes $ 191,486.30 10.441% 180 180 180
Yes $5,776,868.62 10.267% 360 360 360
Yes $1,382,512.85 10.530% 180 180 360
</TABLE>
ADJUSTABLE-RATE GROUP
<TABLE>
<CAPTION>
Current Original Remaining Original
Mortgage Term to Term to Amortizing
PMI Principal Interest Maturity Maturity Term
Coverage Balance Rate (in months) (in months) (in months)
- ----------- -------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
No $ 6,735,679.00 10.551% 360 360 360
No $ 3,884,254.95 10.529% 360 360 360
Yes $10,974,556.74 9.911% 360 360 360
Yes $ 8,685,399.92 9.827% 360 360 360
</TABLE>
<TABLE>
<CAPTION>
Months
Minimum Maximum Until Next
Mortgage Mortgage Gross Initial Rate
Interest Interest Margin Periodic Adjustment
Rate Rate % Cap Date
- ---------- ----------- --------- --------- ---------
<C> <C> <C> <C> <C>
10.508% 17.549% 6.898% 1.513% 24
10.529% 17.529% 6.825% 1.500% 36
9.911% 16.911% 6.451% 1.498% 24
9.827% 16.827% 6.255% 1.500% 36
</TABLE>
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 is scheduled to be repaid to an
investor. The weighted average life of the notes will be influenced by
the rate at which principal of the related mortgage loans is paid,
which may be in the form of scheduled amortization or prepayments --
for this purpose, the term "prepayment" includes liquidations due to
default.
Prepayments on mortgage 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 the pool of mortgage loans
for the life of such mortgage loans. The
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<PAGE>
Prepayment Assumption assumes a constant prepayment rate or "CPR" of
4% per annum of the outstanding principal balance of such mortgage
loans in the first month of the life of the mortgage loans and an
additional 1.45% (precisely 16/11, expressed as a percentage per
annum) in each month thereafter until the twelfth month; beginning in
the twelfth month and in each month thereafter during the life of the
mortgage loans, a constant prepayment rate of 20% per annum each month
is assumed. A 0% Prepayment Assumption assumes a prepayment rate equal
to 0% of the Prepayment Assumption, i.e., no prepayments. A 125%
Prepayment Assumption assumes prepayment rates equal to 125% of the
Prepayment Assumption, and so forth. The Prepayment Assumption is not
intended to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the mortgage loans. The sponsor believes
that no existing statistics of which it is aware provide a reliable
basis for holders of the notes to predict the amount or the timing of
receipt of prepayments on the mortgage loans.
The mortgage loans in the related group prepay in the
indicated percentages of the Prepayment Assumption:
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A-1 PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
PAYMENT DATE 0% 50% 75% 100% 125% 150% 175%
- -------------- -------- ----- ----- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100%
February 2001 97 91 88 85 82 78 75
February 2002 96 80 73 66 59 52 46
February 2003 95 71 61 51 43 36 30
February 2004 94 63 50 40 32 25 19
February 2005 93 56 42 32 24 17 12
February 2006 92 49 35 25 18 12 8
February 2007 91 43 30 20 13 8 5
February 2008 89 39 25 16 10 6 3
February 2009 88 34 21 12 7 4 2
February 2010 86 30 17 10 5 2 1
February 2011 84 27 14 8 4 2 *
February 2012 82 23 12 6 3 1 *
February 2013 80 20 10 5 2 * 0
February 2014 77 18 8 3 1 * 0
February 2015 61 13 6 2 * 0 0
February 2016 54 10 4 1 * 0 0
February 2017 52 9 3 1 0 0 0
February 2018 50 8 3 1 0 0 0
February 2019 48 7 2 * 0 0 0
February 2020 45 6 2 * 0 0 0
February 2021 42 5 1 0 0 0 0
February 2022 39 4 1 0 0 0 0
February 2023 35 3 * 0 0 0 0
February 2024 32 2 * 0 0 0 0
February 2025 27 2 * 0 0 0 0
February 2026 22 1 0 0 0 0 0
February 2027 17 1 0 0 0 0 0
February 2028 11 * 0 0 0 0 0
February 2029 5 0 0 0 0 0 0
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<PAGE>
February 2030 0 0 0 0 0 0 0
Weighted Average Life to
Maturity (years) 18.41 7.67 5.61 4.36 3.54 2.96 2.54
Weighted Average Life to
Call (years)(1) 18.39 7.35 5.29 3.87 3.15 2.65 2.28
</TABLE>
- ------------------------
* Greater than 0% but less than 0.5%.
(1) Assuming the early termination of the trust is exercised when the aggregate
principal balance of the notes is equal to or less than 10% of the original
aggregate principal balance of the notes.
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CLASS A-2 PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
PAYMENT DATE 0% 50% 75% 125% 150% 175% 200%
- ------------------ ---- ----- ----- ------ ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100%
February 2001 96 90 87 81 78 75 71
February 2002 95 80 73 59 52 46 41
February 2003 95 71 61 43 36 30 24
February 2004 94 63 51 32 25 19 15
February 2005 94 56 43 24 18 13 9
February 2006 93 50 36 18 12 8 5
February 2007 93 44 30 13 8 5 3
February 2008 92 40 26 10 6 3 2
February 2009 91 35 22 7 4 2 1
February 2010 90 32 18 5 3 1 *
February 2011 89 28 15 4 2 * 0
February 2012 88 25 13 3 1 * 0
February 2013 86 22 11 2 1 0 0
February 2014 85 20 9 1 * 0 0
February 2015 83 17 7 1 0 0 0
February 2016 81 15 6 * 0 0 0
February 2017 79 13 5 * 0 0 0
February 2018 76 12 4 * 0 0 0
February 2019 73 10 3 0 0 0 0
February 2020 70 9 3 0 0 0 0
February 2021 66 7 2 0 0 0 0
February 2022 61 6 1 0 0 0 0
February 2023 56 5 1 0 0 0 0
February 2024 51 4 1 0 0 0 0
February 2025 44 3 * 0 0 0 0
February 2026 37 2 * 0 0 0 0
February 2027 30 1 0 0 0 0 0
February 2028 21 1 0 0 0 0 0
February 2029 11 * 0 0 0 0 0
February 2030 0 0 0 0 0 0 0
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<PAGE>
Weighted Average Life to
Maturity (years) 21.75 8.15 5.80 3.57 2.98 2.55 2.22
Weighted Average Life to
Call (years)(1) 21.68 7.63 5.35 3.33 2.78 2.37 2.07
</TABLE>
- -------------------------
* Greater than 0% but less than 0.5%.
(1) Assuming the early termination of the trust is exercised when the aggregate
principal balance of the notes is equal to or less than 10% of the original
aggregate principal balance of the notes.
None of the note insurer, the trust, the owner trustee, the indenture
trustee, the sponsor, the master servicer, the backup servicer, the underwriter
or the subservicer will be liable to any holder for any loss or damage incurred
by such holder as a result of any difference in the rate of return received by
such holder as compared to the applicable note rate, with respect to any holder
of notes upon reinvestment of the funds received in connection with any
premature repayment of principal on the notes, including any such repayment
resulting from any prepayment by the mortgagor, any liquidation of such mortgage
loan, or any repurchase of or substitution for any mortgage loan by the sponsor.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain material federal income tax
consequences of the purchase, ownership and disposition of the notes is to be
considered only in connection with "Federal Income Tax Consequences" in the
accompanying prospectus. The discussion in this prospectus supplement and in the
accompanying 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 accompanying prospectus does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the notes.
TREATMENT OF THE NOTES
The sponsor and the trust agree, and the holders of the notes will
agree by their purchase of the notes, to treat the notes as indebtedness for all
federal, state and local income tax purposes. There are no regulations,
published rulings or judicial decisions involving the characterization for
federal income tax purposes of securities with terms substantially the same as
the notes. In general, whether instruments such as the notes constitute
indebtedness for federal income tax purposes is a question of fact, the
resolution of which is based primarily upon the economic substance of the
instruments and the transaction pursuant to which they are issued rather than
merely upon the form of the transaction or the manner in which the instruments
are labeled. The IRS and the courts have set forth various factors to be taken
into account in determining, for federal income tax purposes, whether an
instrument constitutes indebtedness and whether a transfer of property is a sale
because the transferor has relinquished substantial incidents of ownership in
the property or whether such transfer is a borrowing secured by the property. On
the basis of its analysis of such factors as applied to the facts and its
analysis of the economic substance of the contemplated transaction, Brown & Wood
LLP, special federal tax counsel to the trust and counsel to the underwriter, is
of the opinion that, for federal income tax purposes, (i) the notes will be
treated as indebtedness, (ii) the trust will not be classified as an association
or as a publicly traded partnership taxable as a corporation or as a taxable
mortgage pool and (iii) none of the sub trusts will be classified as
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<PAGE>
an association or as a publicly traded partnership taxable as a corporation or
as a taxable mortgage pool. SEE "FEDERAL INCOME TAX CONSEQUENCES -- TAXATION OF
DEBT SECURITIES" IN THE ACCOMPANYING PROSPECTUS.
If the notes are characterized as indebtedness, interest paid or
accrued on a note will be treated as ordinary income to holders of the notes and
principal payments on a note will be treated as a return of capital to the
extent of the holder's basis in the note allocable thereto. An accrual method
taxpayer will be required to include in income interest on the notes when
earned, even if not paid, unless it is determined to be uncollectible. The
indenture trustee, on behalf of the trust, will report to the holders of the
notes of record and the IRS the amount of interest paid and original issue
discount, if any, accrued on the notes to the extent required by law.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS OF THE NOTES. Although, as
described above, it is the opinion of special federal tax counsel that for
federal income tax purposes, the notes will be characterized as indebtedness,
such opinion is not binding on the IRS and thus no assurance can be given that
such a characterization will prevail. If the IRS successfully asserted that the
notes did not represent indebtedness for federal income tax purposes, holders of
the notes would likely be treated as owning an interest in a partnership and not
an interest in an association, or a publicly traded partnership, taxable as a
corporation or a taxable mortgage pool. If the holders of the notes were treated
as owing an equitable interest in a partnership, the partnership itself would
not be subject to federal income tax; rather each partner would be taxed
individually on their respective distributive share of the partnership's income,
gain, loss, deductions and credits. The amount, timing and characterization of
items of income and deduction for a holder of a note would differ if the notes
were held to constitute partnership interests, rather than indebtedness. The
parties will treat the notes as indebtedness for federal income tax purposes.
None of the master servicer, the indenture trustee or the owner trustee will
attempt to satisfy the tax reporting requirements that would apply if the notes
were held to constitute partnership interests. Investors that are foreign
persons are strongly advised to consult their own tax advisors in determining
the federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of the notes. SEE "FEDERAL INCOME TAX CONSEQUENCES --
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES -- TREATMENT OF THE TRUST AS A
PARTNERSHIP" in the accompanying prospectus.
SPECIAL TAX ATTRIBUTES. The notes will not represent "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code or "[l]oans ... secured
by an interest in real property" within the meaning of Section 7701(a)(19)(C) of
the Code.
DISCOUNT AND PREMIUM. It is not anticipated that the notes will be
issued with any original issue discount. SEE "FEDERAL INCOME TAX CONSEQUENCES --
TAXATION OF DEBT SECURITIES -- INTEREST AND ACQUISITION DISCOUNT" IN THE
ACCOMPANYING PROSPECTUS. The prepayment assumption that will be used for
purposes of computing original issue discount, if any, for federal income tax
purposes is 25% HEP. SEE "PREPAYMENT AND YIELD CONSEQUENCES" IN THIS PROSPECTUS
SUPPLEMENT. In addition, a subsequent purchaser who buys a note for less than
its principal amount may be subject to the "market discount" rules of the Code.
SEE "FEDERAL INCOME TAX CONSEQUENCES -- TAXATION OF DEBT SECURITIES -- MARKET
DISCOUNT" IN THE ACCOMPANYING PROSPECTUS. A subsequent purchaser who buys a note
for more than its principal amount may be subject to the "market premium" rules
of the Code. SEE "FEDERAL INCOME TAX CONSEQUENCES -- TAXATION OF DEBT SECURITIES
- -- PREMIUM" IN THE ACCOMPANYING PROSPECTUS.
SALE OR REDEMPTION OF THE NOTES. If a note is sold or retired, the
sponsor will recognize gain or loss equal to the difference between the amount
realized on the sale and such holder's adjusted basis in the note. SEE "FEDERAL
INCOME TAX CONSEQUENCES -- TAX CONSEQUENCES TO HOLDERS OF THE NOTES -- SALE OR
OTHER DISPOSITION" IN THE ACCOMPANYING PROSPECTUS.
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OTHER MATTERS. The Internal Revenue Service has issued withholding
regulations (the "Withholding Regulations"), which make certain modifications to
withholding, backup withholding and information reporting rules. The Withholding
Regulations attempt to unify certification requirements and modify certain
reliance standards. The Withholding Regulations will generally be effective for
payments made after December 31, 2000, although taxpayers may begin compliance
with the Withholding Regulations immediately. Prospective investors are urged to
consult their own tax advisors regarding the Withholding Regulations. For a
discussion of backup withholding and taxation of foreign investors in the notes,
see "FEDERAL INCOME TAX CONSEQUENCES -- TAX CONSEQUENCES TO HOLDERS OF THE NOTES
- -- BACKUP WITHHOLDING" AND " --FOREIGN HOLDERS" in the accompanying prospectus.
ERISA CONSEQUENCES
The Employee Retirement Income Security Act of 1974 and Section 4975 of
the Code impose certain restrictions on
- employee benefit plans, as defined in Section 3(3) of ERISA,
- plans described in section 4975(e)(1) of the Code, including
individual retirement accounts and Keogh plans,
- any entities whose underlying assets include plan assets by
reason of a plan's investment in such entities, and
- persons who have certain specified relationships to such plans
-- "parties-in-interest" under ERISA and "disqualified
persons" under the Code.
Section 406 of ERISA prohibits plans from engaging in certain
transactions involving the assets of such plans with parties-in-interest with
respect to such plans, unless a statutory or administrative exemption is
applicable to the transaction. Excise taxes under Section 4975 of the Code,
penalties under Section 502 of ERISA and other penalties may be imposed on plan
fiduciaries and parties-in-interest or disqualified persons that engage in
"prohibited transactions" involving assets of a plan. Individual retirement
arrangements and other plans that are not subject to ERISA, but are subject to
Section 4975 of the Code, and disqualified persons with respect to such
arrangements and plans also may be subject to excise taxes and other penalties
if they engage in prohibited transactions. Moreover, based on the reasoning of
the United States Supreme Court in JOHN HANCOCK LIFE INSURANCE CO. v. HARRIS
TRUST AND SAVINGS BANK, 510 U.S. 86 (1993), an insurance company's general
account may be deemed to include assets of the plans investing in the general
account -- e.g., through the purchase of an annuity contract. Title I of ERISA
also requires that fiduciaries of plans subject to ERISA make investments that
are prudent, diversified (except if prudent not to do so) and in accordance with
governing plan documents. Governmental plans (as defined in Section 3(32) of
ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are not
subject to ERISA or Section 4975 of the Code, but may be subject to comparable
restrictions under applicable law.
Certain transactions involving the purchase, holding or transfer of the
notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the trust were deemed to be assets of a plan. Under a
regulation issued by the United States Department of Labor, the assets of the
trust would be treated as assets of a plan for the purposes of ERISA and the
Code only if the plan acquired an "equity interest" in the trust and none of the
exceptions contained in the plan assets regulation were applicable. An equity
interest is defined under the plan assets regulation as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Although there is little guidance on
the subject, the notes should be treated as
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indebtedness without substantial equity features for purposes of the plan
assets regulation. This determination is based in part on the traditional
debt features of the notes, including the reasonable expectation of
purchasers of the notes that the notes will be repaid when due, as well as
the absence of conversion rights, warrants and other typical equity features.
The debt treatment of the notes could change if the trust incurs losses.
However, even if the notes are treated as debt for such purposes, the
acquisition or holding of notes by or on behalf of a plan could be considered
to give rise to a prohibited transaction if the trust or any of its
affiliates is or becomes a party-in-interest or a disqualified person with
respect to such plan. In such case, certain exemptions from the prohibited
transaction rules could be applicable, depending on the type and
circumstances of the plan fiduciary making the decision to acquire a note.
Included among these exemptions are: PTCE 90-1, regarding investments by
insurance company pooled separate accounts; PTCE 95-60, regarding investments
by insurance company general accounts; PTCE 91-38, regarding investments by
bank collective investment funds; PTCE 96-23, regarding transactions effected
by "in-house asset managers"; and PTCE 84-14, regarding transactions effected
by "qualified professional asset managers". Each investor using the assets of
a plan which acquires the notes, or to whom the notes are transferred, will
be deemed to have represented that the acquisition and continued holding of
the notes will be covered by one of the exemptions listed above or by another
Department of Labor Class Exemption.
LEGAL INVESTMENT
The Class A-1 Notes will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984. As of the end of the pre-funding period, the Class A-2 Notes will
constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984.
PLAN OF DISTRIBUTION
Subject to the terms and conditions of the underwriting agreement dated
February 25, 2000 between the sponsor and Lehman Brothers Inc., as underwriter,
the sponsor has agreed to sell to the underwriter and the underwriter has agreed
to purchase from the sponsor the notes. The sponsor is obligated to sell, and
the underwriter is obligated to purchase, all of the notes offered hereby if any
are purchased.
The sponsor has been advised by the underwriter that it proposes
initially to offer the notes to the public in Europe and the United States at
the offering price set forth herein and to certain dealers at such price, less a
selling concession, not in excess of 0.210% of the note denominations. The
underwriter may allow and such dealers may reallow a reallowance discount not in
excess of 0.105% of the note denominations to certain other dealers. After the
initial public offering, the public offering price, such concessions and such
discounts may be changed.
The sponsor has been advised by the underwriter that it presently
intends to make a market in the notes offered hereby as permitted by applicable
laws and regulations. The underwriter is not obligated, however, to make a
market in the notes and any market-making may be discontinued at any time.
Accordingly, no assurance can be given that an active public market for the
notes will develop.
Until the distribution of the notes is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriter and
certain selling group members to bid for and purchase the notes. As an exception
to these rules, the underwriter is permitted to engage in certain transactions
that stabilize the price of the notes. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
notes.
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In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the sponsor nor the underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the notes. In addition, neither the
sponsor nor the underwriter makes any representation that the underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Immediately prior to the sale of the mortgage loans to the trust, some
of the mortgage loans were subject to financing provided by an affiliate of the
underwriter. The sponsor will apply a portion of the proceeds it receives from
the sale of the notes to repay such financing.
For further information regarding any offer or sale of the notes
pursuant to this prospectus supplement and the accompanying prospectus, SEE
"PLAN OF DISTRIBUTION" IN THE ACCOMPANYING PROSPECTUS.
The underwriting agreement provides that the sponsor will indemnify the
underwriter or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act of 1933.
INCORPORATION OF INFORMATION BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" certain information already on file with it. This means that we can
disclose important information to you by referring you to those documents. Such
information is considered part of this prospectus supplement, and later
information that is filed will automatically update and supersede this
information. We incorporate by reference all of the documents listed in the
accompanying prospectus under the heading "Incorporation of Certain Documents by
Reference."
You should rely only on the information incorporated by reference or
provided in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone else to provide you with different information. You should
not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus.
ADDITIONAL INFORMATION
Accredited Home Lenders, Inc. has filed with the Securities and
Exchange Commission a registration statement (Registration No. 333-07219) under
the Securities Act of 1933, with respect to the notes offered pursuant to this
prospectus supplement. This prospectus supplement and the accompanying
prospectus, which form a part of the registration statement, omit certain
information contained in such registration statement pursuant to the rules and
regulations of the Securities and Exchange Commission. You may read and copy the
registration statement at the Public Reference Room at the Securities and
Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
and at the Securities and Exchange Commission's regional offices at Seven World
Trade Center, 13th Floor, New York, New York, 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please
call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the Public Reference Rooms. In addition, the Securities and
Exchange Commission maintains a site on the World Wide Web containing reports,
proxy materials, information statements and other items. The address is
http://www.sec.gov.
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EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and its Subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998,
incorporated by reference in this prospectus supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
Certain legal matters in connection with the notes will be passed upon
for the sponsor and the master servicer by Dewey Ballantine LLP, New York, New
York, for the trust by Richards, Layton and Finger, Wilmington, Delaware, and
for the underwriter and as to certain tax matters for the trust by Brown & Wood
LLP, New York, New York.
RATINGS
It is a condition to the original issuance of the notes that they will
receive ratings of "AAA" by Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. and "Aaa" by Moody's Investors Service. The ratings
assigned to the notes will take into account the claims-paying ability of the
note insurer. Explanations of the significance of such ratings may be obtained
from Moody's Investors Service, 99 Church Street, New York, New York 10007 and
Standard & Poor's Rating Services, 55 Water Street, New York, New York 10041.
Such ratings will be the views only of such rating agencies. There is no
assurance that any such ratings will continue for any period of time or that
such ratings will not be revised or withdrawn. Any such revision or withdrawal
of such ratings may have an adverse effect on the market price of the notes.
Additionally, the ratings on the Class A-2 Notes do not address the likelihood
of the payment of the Class A-2 Available Funds Cap Carry-Forward Amount.
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GLOSSARY
The following terms have the meanings given below when used in this
prospectus supplement.
AVAILABLE AMOUNT for any group of mortgage loans and any payment date
is the amount on deposit in the related payment account on that payment date,
(1) after taking into account any transfers made on that payment date from the
related pre-funding account and from the related capitalized interest account,
(2) less the amount applied to the payment of the fees of the indenture trustee
and any payments with respect to the indemnification due to the indenture
trustee, the fees of the owner trustee, the premiums due to the note insurer and
the premiums due to the primary mortgage insurance provider, in each case with
respect to that group, and (3) exclusive of the amount of any Insured Payment.
BASE PRINCIPAL PAYMENT AMOUNT for any group of mortgage loans and any
payment date will be the lesser of:
(a) the excess of (x) the sum, as of such payment date,
of (A) the Available Amount for that group and (B) any optional payment made by
the note insurer with respect to the related class of notes over (y) the sum of
the Interest Payment Amount for such group; and
(b) the sum, without duplication, of:
(1) all scheduled principal payments due and
collected or advanced for the prior Due
Period, plus the principal portion of all
prepayments in full received during the
prior Prepayment Period, plus all partial
prepayments received during the prior
calendar month less any related
reimbursements of Delinquency Advances or of
Servicing Advances to the master servicer,
in each case, for the related group of
mortgage loans;
(2) the principal balance of each mortgage loan
in such group that was repurchased by the
sponsor on the related servicer remittance
date from such group to the extent such
principal balance is actually received by
the indenture trustee and less any related
reimbursements of Delinquency Advances or of
Servicing Advances to the master servicer;
(3) any substitution adjustments delivered by
the sponsor on the related servicer
remittance date in connection with a
substitution of a mortgage loan in that
group, to the extent such substitution
adjustments are actually received by the
indenture trustee;
(4) the Net Liquidation Proceeds actually
collected by the master servicer on all
mortgage loans in such group during the
preceding calendar month -- to the extent
such Net Liquidation Proceeds relate to
principal;
(5) on the payment date in April 2000, moneys
released from the related pre-funding
account, if any;
(6) the proceeds received by the indenture
trustee upon the exercise by the sponsor of
its option to call the notes -- to the
extent such proceeds relate to principal;
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(7) the proceeds received by the indenture
trustee on any termination of the trust --
to the extent such proceeds relate to
principal -- allocable to such group;
(8) any amount that the note insurer has elected
to pay as principal -- including Liquidated
Loan Losses -- prior to the occurrence of
any Remaining Over-collateralization
Deficit;
MINUS
(9) the amount of any Over-collateralization
Reduction Amount for such group for such
payment date.
In no event will the Base Principal Payment Amount for a group with
respect to any payment date be less than zero, or greater than the then
outstanding aggregate principal balance for the related notes.
CIVIL RELIEF ACT INTEREST SHORTFALL means, with respect to any payment
date and a mortgage loan, an amount equal to the excess, if any, of (a) thirty
days' interest on the outstanding principal balance of a mortgage loan at the
related mortgage interest rate over (b) the amount of interest due on such
mortgage loan because of the application of the Soldiers' and Sailors' Civil
Relief Act of 1940.
CLASS A-1 CARRY-FORWARD AMOUNT for any payment date is the sum of (a)
the amount, if any, by which (x) the Class A-1 Interest Payment Amount as of the
immediately preceding payment date exceeded (y) the amount of interest actually
paid to the holders of the Class A-1 Notes on such immediately preceding payment
date and (b) thirty days' interest on the amount described in clause (a),
calculated at an interest rate equal to the Class A-1 Note Rate.
CLASS A-1 INTEREST PAYMENT AMOUNT for any payment date will be an
amount equal to the sum of the Current Interest for the Class A-1 Notes on such
payment date, plus the Class A-1 Carry-Forward Amount remaining unpaid as of
such payment date.
CLASS A-1 NOTE RATE with respect to any payment date, the per annum
rate equal to 7.94%; provided, that, on any payment date after the related
Clean-Up Call Date, the Class A-1 Note Rate will be 8.69% per annum.
CLASS A-2 AVAILABLE FUNDS CAP CARRY-FORWARD AMOUNT is, with respect to
the Class A-2 Notes and any payment date, the sum of
(a) the excess of (x) the Class A-2 Current Interest calculated at the
Class A-2 Formula Note Rate over (y) the Class A-2 Current
Interest calculated at the Class A-2 Available Funds Cap Rate, in
each case as of such payment date, and
(b) the amount calculated under clause (a) above remaining unpaid from
any previous payment date, with interest thereon at the Class A-2
Note Rate.
CLASS A-2 AVAILABLE FUNDS CAP RATE is a per annum rate equal to the
weighted average mortgage interest rate with respect to the mortgage loans in
the adjustable-rate group, less the note insurer premium percentage, the master
servicing fee rate, the indenture trustee fee rate, the owner trustee fee
(expressed as 1/12 of the annual percentage rate), the backup servicer fee rate
and the primary mortgage insurance provider premium percentage, if any, each as
applicable to the Class A-2 Notes, and less 0.75%.
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CLASS A-2 CARRY-FORWARD AMOUNT for any payment date is the sum of (a)
the amount, if any, by which (x) the Class A-2 Interest Payment Amount as of the
immediately preceding payment date exceeded (y) the amount of interest actually
paid to the holders of the Class A-2 Notes on such immediately preceding payment
date and (b) thirty days' interest on the amount described in clause (a),
calculated at an interest rate equal to the Class A-2 Note Rate.
CLASS A-2 FORMULA NOTE RATE is a per annum rate equal to the lesser of
(i) LIBOR plus 0.32% provided, that, on any payment date after the related
Clean-Up Call Date, such rate will be equal to LIBOR plus 0.64% annum and (ii)
14.0%.
CLASS A-2 INTEREST PAYMENT AMOUNT for any payment date will be an
amount equal to the Current Interest for the Class A-2 Notes on such payment
date, plus the Class A-2 Carry-Forward Amount remaining unpaid as of such
payment date.
CLASS A-2 NOTE RATE with respect to any payment date, is the per annum
rate equal to the lesser of (x) the Class A-2 Formula Note Rate and (y) the
Class A-2 Available Funds Cap Rate for such payment date.
CLEAN-UP CALL DATE means, with respect to the Class A-1 Notes, the
first payment date on which: (1) the outstanding principal balance of the Class
A-1 Notes is equal to or less than 10% of the original principal balance of the
Class A-1 Notes; or (2) the aggregate outstanding principal balance of the notes
is equal to or less than 10% of the original aggregate principal balance of the
notes and, with respect to the Class A-2 Notes, the first payment date on which
(1) the outstanding principal balance of the Class A-2 Notes is equal to or less
than 10% of the original principal balance of the Class A-2 Notes; or (2) the
aggregate outstanding principal balance of the notes is equal to or less than
10% of the original aggregate principal balance of the notes.
COMPENSATING INTEREST means an amount equal to the lesser of (a) the
aggregate of the Prepayment Interest Shortfalls for the related payment date
resulting from principal prepayments in full during the related Prepayment
Period and (b) the master servicing fee with respect to the related Due Period.
CURRENT INTEREST for either the Class A-1 Notes or the Class A-2 Notes
and any payment date is the accrued interest on the related class of notes at
the Class A-1 Note Rate or the Class A-2 Note Rate, as the case may be, on the
aggregate outstanding principal balance of such class during the related accrual
period reduced by the sum of (a) the Civil Relief Act Interest Shortfall and (b)
Net Prepayment Interest Shortfalls, in each case for the related class of notes.
CUT-OFF DATE means the close of business as of January 31, 2000.
CUT-OFF DATE PRINCIPAL BALANCE means as to any mortgage loan, the
unpaid principal balance of such mortgage loan as of the related Cut-off Date as
specified in the amortization schedule at the time relating thereto (before any
adjustment to such amortization schedule by reason of any moratorium or similar
waiver or grace period) after application of all payments due on or before
February 1, 2000 (or, with respect to initial mortgage loans which were
originated after the initial Cut-off Date, as of the date of origination) and
after giving effect to any previous curtailments and Liquidation Proceeds
allocable to principal (other than with respect to any Liquidated Mortgage
Loan), irrespective of any delinquency in payment by the related mortgagor.
DELINQUENCY ADVANCE means advances made by the master servicer on each
servicer remittance date with respect to delinquent payments of principal of and
interest on the mortgage loans, at a rate of
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interest equal to the interest rate on the related mortgage note -- or at such
lower rate as may be in effect for such mortgage loan because of application of
the Soldiers' and Sailors' Civil Relief Act of 1940, any reduction as a result
of a bankruptcy proceeding and/or any reduction by a court of the monthly
payment due on such mortgage loan -- less the master servicing fee and the
backup servicing fee rates.
DUE PERIOD means, with respect to any payment date, the period from the
second day of the preceding month to and including the first day of the current
month.
EXCESS INTEREST for any group of mortgage loans and any payment date is
equal to the excess of (x) the Available Amount for such group and such payment
date over (y) the sum (without duplication) of
- the Interest Payment Amount for such group and such payment
date, and
- Base Principal Payment Amount for such group and such payment
date.
FORECLOSURE PROFITS as to any servicer remittance date, are the excess,
if any, of (x) Net Liquidation Proceeds in respect of each mortgage loan that
became a Liquidated Mortgage Loan during the month immediately preceding the
month of such servicer remittance date over (y) the sum of the unpaid principal
balance of each such Liquidated Mortgage Loan plus accrued and unpaid interest
on the unpaid principal balance from the due date to which interest was last
paid by the mortgagor.
INSURANCE PROCEEDS are proceeds paid by any insurer pursuant to any
insurance policy covering a mortgage loan to the extent such proceeds are not
applied to the restoration of the related mortgaged property or released to the
related mortgagor in accordance with the express requirements of law or in
accordance with prudent and customary servicing practices. "Insurance Proceeds"
do not include "Insured Payments."
INSURED AMOUNT for any group of mortgage loans and any payment date, is
the sum of,
- the related Interest Payment Amount;
- the Remaining Over-collateralization Deficit allocable to that
group for that payment date; and
- without duplication of the amount specified in the
bullet-points above, on the payment date which is the final
stated maturity date, the aggregate outstanding principal
balance for the related class of notes.
INSURED PAYMENT for any group of mortgage loans and any payment date
will equal the amount by which the Insured Amount for that group and payment
date exceeds the sum of (1) the Available Amount for that group and payment date
plus (2) any amount transferred on that payment date to that group's payment
account from the other group's payment account, or from the reserve account.
INTEREST PAYMENT AMOUNT means the Class A-1 Interest Payment Amount or
the Class A-2 Interest Payment Amount, as applicable.
LIQUIDATED LOAN LOSS as to any Liquidated Mortgage Loan is the excess,
if any, of (x) the unpaid principal balance of such Liquidated Mortgage Loan
plus accrued and unpaid interest on such unpaid principal balance from the due
date to which interest was last paid by the mortgagor over (y) Net Liquidation
Proceeds.
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LIQUIDATED MORTGAGE LOAN is a mortgage loan that has been finally
liquidated by the master servicer in connection with (x) the taking of all or a
part of a mortgaged property by exercise of the power of eminent domain or
condemnation or (y) the liquidation of a defaulted mortgage loan through a sale,
foreclosure sale, REO disposition or otherwise.
LIQUIDATION EXPENSES as to any Liquidated Mortgage Loan are all
expenses incurred by the master servicer in connection with the liquidation of
such mortgage loan, including, without duplication, unreimbursed expenses for
real property taxes and unreimbursed Servicing Advances.
LIQUIDATION PROCEEDS are amounts received by the master servicer in
connection with (x) the taking of all or a part of a mortgaged property by
exercise of the power of eminent domain or condemnation or (y) the liquidation
of a defaulted mortgage loan through a sale, foreclosure sale, REO disposition
or otherwise.
NET FORECLOSURE PROFITS as to any servicer remittance date, are the
excess, if any, of (x) the aggregate Foreclosure Profits with respect to such
servicer remittance date over (y) Liquidated Loan Losses with respect to such
servicer remittance date.
NET LIQUIDATION PROCEEDS as to any Liquidated Mortgage Loan, are
Liquidation Proceeds net of Liquidation Expenses and net of any unreimbursed
Delinquency Advances and Servicing Advances made by the master servicer or the
subservicer with respect to such mortgage loan.
NET PREPAYMENT INTEREST SHORTFALLS means, with respect to any group of
mortgage loans and any payment date, the amount by which the aggregate
Prepayment Interest Shortfalls for such group during the related Prepayment
Period exceeds the available Compensating Interest for that group.
NET REO PROCEEDS as to any REO property, are REO Proceeds net of any
related expenses of the master servicer.
OVER-COLLATERALIZATION AMOUNT means, with respect to any payment date
and a group of mortgage loans, the excess, if any, of (a) the sum of (x) the
aggregate scheduled principal balance of the mortgage loans in such group as of
the close of business on the last day of the prior calendar month, after
adjustment to reflect scheduled principal payments due during the related Due
Period, prepayments in full received during the related Prepayment Period and
partial principal prepayments received during the prior calendar month and (y)
the amounts, if any, on deposit in the related pre-funding account, over (b) the
principal balance of the related class of notes as of such payment date
- --following the making of all payments on such payment date, other than with
respect to any Over-collateralization Increase Amount for such payment date.
OVER-COLLATERALIZATION DEFICIT means, for any payment date, the amount,
if any, by which the aggregate note principal balance of both classes of notes,
after payment of the Base Principal Payment Amount for both groups, but before
taking into account any principal payment funded from Excess Interest, the
reserve account or any Insured Payment, exceeds the aggregate scheduled
principal balances of the mortgage loans in both groups as of the close of
business on the last day of the prior calendar month, after adjustment to
reflect scheduled principal payments due during the related Due Period,
prepayments in full received during the related Prepayment Period and partial
principal prepayments received during the prior calendar month and, together
with any amount remaining on deposit in the pre-funding accounts on that date.
For purposes of determining the amount to be paid on account of the
Over-collateralization Deficit to the holders of each class of notes on the
payment date, the Over-collateralization Deficit will be allocated to each class
PRO RATA based on the amount by which the note principal balance of each class
on such payment date, after payment of the Base Principal Payment
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Amount but before taking into account any principal payment funded from Excess
Interest, the reserve account or any Insured Payment, exceeds the aggregate
scheduled principal balances of the mortgage loans in the related group as of
the close of business on the last day of the prior calendar month, after
adjustment to reflect scheduled principal payments due during the related Due
Period, prepayments in full received during the related Prepayment Period and
partial principal prepayments received during the prior calendar month and,
together with any amount remaining on deposit in the related pre-funding account
on that date.
OVER-COLLATERALIZATION INCREASE AMOUNT means, for any group of mortgage
loans and any payment date, the amount of Excess Interest (after application, if
necessary, to pay the Over-collateralization Deficit and the Reimbursement
Amount on such payment date) to be applied as an accelerated payment of
principal on the related class of notes until the over-collateralization amount
for such group reaches the Specified Over-collateralization Amount.
OVER-COLLATERALIZATION REDUCTION AMOUNT means, with respect to any
group of mortgage loans and any payment date, the amount by which the
Over-collateralization Amount is permitted to be reduced as provided by the sale
and servicing agreement.
PREPAYMENT INTEREST SHORTFALLS means, with respect to any payment date,
and each mortgage loan that was prepaid in full in the related Prepayment
Period, an amount equal to the excess, if any, of (a) thirty days' interest on
the outstanding principal balance of such mortgage loans at a per annum rate
equal to the related mortgage interest rate -- or at such lower rate as may be
in effect for any such mortgage loan because of the application of the Soldiers'
and Sailors' Civil Relief Act of 1940, any reduction as a result of a bankruptcy
proceeding and/or any reduction by a court of the monthly payment due on such
mortgage loan -- minus the rate at which the master servicing fee and the backup
servicing fee are calculated, over (b) the amount of interest actually remitted
by the related mortgagor in connection with such principal prepayment in full,
less the master servicing fee and the backup servicing fee for such mortgage
loan in such month.
PREPAYMENT PERIOD means, with respect to any payment date, the period
from the sixteenth day of the preceding month (or in the case of the first
payment date, from February 1, 2000) to and including the fifteenth day of the
month in which the payment date occurs and, with respect to the payment date in
April 2000 and solely with respect to mortgage loans acquired by the trust after
the closing date, the period from the subsequent Cut-off Date with respect to
such mortgage loans to and including April 15, 2000).
QUALIFIED SUBSTITUTE MORTGAGE LOAN means any mortgage loan substituted
for a deleted mortgage loan which has a scheduled principal balance, after
application of all payments received on or prior to the date of substitution,
not substantially less and not more than the scheduled principal balance of the
deleted mortgage loan as of such date, and each of which, among other things,
- relates to a detached one- to four-family residence and has
the same or a better lien priority as the deleted mortgage
loan and has the same occupancy status as the deleted mortgage
loan or is an owner-occupied mortgaged property,
- matures no later than, and not more than one year earlier
than, the deleted mortgage loan,
- has a loan-to-value ratio or LTV at the time of such
substitution no higher than the LTV of the deleted mortgage
loan,
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<PAGE>
- has a CLTV at the time of such substitution no higher than the
CLTV of the deleted mortgage loan,
- has a mortgage interest rate greater than or equal to the
interest rate of the deleted mortgage loan,
- complies, as of the date of substitution, with each
representation and warranty set forth in the sale and
servicing agreement, and
- is otherwise acceptable to the note insurer.
REIMBURSEMENT AMOUNT means, with respect to each group of mortgage
loans and each payment date, the amount of all Insured Payments made by the note
insurer on all prior payment dates, together with all other amounts due to the
note insurer for such group pursuant to the insurance agreement, including the
premium amount, which have not been previously paid. In the event any amounts
due under the insurance agreement are not clearly allocable to a particular
group, those amounts shall be allocated between the groups pro rata based on the
aggregate unpaid principal balance of the related notes.
REMAINING OVER-COLLATERALIZATION DEFICIT means, for any payment date,
the amount, if any, that the aggregate note principal balances of both classes
of notes, after payment of the Base Principal Payment Amount for both groups and
after taking into account any principal payment funded from Excess Interest or
from the reserve account, but before taking into account the principal portion
of any Insured Payment, exceeds the aggregate scheduled principal balances of
the mortgage loans in both groups as of the close of business on the last day of
the prior calendar month, after adjustment to reflect scheduled principal
payments due during the related Due Period, prepayments in full received during
the related Prepayment Period and partial principal prepayments received during
the prior calendar month, together with any amount remaining on deposit in the
pre-funding accounts on that date. For purposes of determining the amount to be
paid on account of the Remaining Over-collateralization Deficit to the holders
of each class of notes on the payment date, the Remaining Over-collateralization
Deficit will be allocated to each class PRO RATA based on the amount by which
the note principal balance of each class on such payment date, after payment of
the Base Principal Payment Amount but after taking into account any principal
payment funded from Excess Interest or the reserve account, but before taking
into account the principal portion of any Insured Payment, exceeds the aggregate
scheduled principal balances of the mortgage loans in the related group as of
the close of business on the last day of the prior calendar month, after
adjustment to reflect scheduled principal payments due during the related Due
Period, prepayments in full received during the related Prepayment Period and
partial principal prepayments received during the prior calendar month, together
with any amount remaining on deposit in the related pre-funding account on that
date.
REO PROCEEDS are monies received in respect of any REO property,
including, without limitation, proceeds from the rental of the related mortgaged
property.
SERVICING ADVANCES means the "out-of-pocket" costs and expenses of the
master servicer or subservicer relating to the preservation, restoration and
protection of the mortgaged property, including without limitation advances in
respect of real estate taxes and insurance premiums, any collection,
enforcement, or judicial proceedings, including without limitation foreclosures
and liquidations, the purchase or maintenance of a first lien not included in
the trust estate on the mortgaged property, conservation, management, and
liquidation of any REO property, and certain other customary amounts described
in the sale and servicing agreement.
S-82
<PAGE>
SHORTFALL AMOUNT means, with respect to a group of mortgage loans and
any payment date, the excess, if any, of (y) the amounts listed in clauses (b)
through (d) under "Flow of Funds" over (z) the Available Amount, in each case
for that group and payment date.
SPECIFIED OVER-COLLATERALIZATION AMOUNT with respect to a group of
mortgage loans and any payment date will be the amount of over-collateralization
which the note insurer requires with respect to such group and such payment date
and which amount may step up or step down as determined in the insurance
agreement.
SPECIFIED RESERVE AMOUNT means, with respect to any payment date, the
difference between (x) the Specified Over-collateralization Amount for both
mortgage loan groups on such payment date and (y) the Over-collateralization
Amount for both mortgage loan groups on such payment date.
S-83
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
asset-backed notes, series 2000-1 (the "Global Securities") will be available
only in book-entry form. Investors in the Global Securities may hold such Global
Securities through any of The Depository Trust Company ("DTC"), Clearstream,
Luxembourg 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 holding Global Securities
through Clearstream, Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC Participants holding Notes will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg 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, Clearstream,
Luxembourg and Euroclear will hold positions on behalf of their participants
through their respective Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the 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 Clearstream,
Luxembourg 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.
S-84
<PAGE>
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
asset-backed notes issues in same-day funds.
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM, LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream, Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream, Luxembourg or Euroclear will instruct the respective Depositary, as
the case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of either
the actual number of days in such accrual period and a year assumed to consist
of 360 days or a 360-day year of twelve 30-day months as applicable to the
related class of Global Securities. 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 respective Depositary of
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 Clearstream, Luxembourg 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 Clearstream, Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream, Luxembourg 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 Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended
a line of credit to them, Clearstream, Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream, Luxembourg
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
this result will depend on each Clearstream, Luxembourg 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 sending Global Securities
to the respective European Depositary for the benefit of Clearstream, Luxembourg
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.
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<PAGE>
TRADING BETWEEN CLEARSTREAM, LUXEMBOURG OR EUROCLEAR SELLER AND DTC
PURCHASER. Due to time zone differences in their favor, Clearstream, Luxembourg
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 Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream,
Luxembourg or Euroclear will instruct the respective Depositary, as appropriate,
to deliver the Global Securities to the DTC Participant's account against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of either the actual number of days in such accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months as
applicable to the related class of Global Securities. 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 the Clearstream, Luxembourg Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Clearstream, Luxembourg
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 Clearstream, Luxembourg 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 Clearstream, Luxembourg
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream, Luxembourg Participants or Euroclear Participants should note that
these trades would automatically fail on the sale side unless affirmative action
were taken. At least three techniques should be readily available to eliminate
this potential problem:
(a) borrowing through Clearstream, Luxembourg or Euroclear for
one day (until the purchase side of the day trade is reflected in their
Clearstream, Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their
Clearstream, Luxembourg 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 Clearstream, Luxembourg Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream, Luxembourg 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, 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
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<PAGE>
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 can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status) or
substitute form. 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, 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) or substitute form.
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. Persons that are noteholders 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) or substitute form. 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 the
noteholder or his 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 noteholder 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
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
(a) a citizen or resident of the United States,
(b) a corporation or partnership (or other entity treated as a
corporation or partnership for U.S. federal income tax purposes)
organized in or under the laws of the United States or any political
subdivision thereof,
(c) an estate the income of which is includable in gross
income for United States tax purposes, regardless of its source or
(d) 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 persons have the authority to control all
substantial decisions of the trust.
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 or
with the application of Treasury regulations relating to tax documentation
requirements that are generally effective with respect to payments after
December 31, 2000. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................................A-2
Balance Sheet of the Trust as of February 29, 2000.........................A-3
Notes to Balance Sheet.....................................................A-4
A-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Wilmington Trust Company,
as Owner Trustee of
Accredited Mortgage Loan Trust 2000-1
We have audited the accompanying balance sheet of Accredited Mortgage
Loan Trust 2000-1, a Delaware business trust as of February 29, 2000. This
balance sheet is the responsibility of the trust. Our responsibility is to
express an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of Accredited Mortgage Loan Trust
2000-1, at February 29, 2000, in conformity with generally accepted accounting
principles.
Deloitte and Touche L.L.P.
February 29, 2000
New York, New York
A-2
<PAGE>
ACCREDITED MORTGAGE LOAN TRUST 2000-1
BALANCE SHEET
FEBRUARY 29, 2000
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash.......................................................$ 1,000
-------
Total assets..........................................$ 1,000
-------
-------
Liabilities and Certificateholders' Equity
Liabilities................................................$ 0
Certificateholders' equity.................................$ 1,000
------
Total liabilities and certificateholders' equity......$ 1,000
------
------
</TABLE>
See accompanying notes.
A-3
<PAGE>
ACCREDITED MORTGAGE LOAN TRUST 2000-1
NOTES TO BALANCE SHEET
FEBRUARY 29, 2000
1. FORMATION
Accredited Mortgage Loan Trust 2000-1, a Delaware statutory business
trust, was formed in the state of Delaware on February 29, 2000, with Wilmington
Trust Company, a Delaware banking corporation, as its owner trustee.
The trust was formed to engage exclusively in the following business
and financial activities: to purchase or acquire from Accredited Home Lenders,
Inc. certain property relating to certain receivables consisting of consumer
purpose mortgage loans, and to pledge such receivables or interests therein to
Norwest Bank Minnesota, National Association, as indenture trustee.
2. CAPITAL CONTRIBUTION
Accredited Home Lenders, Inc. made an initial capital contribution of
$1,000 to the trust on February 29, 2000.
3. REGISTRATION STATEMENT
At February 29, 2000, the trust was in the process of preparing to
issue up to $173,476,000 of its Asset-Backed Notes, Series 2000-1.
A-4
<PAGE>
PROSPECTUS
ACCREDITED HOME LENDERS, INC.
ASSET-BACKED NOTES
ASSET-BACKED CERTIFICATES
(ISSUABLE IN SERIES)
---------------------
Accredited Home Lenders, Inc. (the "Sponsor"), may offer from time to time
under this Prospectus and related Prospectus Supplements the Asset-Backed Notes
(the "Notes") and the Asset-Backed Certificates (the "Certificates" and,
together with the Notes, the "Securities") which may be sold from time to time
in one or more series (each, a "Series").
The Certificates of a Series will evidence undivided interests in certain
assets deposited into a trust (each, a "Trust Fund") by the Sponsor or an
affiliate (references to the "Sponsor" herein shall be deemed to include such an
affiliate unless the context otherwise requires). The Notes of a Series will
represent indebtedness secured by the related Trust Fund. A Series may consist
of both Certificates and of Notes, in which case the Certificates will represent
the equity ownership of the assets of the related Trust Fund, which assets are
subject to the senior lien of the related Notes. In no event will the
Certificates and Notes issued in a single Series and with respect to a single
Trust Fund exceed the value of the property in such Trust Fund. See "Description
of the Securities" herein.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect to
the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein under
"Description of the Securities" and in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, the assets comprising the Trust
Fund may be divided into one or more groups, and each Class of the related
Series will evidence beneficial ownership of the corresponding group, as
applicable.
The Trust Fund for a Series of Securities will include (a) assets originated
by the Sponsor or acquired by the Sponsor from affiliated or unaffiliated
institutions (each, a "Seller") composed of (i) mortgage loans (the "Mortgage
Loans"), including mortgage loans secured by senior liens or junior liens on the
related mortgaged properties and closed-end home equity loans, secured by
mortgages primarily on one- to four-family residential or small mixed-use
properties (the "Mortgaged Properties") and/or (ii) home improvement installment
sales contracts and installment loan agreements (the "Home Improvement
Contracts") which are secured by mortgages primarily on one- to four-family
residential properties, or by purchase money security interests in the home
improvements financed thereby (the "Home Improvements"), (b) all Mortgaged
Properties and/or Home Improvements (collectively, "Properties") acquired in
respect of Mortgage Loans and/or Home Improvement Contracts, respectively
(collectively, the "Loans"), and all monies due under the Loans net, to the
extent described in the related Prospectus Supplement, of certain amounts
payable to the Servicer, and (c) certain funds, Credit Enhancement (as defined
herein) and other assets as described herein under "The Trust Funds", all as
specifically set forth in the related Prospectus Supplement.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Loans. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein under "Description of the Securities--Weighted Average Life of
Securities" and in the related Prospectus Supplement. Under certain
circumstances a Series of Securities may be subject to termination or redemption
under the circumstances described herein under "Description of the
Securities--Special Redemption" and "--Optional Redemption, Purchase or
Termination" to the extent described in the related Prospectus Supplement.
SEE "RISK FACTORS", COMMENCING ON PAGE 15 HEREOF, FOR A DISCUSSION OF
CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE CERTIFICATES.
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A
SERIES EVIDENCE BENEFICIAL INTERESTS IN THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE SPONSOR, ANY SELLER, THE
TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS
OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY OTHER PERSON OR
ENTITY. THE SPONSOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF SECURITIES
WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH IN THE
RELATED POOLING AND SERVICING AGREEMENT. SEE "RISK FACTORS" COMMENCING ON PAGE
HEREOF FOR CERTAIN FACTORS TO BE CONSIDERED IN PURCHASING THE SECURITIES.
------------------------------
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 PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by the underwriters set forth in the related Prospectus
Supplement subject to prior sale, to withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the underwriters and
certain further conditions. Retain this Prospectus for future reference. This
Prospectus may not be used to consummate sales of the Securities offered hereby
unless accompanied by a Prospectus Supplement.
------------------------------
February 24, 2000
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the related Loans, any Seller and any Subservicer; (iii) the terms of
any Credit Enhancement with respect to such Series; (iv) the terms of any
insurance related to the related Loans; (v) information concerning any other
assets in the related Trust Fund, including any Reserve Fund; (vi) the Final
Scheduled Distribution Date of each Class of such Securities; (vii) the method
to be used to calculate the amount of principal required to be applied to the
Securities of each Class of such Series on each Distribution Date, the timing of
the application of principal and the order of priority of the application of
such principal to the respective Classes and the allocation of principal to be
so applied; (viii) the Distribution Dates; (ix) additional information with
respect to the plan of distribution of such Securities; and (x) whether a REMIC
election will be made with respect to some or all of the Trust Fund for such
Series.
AVAILABLE INFORMATION
The Sponsor is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by the Sponsor can be
inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located as follows: Chicago Regional
Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661: New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates.
The Sponsor does not intend to send any financial reports to Certificateholders.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Sponsor has filed with the Commission under the Securities Act
of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Pooling and Servicing Agreement to
be forwarded to the related Holders. If the Securities of a Series are to be
issued in book-entry form, such reports will be provided to the Holder of record
and beneficial owners of such Securities will have to rely on the procedures
described herein under "Description of the Securities--Book-Entry Registration."
Such reports will not be examined and reported on by an independent public
account. See "The Pooling and Servicing Agreement--Reports to Holders". In
addition, the related Trust Fund will file certain other periodic and annual
reports with the Securities and Exchange Commission, as required by the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Such
reports will be examined and reported on by an independent public accountant to
the extent required by the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to a Trust Fund pursuant to Section 13(a),
13(c), 14 or 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 Fund offered hereby shall be deemed to be incorporated
by reference into the Prospectus when delivered with respect to such Trust Fund.
Any
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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 Accredited Home Lenders, Inc., 15030 Avenue of Science, Suite 100,
San Diego, California 92128 (telephone number (619) 451-7044).
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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 INFORMATION WITH RESPECT TO EACH SERIES OF SECURITIES CONTAINED IN THE
PROSPECTUS SUPPLEMENT TO BE PREPARED AND DELIVERED IN CONNECTION WITH THE
OFFERING OF SECURITIES OF SUCH SERIES. CAPITALIZED TERMS USED AND NOT OTHERWISE
DEFINED HEREIN OR IN THE RELATED PROSPECTUS SUPPLEMENT SHALL HAVE THE MEANINGS
SET FORTH IN THE "GLOSSARY OF TERMS".
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The Sponsor and Servicer..................... Accredited Home Lenders, Inc., a California
corporation (the "Sponsor" or the
"Servicer"). See "The Sponsor and Servicer".
Securities................................... Asset-Backed Certificates ("Certificates")
representing beneficial ownership interests
in the related Trust Fund and Asset-Backed
Notes ("Notes") representing debt secured by
the assets of the related Trust Fund,
issuable in Series.
Types of Securities.......................... Each Series of Securities will consist of one
or more Classes, one or more of which may be
Classes of Compound Interest Securities,
Planned Amortization Class ("PAC")
Securities, Variable Interest Securities,
Zero Coupon Securities, Principal Only
Securities, Interest Only Securities,
Participating Securities, Senior Securities
or Subordinate Securities. Each Class may
differ in, among other things, the amounts
allocated to and the priority of principal
and interest payments, Final Scheduled
Distribution Dates, Distribution Dates and
interest rates. The Securities of each Class
will be issued in fully registered form in
the denominations specified in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, the Securities
or certain Classes of such Securities offered
thereby may be available in book-entry form
only. See "Description of the
Securities--Book-Entry Registration".
Securities Will Be Recourse to the Assets of
the Related Trust Fund Only.
The sole source of payment for any Series of
Securities will be the assets of the related
Trust Fund. The Securities will not be
obligations, either recourse or nonrecourse
(except for certain nonrecourse debt
described under "Federal Income Tax
Considerations"), of the Sponsor or any
Person other than the related Trust Fund. In
the case of Securities that represent
beneficial ownership interest in the related
Trust Fund, such Securities will represent
the ownership of such Trust Fund; with
respect to Securities that
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represent debt issued with respect to the
related Trust Fund, such Securities will be
secured by the related Trust Fund.
Notwithstanding the foregoing, and as to be
described in the related Prospectus
Supplement, certain types of Credit
Enhancement, such as a financial guaranty
insurance policy or a letter of credit, may
constitute a full recourse obligation of the
issuer of such Credit Enhancement.
The Trust Funds.............................. The Trust Fund for a Series of Securities
will include (a) assets originated by the
Sponsor or acquired by the Sponsor from
affiliated or unaffiliated institutions
(each, a "Seller") composed of (i) mortgage
loans (the "Mortgage Loans"), including
mortgage loans secured by senior liens or
junior liens on the related mortgaged
properties and closed-end home equity loans,
secured by mortgages primarily on one- to
four-family residential or small mixed-use
properties (the "Mortgaged Properties")
and/or (ii) home improvement installment
sales contracts and installment loan
agreements (the "Home Improvement Contracts")
which are secured by mortgages primarily on
one- to four-family residential properties,
or by purchase money security interests in
the home improvements financed thereby (the
"Home Improvements"),
(b) all Mortgaged Properties and/or Home
Improvements (collectively, "Properties")
acquired in respect of Mortgage Loans and/or
Home Improvement Contracts, respectively
(collectively, the "Loans"), and all monies
due under the Loans net, to the extent
described in the related Prospectus
Supplement, of certain amounts payable to the
Servicer and (c) certain funds, Credit
Enhancement (as defined herein) and other
assets as described herein under "The Trust
Funds", all as specifically set forth in the
related Prospectus Supplement.
The related Prospectus Supplement will
describe certain characteristics of the Loans
for a Series, including, without limitation,
and to the extent relevant: (a) the aggregate
unpaid principal balance of the Loans (or the
aggregate unpaid principal balance included
in the Trust Fund for the related Series) and
the average outstanding principal balance of
the Loans; (b) the weighted average Loan Rate
on the Loans as of the Cut-off Date; (c) the
Combined Loan-to-Value Ratios or
Loan-to-Value Ratios, as applicable, of the
Loans,
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computed in the manner described in the
related Prospectus Supplement; (d) the
percentage (by principal balance as of the
Cut-off Date) of Loans that accrue interest
at adjustable or fixed interest rates; (e)
any Credit Enhancement relating to the Loans;
(f) the percentage (by principal balance as
of the Cutoff Date) of Loans that are secured
by Properties; (g) the geographic
distribution of any Properties securing the
Loans; (h) the use and type of each Property
securing a Loan; (i) the lien priority of the
Loans; and (j) the delinquency status and
year of origination of the Loans. Each Trust
Fund will be established pursuant to an
agreement (each, a "Trust Agreement") by and
between the Sponsor and the Trustee named
therein. Each Trust Agreement will describe
the assets of the related Trust Fund, which
will include the related Loans and, if so
specified in the related Prospectus
Supplement, may include any combination of a
mortgage pool insurance policy, letter of
credit, financial guaranty insurance policy,
special hazard policy, reserve fund or other
form of Credit Enhancement.
The Loans held by each Trust Fund will be
serviced by the Servicer pursuant to a
servicing agreement (each, a "Servicing
Agreement") by and between the Servicer and
the related Trustee.
With respect to Securities that represent
debt secured by the related Trust Fund, the
Sponsor will enter into an indenture (each,
an "Indenture") with the trustee named on
such Indenture (the "Indenture Trustee"), as
set forth in the related Prospectus
Supplement. Securities that represent
beneficial ownership interests in the related
Trust Fund will be issued pursuant to the
related Trust Agreement.
In the case of any individual Trust Fund, the
contractual arrangements relating to the
establishment of the Trust Fund, the
servicing of the related Loans and the
issuance of the related Securities may be
contained in a single agreement, or in
several agreements which combine certain
aspects of the Trust Agreement, the Servicing
Agreement and the Indenture described above
(for example, a pooling and servicing
agreement, or a servicing and collateral
management agreement). For purposes of this
Prospectus, the term "Pooling and Servicing
Agreement" as used with respect to a Trust
Fund means, collectively,
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and except as otherwise specified, any and
all agreements relating to the establishment
of the related Trust Fund, the servicing of
the related Loans and the issuance of the
related Securities.
Interest Payments............................ Interest payments on the Securities of a
Series entitled by their terms to receive
interest will be made on each Distribution
Date, to the extent set forth in, and at the
applicable rate specified in (or determined
in the manner set forth in), the related
Prospectus Supplement. The interest rate on
Securities of a Series may be variable or
change with changes in the rates of interest
on the related Loans, and/or as prepayments
occur with respect to such Loans. Interest
Only Securities may be assigned a Notional
Amount set forth in the related Prospectus
Supplement for the purpose of calculating the
interest due on such Interest Only
Securities. See "Description of the
Securities--Use of Notional Amounts".
Principal Only Securities may not be entitled
to receive any interest payments or may be
entitled to receive only nominal interest
payments. Interest payable on the Securities
of a Series on a Distribution Date will
include all interest accrued during the
period specified in the related Prospectus
Supplement. See "Description of the
Securities--Payments of Interest".
Principal Payments........................... All payments of principal of a Series of
Securities will be made in an aggregate
amount determined as set forth in the related
Prospectus Supplement and will be paid at the
times and will be allocated among the Classes
of such Series in the order and amounts, and
will be applied either on a pro rata or a
random lot basis among all Securities of any
such Class, all as specified in the related
Prospectus Supplement.
Final Scheduled Distribution date of the
Securities................................. The Final Scheduled Distribution Date with
respect to each Class of Notes is the date no
later than which principal thereof will be
fully paid and with respect to each Class of
Certificates is the date after which no
Certificates of such Class are expected to
remain outstanding, in each case calculated
on the basis of the assumptions applicable to
such Series described in the related
Prospectus Supplement. The Final Scheduled
Distribution Date of a Class will be set
forth in the related Prospectus Supplement.
The actual final Distribution Date of the
Securities of a
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Series will depend primarily upon the rate of
payment (including prepayments, liquidations
due to default, the receipt of proceeds from
casualty insurance policies and repurchases)
of the Loans in the related Trust Fund, and,
consequently, the actual final Distribution
Date of any Security is likely to occur
earlier and may occur substantially earlier
or may occur later than its Final Scheduled
Distribution Date. The rate of payments on
the Loans in the Trust Fund for a Series will
depend on a variety of factors, including
certain characteristics of such Loans, and
the prevailing level of interest rates from
time to time, as well as on a variety of
economic, demographic, tax, legal, social and
other factors. No assurance can be given as
to the actual prepayment experience with
respect to a Series. See "Yield and Maturity
Considerations" herein.
Optional Termination......................... The Sponsor, the Servicer, or such other
entity that is specified in the related
Prospectus Supplement, may, at its option,
cause an early termination of the related
Trust Fund by repurchasing all of the Loans
and/or Properties remaining in the Trust Fund
on or after the date specified in the related
Prospectus Supplement, or on or after such
time as the aggregate principal balance of
the Securities of the Series or the Mortgage
Assets relating to such Series, is less than
the amount or percentage specified in the
related Prospectus Supplement. See
"Description of the Securities--Optional
Purchase or Termination".
Collection and Distribution Accounts......... All payments on or with respect to the Loans
for a Series will be remitted directly to an
account (the "Collection Account") to be
established for such Series with the Trustee
or the Servicer, in the name of the Trustee.
All such amounts will be available for (i)
application to the payment of principal of
and interest on such Series of Securities on
the next Distribution Date, (ii) the making
of adequate provision for future payments on
certain Classes of Securities, (iii) for the
purpose of reimbursing expenses to other
persons which may be supplying services to
the related Trust Fund (for example, a
subservicer or a provider of Credit
Enhancement (a "Credit Enhancer")), and to
pay to such persons their fees and (iv) for
reinvestment in additional Loans, as
described below. After applying the funds in
the Collection Account as described above,
any
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funds remaining in the Collection Account may
be paid over to the Servicer, the Sponsor,
the related Credit Enhancer or deposited into
a Reserve Account.
In addition, and as may be described in the
related Prospectus Supplement, the related
Pooling and Servicing Agreement may provide
that all or a portion of such collected
principal may be retained by the Trustee (and
held in certain temporary investments,
including Loans) for a specified period prior
to being used to fund payments of principal
to Holders. See "Yield and Maturity
Considerations."
Pre-funding Account.......................... If so specified in the related Prospectus
Supplement, a portion of the issuance
proceeds of the Securities of a particular
series (such amount, (the "Pre-Funded
Amount") will be deposited in an account (the
"Pre-Funding Account") to be established with
the Trustee, which will be used to acquire
additional Loans from time to time during the
time period specified in the related
Prospectus Supplement (the "Pre-Funding
Period"). Prior to the investment of the
Pre-Funded Amount in additional Loans, such
Pre-Funded Amount will be invested in one or
more Eligible Investments. Any Eligible
Investment must mature no later than the
Business Day prior to the next Distribution
Date. See "The Pooling and Servicing
Agreement--Assignment of Loans--Pre-Funding
Account--Pre-Funding Account."
During any Pre-Funding Period, the Sponsor
will be obligated (subject only to the
availability thereof) to transfer to the
related Trust Fund, additional Loans from
time to time during such Pre-Funding Period.
Such additional Loans will be required to
satisfy certain eligibility criteria more
fully set forth in the related Prospectus
Supplement which eligibility criteria will be
consistent with the eligibility criteria of
the Loans included in the Trust Fund as of
the Closing Date subject to such exceptions
as are expressly stated in such Prospectus
Supplement.
Although the specific parameters of the Pre-
Funding Account with respect to any issuance
of Securities will be specified in the
related Prospectus Supplement, it is
anticipated that:
(a) the Pre-Funding Period will not exceed
120 days from the related Closing Date, (b)
that the additional Loans to be acquired
during the Pre-
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Funding Period will be subject to the same
representations and warranties as the Loans
included in the related Trust Fund on the
Closing Date (although additional criteria
may also be required to be satisfied, as
described in the related Prospectus
Supplement) and (c) that the Pre-Funded
Amount will not exceed 25% of the principal
amount of the Securities issued pursuant to a
particular offering.
Credit Enhancement........................... If stated in the Prospectus Supplement
relating to a Series, the Sponsor will
provide or obtain credit support described
below (collectively, "Credit Enhancement") in
favor of the Trustee on behalf of the Holders
of such Series. The Credit Enhancement will
support the payments on the Securities to the
extent and under the conditions specified in
such Prospectus Supplement. See "Credit
Enhancement". Credit Enhancement for a Series
may include one or more of the following
types of Credit Enhancement.
A. Subordinate Securities.................... Credit Enhancement for a Series may consist
of one or more Classes of Subordinate
Securities. The rights of Holders of such
Subordinate Securities to receive
distributions on any Distribution Date will
be subordinate in right and priority to the
rights of Holders of Senior Securities of the
Series, but only to the extent described in
the related Prospectus Supplement.
B. Insurance................................. Credit Enhancement for a Series may consist
of special hazard insurance policies,
bankruptcy bonds and other types of insurance
supporting payments on the Securities.
C. Reserve Funds............................. The Sponsor may deposit cash, a letter or
letters of credit, short-term investments, or
other instruments acceptable to each Rating
Agency in one or more reserve funds to be
established in the name of the Trustee (each,
a "Reserve Fund"), which will be used, as
specified in the related Prospectus
Supplement, by the Trustee to make required
payments of principal of or interest on the
Securities of such Series, to make adequate
provision for future payments on such
Securities or for any other purpose specified
in the Pooling and Servicing Agreement with
respect to such Series, to the extent that
funds are not otherwise available. In the
alternative or in addition to such deposit, a
Reserve Fund for a Series may be funded
through application of all or a portion of
the excess cash flow from the Mortgage Assets
for
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such Series, to the extent described in the
related Prospectus Supplement.
D. Minimum Principal Payment Agreement....... The Sponsor may enter into a minimum
principal payment agreement (the "Minimum
Principal Payment Agreement") with an entity
meeting the criteria of each Rating Agency,
pursuant to which such entity will provide
funds in the event that aggregate principal
payments on the Mortgage Assets for the
related Series are not sufficient to make
certain payments, as provided in the related
Prospectus Supplement. See "Credit
Enhancement--Minimum Principal Payment
Agreement".
E. Other Insurance, Guarantee and Similar
Instruments or Agreements.................. A Trust Fund may include a guaranteed
investment contract or reinvestment agreement
pursuant to which funds held in one or more
accounts will be invested at a specified
rate. If any Class of Securities has a
floating interest rate, or if any of the
Loans has a floating interest rate, the
related Trust Fund may include an interest
rate swap contract, an interest rate cap
agreement or similar contract providing
limited protection against interest rate
risks.
F. Deposit Agreement......................... The Sponsor and the Trustee may enter into a
guaranteed investment contract or an
investment agreement pursuant to which all or
a portion of amounts held in the Collection
Account, the Distribution Account or in any
Reserve Fund will be invested with the entity
specified in such Prospectus Supplement. The
Trustee will be entitled to withdraw amounts
so invested, plus interest at the related and
revised rate, in the manner specified in the
Prospectus Supplement. See "Credit
Enhancement--Deposit Agreement".
G. Cross Collateralization................... The source of payment for Securities of each
Series will be the assets of the related
Trust Fund only. However, a Trust Fund may
include the right to receive moneys from a
common pool of Credit Enhancement which may
be available for more than one Series of
Securities, such as a master reserve account
or a master insurance policy. In addition, a
Series of Securities may provide for excess
cash flow with respect to one Class of the
Series to be applied to shortfalls with
respect to another Class of the same Series.
See "Credit Enhancement--Cross
Collateralization".
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H. Overcollateralization..................... Credit Enhancement for a Series may include
over-collateralization--an excess of the
aggregate principal balance of the related
Loans, or a group thereof, over the principal
balance of the related Class of Securities.
Overcollateralization is achieved by the
application of certain "excess" portions of
interest payments on Loans to the payment of
principal of one or more Classes of
Securities. This feature may continue for the
life of the related Securities or may be
limited as set forth in the related
Prospectus Supplement.
Any form of credit enhancement will have
certain limitations and exclusions from
coverage thereunder, which will be described
in the related Prospectus Supplement. See
"Description of the Pooling and Servicing
Agreement--Credit Enhancements." To the
extent that shortfalls in the proceeds of the
Trust Funds occur which exceed the amount
covered by the Credit Enhancement or which
are not covered by the Credit Enhancement
available to a particular Series or Class,
Holders will bear their allocable share of
any deficiencies. See "Risk Factors--Limited
Assets" herein, and to the extent applicable,
in the related Prospectus Supplement.
Servicing.................................... The Servicer will be responsible for
servicing, managing and making collections on
the Loans for a Series. In addition, the
Servicer, if so specified in the related
Prospectus Supplement, will act as custodian
and will be responsible for maintaining
custody of the Loans and related
documentation on behalf of the Trustee.
Advances with respect to delinquent payments
of principal or interest on a Loan will be
made by the Servicer only to the extent
described in the related Prospectus
Supplement. Such advances will be intended to
provide liquidity only and not credit support
for the related Securities. In performing
these functions, the Servicer will exercise
the same degree of skill and care that it
customarily exercises with respect to similar
receivables or Loans owned or serviced by it.
Under certain limited circumstances, the
Servicer may resign or be removed, in which
event either the Trustee or a third-party
servicer will be appointed as successor
servicer. The Servicer will receive a
periodic fee as servicing compensation (the
"Servicing Fee") and may, as specified herein
and in the related Prospectus Supplement,
receive certain additional compensation. See
"Servicing of
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Loans--Servicing Compensation and Payment of
Expenses".
Certain Federal Income Tax Considerations.... Securities of each Series offered hereby
will, for federal income tax purposes,
constitute either (i) interests ("Grantor
Trust Securities") in a trust treated as a
grantor trust under applicable provisions of
the Code, (ii), "regular interests" ("REMIC
Regular Securities") or "residual interests"
("REMIC Residual Securities") in a trust
treated as a REMIC (or, in certain instances,
containing one or more REMIC's) under
Sections 860A through 860G of the Code,
(iii) debt issued by a trust ("Debt
Securities") or (iv) interests in a trust
which is treated as a partnership
("Partnership Interests"). Investors are
advised to consult their tax advisors with
respect to individual tax advice regarding
the tax implications of an investment on any
securities, and to review "Federal Income Tax
Considerations" herein and in the related
Prospectus Supplement. The information set
forth under such caption describes the
material tax aspects of the transactions
described herein, but is of general
applicability and may not apply to any
individual taxpayer.
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. See
"Erisa Considerations".
Legal Investment............................. Securities of each Series offered by this
Prospectus and the related Prospectus
Supplement may or may not constitute
"mortgage related securities" under the
Secondary Mortgage Market Credit Enhancement
Act of 1984 ("SMMEA"). Whether or not such
Securities are "mortgage related securities"
will be set forth in the related Prospectus
Supplement. Investors whose investment
authority is subject to legal restrictions
should consult their own legal advisors to
determine whether and to what extent the
Securities constitute legal investments for
them. See "Legal Investment".
Use of Proceeds.............................. The Sponsor will use the net proceeds from
the sale of each Series for one or more of
the following purposes: (i) to purchase the
related
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Loans, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such
Loans, (iii) to establish any Reserve Funds
described in the related Prospectus
Supplement and (iv) to pay costs of
structuring and issuing such Securities,
including the costs of obtaining Credit
Enhancement, if any. See "Use of Proceeds".
Ratings...................................... It will be a requirement for issuance of any
Series that the Securities offered by this
Prospectus and the related Prospectus
Supplement be rated by each Rating Agency in
one of its four highest applicable rating
categories. The rating or ratings applicable
to Securities of each Series offered hereby
and by the related Prospectus Supplement will
be as set forth in the related Prospectus
Supplement. A securities rating should be
evaluated independently of similar ratings on
different types of securities. A securities
rating does not address the effect that the
rate of prepayments on Loans for a Series may
have on the yield to investors in the
Securities of such Series. See "Risk
Factors--Rating of Securities".
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RISK FACTORS
INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE FOLLOWING FACTORS IN
CONNECTION WITH THE PURCHASE OF THE SECURITIES.
AN INVESTMENT IN ANY SECURITY MAY BE AN ILLIQUID INVESTMENT, WHICH MAY
RESULT IN THE HOLDER HOLDING SUCH INVESTMENT TO MATURITY. 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 Holders with liquidity of investment or will continue for
the life of the Securities of such Series. The underwriters specified in the
related Prospectus Supplement may make a secondary market in the Securities, but
have no obligation to do so.
THE ASSETS OF EACH TRUST FUND, AS WELL AS ANY APPLICABLE CREDIT ENHANCEMENT,
WILL BE LIMITED AND, IF SUCH ASSETS AND/OR CREDIT ENHANCEMENT BECOMES
INSUFFICIENT TO SERVICE THE RELATED SECURITIES, LOSSES MAY RESULT. The
Securities of a Series will be payable solely from the assets of the Trust Fund
for such Securities. There is no assurance that the market value of the Loans or
any other assets for a Series will at any time be equal to or greater than the
aggregate principal amount of the Securities of such Series then outstanding,
plus accrued interest thereon. Consequently, Holders of Securities of each
Series must rely solely upon payments with respect to the Loans and the other
assets constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any Credit Enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
The only obligations, if any, of the Sponsor with respect to the Securities
of any Series will be pursuant to certain representations and warranties. See
"The Pooling and Servicing Agreement--Assignment of Loans".
Although any Credit Enhancement for a Series of Securities will be intended
to reduce the risk of delinquent payments or losses to Holders of Securities
entitled to the benefit thereof, the amount of such Credit Enhancement may be
limited, as set forth in the related Prospectus Supplement, and will decline and
could be depleted under certain circumstances prior to the payment in full of
the related Series of Securities, and as a result Holders may suffer losses. See
"Credit Enhancement".
THE SECURITIES DO NOT HAVE SPECIFIED PAYMENT OR DEBT SERVICE SCHEDULES, AND
PAYMENTS ON THE SECURITIES ARE SUBJECT TO THE RATE OF PAYMENT ON THE UNDERLYING
LOANS. The yield to maturity of the Securities of each Series will depend on
the rate of payment of principal (including prepayments, liquidations due to
defaults, and repurchases due to conversion of adjustable-rate mortgage loans
("ARM Loans") to fixed-rate loans or breaches of representations and warranties)
on the Loans and the price paid by Holders. Such yield may be adversely affected
by a higher or lower than anticipated rate of prepayments on the related Loans.
The yield to maturity on Principal Only or Interest Only Securities or
Securities purchased at premiums or discounted to par will be extremely
sensitive to the rate of prepayments on the related Loans. In addition, the
yield to maturity on certain other types of classes of Securities may be
relatively more sensitive to the rate of prepayment on the related Loans than
other Classes of Securities.
The Loans may be prepayable in full or in part at any time; however, a
prepayment penalty or premium may be imposed in connection therewith. The rate
of prepayments of the Loans cannot be predicted and is influenced by a wide
variety of economic, social, and other factors, including prevailing mortgage
market interest rates, the availability of alternative financing, local and
regional economic conditions and homeowner mobility. Therefore, no assurance can
be given as to the level of prepayments that a Trust Fund will experience.
Prepayments may result from mandatory prepayments relating to unused moneys
held in Pre-Funding Accounts, if any, voluntary early payments by borrowers
(including payments in connection with refinancings of related senior liens),
sales of Properties subject to "due-on-sale" provisions and
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liquidations due to default, as well as the receipt of proceeds from physical
damage, credit life and disability insurance policies. In addition, repurchases
or purchases of Loans from a Trust Fund or substitution adjustments required to
be made under the related Pooling and Servicing Agreement will have the same
effect on the Holders as a prepayment of such Loans. The Loans may contain
"due-on-sale" provisions, and the Servicer will be required to enforce such
provisions unless (i) the "due-on-sale" clause, in the reasonable belief of the
Servicer, is not enforceable under applicable law or (ii) the Servicer
reasonably believes that to permit an assumption of the Loans would not
materially and adversely affect the interests of the Holders or of the related
Credit Enhancer, if any.
NONCONFORMING CREDIT MORTGAGE LOANS MAY EXPERIENCE HIGHER RATES OF
DELINQUENCIES AND LOSSES. In general, the Sponsor originates and acquires
mortgage loans which do not meet the credit criteria required by the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), commonly referred to as "nonconforming credit" mortgage
loans. Such mortgage loans tend to exhibit higher levels of delinquency,
foreclosure and loss than mortgage loans which conform to the requirements of
FNMA and FHLMC. The interest rates and the loan-to-value ratios for such
mortgage loans are established at levels designed to compensate for and offset
the increased delinquency, foreclosure and loss risks presented by such loans,
and rating agencies take such increased risks into account in assigning ratings
to classes of securities which represent interests in such loans. No assurances
can be given, however, that the Loans in any Trust Fund will not exceed expected
delinquency, foreclosure and loss levels and adversely affect the value of the
related Securities and the interests of the Holders thereof.
JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND LOSSES. To
the extent Mortgages are junior liens subordinate to the rights of the mortgagee
under the related senior mortgage or mortgages, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of such junior mortgage only to the extent that the
claims of such senior mortgagees have been satisfied in full, including any
related foreclosure costs. In addition, a junior mortgagee may not foreclose on
the Property securing a junior mortgage unless it forecloses subject to the
senior mortgages, in which case it must either pay the entire amount due on the
senior mortgages to the senior mortgagees at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgages in the event
the mortgagor is in default thereunder. The Trust Fund will not have any source
of funds to satisfy the senior mortgages or make payments due to the senior
mortgagees.
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES. There are several
factors that could adversely affect the value of Properties such that the
outstanding balance of the related Loan, together with any senior financing on
the Properties, would equal or exceed the value of the Properties. Among the
factors that could adversely affect the value of the Properties are an overall
decline in the residential real estate market in the areas in which the
Properties are located or a decline in the general condition of the Properties
as a result of failure of borrowers to maintain adequately the Properties or of
natural disasters that are not necessarily covered by insurance, such as
earthquakes and floods. Any such decline could extinguish the value of a junior
interest in Property before having any effect on the related senior interest
therein. If such a decline occurs, the actual rates of delinquencies,
foreclosure and losses on the junior Loans could be higher than those currently
experienced in the mortgage lending industry with respect to the same types of
loans.
"BALLOON" LOANS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND
LOSSES. Certain of the Loans in a Trust Fund may constitute "balloon" Loans,
Loans originated with a stated maturity scheduled to occur prior to the
expiration of the corresponding amortization schedule. Upon the maturity of a
"balloon" Loan, the Mortgagor will be required to make a "balloon" payment that
will be significantly larger than such Mortgagor's previous Scheduled Payments.
The ability of such a Mortgagor to repay a "balloon" Loan at maturity frequently
will depend on such Mortgagor's ability to refinance the Loan. The ability
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of a Mortgagor to refinance such a Loan will be affected by a number of factors,
including the level of available mortgage rates at the time, the value of the
related Property, the Mortgagor's equity in the related Property, the financial
condition of the Mortgagor, the tax laws and general economic conditions at the
time. A high interest rate environment may make it more difficult for the
Mortgagor to accomplish a refinancing and may result in an increased rate of
delinquencies, foreclosures and/or losses. None of the Sponsor, the Servicer,
any Subservicer or any Trustee will be obligated to provide funds to refinance
any Loan, including "balloon" Loans.
ADJUSTABLE-RATE LOANS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND
LOSSES. In general, the Sponsor's underwriting guidelines provide for a
prospective borrower's repayment ability to be evaluated based on the initial
level of monthly payment required by the mortgage loan for which the borrower is
applying. However, with respect to certain types of Loans, including Loans as to
which the Loan Rate may adjust in accordance with movements in an index, the
Scheduled Payment may increase beyond the initial level of the Scheduled
Payment. To the extent the income level of the related Mortgagor may not be
sufficient to enable the Mortgagor to meet higher Scheduled Payments, the risk
of delinquency, foreclosure and loss may be increased with respect to such
Loans. In addition, certain types of these Loans may provide for "negative
amortization"--deferral of the payment of a portion of currently accrued
interest and the addition of such deferred amount to the principal balance of
the Loan. To the extent such "negative amortization" results in total liens
against a Property in excess of the value of the Property, the risk of
delinquency, foreclosure and loss with respect to the related Loan may be
further increased.
NONOWNER-OCCUPIED LOANS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND
LOSSES. A Loan included in a Trust Fund may be secured by a Property which is
not the primary residence of the related Mortgagor. Because the Mortgagor on
such a "nonowner-occupied" Loan may have less incentive to avoid foreclosure
than Mortgagors under Loans secured by primary residences, nonowner-occupied
Loans may experience higher rates of delinquencies and losses than
owner-occupied Loans.
BANKRUPTCY OF MORTGAGORS MAY LEAD TO HIGHER LEVELS OF LOSSES. General
economic conditions may have an impact on the ability of Mortgagors to repay
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by Mortgagors. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust Fund could
experience a loss with respect to the related Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Loan or permanently
reduce the principal balance of such Loan thereby either delaying or permanently
limiting the amount received by the Trust Fund with respect to such Loan.
Moreover, in the event a bankruptcy court prevents the transfer of the related
Property to the Trust Fund, any remaining balance on such Loan may not be
recoverable. See "Certain Legal Aspects of Loans".
FORECLOSURE OF PROPERTIES MAY BE SUBJECT TO SUBSTANTIAL DELAY, RESULTING IN
LONGER MATURITY OF THE SECURITIES, AS WELL AS HIGHER LOSSES. Substantial delays
can be encountered in connection with the liquidation of defaulted Loans and
corresponding delays in the receipt of related proceeds by the related Holders
could occur. An action to foreclose on a Property securing a Loan is regulated
by state statutes, rules and judicial decisions and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Property or to obtain Liquidation Proceeds sufficient
to repay all amounts due on the related Loan. The Servicer will be entitled to
deduct from Liquidation Proceeds all expenses reasonably incurred in attempting
to recover amounts due on the related liquidated Loan and not yet repaid,
including payments to prior lienholders, accrued Servicing Fees, legal fees and
costs of legal action, real estate taxes, and
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maintenance and preservation expenses. In the event that any Property fails to
provide adequate security for the related Loan and insufficient funds are
available from any applicable Credit Enhancement, related Holders could
experience a loss on their investment. See "Certain Legal Aspects of Loans".
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a larger principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the smaller loan than would be the case with a
larger loan. To the extent the average outstanding principal balances of the
Loans are small relative to the size of the loans in a typical pool of first
mortgages, realizations net of liquidation expenses on defaulted Loans may also
be smaller as a percentage of the principal amount of the Loans than would such
net realizations in the case of a typical pool of first mortgage loans.
ENVIRONMENTAL RISKS. Real property pledged as security to a lender may be
subject to certain environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the property to assure
the costs of clean-up. In several states, such a lien has priority over the lien
of an existing mortgage or owner's interest against such property. In addition,
under the laws of some states and under the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 ("CERCLA"), a lender may be
liable, as an "owner" or "operator", for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender also risks such liability
on foreclosure of a Property.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS, MAY LIMIT
ENFORCEMENT OF THE LOANS AGAINST THE RELATED MORTGAGORS. Applicable state laws
generally regulate interest rates and other charges and require certain
disclosures. 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 Loans. 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 Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner of
the Loan to damages and administrative enforcement.
The Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated thereunder
and the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require, among other things, certain disclosures to have been
made to a Mortgagor regarding the terms of the related Loan;
(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 a Mortgagors' 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
Loans and in addition could subject the Trust Fund to damages and administrative
enforcement. The Loans may be subject to the Home Ownership and
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Equity Protection Act of 1994 (the "Act") which amended the Truth in Lending Act
as it applies to mortgages subject to the Act. The Act requires certain
additional disclosures, specifies the timing of such disclosures and limits or
prohibits inclusion of certain provisions in mortgages subject to the Act. The
Act also provides that any purchaser or assignee of a mortgage covered by the
Act is subject to all of the claims and defenses which the borrower could assert
against the original lender. The maximum damages that may be recovered under the
Act from an assignee is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the Loan. If the Trust Fund
includes Loans subject to the Act, it will be subject to all of the claims and
defenses which the borrower could assert against the Sponsor or a Seller. Any
violation of the Act which would result in such liability would be a breach of
the Sponsor's or a Seller's representations and warranties, and the Sponsor or a
Seller would be obligated to cure, repurchase or, if permitted by the Agreement,
substitute for the Loan in question. See "Certain Legal Aspects of Loans".
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER
LOSSES, IF PARTICULAR REGIONS EXPERIENCE DOWNTURNS. Certain geographic regions
from time to time will experience weaker regional economic conditions and
housing markets than will other regions, and, consequently, will experience
higher rates of delinquency, foreclosure and loss on mortgage loans generally.
The Loans underlying certain series of Securities may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Statistical information with respect to the
geographic concentration of Properties relating to a particular Series will be
specified in the related Prospectus Supplement.
BANKRUPTCY OF THE SPONSOR MAY ADVERSELY AFFECT THE INTERESTS OF HOLDERS. In
the event of the bankruptcy of the Sponsor at a time when it or any affiliate
thereof holds a Security, a trustee in bankruptcy of the Sponsor or such
affiliate, or its creditors could attempt to recharacterize the sale of the
Loans to the related Trust Fund as a borrowing by the Sponsor or such affiliate,
with the result, if such recharacterization is upheld, that the related Holders
would be deemed creditors of the Sponsor or such affiliate, secured by a pledge
of the Loans. If such an attempt were successful, it could prevent timely
payments of amounts due to the Trust Fund.
CERTAIN LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES MAY REDUCE THE
AMOUNTS PAYABLE ON THE LOANS AND LIMIT THE ENFORCEMENT OF THE LOANS AGAINST
CERTAIN MORTGAGORS. 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 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 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 Servicer to collect full amounts of interest on
certain of the Loans. In addition, the Relief Act imposes limitations that would
impair the ability of the Servicer to foreclose on an affected Loan during the
Mortgagor's period of
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active duty status. Thus, in the event that such a Loan goes into default, there
may be delays and losses occasioned by the inability to realize upon the
Property in a timely fashion.
UNCERTAINTY REGARDING ORIGINAL ISSUE DISCOUNT. Some or all classes of the
Securities may be issued with original issue discount, which generally will
result in recognition of some taxable income in advance of the receipt of the
cash attributable to such income. A Security will be considered to be issued
with original issue discount equal to the excess, if any, of its "stated
redemption price at maturity" over its "issue price." The "issue price" of a
Security is the initial offering price to the public (excluding bond houses and
brokers) at which a substantial number of the Securities was sold. See "Federal
Income Tax Considerations--Discount and Premium--Original Issue Discount."
RATINGS OF THE SECURITIES MAY BE DEPENDENT ON THE RELATED CREDIT ENHANCER,
AND FURTHER, MAY BE REDUCED OR WITHDRAWN AT ANY TIME; THERE IS NO OBLIGATION TO
MAINTAIN ANY SPECIFIC RATINGS. It will be a condition to the issuance of a
Series of Securities that they be rated in one of the four highest rating
categories by each Rating Agency. Any such rating would be based on, among other
things, the adequacy of the value of the Loans and any Credit Enhancement with
respect to such Series. Such rating should not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. There is also no assurance that any
such rating will remain in effect for any given period of time or may not be
lowered or withdrawn entirely by the related Rating Agency if in its judgment
circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Loans, such
rating might also be lowered or withdrawn, among other reasons, because of an
adverse change in the financial or other condition of an Credit Enhancer or a
change in the rating of such Credit Enhancer's long term debt.
LOSSES MAY BE GREATER IN THE EVENT OF AN ACCELERATION. Upon an event of
default under the Pooling and Servicing Agreement for a Series of Securities and
a sale of the assets in the related Trust Fund, the Trustee, the Servicer, any
Credit Enhancer and any other service provider specified in the related
Prospectus Supplement generally will be entitled to receive the proceeds of any
such sale to the extent of unpaid fees and other amounts owing to such persons
under the related Agreement prior to distributions to Holders of Securities.
Upon any such sale, the proceeds thereof may be insufficient to pay in full the
principal of and interest on the Securities of such Series.
CERTAIN RISKS RELATING TO DIFFERING UNDERWRITING CRITERIA. The Loans
included in a particular Trust Fund may have been purchased by the Sponsor from
one or more originators, and may, to the extent described in the related
Prospectus Supplement, have been originated using underwriting criteria
different from that of the Sponsor. However, the Loans included in a particular
Trust Fund will satisfy the criteria set forth in the related Prospectus
Supplement.
LACK OF HISTORICAL PREPAYMENT RATE INFORMATION MAY CREATE UNCERTAINTY AS TO
YIELDS AND MATURITIES. The Sponsor has previously sold its Loans and does not
have any information available to it regarding its prepayment experience. As a
result, its future prepayment rates may be relatively less predictable than
those of other mortgage-backed securities issuers, which may have more
information.
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DESCRIPTION OF THE SECURITIES
GENERAL
The following summaries describe certain features which will generally be
applicable to most Series of Securities. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the Pooling and Servicing Agreement and the Prospectus
Supplement relating to each Series of Securities.
Each Series of Securities will consist of one or more Classes of Securities,
one or more of which may be Compound Interest Securities, Variable Interest
Securities, PAC Securities, Zero Coupon Securities, Principal Only Securities,
Interest Only Securities or Participating Securities. A Series may also include
one or more Classes of Subordinate Securities. The Securities of each Series
will be issued only in fully registered form, without coupons, in the authorized
denominations for each Class specified in the related Prospectus Supplement.
Upon satisfaction of the conditions, if any, applicable to a Class of a Series,
as described in the related Prospectus Supplement, the transfer of the
Securities may be registered and the Securities may be exchanged at the office
of the Trustee specified in the Prospectus Supplement without the payment of any
service charge other than any tax or governmental charge payable in connection
with such registration of transfer or exchange. If specified in the related
Prospectus Supplement, one or more Classes of a Series may be available in
book-entry form only. See "--Book-Entry Registration" below.
Payments of principal of and interest on a Series of Securities will be made
on the Distribution Dates specified in the Prospectus Supplement relating to
such Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the Holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. All payments with respect to the Mortgage Assets for a
Series, together with reinvestment income thereon, amounts withdrawn from any
Reserve Fund, and amounts available pursuant to any other Credit Enhancement
will be deposited directly into the Collection Account, net of certain amounts
payable to the related Servicer and any other person specified in the Prospectus
Supplement, and will thereafter be available to make payments on Securities of
such Series on the next Distribution Date, as the case may be. See "The Trust
Funds--Collection and Distribution Accounts".
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest from the date and at the rate per annum specified, or
calculated in the method described, in the related Prospectus Supplement.
Interest on such Securities of a Series will be payable on the Distribution Date
specified in the related Prospectus Supplement. The rate of interest on
Securities of a Series may be variable or may change with changes in the annual
percentage rates of the Loans included in the related Trust Fund and/or as
prepayments occur with respect to such Loans. Principal Only Securities may not
be entitled to receive any interest distributions or may be entitled to receive
only nominal
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interest distributions. Any interest on Zero Coupon Securities that is not paid
on the related Distribution Date will accrue and be added to the principal
thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes is
the date no later than which principal thereof will be fully paid and, with
respect to each Class of a Series of Certificates, will be the date on which the
entire aggregate principal balance of such Class is expected to be reduced to
zero, in each case calculated on the basis of the assumptions applicable to such
Series described in the related Prospectus Supplement. The Final Scheduled
Distribution Date for each Class of a Series will be specified in the related
Prospectus Supplement. Since payments on the Loans will be used to make
distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date. Furthermore, with respect to a Series of
Certificates, as a result of delinquencies, defaults and liquidations of the
Loans in the Trust Fund, the actual final Distribution Date of any such Class
may occur later than its Final Scheduled Distribution Date. No assurance can be
given as to the actual prepayment experience with respect to a Series. See
"Yield and Maturity Considerations".
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Sponsor, the Servicer, or another entity designated in the related
Prospectus Supplement may, at its option, cause an early termination of a Trust
Fund by repurchasing all of the Loans and/or Properties from such Trust Fund on
or after a date specified in the related Prospectus Supplement, or on or after
such time as the aggregate outstanding principal amount of the Certificates or
Loans, is less than the amount or percentage specified in the related Prospectus
Supplement. Notice of such redemption, purchase or termination must be given by
the Sponsor or the Trustee prior to the related date. The redemption, purchase
or repurchase price will be set forth in the related Prospectus Supplement. If
specified in the related Prospectus Supplement, in the event that a REMIC
election has been made, the Trustee shall receive a satisfactory opinion of
counsel that the optional redemption, purchase or termination will be conducted
so as to constitute a "qualified liquidation" under Section 860F of the Code.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
"Weighted average life" refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
Securities of a Class will be influenced by the rate at which the amount
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financed under the Loans included in the Trust Fund for a Series is paid, which
may be in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
included in the related Trust Fund are made at rates corresponding to various
percentages of the prepayment standard or model specified in such Prospectus
Supplement.
There is, however, no assurance that prepayment of the Loans included in the
related Trust Fund will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans is influenced by a variety of economic,
demographic, geographic, legal, tax, social and other factors.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Loans for a
Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans for a Series may have different
interest rates. In addition, the weighted average life of the Securities may be
affected by the varying maturities of the Loans. If any Loans for a Series have
actual terms-to-stated maturity of less than those assumed in calculating the
Final Scheduled Distribution Date of the related Securities, one or more Classes
of the Series may be fully paid prior to their respective Final Scheduled
Distribution Dates, even in the absence of prepayments. See "Yield and Maturity
Considerations".
The Sponsor, prior to 1996, engaged in whole-loan sales of its mortgage
loans on a servicing-released basis (i.e., the purchaser acts as the servicer).
Consequently, the Sponsor has limited historical information available to it
with respect to the prepayment experience of its mortgage loans.
USE OF NOTIONAL AMOUNTS
If so provided in the related Prospectus Supplement, interest on certain
Classes of Interest Only Securities may be payable based on a schedule of
Notional Amounts rather than the actual aggregate outstanding principal balances
of the related Loans. The Notional Amounts contained in such a schedule would
not be affected by prepayments on the related Loans, thereby reducing the
disproportionate impact which prepayments have on the yield of Interest Only
Securities relative to the yields of other types of Securities which are
entitled to payments of principal. See "Yield and Maturity Considerations".
The related Prospectus Supplement will set forth the Notional Amount
schedule, if any, and will describe fee prepayment spreads used in constructing
such schedule.
BOOK-ENTRY REGISTRATION
As may be described in the related Prospectus Supplement, investors in a
given Series may hold their Securities through DTC (in the United States) or
CEDEL or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations that are participants in such systems.
Cede, as nominee for DTC, will hold the global Securities in respect of a
given series. CEDEL and Euroclear will hold omnibus positions on behalf of the
CEDEL Participants (as defined below) and the Euroclear Participants (as defined
below) (collectively, the "Participants"), respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
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respective depositaries (collectively, the "Depositaries") which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of notes or certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations. Indirect access to the DTC system also is available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable 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 its 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 its 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 Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant 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 settlement
in DTC.
The investors in a given Series that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Securities of such Series may do so only through
Participants and Indirect Participants. In addition, investors in a given Series
will receive all distributions of principal and interest through the
Participants who in turn will receive them from DTC. Under a book-entry format,
investors in a given Series may experience some delay in their receipt of
payments, since such payments will be forwarded by the applicable Trustee to
Cede, as nominee for DTC. DTC will forward such payments to its Participants,
which thereafter will forward them to Indirect Participants or such investors.
It is anticipated that the only "Holder" in respect of any Series will be Cede,
as nominee of DTC. Investors in a given Series will not be recognized as Holders
of such Series, and such investors will be permitted to exercise the rights of
Holders of such Series only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities of a given Series among Participants on whose behalf it acts with
respect to such Securities and to receive and transmit distributions of
principal of, and interest on, such Securities. Participants and Indirect
Participants with
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which the investors in a given Series have accounts with respect to such
Securities similarly are required to make book-entry transfers and receive and
transmit such payments on behalf of their respective investors in such Series.
Accordingly, although such investors will not possess physical certificates, the
Rules provide a mechanism by which Participants will receive payments and will
be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of investors in a
given Series to pledge Securities of such Series to persons or entities that do
not participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC will advise the Trustee in respect of each Series that it will take any
action permitted to be taken by investors in the related Series only at the
direction of one or more Participants to whose accounts with DTC the Securities
of such Series are credited. DTC may take conflicting actions with respect to
other undivided interests to the extent that such actions are taken on behalf of
Participants whose holdings include such undivided interests.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating 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 the
Euroclear System ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 28 currencies, including United
States dollars. The Euroclear System 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 Morgan Guaranty Trust Company of
New York, Brussels, Belgium office, under contract with Euroclear Clearance
System, S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the "Euroclear Operator" (as defined below), and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for the Euroclear System on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters for a Series. Indirect access to the Euroclear System 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.
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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 the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System 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 relationship with persons holding through Euroclear Participants.
Except as required by law, the Trustee in respect of a Series will not have
any liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the related Securities held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
As may be described in the related Prospectus Supplement, the Securities may
be issued in fully registered, certificated form ("Definitive Securities") to
the Holders of a given Series or their nominees, rather than to DTC or its
nominee, only if (i) the Trustee in respect of the related Series advises in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to such Securities and such Trustee
is unable to locate a qualified successor, (ii) such Trustee, at its option,
elects to terminate the book-entry-system through DTC or (iii) after the
occurrence of an "Event of Default" under the related Pooling and Servicing
Agreement, Holders representing at least a majority of the outstanding principal
amount of such Securities advise the applicable Trustee through DTC in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in such Holders' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee will be required to notify all such Holders
through Participants of the availability of Definitive Securities. Upon
surrender by DTC of the definitive certificates representing such Securities and
receipt of instructions for re-registration, the applicable Trustee will reissue
such Securities as Definitive Securities to such Holders.
Distributions of principal of, and interest on, such Securities will
thereafter be made by the applicable Trustee in accordance with the procedures
set forth in the related Indenture or Trust Agreement directly to Holders of
Definitive Securities in whose names the Definitive Securities were registered
at the close of business on the applicable Record Date specified for such
Securities in the related Prospectus Supplement. Such distributions will be made
by check mailed to the address of such Holder as it appears on the register
maintained by the applicable Trustee. The final payment on any such Security,
however, will be made only upon presentation and surrender of such Security at
the office or agency specified in the notice of final distribution to the
applicable Holders.
Definitive Securities in respect of a given Series of Securities will be
transferable and exchangeable at the offices of the applicable Trustee or of a
certificate registrar named in a notice delivered to Holders of such Definitive
Securities. No service charge will be imposed for any registration of transfer
or exchange, but the applicable Trustee may require payment of a sum sufficient
to cover any tax or other governmental charge imposed in connection therewith.
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THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets originated by the Sponsor or acquired from affiliated or
unaffiliated institutions composed of (i) Loans, (ii) amounts available from the
reinvestment of payments on such Loans, (iii) any Credit Enhancement, (iv) any
Property that secured a Loan but which is acquired by foreclosure or deed in
lieu of foreclosure or repossession.
The Securities will be nonrecourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Sponsor or the related Trust Fund
not pledged to secure such Notes.
The Loans for a Series will be originated by the Sponsor or acquired by the
Sponsor in the open market or in privately negotiated transactions, which may
include transactions with affiliates and will be transferred by the Sponsor to
the Trust Fund. Loans relating to a Series will be serviced by the Servicer
pursuant to the related Pooling and Servicing Agreement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Loans and other assets contemplated herein and
in the related Prospectus Supplement and the proceeds thereof, issuing
Securities and making payments and distributions thereon and certain related
activities. No Trust Fund is expected to have any source of capital other than
its assets and any related Credit Enhancement.
Loans included in the Trust Fund for a Series may consist of any combination
of Mortgage Loans and Contracts, to the extent and as specified in the related
Prospectus Supplement.
THE LOANS
MORTGAGE LOANS The Loans for a Series may consist, in whole or in part, of
closed-end mortgage loans, including closed-end home equity loans (the
"Closed-End Loans" or the "Mortgage Loans") secured by mortgages on Single
Family Properties and small mixed-use properties, which mortgages which may be
subordinated to other mortgages on the same Mortgaged Property. The Mortgage
Loans may have fixed interest rates or adjustable interest rates and may provide
for other payment characteristics as described below and in the related
Prospectus Supplement.
The full principal amount of a Closed-End Loan is advanced at origination of
the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize such loan at its stated
maturity. Interest on each Closed-End Loan is calculated on the basis of the
outstanding principal balance of such loan multiplied by the Loan Rate thereon
and further multiplied by a fraction, the numerator of which is the number of
days in the period elapsed since the preceding payment of interest was made and
the denominator is the number of days in the annual period for which interest
accrues on such loan. Under certain circumstances, under a Closed-End Loan, a
borrower may choose an interest only payment option and is obligated to pay only
the amount of interest which accrues on the loan during the billing cycle. An
interest only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the loan.
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The Mortgaged Properties will include primarily Single Family Property
(i.e., one- to four-family residential housing, including Condominium Units and
Cooperative Dwellings). The Mortgaged Properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least five years
(unless otherwise provided in the related Prospectus Supplement) greater than
the term of the related Loan. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Loans secured by Mortgaged Properties
that are owner-occupied will be disclosed in the related Prospectus Supplement.
Such statistic will be based on either (i) the making of a representation by the
Mortgagor at origination of the Loan either that the underlying Mortgaged
Property will be used by the Mortgagor for a period of at least six months every
year or that the Mortgagor intends to use the Mortgaged Property as a primary
residence, or (ii) a finding that the address of the underlying Mortgaged
Property is the Mortgagor's mailing address as reflected in the Servicer's
records. To the extent specified in the related Prospectus Supplement, the
Mortgaged Properties may include nonowner-occupied investment properties and
vacation and second homes.
The initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
HOME IMPROVEMENT CONTRACTS The Loans for a Series may consist, in whole or
part, of home improvement installment sales contracts and installment loan
agreements (the "Home Improvement Contracts") originated by a home improvement
contractor in the ordinary course of business. A Home Improvement Contract will
be secured by a Mortgage, primarily on Single Family Properties, which will
generally be subordinate to other mortgages on the same Mortgaged Property or by
a purchase money security interest in the home improvements (the "Home
Improvements") financed thereby.
The Home Improvements securing the Home Improvement Contracts include, but
are not limited to, replacement windows, house siding, new roofs, swimming
pools, satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
ADDITIONAL INFORMATION The selection criteria which shall apply with
respect to the Loans relating to a particular Series, including, but not limited
to, the Combined Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable,
original terms-to-maturity and delinquency information, will be specified in the
related Prospectus Supplement.
The related Prospectus Supplement for each Series will provide information
with respect to the related Loans as of the Cut-off Date, including, among other
things, and to the extent relevant (a) the aggregate unpaid principal balance of
the Loans (or the aggregate unpaid principal balance included in the Trust Fund
for the related Series); (b) the range and weighted average Loan Rate on the
Loans, and, in the case of adjustable-rate Loans, the range and weighted average
of the current Loan Rates and the Lifetime Rate Caps, if any; (c) the range and
average outstanding principal balance of the Loans; (d) the weighted average
original and remaining term-to-stated maturity of the Loans and the range of
original and remaining terms-to-stated maturity, if applicable; (e) the range
and weighted average of Combined Loan-to-Value Ratios or Loan-to-Value Ratios
for the Loans, as applicable; (f) the percentage (by outstanding principal
balance as of the Cut-off Date) of Loans that accrue
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interest at adjustable or fixed interest rates; (g) any special hazard insurance
policy or bankruptcy bond or other credit enhancement relating to the Loans;
(h) the percentage (by principal balance as of the Cut-off Date) of Loans that
are secured by Mortgaged Properties or Home Improvements; (i) the geographic
distribution of any Mortgaged Properties securing the Loans; (j) the percentage
of Loans (by principal balance as of the Cut-off Date) that are secured by
Single Family Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (k) the lien priority
of the Loans; and (l) the delinquency status and year of origination of the
Loans. The related Prospectus Supplement will also specify any other limitations
on the types or characteristics of Loans for a Series.
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CREDIT ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Sponsor's assignment of the related Loans to the
Trustee, the Sponsor will obtain an irrevocable letter of credit, surety bond or
insurance policy, issue Subordinate Securities or obtain any other form of
credit enhancement or combination thereof described below (collectively, "Credit
Enhancement") in favor of the Trustee on behalf of the Holders of the related
Series or designated Classes of such Series from an institution or by other
means acceptable to each Rating Agency. The Credit Enhancement will support the
payment of principal and interest on the Securities, and may be applied for
certain other purposes to the extent and under the conditions set forth in such
Prospectus Supplement. Credit Enhancement for a Series may include one or more
of the following forms. Any of such Credit Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund.
SUBORDINATE SECURITIES
Credit Enhancement for a Series may consist of one or more Classes of
Subordinate Securities. The rights of Holders of such Subordinate Securities to
receive distributions on any Distribution Date will be subordinate in right and
priority to the rights of Holders of Senior Securities of the Series, but only
to the extent described in the related Prospectus Supplement.
INSURANCE
Credit Enhancement for a Series may consist of special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the Loans,
as described below and in the related Prospectus Supplement.
POOL INSURANCE POLICY The Sponsor may obtain an insurance policy for
certain of the Securities issued with respect to the related Trust Fund. The
amount and terms of any such coverage will be set forth in the related
Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICY Although the terms of such policies vary to
some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such Property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard 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 such Property to the special hazard insurer, the unpaid
principal balance of such 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 by the Servicer 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 special hazard insurance policy will be reduced by such amount less
any net proceeds from the sale of such Property. Any amount paid as the cost of
repair of such Property will reduce coverage by such amount. Special hazard
insurance policies typically do 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 in a federally designated flood area), chemical
contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in
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respect of such Loan under any pool insurance policy. Therefore, so long as such
pool insurance policy remains in effect, the payment by the special hazard
insurer of the cost of repair or of the unpaid principal balance of the related
Loan plus accrued interest and certain expenses will not affect the total
insurance proceeds paid to Holders of the Securities, but will affect the
relative amounts of coverage remaining under the special hazard insurance policy
and 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 Loan at an
amount less than the then outstanding principal balance of such Loan. The amount
of the secured debt could be reduced to such value, and the holder of such Loan
thus would become an unsecured creditor to the extent the outstanding principal
balance of such Loan exceeds the value so assigned to the Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See "Certain Legal Aspects of
Loans". The Sponsor or other entity specified in the related Prospectus
Supplement may obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") covering losses resulting from 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 Loan or a reduction by such court of the
principal amount of a 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 for all Loans in the Trust Fund for such
Series.
RESERVE FUNDS
The Sponsor may deposit into one or more funds to be established with the
Trustee as part of the Trust Fund for such Series or for the benefit of any
Credit Enhancer with respect to such Series (the "Reserve Funds") cash, a letter
or letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of each Rating Agency in the amount specified
in such Prospectus Supplement. In the alternative or in addition to such
deposit, a Reserve Fund for a Series may be funded over time through application
of all or a portion of the excess cash flow from the Mortgage Assets for such
Series, to the extent described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Credit Enhancer or for any other purpose, in the manner and to the extent
specified in the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
The Sponsor may enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of each Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Loans for such
Series are not sufficient to make certain payments on the Securities of such
Series, as provided in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEE AND SIMILAR INSTRUMENTS OR AGREEMENTS
Trust Fund may include a guaranteed investment contract or reinvestment
agreement pursuant to which funds held in one or more accounts will be invested
at a specified rate. If any Class of Securities has a floating interest rate, or
if any of the Loans has a floating interest rate, the Trust may include an
interest rate swap contract, an interest rate cap agreement or similar contract
providing limited protection against interest rate risks.
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DEPOSIT AGREEMENT
The Sponsor and the Trustee for such Series of Securities will enter into a
Deposit Agreement with the entity specified in such Prospectus Supplement on or
before the sale of such Series of Securities. The purpose of a Deposit Agreement
would be to accumulate available cash for investment so that such cash, together
with income thereon, can be applied to future distributions on one or more
Classes of Securities. The Prospectus Supplement for a Series of Securities
pursuant to which a Deposit Agreement is used will contain a description of the
terms of such Deposit Agreement.
CROSS COLLATERALIZATION
The source of payment for Securities of each Series will be the assets of
the related Trust Fund only. However, a Trust Fund may include the right to
receive moneys from a common pool of Credit Enhancement which may be available
for more than one Series of Securities, such as a master reserve account or a
master insurance policy. In addition, a Series of Securities may provide for
excess cash flow with respect to one Class of the Series to be applied to
shortfalls with respect to another Class of the same Series. Notwithstanding the
foregoing, unless specifically described otherwise in the related Prospectus
Supplement, no collections on any Loans held by any Trust Fund may be applied to
the payment of Securities issued by any other Trust Fund (except to the limited
extent that certain collections in excess of amounts needed to pay the related
Securities may be deposited in a common, master reserve account that provides
Credit Enhancement for more than one Series of Securities).
OVERCOLLATERALIZATION
Credit Enhancement for a Series may include overcollateralization--an excess
of the aggregate principal balance of the related Loans, or a group thereof,
over the principal balance of the related Class of Securities.
Overcollateralization is achieved by the application of certain "excess"
portions of interest payments on Loans to the payment of principal of one or
more Classes of Securities. This feature may continue for the life of the
related Securities or may be limited as set forth in the related Prospectus
Supplement. In the case of limited overcollateralization, once the required
level of overcollateralization is reached, such limited acceleration feature may
cease, unless necessary to maintain the required level of overcollateralization.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Loans in
the Trust Fund will be provided by the Servicer pursuant to the related Pooling
and Servicing Agreement, with respect to a Series of Securities. Each Pooling
and Servicing Agreement will authorize the Servicer, and the Servicer expects,
to enter into one or more subservicing agreements (each, a "Subservicing
Agreement") with one or more subservicers (each, a "Subservicer") pursuant to
which the Subservicer will agree to perform all or a portion of the Servicer's
servicing responsibilities with respect to the Loans in a Trust Fund. Any
Subservicer will be an experienced servicer of loans of the type to be
subserviced by such Subservicer and will have been approved by each Rating
Agency and any Credit Enhancer.
Notwithstanding the Servicer's engagement of any Subservicer, the Servicer
shall not be relieved of its obligations under the related Pooling and Servicing
Agreement, and the Servicer shall be obligated to the same extent and under the
same terms and conditions as if it alone were servicing and administering the
Loans. The Servicer shall be entitled to include in any Subservicing Agreement
provisions for indemnification of the Servicer by the related Subservicer, and
nothing contained in the related Pooling and Servicing Agreement shall be deemed
to limit or modify such indemnification.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Pooling and Servicing Agreement for a Series and any applicable Credit
Enhancement, follow such collection procedures as it follows with respect to
comparable loans held in its own portfolio. Consistent with the above, the
Servicer may, in its discretion, (i) waive any assumption fee, late payment
charge, or other charge in connection with a Loan and (ii) to the extent
provided in the related Pooling and Servicing Agreement, arrange with an obligor
a schedule for the liquidation of delinquencies by extending the due dates for
Scheduled Payments on such Loan.
The Servicer may establish and maintain escrow or impound accounts ("Escrow
Accounts") with respect to Loans in which payments by obligors to pay taxes,
assessments, mortgage and hazard insurance premiums, and other comparable items
will be deposited. Loans may not require such payments under the loan related
documents, in which case the Servicer would not establish any Escrow Account
with respect to such Loans. Withdrawals from the Escrow Accounts are to be made
to effect timely payment of taxes, assessments, mortgage and hazard insurance
premiums and such other comparable items; to refund to obligors amounts
determined to be overages; to pay interest to obligors on balances in the Escrow
Account to the extent required by law; to repair or otherwise protect the
related Property; and to clear and terminate such Escrow Account. The Servicer
will be responsible for the administration of the Escrow Accounts and generally
will make advances to such account when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
The related Trustee or the Servicer will establish a separate account (the
"Collection Account") in the name of the Trustee. The Collection Account will be
an account maintained (i) at a depository institution, the short- and/or
long-term unsecured debt obligations of which at the time of any deposit therein
are rated at levels satisfactory to each Rating Agency or (ii) in an account or
accounts the deposits in which are otherwise secured in a manner meeting
requirements established by each Rating Agency.
The funds held in the Collection Account may be invested, pending remittance
to the related Trustee, in Eligible Investments. The Servicer may be entitled to
receive as additional compensation any interest or other income earned on funds
in the Collection Account.
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The Servicer will deposit into the Collection Account for each Series the
following payments and collections received or made by it:
(i) All payments on account of principal, including prepayments, on such
Loans;
(ii) All payments on account of interest on such Loans after deducting
therefrom, at the discretion of the Servicer but only to the extent of the
amount permitted to be withdrawn or withheld from the Collection Account in
accordance with the related Pooling and Servicing Agreement, the Servicing Fee
in respect of such Loans;
(iii) All amounts received by the Servicer in connection with the liquidation
of Loans or property acquired in respect thereof, whether through foreclosure
sale, repossession or otherwise, including payments in connection with such
Loans received from the obligor, other than amounts required to be paid or
refunded to the obligor pursuant to the terms of the applicable loan documents
or otherwise pursuant to law ("Liquidation Proceeds"), exclusive of, in the
discretion of the Servicer, but only to the extent of the amount permitted to be
withdrawn from the Collection Account in accordance with the related Pooling and
Servicing Agreement, the Servicing Fee, if any, in respect of the related Loans;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Loan, other than proceeds to be applied to
the restoration or repair of the related Property or released to the obligor in
accordance with the related Pooling and Servicing Agreement ("Insurance
Proceeds");
(v) All amounts required to be deposited therein from any applicable Reserve
Fund for such Series pursuant to the related Pooling and Servicing Agreement;
(vi) All Advances required to be made by the Servicer pursuant to the
related Pooling and Servicing Agreement; and
(vii) All repurchase prices of any such Loans repurchased by the Sponsor, the
Servicer or any Seller pursuant to the related Pooling and Servicing Agreement.
The Servicer will be permitted, from time to time, to make withdrawals from
the Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it pursuant to
the related Pooling and Servicing Agreement; the Servicer's right to reimburse
itself being limited to amounts received on or in respect of particular Loans
(including, for this purpose, Liquidation Proceeds and Insurance Proceeds) which
represent late recoveries of Scheduled Payments respecting which any such
Advance was made;
(ii) to the extent provided in the related Pooling and Servicing Agreement,
to reimburse itself for any Advances for such Series that the Servicer
determines in good faith it will be unable to recover from amounts representing
late recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or Insurance Proceeds;
(iii) to reimburse itself from Liquidation Proceeds for liquidation expenses
and for amounts expended by it in good faith in connection with the restoration
of a damaged Property and, in the event deposited in the Collection Account and
not previously withheld, and to the extent that Liquidation Proceeds after such
reimbursement exceed the outstanding principal balance of the related Loan,
together with accrued and unpaid interest thereon to the Due Date for such Loan
next succeeding the date of its receipt of such Liquidation Proceeds, to pay to
itself out of such excess the amount of any unpaid Servicing Fee and any
assumption fees, late payment charges, or other charges on the related Loan;
(iv) in the event it has elected not to pay itself the Servicing Fee out of
the interest component of any Scheduled Payment, late payment or other recovery
with respect to a particular Loan prior to the
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deposit of such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the related
Pooling and Servicing Agreement, from any such Scheduled Payment, late payment
or such other recovery, to the extent permitted by the related Pooling and
Servicing Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Pooling and Servicing Agreement;
(vi) to pay to the applicable person with respect to each Loan or REO
Property acquired in respect thereof that has been repurchased or removed from
the Trust by the Sponsor, the Servicer or any Seller pursuant to the related
Pooling and Servicing Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was determined;
(vii) to make payments to the Trustee of such Series for remittance to the
Holders of such Series in the amounts and in the manner provided for in the
related Pooling and Servicing Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the related
Pooling and Servicing Agreement.
In addition, if the Servicer deposits in the Collection Account for a series
any amount not required to be deposited therein, it may, at any time, withdraw
such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
To the extent specified in the related Prospectus Supplement, the Servicer
will be obligated to make Advances, and such obligations may be limited in
amount, or may not be activated until a certain portion of a specified Reserve
Fund is depleted. Advances are intended to provide liquidity and, not to
guarantee or insure against losses. Accordingly, any funds advanced will be
recoverable by the Servicer out of amounts received on particular Loans which
represent late recoveries of principal or interest, Insurance Proceeds or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late collections,
Insurance Proceeds or Liquidation Proceeds from the related Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
from a specified Reserve Fund as applicable, to the extent specified in the
related Prospectus Supplement; such reimbursement to the Servicer will reduce
amounts available for distribution to the Holders, but since such reimbursement
will only relate to amounts previously advanced by the Servicer, such
reimbursment will not result in a net reduction of funds available for
distribution to Holders.
Reports received by Holders generally will not disclose amounts advanced, or
subject to reimbursement to the Servicer in respect of Advances, although such
reports will disclose loss and delinquency information. See "The Pooling and
Servicing Agreement--Reports to Holders."
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. The Servicer will be required to
maintain or to cause the obligor on each Loan to maintain a standard hazard
insurance policy providing coverage of the standard form of fire insurance with
extended coverage for certain other hazards as is customary in the state in
which the related Property is located. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related Loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to or destruction of, the related
Property caused by fire, lightning, explosion, smoke, windstorm, hail, riot,
strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Because the standard hazard insurance policies
relating to the Loans will be underwritten by different hazard insurers and will
cover Properties located
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in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides,
and mudflows), nuclear reaction, 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. Uninsured risks not covered by a special hazard insurance policy
or other form of Credit Enhancement will adversely affect distributions to
Holders. When a Property securing a Loan is located in a flood area identified
by HUD pursuant to the Flood Disaster Protection Act of 1973, as amended, the
Servicer will be required to cause flood insurance to be maintained with respect
to such Property, to the extent available.
The standard hazard insurance policies covering Properties securing Loans
typically will contain a "coinsurance" clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property, including
the improvements on any Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the principal balances owing thereon
decrease, and since the value of the Properties will fluctuate in value over
time, the effect of this requirement in the event of partial loss may be that
hazard insurance proceeds will be insufficient to restore fully the damage to
the affected Property.
Coverage will be in an amount at least equal to the greater of (i) the
amount necessary to avoid the enforcement of any co-insurance clause contained
in the policy or (ii) the outstanding principal balance of the related Loan. The
Servicer will also be required to maintain, on REO Property that secured a
defaulted Loan and that has been acquired upon foreclosure, deed in lieu of
foreclosure, or repossession, a standard hazard insurance policy in an amount
that is at least equal to the maximum insurable value of such REO Property. No
earthquake or other additional insurance will be required of any obligor or will
be maintained on REO Property acquired in respect of a defaulted Loan, other
than pursuant to such applicable laws and regulations as shall at any time be in
force and shall require such additional insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency, it will
conclusively be deemed to have satisfied its obligations to cause to be
maintained a standard hazard insurance policy for each Loan or related REO
Property. This blanket policy may contain a deductible clause, in which case the
Servicer will, in the event that there has been a loss that would have been
covered by such policy absent such deductible clause, deposit in the Collection
Account the amount not otherwise payable under the blanket policy because of the
application of such deductible clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Loans as come into and
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continue in default and as to which no satisfactory arrangements can be made for
collection of delinquent payments. In connection with such foreclosure or other
conversion, the Servicer will follow such practices and procedures as it deems
necessary or advisable and as are normal and usual in its servicing activities
with respect to comparable loans serviced by it. However, the Servicer will not
be required to expend its own funds in connection with any foreclosure or
towards the restoration of the Property unless it determines that: (i) such
restoration or foreclosure will increase the Liquidation Proceeds in respect of
the related Loan available to the Holders after reimbursement to itself for such
expenses and (ii) such expenses will be recoverable by it either through
Liquidation Proceeds or Insurance Proceeds. Notwithstanding anything to the
contrary herein, in the case of a Trust Fund for which a REMIC election has been
made, the Servicer shall liquidate any Property acquired through foreclosure
within two years after the acquisition of the beneficial ownership of such
Property. While the holder of a Property acquired through foreclosure can often
maximize its recovery by providing financing to a new purchaser, the Trust Fund,
if applicable, will have no ability to do so and neither the Servicer nor the
Sponsor will be required to do so.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When any Property is about to be conveyed by the obligor, the Servicer will,
to the extent it has knowledge of such prospective conveyance and prior to the
time of the consummation of such conveyance, exercise its rights to accelerate
the maturity of the related Loan under the applicable "due-on-sale" clause, if
any, unless it reasonably believes that such clause is not enforceable under
applicable law or if the enforcement of such clause would result in loss of
coverage under any primary mortgage insurance policy. In such event, the
Servicer is authorized to accept from or enter into an assumption 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 Loan and pursuant to which the
original obligor is released from liability and such person is substituted as
the obligor and becomes liable under the Loan. Any fee collected in connection
with an assumption will be retained by the Servicer as additional servicing
compensation. The terms of a Loan may not be changed in connection with an
assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be entitled to a periodic fee as servicing compensation
(the "Servicing Fee") in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement and will generally consist of a percentage
(to be specified in the related Prospectus Supplement) of the then-outstanding
principal amount of the related Loans, and may include the right to recover
additional servicing compensation in the form of assumption fees, late payment
charges and similar items, or excess proceeds following disposition of property
in connection with defaulted Loans.
When an obligor makes a principal prepayment in full between Due Dates on
the related Loan, the obligor will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement, in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related Loan
(less the Servicing Fee). If the aggregate amount of such shortfalls in a month
exceeds the Servicing Fee for such month, the amount of funds available for
distribution to the related Holders may be reduced.
To the extent specified in the related Prospectus Supplement, the Servicer
will be entitled to reimbursement for certain expenses incurred by it in
connection with the liquidation of defaulted Loans. The related Holders will
suffer no loss by reason of such expenses to the extent expenses are covered
under related insurance policies or from excess Liquidation Proceeds. If claims
are either not
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made or paid under the applicable insurance policies or if coverage thereunder
has been exhausted, the related Holders will suffer a loss to the extent that
Liquidation Proceeds, after reimbursement of the Servicer's expenses, are less
than the outstanding principal balance of and unpaid interest on the related
Loan which would be distributable to Holders. In addition, the Servicer will be
entitled to reimbursement of expenditures incurred by it in connection with the
restoration of property securing a defaulted Loan, such right of reimbursement
being prior to the rights of the Holders to receive any related Insurance
Proceeds, Liquidation Proceeds or amounts derived from other Credit Enhancement.
The Servicer is generally also entitled to reimbursement from the Collection
Account for Advances.
EVIDENCE AS TO COMPLIANCE
The related Pooling and Servicing Agreement for each Series will provide
that each year, a firm of independent public accountants will furnish a
statement to the Trustee to the effect that such firm has examined certain
documents and records relating to the servicing of the Loans by the Servicer and
that, on the basis of such examination, such firm is of the opinion that the
servicing has been conducted in compliance with such Pooling and Servicing
Agreement, except for (i) such exceptions as such firm believes to be immaterial
and (ii) such other exceptions as are set forth in such statement.
The applicable Pooling and Servicing Agreement for each Series will also
provide for delivery to the Trustee for such Series of an annual statement
signed by an officer of the Servicer to the effect that the Servicer has
fulfilled its obligations under such Pooling and Servicing Agreement, throughout
the preceding calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
In the event of an Event of Default under a Pooling and Servicing Agreement,
the Servicer may be replaced by the related Credit Enhancer, if and, or the
Trustee or a successor Servicer. Such Events of Default and the rights of the
Trustee upon such a default under the related Pooling and Servicing Agreement
for the related Series will be substantially similar to those described under
"The Pooling and Servicing--Events of Default; Rights Upon Events of Default".
The Servicer will not have the right to assign its rights and delegate its
duties and obligations under the related Pooling and Servicing Agreement unless
the successor Servicer accepting such assignment or delegation (i) services
similar loans in the ordinary course of its business, (ii) is reasonably
satisfactory to the Trustee for the related Series, (iii) has a specified
minimum net worth, (iv) would not cause any Rating Agency's rating of the
Securities for such Series in effect immediately prior to such assignment, sale
or transfer to be qualified, downgraded or withdrawn as a result of such
assignment, sale or transfer and (v) executes and delivers to the Trustee an
agreement, in form and substance reasonably satisfactory to the Trustee, which
contains an assumption by such Servicer of the due and punctual performance and
observance of each covenant and condition to be performed or observed by the
Servicer under the related Pooling and Servicing Agreement from and after the
date of such agreement. No such assignment will become effective until the
Trustee or a successor Servicer has assumed the Servicer's obligations and
duties under the related Pooling and Servicing Agreement. To the extent that the
Servicer transfers its obligations to a wholly owned subsidiary or affiliate,
such subsidiary or affiliate need not satisfy the criteria set forth above;
however, in such instance, the assigning Servicer will remain liable for the
servicing obligations under the related Pooling and Servicing Agreement. Any
entity into which the Servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will succeed
to the Servicer's obligations under the related Pooling and Servicing Agreement,
provided that such successor or surviving entity meets the requirements for a
successor Servicer set forth above.
Except to the extent otherwise provided therein, each Pooling and Servicing
Agreement will provide that neither the Servicer, nor any director, officer,
employee or agent of the Servicer, will be
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under any liability to the related Trust Fund, the Sponsor or the Holders for
any action taken or for failing to take any action in good faith pursuant to the
related Pooling and Servicing Agreement, or for errors in judgment; provided,
however, that neither the Servicer nor any such person will be protected against
any breach of warranty or representation made under such Pooling and Servicing
Agreement, or the failure to perform its obligations in compliance with any
standard of care set forth in such Pooling and Servicing Agreement, or liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of their duties or by reason of reckless disregard
of their obligations and duties thereunder. Each Pooling and Servicing Agreement
will further provide that the Servicer and any director, officer, employee or
agent of the Servicer is entitled to indemnification from the related Trust Fund
and will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Pooling and Servicing Agreement
or the Securities, other than any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the related Pooling and Servicing Agreement will
provide that the Servicer is not under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its servicing
responsibilities under such Pooling and Servicing Agreement which, in its
opinion, may involve it in any expense or liability. The Servicer may, in its
discretion, undertake any such action which it may deem necessary or desirable
with respect to the related Pooling and Servicing Agreement and the rights and
duties of the parties thereto and the interests of the Holders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom may be expenses, costs, and liabilities of the Trust Fund
and the Servicer may be entitled to be reimbursed therefor out of the Collection
Account.
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THE POOLING AND SERVICING AGREEMENT
The following summaries describe certain provisions of the Pooling and
Servicing Agreement. The summaries do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the provisions of the
Pooling and Servicing Agreements. Where particular provisions or terms used in
the Pooling and Servicing Agreements are referred to, such provisions or terms
are as specified in the related Pooling and Servicing Agreements.
ASSIGNMENT OF LOANS
GENERAL At the time of issuance of the Securities of a Series, the Sponsor
will transfer, convey and assign to the Trust Fund all right, title and interest
of the Sponsor in the Loans and other property to be transferred to the Trust
Fund for a Series. Such assignment will include all principal and interest due
on or with respect to the Loans after the Cut-off Date specified in the related
Prospectus Supplement. The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
ASSIGNMENT OF LOANS The Sponsor will, as to each Loan, deliver or cause to
be delivered to the Trustee, or, a custodian on behalf of the Trustee (the
"Custodian"), the Mortgage Note endorsed without recourse to the order of the
Trustee or in blank, the original Mortgage with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office,
in which case a copy of such Mortgage will be delivered, together with a
certificate that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. The Trustee or,
the Custodian will hold such documents in trust for the benefit of the Holders.
The Sponsor will, as to each Home Improvement Contract, either deliver or
cause to be delivered to the Trustee (or the Custodian) the original Home
Improvement Contract and copies of documents and instruments related to each
Home Improvement Contract and the security interest in the property securing
such Home Improvement Contract, or maintain possession (or cause the Servicer to
maintain possession) of such Home Improvement Contracts and other documents, as
custodian on behalf of the related Trust Fund. In order to give notice of the
right, title and interest of Holders to the Home Improvement Contracts, the
Sponsor will cause a UCC-1 financing statement to be executed by the Sponsor or
the Seller identifying the Trustee as the secured party and identifying all Home
Improvement Contracts as collateral. See "Certain Legal Aspects of the
Loans--The Home Improvement Contracts".
With respect to Loans secured by Mortgages, the Sponsor will, at the time of
issuance of the Securities, cause assignments to the Trustee of the Mortgages
relating to the Loans for a Series to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Loans. The Sponsor will cause such assignments
to be so recorded within a specified time period after issuance of the
Securities in which event, the Pooling and Servicing Agreement may require the
Sponsor to repurchase from the Trustee any Loan the related Mortgage of which is
not recorded within such time period, at the price described below with respect
to repurchases by reason of defective documentation. Such repurchase obligation
would constitute the sole remedy available to the Holders or the Trustee for the
failure of a Mortgage to be recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Pooling and Servicing Agreement (the "Loan Schedule"). Such Loan
Schedule will specify with respect to each Loan: the original principal amount
and unpaid principal balance as of the Cut-off Date; the current Loan Rate; the
current Scheduled Payment; the maturity date, if any, of the related Mortgage
Note; if the Loan is an adjustable-rate Loan, the lifetime rate cap, if any, and
the current index.
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PRE-FUNDING ACCOUNT. If so specified in the related Prospectus Supplement,
a portion of the issuance proceeds of the Securities of a particular series
(such amount, (the "Pre-Funded Amount") will be deposited in an account (the
"Pre-Funding Account") to be established with the Trustee, which will be used to
acquire Additional Loans from time to time during the time period specified in
the related Prospectus Supplement (the "Pre-Funding Period"). Prior to the
investment of the Pre-Funded Amount in additional Loans, such Pre-Funded Amount
will be invested in one or more Eligible Investments. An "Eligible Investment"
is any of the following, in each case as determined at the time of the
investment or contractual commitment to invest therein (to the extent such
investments would not require registration of the Trust Fund as an investment
company pursuant to the Investment Company Act of 1940): (a) negotiable
instruments or securities represented by instruments in bearer or registered or
book-entry form which evidence: (i) obligations which have the benefit of the
full faith and credit of the United States of America, including depository
receipts issued by a bank as custodian with respect to any such instrument or
security held by the custodian for the benefit of the holder of such depository
receipt, (ii) demand deposits or time deposits in, or bankers' acceptances
issued by, any depositary institution or trust company incorporated under the
laws of the United States of America or any state thereof and subject to
supervision and examination by Federal or state banking or depositary
institution authorities; provided that at the time of the Trustee's investment
or contractual commitment to invest therein, the certificates of deposit or
short-term deposits (if any) or long-term unsecured debt obligations (other than
such obligations whose rating is based on collateral or on the credit of a
Person other than such institution or trust company) of such depositary
institution or trust company has a credit rating in the highest rating category
from each Rating Agency, (iii) certificates of deposit having a rating in the
highest rating category from each Rating Agency, or (iv) investments in money
market funds which are (or which are composed of instruments or other
investments which are) rated in the highest rating category from each Rating
Agency; (b) demand deposits in the name of the Trustee in any depositary
institution or trust company referred to in clause (a)(ii) above;
(c) commercial paper (having original or remaining maturities of no more than
270 days) having a credit rating in the highest rating category from each Rating
Agency; (d) Eurodollar time deposits that are obligations of institutions whose
time deposits carry a credit rating in the highest rating category from each
Rating Agency; (e) repurchase agreements involving any Eligible Investment
described in any of clauses (a)(i), (a)(iii) or (d) above, so long as the other
party to the repurchase agreement has its long-term unsecured debt obligations
rated in the highest rating category from each Rating Agency; and (f) any other
investment with respect to which each Rating Agency rating such Securities
indicates will not result in the reduction or withdrawal of its then-existing
rating of the Securities. Any Eligible Investment must mature no later than the
Business Day prior to the next Distribution Date.
During any Pre-Funding Period, the Sponsor will be obligated (subject only
to the availability thereof) to transfer to the related Trust Fund, additional
Loans from time to time during such Pre-Funding Period. Such additional Loans
will be required to satisfy certain eligibility criteria more fully set forth in
the related Prospectus Supplement which eligibility criteria will be consistent
with the eligibility criteria of the Loans included in the Trust Fund as of the
Closing Date subject to such exceptions as are expressly stated in such
Prospectus Supplement.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of Securities will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Pre-Funding Period will not exceed
120 days from the related Closing Date, (b) that the additional loans to be
acquired during the Pre-Funding Period will be subject to the same
representations and warranties as the Loans included in the related Trust Fund
on the Closing Date (although additional criteria may also be required to be
satisfied, as described in the related Prospectus Supplement) and (c) that the
Pre-Funded Amount will not exceed 25% of the principal amount of the Securities
issued pursuant to a particular offering.
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REPURCHASE AND SUBSTITUTION OF DEFECTIVE LOANS If any document in the file
relating to a Loan delivered by the Sponsor to the Trustee (or Custodian) is
found by the Trustee within a specified time period following the execution of
the related Pooling and Servicing Agreement (or promptly after the Trustee's
receipt of any document permitted to be delivered after the Closing Date) to be
defective in any material respect and the Sponsor or Seller does not cure such
defect, the Sponsor or Seller will be required to repurchase the related Loan or
any property acquired in respect thereof from the Trustee at a price equal to,
(a) the outstanding principal balance of such Loan and (b) accrued and unpaid
interest to the date of the next Scheduled Payment on such Loan at the rate set
forth in the related Pooling and Servicing Agreement (less any unreimbursed
Advances respecting such Loan).
The Sponsor or Seller, as the case may be, may, rather than repurchase the
Loan as described above, remove such Loan from the Trust Fund (the "Deleted
Loan") and substitute in its place one or more other Loans (each, a "Qualifying
Substitute Loan"); provided, however, that such substitution may only occur
during a specified period.
The Sponsor or another entity will make representations and warranties with
respect to the Loans Assets for a Series. If the Sponsor or such entity cannot
cure a breach of any such representations and warranties in all material
respects within a specified time period after notification by the Trustee of
such breach, and if such breach is of a nature that materially and adversely
affects the value of such Loan, the Sponsor or such entity is obligated to
repurchase the affected Loan or, provide a Qualifying Substitute Loan therefor,
subject to the same conditions and limitations on purchases and substitutions as
described above.
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Pooling and
Servicing Agreement for such Series to institute any proceeding with respect to
such Pooling and Servicing Agreement, unless such Holder previously has given to
the Trustee for such Series written notice of default and unless the Holders of
Securities evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series have made written request upon 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 60 days has neglected
or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related Securities
and the outstanding principal balance of such Securities following such
distribution;
(ii) the amount of interest distributed to Holders of the related Securities
and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to such
Securities or (c) any current shortfall in amounts to be distributed as accrued
interest to Holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal included
in such distribution, (b) any remaining overdue principal amounts with respect
to such Securities, (c) any current shortfall in receipt of scheduled principal
payments on the related Loans or (d) any realized losses or Liquidation Proceeds
to be allocated as reductions in the outstanding principal balances of such
Securities;
(v) the amount received under any related Credit Enhancement, and the
remaining amount available under such Credit Enhancement;
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(vi) the amount of any delinquencies with respect to payments on the related
Loans;
(vii) the book value of any REO Property acquired by the related Trust Fund;
and
(viii) such other information as specified in the related Pooling and
Servicing Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, or other specified person, will furnish to each
Holder of record at any time during such calendar year: (a) the aggregate of
amounts reported pursuant to (i), (ii), and (iv)(d) above for such calendar year
and (b) such information specified in the related Pooling and Servicing
Agreement to enable Holders to prepare their tax returns, including, without
limitation, the amount of original issue discount accrued on the Securities, if
applicable. Information in the Distribution Date and annual statements provided
to the Holders will not have been examined and reported upon by an independent
public accountant. However, the Servicer will provide to the Trustee a report by
independent public accountants with respect to the Servicer's servicing of the
Loans. See "Servicing of Loans--Evidence as to Compliance".
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
CERTIFICATES Events of Default under the Pooling and Servicing Agreement
for each Series of Certificates include (i) any failure by the Servicer to
deposit amounts in the Collection Account to enable the Trustee to distribute to
Holders of such Series any required payment, which failure continues unremedied
for a specified number of days after the giving of written notice of such
failure to the Servicer by the Trustee for such Series, or to the Servicer and
the Trustee by the Holders of such Series evidencing not less than 25% of the
aggregate voting rights of the Holders for such Series, (ii) any failure by the
Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the applicable Pooling and Servicing Agreement which
continues unremedied for a specified number of days after the giving of written
notice of such failure to the Servicer by the Trustee, or to the Servicer and
the Trustee by the Holders of such Series evidencing not less than 25% of the
aggregate voting rights of the Holders and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings and certain actions by the Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Pooling and Servicing Agreement for a Series of Securities relating to the
servicing of Loans, the related Credit Enhancer or, the Trustee for such Series
or Holders of Securities of such Series evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series may terminate all of
the rights and obligations of the Servicer as the "Servicer" under the
applicable Pooling and Servicing Agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of such Pooling and
Servicing Agreement which rights the Servicer will retain under all
circumstances), whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the "Servicer" under such Pooling and Servicing
Agreement and will be entitled to reasonable servicing compensation not to
exceed the applicable Servicing Fee, together with other servicing compensation
in the form of assumption fees, late payment charges or otherwise as provided in
such Pooling and Servicing Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a specified minimum net
worth to act as successor Servicer under the provisions of the applicable
Pooling and Servicing Agreement. The successor Servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the related
Servicing Fee, together with the other servicing compensation in the form of
assumption fees, late payment charges or otherwise, as provided in such Pooling
and Servicing Agreement.
During the continuance of any Event of Default of the Servicer under a
Pooling and Servicing Agreement, the Trustee for such Series will have the right
to take action to enforce its rights and
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remedies and to protect and enforce the rights and remedies of the Holders of
such Series, and, the related Credit Enhancer or the Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
(with the consent of the related Credit Enhancer, if any) for such Series may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred upon that
Trustee. However, the Trustee will not be under any obligation to pursue any
such remedy or to exercise any of such trusts or powers unless such Holders have
offered the Trustee reasonable security or indemnity against the cost, expenses
and liabilities which may be incurred by the Trustee therein or thereby. Also,
the Trustee may decline to follow any such direction if the Trustee determines
that the action or proceeding so directed may not lawfully be taken or would
involve it in personal liability or be unjustly prejudicial to the nonassenting
Holders.
NOTES Events of Default for each Series of Notes include: (i) a default for
thirty (30) days or more in the payment of any principal of or interest on any
Note of such Series; (ii) failure to perform any other covenant of the Sponsor
or the Trust Fund in the related Pooling and Servicing Agreement which continues
for a specified period after notice thereof is given in accordance with the
procedures specified in the related Pooling and Servicing Agreement; (iii) any
representation or warranty made by the Sponsor or the Trust Fund in the related
Pooling and Servicing Agreement or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting such
Series having been incorrect in a material respect as of the time made, and such
breach is not cured within a specified period after notice thereof is given in
accordance with the procedures described in the related Pooling and Servicing
Agreement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Sponsor or the Trust Fund; or (v) any other Event of Default
provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, the related Credit Enhancer or either the
Trustee or the Holders of a majority of the then aggregate outstanding amount of
the Notes of such Series (with the consent of the related Credit Enhancer, if
any) may declare the principal amount of all the Notes of such Series to be due
and payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the related Credit Enhancer or the Holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the related
Credit Enhancer or the Trustee (with the consent of the related Credit Enhancer,
if any) may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Trustee may not sell or otherwise liquidate the collateral
securing the Notes of a Series following an Event of Default, other than a
default in the payment of any principal or interest on any Note of such Series,
unless (a) the related Credit Enhancer or the Holders of 100% of the then
aggregate outstanding amount of the Notes of such Series (with the consent of
the related Credit Enhancer, if any) consent to such sale, (b) the proceeds of
such sale or liquidation are sufficient to pay in full the principal of and
accrued interest, due and unpaid, on the outstanding Notes of such Series at the
date of such sale or (c) the Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such Notes had not been declared due and
payable, and the Trustee obtains the consent of the Holders of 66 2/3% of the
then aggregate outstanding amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default in the payment of principal of or
interest on the Notes of a Series, the Trustee will
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have a prior lien on the proceeds of any such liquidation for unpaid fees and
expenses. As a result, upon the occurrence of such an Event of Default, the
amount available for distribution to the Noteholders would be less than would
otherwise be the case. However, the Trustee may not institute a proceeding for
the enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the related Pooling and Servicing Agreement for the
benefit of the Noteholders after the occurrence of such an Event of Default.
In the event the principal of the Notes of a Series is declared due and
payable, as described above, the Holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the related Pooling and Servicing Agreement
relating to the duties of the Trustee, in case an Event of Default shall occur
and be continuing with respect to a Series of Notes, the Trustee shall be under
no obligation to exercise any of the rights or powers under the related Pooling
and Servicing Agreement at the request or direction of any of the Holders of
Notes of such Series, unless such Holders offer to the Trustee security or
indemnity satisfactory to it against the costs, expenses and liabilities which
might be incurred by it in complying with such request or direction. Subject to
such provisions for indemnification and certain limitations contained in the
related Pooling and Servicing Agreement, the related Credit Enhancer or the
Holders of a majority of the then aggregate outstanding amount of the Notes of
such Series (with the consent of the related Credit Enhancer, if any) shall have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on the Trustee with respect to the Notes of such Series, and the related Credit
Enhancer or the Holders of a majority of the then aggregate outstanding amount
of the Notes of such Series (with the consent of the related Credit Enhancer, if
any) 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 all the Holders of the outstanding Notes of such Series
affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Sponsor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the related Pooling and Servicing Agreement relating
to such Series will be conferred or imposed upon the Trustee and each such
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
Trustee shall be incompetent or unqualified to perform certain acts, singly upon
such separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee. The
Trustee may also appoint agents to perform any of the responsibilities of the
Trustee, which agents shall have any or all of the rights, powers, duties and
obligations of the Trustee conferred on them by such appointment; provided that
the Trustee shall continue to be responsible for its duties and obligations
under the related Pooling and Servicing Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the related Pooling and Servicing Agreement, the Securities or of any Loan or
related documents. If no Event of Default (as
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defined in the related Agreement) has occurred, the Trustee is required to
perform only those duties specifically required of it under the related Pooling
and Servicing Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the related Pooling and Servicing Agreement, or in the exercise of any of
its rights or powers, if it has reasonable grounds for believing that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Sponsor, resign at any time, in
which event the Sponsor will be obligated to use its best efforts to appoint a
successor Trustee. If no successor Trustee has been appointed and has accepted
the appointment within 30 days after giving such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time
(i) if the Trustee ceases to be eligible to continue as such under the related
Pooling and Servicing Agreement, (ii) if the Trustee becomes insolvent or (iii)
related Credit Enhancer or by the Holders of Securities evidencing over 50% of
the aggregate voting rights of the Securities in the Trust Fund (with the
consent of the related Credit Enhancer, if any) upon written notice to the
Trustee and to the Sponsor. 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.
AMENDMENT OF AGREEMENT
The related Pooling and Servicing Agreement may be amended by the Sponsor,
the Servicer (with respect to a Series relating to Loans), and the Trustee with
respect to such Series, without notice to or consent of the Holders, but with
the consent of the related Credit Enhancer (i) to cure any ambiguity, (ii) to
correct any defective provisions or to correct or supplement any provision
therein, (iii) to add to the duties of the Sponsor, the Trust Fund or Servicer,
(iv) to add any other provisions with respect to matters or questions arising
under such Pooling and Servicing Agreement or related Credit Enhancement,
(v) to add or amend any provisions of such Pooling and Servicing Agreement as
required by a Rating Agency in order to maintain or improve the rating of the
Securities, or (vi) to comply with any requirements imposed by the Code;
provided that any such amendment except pursuant to clause (vi) above will not
adversely affect in any material respect the interests of any Holders of such
Series, as evidenced by an opinion of counsel. Any such amendment, except
pursuant to clause (vi) of the preceding sentence, shall be deemed not to
adversely affect in any material respect the interests of any Holder if the
Trustee receives written confirmation from each Rating Agency that such
amendment will not cause such Rating Agency to reduce the then current rating
thereof. Supplement, the Pooling and Servicing Agreement for each Series may
also be amended by the Trustee, the Servicer, if applicable, and the Sponsor
(with the consent of the related Credit Enhancer, if any) with respect to such
Series with the consent of the Holders possessing not more than 50% of the
aggregate outstanding principal amount of the Securities of such Series or, if
only certain Classes of such Series are affected by such amendment, more than
50% of the aggregate outstanding principal amount of the Securities of each
Class of such Series affected thereby, for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of such
Pooling and Servicing Agreement or modifying in any manner the rights of Holders
of such Series; provided, however, that no such amendment may (a) reduce the
amount or delay the timing of payments on any Security without the consent of
the Holder of such Security; or (b) reduce the aforesaid percentage of
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the aggregate outstanding principal amount of Securities of each Class, the
Holders of which are required to consent to any such amendment without the
consent of the Holders of 100% of the aggregate outstanding principal amount of
each Class of Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the related Pooling and Servicing Agreement, which request is accompanied by a
copy of the communication which such Holders propose to transmit, the Trustee
will afford such Holders access during business hours to the most recent list of
Holders of that Series held by the Trustee.
No Pooling and Servicing Agreement will provide for the holding of any
annual or other meeting of Holders.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be the Servicer.
TERMINATION
CERTIFICATES The obligations created by the Pooling and Servicing Agreement
for a Series of Certificates will terminate upon the distribution to Holders of
all amounts distributable to them pursuant to such Pooling and Servicing
Agreement after the earlier of (i) the later of (a) the final payment or other
liquidation of the last Loan remaining in the Trust Fund for such Series and (b)
the disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure or repossession in respect of any Loan or (ii) the repurchase, as
described below, by the Servicer or other entity specified in the related
Prospectus Supplement from the Trustee for such Series of all Loans and other
property at that time subject to such Pooling and Servicing Agreement. The
Pooling and Servicing Agreement for each Series permits, but does not require,
the Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Loans at a price
equal to, unless otherwise specified in the related Prospectus Supplement, 100%
of the aggregate principal balance of such Loans plus, with respect to any
property acquired in respect of a Loan, if any, the outstanding principal
balance of the related Loan at the time of foreclosure, less, in either case,
related unreimbursed Advances (in the case of the Loans, only to the extent not
already reflected in the computation of the aggregate principal balance of such
Loans) and unreimbursed expenses (that are reimbursable pursuant to the terms of
the Pooling and Servicing Agreement) plus, in either case, accrued interest
thereon at the weighted average interest rate on the related Loans through the
last day of the month in which such repurchase occurs; provided, however, that
if an election is made for treatment as a REMIC under the Code, the repurchase
price may equal the greater of (a) 100% of the aggregate principal balance of
such Loans, plus accrued interest thereon at the applicable interest rates on
the Loans through the last day of the month of such repurchase and (b) the
aggregate fair market value of such Loans plus the fair market value of any
property acquired in respect of a Loan and remaining in the Trust Fund. The
exercise of such right will effect early retirement of the Securities of such
Series, but such entity's right to so purchase is subject to the aggregate
principal balance of the Loans at the time of repurchase being less than a fixed
percentage, to be set forth in the related
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Prospectus Supplement, of the aggregate principal balance of the Loans as of the
Cut-off Date. In no event, however, will the trust created by Pooling and
Servicing Agreement continue beyond the expiration of 21 years from the death of
the last survivor of certain persons identified therein. For each Series, the
Servicer or the Trustee, as applicable, will give written notice of termination
of the Pooling and Servicing Agreement to each Holder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency specified in the notice of termination. If so provided in
the related Prospectus Supplement for a Series, the Sponsor or another entity
may effect an optional termination of the Trust Fund under the circumstances
described in such Prospectus Supplement. See "Description of The
Securities--Optional Purchase or Termination".
NOTES The Pooling and Servicing Agreement will be discharged with respect
to a Series of Notes (except with respect to certain continuing rights specified
in the Pooling and Servicing Agreement) upon the delivery to the Trustee for
cancellation of all the Notes of such Series or, with certain limitations, upon
deposit with the Trustee of funds sufficient for the payment in full of all of
the Notes of such Series.
In addition to such discharge with certain limitations, the related Pooling
and Servicing Agreement will provide that, if so specified with respect to the
Notes of any Series, the related Trust Fund will be discharged from any and all
obligations in respect of the Notes of such Series (except for certain
obligations relating to temporary Notes and exchange of Notes, to register the
transfer of or exchange Notes of such Series, to replace stolen, lost or
mutilated Notes of such Series, to maintain paying agencies and to hold monies
for payment in trust) upon the deposit with the Trustee, in trust, of money
and/or direct obligations of or obligations guaranteed by the United States of
America which through the payment of interest and principal in respect thereof
in accordance with their terms will provide money in an amount sufficient to pay
the principal of and each installment of interest on the Notes of such
Series on the Final Scheduled Distribution Date for such Notes and any
installment of interest on such Notes in accordance with the terms of the
Pooling and Servicing Agreement and the Notes of such Series. In the event of
any such defeasance and discharge of Notes of such Series, Holders of Notes of
such Series would be able to look only to such money and/or direct obligations
for payment of principal and interest, if any, on their Notes until maturity.
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YIELD AND MATURITY CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by the
Holder for such Security, the interest rate on such Security (which interest
rate may vary if so specified in the related Prospectus Supplement), the rate of
payment of principal on such Security (or the rate at which the Notional Amount
thereof is reduced if such Security is not entitled to payments of principal)
and other factors.
In general, if a Class of Securities is purchased at initial issuance at a
premium and payments of principal on the related Loans occur at a rate faster
than anticipated at the time of purchase, the purchaser's actual yield to
maturity will be lower than that assumed at the time of purchase. In addition,
if a Class of Securities is purchased at initial issuance at a discount and
payments of principal on the related Loans occur at a rate slower than that
assumed at the time of purchase, the purchaser's actual yield to maturity will
be lower than that originally anticipated. The effect of principal prepayments,
liquidations and purchases on yield will be particularly significant in the case
of a Series of Securities having a Class entitled to payments of interest only
or to payments of interest that are disproportionately high relative to the
principal payments to which such Class is entitled. Such a Class will likely be
sold at a substantial premium to its principal balance, if any, and any faster
than anticipated rate of prepayments will adversely affect the yield to Holders
thereof. In certain circumstances, rapid prepayments may result in the failure
of such Holders to recoup their original investment. In addition, the yield to
maturity on certain other types of Classes of Securities, may be relatively more
sensitive to the rate of prepayment on the related Loans than other Classes of
Securities.
The timing of changes in the rate of principal payments on or repurchases of
the Loans may significantly affect an investor's actual yield to maturity, even
if the average rate of principal payments experienced over time is consistent
with an investor's expectation. In general, the earlier a prepayment of
principal on the underlying Loans or a repurchase thereof, the greater will be
the effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments and repurchases occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of a Series of Securities would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
When a full prepayment is made on a Loan, the Mortgagor is charged interest
on the principal amount of the Loan so prepaid for the number of days in the
month actually elapsed up to the date of the prepayment, at a daily rate
determined by dividing the Loan Rate by 365. A Series of Securities may provide
that the Servicer is obligated to deposit into the Distribution Account, for
distribution to Holders of the Series, an amount, not to exceed the Servicer's
aggregate Servicing Fee for such Series for the related month, equal to the
difference between (a) a full months' interest (net of the Servicing Fee) on a
Loan which has prepaid in full and (b) the amount of interest actually paid with
such prepayment in full. See "Servicing of Loans--Servicing Compensation and
Payment of Expenses". To the extent the Servicer is not obligated to deposit for
distribution to the related Holders the full amount of such difference, the
effect of prepayments in full will be to reduce the amount of interest paid in
the next succeeding month to Holders of Securities entitled to payments of
interest because interest on the principal amount of any Loan so prepaid will be
paid only to the date of prepayment rather than for a full month. A partial
prepayment of principal is applied so as to reduce the outstanding principal
balance of the related Loan as of the first day of the month in which such
partial prepayment is received. As a result, the effect of a partial prepayment
on a Loan will be to reduce the amount of interest passed through to Holders of
Securities on the Distribution Date following the receipt of such partial
prepayment by an amount equal to one month's interest at the applicable pass-
through rate, as the case may be, on the prepaid amount. Neither full nor
partial principal prepayments are passed through until the month following
receipt.
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A number of factors affect principal prepayment rates, including homeowner
mobility, economic conditions, mortgage market interest rates, the availability
of mortgage funds and the enforceability of due-on-sale clauses. Many Loans will
contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the Loan upon sale or certain transfers by the Mortgagor of the
underlying Property. The Servicer will generally enforce any due-on-sale clause
to the extent it has knowledge of the conveyance or proposed conveyance of the
underlying Property and it is entitled to do so under applicable law; provided,
however, that the Servicer will not take any action in relation to the
enforcement of any due-on-sale provision which would adversely affect the
interests of the Holders or adversely affect or jeopardize coverage under any
applicable insurance policy. The extent to which the Loans are assumed by
purchasers of the Properties rather than prepaid by the related Mortgagors in
connection with the sales of the Properties will affect the yield of the related
Series of Securities.
The yield on the Securities also will be effected by liquidations of Loans
following Mortgagor defaults and by purchases of Loans required by the Pooling
and Servicing Agreement in the event of breaches of representations made in
respect of such Mortgage Loans by the Sponsor, the related Seller if any, the
Servicer and others, or repurchases due to conversions of ARM Loans to a fixed
interest rate. See "Descriptions of the Securities--Assignment of Loans" above.
Under certain circumstances, the Servicer, the Sponsor or, if specified in the
related Prospectus Supplement, the Holders of the REMIC residual interest or the
Credit Enhancer may have the option to purchase the Loans in a Trust Fund. See
"Description of the Securities--Optional Termination."
The rate of prepayments with respect to fixed-rate mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates on fixed-rate mortgage loans,
such mortgage loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest rate on such mortgage loans.
Conversely, if prevailing interest rates rise appreciably above the interest
rates on fixed-rate mortgage loans, such mortgage loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below the interest
rates on such mortgage loans.
Although the Loan Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will, generally, (i) not increase or decrease such
Loan Rates by more than a fixed percentage amount on each adjustment date, (ii)
not increase such Loan Rates over a fixed percentage amount during the life of
any ARM Loan and (iii) be based on an index (which may not rise and fall
consistently with mortgage interest rates) plus the related margin (which may be
different from margins being used at the time for newly originated adjustable
rate mortgage loans). As a result, the Loan Rates on the ARM Loans in a Trust
Fund at any time may not equal the prevailing rates for similar, newly
originated adjustable-rate mortgage loans. In certain rate environments, the
prevailing rates on fixed-rate mortgage loans may be sufficiently low in
relation to the then-current Loan Rates on ARM Loans that the rate of prepayment
may increase as a result of refinancings.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Loans) for a specified period prior to being
used to fund payments of principal to Holders. The result of such retention and
temporary investment by the Trustee of such principal would be to slow the
amortization rate of the related Securities relative to the amortization rate of
the related Loans, or to attempt to match the amortization rate of the related
Securities to an amortization schedule established at the time such Securities
are issued. Any such feature applicable to any Securities may terminate upon the
occurrence of events to be described in the related Prospectus Supplement,
resulting in the current funding of principal payments to the related Holders
and an acceleration of the amortization of such Securities.
In addition to its impact on a Security's yield to maturity the rate of
principal prepayments on the Loans related to the Security will affect the
weighted average life of the Security. "Weighted average
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life" refers to the average amount of time from the date of issuance of a
security until each dollar of principal of the security is repaid to the
investor.
There can be no assurance as to the rate of prepayment of the Loans. The
Sponsor is not aware of any reliable, publicly available statistics relating to
the principal prepayment experience of diverse portfolios of mortgage loans such
as the Loans over an extended period of time. All statistics known to the
Sponsor that have been compiled with respect to prepayment experience on
mortgage loans indicate that while some mortgage loans may remain outstanding
until their stated maturities, a substantial number will be paid prior to their
respective stated maturities.
The effective yield to maturity to each Holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable interest rate and purchase price of such Security because, while
interest will accrue on each Loan from the first day of each month, the payment
of such interest to the Holders will be made on a specified day (for example,
the twenty-fifth day) of the month (or, in the case of quarterly pay Securities,
the twenty-fifth day of every third month, or, in the case of semiannually pay
Securities, the twenty-fifth day of every sixth month) following the month of
accrual.
The Loan Rates on certain ARM Loans subject to negative amortization adjust
monthly and their amortization schedules adjust less frequently. During a period
of rising interest rates as well as immediately after origination (initial Loan
Rates are generally lower than the sum of the indices applicable at origination
and the related Loan margins) the amount of interest accruing on the principal
balance of such Loans may exceed the amount of the minimum scheduled monthly
payment thereon. As a result, a portion of the accrued interest on negatively
amortizing Loans may become deferred interest that will be added to the
principal balance thereof and will bear interest at the applicable Loan Rate.
The addition of any such deferred interest to the principal balance will
lengthen the weighted average life of the Securities evidencing interests in
such Loans and may adversely affect yield to Holders thereof depending upon the
price at which such Securities were purchased. In addition, with respect to
certain ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly payment
on such a Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce such principal balance, the weighted average life of such Securities
will be reduced and may adversely affect yield to Holders thereof depending upon
the price at which such Securities were purchased.
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CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
certain of such legal aspects are governed by applicable state law (which laws
may differ substantially), the summaries do not purport to be complete nor
reflect the laws of any particular state, nor encompass the laws of all states
in which the properties securing the Loans are situated. In the event that a
particular Trust Fund contains Loans with a concentration in a particular state,
and such state's laws vary materially from the general discussion below, the
related Prospectus Supplement will elaborate on the relevant laws of such state.
The summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Loans.
MORTGAGES
GENERAL The Loans for a Series will and certain Home Improvement Contracts
for a Series may be secured by either mortgages or deeds of trust or deeds to
secure debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this Section as "mortgage loans"), depending upon the prevailing
practice in the state in which the property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by such instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. It is not prior to the lien for real estate
taxes and assessments or other charges imposed under governmental police powers
and may also be subject to other liens pursuant to the laws of the jurisdiction
in which the Mortgaged Property is located. Priority with respect to such
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner 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. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties, the trustor, who is the borrower/property owner; the
beneficiary, who is the lender, and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES Foreclosure of a mortgage is generally
accomplished by judicial action. Generally, the action is initiated by the
service of legal pleadings upon all parties having an interest of record in the
real property. Delays in completion of the foreclosure occasionally may result
from difficulties in locating necessary parties defendant. When the mortgagee's
right to foreclosure is contested, the legal proceedings necessary to resolve
the issue can be time-consuming and expensive. After the completion of a
judicial foreclosure proceeding, the court may issue a judgment of foreclosure
and appoint a receiver or other officer to conduct the sale of the property. In
some states, mortgages may also be foreclosed by advertisement, pursuant to a
power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also
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may be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower/trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified 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 of record in the property. The trustor, borrower, or any 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
specified 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, recorded
and sent to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counter claims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the 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 potential third-party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
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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 guaranty insurance proceeds.
RIGHTS OF REDEMPTION In some states, after sale pursuant to a deed of trust
or foreclosure of a mortgage, the trustor or mortgagor and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. The right of redemption should be distinguished from the
equity of redemption, which is a non-statutory right that must be exercised
prior to the foreclosure sale. 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 exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to foreclosure or sale under a deed of trust. Consequently the
practical effect of a right of redemption is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
In some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES The mortgage loans included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the Trust Fund (and therefore the
Holders), as mortgagee under a junior mortgage, are subordinate to those of the
mortgagee under the senior mortgage, including the prior rights of the senior
mortgagee to receive hazard insurance and condemnation proceeds and to cause the
property securing the mortgage loan to be sold upon default of the mortgagor,
thereby extinguishing the junior mortgagee's lien unless the junior mortgagee
asserts its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee 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 mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders confers
on the mortgagee the right both to receive all proceeds collected under any
hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor 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 under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the
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mortgagor. All sums so expended by the mortgagee become part of the indebtedness
secured by the mortgage.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain states
have imposed statutory prohibitions which 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 is 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. In certain other states,
the lender has the option of bringing a personal action against the borrower on
the debt without first exhausting such security; however, in some of these
states, the lender, following judgment on such personal action, may be deemed to
have elected a remedy and may be precluded from exercising remedies with respect
to the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a foreclosure 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 foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the federal
Soldiers' and Sailors' Relief Act, and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 Bankruptcy Code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded from
foreclosing without authorization from the bankruptcy court. The lender's lien
may be transferred to other collateral and/or be limited in amount to the value
of the lender's interest in the collateral as of the date of the bankruptcy. The
loan term may be extended, the interest rate may be adjusted to market rates and
the
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priority of the loan may be subordinated to bankruptcy court-approved financing.
The bankruptcy court can, in effect, invalidate due-on-sale clauses through
confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the lender's
security. This may delay or interfere with the enforcement of rights in respect
of a defaulted Loan. In addition, substantive requirements are imposed upon
lenders in connection with the organization and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. The 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 and regulations. These federal laws impose specific statutory
liabilities upon lenders who originate loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS. Due-on-sale clauses permit the
lender to accelerate the maturity of the loan if the borrower sells or
transfers, whether voluntarily or involuntarily, all or part of the real
property securing the loan without the lender's prior written consent. The
enforceability of these clauses has been the subject of legislation or
litigation in many states, and in some cases, typically involving single-family
residential mortgage transactions, their enforceability has been limited or
denied. The Garn-St. Germain Sponsory Institutions Act of 1982 (the "Garn-St.
Germain Act") preempts state constitutional, statutory and case law that
prohibits the enforcement of due-on-sale clauses and permits lenders to enforce
these clauses in accordance with their terms, subject to certain exceptions. As
a result, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were
(i) originated or assumed during the "window period" under the Garn-St. Germain
Act which ended in all cases not later than October 15, 1982, and
(ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of "window period" loans. Also, 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.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES Forms of notes,
mortgages and deeds of trust used by lenders may contain provisions obligating
the borrower to pay a late charge if payments are not timely made, and in some
circumstances may provide for prepayment fees or penalties if the obligation is
paid prior to maturity. In certain states, there are or may be specific
limitations upon the 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. Late
charges and prepayment fees are typically retained by servicers as additional
servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES In connection with lenders' attempts to
realize upon their security, courts have invoked general equitable principles.
The equitable principles are generally designed to relieve the borrower from the
legal effect of the borrower's default under the loan documents. Such equitable
relief has included court-imposed requirements that the lender undertake
affirmative and sometimes costly actions to determine the causes of the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have required that lenders reinstate
loans or recast payment schedules in order to accommodate borrowers who are
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suffering from temporary financial disability. In other cases, courts have
limited the right of a lender to realize upon its security if the default under
the security agreement is not monetary, such as the borrower's failure to
adequately maintain the property or the borrower's execution of secondary
financing affecting the property. Finally, some courts have considered whether
federal or state constitutional requirements of "due process" require that
borrowers under security agreements receive notices in addition to the
statutorily prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
APPLICABILITY OF USURY LAWS Title V of the Sponsory Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980
("Title V"), provides that state usury limitations shall not apply to certain
types of residential first mortgage loans originated by certain lenders after
March 31, 1980. Similar federal statutes were in effect with respect to mortgage
loans made during the first three months of 1980. The Federal Home Loan Bank
Board is authorized to issue rules and regulations and to publish
interpretations governing implementation of Title V. Title V authorizes any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
state law, or by certifying that the voters of such state have voted in favor of
any provision, constitutional or otherwise, which expressly rejects an
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on mortgage loans covered by Title V.
THE HOME IMPROVEMENT CONTRACTS
GENERAL Home Improvement Contracts that are secured by the Home
Improvements financed thereby grant to the originator of such contracts a
purchase money security interest in such Home Improvements to secure all or part
of the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of such collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in such collateral must generally be perfected by a timely fixture filing. In
general, under the Uniform Commercial Code (the "UCC"), a security interest does
not exist under the UCC in ordinary building material incorporated into an
improvement on land. Home Improvement Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
such characterization, upon incorporation of such materials into the related
property, will not be secured by a purchase money security interest in the Home
Improvement being financed.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS So long as Home
Improvements have not become fixtures subject to real property laws, a creditor
can repossess Home Improvements securing a Home Improvement Contract by
voluntary surrender, by "self-help" repossession that is peaceful (i.e., without
breach of the peace) or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, by judicial process. The holder of
such a Home Improvement Contract
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must give the debtor a number of days' notice, which varies from 10 to 30 days
depending on the state, prior to commencement of any repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting such a sale. The laws in most states also require
that the debtor be given notice of any sale prior to resale of the unit so that
the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgement from a debtor for any deficiency following repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
CONSUMER PROTECTION LAWS The so-called "Holder-in-Due-Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract, if such transferor is the seller of the goods which
gave rise to the transaction (and certain related lenders and assignees), to
transfer such contract free of notice of claims by the debtor thereunder. The
effect of the rule is to subject the assignee of such a contract to all claims
and defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a contract; however,
the obligor also may be able to assert the rule to offset remaining amounts due
as a defense against a claim brought by the assignee against such obligor.
Numerous other federal and state consumer protection laws impose requirements
applicable to the Home Improvement Contracts, including the Truth in Lending
Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the Fair
Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
APPLICABILITY OF USURY LAWS Title V provides that, subject to certain
conditions, state usury limitations shall not apply to any contract which is
secured by a first lien on certain kinds of consumer goods. In the case of Home
Improvement Contracts secured by Home Improvements which have not become
fixtures, such conditions include, among other things, restrictions on
prepayment fees, late charges and deferral fees and a 30-day notice period prior
to instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by
Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts (each, an "Installment
Contract"). Under an Installment Contract, the seller retains legal title to the
property and enters into an agreement with the purchaser for the payment of the
purchase price, plus interest, over the term of such contract. Only after full
performance by the purchaser of the contract is the seller obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the term of the Installment Contract, the purchaser is
generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums associated
with the property.
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The method of enforcing the rights of the seller under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the purchaser, the purchaser loses his
or her right to occupy the property, the entire indebtedness is accelerated, and
the purchaser's equitable interest in the property is forfeited.
The seller in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases, a quiet title action is in order
if the purchaser has filed the Installment Contract in local land records, and
an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of a purchaser default during the early years of an
Installment Contract, the courts will permit ejectment of the purchaser and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
purchasers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the seller may be required to give notice of default, the purchaser
may be granted some grace period during which the Installment Contract may be
reinstated upon full payment of the default amount, and the purchaser may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a purchaser with significant investment in the property under an
Installment Contract for the sale of real estate to share in the proceeds of
sale of the property after the indebtedness is repaid or may otherwise refuse to
enforce the forfeiture clause. Nevertheless, generally speaking, the seller's
procedures for obtaining possession and clear title under an Installment
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors, and if, in the opinion of the
court, the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Loan
included in a Trust Fund for a Series is relieved pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940, none of the Trust Fund, the Servicer, the
Sponsor nor the Trustee will be required to advance such amounts, and any loss
in respect thereof may reduce the amounts available to be paid to the Holders of
the Securities of such Series. Unless otherwise specified in the related
Prospectus Supplement, any shortfalls in interest collections on Loans included
in a Trust Fund for a Series resulting from application of the Soldiers' and
Sailors' Civil Relief Act of 1940 will be allocated to each Class of Securities
of such Series that is entitled to receive interest in respect of such Loans in
proportion to the interest that each such Class of Securities would have
otherwise been entitled to receive in respect of such Loans had such interest
shortfall not occurred.
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THE SPONSOR AND SERVICER
Accredited Home Lenders, Inc. ("Accredited"), is a California corporation
engaged primarily in the origination and sale of nonconforming mortgage loans.
Accredited commenced operations in 1990 as a retail mortgage broker, and now
operates primarily as a wholesale mortgage banker, funding mortgage loans to
borrowers who are direct clients of mortgage brokers or other mortgage lenders
with which Accredited cultivates and maintains relationships. Accredited also
purchases funded mortgage loans which have been originated by other lenders in
accordance with Accredited's underwriting guidelines or which have been
reunderwritten by Accredited to ensure conformance to Accredited's underwriting
criteria. Accredited currently funds or purchases mortgage loans in over twenty
different states.
In 1996, Accredited began retaining the servicing rights to its mortgage
loan production, but it currently subcontracts substantially all of its
servicing obligations.
Accredited's headquarters are located at 15030 Avenue of Science,
Suite 100, San Diego, California 92128, and its telephone number is (619)
676-2100.
The related Holders will not have the right to direct the day-to-day
operations of the Sponsor or of the Servicer with respect to the related
Mortgage Assets. The Holders or, if specified in the related Prospectus
Supplement, the related Credit Enhancer, will have the right to terminate the
Servicer in connection with a Servicer default. See "The Pooling and Servicing
Agreement--Events of Default; Rights Upon Events of Default".
USE OF PROCEEDS
The Sponsor will apply all or substantially all of the net proceeds from the
sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Mortgage Assets, (ii) to repay indebtedness which
has been incurred to obtain funds to acquire such Mortgage Assets, (iii) to
establish any Reserve Funds described in the related Prospectus Supplement and
(iv) to pay costs of structuring and issuing such Securities, including the
costs of obtaining Credit Enhancement, if any.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material federal income tax consequences
of the purchase, ownership, and disposition of the securities and is based on
advice of tax counsel. The summary is based upon the provisions and regulations
of the Code, including, where applicable, proposed regulations, and the judicial
and administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and those changes could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold securities as capital assets within the meaning of Section 1221 of
the Code, but much of the discussion is applicable to other investors as well.
Prospective investors are advised to consult their own tax advisers concerning
the federal, state, local and any other tax consequences to them of the
purchase, ownership and disposition of the securities.
The federal income tax consequences to holders will vary depending on
whether
- the securities are classified as indebtedness;
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- an election is made to treat the trust as a REMIC or a FASIT under the
Internal Revenue Code of 1986, as amended (the "Code");
- the securities represent an ownership interest in some or all of the trust
assets; or
- an election is made to treat the trust as a partnership.
The prospectus supplement will specify how the securities will be treated
for federal income tax purposes and will discuss whether a REMIC or FASIT
election will be made.
TAXATION OF DEBT SECURITIES
STATUS AS REAL PROPERTY LOANS.
Typically, tax counsel will have advised the seller that:
- securities held by a domestic building and loan association will
constitute "loans...secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v); and
- securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code Section 856(c)(5)(A) and
interest on these 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).
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
INTEREST AND ACQUISITION DISCOUNT.
Securities representing regular interests in a REMIC are generally taxable
to holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the regular interest securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the holder's normal accounting method. Interest, other than original issue
discount, on securities, other than regular interest securities, that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders in accordance with their usual methods of accounting.
Securities characterized as debt for federal income tax purposes and regular
interest securities will be referred to collectively as debt securities. If a
FASIT election is made, the material federal tax income consequences for
investors associated with the purchase, ownership and disposition of those
securities will be set forth under the heading "Federal Income Tax Consequences"
in the prospectus supplement.
Debt securities that are compound interest securities will, and other debt
securities may, be issued with original issue discount, which we refer to as
"OID". The following discussion is based in part on the rules governing OID
which are set forth in Sections 1271-1275 of the Code and the Treasury
regulations issued on February 2, 1994, which we refer to as "OID Regulations".
A holder should be aware, however, that the OID Regulations do not adequately
address some issues relevant to prepayable securities, such as the debt
securities.
In general, OID, will equal the difference between the stated redemption
price at maturity of a debt security and its issue price. A holder of a debt
security must include OID in gross income as ordinary interest income as it
accrues under an accrual method of accounting. In general, OID must be included
in income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a de minimis amount determined under the Code.
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The issue price of a debt security is the first price at which a substantial
amount of debt securities of that class are sold to the public, excluding bond
houses, brokers, underwriters or wholesalers. If less than a substantial amount
of a particular class of debt securities is sold for cash on or prior to the
closing date, the issue price for the class will be treated as the fair market
value of the class on the closing date. The issue price of a debt security also
includes the amount paid by an initial debt security holder for accrued interest
that relates to a period prior to the issue date of the debt security. The
stated redemption price at maturity of a debt security includes the original
principal amount of the debt security, but generally will not include
distributions of interest if distributions constitute qualified stated interest.
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate and those
interest payments are unconditionally payable at intervals of one year or less
during the entire term of the debt security. The OID Regulations state that
interest payments are unconditionally payable only if a late payment or
nonpayment is expected to be penalized or reasonable remedies exist to compel
payment. Some debt securities may provide for default remedies in the event of
late payment or nonpayment of interest. The interest on those debt securities
will be unconditionally payable and constitute qualified stated interest, not
OID. However, absent clarification of the OID Regulations, where debt securities
do not provide for default remedies, the interest payments will be included in
the debt security's stated redemption price at maturity and taxed as OID.
Interest is payable at a single fixed rate only if the rate appropriately takes
into account the length of the interval between payments. Distributions of
interest on debt securities on which deferred interest will accrue will not
constitute qualified stated interest payments and will be part of the stated
redemption price at maturity of those debt securities. Where the interval
between the issue date and the first distribution date on a debt security is
either longer or shorter than the interval between subsequent distribution
dates, all or part of the interest foregone, in the case of the longer interval,
and all of the additional interest, in the case of the shorter interval, will be
included in the stated redemption price at maturity and tested under the de
minimis rule described in the next paragraph. In the case of a debt security
with a long first period which has non-de minimis OID, all stated interest in
excess of interest payable at the effective interest rate for the long first
period will be included in the stated redemption price at maturity and the debt
security will usually have OID. Holders of debt securities should consult their
own tax advisors to determine the issue price and stated redemption price at
maturity of a debt security.
Under the de minimis rule, OID on a debt security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity of
the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full 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 debt security and the denominator of which
is the stated redemption price at maturity of the debt security. Holders usually
must report de minimis OID pro rata as principal payments are received, and such
income will be capital gain if the debt security is held as a capital asset.
However, accrual method holders may elect to accrue all de minimis OID as well
as market discount under a constant interest method.
Debt securities may provide for interest based on a qualified variable rate.
Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally:
- the interest is unconditionally payable at least annually,
- the issue price of the debt instrument does not exceed the total
noncontingent principal payments and
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- interest is based on a qualified floating rate, an objective rate, or a
combination of qualified floating rates that do not operate in a manner
that significantly accelerates or defers interest payments on the debt
security.
In the case of compound interest securities, some interest weighted securities,
and other debt securities, none of the payments under the instrument will be
considered qualified stated interest, and thus the aggregate amount of all
payments will be included in the stated redemption price.
The IRS recently issued final regulations governing the calculation of OID
on instruments having contingent interest payments. The regulations specifically
do not apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the debt security. Additionally, the OID Regulations
do not contain provisions specifically interpreting Code Section 1272(a)(6).
Until the Treasury issues guidance to the contrary, the trustee intends to base
its computation on Code Section 1272(a)(6) and the OID Regulations as described
in this Prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that this methodology
represents the correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds the debt security, the
sum of the "daily portions" of the OID. The amount of OID includible in income
by a holder will be computed by allocating to each day during a taxable year a
pro rata portion of the OID that accrued during the relevant accrual period. In
the case of a debt security that is not a regular interest security and the
principal payments on which are not subject to acceleration resulting from
prepayments on the loans, the amount of OID includible in income of a holder for
an accrual period, which typically is the period over which interest accrues on
the debt instrument, will equal the product of the yield to maturity of the debt
security and the adjusted issue price of the debt security, reduced by any
payments of qualified stated interest. The adjusted issue price is the sum of
its issue price plus prior accruals or OID, reduced by the total payments made
with respect to the debt security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a holder of a debt instrument,
that is subject to acceleration due to prepayments on other debt obligations
securing such instruments, is computed by taking into account the anticipated
rate of prepayments assumed in pricing the debt instrument. The amount of OID
that will accrue during an accrual period on this type of security is the
excess, if any, of the sum of
- the present value of all payments remaining to be made on the security as
of the close of the accrual period and
- the payments during the accrual period of amounts included in the stated
redemption price of the security, over the adjusted issue price of the
security at the beginning of the accrual period.
The present value of the remaining payments is to be determined on the basis of
three factors:
- the original yield to maturity of the pay-through security, which is
determined on the basis of compounding at the end of each accrual period
and properly adjusted for the length of the accrual period,
- events which have occurred before the end of the accrual period, and
- the assumption that the remaining payments will be made in accordance with
the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments with respect to
the loans at a rate that exceeds the prepayment assumption, and to decrease, but
not below zero for any period, the portions of OID
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required to be included in income by a holder of this type of security to take
into account prepayments with respect to the loans at a rate that is slower than
the prepayment assumption. Although OID will be reported to holders of these
securities based on the prepayment assumption, no representation is made to
holders that loans will be prepaid at that rate or at any other rate.
The seller may adjust the accrual of OID on a class of regular interest
securities or other regular interests in a REMIC in a manner that it believes to
be appropriate, to take account of realized losses on the loans, although the
OID Regulations do not provide for such adjustments. If the IRS were to require
that OID be accrued without such adjustments, the rate of accrual of OID for a
class of regular interest securities could increase.
Some classes of regular interest securities may represent more than one
class of REMIC regular interests. As specified in the prospectus supplement, the
trustee intends, based on the OID Regulations, to calculate OID on these
securities as if, solely for the purposes of computing OID, the separate regular
interests were a single debt instrument.
A subsequent holder of a debt security will also be required to include OID
in gross income, but a holder who purchases that debt security for an amount
that exceeds its adjusted issue price will be entitled, as will an initial
holder who pays more than a debt security's issue price, to offset such OID by
comparable economic accruals of portions of the excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES.
Holders will be required to report income with respect to the securities
under an accrual method without giving effect to delays and reductions in
distributions attributable to a default or delinquency on the loans, except
possibly to the extent that it can be established that those amounts are
uncollectible. As a result, the amount of income, including OID, reported by a
holder of that security in any period could significantly exceed the amount of
cash distributed to the holder in that period. The holder will eventually be
allowed a loss, or will be allowed to report a lesser amount of income, to the
extent that the aggregate amount of distributions on the securities is deducted
as a result of a loan default. However, the timing and character of the losses
or reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
INTEREST WEIGHTED SECURITIES.
It is not clear how income should be accrued with respect to regular
interest securities or stripped securities, which we define under "--Tax Status
as a Grantor Trust; General", the payments on which consist solely or primarily
of a specified portion of the interest payments on qualified mortgages held by
the REMIC or on loans underlying pass-through securities which we refer to
interest weighted securities. The seller intends to take the position that all
of the income derived from an interest weighted security should be treated as
OID and that the amount and rate of accrual of such OID should be calculated by
treating the interest weighted security as a compound interest security.
However, in the case of interest weighted securities that are entitled to some
payments of principal and that are regular interest securities the IRS could
assert that income derived from an interest weighted security should be
calculated as if the security were a security purchased at a premium equal to
the excess of the price paid by the holder for the security over its stated
principal amount, if any. Under this approach, a holder would be entitled to
amortize such premium only if it has in effect an election under Section 171 of
the Code with respect to all taxable debt instruments held by such holder.
Alternatively, the IRS could assert that an interest weighted security should be
taxable under the rules governing bonds issued with contingent payments. That
treatment may be more likely in the case of interest weighted securities that
are stripped securities. See "--Tax Status as a Grantor Trust--Discount or
Premium on Pass-Through Securities."
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VARIABLE RATE DEBT SECURITIES.
In the case of debt securities bearing interest at a rate that varies
directly, according to a fixed formula, with an objective index, it appears that
- the yield to maturity of those debt securities and
- in the case of pay-through securities, the present value of all payments
remaining to be made on those debt securities, should be calculated as if
the interest index remained at its value as of the issue date of those
securities.
Because the proper method of adjusting accruals of OID on a variable rate debt
security is uncertain, holders of variable rate debt securities should consult
their own tax advisers regarding the appropriate treatment of such securities
for federal income tax purposes.
MARKET DISCOUNT.
A purchaser of a security may be subject to the market discount rules of
Sections 1276-1278 of the Code. A holder that acquires a debt security with more
than a prescribed de minimis amount of market discount, which generally is the
excess of the principal amount of the debt security over the purchaser's
purchase price, will be required to include accrued market discount in income as
ordinary income in each month, but limited to an amount not exceeding the
principal payments on the debt security received in that month and, if the
securities are sold, the gain realized. Market discount would accrue in a manner
to be provided in Treasury regulations but, until regulations are issued, market
discount would in general accrue either:
- on the basis of a constant yield, in the case of a security subject to
prepayment, taking into account a prepayment assumption, or
- in the ratio of (a) in the case of securities or the loans underlying
pass-through security that have not been originally issued with OID,
stated interest payable in the relevant period to total stated interest
remaining to be paid at the beginning of the period or (b) in the case of
securities or the loans underlying pass-through security originally issued
at a discount, OID in the relevant period to total OID remaining to be
paid.
Section 1277 of the Code provides that, regardless of the origination date
of the debt security or the loans for a pass-through security, the excess of
interest paid or accrued to purchase or carry a security or the underlying loans
for a pass-through security with market discount over interest received on the
security is allowed as a current deduction only to the extent excess is greater
than the market discount that accrued during the taxable year in which interest
expense was incurred. In general, the deferred portion of any interest expense
will be deductible when market discount is included in income, including upon
the sale, disposition, or repayment of the security or an underlying loan for a
pass-through security. A holder may elect to include market discount in income
currently as it accrues, on all market discount obligations acquired by holder
during the taxable year the election is made and after, in which case the
interest deferral rule will not apply.
PREMIUM.
A holder who purchases a debt security, other than an interest weighted
security as described under "--Taxation of Debt Securities; Interest Weighted
Securities", at a cost greater than its stated redemption price at maturity,
generally will be considered to have purchased the security at a premium, which
it may elect to amortize as an offset to interest income on such security, and
not as a separate deduction item, on a constant yield method. Although no
regulations addressing the computation of premium accrual on securities similar
to the securities have been issued, the legislative history of the 1986 Act
indicates that premium is to be accrued in the same manner as market discount.
Accordingly,
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it appears that the accrual of premium on a class of pay-through securities will
be calculated using the prepayment assumption used in pricing. If a holder makes
an election to amortize premium on a debt security, the election will apply to
all taxable debt instruments, including all REMIC regular interests and all
pass-through securities representing ownership interests in a trust holding debt
obligations, held by the holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired after by the
holder, and will be irrevocable without the consent of the IRS. Purchasers who
pay a premium for the securities should consult their tax advisers regarding the
election to amortize premium and the method to be employed. Recently, the IRS
issued final regulations dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the securities. Absent further guidance from the
IRS, the trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the securities should consult their
tax advisors regarding the possible application of these regulations.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT.
The OID Regulations permit a holder of a debt security to elect to accrue
all interest, discount, including de minimis market or OID, and premium income
as interest, based on a constant yield method for debt securities acquired on or
after April 4, 1994. If an election were to be made with respect to a debt
security with market discount, the holder of the debt security would be deemed
to have made an election to include in income currently market discount with
respect to all other debt instruments having market discount that such holder of
the debt security acquires during the year of the election or thereafter.
Similarly, a holder of a debt security that makes this election for a debt
security that is acquired at a premium will be deemed to have made an election
to amortize bond premium for all debt instruments having amortizable bond
premium that such holder owns or acquires. The election to accrue interest,
discount and premium on a constant yield method for a debt security is
irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
In the opinion of tax counsel, if a REMIC election is made with respect to a
series of securities, then the arrangement by which the securities of that
series are issued will be treated as a REMIC as long as all of the provisions of
the applicable Agreement are complied with and the statutory and regulatory
requirements are satisfied. Securities will be designated as regular interests
or residual interests in a REMIC, as specified in the prospectus supplement.
Generally, if a REMIC election is made with respect to a series of
securities,
- securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the
meaning of Code Section 7701(a)(19)(C)(xi), assuming that at least 95% of
the REMIC's assets consist of cash, government securities, "loans secured
by an interest in real property," and other types of assets described in
Code Section 7701(a)(19)(C); and
- securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Code Section 856(c)(5)(B), and income
with respect to the 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), assuming, for both
purposes, that at least 95% of the REMIC's assets are qualifying assets.
If less than 95% of the REMIC's assets consist of the qualifying assets
described above, then a security will be a qualifying asset in the proportion
that REMIC assets are qualifying assets.
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REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into account
by holders of the residual interest securities. In the case of a single class
REMIC, however, the expenses will be allocated, under Treasury regulations,
among the holders of the regular interest securities and the holders of the
residual interest securities, on a daily basis in proportion to the relative
amounts of income accruing to each holder on that day. In the case of a holder
of a regular interest security who is an individual or a pass-through interest
holder, including certain pass-through entities but not real estate investment
trusts, expenses will be deductible only to the extent that expenses, plus other
"miscellaneous itemized deductions" of the holder, exceed 2% of the holder's
adjusted gross income. In addition, for taxable years beginning after December
31, 1990, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable
amount, which amount will be adjusted for inflation for taxable years beginning
after 1990, will be reduced by the lesser of:
- 3% of the excess of adjusted gross income over the applicable amount, or
- 80% of the amount of itemized deductions otherwise allowable for such
taxable year.
The reduction or disallowance of this deduction may have a significant
impact on the yield of the regular interest security to such a holder. In
general terms, a single class REMIC is one that either:
- would qualify, under existing Treasury regulations, as a grantor trust if
it were not a REMIC, treating all interests as ownership interests, even
if they would be classified as debt for federal income tax purposes, or
- is similar to a trust and which is structured with the principal purpose
of avoiding the single class REMIC rules.
As specified in the prospectus supplement, the expenses of the REMIC will be
allocated to holders of the related residual interest securities.
TAXATION OF THE REMIC
GENERAL.
Although a REMIC is a separate entity for federal income tax purposes, a
REMIC is not generally subject to entity-level tax. Rather, the taxable income
or net loss of a REMIC is taken into account by the holders of residual
interests. As described in "--Taxation of Debt Securities; Interest and
Acquisition Discount", the regular interests are generally taxable as debt of
the REMIC.
CALCULATION OF REMIC INCOME.
The taxable income or net loss of a REMIC is determined under an accrual
method of accounting and in the same manner as in the case of an individual,
with certain adjustments. In general, the taxable income or net loss will be the
difference between
- the gross income produced by the REMIC's assets, including stated interest
and any OID or market discount on loans and other assets, and
- deductions, including stated interest and OID accrued on regular interest
securities, amortization of any premium with respect to loans, and
servicing fees and other expenses of the REMIC.
A holder of a residual interest security that is an individual or a pass-through
interest holder, including certain pass-through entities, but not including real
estate investment trusts, will be unable to deduct servicing fees payable on the
loans or other administrative expenses of the REMIC for a given taxable year, to
the extent that such expenses, when aggregated with such holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such holder's adjusted gross income.
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For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the day that
the interests are issued, which we refer to as the "start up day". The aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on the loans
will be equivalent to the method under which holders of pay-through securities
accrue OID, i.e., under the constant yield method taking into account the
prepayment assumption. The REMIC will deduct OID on the regular interest
securities in the same manner that the holders of the regular interest
securities include such discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities". However, a REMIC that acquires loans
at a market discount must include such market discount in income currently, as
it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans, taking into account the prepayment assumption on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before that date, it is possible that the
premium may be recovered in proportion to payments of loan principal.
PROHIBITED TRANSACTIONS AND CONTRIBUTIONS TAX.
The REMIC will be subject to a 100% tax on any net income derived from a
"prohibited transaction." For this purpose, net income will be calculated
without taking into account any losses from prohibited transactions or any
deductions attributable to any prohibited transaction that resulted in a loss.
In general, prohibited transactions include:
- the sale or other disposition of any qualified mortgage transferred to the
REMIC;
- the sale or other disposition of a cash flow investment;
- the receipt of any income from assets not permitted to be held by the
REMIC; or
- the receipt of any fees or other compensation for services rendered by the
REMIC.
It is anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, a tax is
generally imposed at the rate of 100% on amounts contributed to a REMIC after
the close of the three-month period beginning on the startup day. The holders of
residual interest securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, taxes will be paid out of the trust and will be allocated
pro rata to all outstanding classes of securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a security representing a residual interest security will take
into account the "daily portion" of the taxable income or net loss of the REMIC
for each day during the taxable year on which holder held the residual interest
security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for such quarter, and by allocating that amount among the holders, on that
day of the residual interest securities in proportion to their respective
holdings on such day.
The holder of a residual interest security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to the income or loss. The reporting
of taxable income without corresponding distributions could occur, for
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example, in certain REMIC issues in which the loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC regular interests
issued without any discount or at an insubstantial discount. If this occurs, it
is likely that cash distributions will exceed taxable income in later years.
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC regular interest securities, will typically
increase over time as lower yielding securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the holder of a residual interest security is taxed on
the net income of the REMIC, the taxable income derived from a residual interest
security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the residual interest security may be less than that of a bond or
instrument.
LIMITATION ON LOSSES.
The amount of the REMIC's net loss that a holder may take into account
currently is limited to the holder's adjusted basis at the end of the calendar
quarter in which the loss arises. A holder's basis in a residual interest
security will initially equal such holder's purchase price, and will
subsequently be increased by the amount of the REMIC's taxable income allocated
to the holder, and decreased, but not below zero, by the amount of distributions
made and the amount of the REMIC's net loss allocated to the holder. Any
disallowed loss may be carried forward indefinitely, but may be used only to
offset income of the REMIC generated by the same REMIC. The ability of holders
of residual interest securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
DISTRIBUTIONS.
Distributions on a residual interest security, whether at their scheduled
times or as a result of prepayments, will generally not result in any additional
taxable income or loss to a holder of a residual interest security. If the
amount of such payment exceeds a holder's adjusted basis in the residual
interest security, however, the holder will recognize gain, treated as gain from
the sale of the residual interest security, to the extent of the excess.
SALE OR EXCHANGE.
A holder of a residual interest security will recognize gain or loss on the
sale or exchange of a residual interest security equal to the difference, if
any, between the amount realized and the holder's adjusted basis in the residual
interest security at the time of the sale or exchange. Except to the extent
provided in regulations, which have not yet been issued, any loss upon
disposition of a residual interest security will be disallowed if the selling
holder acquires any residual interest in a REMIC or similar mortgage pool within
six months before or after the disposition.
EXCESS INCLUSIONS.
The portion of the REMIC taxable income of a holder of a residual interest
security consisting of "excess inclusion" income may not be offset by other
deductions or losses, including net operating losses, on the holder's federal
income tax return. Further, if the holder of a residual interest security is an
organization subject to the tax on unrelated business income imposed by Code
Section 511, the holder's excess inclusion income will be treated as unrelated
business taxable income of the holder. In addition, under Treasury regulations
yet to be issued, if a real estate investment trust, a regulated investment
company, a common trust, or certain cooperatives were to own a residual interest
security, a portion of dividends or other distributions paid by the real estate
investment trust or other entity would
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be treated as excess inclusion income. If a Residual security is owned by a
foreign person excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as portfolio
interest and is subject to certain additional limitations. See "Tax Treatment of
Foreign Investors."
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions, i.e., thrift institutions, to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
residual interest security, over the daily accruals for the quarterly period of:
- 120% of the long term applicable federal rate on the startup day
multiplied by
- the adjusted issue price of the residual interest security at the
beginning of the quarterly period.
The adjusted issue price of a residual interest at the beginning of each
calendar quarter will equal its issue price, calculated in a manner analogous to
the determination of the issue price of a regular interest, increased by the
aggregate of the daily accruals for prior calendar quarters, and decreased, but
not below zero, by the amount of loss allocated to a holder and the amount of
distributions made on the residual interest security before the beginning of the
quarter. The long-term federal rate, which is announced monthly by the Treasury
Department, is an interest rate that is based on the average market yield of
outstanding marketable obligations of the United States government having
remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of residual
securities may be disregarded. See "--Restrictions on Ownership and Transfer of
Residual Interest Securities" and "--Tax Treatment of Foreign Investors" below.
RESTRICTIONS ON OWNERSHIP AND TRANSFER OF RESIDUAL INTEREST SECURITIES.
As a condition to qualification as a REMIC, reasonable arrangements must be
made to prevent the ownership of a residual interest security by any
disqualified organization. Disqualified organizations include the United States,
any State or political subdivision of the United States, any foreign government,
any international organization, or any agency or instrumentality of any of the
foregoing, a rural electric or telephone cooperative described in Section
1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by Sections
1-1399 of the Code, if such entity is not subject to tax on its unrelated
business income. Accordingly, the applicable Agreement will prohibit
disqualified organizations from owning a residual interest security. In
addition, no transfer of a residual interest
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security will be permitted unless the proposed transferee shall have furnished
to the trustee an affidavit representing and warranting that it is neither a
disqualified organization nor an agent or nominee acting on behalf of a
disqualified organization.
If a residual interest security is transferred to a disqualified
organization in violation of the restrictions set forth above, a substantial tax
will be imposed on the transferor of the residual interest security at the time
of the transfer. In addition, if a disqualified organization holds an interest
in a pass-through entity, including, among others, a partnership, trust, real
estate investment trust, regulated investment company, or any person holding as
nominee, that owns a residual interest security, the pass-through entity will be
required to pay an annual tax on its allocable share of the excess inclusion
income of the REMIC.
Under the REMIC Regulations, if a residual interest security is a
noneconomic residual interest, a transfer of the residual interest security to a
United States person will be disregarded for all federal tax purposes unless no
significant purpose of the transfer was to impede the assessment or collection
of tax (a "wrongful purpose"). A residual interest security is a noneconomic
residual interest unless, at the time of the transfer:
- the present value of the expected future distributions on the residual
interest security at least equals the product of the present value of the
anticipated excess inclusions and the highest rate of tax for the year in
which the transfer occurs, and
- the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes
accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
The transferor of a REMIC residual interest is presumed not to have a wrongful
purpose if it: (i) conducts a reasonable investigation of the transferee's
financial condition and concludes that the transferee has historically paid its
debts as they come due and finds no significant evidence indicating that the
transferee will not continue to pay its debts as they come due in the future,
and (ii) receives a representation from the transferee that the transferee
understands the tax obligations associated with holding a residual interest and
intends to pay those taxes as they come due. The IRS has issued proposed
Treasury regulations that would add to the conditions necessary to ensure that a
transfer of a noneconomic residual interest would be respected. The proposed
additional condition provides that the transfer of a noneconomic residual
interest will not qualify under this safe harbor unless the present value of the
anticipated tax liabilities associated with holding the residual interest does
not exceed the present value of the sum of (i) any consideration given to the
transferee to acquire the interest (the inducement payment), (ii) future
distributions on the interest, and (iii) any anticipated tax savings associated
with holding the interest as the REMIC generates losses. For purposes of this
calculation, the present value is calculated using a discount rate equal to the
lesser of the applicable federal rate and the transferee's cost of borrowing.
The proposed effective date for the changes is February 4, 2000. If a transfer
of a residual interest is disregarded, the transferor would be liable for any
Federal income tax imposed upon taxable income derived by the transferee from
the REMIC. The REMIC Regulations provide no guidance as to how to determine if a
significant purpose of a transfer is to impede the assessment or collection of
tax. A similar type of limitation exists with respect to certain transfers of
residual interest securities by foreign persons to United States persons. See
"--Tax Treatment of Foreign Investors."
MARK TO MARKET RULES.
Prospective purchasers of a residual interest security should be aware that
the IRS regulations which provide that a residual interest security acquired
after January 3, 1995 cannot be marked-to-market.
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ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
GENERAL.
As specified in the prospectus supplement if a REMIC election is not made,
in the opinion of tax counsel, the trust relating to a series of securities will
be classified for federal income tax purposes as a grantor trust under Subpart
E, Part I of Subchapter J of the Code and not as an association taxable as a
corporation. In some series there will be no separation of the principal and
interest payments on the loans. In such circumstances, a holder will be
considered to have purchased a pro rata undivided interest in each of the loans.
In other cases, i.e. stripped securities, sale of the securities will produce a
separation in the ownership of all or a portion of the principal payments from
all or a portion of the interest payments on the loans.
Each holder must report on its federal income tax return its share of the
gross income derived from the loans, not reduced by the amount payable as
trustee fees and the servicing fees, at the same time and in the same manner as
those items would have been reported under the holder's tax accounting method
had it held its interest in the loans directly, received directly its share of
the amounts received with respect to the loans, and paid directly its share of
the servicing fees. In the case of pass-through securities other than stripped
securities, the income will consist of a pro rata share of all of the income
derived from all of the loans and, in the case of stripped securities, the
income will consist of a pro rata share of the income derived from each stripped
bond or stripped coupon in which the holder owns an interest. The holder of a
security will generally be entitled to deduct servicing fees under Section 162
or Section 212 of the Code to the extent that the servicing fees represent
reasonable compensation for the services rendered by the trustee and the master
servicer or third parties that are compensated for the performance of services.
In the case of a noncorporate holder, however, servicing fees, to the extent not
otherwise disallowed, e.g., because they exceed reasonable compensation, will be
deductible in computing the holder's regular tax liability only to the extent
that the fees, when added to other miscellaneous itemized deductions, exceed 2%
of adjusted gross income and may not be deductible to any extent in computing
the holder's alternative minimum tax liability. In addition, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount, which will be
adjusted for inflation, will be reduced by the lesser of:
- 3% of the excess of adjusted gross income over the applicable amount or
- 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
DISCOUNT OR PREMIUM ON PASS-THROUGH SECURITIES.
The holder's purchase price of a pass-through security is to be allocated
among the loans in proportion to their fair market values, determined as of the
time of purchase of the securities. In the typical case, the trustee, to the
extent necessary to fulfill its reporting obligations, will treat each loan as
having a fair market value proportional to the share of the aggregate principal
balances of all of the loans that it represents, since the securities generally
will have a relatively uniform interest rate and other common characteristics.
To the extent that the portion of the purchase price of a pass-through security
allocated to a loan, other than to a right to receive any accrued interest
thereon and any undistributed principal payments, is less than or greater than
the portion of the principal balance of the
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loan allocable to the security, the interest in the loan allocable to the
pass-through security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount represents
OID or market discount. In the case of a loan with OID in excess of a prescribed
de minimis amount or a stripped security, a holder of a security will be
required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a loan could arise, for example, by virtue of the financing of
points by the originator of the loan, or by virtue of the charging of points by
the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not deductible under the
Code. Any market discount or premium on a loan will be includible in income,
generally in the manner described in "--Taxation of Debt Securities; Premium and
Market Discount", except that in the case of pass-through securities, market
discount is calculated on the loans underlying the Certificate, rather than on
the security. A holder that acquires an interest in a loan originated after July
18, 1984 with more than a de minimis amount of market discount, generally, the
excess of the principal amount of the loan over the purchaser's allocable
purchase price, will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities; Market Discount"
and "--Premium" above.
In the case of market discount on a pass-through security attributable to
loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time such principal payment
is made. That treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
STRIPPED SECURITIES.
A stripped security may represent a right to receive only a portion of the
interest payments on the loans, a right to receive only principal payments on
the loans, or a right to receive certain payments of both interest and
principal. Certain stripped securities such as ratio strip securities may
represent a right to receive differing percentages of both the interest and
principal on each loan. Under Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of stripped bonds with respect to principal
payments and stripped coupons with respect to interest payments. Section 1286 of
the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing OID, a stripped bond or a stripped coupon is treated as a
debt instrument issued on the date that such stripped interest is purchased with
an issue price equal to its purchase price or, if more than one stripped
interest is purchased, the ratable share of the purchase price allocable to the
stripped interest.
Servicing fees in excess of reasonable servicing fees will be treated under
the stripped bond rules. If the excess servicing fees are less than 100 basis
points or 1% interest on the loan principal balance or the securities are
initially sold with a de minimis discount, assuming no prepayment assumption is
required, any non-de minimis discount arising from a subsequent transfer of the
securities should be treated as market discount. The IRS appears to require that
reasonable servicing fees be calculated on a loan by loan basis, which could
result in some loans being treated as having more than 100 basis points of
interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and OID rules are to apply to stripped securities and
other pass-through securities. Under the method described in "--Taxation of Debt
Securities; Interest and Acquisition Discount" for prepayment securities or the
cash flow bond method, a prepayment assumption is used and periodic
recalculations are made which take into account with respect to each accrual
period the effect of prepayments during
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the period. However, the 1986 Act does not, absent Treasury regulations, appear
specifically to cover instruments such as the stripped securities which
technically represent ownership interests in the underlying loans, rather than
being debt instruments secured by those loans. Nevertheless, it is believed that
the cash flow bond method is a reasonable method of reporting income for the
securities, and it is expected that OID will be reported on that basis, as
specified in the prospectus supplement. In applying the calculation to
pass-through securities, the trustee will treat all payments to be received by a
holder with respect to the underlying loans as payments on a single installment
obligation. The IRS could, however, assert that OID must be calculated
separately for each loan underlying a security.
Under certain circumstances, if the loans prepay at a rate faster than the
prepayment assumption, the use of the cash flow bond method may accelerate a
holder's recognition of income. If, however, the loans prepay at a rate slower
than the prepayment assumption, in some circumstances the use of this method may
decelerate a holder's recognition of income.
In the case of a stripped security that is an interest weighted security,
the trustee intends, absent contrary authority, to report income to
securityholders as OID, in the manner described above for interest weighted
securities.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS.
The characterizations of the stripped securities described in the preceding
section are not the only possible interpretations of the applicable Code
provisions. Among other possibilities, the IRS could contend that:
- in some series, each non-interest weighted security is composed of an
unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped principal payments;
- the non-interest weighted securities are subject to the contingent payment
provisions of the Contingent Regulations; or
- each interest weighted stripped security is composed of an unstripped
undivided ownership interest in loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the stripped securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the securities for federal income tax
purposes.
CHARACTER AS QUALIFYING LOANS.
In the case of stripped securities, there is no specific legal authority
existing regarding whether the character of the securities, for federal income
tax purposes, will be the same as the loans. The IRS could take the position
that the loans' character is not carried over to the securities. Pass-through
securities will be, and, although the matter is not free from doubt, stripped
securities should be considered to represent "real estate assets" within the
meaning of Section 856(c)(5)(B) of the Code and "loans secured by an interest in
real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code. In
addition, interest income attributable to the securities should be considered to
represent "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Section 856(c)(3)(B) of the
Code. Reserves or funds underlying the securities may cause a proportionate
reduction in the above-described qualifying status categories of securities.
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SALE OR EXCHANGE
Subject to the discussion below with respect to trusts as to which a
partnership election is made, a holder's tax basis in its security is the price
such holder pays for a security, plus amounts of original issue or market
discount included in income and reduced by any payments received, other than
qualified stated interest payments, and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a security, measured by the
difference between the amount realized and the security's basis as so adjusted,
will generally be capital gain or loss, assuming that the security is held as a
capital asset. In the case of a security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a regular interest security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a regular
interest security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of the amount that would
have been includible in the holder's income if the yield on the regular interest
security had equaled 110% of the applicable federal rate as of the beginning of
the holder's holding period, over the amount of ordinary income actually
recognized by the holder on the regular interest security.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING.
Subject to the discussion below with respect to trusts as to which a
partnership election is made, a holder, other than a holder of a residual
interest security, may, under certain circumstances, be subject to "backup
withholding" at a rate of 31% with respect to distributions or the proceeds of a
sale of certificates to or through brokers that represent interest or OID on the
securities. This withholding generally applies if the holder of a security
- fails to furnish the trustee with its taxpayer identification number;
- furnishes the trustee an incorrect taxpayer identification number;
- fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
- under some circumstances, fails to provide the trustee or such holder's
securities broker with a certified statement, signed under penalty of
perjury, that the taxpayer identification number provided is its correct
number and that the holder is not subject to backup withholding.
Backup withholding will not apply, however, to some payments made to holders,
including payments to certain exempt recipients, such as exempt organizations,
and to certain nonresidents. Holders should consult their tax advisers as to
their qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The trustee will report to the holders and to the master servicer for each
calendar year the amount of any reportable payments during the year and the
amount of tax withheld, if any, with respect to payments on the securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to trusts as to which a
partnership election is made, under the Code, unless interest, including OID,
paid on a security, other than a residual interest security, is considered to be
effectively connected with a trade or business conducted in the United States by
a nonresident alien individual, foreign partnership or foreign corporation,
which we define as "nonresident", those interest will normally qualify as
portfolio interest, except where the recipient is a holder, directly or by
attribution, of 10% or more of the capital or profits interest in the issuer, or
the recipient is a controlled foreign corporation to which the issuer is a
related person, and will be exempt
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from federal income tax. Upon receipt of appropriate ownership statements, the
issuer normally will be relieved of obligations to withhold tax from the
interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate, unless that rate were reduced or eliminated by an
applicable tax treaty, on, among other things, interest and other fixed or
determinable, annual or periodic income paid to nonresidents. Holders of
pass-through securities and stripped securities, including ratio strip
securities, however, may be subject to withholding to the extent that the loans
were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of residual interest securities who are foreign persons
will generally be treated as interest for purposes of the 30% or lower treaty
rate United States withholding tax. Holders should assume that the income does
not qualify for exemption from United States withholding tax as portfolio
interest. It is clear that, to the extent that a payment represents a portion of
REMIC taxable income that constitutes excess inclusion income, a holder of a
residual interest security will not be entitled to an exemption from or
reduction of the 30% or lower treaty rate withholding tax rule. If the payments
are subject to United States withholding tax, they generally will be taken into
account for withholding tax purposes only when paid or distributed or when the
residual interest security is disposed of. The Treasury has statutory authority,
however, to promulgate regulations which would require that these amounts to be
taken into account at an earlier time in order to prevent the avoidance of tax.
Such regulations could, for example, require withholding prior to the
distribution of cash in the case of residual interest securities that do not
have significant value. Under the REMIC Regulations, if a residual interest
security has tax avoidance potential, a transfer of a residual interest security
to a nonresident will be disregarded for all federal tax purposes. A residual
interest security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee amounts that will equal at least 30% of each excess inclusion, and
that these amounts will be distributed at or after the time at which the excess
inclusions accrue and not later than the calendar year following the calendar
year of accrual. If a Nonresident transfers a residual interest security to a
United States person, and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
residual interest security for purposes of the withholding tax provisions of the
Code. See "--Excess Inclusions."
On October 6, 1997, the Treasury Department issued new regulations which
make certain modifications to the withholding and information reporting rules
described in the preceding paragraph. The new regulations attempt to unify
certification requirements and modify reliance standards. The new regulations
will generally be effective for payments made after December 31, 2000, subject
to certain transition rules. We suggest that prospective investors consult their
own tax advisors regarding the new regulations.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Tax counsel will deliver its opinion that a trust will not be treated as a
publicly traded partnership taxable as a corporation for federal income tax
purposes. This opinion will be based on the assumption that the terms of the
related Agreement and related documents will be complied with, and on counsel's
conclusions that the nature of the income of the trust will exempt it from the
rule that certain publicly traded partnerships are taxable as corporations or
the issuance of the securities has been structured as a private placement under
an IRS safe harbor, so that the trust will not be characterized as a publicly
traded partnership taxable as a corporation.
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If the trust were taxable as a corporation for federal income tax purposes,
the trust would be subject to corporate income tax on its taxable income. The
trust's taxable income would include all its income, possibly reduced by its
interest expense on the notes. Any such corporate income tax could materially
reduce cash available to make payments on the notes and distributions on the
certificates, and certificateholders could be liable for any tax that is unpaid
by the trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS.
The trust will agree, and the noteholders will agree by their purchase of
notes, to treat the notes as debt for federal income tax purposes. Generally,
tax counsel will advise the seller that the notes will be classified as debt for
federal income tax purposes. The discussion below assumes this characterization
of the notes is correct.
OID, INDEXED SECURITIES, ETC.
The discussion below assumes that all payments on the notes are denominated
in U.S. dollars, and that the notes are not indexed securities or strip notes.
Moreover, the discussion assumes that the interest formula for the notes meets
the requirements for qualified stated interest under the OID Regulations, and
that any OID on the notes, i.e., any excess of the principal amount of the notes
over their issue price, does not exceed a de minimis amount, i.e., 0.25% of
their principal amount multiplied by the number of full years included in their
term, all within the meaning of the OID Regulations. If these conditions are not
satisfied with respect to any given series of notes, additional tax
considerations with respect to such notes will be disclosed in the prospectus
supplement.
INTEREST INCOME ON THE NOTES.
Based on the above assumptions, except as discussed in the following
paragraph, the notes will not be considered issued with OID. The stated interest
thereon will be taxable to a noteholder as ordinary interest income when
received or accrued in accordance with noteholder's method of tax accounting.
Under the OID Regulations, a holder of a note issued with a de minimis amount of
OID must include such OID in income, on a pro rata basis, as principal payments
are made on the note. It is believed that any prepayment premium paid as a
result of a mandatory redemption will be taxable as contingent interest when it
becomes fixed and unconditionally payable. A purchaser who buys a note for more
or less than its principal amount will generally be subject, respectively, to
the premium amortization or market discount rules of the Code.
A holder of a note that has a fixed maturity date of not more than one year
from the issue date of note which we refer to as a short-term note may be
subject to special rules. An accrual basis holder of a short-term note and
certain cash method holders, including regulated investment companies, as set
forth in Section 1281 of the Code generally would be required to report interest
income as interest accrues on a straight-line basis over the term of each
interest period. Other cash basis holders of a short-term note would, in
general, be required to report interest income as interest is paid or, if
earlier, upon the taxable disposition of the short-term note. However, a cash
basis holder of a short-term note reporting interest income as it is paid may be
required to defer a portion of any interest expense otherwise deductible on
indebtedness incurred to purchase or carry the short-term note until the taxable
disposition of the short-term note. A cash basis taxpayer may elect under
Section 1281 of the Code to accrue interest income on all nongovernment debt
obligations with a term of one year or less, in which case the taxpayer would
include interest on the short-term note in income as it accrues, but would not
be subject to the interest expense deferral rule referred to in the preceding
sentence. Certain special rules apply if a short-term note is purchased for more
or less than its principal amount.
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SALE OR OTHER DISPOSITION.
If a noteholder sells a note, the holder will recognize gain or loss in an
amount equal to the difference between the amount realized on the sale and the
holder's adjusted tax basis in the note. The adjusted tax basis of a note to a
particular noteholder will equal the holder's cost for the note, increased by
any market discount, acquisition discount, OID and gain previously included by
noteholder in income with respect to the note and decreased by the amount of
bond premium, if any, previously amortized and by the amount of principal
payments previously received by noteholder with respect to the note. Any such
gain or loss will be capital gain or loss if the note was held as a capital
asset, except for gain representing accrued interest and accrued market discount
not previously included in income. Capital losses generally may be used only to
offset capital gains.
FOREIGN HOLDERS.
Interest payments made or accrued to a noteholder who is a nonresident
alien, foreign corporation or other non-United States person generally will be
considered portfolio interest, and generally will not be subject to United
States federal income tax and withholding tax, if the interest is not
effectively connected with the conduct of a trade or business within the United
States by the foreign person, and the foreign person:
- is not actually or constructively a "10 percent shareholder" of the trust
or the seller, including a holder of 10% of the outstanding certificates,
or a "controlled foreign corporation" with respect to which the trust or
the seller is a "related person" within the meaning of the Code and
- provides the trustee or other person who is otherwise required to withhold
U.S. tax with respect to the notes with an appropriate statement on Form
W-8 or a similar form, signed under penalties of perjury, certifying that
the beneficial owner of the note is a foreign person and providing the
foreign person's name and address.
If a note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8 or substitute form provided by the
foreign person that owns the note. If such interest is not portfolio interest,
then it will be subject to United States federal income and withholding tax at a
rate of 30 percent, unless reduced or eliminated by an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a foreign person will be exempt from United
States federal income and withholding tax, if:
- the gain is not effectively connected with the conduct of a trade or
business in the United States by the foreign person and
- in the case of an individual foreign person, the foreign person is not
present in the United States for 183 days or more in the taxable year.
BACKUP WITHHOLDING.
Each holder of a note, other than an exempt holder such as a corporation,
tax-exempt organization, qualified pension and profit-sharing trust, individual
retirement account or nonresident alien who provides certification as to status
as a nonresident, will be required to provide, under penalties of perjury, a
certificate containing the holder's name, address, correct federal taxpayer
identification number and a statement that the holder is not subject to backup
withholding. Should a nonexempt noteholder fail to provide the required
certification, the trust will be required to withhold 31 percent of the amount
otherwise payable to the holder, and remit the withheld amount to the IRS as a
credit against the holder's federal income tax liability.
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POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES.
If, contrary to the opinion of tax counsel, the IRS successfully asserted
that one or more of the notes did not represent debt for federal income tax
purposes, the notes might be treated as equity interests in the trust. If so
treated, the trust might be treated as a publicly traded partnership taxable as
a corporation with the adverse consequences described in "--Tax Characterization
of the Trust as a Partnership" and the taxable corporation would not be able to
reduce its taxable income by deductions for interest expense on notes
recharacterized as equity. Alternatively, and most likely in the view of tax
counsel, the trust might be treated as a publicly traded partnership that would
not be taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to some holders.
For example, income to certain tax-exempt entities including pension funds would
be unrelated business taxable income, income to foreign holders generally would
be subject to U.S. tax and U.S. tax return filing and withholding requirements,
and individual holders may be limited in their ability to deduct their share of
the trust's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST AS A PARTNERSHIP.
The trust and the master servicer will agree, and the certificateholders
will agree by their purchase of certificates, to treat the trust as a
partnership for purposes of federal and state income tax, franchise tax and any
other tax measured in whole or in part by income, with the assets of the
partnership being the assets held by the trust, the partners of the partnership
being the certificateholders, and the notes being debt of the partnership.
However, the proper characterization of the arrangement involving the trust, the
certificates, the notes, the trust and the master servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust. Any such characterization
would not result in materially adverse tax consequences to certificateholders as
compared to the consequences from treatment of the certificates as equity in a
partnership. The following discussion assumes that the certificates represent
equity interests in a partnership.
INDEXED SECURITIES, ETC.
The following discussion assumes that all payments on the certificates are
denominated in U.S. dollars, none of the certificates are indexed securities or
strip certificates, and that a series of securities includes a single class of
certificates. If these conditions are not satisfied with respect to any given
series of certificates, additional tax considerations with respect to such
certificates will be disclosed in the prospectus supplement.
PARTNERSHIP TAXATION.
As a partnership, the trust will not be subject to federal income tax.
Rather, each certificateholder will be required to separately take into account
such holder's allocated share of income, gains, losses, deductions and credits
of the trust. The trust's income will consist primarily of interest and finance
charges earned on the loans including appropriate adjustments for market
discount, OID and bond premium and any gain upon collection or disposition of
loans. The trust's deductions will consist primarily of interest accruing with
respect to the notes, servicing and other fees, and losses or deductions upon
collection or disposition of loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the related Agreement and related
documents. The Agreement will provide, in general,
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that the certificateholders will be allocated taxable income of the trust for
each month equal to the sum of:
- the interest that accrues on the certificates in accordance with their
terms for the month, including interest accruing at the pass-through rate
for the month and interest on amounts previously due on the certificates
but not yet distributed;
- any trust income attributable to discount on the loans that corresponds to
any excess of the principal amount of the certificates over their initial
issue price;
- prepayment premium payable to the certificateholders for the month; and
- any other amounts of income payable to the certificateholders for the
month.
The allocation will be reduced by any amortization by the trust of premium
on loans that corresponds to any excess of the issue price of certificates over
their principal amount. All remaining taxable income of the trust will be
allocated to the seller. Based on the economic arrangement of the parties, this
approach for allocating trust income should be permissible under applicable
Treasury regulations, although no assurance can be given that the IRS would not
require a greater amount of income to be allocated to certificateholders.
Moreover, even under the foregoing method of allocation, certificateholders may
be allocated income equal to the entire pass-through rate plus the other items
described in the preceding paragraph even though the trust might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
income even if they have not received cash from the trust to pay taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all certificateholders but certificateholders may be purchasing
certificates at different times and at different prices, certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the trust.
All of the taxable income allocated to a certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
including an individual retirement account will constitute unrelated business
taxable income generally taxable to the holder under the Code.
An individual taxpayer's share of expenses of the trust including servicing
fees but not interest expense would be miscellaneous itemized deductions. The
deductions might be disallowed to the individual in whole or in part and might
result in the holder being taxed on an amount of income that exceeds the amount
of cash actually distributed to the holder over the life of the trust.
The trust intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each loan, the trust might
be required to incur additional expense but it is believed that there would not
be a material adverse effect on certificateholders.
DISCOUNT AND PREMIUM.
It is believed that the loans were not issued with OID, and, therefore, the
trust should not have OID income. However, the purchase price paid by the trust
for the loans may be greater or less than the remaining principal balance of the
loans at the time of purchase. If so, the loan will have been acquired at a
premium or discount, as the case may be. As indicated above, the trust will make
this calculation on an aggregate basis, but might be required to recompute it on
a loan by loan basis.
If the trust acquires the loans at a market discount or premium, the trust
will elect to include any discount in income currently as it accrues over the
life of the loans or to offset any premium against interest income on the loans.
As indicated above, a portion of market discount income or premium deduction may
be allocated to certificateholders.
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SECTION 708 TERMINATION.
Pursuant to final regulations issued on May 9, 1997 under Code Section 708,
a sale or exchange of 50% or more of the capital and profits in a partnership
would cause a deemed contribution of assets of the partnership (the "old
partnership") to a new partnership (the "new partnership") in exchange for
interests in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. Accordingly under these new regulations, if the
trust fund were characterized as a partnership and a sale of certificates
terminated the partnership under Code Section 708, the purchaser's basis in its
ownership interest would not change.
DISPOSITION OF CERTIFICATES.
Generally, capital gain or loss will be recognized on a sale of certificates
in an amount equal to the difference between the amount realized and the
seller's tax basis in the certificates sold. A certificateholder's tax basis in
a certificate will generally equal the holder's cost increased by the holder's
share of trust income includible in income and decreased by any distributions
received with respect to such certificate. In addition, both the tax basis in
the certificates and the amount realized on a sale of a certificate would
include the holder's share of the notes and other liabilities of the trust. A
holder acquiring certificates at different prices may be required to maintain a
single aggregate adjusted tax basis in such certificates, and, upon sale or
other disposition of some of the certificates, allocate a portion of such
aggregate tax basis to the certificates sold rather than maintaining a separate
tax basis in each certificate for purposes of computing gain or loss on a sale
of that certificate.
Any gain on the sale of a certificate attributable to the holder's share of
unrecognized accrued market discount on the loans would generally be treated as
ordinary income to the holder and would give rise to special tax reporting
requirements. The trust does not expect to have any other assets that would give
rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the trust will elect to include market discount in
income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income not including income attributable to disallowed itemized deductions
described in "--Tax Consequences to Holders of Certificates; Partnership
Taxation" over the life of the certificates that exceeds the aggregate cash
distributions, the excess will generally give rise to a capital loss upon the
retirement of the certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES.
In general, the trust's taxable income and losses will be determined monthly
and the tax items for a particular calendar month will be apportioned among the
certificateholders in proportion to the principal amount of certificates owned
by them as of the close of the last day of such month. As a result, a holder
purchasing certificates may be allocated tax items which will affect its tax
liability and tax basis attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed or only applies to transfers
of less than all of the partner's interest, taxable income or losses of the
trust might be reallocated among the certificateholders. The trust's method of
allocation between transferors and transferees may be revised to conform to a
method permitted by future regulations.
SECTION 754 ELECTION.
In the event that a certificateholder sells its certificates at a profit or
loss, the purchasing certificateholder will have a higher lower basis in the
certificates than the selling certificateholder had. The tax basis of the
trust's assets will not be adjusted to reflect that higher or lower basis unless
the
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trust were to file an election under Section 754 of the Code. In order to avoid
the administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the trust will not make an election. As a result,
certificateholders might be allocated a greater or lesser amount of trust income
than would be appropriate based on their own purchase price for certificates.
ADMINISTRATIVE MATTERS.
The trustee is required to keep or have kept complete and accurate books of
the trust. Such books will be maintained for financial reporting and tax
purposes on an accrual basis and the fiscal year of the trust will be the
calendar year. The trustee will file a partnership information return on IRS
Form 1065 with the IRS for each taxable year of the trust and will report each
certificateholder's allocable share of items of trust income and expense to
holders and the IRS on Schedule K-1. The trust will provide the Schedule K-l
information to nominees that fail to provide the trust with the information
statement described in the following paragraph and nominees will be required to
forward information to the beneficial owners of the certificates. Generally,
holders must file tax returns that are consistent with the information return
filed by the trust or be subject to penalties unless the holder notifies the IRS
of all inconsistencies .
Under Section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust with
a statement containing certain information on the nominee, the beneficial owners
and the certificates so held. The information includes:
- the name, address and taxpayer identification number of the nominee and
- as to each beneficial owner
- the name, address and identification number of the person,
- whether the person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing, and
- some information on certificates that were held, bought or sold on behalf
of the person throughout the year.
In addition, brokers and financial institutions that hold certificates through a
nominee are required to furnish directly to the trust information as to
themselves and their ownership of certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the trust. The information referred to above for any
calendar year must be furnished to the trust on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the trust
with the information described above may be subject to penalties.
The seller will be designated as the tax matters partner in the Agreement
and will be responsible for representing the certificateholders in any dispute
with the IRS. The Code provides for administrative examination of a partnership
as if the partnership were a separate and distinct taxpayer. Generally, the
statute of limitations for partnership items does not expire before three years
after the date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
certificateholders. In some circumstances, a certificateholder may be precluded
from separately litigating a proposed adjustment to the items of the trust. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust.
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TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS.
It is not clear whether the trust would be considered to be engaged in a
trade or business in the United States for purposes of federal withholding taxes
with respect to non-U.S. persons because there is no clear authority dealing
with that issue under facts substantially similar to those describing the trust.
Although it is not expected that the trust would be engaged in a trade or
business in the United States for such purposes, the trust will withhold as if
it were so engaged in order to protect the trust from possible adverse
consequences of a failure to withhold. The trust expects to withhold on the
portion of its taxable income that is allocable to foreign certificateholders
under Section 1446 of the Code, as if such income were effectively connected to
a U.S. trade or business, at a rate of 35% for foreign holders that are taxable
as corporations and 39.6% for all other foreign holders. Subsequent adoption of
Treasury regulations or the issuance of other administrative pronouncements may
require the trust to change its withholding procedures. In determining a
holder's withholding status, the trust may rely on IRS Form W-8, IRS Form W-9 or
the holder's certification of nonforeign status signed under penalties of
perjury.
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, any state of the United States or the District of
Columbia, other than a partnership that is not treated as a United States person
under any applicable Treasury regulation , or an estate whose income is subject
to U.S. federal income tax regardless of its source of income, 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 persons have the
authority to control all substantial decisions of the trust.
Each foreign holder might be required to file a U.S. individual or corporate
income tax return including, in the case of a corporation, the branch profits
tax on its share of the trust's income. Each foreign holder must obtain a
taxpayer identification number from the IRS and submit that number to the trust
on Form W-8 in order to assure appropriate crediting of the taxes withheld. A
foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the trust taking the position that no
taxes were due because the trust was not engaged in a U.S. trade or business.
However, interest payments made or accrued to a certificateholder who is a
foreign person generally will be considered guaranteed payments to the extent
such payments are determined without regard to the income of the trust. If these
interest payments are properly characterized as guaranteed payments, then the
interest will not be considered portfolio interest. As a result,
certificateholders will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated by an
applicable treaty. In that case, a foreign holder would only be entitled to
claim a refund for that portion of the taxes in excess of the taxes that should
be withheld with respect to the guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 31% if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
FASIT SECURITIES
GENERAL
The FASIT provisions of the Code were enacted by the Small Business Job
Protection Act of 1996 and create a new elective statutory vehicle for the
issuance of mortgage-backed and asset-backed securities. On February 4, 2000,
the IRS and Treasury issued proposed Treasury regulations on FASIT's. The
regulations generally would not be effective until final regulations are filed
with the federal register. However, it appears that certain anti-abuse rules
would apply as of February 4, 2000. Accordingly, definitive guidance cannot be
provided with respect to many aspects of the tax treatment
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of FASIT securityholders. In the opinion tax counsel, if a FASIT election is
made with respect to a series of securities, then the arrangement by which the
securities of that series are issued will be treated as a FASIT assuming
compliance with all of the provisions of the applicable Agreement, including the
making of a timely FASIT election, and certain representations made by the
seller as to factual matters. In addition, the trust's qualification as a FASIT
depends on its ability to satisfy the requirements of the FASIT provisions on an
ongoing basis, including, without limitation, requirements of proposed,
temporary or final Treasury regulations that may be promulgated in the near
future under the FASIT provisions and that may apply to the trust or as a result
of any change in the applicable law. Investors also should note that the FASIT
discussion contained herein constitutes only a summary of the federal income tax
consequences to holders of FASIT securities. With respect to each series of
FASIT securities, the prospectus supplement will provide a detailed discussion
regarding the federal income tax consequences associated with the particular
transaction.
FASIT securities will be classified as either FASIT regular securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT ownership securities, which generally are not treated as debt for federal
income tax purposes, but rather as representing rights and responsibilities with
respect to the taxable income or loss of the related series FASIT. The
prospectus supplement for each series of securities will indicate whether one or
more FASIT elections will be made for that series and which securities of that
series will be designated as regular interests, and which, if any, will be
designated as ownership interests.
QUALIFICATION AS A FASIT
The trust underlying a series, or one or more designated pools of assets
held in the trust, will qualify under the Code as a FASIT in which the FASIT
regular securities and the FASIT ownership securities will constitute the
"regular interests" and the "ownership interests," respectively, if
- a FASIT election is in effect,
- certain tests concerning the composition of the FASIT's assets and the
nature of the "securityholders" interests in the FASIT are met on a
continuing basis,
- the trust is not a regulated investment company as defined in Section
851(a) of the Code, and
- under proposed regulations, is not subject to net tax by a foreign country
or a possession of the United States.
ASSET COMPOSITION
In order for a trust, or one or more designated pools of assets held by a
trust, to be eligible for FASIT status, substantially all of the assets of the
trust or the designated pool must consist of "permitted assets" as of the close
of the third month beginning after the closing date and at all times thereafter
(the "FASIT Qualification Test"). Permitted assets include:
- cash or cash equivalents,
- debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC, i.e., instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only type rate,
- foreclosure property,
- certain hedging instruments, generally, interest and currency rate swaps
and enhancement contracts, that are reasonably required to guarantee or
hedge against the FASIT's risks associated with being the obligor on FASIT
interests,
- contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
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- FASIT regular interests, and
- REMIC regular interests.
Permitted assets do not include any debt instruments issued by the holder of
the FASIT's ownership interest or by any person related to the holder.
INTERESTS IN A FASIT
In addition to the foregoing asset qualification requirements, the interests
in a FASIT also must meet certain requirements. All of the interests in a FASIT
must belong to either of the following:
- one or more classes of regular interests or
- a single class of ownership interest that is held by a fully taxable
domestic C corporation.
In the case of series that include FASIT ownership securities, the ownership
interest will be represented by the FASIT ownership securities.
A FASIT interest generally qualifies as a regular interest if:
- it is designated as a regular interest,
- it has a stated maturity no greater than thirty years,
- it entitles its holder to a specified principal amount,
- the issue price of the interest does not exceed 125% of its stated
principal amount,
- the yield to maturity of the interest is less than the applicable Treasury
rate published by the IRS plus 5%, and
- if it pays interest, such interest is payable at either (a) a fixed rate
with respect to the principal amount of the regular interest or (b) a
permissible variable rate with respect to such principal amount.
Permissible variable rates for FASIT regular interests are the same as
those for REMIC regular interests, i.e., certain qualified floating rates
and weighted average rates. See "--Taxation of Debt Securities--Variable
Rate Debt Securities."
If a FASIT security fails to pay a specified principal amount, has an issue
price that exceeds 125% of its stated principal amount, or has yield to maturity
in excess of the AFR, but otherwise meets the above requirements, it may still
qualify as a type of regular interest known as a high-yield interest. In
addition, if a FASIT security fails to pay a fixed rate or a permissible
variable rate, but the interest payable on the security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the security, the security also will qualify as a
high-yield interest. A high-yield interest may be held only by domestic C
corporations that are fully subject to corporate income tax ("Eligible
Corporations"), other FASITs, and dealers in securities who acquire high yield
interests as inventory, rather than for investment. In addition, holders of
high-yield interests may be limited in offsetting income derived from such
interest. See "--Tax Treatment of FASIT Regular Securities--Treatment of
High-Yield Interests."
CONSEQUENCES OF DISQUALIFICATION
If a series FASIT fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Proposed Treasury
Regulations provide that its FASIT status would be lost for that year and the
Trust will not be able to elect FASIT status again without the Commissioner's
approval. If FASIT status is lost, under proposed Treasury regulations the
entity classification of the former FASIT (the "New Arrangement") is determined
under general federal income tax principles. The holder of the ownership
interest is treated as exchanging the New
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Arrangement's assets for an amount equal to their value and gain recognized is
treated as gain from a prohibited transaction that is subject to the 100 percent
tax, without exception. Loss, if any, is disallowed. In addition, the holder of
the ownership interest must recognize cancellation of indebtedness income, on a
regular interest by regular interest basis, in an amount equal to the adjusted
issued price of each regular interest outstanding immediately before the
cessation over its fair market value. If the holder of the ownership interest
has a continuing economic interest in the New Arrangement, the characterization
of this interest is determined under general federal income tax principles.
Holder of regular interests are treated as exchanging their regular interest for
interest in the New Arrangement, the classification of which is determined under
general federal income tax principles. Gain is recognized to the extent the new
interest either does not qualify as debt or differs either in kind or extent.
The basis of the interest in the New Arrangement equals the basis in the regular
interest increased by any gain recognized on the exchange.
TAX TREATMENT OF FASIT REGULAR SECURITIES
GENERAL.
Payments received by holders of FASIT regular securities generally should be
accorded the same tax treatment under the Code as payments received on other
taxable corporate debt instruments and on REMIC regular interests. As in the
case of holders of REMIC Regular interests, holders of FASIT regular interests
must report income from such interests under an accrual method of accounting,
even if they otherwise would have used the cash receipts and disbursements
method. Except in the case of FASIT regular interests issued with original issue
discount or acquired with market discount or premium, interest paid or accrued
on a FASIT regular interest generally will be treated as ordinary income to the
securityholder and a principal payment on such security will be treated as a
return of capital to the extent that the securityholder's basis is allocable to
that payment. FASIT regular interests issued with original issue discount or
acquired with market discount or premium generally will treat interest and
principal payments on such securities in the same manner described for REMIC
regular interests. See "--Taxation of Debt Securities," "--Market Discount," and
"--Premium" above. High-yield securities may be held only by fully taxable
domestic C corporations, other FASITs, and certain securities dealers.
securityholders of high-yield securities may be limited in their ability to use
current losses or net operating loss carryforwards or carrybacks to offset any
income derived from those securities.
If a FASIT regular interest is sold or exchanged, the securityholder
generally will recognize gain or loss upon the sale in the manner described in
"--Taxation of Debt Securities; Sale or Exchange". In addition, if a FASIT
regular interest becomes wholly or partially worthless as a result of default
and delinquencies on the underlying assets, the holder of such security should
be allowed to deduct the loss sustained or alternatively be able to report a
lesser amount of income. However, the timing and character of such losses in
income are uncertain. See "--Taxation of Debt Securities--Effects of Default and
Delinquencies."
FASIT regular securities held by a REIT will qualify as "real estate assets"
within the meaning of section 856(c)(4) of the Code, and interest on such
securities will be considered Qualifying REIT Interest to the same extent that
REMIC securities would be so considered. FASIT regular securities held by a
thrift institution taxed as a "domestic building and loan association" will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC securities would
be so considered. See "--Taxation of Debt Securities." In addition, FASIT
regular securities held by a financial institution to which Section 585 of the
Code applies will be treated as evidences of indebtedness for purposes of
Section 582(c)(1) of the Code. FASIT securities will not qualify as "government
securities" for either REIT or RIC qualification purposes.
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TREATMENT OF HIGH-YIELD INTERESTS
High-yield interests are subject to special rules regarding the eligibility
of holders of such interests, and the ability of such holders to offset income
derived from their FASIT security with losses. High-yield interests may be held
only by Eligible Corporations, other FASITs, and dealers in securities who
acquire such interests as inventory. If a securities dealer, other than an
Eligible Corporation, initially acquires a high-yield interest as inventory, but
later begins to hold it for investment, the dealer will be subject to an excise
tax equal to the income from the high-yield interest multiplied by the highest
corporate income tax rate. In addition, transfers of high-yield interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the high-yield interest.
The holder of a high-yield interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the high-yield interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
regular interest that is held by a pass-through entity, other than another
FASIT, that issues debt or equity securities backed by the FASIT regular
interest and that have the same features as high-yield interests.
TAX TREATMENT OF FASIT OWNERSHIP SECURITIES
A FASIT ownership security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT ownership security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT ownership interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT ownership interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
ownership security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT regular securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT ownership securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
security as are the holders of high-yield interests. See "--Tax Treatment of
FASIT Regular Securities--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual securities
also will apply to FASIT ownership securities. Accordingly, losses on
dispositions of a FASIT ownership security generally will be disallowed where,
within six months before or after the disposition, the seller of the security
acquires any other FASIT ownership security or, in the case of a FASIT holding
mortgage assets, any interest in a taxable mortgage pool, that is economically
comparable to a FASIT ownership security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT ownership
security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be the greater of the
securities value under present law or the securities value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semiannually.
The holder of a FASIT ownership security will be subject to a tax equal to
100% of the net income derived by the FASIT from any prohibited transactions.
Prohibited transactions include:
- the receipt of income derived from assets that are not permitted assets,
- certain dispositions of permitted assets,
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- the receipt of any income derived from any loan originated by a FASIT, and
- in certain cases, the receipt of income representing a servicing fee or
other compensation.
Proposed Treasury Regulations provide certain safe harbors for situations
when a FASIT will not be considered to have originated a loan. Any series for
which a FASIT election is made generally will be structured in order to avoid
application of the prohibited transaction tax.
ANTI-ABUSE RULE. Under proposed Treasury regulations, the Commissioner may
make appropriate adjustments with regard to the FASIT and any arrangement or
transaction involving the FASIT if a principal purpose of forming or using the
FASIT is to achieve results inconsistent with the intent of the FASIT provisions
and the FASIT regulations. This determination would be based on all of the facts
and circumstances, including a comparison of the purported business purpose for
a transaction and the claimed tax benefits resulting from the transaction.
BACKUP WITHHOLDING, REPORTING AND TAX ADMINISTRATION
Securityholders of FASIT securities will be subject to backup withholding to
the same extent holders of REMIC securities would be subject. See
"--Miscellaneous Tax Aspects--Backup Withholding." For purposes of reporting and
tax administration, holders of record of FASIT securities generally will be
treated in the same manner as holders of REMIC securities.
FOREIGN SECURITYHOLDERS
Foreign holders of FASIT securities will be subject to withholding to the
same extent foreign holders of notes would be subject. See "-- Tax Consequences
to Holders of the Notes -- Foreign Holders."
Under proposed Treasury regulations, if a person that is not a United States
person holds (either directly or through a vehicle which itself is not subject
to U.S. federal income tax such as a partnership or a trust) a regular interest
in a FASIT and a "conduit debtor" pays or accrues interest on a debt instrument
held by such FASIT, any interest received or accrued by the non-United States
person regular interest holder is treated as received or accrued from the
conduit debtor. The proposed Treasury regulations state that a debtor is a
conduit debtor if the debtor is a United States person or the United States
branch of a non-United States person and the non-United States person regular
interest holder is (1) a "10 percent shareholder" of the debtor, (2) a
"controlled foreign corporation" and the debtor is a related person with respect
to the controlled foreign corporation or (3) related to the debtor. As set forth
above, the proposed Treasury regulations would not be effective until final
regulations are filed with the federal register.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, WE SUGGEST THAT POTENTIAL INVESTORS CONSULT THEIR
OWN TAX ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, we suggest
that potential investors consult their own tax advisors with respect to the
various state and local tax consequences of an investment in the securities.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
("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 Securities 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 investment in an "equity
interest" 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 Fund may be deemed to hold plan
assets by reason of a Plan's investment in a Security; such plan assets would
include an undivided interest in the Loans and any other assets held by the
Trust Fund. In such an event, persons providing services with respect to the
assets of the Trust Fund 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.
Under the regulation, a Plan will not be considered to have invested in an
"equity interest" if the interest described is treated as indebtedness under
applicable local law and has no substantial equity features. Generally, a
profits interest in a partnership, an undivided ownership interest in property
and a beneficial ownership interest in a trust are deemed to be "equity
interests" under the final regulation. If Notes of a particular Series were
deemed to be indebtedness under applicable local law without any substantial
equity features, an investing Plan's assets would include such Notes, but not,
by reason of such purchase, the underlying assets of the Trust Fund.
An exception applies if the class of equity interests in question is: (i)
"widely held" (held by 100 or more investors who are independent of the Sponsor
and each other); (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 all
classes of equity interests in the Sponsor or the Trust Fund are held by
investors other than benefit plan investors (which is defined as including plans
subject to ERISA, government
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plans and individual retirement accounts), the investing Plan's assets will not
include any of the underlying assets of the Trust Fund.
If an investing Plan's assets are considered to include the underlying
assets of the Trust Fund, an exemption may be available. Various underwriters
and placement agents have been granted individual exemptions by the DOL from
certain of the prohibited transaction rules of ERISA with respect to the initial
purchase, the holding and the subsequent resale by Plans of securities
representing interests in, and the operation of, asset-backed pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of such exemptions (each such exemption is
referred to hereafter as the "Exemption"). These securities may include the
Certificates. The obligations that may be held in trust covered by the Exemption
include obligations such as the Loans. The Exemption will apply to the
acquisition, holding and resale of the Securities by a Plan, provided that
certain conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(i) 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 arm's-length transaction with an unrelated party;
(ii) The rights and interests evidenced by the Certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
securities of the trust;
(iii) The Certificates acquired by the Plan have received a rating at the
time of such acquisition that is in one of the three highest generic rating
categories from either Standard & Poor's Ratings Group ("Standard & Poor's"),
Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Inc. ("D&P") or Fitch
Investors Service, Inc. ("Fitch");
(iv) The sum of all payments made to the underwriter 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 seller pursuant to the sale of the obligations to the trust
represents not more than the fair market value of such obligations. The sum of
all payments made to and retained by the servicer represents not more than
reasonable compensation for the servicer's services under the related servicing
agreement and reimbursement of the servicer's reasonable expenses in connection
therewith;
(v) The Trustee is not an affiliate of any other member of the Restricted
Group (as defined below); and
(vi) 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.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type which
have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in one
of the three highest rating categories of Standard & Poor's, Moody's, D&P or
Fitch for at least one year prior to the Plan's acquisition of securities; and
(iii) securities evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one year prior to
any Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
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among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Certificates, at least fifty (50) percent of each Class
of Certificates in which Plans have invested is acquired by persons independent
of the Restricted Group and at least fifty (50) percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
(5) percent or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in Certificates does not exceed twenty-five
(25) percent of all of the Certificates outstanding after the acquisition; and
(iv) no more than twenty-five (25) percent of the assets of the Plan are
invested in securities 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 Sponsor, the underwriters of the Certificates, the
Trustee, the Servicer, any obligor with respect to obligations included in a
Trust Fund constituting more than five (5) percent of the aggregate unamortized
principal balance of the assets in a Trust Fund, or any affiliate of such
parties (the "Restricted Group").
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
regulation described above or the Exemption to the purchase and holding of the
Securities and the potential consequences to their specific circumstances, prior
to making an investment in the Securities. Moreover, each Plan fiduciary should
determine whether under the general fiduciary standards of investment procedure
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. In this regard, purchasers 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 purposes of ERISA under certain circumstances.
Prospective purchasers should determine whether the decision affects their
ability to purchase the Securities.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement will
be offered in Series through one or more of the methods described below. The
Prospectus Supplement prepared for each Series will describe the method of
offering being utilized for that Series and will state the public offering or
purchase price of such Series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular Series of
Securities may be made through a combination of two or more of these methods.
Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
2. By placements by the Sponsor with institutional investors through
dealers;
3. By direct placements by the Sponsor with institutional investors; and
4. By competitive bid.
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If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold 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 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 Sponsor 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 Sponsor 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 "Securities Act"). The Prospectus Supplement will describe
any such compensation paid by the Sponsor.
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 (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Sponsor will indemnify the several underwriters and the
underwriters will indemnify the Sponsor against certain civil liabilities,
including liabilities under the Securities Act or will contribute to payments
required to be made in respect thereof.
The Prospectus Supplement with respect to any Series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Sponsor and purchasers of
Securities of such Series.
Purchasers of Securities, including dealers, may, depending on the facts and
circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Securities. Holders of Securities should consult with their legal advisors in
this regard prior to any such reoffer or sale.
LEGAL MATTERS
Certain legal matters in connection with the Securities will be passed upon
for the Sponsor by Dewey Ballantine, New York, New York.
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a "Supplemental Glossary" in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
"ADVANCE" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Loan, and for any other purposes
specified in the related Prospectus Supplement.
"BANKRUPTCY CODE" means the federal bankruptcy code, 11 United States
Code 101 et seq., and related rules and regulations promulgated thereunder.
"BUSINESS DAY" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"CERTIFICATE" means the Asset-Backed Certificates.
"CERTIFICATEHOLDER" means a Holder of a Certificate.
"CLASS" means a Class of Securities of a Series.
"CLOSING DATE" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
"CODE" means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the IRS promulgated
thereunder.
"COLLECTION ACCOUNT" means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Loans.
"COMBINED LOAN-TO-VALUE RATIO" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
"COMMISSION" means the Securities and Exchange Commission.
"COMPOUND INTEREST SECURITY" means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the accrual termination date
specified in the related Prospectus Supplement, and with respect to which no
interest shall be payable until such accrual termination date, after which
interest payments will be made on the Compound Value thereof.
"COMPOUND VALUE" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"CONDOMINIUM" means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
"CONDOMINIUM BUILDING" means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
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"CONDOMINIUM LOAN" means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
"CONDOMINIUM UNIT" means an individual housing unit in a Condominium
Building.
"COOPERATIVE" means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
"COOPERATIVE DWELLING" means an individual housing unit in a building owned
by a Cooperative.
"CREDIT ENHANCEMENT" means the credit enhancement for a Series, if any,
specified in the related Prospectus Supplement.
"CREDIT ENHANCER" means the provider of the Credit Enhancement for a Series
specified in the related Prospectus Supplement.
"CUT-OFF DATE" means the date designated as such in the related Prospectus
Supplement for a Series.
"DEBT SECURITIES" means Securities characterized as indebtedness for federal
income tax purposes.
"DEPOSIT AGREEMENT" means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
"DISTRIBUTION ACCOUNT" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Loans.
"DISTRIBUTION DATE" means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
"DUE DATE" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Loan pursuant to the terms thereof.
"ELIGIBLE INVESTMENTS" means any one or more of the obligations or
securities described as such in the related Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESCROW ACCOUNT" means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FINAL SCHEDULED DISTRIBUTION DATE" means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
"FNMA" means the Federal National Mortgage Association.
"HOLDER" means the person or entity in whose name a Security is registered.
"HOME IMPROVEMENTS" means the home improvements financed by a Home
Improvement Contract.
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"HOME IMPROVEMENT CONTRACT" means any home improvement installment sales
contracts and installment loan agreements which may be secured by purchase money
security interests in the Home Improvements financed thereby.
"HUD" means the United States Department of Housing and Urban Development.
"INDEX" means the index applicable to any adjustments in the Loan Rates of
any adjustable-rate Loans.
"INSURANCE POLICIES" means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
"INSURANCE PROCEEDS" means amounts paid by the insurer under any of the
Insurance Policies covering any Loan or Property.
"INTEREST ONLY SECURITIES" means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
"IRS" means the Internal Revenue Service.
"LIFETIME RATE CAP" means the lifetime limit, if any, on the Loan Rate
during the life of each adjustable-rate Loan.
"LIQUIDATION PROCEEDS" means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
"LOAN RATE" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
"LOANS" means Mortgage Loans and/or Home Improvement Contracts,
collectively.
"LOAN-TO-VALUE RATIO" means, with respect to a Loan, the ratio determined as
set forth in the related Prospectus Supplement.
"MINIMUM PRINCIPAL PAYMENT AGREEMENT" means a minimum principal payment
agreement with an entity meeting the criteria of each Rating Agency.
"MORTGAGE" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"MORTGAGE LOAN" means a mortgage loan included in a Trust Fund, including a
mortgage loan secured by a senior lien or junior lien on the related Mortgaged
Property and a closed-end home equity loan secured by a Mortgaged Property.
"MORTGAGE NOTE" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"MORTGAGED PROPERTY" means the real property securing a Mortgage Loan.
"MORTGAGOR" means the obligor on a Mortgage Note.
"NOTEHOLDER" means the Holder of a Note.
"NOTES" means the Asset-Backed Notes.
"NOTIONAL AMOUNT" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"PAC" ("Planned Amortization Class Securities") means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
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"PARTICIPATING SECURITIES" means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint stock company, trust (including any
beneficiary thereof), unincorporated organization, or government or any agency
or political subdivision thereof.
"POOLING AND SERVICING AGREEMENT" means collectively, any and all agreements
relating to the establishment of the related Trust Fund, the servicing of the
related Loans and the issuance of the related Securities.
"PRINCIPAL ONLY SECURITIES" means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
"PROPERTY" means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
"RATING AGENCY" means a nationally recognized statistical rating
organization which was requested by the Sponsor to rate the Securities upon the
original issuance thereof.
"REMIC" means a real estate mortgage investment conduit.
"REMIC ADMINISTRATOR" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"REO PROPERTY" means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"RESERVE FUND" means, with respect to a Series, any Reserve Fund established
pursuant to the related Pooling and Servicing Agreement.
"RETAINED INTEREST" means, with respect to a Loan, the amount or percentaged
specified in the related Prospectus Supplement which is not included in the
Trust Fund for the related Series.
"SCHEDULED PAYMENT" means the scheduled payment of principal and interest
required to be made by the Mortgagor on a Loan.
"SECURITIES" means the Notes or the Certificates.
"SELLER" means a seller of Loans to the Sponsor identified in the related
Prospectus Supplement for a Series.
"SENIOR SECURITIES" means a Class of Securities as to which the Holders'
rights to receive distributions of principal and interest are senior to the
rights of Holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"SERIES" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"SERVICER" means Accredited Home Lenders, Inc.
"SERVICING FEE" means the periodic fee payable to the Servicer as
compensation for servicing Loans.
"SINGLE FAMILY PROPERTY" means property securing a Loan consisting of one-to
four-family attached or detached residential housing, including Cooperative
Dwellings.
"SPONSOR" means Accredited Home Lenders, Inc.
"SUBORDINATED SECURITIES" means a Class of Securities as to which the rights
of Holders to receive distributions of principal, interest or both is
subordinated to the rights of Holders of Senior Securities,
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and may be allocated losses and shortfalls prior to the allocation thereof to
other Classes of Securities, to the extent and under the circumstances specified
in the related Prospectus Supplement.
"TREASURY" or "TREASURY DEPARTMENT" means the United States Department of
the Treasury.
"TRUSTEE" means the trustee under the applicable Pooling and Servicing
Agreement and its successors.
"TRUST FUND" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee or, with respect to a Series of Notes,
pledged to the Trustee as a security for such Notes, including, without
limitation, the Loans (except any Retained Interests), all amounts in the
Distribution Account, Collection Account or Reserve Funds, distributions on the
Loans (net of Servicing Fees), and reinvestment earnings on such net
distributions and any Credit Enhancement and all other property and interests
held by or pledged to the Trustee pursuant to the related Pooling and Servicing
Agreement for such Series.
"UCC" means the Uniform Commercial Code.
"VARIABLE INTEREST SECURITY" means a Security on which interest accrues at a
rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"ZERO COUPON SECURITY" means a Security entitled to receive payments of
principal only.
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$173,476,000
ACCREDITED MORTGAGE LOAN TRUST 2000-1
ISSUER
ACCREDITED HOME LENDERS, INC.
SPONSOR
ACCREDITED HOME LENDERS, INC.
MASTER SERVICER
ASSET-BACKED NOTES
SERIES 2000-1
-------------------------------
PROSPECTUS SUPPLEMENT
FEBRUARY 24, 2000
-----------------------------------------
LEHMAN BROTHERS
