Registration No. ___________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
IMH ASSETS CORP.
(Exact name of Registrant as specified in its Charter)
California
(State of Incorporation)
33-0705301
(I.R.S. Employer Identification Number)
20371 Irvine Avenue
Santa Ana Heights, California 92707
(714) 556-0122
(Address and telephone number of Registrant's principal executive offices)
Richard Johnson
IMH Assets Corp.
20371 Irvine Avenue
Santa Ana Heights, California 92707
(714) 556-0122
(Name, address and telephone number of agent for service)
----------------
Copies to:
Paul D. Tvetenstrand, Esq.
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
================================================================================
Approximate date of commencement of proposed sale to the public: From
time to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, please check the following box.
/X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
================================================================================
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
AMOUNT TO BE PRICE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED (1) PER UNIT (2) PRICE (2) FEE (1)
------------------------------------ -------------- ------------ --------- -------
<S> <C> <C> <C> <C>
Collateralized Mortgage Bonds, issued in
series $1,000,000,000 100% $1,000,000,000 $303,030.30
</TABLE>
================================================================================
<PAGE>
(1) $392,112,636.00 aggregate principal amount of Collateralized Mortgage Bonds
registered by the Registrant under Registration Statement No. 333-23387 referred
to below and not previously sold are consolidated in this Registration Statement
pursuant to Rule 429. All registration fees in connection with such unsold
amount of Collateralized Mortgage Bonds have been previously paid by the
Registrant under the foregoing Registration Statement. Accordingly, the total
amount registered under the Registration Statement as so consolidated as of the
date of this filing is $1,392,112,636.00.
(2) Estimated solely for the purpose of calculating the registration fee.
--------------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the Prospectus and
Prospectus Supplement contained in this Registration Statement also relate to
the Registrant's Registration Statements on Form S-3 (Registration No.
333-23387). This Registration Statement, which is a new registration statement,
also constitutes a post-effective amendment to Registration Statement No. 333-
23387. Such post-effective amendment shall hereafter become effective
concurrently with the effectiveness of this Registration Statement in accordance
with Section 8(a) of the Securities Act of 1933.
================================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a base prospectus and (ii) an
illustrative form of prospectus supplement for use in an offering of
Collateralized Mortgage Bonds.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
Subject to Completion Dated October 28, 1997
Prospectus Supplement
(To Prospectus Dated ____________, 19__)
$----------------
IMH Assets Corp.
Company
Imperial CMB Trust 19__-___
[Name of Master Servicer]
Master Servicer
Collateralized Mortgage Bonds, Series 19__-___
The Imperial CMB Trust 19__ (the "Issuer") will be formed pursuant to a
Trust Agreement to be dated as of _________________, 19__ between IMH Assets
Corp. (the "Company") and __________________________, the Owner Trustee. The
Issuer will issue $__________ aggregate principal amount of Collateralized
Mortgage Bonds, Series 19__-____ (the "Bonds"). The Bonds will be issued
pursuant to an Indenture to be dated as of _________________, 19__, between the
Issuer and ___________________, the Indenture Trustee. The Issuer will also
issue $___________ aggregate principal amount of the Issuer's Trust
Certificates, Series 19__-____ (the "Certificates"). The Bonds and the
Certificates are collectively referred to herein as the "Securities". Only the
Bonds are offered hereby.
The Bonds will represent indebtedness of the related trust fund (the
"Trust Fund") created by the Trust Agreement. The Trust Fund consists of
adjustable-rate, conventional, residential, one- to four-family first lien
mortgage loans (the "Mortgage Loans"). In addition, the Bonds will have the
benefit of an irrevocable and unconditional financial guaranty insurance policy
(the "Policy") issued by _______________ (the "Insurer") as described under "The
Policy" herein.
The interest rates on the Mortgage Loans (each, a "Mortgage Rate") will
change semi-annually based on the Index (as defined herein) and the respective
Note Margins described herein, subject to certain periodic and lifetime
limitations as described more fully herein.
Payments of principal and interest on the Bonds will be made on the
_______ day of each month or, if such day is not a business day, then on the
next business day, commencing on ____________, 19__ (each, a "Payment Date"). As
described herein, interest will accrue on the Bonds at a floating rate (the
"Bond Rate") equal to [LIBOR (as defined herein)] plus _____% per annum subject
to certain limitations as described herein. See "Description of the
Securities--Interest on the Bonds" herein.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" BEGINNING ON PAGE S-__ HEREIN AND ON PAGE 11 IN THE ACCOMPANYING
PROSPECTUS.
S-1
<PAGE>
It is a condition of the issuance of the Bonds that they be rated "___"
by ___________________ and "____" by ___________________.
THE YIELD TO MATURITY ON THE BONDS WILL DEPEND ON THE RATE AND TIMING
OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, LIQUIDATIONS AND REPURCHASES) ON
THE MORTGAGE LOANS. SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND
"YIELD AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS.
There is currently no secondary market for the Bonds.
____________________ (the "Underwriter") intends to make a secondary market in
the Bonds, but is not obligated to do so. There can be no assurance that a
secondary market for the Bonds will develop or, if it does develop, that it will
continue. The Bonds will not be listed on any securities exchange.
THE BONDS REPRESENT OBLIGATIONS OF THE ISSUER ONLY AND DO NOT REPRESENT
AN INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, OR ANY OF
THEIR AFFILIATES. NONE OF THE BONDS OR THE UNDERLYING MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY,
THE MASTER SERVICER OR ANY OF THEIR AFFILIATES.
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 SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Bonds will be purchased from the Company by the Underwriter and
will be offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Bonds are expected to be
approximately $___________, before the deduction of expenses payable by the
Company estimated to be approximately $_______.
The Bonds are offered by the Underwriter subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to certain
other conditions. The Underwriter reserves the right to withdraw, cancel or
modify such offer and to reject any order in whole or in part. It is expected
that delivery of the Bonds will be made on or about ____________, 19__ [in
book-entry form through the Same Day Funds Settlement System of The Depository
Trust Company as discussed herein,] [at the office of __________________,
_______________, _________________] against payment therefor in immediately
available funds.
[Name of Underwriter]
[Date of Prospectus Supplement]
S-2
<PAGE>
THE SECURITIES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF SECURITIES BEING OFFERED PURSUANT TO THE COMPANY'S
PROSPECTUS DATED ____________, 19__, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE SECURITIES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET, SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Issuer.................................. The Bonds will be issued by Imperial
CMB Trust 19__-___, a Delaware
business trust established pursuant to
the Trust Agreement, dated as of
________ 1, 19__ between the Company
and the Owner Trustee.
The Bonds............................... $____________ Collateralized Mortgage
Bonds, Series 19__-__. Only the Bonds
are offered hereby. The Bonds will be
issued pursuant to an Indenture, dated
as of ________ 1, 19__ between the
Issuer and ___________________, as
Indenture Trustee.
Company................................. IMH Assets Corp., (the "Company"). See
"The Company" in the Prospectus.
Master Servicer......................... [Name of Master Servicer] (the "Master
Servicer"). See "[Name of Master
Servicer]" in the Prospectus.
Owner Trustee........................... , .
------------------ ------------
Indenture Trustee....................... , .
------------------ ------------
Delivery Date........................... On or about ____________, 19__.
Payment Date............................ The [______] day of each month (or, if
such day is not a business day, the
next business day), beginning on
___________________, 199___, (each, a
"Payment Date").
[Denominations and
Registration............................ The Bonds (the "Book-Entry Bonds")
will be issued, maintained and
transferred on the book-entry records
of DTC and its Participants (as
defined in the Prospectus). The Bonds
will be offered in registered form, in
minimum denominations of $______ and
integral multiples of $_____ in excess
thereof. The Book-Entry Bonds will be
represented by one or more Bond
certificates registered in the name of
Cede & Co., as nominee of DTC. No
Beneficial Owner will be entitled to
receive a Bond in fully registered,
certificated form (a "Definitive
Bond"), except under the limited
circumstances
S-4
<PAGE>
described herein. See "Description of
the Bonds--Book Entry Bonds" herein.]
The Mortgage Pool....................... The Mortgage Loans are secured by
first liens on one- to four- family
residential real properties (each, a
"Mortgaged Property"). The Mortgage
Loans have individual principal
balances at origination of at least
$______ but not more than $_________
with an average principal balance at
origination of approximately
$_________. The Mortgage Loans have
terms to maturity of __ years from the
date of origination and a weighted
average remaining term to stated
maturity of approximately ____ years
and __ months as of the Cut-off Date.
The Mortgage Rate on each Mortgage
Loan will adjust semi-annually on its
Adjustment Date (as defined herein),
with corresponding adjustments in the
amount of monthly payments, to equal
the sum (rounded as described herein)
of the Index described below and a
fixed percentage set forth in the
related Mortgage Note (the "Note
Margin"). However, (i) on any
Adjustment Date such Mortgage Rate may
not increase or decrease by more than
1% (the "Periodic Rate Cap"), (ii)
over the life of such Mortgage Loan,
such Mortgage Rate may not exceed the
related maximum Mortgage Rate (such
maximum Mortgage Rate is equal to the
Mortgage Rate at origination plus a
lifetime rate cap (the "Lifetime Rate
Cap")), which maximum Mortgage Rates
will range from ______% to ______% and
(iii) with respect to approximately
____% of the Mortgage Loans, by
aggregate principal balance as of the
Cut- off Date, over the life of such
Mortgage Loan, such Mortgage Rate may
not be lower than the minimum Mortgage
Rate. The difference between the
Mortgage Rate on each Mortgage Loan at
origination and the minimum Mortgage
Rate on such Mortgage Loan will equal
the lifetime rate floor (the "Lifetime
Rate Floor"). The minimum Mortgage
Rates will range from _____% to
______% per annum. The Mortgage Loans
will bear interest at Mortgage Rates
of at least _____% per annum but not
more than ______% per annum, as of the
Cut-off Date. For a further
description of the Mortgage Loans, see
"Description of the Mortgage Pool"
herein.
The Index............................... As of any Adjustment Date with respect
to any Mortgage Loan, the Index
applicable to the determination of the
related Mortgage Rate will be a rate
equal to the monthly weighted average
cost of funds for members of the
Federal Home Loan Bank of San
Francisco as most recently available
45 days prior
S-5
<PAGE>
to the Adjustment Date (the "Cost of
Funds Index" or "Index").
Interest Payments ...................... Interest on the Bonds will be paid
monthly on each Payment Date,
commencing in ------ 19__, at the Bond
Interest Rate for the related Interest
Period (as defined below). The Bond
Interest Rate for an Interest Period
will be equal to LIBOR plus ___% as
described herein under "Description of
the Bonds--Interest on the Bonds."
Interest on the Bonds in respect of
any Payment Date will accrue from the
preceding Payment Date (or in the case
of the first Payment Date, from the
date of initial issuance of the Bonds
(the "Closing Date") through the day
preceding such Payment Date (each such
period, an "Interest Period")) on the
basis of the actual number of days in
the Interest Period and a 360-day
year.
Principal Payments ..................... On any Payment Date, to the extent of
funds available therefor, Bondholders
will be entitled to receive principal
payments generally equal to the
amount, if any, necessary to bring the
Outstanding Reserve Amount up to the
Reserve Amount Target. In no event
will principal payments on the Bonds
on any Payment Date exceed the Bond
Principal Balance thereof on such
date. On the Payment Date in
__________, principal will be due and
payable on the Bonds in an amount
equal to the Bond Principal Balance
for such Payment Date.
The "Bond Principal Balance" of the
Bonds on any day is the initial
balance thereof as of the Closing Date
reduced by all payments of principal
thereon as of such day.
P&I Collections......................... All collections on the Mortgage Loans
will be allocated by the Master
Servicer in accordance with the terms
of the Mortgage Loans between amounts
collected in respect of interest and
amounts collected in respect of
principal. See "Description of the
Servicing Agreement--P&I Collections"
herein, which describes the
calculation of the Interest
Collections and the Principal
Collections on the Mortgage Loans for
the Collection Period related to each
Payment Date.
With respect to any Payment Date, the
portion of Principal Collections and
Interest Collections that are
distributable pursuant to the
Servicing Agreement (together, the
"P&I Collections") will equal (a)
Interest Collections for such
S-6
<PAGE>
Payment Date and (b) Principal
Collections for such Payment Date.
Outstanding Reserve
Amount.................................. The distribution of the Additional
Principal Distribution Amount, if any,
on the Mortgage Loans will create the
Outstanding Reserve Amount. The
Outstanding Reserve Amount, if any,
will be available to absorb any
Liquidation Loss Amounts that are
allocated to the Mortgage Loans and
not covered by Principal Collections
and Interest Collections. Any
Liquidation Loss Amounts allocable to
the Bondholders and not covered by
such overcollateralization will be
covered by draws on the Policy to the
extent provided herein. The
"Outstanding Reserve Amount" on any
Payment Date is the amount, if any, by
which the Pool Balance as of the end
of the related Collection Period
exceeds the Bond Principal Balance on
such day (after giving effect to all
distributions on such Payment Date).
As of the Closing Date, the Reserve
Amount Target is equal to ___% of the
Cut-Off Date Pool Balance. The Reserve
Amount Target may be increased or
reduced from time to time pursuant to
the terms of the Pooling and Servicing
Agreement, with the consent of the
Rating Agencies and the Indenture
Trustee. To the extent the Reserve
Amount Target is reduced on any
Payment Date, the amount of the
Principal Collections distributed on
such Payment Date will be reduced and
on each subsequent Payment Date to the
extent the remaining Outstanding
Reserve Amount is in excess of the
reduced Reserve Amount Target until
the Outstanding Reserve Amount equals
the Reserve Amount Target.
Insurer................................. --------------. See "The Insurer"
herein.
Policy.................................. On the Closing Date, the Insurer will
issue a Policy in favor of the
[Indenture Trustee on behalf of the
Issuer]. The Policy will
unconditionally and irrevocably
guarantee principal payments on the
Bonds plus accrued and unpaid interest
due on the Bonds. The Policy will not
guarantee payments on the
Certificates. On each Payment Date, a
draw will be made on the Policy to
cover (a) any shortfall in amounts
available to make payments of interest
on the outstanding Bond Principal
Balance of the Bonds and (b) the
amount, if any, [by which
S-7
<PAGE>
the Bond Principal Balance of the
Bonds exceeds the Pool Balance at the
end of the related Collection Period].
In addition, the Policy will guarantee
the payment of the outstanding Bond
Principal Balance of each Bond on the
Payment Date in _______ (after giving
effect to all other amounts
distributable and allocable to
principal on such Payment Date). See
"The Policy" herein and "Description
of Credit Enhancement" in the
Prospectus.
The Certificates........................ $________ Trust Certificates, Series
19__-__. The Certificates will be
issued pursuant to the Trust Agreement
and will represent the beneficial
ownership interest in the Issuer. The
Certificates are not offered hereby.
Final Payment of Principal on
the Bonds.............................. The Bonds will be payable in full on .
In addition, the Issuer will pay the
Bonds in full upon the exercise by the
[Master Servicer] of its option to
purchase all Mortgage Loans and all
property acquired in respect of such
Mortgage Loans. See "The
Agreements--Termination; Redemption of
Bonds" in the Prospectus.
Federal Income Tax
Consequences........................... In the opinion of Tax Counsel (as
defined in the Prospectus), for
federal income tax purposes, the Bonds
will be characterized as indebtedness
of the Issuer and the Issuer, as
created pursuant to the terms and
conditions of the Trust Agreement,
will not be characterized as an
association (or publicly traded
partnership) taxable as a corporation
or as a taxable mortgage pool within
the meaning of section 7701(i) of the
Code.
For further information regarding
certain federal income tax
consequences of an investment in the
Bonds see "Federal Income Tax
Consequences" herein and "Federal
Income Tax Consequences" and "State
and Other Tax Consequences" in
the Prospectus.
Legal Investment........................ So long as the Bonds are rated in the
top two rating agencies, the Bonds
will constitute "mortgage related
securities" for purposes of SMMEA. See
"Legal Investment Considerations"
herein.
S-8
<PAGE>
Rating.................................. It is a condition to the issuance of
the Bonds that they be rated "____" by
and "____" by (each a "Rating
--------- ------------- Agency"). A
security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time by
the assigning rating organization. A
security rating does not address the
frequency of prepayments of Mortgage
Loans, or the corresponding effect on
yield to investors. See "Certain Yield
and Prepayment Considerations" and
"Ratings" herein.
S-9
<PAGE>
[RISK FACTORS]
[Prospective Bondholders should consider, among other things, the items
discussed under "Risk Factors" in the Prospectus and the following factors in
connection with the purchase of the Bonds:]
[Appropriate Risk Factors as necessary. Possible Risk Factors based on present
disclosure include the following:
DELINQUENCIES AND POTENTIAL DELINQUENCIES
Approximately _____% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) were thirty days or more but less than sixty
days delinquent in their Monthly Payments (such Mortgage Loans, "Delinquent
Mortgage Loans") as of the Cut-off Date. Prospective investors in the Bonds
should be aware, however, that only approximately _____% of the Mortgage Loans
(by aggregate principal balance as of the Cut-off Date), had a first Monthly
Payment due on or before ______ _, 1996, and therefore, the remaining Mortgage
Loans could not have been Delinquent Mortgage Loans as of the Cut-off Date.
Approximately _____% of the Mortgage Loans (by aggregate outstanding
principal balance as of the Cut-off Date), are secured by Mortgaged Properties
located in the State of California. Property values of residential real estate
in California have declined in recent years. If the California residential real
estate market should continue to experience an overall decline in property
values after the dates of origination of the Mortgage Loans, the rates of
delinquency, foreclosure, bankruptcy and loss on the Mortgage Loans may be
expected to increase, and may increase substantially, as compared to such rates
in a stable or improving real estate market.
In addition, ___% of the Mortgage Loans are secured by Mortgaged
Properties located in Orange County, California. On December 6, 1994, Orange
County filed for protection under Chapter 9 of the United States Bankruptcy
Code. If public services are curtailed as a result of Orange County's financial
difficulties, property values in the related market area may be adversely
affected.]
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date of $____________. The
Mortgage Loans will consist of conventional, adjustable-rate, fully-amortizing,
first lien Mortgage Loans with terms to maturity of not more than ___ years from
the due date of the first monthly payment. On or before the Delivery Date, the
Company will acquire the Mortgage Loans to be included in the Mortgage Pool from
_______________ and ________________ (the "Sellers"). The Sellers will make
certain
S-10
<PAGE>
representations and warranties with respect to the Mortgage Loans and, as more
particularly described in the Prospectus, will have certain repurchase or
substitution obligations in connection with a breach of any such representation
and warranty, as well as in connection with an omission or defect in respect of
certain constituent documents required to be delivered with respect to the
Mortgage Loans, in any event if such breach, omission or defect cannot be cured
and it materially and adversely affects the interests of Bondholders. Neither
the Company nor any other entity or person will have any responsibility to
purchase or replace any Mortgage Loan if a Seller is obligated but fails to do
so. See "Description of the Mortgage Pool--Representations by Sellers" and
"Description of the Bonds--Assignment of Trust Fund Assets" in the Prospectus
and "--The Seller" below. The Mortgage Loans will have been originated or
acquired by the [Sellers] in accordance with the underwriting criteria described
herein. See "--Underwriting" below. All percentages of the Mortgage Loans
described herein are approximate percentages (except as otherwise indicated) by
aggregate principal balance as of the Cut-off Date.
The Mortgage Rate on each Mortgage Loan will adjust semi-annually on a
date specified in the related Mortgage Note (the "Adjustment Date"). For
approximately ____% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, the first Adjustment Date occurred prior to the Cut-off Date.
On each Adjustment Date, the Mortgage Rate on a Mortgage Loan will be
adjusted to equal the sum (rounded to either the nearest or next highest
multiple of _____%) of (a) a rate per annum equal to the monthly weighted
average cost of funds for members of the Federal Home Loan Bank of San Francisco
(the "FHLB of San Francisco") as published by the FHLB of San Francisco (the
"Cost of Funds Index" or "Index") and as most recently available as of the day
45 days prior to such Adjustment Date or, in the event that such Index is no
longer available, an index selected by the Master Servicer and reasonably
acceptable to the Trustee that is based on comparable information, and (b) the
related Note Margin, subject to the following limitations. The Mortgage Rate on
the Mortgage Loan on any Adjustment Date may not increase or decrease by more
than the Periodic Rate Cap applicable to such Mortgage Loan and, over the life
of such Mortgage Loan, generally may not exceed the Mortgage Rate at origination
plus the Lifetime Rate Cap, or be less than the Mortgage Rate at origination
minus any Lifetime Rate Floor, applicable to such Mortgage Loan. No Mortgage
Loan provides for payment caps on any Adjustment Date which would result in
deferred interest or negative amortization. Effective with the first payment due
date on a Mortgage Loan after an Adjustment Date therefor, the monthly principal
and interest payment will be adjusted to an amount that will fully amortize the
then outstanding principal balance of such Mortgage Loan at its stated maturity
and pay interest at the adjusted Mortgage Rate. Because the amortization
schedule of each Mortgage Loan will be recalculated semi-annually, any partial
prepayments thereof will not reduce the term to maturity of such Mortgage Loan.
An increase in the Mortgage Rate on a Mortgage Loan will result in a larger
monthly payment and in a larger percentage of such monthly payment being
allocated to interest and a smaller percentage being allocated to principal, and
conversely, a decrease in the Mortgage Rate on the Mortgage Loan will result in
a lower monthly payment and in a larger percentage of each monthly payment being
allocated to principal and a smaller percentage being allocated to interest.
S-11
<PAGE>
The Cost of Funds Index reflects the monthly weighted average cost of
funds of savings and loan associations and savings banks, the home offices of
which are located in Arizona, California and Nevada, that are member
institutions of the FHLB of San Francisco, as computed from statistics tabulated
and published by the FHLB of San Francisco. The FHLB of San Francisco normally
announces the Cost of Funds Index on or near the last working day of the month
following the month in which the cost of funds was incurred. The Index is
available through a variety of sources, including, without limitation, Telerate,
The Wall Street Journal and USA Today.
Listed below are the historical values of the Cost of Funds Index since
1988. Such values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of the Index. No assurance can be
given as to the Index value to be applied on any future Adjustment Date.
COST OF FUNDS INDEX
Month 1990 1991 1992 1993 1994 1995
===== ===== ===== ====== ====== ====== =====
January.............
February............
March...............
April...............
May.................
June................
July................
August..............
September...........
October.............
November............
December............
The initial Mortgage Rate in effect on a Mortgage Loan generally will
be lower than the sum of the Index that would have been applicable at
origination and the Note Margin. Absent a decline in the Index subsequent to
origination of a Mortgage Loan, the related Mortgage Rate will generally
increase on the first Adjustment Date following origination of such Mortgage
Loan. The repayment of such Mortgage Loans will be dependent on the ability of
the Mortgagor to make larger Monthly Payments following adjustments of the
Mortgage Rate. Moreover, because the maximum Mortgage Rate on any Mortgage Loan
is determined by adding the Lifetime Rate Cap to the Mortgage Rate at
origination, irrespective of the Index that would have been applicable at
origination, the maximum Mortgage Rate on a Mortgage Loan will generally be less
than the sum of the Index and the Note Margin that would have been applicable at
origination plus the Lifetime Rate Cap. Mortgage Loans that have the same
initial Mortgage Rate may not always bear interest at the same Mortgage Rate
because the Mortgage Loans may have different Adjustment Dates (and
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<PAGE>
the Mortgage Rate therefore may reflect different Index values), different Note
Margins, different Lifetime Rate Caps and different Lifetime Rate Floors, if
any.
The Mortgage Loans will have approximately the following
characteristics as of the Cut-off Date:
Number of Mortgage Loans.........................
Mortgage Rates:
Weighted Average.............................
Range........................................
Range of Net Mortgage Rates.......................
Note Margins:
Weighted Average.............................
Range........................................
Maximum Mortgage Rates:
Weighted Average.............................
Range........................................
Maximum Net Mortgage Rates (1):
Weighted Average.............................
Range........................................
Weighted Average Months to Next Adjustment Date after ____________, 19__
(2)......
(1) The difference between the maximum Net Mortgage Rate and the Net
Mortgage Rate as of the Cut-off Date may be less than the Lifetime Rate
Cap.
(2) The Weighted Average Months to the next Adjustment Date is equal to the
weighted average of the number of months until the Adjustment Date next
following _____________, 19__.
The Mortgage Loans in the Mortgage Pool will have the following
characteristics as of the Cut-off Date (expressed as a percentage of the
aggregate principal balance of the Mortgage Loans having such characteristics
relative to the aggregate principal balance of all Mortgage Loans in the
Mortgage Pool):
The Mortgage Loans will have had individual principal balances
at origination of at least $__________ but not more than $__________.
None of the Mortgage Loans in the Mortgage Pool will have been
originated prior to _____________, 19__ or will have a scheduled
maturity later than ____________, ____. No Mortgage Loan in the
Mortgage Pool will have an unexpired term to stated maturity as of the
Cut-off Date of less than __ years and __ months. The weighted average
remaining term to stated maturity of the Mortgage Loans in the Mortgage
Pool as of the Cut-off Date will be approximately ____ years and __
months. The weighted average
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<PAGE>
Adjustment Date of the Mortgage Loans in the Mortgage Pool next
following the Cut-off Date is ____________, 19__.
Approximately _____% of the Mortgage Loans will have
Loan-to-Value Ratios at origination exceeding 80% but less than or
equal to 90%, and approximately ____% of the Mortgage Loans will have
Loan-to-Value Ratios exceeding 90%. The weighted average Loan-to-Value
Ratio at origination, as of the Cut-off Date, is approximately _____%.
At least _____% of such Mortgage Loans will be secured by fee
simple interests in detached one- to four-family dwelling units with
the remaining units being secured by fee simple interests in attached
planned unit developments, condominiums or townhouses.
Approximately _____% of the Mortgage Loans in the Mortgage
Pool will be secured by Mortgaged Properties located in California.
No more than _____% of the Mortgage Loans in the Mortgage Pool
will be secured by Mortgaged Properties located in any one zip code
area in California, and no more than ____% will be secured by Mortgaged
Properties located in any one zip code area outside California.
No more than _____% of the Mortgage Loans were equity
refinance mortgage loans made to mortgagors who used less than the
entire amount of the proceeds to refinance an existing mortgage loan.
The weighted average Loan-to-Value Ratio at origination of such
Mortgage Loans, as of the Cut-off Date, is approximately ______%.
Approximately ____% of the Mortgage Loans were made to Mortgagors who
used the entire proceeds to refinance an existing Mortgage Loan.
No Mortgage Loan provides for deferred interest or negative
amortization.
Approximately ____% of the Mortgage Loans in the Mortgage Pool
will have been underwritten under a reduced loan documentation program.
The weighted average Loanto-Value Ratio at origination of the Mortgage
Loans in the Mortgage Pool which were underwritten under such reduced
loan documentation program will be approximately ____% and no more than
approximately ____% of such Mortgage Loans will be secured by Mortgaged
Properties located in California. See "Servicing Agreement--The Master
Servicer" herein.
No more than ____% of the Mortgage Loans will be secured by
vacation or second homes. No more than ____% of the Mortgage Loans will
be secured by one- to four-story condominium units. No Mortgage Loans
will be secured by condominium units in buildings of five or more
stories.
None of the Mortgage Loans in the Mortgage Pool will be
Buydown Mortgage Loans.
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<PAGE>
The following table sets forth the number and aggregate principal
balance as of the Cut-off Date of Mortgage Loans having their next Adjustment
Dates in the month described therein. The table also indicates the approximate
percentage of Mortgage Loans in the Mortgage Pool with an Adjustment Date in
each such month.
MONTH OF NUMBER OF AGGREGATE PERCENTAGE OF
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
--------------- -------------- ----------------- -------------
Total..................
The following table sets forth the number and aggregate principal
balance of Mortgage Loans having unpaid principal balances in the ranges
described therein as of the Cut-off Date. The table also indicates the
approximate weighted average Mortgage Rate and the approximate weighted average
Loan-to-Value Ratio at origination of the Mortgage Loans in each given range, as
of the Cut-off Date.
WEIGHTED
AVERAGE
NUMBER WEIGHTED ORIGINAL
OF AGGREGATE AVERAGE LOAN-TO-
MORTGAGE PRINCIPAL MORTGAGE VALUE
PRINCIPAL BALANCE LOANS BALANCE RATE RATIO
- ----------------- ----- ------- ---- -----
Total, Average or
Weighted Average... _______ $____________ ________% _______%
[Specific information with respect to the Mortgage Loans will be
available to purchasers of the Bonds on or before the time of issuance of such
Bonds. If not included in the Prospectus Supplement, such information will be
included in the Form 8-K.]
UNDERWRITING
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[Underwriting standards as appropriate.]
DELINQUENCY AND FORECLOSURE EXPERIENCE
Based solely upon information provided by the Master
Servicer, the following tables summarize, for the respective dates indicated,
the delinquency, forbearance, foreclosure, bankruptcy and REO property status
with respect to all mortgage loans originated or acquired by the Sellers that
were originated as of the date three months prior to the date indicated. The
indicated periods of delinquency are based on the number of days past due on a
contractual basis. The monthly payments under all of such mortgage loans are due
on the first day of each calendar month.
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<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
-------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C> <C> <C>
Total Loans Outstanding.......................... $ $
DELINQUENCY(1)
Period of Delinquency:
31-60 Days.............................. $ $
61-90 Days..............................
91-120 Days or More..................... -- -- -- -
Total Delinquencies........................... $ $
=== = ===== == = ====
Delinquencies as a Percentage of
Total Loans Outstanding.......................... % % % %
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
-------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C> <C> <C>
FORBEARANCE LOANS(2)............................. $ $
Forbearance Loans as a
Percentage of Total Loans
Outstanding...................................... % %
FORECLOSURES PENDING(3).......................... $ $
Foreclosures Pending as a
Percentage of Total Loans
Outstanding...................................... % % % %
BANKRUPTCIES PENDING(4).......................... $ $
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................................... % % % %
Total Delinquencies plus
Forbearance Loans, Foreclosures
Pending and Bankruptcies
Pending.......................................... $ $
Total Delinquencies plus
Forbearance Loans, Foreclosures
Pending and Bankruptcies Pending as
a Percentage of Total Loans
Outstanding...................................... % % % %
REO PROPERTIES(5)................................ $ $
REO Properties as a
Percentage of Total Loans
Outstanding...................................... % % % %
</TABLE>
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<PAGE>
(1) The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were subject to
forbearance agreements with the related mortgagors at the respective
dates indicated ("Forbearance Loans"), (b) delinquent mortgage loans
that were in foreclosure at the respective dates indicated
("Foreclosure Loans"), (c) delinquent mortgage loans as to which the
related mortgagor was in bankruptcy proceedings at the respective dates
indicated ("Bankruptcy Loans") and (d) REO properties that have been
purchased upon foreclosure of the related mortgage loans. All
Forbearance Loans, Foreclosure Loans, Bankruptcy Loans and REO
properties have been segregated into the sections of the table entitled
"Forbearance Loans," "Foreclosures Pending," "Bankruptcies Pending" and
"REO Properties," respectively, and are not included in the "31-60
Days," "61-90 Days," "91-120 Days or More" and "Total Delinquencies"
sections of the table. See the section of the table entitled "Total
Delinquencies plus Forbearance Loans, Foreclosures Pending and
Bankruptcies Pending" for total delinquency balances, percentages and
numbers which include Forbearance Loans, Foreclosure Loans and
Bankruptcy Loans, and see the section of the table entitled "REO
Properties" for delinquency balances, percentages and numbers related
to REO properties that have been purchased upon foreclosure of the
related mortgage loans.
(2) For each of the Forbearance Loans, the Master Servicer has entered into
a written forbearance agreement with the related mortgagor, based on
the Master Servicer's determination that the mortgagor is temporarily
unable to make the scheduled monthly payment on such mortgage loan.
Prior to entering into each forbearance agreement, the Master Servicer
confirmed the continued employment status of the mortgagor and found
the payment history of such mortgagor to be satisfactory. There can be
no assurance that the mortgagor will be able to make the payments as
required by the forbearance agreement, and any failure to make such
payments will constitute a delinquency. None of the Mortgage Loans
included in the Mortgage Pool are Forbearance Loans.
(3) Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated. It
is generally the Master Servicer's policy, with respect to mortgage
loans originated by the Seller, to commence foreclosure proceedings
when a
mortgage loan is between 31 and 60 days delinquent.
(4) Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective
dates indicated.
(5) REO properties that have been purchased upon foreclosure of the related
mortgage loans, including mortgaged properties that were purchased by
the Seller after the respective dates indicated.
The above data on delinquency, forbearance, foreclosure, bankruptcy and
REO property status are calculated on the basis of the total mortgage loans
originated or acquired by the Seller's that were originated as of the date three
months prior to the date indicated. However, the total amount of mortgage loans
on which the above data are based includes many mortgage loans which were not,
as of the respective dates indicated, outstanding long enough to give rise to
some of the indicated periods of delinquency or to foreclosure or bankruptcy
proceedings or REO property status. In the absence of such mortgage loans, the
delinquency, forbearance, foreclosure, bankruptcy and REO property percentages
indicated above would be higher and could be substantially higher. Because the
Mortgage Pool will consist of a fixed group of Mortgage Loans, the actual
delinquency, forbearance, foreclosure, bankruptcy and REO property percentages
with
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<PAGE>
respect to the Mortgage Pool may therefore be expected to be higher, and may be
substantially higher, than the percentages indicated above.
The information set forth in the preceding paragraphs concerning ____
and _____ has been provided by [Names of Sellers].
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Bonds,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise, if the Company deems such removal necessary or
appropriate. The Company believes that the information set forth herein will be
substantially representative of the characteristics of the Mortgage Pool as it
will be constituted at the time the Bonds are issued although the range of
Mortgage Rates and maturities and certain other characteristics of the Mortgage
Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
Bonds and will be filed, together with the Servicing Agreement, the Trust
Agreement and the Indenture, with the Securities and Exchange Commission within
fifteen days after the initial issuance of the Bonds. In the event Mortgage
Loans are removed from or added to the Mortgage Pool as set forth in the
preceding paragraph, such removal or addition will be noted in the Current
Report on Form 8-K.
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage Loans"
in the Prospectus.
THE ISSUER
GENERAL
The Imperial CMB Trust 19_-_, is a business trust formed under the laws
of the State of [Delaware] pursuant to the Trust Agreement dated as of _____ 1,
19__ between the Company and ________________, as the Owner Trustee for the
transactions described in this Prospectus Supplement. The Trust Agreement
constitutes the "governing instrument" under the laws of the State of [Delaware]
relating to business trusts. After its formation, the Issuer will not engage in
any activity other than (i) acquiring the Mortgage Loans and the other assets of
the Issuer and proceeds therefrom and pledging them to the Indenture Trustee,
(ii) issuing the Bonds and the Certificates, (iii) making payments on the Bonds
and the Certificates and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
The assets of the Issuer will consist of the Mortgage Loans and certain
related assets.
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<PAGE>
The Issuer's principal offices are in ___________, Delaware, in care of
________________, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
_______________ is the Owner Trustee under the Trust Agreement.
_______________ is a [Delaware] banking corporation and its principal offices
are located at _______________ .
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Bondholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Trust Agreement or for errors in judgment; provided, however,
that none of the Owner Trustee and any director, officer or employee thereof
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
Trust Agreement. All persons into which the Owner Trustee may be merged or with
which it may be consolidated or any person resulting from such merger or
consolidation shall be the successor of the Owner Trustee under the Trust
Agreement.
THE INSURER
[Insert Description of Insurer as Appropriate.]
DESCRIPTION OF THE SECURITIES
GENERAL
The Bonds will be issued pursuant to the Indenture dated as of
________, between the Issuer and _________, as Indenture Trustee. The
Certificates will be issued pursuant to the Trust Agreement dated as of
____________, between the Company and _____________, as Owner Trustee. The
following summaries describe certain provisions of the Securities, the Indenture
and the Trust 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 applicable agreement. Only the Bonds are offered hereby.
The Bonds will be secured by the Trust Fund pledged by the Issuer to
the Indenture Trustee pursuant to the Indenture which will consist of: (i) the
Mortgage Loans; (ii) collections in respect of principal of the Mortgage Loans
received after the applicable Cut-Off Date and collections in respect of
interest on the Mortgage Loans from the Cut-Off Date relating to the Mortgage
Loan; (iii) the amounts on deposit in the Custodial Account allocated to the
Mortgage Loans and the Payment Account (excluding net earnings thereon); (iv)
the Policy; (v) certain hazard insurance policies maintained by the Mortgagors
or by or on behalf of the Master Servicer or related subservicer in respect of
the Mortgage Loans and (vi) an assignment of the Company's rights under the
Purchase Agreement and the Servicing Agreement.
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<PAGE>
The Bonds will be issued in denominations of $1,000 and integral
multiples in excess thereof. See "--Book-Entry Securities" below.
BOOK-ENTRY SECURITIES
General. Beneficial Owners (as defined in the Prospectus) that are not
Participants or Intermediaries (as defined in the Prospectus) but desire to
purchase, sell or otherwise transfer ownership of, or other interests in, the
related Book-Entry Securities may do so only through Participants and
Intermediaries. In addition, Beneficial Owners will receive all payments of
principal of and interest on the related Book-Entry Securities from the Paying
Agent (as defined in the Prospectus) through DTC and Participants. Accordingly,
Beneficial Owners may experience delays in their receipt of payments. Unless and
until Definitive Securities are issued for the related Book-Entry Securities, it
is anticipated that the only registered Bondholder of such Book-Entry Securities
will be Cede, as nominee of DTC. Beneficial Owners will not be recognized by the
Indenture Trustee or the Master Servicer as Bondholders, as such term is used in
the Indenture, and Beneficial Owners will be permitted to receive information
furnished to Bondholders and to exercise the rights of Bondholders only
indirectly through DTC, its Participants and Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Securities among Participants and to receive and transmit payments
of principal of, and interest on, such Book-Entry Securities. Participants and
Intermediaries with which Beneficial Owners have accounts with respect to such
Book-Entry Securities similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess physical
certificates evidencing their interests in the Book-Entry Securities, the Rules
provide a mechanism by which Beneficial Owners, through their Participants and
Intermediaries, will receive payments and will be able to transfer their
interests in the Book-Entry Securities.
None of the Company, the Master Servicer, the Insurer or the Indenture
Trustee will have any liability for any actions taken by DTC or its nominee,
including, without limitation, actions for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Book-Entry
Securities held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Definitive Securities. Definitive Securities will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Securities--Form of Securities."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Securities--Form of Securities," the
Indenture Trustee is required to notify, through DTC, Participants who have
ownership of Book-Entry Securities as indicated on the records of DTC of the
availability of Definitive Securities for their Book-Entry Securities. Upon
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<PAGE>
surrender by DTC of the definitive certificates representing the Book-Entry
Securities and upon receipt of instructions from DTC for re-registration, the
Indenture Trustee will reissue the Book- Entry Securities as Definitive
Securities issued in the respective principal amounts owned by individual
Beneficial Owners, and thereafter the Indenture Trustee will recognize the
holders of such Definitive Securities as Bondholders under the Indenture.
For additional information regarding DTC and the Book-Entry Securities,
see "Description of the Bonds--Form of Bonds" in the Prospectus.]
PAYMENTS
Payments on the Bonds will be made by the Indenture Trustee or the
Paying Agent on the _____ day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in __________. Payments
on the Bonds will be made to the persons in whose names such Bonds are
registered at the close of business on the day prior to each Payment Date or, if
the Bonds are no longer Book-Entry Securities, on the Record Date. See
"Description of the Bonds--Payments" in the Prospectus. Payments will be made by
check or money order mailed (or upon the request of a Holder owning Bonds having
denominations aggregating at least $_________, by wire transfer or otherwise) to
the address of the person entitled thereto (which, in the case of Book-Entry
Securities, will be DTC or its nominee) as it appears on the Security Register
in amounts calculated as described herein on the Determination Date. However,
the final payment in respect of the Bonds will be made only upon presentation
and surrender thereof at the office or the agency of the Indenture Trustee
specified in the notice to Holders of such final payment. A "Business Day" is
any day other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in the State of ___________ are required or authorized by law to be
closed.
INTEREST ON THE BONDS
Interest payments will be made on the Bonds on each Payment Date at the
Bond Rate for the related Interest Period. The "Bond Rate" for an Interest
Period will generally equal the sum of [(a) LIBOR determined as specified
herein, as of the second LIBOR Business Day prior to the first day of such
Interest Period (or as of two LIBOR Business Days prior to the Closing Date, in
the case of the first Interest Period)] plus (b) ___% per annum. Notwithstanding
the foregoing, in no event will the Bond Rate on any Payment Date exceed a rate
equal to the weighted average of the Loan Rates (net of the applicable Servicing
Fee Rate) (adjusted to an effective rate reflecting accrued interest calculated
on the basis of the actual number of days in the Collection Period commencing in
the month in which such Interest Period commences and a year assumed to consist
of 360 days).
Interest on the Bonds in respect of any Payment Date will accrue on the
applicable Bond Principal Balance from the preceding Payment Date (or in the
case of the first Payment Date, from the Closing Date) through the day preceding
such Payment Date (each such period, an "Interest Period") on the basis of the
actual number of days in the Interest Period and a 360-day year.
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Interest payments on the Bonds will be funded from P&I Collections [and with
respect to the Bonds, if necessary, from draws on the Policy.
[On each Payment Date, LIBOR shall be established by the Indenture
Trustee and as to any Interest Period, LIBOR will equal the rate for United
States dollar deposits for one month which appears on the Telerate Screen Page
3750 as of 11:00 A.M., London time, on the second LIBOR Business Day prior to
the first day of such Interest Period. "Telerate Screen Page 3750" means the
display designated as page 3750 on the Telerate Service (or such other page as
may replace page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks). If such rate does not appear on such
page (or such other page as may replace that page on that service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be selected by the Indenture Trustee after consultation
with the Master Servicer), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by _________) as of 11:00 A.M., London time, on the day that is
two LIBOR Business Days prior to the immediately preceding Payment Date to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the Bond Principal Balance then outstanding. The
Indenture Trustee will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Indenture Trustee after consultation with the
Master Servicer, as of 11:00 A.M., New York City time, on such date for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the Bond Principal Balance then outstanding. If no such
quotations can be obtained, the rate will be LIBOR for the prior Payment Date.
"LIBOR Business Day" means any day other than (i) a Saturday or a Sunday or (ii)
a day on which banking institutions in the State of [New York] or in the city of
London, England are required or authorized by law to be closed.]
PRINCIPAL PAYMENTS ON THE BONDS
On each Payment Date, other than the Payment Date in _________,
principal payments except as provided below will be due and payable on the Bonds
in an amount equal to the Principal Collection Distribution Amount (as defined
below) for such Payment Date, together with any Liquidation Loss Amounts. On the
Payment Date in ______, principal will be due and payable on the Bonds in
amounts equal to the Bond Principal Balance on such Payment Date. In no event
will principal payments on the Bonds on any Payment Date exceed the Bond
Principal Balance thereof on such date.
ALLOCATION OF P&I COLLECTIONS
The Master Servicer on behalf of the Issuer will establish an account
(the "Distribution Account") into which the Master Servicer will deposit P&I
Collections for each Payment Date on
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<PAGE>
the Business Day prior thereto. The Distribution Account will be an Eligible
Account. Amounts on deposit in the Distribution Account will be invested in
Eligible Investments maturing on or before the Business Day prior to the related
Payment Date.
On each Payment Date, P&I Collections will be allocated from the
Distribution Account in the following order of priority:
(i) to the Bonds, the sum of the following:
(a) as payment for the accrued interest due and any
overdue accrued interest at the Bond Rate (as defined herein) on the
Bond Principal Balance (as defined herein) of the Bonds;
(b) an amount equal to the Principal Collection
Distribution Amount, applied to reduce the Bond Principal Balance of
the Bonds; and
(c) an additional amount to be applied to reduce the
Bond Principal Balance (each such amount, a "Additional Principal
Distribution Amount"), to the extent necessary to bring the Outstanding
Reserve Amount up to the Reserve Amount Target; and
(ii) to the Insurer, the aggregate of all payments, if any, made
by the Insurer under the Policy [and any other amounts].
(iii) as payment for the premium for the Policy;
(iv) to reimburse prior draws made on the Policy (with interest
thereon);
(v) any other amounts owed to the Insurer pursuant to the
Insurance Agreement; and
(vi) the remaining amount, if any, of the P&I Collections
shall be allocated to the Certificates.
For any Payment Date, the "Principal Collection Distribution Amount"
will equal Principal Collections for such Payment Date.
"Liquidation Loss Amount" means with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the related
Collection Period in which such Mortgage Loan became a Liquidated Mortgage Loan,
after giving effect to the Net Liquidation Proceeds allocable to such Principal
Balance in connection therewith.
A "Liquidated Mortgage Loan" means, as to any Payment Date, any
Mortgage Loan in respect of which the Master Servicer has determined, based on
the servicing procedures specified in the Servicing Agreement, as of the end of
the preceding Collection Period that all liquidation
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<PAGE>
proceeds which it expects to recover with respect to the disposition of the
related Mortgaged Property have been recovered.
As of the Closing Date, the Reserve Amount Target is equal to at least
___% of the CutOff Date Pool Balance. The Reserve Amount Target may be increased
or reduced from time to time pursuant to the terms of the Pooling and Servicing
Agreement, with the consent of the Rating Agencies and the Indenture Trustee. To
the extent the Reserve Amount Target is reduced on any Payment Date, the amount
of the Principal Collections distributed pursuant to clause (ii)(b) will be
reduced on such Payment Date and on each subsequent Payment Date to the extent
the remaining Outstanding Reserve Amount is in excess of the reduced Reserve
Amount Target until the Outstanding Reserve Amount equals the Reserve Amount
Target.
The Indenture Trustee will establish the Payment Account into which the
Master Servicer will deposit the portion of the P&I Collections allocable to the
Mortgage Loan for each Payment Date on the Business Day prior thereto. The
Payment Account will be an Eligible Account. Amounts on deposit in the Payment
Account will be invested in Eligible Investments maturing on or before the
Business Day prior to the related Payment Date.
The "Bond Principal Balance" of the Bonds on any day is the initial
principal balance thereof as of the Closing Date, reduced by all payments of
principal thereon as of such day.
Except as provided below, payments pursuant to clause (i) will be
allocated to the Bonds based on the amount of interest such Bond is entitled to
receive pursuant to such clause. Except as provided below, payments pursuant to
clauses (ii), (iii) and (vi) will constitute payments of principal.
An "Amortization Event" will be deemed to occur upon (i) the occurrence
of certain events relating to a violation of the Seller's obligations under the
Mortgage Loan Purchase Agreement, (ii) the occurrence of certain events of
bankruptcy, insolvency or receivership relating to the Seller or the Master
Servicer, (iii) the Issuer becomes subject to regulation as an investment
company within the meaning of the Investment Company Act of 1940, as amended, or
(iv) the aggregate of all draws under the Policy exceeds __________;
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Seller, the conservator, receiver or
trustee-in-bankruptcy may have the power to prevent the commencement of the
Amortization Period.
OUTSTANDING RESERVE AMOUNT
The distribution of the Additional Principal Distribution Amount, if
any, to the Bondholders, will create the Outstanding Reserve Amount. The
Outstanding Reserve Amount, if any, will be available to absorb any Liquidation
Loss Amounts that are allocated to the Mortgage Loans and not covered by
Principal Collections and Interest Collections. Any Liquidation Loss Amounts
allocable to the Bondholders and not covered by such overcollateralization will
be
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covered by draws on the Policy to the extent provided herein. The "Outstanding
Reserve Amount" on any Payment Date is the amount, if any, by which the Pool
Balance as of the end of the related Collection Period exceed the Bond Principal
Balance on such day (after giving effect to all amounts payable and allocable to
principal on the Bonds that are applied to reduce the Bond Principal Balance on
such Payment Date).
To the extent that such overcollateralization is insufficient or not
available to absorb Liquidation Loss Amounts, and payments are not made under
the Policy, a Bondholder may incur a loss.
THE PAYING AGENT
The Paying Agent shall initially be the [Indenture Trustee], together
with any successor thereto. The Paying Agent shall have the revocable power to
withdraw funds from the Payment Account for the purpose of making payments to
the Securityholders.
MATURITY
The Bonds will be payable in full on ___________. In addition, the
Issuer will pay the Bonds in full upon the exercise by the Master Servicer of
its option to purchase the assets of the Issuer after the Pool Balance is
reduced to an amount less than or equal to $________ (___% of the initial Pool
Balance). The purchase price will be equal to the sum of the outstanding Pool
Balance and accrued and unpaid interest thereon at the weighted average of the
Loan Rates through the day preceding the Payment Date on which the Bonds are
paid in full together with all amounts due and owing to the Insurer.
DESCRIPTION OF THE POLICY
On the Closing Date, the Insurer will issue the Policy in favor of the
[Owner Trustee on behalf of the Issuer] pursuant to an insurance agreement (the
"Insurance Agreement") between the Insurer, the Master Servicer and the Trustee.
The Policy will unconditionally and irrevocably guarantee principal payments on
the Bonds plus accrued and unpaid interest due on the Bonds. On each Payment
Date, a draw will be made on the Policy equal to the sum of (a) the amount by
which the sum of interest accrued at (i) the Bond Rate on the outstanding Bond
Principal Balance of the Bonds and (b) the amount (the "Guaranteed Principal
Payment Amount"), if any, [by which the Bond Principal Balance of the Bonds
exceeds the sum of the Pool Balance at the end of the related Collection Period
(after giving effect to all amounts paid and allocable to principal on the Bonds
that are applied to reduce the Bond Principal Balances on such Payment Date)].
Pursuant to the terms of [the Indenture], draws under the Policy in respect of
the Guaranteed Principal Payment Amount will be paid on the Bonds by the
Indenture Trustee, as principal pro rata, based on the outstanding Bond
Principal Balances thereof. In addition, the Policy will guarantee the payment
of the outstanding Bond Principal Balance of each Bond on the Payment Date in
_____________ (after giving effect to all other amounts paid and allocable to
principal on such
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Payment Date). In the absence of payments under the Policy, Bondholders will
directly bear the credit and other risks associated with their investment to the
extent such risks are not covered by overcollateralization. The Policy does not
guarantee any payments to the Certificates.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
The yield to maturity of the Bonds will depend on the price paid by the
holder for such Bond, the Bond Interest Rate and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on
the Mortgage Loans and the allocation thereof.
In general, if a Bond is purchased at a premium over its face amount
and payments of principal on such Bond 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. Conversely, if a Bond is purchased at
a discount from its face amount and payments of principal on such Bond 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 rate and timing of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans and thus the
yield on the Bonds. There can be no assurance as to the rate of losses or
delinquencies on any of the Mortgage Loans, however, such losses and
delinquencies may be expected to be higher than those of traditional first lien
mortgage loans. To the extent that any losses are incurred on any of the
Mortgage Loans that are not covered by overcollateralization or the Policy,
losses resulting from default by Mortgagors may be allocated to the Bonds. See
"Risk Factors--Limitations, Reduction and Substitution of Credit Enhancement" in
the Prospectus. Even where the Policy covers all losses incurred on the Mortgage
Loans, the effect of losses may be to increase prepayment experience on the
Mortgage Loans, thus reducing average weighted life and affecting yield to
maturity.
[With respect to ___ Mortgage Loans representing ___% of the Cut-off
Date Pool Balance, the Mortgage Rate at origination is below the rate that would
result from the sum of the then-applicable Index and Gross Margin. Under the
applicable underwriting standards, Mortgagors under such Mortgage Loans are
generally qualified based on an assumed payment which reflects a rate
significantly lower than the maximum rate. The repayment of any such Mortgage
Loan may thus be dependent on the ability of the mortgagor to make larger
interest payments following the adjustment of the Mortgage Rate.]
With respect to the Mortgage Loans required minimum monthly payments
are equal to [the amount of interest currently accruing thereon,] and therefore
are not expected to significantly amortize the outstanding principal amounts of
the Mortgage Loans prior to maturity. As a result, a borrower will generally be
required to pay a substantial principal amount at the maturity of a Mortgage
Loan. Such Mortgage Loans pose a greater risk of default than fully-amortizing
mortgage loans, because the Mortgagor's ability to make such a substantial
payment at maturity will generally depend on the Mortgagor's ability to obtain
refinancing of the Mortgage Loans or
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to sell the Mortgaged Property prior to the maturity of the Mortgage Loan. See
"Yield and Prepayment Considerations" in the Prospectus and "Risk Factors"
herein.
There can be no assurance as to the rate of principal payments on the
Mortgage Loans. The rate of principal payments may fluctuate substantially from
time to time.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Issuer by the Company were
or will be purchased by the Company from [Name of Master Servicer] (the
"Seller") pursuant to the Purchase Agreement. Under the Purchase Agreement, the
Seller has agreed to transfer to the Company the Initial Mortgage Loans.
Pursuant to an assignment by the Company executed on the Closing Date, upon such
transfer to the Company, the Initial Mortgage Loans will be transferred by the
Company to the Issuer, as well as the Company's rights in, to and under the
Purchase Agreement, which will include the right to purchase the Subsequent
Mortgage Loans. The following summary describes certain terms of the form of the
Purchase Agreement and is qualified in its entirety by reference to the form of
Purchase Agreement.
TRANSFER OF MORTGAGE LOANS
Pursuant to the Purchase Agreement, the Seller will transfer and assign
to the Company all of its right, title and interest in and to the Mortgage
Loans, the related mortgage note, mortgages and other related documents
(collectively, the "Related Documents"). The purchase price of the Mortgage
Loans is a specified percentage of the face amount thereof as of the time of
transfer and is payable by the Company, as provided in the Purchase Agreement.
The Purchase Agreement will require that, within the time period
specified therein, the Seller, acting at the Company's request, deliver to
____________________ (the "Custodian") (as the Issuer's agent for such purpose)
the Mortgage Loans and the Related Documents. In lieu of delivery of original
mortgages, the Seller may deliver true and correct copies thereof which have
been certified as to authenticity by the appropriate county recording office
where such mortgage is recorded. In addition, under the terms of the Purchase
Agreement, the Seller will be required to record assignments of mortgages
relating to such Mortgage Loans.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Company that, among other
things, as of _________________, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Purchase Agreement.
The Seller will also represent and warrant to the Company, that, among
other things, (a) the information with respect to the Initial Mortgage Loans set
forth in the schedule attached to the Purchase Agreement is true and correct in
all material respects and (b) immediately prior to the sale of the Initial
Mortgage Loans to the Company, the Seller was the sole owner and holder of
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the Initial Mortgage Loans free and clear of any and all liens and security
interests. The Seller will also represent and warrant to the Company, that,
among other things, as of ______________, (a) the Purchase Agreement constitutes
a legal, valid and binding obligation of the Seller and (b) the Purchase
Agreement constitutes a valid transfer and assignment to the Company of all
right, title and interest of the Seller in and to the Initial Mortgage Loans and
the proceeds thereof. Such representations and warranties will also be made by
the Seller with respect to the Subsequent Mortgage Loans as of the date of
transfer to the Issuer. The benefit of the representations and warranties made
to the Company by the Seller in the Purchase Agreement will be assigned by the
Company to the Issuer and by the Issuer to the Indenture Trustee in the
Indenture.
Within ____ days of the Closing Date, the Custodian will review or
cause to be reviewed the Mortgage Loans and the Related Documents and if any
Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within ____ days following notification
thereof to the Seller and the Issuer by the Custodian, the Seller will be
obligated under the Purchase Agreement to deposit the Transfer Price into the
Custodial Account. In lieu of any such deposit, the Seller may substitute an
Eligible Substitute Loan. Any such purchase or substitution will result in the
removal of such Defective Loan from the Trust Fund and the lien of the
Indenture. The obligation of the Seller to remove a Defective Loan from the
Trust Fund is the sole remedy regarding any defects in the Mortgage Loans and
Related Documents available to the Indenture Trustee or the Bondholders against
the Seller.
With respect to any Mortgage Loan, the "Transfer Price" is equal to the
Principal Balance of such Mortgage Loan at the time of any removal described
above plus accrued and unpaid interest thereon to the date of removal. In
connection with the substitution of an Eligible Substitute Loan, the Seller will
be required to deposit in the Custodial Account an amount (the "Substitution
Adjustment Amount") equal to the excess of the Principal Balance of the related
Defective Loan over the Principal Balance of such Eligible Substitute Loan.
An "Eligible Substitute Loan" is a mortgage loan substituted by the
Seller for a Defective Loan which must, on the date of such substitution, (i)
have an outstanding Principal Balance (or in the case of a substitution of more
than one Mortgage Loan for a Defective Loan, an aggregate Principal Balance),
not in excess of the Principal Balance relating to such Defective Loan; (ii)
have a Loan Rate, Net Loan Rate and Gross Margin no lower than and not more than
1% in excess of the Loan Rate, Net Loan Rate and Gross Margin, respectively, of
such Defective Loan; (iii) have a Combined Loan-to-Value Ratio at the time of
substitution no higher than that of the Defective Loan at the time of
substitution; (iv) have a remaining term to maturity not more than one year
earlier and not later than the remaining term to maturity of the Defective Loan;
(v) comply with each representation and warranty as to the Mortgage Loans set
forth in the Purchase Agreement (deemed to be made as of the date of
substitution); and (vi) satisfy certain other conditions specified in the
Indenture.
In addition the Seller will be obligated to deposit the Transfer Price
or substitute an Eligible Substitute Loan with respect to a Mortgage Loan as to
which there is a breach of a representation or warranty in the Purchase
Agreement.
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Mortgage Loans required to be removed from the Trust Fund as described
in the preceding paragraphs are referred to as "Defective Loans."
ASSIGNMENT TO THE ISSUER
The Master Servicer expressly acknowledges and consents to the
Company's transfer of its rights relating to the Mortgage Loans and its
obligation to pay for the Subsequent Mortgage Loans under the Purchase Agreement
to the Issuer, the Issuer's pledge of its interest in the Purchase Agreement to
the Indenture Trustee and the enforcement by the Indenture Trustee of any
such right or remedy against the Master Servicer.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing
Agreement, dated as of ________ 1, 19__ between the Company and the Master
Servicer. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the Servicing
Agreement. Whenever particular sections or defined terms of the Servicing
Agreement are referred to, such sections or defined terms are thereby
incorporated herein by reference.
P&I COLLECTIONS
The Master Servicer shall establish and maintain an account (the
"Custodial Account") in which the Master Servicer shall deposit or cause to be
deposited any amounts representing payments on and any collections received in
respect of the Mortgage Loans received by it subsequent to the Cut-Off Date. The
Custodial Account shall be an Eligible Account. On the _____ day of each month
or if such day is not a Business Day, the next succeeding Business Day (the
"Determination Date"), the Master Servicer will notify the Indenture Trustee of
the amount of P&I Collections to be included in funds available distribution to
the Mortgage Loan for the related Payment Date.
"Eligible Investments" are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then current ratings of the Bonds.
On the Business Day prior to each Payment Date, the Master Servicer
will make the following withdrawals from the Custodial Account and deposit such
amounts as follows:
(i) to the Distribution Account, an amount equal to the
P&I Collections for such Payment Date; and
(ii) to pay to itself various reimbursement amounts and other
amounts as provided in the Servicing Agreement.
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As to any Payment Date, "P&I Collections" will equal the sum of (a)
Interest Collections for such Payment Date and (b) Principal Collections for
such date.
All collections on the Mortgage Loans will generally be allocated
between amounts collected in respect of interest and amounts collected in
respect of principal. As to any Payment Date, "Interest Collections" will be
equal to the sum of (i) the amounts collected during the related Collection
Period, including Net Liquidation Proceeds (as defined below), allocated to
interest, reduced by the Servicing Fees for such Collection Period and (ii) the
interest portion of the Transfer Price for any Defective Loans. As to any
Payment Date, "Principal Collections" will be equal to the sum of (i) the amount
collected during the related Collection Period, including Net Liquidation
Proceeds (as defined herein) allocated to principal and (ii) the principal
portion of the Transfer Price for any Defective Loans and any Substitution
Adjustment Amounts.
As to any Payment Date other than the first Payment Date, the
"Collection Period" is the calendar month preceding the month of such Payment
Date and in the case of the first Payment
Date the period from the Cut-Off Date to ___________.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are the
proceeds (excluding amounts drawn on the Policy) received in connection with the
liquidation of any Mortgage Loan, whether through trustee's sale, foreclosure
sale or otherwise, reduced by related expenses, but not including the portion,
if any, of such amount that exceeds the Principal Balance of the Mortgage Loan
at the end of the Collection Period immediately preceding the Collection Period
in which such Mortgage Loan became a Liquidated Mortgage Loan.
With respect to any date, the "Pool Balance" will be equal to the
aggregate of the Principal Balances of all Mortgage Loans as of such date. The
Principal Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on
any day is equal to the Cut-Off Date Principal Balance thereof, minus all
collections credited against the Principal Balance of such Mortgage Loan prior
to such day. The Principal Balance of a Liquidated Mortgage Loan after final
recovery of related Liquidation Proceeds shall be zero.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master Servicer will make reasonable efforts to collect all
payments called for under the Mortgage Loans and will, consistent with the
Servicing Agreement, follow such collection procedures as it follows from time
to time with respect to the mortgage loans in its servicing portfolio comparable
to the Mortgage Loans. Consistent with the above, the Master Servicer may in its
discretion waive any late payment charge or any assumption or other fee or
charge that may be collected in the ordinary course of servicing the Mortgage
Loans.
With respect to the Mortgage Loans, the Master Servicer may arrange
with a borrower a schedule for the payment of interest due and unpaid for a
period, provided that any such arrangement is consistent with the Master
Servicer's policies with respect to mortgage loans.
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REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably convert
to ownership Mortgaged Properties securing such of the Mortgage Loans as come
into default when in accordance with applicable servicing procedures under the
Servicing Agreement, no satisfactory arrangements can be made for the collection
of delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage servicing
activities, provided the Master Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Bondholders.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement provides for delivery on or before March 31 in
each year, beginning in March 31, 19__, to the Indenture Trustee of an annual
statement signed by an officer of the Master Servicer to the effect that the
Master Servicer has fulfilled its material obligations under the Servicing
Agreement throughout the preceding calendar year, except as specified in such
statement.
On or before March 31 of each year, beginning March 31, 19__, the
Master Servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants (who may also render other services to
the Master Servicer) to the Indenture Trustee to the effect that such firm has
examined certain documents and the records relating to servicing of the Mortgage
Loans under the Servicing Agreement for the preceding calendar year and that, on
the basis of such examination, such firm believes that such servicing was
conducted in compliance with the Servicing Agreement except for (a) such
exceptions as such firm believes to be immaterial and (b) such other exceptions
as shall be set forth in such report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Servicing Agreement provides that the Master Servicer may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Issuer and the Indenture Trustee in writing and such proposed successor servicer
is reasonably acceptable to the Issuer and the Indenture Trustee; (b) the Rating
Agencies have confirmed to the Issuer and the Indenture Trustee that the
appointment of such proposed successor servicer as the Master Servicer will not
result in the reduction or withdrawal of the then current rating of the Bonds
and (c) such proposed
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successor servicer is reasonably acceptable to the Insurer. No such resignation
will become effective until the Indenture Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Servicing
Agreement.
The Master Servicer may perform any of its duties and obligations under
the Servicing Agreement through one or more subservicers or delegates, which may
be affiliates of the Master Servicer. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Issuer for the Master
Servicer's duties and obligations under the Servicing Agreement, without any
diminution of such duties and obligations and as if the Master Servicer itself
were performing such duties and obligations.
The Servicing Agreement provides that the Master Servicer will
indemnify the Owner Trustee and the Indenture Trustee, as the case may be, from
and against any loss, liability or expense, imposed by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties
under the Servicing Agreement or by reason of its reckless disregard of its
obligations and duties under the Servicing Agreement. The Servicing Agreement
provides that neither the Master Servicer nor its directors, officers, employees
or agents will be under any other liability to the Owner Trustee, the Indenture
Trustee, or any other person for any action taken or for refraining from taking
any action pursuant to the Servicing Agreement. The Master Servicer and any
director or officer or employee or agent of the Master Servicer shall be
indemnified by the Issuer and held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Servicing
Agreement or the Securities, other than any loss, liability or expense related
to any specific Mortgage Loan or Mortgage Loans (except as any such loss,
liability or expense shall be otherwise reimbursable pursuant to the Servicing
Agreement) and any loss, liability or expense incurred by reason of its willful
misfeasance, bad faith or gross negligence in the performance of its duties
thereunder or by reason of its reckless disregard of its obligations and duties
thereunder. In addition, the Servicing Agreement provides that the Master
Servicer will not be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its servicing responsibilities under the
Servicing Agreement and which in its opinion may expose it to any expense or
liability. The Master Servicer may, in its sole discretion, undertake any such
legal action which it may deem necessary or desirable with respect to the
Servicing Agreement and the rights and duties of the parties thereto.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything in the Servicing
Agreement to the contrary notwithstanding.
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EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure by
the Master Servicer to (a) deposit in the Custodial Account or Payment Account
any deposit required to be made under the Servicing Agreement or (b) to pay when
due any amount payable by it under the terms of the Insurance Agreement, which
failure continues unremedied for three Business Days after the giving of written
notice of such failure to the Master Servicer by the Issuer or Indenture
Trustee, or to the Master Servicer, the Issuer and the Indenture Trustee by the
Insurer; (ii) any failure by the Master Servicer duly to observe or perform in
any material respect any other of its covenants or agreements in the Servicing
Agreement or Insurance Agreement which, in each case, materially and adversely
affects the interests of the Bondholders or the Insurer and continues unremedied
for ____ days or ____ days, respectively, after the giving of written notice of
such failure to the Master Servicer by the Issuer or the Indenture Trustee, or
to the Master Servicer, the Issuer and the Indenture Trustee by the Insurer;
(iii) certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings relating to the Master Servicer and
certain actions by the Master Servicer indicating insolvency, reorganization or
inability to pay its obligations; or (iv) any merger, consolidation, or
combination with another entity and the surviving entity thereof or corporate
successor is not rated at least investment grade by the Rating Agencies. Under
the above circumstances, the Indenture Trustee with the consent of the Insurer
or the Insurer may deliver written notice to the Master Servicer terminating all
the rights and obligations of the Master Servicer under the Servicing Agreement.
Under certain other circumstances, the Insurer with the consent of 51% of the
outstanding principal amount of the Bonds and the Certificates may terminate all
the rights and obligations of the Master Servicer under the Servicing Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for the applicable periods referred to
therein or referred to under clause (ii) above for the applicable periods
referred to therein, shall not constitute an Event of Servicing Termination if
such delay or failure could not be prevented by the exercise of reasonable
diligence by the Master Servicer and such delay or failure was caused by an act
of God or other similar occurrence. Upon the occurrence of any such event the
Master Servicer shall not be relieved from using reasonable efforts to perform
its obligations in a timely manner in accordance with the terms of the Servicing
Agreement and the Master Servicer shall provide the Issuer, the Insurer and the
Indenture Trustee prompt notice of such failure or delay by it, together with a
description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, the
Indenture Trustee with the consent of the Insurer or the Insurer may terminate
all of the rights and obligations of the Master Servicer under the Servicing
Agreement with respect to the Mortgage Loans, whereupon the Indenture Trustee
will succeed to all the responsibilities, duties and liabilities of the Master
Servicer under the Servicing Agreement and will be entitled to similar
compensation arrangements.
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In the event that the Indenture Trustee would be obligated to succeed the Master
Servicer but is unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, an established housing
and home finance institution or other mortgage loan or mortgage loan servicer
with all licenses and permits required to perform its obligations under the
Servicing Agreement and having a net worth of at least $25,000,000 and
acceptable to the Insurer to act as successor to the Master Servicer under the
Servicing Agreement. Pending such appointment, the Indenture Trustee will be
obligated to act in such capacity unless prohibited by law. Such successor will
be entitled to receive the same compensation that the Master Servicer would
otherwise have received (or such lesser compensation as the Issuer and such
successor may agree). A receiver or conservator for the Master Servicer may be
empowered to prevent the termination and replacement of the Master Servicer
where the only Event of Servicing Termination that has occurred is an Insolvency
Event.
AMENDMENT
The Servicing Agreement may be amended from time to time by the Master
Servicer, the Issuer and the Indenture Trustee, [with the consent of the
Insurer,] provided that the Rating Agencies confirm in writing that such
amendment will not result in a downgrading or a withdrawal
of the rating then assigned to the Bonds.
DESCRIPTION OF THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Indenture. Whenever particular
sections or defined terms of the Indenture are referred to, such sections or
defined terms are thereby incorporated herein by reference.
THE TRUST FUND
Simultaneously with the issuance of the Bonds, the Issuer will pledge
the Trust Fund to the Indenture Trustee as collateral for the Bonds.
REPORTS TO HOLDERS
The Indenture Trustee will mail to each Holder of Bonds, at its address
listed on the Security Register maintained with the Indenture Trustee a report
setting forth certain amounts relating to the Bonds for each Payment Date, among
other things:
(i) the amount of principal, if any, payable on such Payment
Date to Bondholders separately stating the portion thereof in respect of
Liquidation Loss Amounts and Additional Principal Distribution Amount and
stating the amount of any remaining Liquidation Loss Amounts;
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(ii) the amount of interest payable on such Payment Date to
Bondholders separately stating the portion thereof in respect of overdue accrued
interest and stating the amount
of remaining overdue accrued interest;
(iii) the Bond Principal Balance of the Bonds after giving effect
to the payment of principal on such Payment Date;
(iv) P&I Collections for the related Collection Period;
(v) the aggregate Principal Balance of the Mortgage Loans as of
last day of the related Collection Period;
[(vi) the amount paid, if any, under the Policy separately
stating the portion thereof included in (i) and (ii) above; and]
(vii) the Outstanding Reserve Amount after giving effect to the
payment of principal on the Bonds on such Payment Date.
In the case of information furnished pursuant to clauses (i) and (ii)
above, the amounts shall be expressed as a dollar amount per $1,000 in face
amount of Bonds.
CERTAIN COVENANTS
The Indenture will provide that the Issuer may not consolidate with or
merge into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Issuer's obligation to make due and punctual payments upon the Bonds and the
performance or observance of any agreement and covenant of the Issuer under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Issuer has been advised
that the ratings of the Bonds then in effect would not be reduced or withdrawn
by any Rating Agency as a result of such merger or consolidation, (v) any action
that is necessary to maintain the lien and security interest created by the
Indenture is taken and (vi) the Issuer has received an Opinion of Counsel to the
effect that such consolidation or merger would have no material adverse tax
consequence to the Issuer or to any Bondholder or Certificateholder. The Issuer
will not, among other things, (i) except as expressly permitted by the
Indenture, sell, transfer, exchange or otherwise dispose of any of the assets of
the Issuer, (ii) claim any credit on or make any deduction from the principal
and interest payable in respect of the Bonds (other than amounts withheld under
the Code or applicable state law) or assert any claim against any present or
former holder of Bonds because of the payment of taxes levied or assessed upon
the Issuer, (iii) permit the validity or effectiveness of the Indenture to be
impaired or permit any person to be released from any covenants or obligations
with respect to the Bonds under the Indenture except as may be expressly
permitted thereby or (iv) permit any lien, charge excise, claim, security
interest, mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Issuer or any part thereof, or
any interest therein or the
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<PAGE>
proceeds thereof. The Issuer may not engage in any activity other than as
specified under "The Issuer" herein.
MODIFICATION OF INDENTURE
With the consent of both the holders of a majority of the outstanding
Bonds and the Insurer, the Issuer and the Indenture Trustee may execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify (except as provided below) in any
manner the rights of the Bondholders. Without the consent of the holder of each
outstanding Bond affected thereby, however, no supplemental indenture will: (i)
change the due date of any installment of principal of or interest on any Bond
or reduce the principal amount thereof, the interest rate specified thereon or
the redemption price with respect thereto or change any place of payment where
or the coin or currency in which any Bond or any interest thereon is payable;
(ii) impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment; (iii) reduce the percentage of
the aggregate amount of the outstanding Bonds, the consent of the holders of
which is required for any supplemental indenture or the consent of the holders
of which is required for any waiver of compliance with certain provisions of the
Indenture or of certain defaults thereunder and their consequences as provided
for in the Indenture; (iv) modify or alter the provisions of the Indenture
regarding the voting of Bonds held by the Issuer, the Company or an affiliate of
any of them; (v) decrease the percentage of the aggregate principal amount of
Bonds required to amend the sections of the Indenture which specify the
applicable percentage of aggregate principal amount of the Bonds necessary to
amend the Indenture or certain other related agreements; (vi) modify any of the
provisions of the Indenture in such manner as to affect the calculation of the
amount of any payment of interest of principal due on any Bond (including the
calculation of any of the individual components of such calculation); or (vii)
permit the creation of any lien ranking prior to or, except as otherwise
contemplated by the Indenture, on a parity with the lien of the Indenture with
respect to any of the collateral for the Bonds or, except as otherwise permitted
or contemplated in the Indenture, terminate the lien of the Indenture on any
such collateral or deprive the holder of any Bond of the security afforded by
the lien of the Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, with the consent of the Insurer and without obtaining the consent of
the Bondholders, for the purpose of, among other things, to cure any ambiguity
or to correct or supplement any provision in the Indenture that may be
inconsistent with any other provision therein.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the Issuer, the Indenture Trustee nor any director, officer or
employee of the Issuer or the Indenture Trustee will be under any liability to
the Issuer or the related Bondholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Issuer and any director, officer or employee thereof will be protected against
any liability which would otherwise be imposed by reason of willful malfeasance,
bad faith or negligence in the performance
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<PAGE>
of duties or by reason of reckless disregard of obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent of the Indenture
Trustee shall be indemnified by the Issuer and held harmless against any loss,
liability or expense incurred in connection with investigating, preparing to
defend or defending any legal action, commenced or threatened, relating to the
Indenture other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or negligence in the performance of its duties
under such Indenture or by reason of reckless disregard of its obligations and
duties under the Indenture. All persons into which the Indenture Trustee may be
merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the Indenture Trustee under
each Indenture.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Bonds [will][will not] be treated
as having been issued with "original issue discount" (as defined in the
Prospectus). See "Federal Income Tax Consequences" in the Prospectus. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, market discount and premium, if any, for federal income
tax purposes will be [ ]% [ ]. No representation is made that the Mortgage Loans
will prepay at that rate or any other rate.
The Bonds will not be treated as "qualifying real property loans" under
Section 593 (d) of the Code, assets described in Section 7701(a)(19)(C) of the
Code and "real estate assets" under Section 856(c)(5)(A) of the Code. In
addition, interest on the Bonds will not be treated as "interest on obligations
secured by mortgages on real property" under Section 856(c)(3)(B) of the Code.
The Bonds will also not be treated as "qualified mortgages" under Section
860G(a)(3)(C) of the Code.
Prospective investors in the Bonds should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of certain federal income and state and local tax
laws to the Issuer and purchasers of the Bonds.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Bonds on behalf of or with Plan assets of any Plan should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment. See "ERISA
Considerations" in the Prospectus.
LEGAL INVESTMENT
The Bonds will constitute "mortgage related securities" for purposes of
SMMEA so long as they are rated in the highest two rating categories by a Rating
Agency. See "Legal Investment" in the Prospectus.
S-38
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the
Company, the Bonds.
The Bonds will be purchased from the Company by the Underwriter and
will be offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Bonds are expected to be
approximately $___________, before the deduction of expenses payable by the
Company estimated to be approximately $_______. The Underwriter may effect such
transactions by selling the Bonds to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter. In connection with the sale of the Bonds, the
Underwriter may be deemed to have received compensation from the Company in the
form of underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Bonds may be deemed
to be underwriters and any profit on the resale of the Bonds positioned by them
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933.
The Company has been advised by the Underwriter that it presently
intends to make a market in the Bonds offered hereby; however, it is not
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for the
Bonds will develop.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof.
LEGAL MATTERS
Certain legal matters with respect to the Bonds will be passed upon for
the Company by [Thacher Proffitt & Wood], New York, New York and for the
Underwriter by ________________, New York, New York.
RATINGS
It is a condition to issuance that the Bonds be rated "___" by
_______________ and "---" by ___________________. The Company has not requested
a rating on the Bonds by any rating agency other than _______________ and
_______________. However, there can be no assurance as to whether any other
rating agency will rate the Bonds, or, if it does, what rating would be assigned
by any such other rating agency. A rating on the Bonds by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Bonds by
___________ and ___________________________. A securities rating addresses the
likelihood of the receipt by holders of Bonds of distributions on the Mortgage
Loans. The rating takes into consideration the
S-39
<PAGE>
structural, legal and tax aspects associated with the Bonds. The ratings on the
Bonds do not, however, constitute statements regarding the possibility that
Holders might realize a lower than anticipated yield. A securities rating is not
a recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating organization. Each securities
rating should be evaluated independently of similar ratings on different
securities.
S-40
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
------------
TABLE OF CONTENTS
[To be updated] Page
----
Prospectus Supplement
Summary.............................................. S-
Risk Factors......................................... S-
Description of the Mortgage Pool..................... S-
Servicing of the Mortgage Loans...................... S-
The Issuer........................................... S-
The Owner Trustee.................................... S-
Description of the Securities........................ S-
Description of the Purchase
Agreement....................................... S-
Assignment to the Issuer............................. S-
Description of the Servicing
Agreement....................................... S-
Description of the Indenture......................... S-
Federal Income Tax Consequences...................... S-
ERISA Considerations................................. S-
Legal Investment..................................... S-
Method of Distribution............................... S-
Legal Matters........................................ S-
Ratings.............................................. S-
Prospectus
Summary of Prospectus ...............................
Risk Factors.........................................
The Mortgage Pools...................................
Servicing of Mortgage Loans..........................
Description of Credit Enhancement....................
Purchase Obligations.................................
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder.......................
The Company..........................................
ICI Funding Corporation..............................
The Agreements.......................................
Yield Considerations.................................
Maturity and Prepayment Considerations...............
Certain Legal Aspects of Mortgage Loans..............
Federal Income Tax Consequences......................
State and Other Tax Consequences.....................
ERISA Considerations.................................
Legal Investment Matters ............................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Rating...............................................
Index of Principal Definitions.......................
================================================================================
================================================================================
IMH ASSETS CORP.
IMPERIALS CMB TRUST
19__-__
$_______________
COLLATERALIZED
MORTGAGE BONDS
SERIES 199__-__
------------
PROSPECTUS SUPPLEMENT
------------
------------------------
_____, 19__
[UNDERWRITER]
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
SUBJECT TO COMPLETION DATED OCTOBER 28, 1997
PROSPECTUS
Collateralized Mortgage Bonds
IMH Assets Corp.
The collateralized mortgage bonds (the "Bonds") offered hereby and by the
supplements hereto (each, a "Prospectus Supplement") will be offered from time
to time in series.
Each series of Bonds will represent indebtedness of the related trust fund (with
respect to any series, the "Trust Fund") to be established by IMH Assets Corp.
(the "Company") pursuant to a trust agreement (the "Trust Agreement") and will
be secured by certain assets deposited therein. Each Trust Fund for a series of
Bonds and the related Certificates (as defined herein, and together with the
Bonds, the "Securities") will consist primarily of a segregated pool (a
"Mortgage Pool") of one- to four-family and/or multifamily residential first
and/or junior mortgage loans or manufactured housing conditional sales contracts
and installment loan agreements (collectively, the "Mortgage Loans") or
interests therein, acquired by the Company from one or more affiliated or
unaffiliated institutions (the "Sellers"). See "The Mortgage Pools." The
Mortgage Loans and other assets in each Trust Fund, which may only include, if
applicable, reinvestment income, reserve funds, cash accounts and various forms
of credit enhancement as described herein (collectively, the "Trust Fund
Assets") will be pledged pursuant to an indenture (the "Indenture") to secure a
series of Bonds to the extent and as more fully described herein under "The
Agreements" and in the related Prospectus Supplement. Information regarding the
Bonds of a series, and the general characteristics of the Mortgage Loans and
other Trust Fund Assets in the related Trust Fund, will be set forth in the
related Prospectus Supplement.
Each series of Bonds will include one or more classes. Each class of Bonds of
any series will represent the right, which right may be senior or subordinate to
the rights of one or more of the other classes of Bonds to receive a specified
portion of payments of principal or interest (or both) on the Mortgage Loans and
the other Trust Fund Assets in the related Trust Fund in the manner described
herein under "Description of the Bonds" and in the related Prospectus
Supplement. A series may include one or more classes of Bonds entitled to
principal distributions, with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no principal distributions. A series may include two or more classes of Bonds
which differ as to the timing, sequential order, priority of payment,
pass-through rate or amount of distributions of principal or interest or both.
THE COMPANY'S ONLY OBLIGATIONS WITH RESPECT TO A SERIES OF BONDS WILL BE
PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY, EXCEPT
AS PROVIDED IN THE RELATED PROSPECTUS SUPPLEMENT. THE MASTER SERVICER (THE
"MASTER SERVICER") FOR ANY SERIES OF BONDS WILL BE NAMED IN THE RELATED
PROSPECTUS SUPPLEMENT. THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE
PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH INCLUDE ITS LIMITED
OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON
THE RELATED MORTGAGE LOANS). SEE "DESCRIPTION OF THE BONDS."
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Bonds may include any one or any combination of a financial guaranty
insurance policy, mortgage pool insurance policy, letter of credit, bankruptcy
bond, special hazard insurance policy or reserve fund. In addition to or in lieu
of the foregoing, credit enhancement may be provided by means of subordination
of one or more classes of Bonds or by Overcollateralization (as defined herein).
See "Description of Credit Enhancement."
The rate of payment of principal of each class of Bonds entitled to a portion of
principal payments on the Mortgage Loans and the other Trust Fund Assets in the
related Mortgage Pool will depend on the priority of payment of such class and
the rate and timing of principal payments (including by reason of prepayments,
defaults, liquidations and repurchases of Mortgage Loans) on such Mortgage Loans
and other Trust Fund Assets. A rate of principal payment slower or faster than
that anticipated may affect the yield on a class of Bonds in the manner
described herein and in the related Prospectus Supplement. See "Yield
Considerations."
Bonds of a series will be characterized for federal income tax purposes as debt
instruments. No election will be made to treat a Trust Fund or a designated
portion thereof as a real estate mortgage investment conduit ("REMIC") for
federal income tax purposes. See "Federal Income Tax Consequences" herein.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 HEREIN AND ON PAGE S-10 IN THE RELATED
PROSPECTUS SUPPLEMENT FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING
INVESTMENTS IN THE CERTIFICATES.
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND AND PAYMENTS UNDER ANY BOND
INSURANCE POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE BONDS. THE BONDS DO NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER OR
ANY OF THEIR RESPECTIVE AFFILIATES. NEITHER THE BONDS OF ANY SERIES NOR THE
UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR
RESPECTIVE AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Bonds may be offered through one or more different methods, including
offerings through underwriters, as more fully described under "Methods of
Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Bonds of any series prior to the
offering thereof. There can be no assurance that a secondary market for any of
the Bonds will develop or, if it does develop, that it will continue. The Bonds
will not be listed on any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is October __, 1997.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE BONDS OFFERED
HEREBY AND THEREBY OR AN OFFER OF SUCH BONDS TO ANY PERSON IN ANY STATE OR OTHER
JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
CAPTION PAGE
- ------- ----
<S> <C>
SUMMARY OF PROSPECTUS.......................................................................................... 4
RISK FACTORS................................................................................................... 13
THE MORTGAGE POOLS............................................................................................. 18
General............................................................................................... 18
The Mortgage Loans.................................................................................... 20
Underwriting Standards................................................................................ 24
Qualifications of Originators and Sellers............................................................. 26
Representations by Sellers............................................................................ 27
SERVICING OF MORTGAGE LOANS.................................................................................... 29
General............................................................................................... 29
The Master Servicer................................................................................... 29
Collection and Other Servicing Procedures; Mortgage Loan Modifications................................ 29
Subservicers.......................................................................................... 32
Special Servicers..................................................................................... 32
Realization Upon or Sale of Defaulted Mortgage Loans.................................................. 32
Servicing and Other Compensation and Payment of Expenses; Spread...................................... 34
Evidence as to Compliance............................................................................. 35
DESCRIPTION OF THE BONDS....................................................................................... 36
General............................................................................................... 36
Form of Bonds......................................................................................... 37
Assignment of Trust Fund Assets....................................................................... 38
Collection Account.................................................................................... 40
Distributions......................................................................................... 44
Distributions of Interest and Principal on the Bonds.................................................. 45
Funding Account....................................................................................... 46
Distributions on the Bonds in Respect of Prepayment Premiums.......................................... 46
Allocation of Losses and Shortfalls................................................................... 47
Advances.............................................................................................. 47
Reports to Bondholders................................................................................ 48
DESCRIPTION OF CREDIT ENHANCEMENT.............................................................................. 49
General............................................................................................... 49
Financial Guaranty Insurance Policy................................................................... 50
Subordinate Bonds..................................................................................... 50
Letter of Credit...................................................................................... 51
Mortgage Pool Insurance Policies...................................................................... 51
Special Hazard Insurance Policies..................................................................... 53
Bankruptcy Bonds...................................................................................... 54
Overcollateralization................................................................................. 54
Reserve Funds......................................................................................... 54
Maintenance of Credit Enhancement..................................................................... 55
Reduction or Substitution of Credit Enhancement....................................................... 57
PURCHASE OBLIGATIONS........................................................................................... 58
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER................................................ 58
General............................................................................................... 58
Primary Mortgage Insurance Policies................................................................... 58
Hazard Insurance Policies............................................................................. 60
FHA Insurance......................................................................................... 61
THE COMPANY.................................................................................................... 62
ICI FUNDING CORPORATION........................................................................................ 62
THE AGREEMENTS................................................................................................. 62
Events of Default; Rights Upon Event of Default....................................................... 62
Amendment............................................................................................. 64
Termination; Redemption of Bonds...................................................................... 65
The Owner Trustee..................................................................................... 65
The Indenture Trustee................................................................................. 66
YIELD CONSIDERATIONS........................................................................................... 66
MATURITY AND PREPAYMENT CONSIDERATIONS......................................................................... 69
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS........................................................................ 70
Single Family Loans and Multifamily Loans............................................................. 70
Contracts............................................................................................. 71
Foreclosure on Mortgages.............................................................................. 73
Repossession with respect to Contracts................................................................ 74
Rights of Redemption.................................................................................. 76
Anti-Deficiency Legislation and Other Limitations on Lenders.......................................... 76
Junior Mortgages...................................................................................... 78
Consumer Protection Laws with respect to Contracts.................................................... 78
Environmental Legislation............................................................................. 79
Enforceability of Certain Provisions.................................................................. 79
Subordinate Financing................................................................................. 80
Applicability of Usury Laws........................................................................... 81
Alternative Mortgage Instruments...................................................................... 81
Formaldehyde Litigation with respect to Contracts..................................................... 82
Soldiers' and Sailors' Civil Relief Act of 1940....................................................... 82
FEDERAL INCOME TAX CONSEQUENCES................................................................................ 83
General............................................................................................... 83
STATE AND OTHER TAX CONSEQUENCES............................................................................... 90
ERISA CONSIDERATIONS........................................................................................... 90
Tax-Exempt Investors.................................................................................. 91
LEGAL INVESTMENT MATTERS....................................................................................... 91
USE OF PROCEEDS................................................................................................ 92
METHODS OF DISTRIBUTION........................................................................................ 93
LEGAL MATTERS.................................................................................................. 94
FINANCIAL INFORMATION.......................................................................................... 94
RATING......................................................................................................... 94
INDEX OF PRINCIPAL DEFINITIONS................................................................................. 95
</TABLE>
-2-
<PAGE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED BONDS, WHETHER OR NOT PARTICIPATING IN THE
DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE RELATED
PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Company 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 Company can
be inspected and copied at the public reference facilities maintained by the
Commission at 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 and electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http:\\www.sec.gov). The Company does not intend to send
any financial reports to Bondholders.
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 Company has filed with the Commission under the Securities
Act of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO BONDHOLDERS
The Master Servicer or other designated person will be required to
provide periodic unaudited reports concerning each Trust Fund to all registered
holders of Bonds of the related series as are required under the Exchange Act
and the rules and regulations of the Commission thereunder. See "Description of
the Bonds--Reports to Bondholders."
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein and in the related Prospectus Supplement
by reference all documents and reports filed or caused to be filed by the
Company with respect to a Trust Fund pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act, prior to the termination of the offering of the Bonds
of the related series. The Company will provide or cause to be provided without
charge to each person to whom this Prospectus is delivered in connection with
the offering of one or more classes of Bonds, upon written or oral request of
such person, a copy of any or all such reports incorporated herein by reference,
in each case to the extent such reports relate to one or more of such classes of
such Bonds, other than the exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. Requests should be
directed in writing to IMH Assets Corp., 20371 Irvine Avenue, Suite 200, Santa
Ana Heights, California 92707, or by telephone at (714) 556-0122. The Company
has determined that its financial statements will not be material to the
offering of any Bonds.
-3-
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Bonds contained in the Prospectus
Supplement to be prepared and delivered in connection with the offering of Bonds
of such series. Capitalized terms used in this summary that are not otherwise
defined shall have the meanings ascribed thereto elsewhere in this Prospectus.
An index indicating where certain capitalized terms used herein are defined
appears at the end of this Prospectus.
Securities Offered...............Collateralized mortgage bonds (the "Bonds").
The Bonds offered hereby and by the various
Prospectus Supplements with respect hereto will
be offered from time to time in series.
Company..........................IMH Assets Corp. (the "Company"), a limited-
purpose wholly owned subsidiary of Imperial
Credit Mortgage Holdings, Inc. ("Imperial
Holdings") and an affiliate of ICI Funding
Corporation ("ICI Funding"). See "The Company."
Issuer...........................The Issuer with respect to a series of Bonds
will be the Company or an owner trust
established by it for the purpose of issuing
one or more series of Bonds. Each such owner
trust will be created pursuant to a trust
agreement (the "Trust Agreement") between the
Company, acting as depositor, and the Owner
Trustee. Each series of Bonds will represent
indebtedness of the Issuer and will be issued
pursuant to an indenture between the Issuer and
the Indenture Trustee (the "Indenture") whereby
the Issuer will pledge the Trust Fund to secure
the Bonds under the lien of the Indenture. As
to each series of Bonds where the Issuer is an
owner trust, the ownership of the Trust Fund
will be evidenced by certificates (the
"Certificates," and together with the Bonds,
the "Securities") issued under the Trust
Agreement, which are not offered hereby. The
Bonds will represent nonrecourse obligations
solely of the Issuer, and the proceeds of the
Trust Fund will be the sole source of payments
on the Bonds, except as described herein under
"Description of Credit Enhancement" and in the
related Prospectus Supplement.
-4-
<PAGE>
Master Servicer..................The master servicer (the "Master Servicer"), if
any, for a series of Bonds will be specified in
the related Prospectus Supplement and may be
ICI Funding or another affiliate of the
Company. See "ICI Funding Corporation" and
"Servicing of Mortgage Loans--The Master
Servicer."
Special Servicer.................The special servicer (the "Special Servicer"),
if any, for a series of Bonds will be
specified, or the circumstances under which a
Special Servicer will be appointed will be
described, in the related Prospectus
Supplement. Any Special Servicer may be an
affiliate of the Company. See "Servicing of
Mortgage Loans--Special Servicers."
Administrator....................An entity may be named as the Administrator in
the related Prospectus Supplement, if required
in addition to or in lieu of the Master
Servicer or Servicer for a series of Bonds (the
"Administrator").
Indenture Trustee................The Indenture Trustee for each series of Bonds
will be specified in the related Prospectus
Supplement (the "Indenture Trustee").
Owner Trustee....................As to each series of Bonds where the Issuer in
an owner trust, the Owner Trustee for each
related Trust Fund will be specified in the
related Prospectus Supplement (the "Owner
Trustee").
The Bonds........................Each series of Bonds will include one or more
classes of Bonds which will represent
indebtedness secured by a segregated pool of
Mortgage Loans (exclusive of any portion of
interest payments (the "Spread") relating to
each Mortgage Loan retained by the Company or
any of its affiliates) or interests therein and
certain other assets, which may only include,
if applicable, reinvestment income, reserve
funds, cash accounts and various forms of
credit enhancement as described herein
(collectively, the "Trust Fund Assets," and the
related trust fund, the "Trust Fund").
Except for certain Strip Bonds (as hereinafter
described), each series of Bonds, or class of
Bonds
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in the case of a series consisting of two or
more classes, will have a stated principal
balance and will be entitled to distributions
of interest based on a specified interest rate
or rates (each, an "Interest Rate"). Each
series or class of Bonds may have a different
Interest Rate, which may be a fixed, variable
or adjustable Interest Rate, or any combination
of two or more such Interest Rates. The related
Prospectus Supplement will specify the Interest
Rate or Rates for each series or class of
Bonds, or the initial Interest Rate or Rates
and the method for determining subsequent
changes to the Interest Rate or Rates.
A series may include one or more classes of
Bonds ("Strip Bonds") entitled (i) to principal
distribu tions, with disproportionate, nominal
or no interest distributions, or (ii) to
interest distributions, with disproportionate,
nominal or no principal distribu tions. In
addition, a series may include two or more
classes of Bonds which differ as to timing,
sequential order, priority of payment,
pass-through rate or amount of distributions of
principal or interest or both, or as to which
distributions of principal or interest or both
on any class may be made upon the occurrence of
specified events, in accordance with a schedule
or formula, or on the basis of collections from
designated portions of the Mortgage Pool, which
series may include one or more classes of Bonds
("Accrual Bonds"), as to which certain accrued
interest will not be distributed but rather
will be added to the principal balance thereof
on each Distribution Date, as hereinafter
defined, in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of Bonds may include one
or more classes of Bonds (collectively, the
"Senior Bonds") which are senior to one or more
classes of Bonds (collectively, the
"Subordinate Bonds") in respect of certain
distributions of principal and interest and
allocations of losses on Mortgage Loans. In
addition, certain classes of Senior (or
Subordinate) Bonds may be senior to other
classes
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<PAGE>
of Senior (or Subordinate) Bonds in respect of
such distributions or losses. The Certificates,
insofar as they represent the beneficial
ownership interest in the Issuer, will be
subordinate to the Bonds. See "Description of
the Bonds."
The Bonds will not be guaranteed or insured by
any governmental agency or instrumentality, by
the Company, the Master Servicer or any of
their respective affiliates.
Bonds of one or more classes of a series may be
issued in book-entry form. See "Description of
the Bonds--Form of Bonds."
The Mortgage Pools...............Each Trust Fund will consist primarily of a
segregated pool (a "Mortgage Pool") of mortgage
loans and/or manufactured housing conditional
sales and installment loan agreements
(collectively, the "Mortgage Loans") or
interests therein. Each Mortgage Loan will be
secured by a first or junior lien on or
security interest in (i) a one- to four- family
residential property, (ii) a residential
property consisting of five or more rental or
cooperatively-owned dwelling units or (iii) a
new or used manufactured home (each, a
"Mortgaged Property"). The Mortgaged Properties
may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of
Puerto Rico. For a description of the types of
Mortgage Loans that may be included in the
Mortgage Pools, see "The Mortgage Pools--The
Mortgage Loans." The Mortgage Loans will not be
guaranteed or insured by the Company, any of
its affiliates or by any governmental agency or
instrumentality.
If specified in the related Prospectus
Supplement, Mortgage Loans which are converting
or converted from an adjustable-rate to a
fixed-rate or certain Mortgage Loans for which
the Mortgage Rate has been reset may be
repurchased by the Company or purchased by the
related Master Servicer, the applicable Seller
or another party, or a designated remarketing
agent will use its best efforts to arrange the
sale thereof as further described herein
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<PAGE>
under "The Mortgage Pools--The Mortgage Loans."
If so specified in the related Prospectus
Supplement, some Mortgage Loans may be
delinquent or non-performing as of the date of
their deposit in the related Trust Fund.
Each Mortgage Loan included in a Trust Fund
will have been selected by the Company from
among those purchased, either directly or
indirectly, from a prior holder thereof (a
"Seller"), which prior holder may or may not be
the originator of such Mortgage Loan and may be
an affiliate of the Company.
A Current Report on Form 8-K will be available
upon request to purchasers of the Bonds of the
related series and will be filed, together with
the related Servicing Agreement, Trust
Agreement (if any) and Indenture, with the
Securities and Exchange Commission within
fifteen days after such initial issuance.
Interest Distributions...........Except as otherwise specified herein or in the
related Prospectus Supplement, interest on each
class of Bonds of each series, other than Strip
Bonds or Accrual Bonds (prior to the time when
accrued interest becomes payable thereon), will
accrue at the applicable Interest Rate (which
may be a fixed, variable or adjustable rate or
any combination thereof) on such class's
principal balance outstanding from time to time
and will be remitted on the 25th day (or, if
such day is not a business day, on the next
succeeding business day) of each month,
commencing with the month following the month
in which the Cut-off Date (as defined in the
applicable Prospectus Supplement) occurs (each,
a "Distribution Date"). Distributions, if any,
with respect to interest on Strip Bonds will be
calculated and made on each Distribution Date
as described herein under "Description of the
Bonds--Distribution of Interest and Principal
on the Bonds" and in the related Prospectus
Supplement. Interest that has accrued
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<PAGE>
but is not yet payable on any Accrual Bonds
will be added to the principal balance of such
class on each Distribution Date, and will
thereafter bear interest at the applicable
Interest Rate. Distributions of interest with
respect to one or more classes of Bonds (or, in
the case of a class of Accrual Bonds, accrued
interest to be added to the principal balance
thereof) may be reduced as a result of the
occurrence of certain delinquencies not covered
by advances, losses, prepayments and other
contingencies described herein and in the
related Prospectus Supplement. See "Yield
Considerations" and "Description of the
Bonds--Distribution of Interest and Principal
on the Bonds."
Principal Distributions..........Except as otherwise specified in the related
Prospectus Supplement, principal distributions
on the Bonds of each series will be payable on
each Distribution Date, commencing with the
Distribution Date in the month following the
month in which the Cut-off Date occurs, to the
holders of the Bonds of such series, or of the
class or classes of Bonds then entitled
thereto, on a pro rata basis among all such
Bonds or among the Bonds of any such class, in
proportion to their respective outstanding
principal balances, or in the priority and
manner otherwise specified in the related
Prospectus Supplement. Strip Bonds with no
principal balance will not receive
distributions in respect of principal.
Distributions of principal with respect to any
series of Bonds, or with respect to one or more
classes included therein, may be reduced to the
extent of certain delinquencies not covered by
advances or losses not covered by the
applicable form of credit enhancement. See "The
Mortgage Pools," "Maturity and Prepayment
Considerations" and "Description of the Bonds."
Funding Account..................If so specified in the related Prospectus
Supplement, a portion of the proceeds of the
sale of one or more Classes of Bonds of a
series may be deposited in a segregated account
to be applied to acquire additional Mortgage
Loans from the Sellers, subject to the
limitations set forth herein
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<PAGE>
under "Description of the Bonds-Funding
Account." Monies on deposit in the Funding
Account and not applied to acquire such
additional Mortgage Loans within the time set
forth in the related Trust Agreement or other
applicable agreement may be treated as
principal and applied in the manner described
in the related Prospectus Supplement.
Credit Enhancement...............If so specified in the Prospectus Supplement,
the Trust Fund with respect to any series of
Bonds may include any one or any combination of
a financial guaranty insurance policy, mortgage
pool insurance policy, letter of credit,
special hazard insurance policy, bankruptcy
bond or reserve fund to provide partial
coverage for certain defaults and losses
relating to the Mortgage Loans. Credit support
also will be provided in the form of
subordination of the Certificates (if
applicable) and also may be provided in the
form of subordination of one or more classes of
Bonds in a series under which losses are first
allocated to any Subordinate Bonds up to a
specified limit or in the form of
Overcollateralization. Any form of credit
enhancement may have certain limitations and
exclusions from coverage thereunder, which will
be described in the related Prospectus
Supplement. Losses not covered by any form of
credit enhancement will be borne by the holders
of the related Bonds (or certain classes
thereof). To the extent not set forth herein,
the amount and types of coverage, the
identification of any entity providing the
coverage, the terms of any subordination and
related information will be set forth in the
Prospectus Supplement relating to a series of
Bonds. See "Description of Credit Enhancement"
and "Subordination."
Advances.........................If and to the extent described in the related
Prospectus Supplement, and subject to any
limitations specified therein, the Master
Servicer for any Trust Fund will be obligated
to make, or have the option of making, certain
advances with respect to delinquent scheduled
payments on the Mortgage Loans in such Trust
Fund. Any such
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<PAGE>
advance made by the Master Servicer with
respect to a Mortgage Loan is recoverable by it
as described herein under "Description of the
Bonds--Advances" either from recoveries on or
in respect of the specific Mortgage Loan or,
with respect to any advance subsequently
determined to be nonrecoverable from recoveries
on or in respect of the specific Mortgage Loan,
out of funds otherwise distributable to the
holders of the related series of Bonds, which
may include the holders of any Senior Bonds of
such series. If and to the extent provided in
the Prospectus Supplement for a series of
Bonds, the Master Servicer will be entitled to
receive interest on its advances for the period
that they are outstanding payable from amounts
in the related Trust Fund.
Optional Termination.............The Master Servicer, the Company or a person
specified in the related Prospectus Supplement
(other than any Bondholder) may at its option
either (i) effect early retirement of a series
of Bonds through the purchase of the assets in
the related Trust Fund or (ii) purchase, in
whole but not in part, the Bonds specified in
the related Prospectus Supplement; in each case
under the circumstances and in the manner set
forth herein under "The
Agreements--Termination; Redemption of Bonds"
and in the related Prospectus Supplement.
Legal Investment.................At the date of issuance, as to each series,
each class of Bonds will be rated at the
request of the Company in one of the four
highest rating categories by one or more
nationally recognized statistical rating
agencies (each, a "Rating Agency"). Each class
of Bonds that is rated in one of the two
highest rating categories by at least one
Rating Agency will constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"). Investors whose investment
authority is subject to legal restrictions
should consult their own legal advisors to
determine whether and to what extent the Bonds
of any series
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<PAGE>
constitute legal investments for them. See
"Legal Investment Matters."
ERISA Considerations.............A fiduciary of an employee benefit plan and
certain other retirement plans and
arrangements, including individual retirement
accounts and annuities, Keogh plans, and
collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that is
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code (each, a "Plan")
should carefully review with its legal advisors
whether the purchase or holding of Bonds could
give rise to a transaction that is prohibited
or is not otherwise permissible either under
ERISA or Section 4975 of the Code. Investors
are advised to consult their counsel and to
review "ERISA Considerations" herein and in the
related Prospectus Supplement.
Federal Income
Tax Consequences...............In the opinion of Tax Counsel (as defined
herein), for federal income tax purposes, the
Bonds will constitute indebtedness of the
Issuer.
(i) Bonds held by a domestic building and loan
association will not constitute
"loans...secured by an interest in real
property" within the meaning of Code section
7701(a)(19)(C)(v); (ii) Bonds held by a real
estate investment trust will not constitute
"real estate assets" within the meaning of Code
section 856(c)(5)(A); and (iii) interest on
Bonds will not be considered "interest on
obligations secured by mortgages on real
property" within the meaning of Code section
856(c)(3)(B).
Investors are advised to consult their tax
advisors as to the tax consequences of an
investment in the Bonds in light of investors'
individual circumstances and to review "Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement for a more
general discussion of material tax matters
related to the Bonds. See "Federal Income Tax
Consequences."
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Bonds:
LIMITED LIQUIDITY. There can be no assurance that a secondary market
for the Bonds of any series will develop or, if it does develop, that it will
provide Bondholders with liquidity of investment or that it will continue for
the life of the Bonds of any series. The Prospectus Supplement for any series of
Bonds may indicate that an underwriter specified therein intends to establish a
secondary market in such Bonds, however no underwriter will be obligated to do
so. As a result, any resale prices that may be available for any Bond in any
market that may develop may be at a discount from the initial offering price or
the fair market value thereof. The Bonds will not be listed on any securities
exchange.
LIMITED OBLIGATIONS. The Bonds will evidence an obligation of the
related Issuer to remit certain payments to the registered holder thereof. The
Bonds will not represent an interest in or obligation of the Company, the Master
Servicer or any of their respective affiliates. The only obligations of the
foregoing entities with respect to the Bonds and the Mortgage Loans will be the
obligations (if any) of the Company pursuant to certain limited representations
and warranties made with respect to the Mortgage Loans, the Master Servicer's
servicing obligations under the related Servicing Agreement (including, if and
to the extent described in the related Prospectus Supplement, its limited
obligation to make certain advances in the event of delinquencies on the
Mortgage Loans) and, if and to the extent expressly described in the related
Prospectus Supplement, certain limited obligations of the Master Servicer in
connection with a Purchase Obligation or an agreement to purchase or act as
remarketing agent with respect to a Convertible Mortgage Loan upon conversion to
a fixed rate. Neither the Bonds nor the underlying Mortgage Loans will be
guaranteed or insured by any governmental agency or instrumentality, by the
Company, the Master Servicer or any of their respective affiliates. Proceeds of
the assets included in the related Trust Fund for each series of Bonds
(including the Mortgage Loans and any form of credit enhancement) will be the
sole source of payments on the Bonds, and there will be no recourse to the
Company, the Master Servicer or any other entity in the event that such proceeds
are insufficient or otherwise unavailable to make all payments provided for
under the Bonds.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. With
respect to each series of Bonds, credit enhancement will be provided in limited
amounts to cover certain types of losses on the underlying Mortgage Loans.
Credit enhancement will be provided in one or more of the forms referred to
herein, including: subordination of any Subordinate Bonds of the same series; a
Financial Guaranty Insurance Policy; a Letter of Credit; a Purchase Obligation;
a Mortgage Pool Insurance Policy; a Special Hazard Insurance Policy; a
Bankruptcy Bond; Overcollateralization; a Reserve Fund; or any combination
thereof. See "Subordination" and "Description of Credit Enhancement" herein.
Regardless of the form of credit enhancement provided, the amount of coverage
will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. Furthermore, such credit
enhancements may provide only very limited coverage as to certain types of
losses or risks, and may provide no coverage as to certain other types of losses
or risks. In the event losses exceed the amount of coverage provided by any
credit enhancement or losses of a type not covered by any credit enhancement
occur, such losses will be borne by the holders of the related Bonds (or certain
classes thereof). The Company, the Master Servicer or other specified person
will generally be permitted to reduce, terminate or substitute all or a portion
of the credit enhancement for any series of Bonds, if each applicable Rating
Agency indicates that the then-current rating(s) thereof will not be adversely
affected. The rating(s) of any series of Bonds by any applicable Rating Agency
may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable credit support provider, or as
a result of losses on the related Mortgage Loans in excess of the levels
contemplated by such Rating Agency at the
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time of its initial rating analysis. Neither the Company, the Master Servicer
nor any of their respective affiliates will have any obligation to replace or
supplement any credit enhancement, or to take any other action to maintain any
rating(s) of any series of Bonds. See "Description of Credit
Enhancement--Reduction of Credit Enhancement."
LIMITED NATURE OF RATINGS. It is a condition to the issuance of the
Bonds that each class of Bonds be rated in one of the four highest rating
categories by a nationally recognized statistical rating agency. A security
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time. No person is obligated to
maintain the rating on any Bond, and, accordingly, there can be no assurance
that the ratings assigned to any Bond on the date on which such Bonds are
initially issued will not be lowered or withdrawn by a Rating Agency at any time
thereafter. In the event any rating is revised or withdrawn, the liquidity or
the market value of the related Bonds may be adversely affected. See "Rating"
herein.
FORECLOSURE RISKS OF THE MORTGAGE LOANS. Statutory and judicial
limitations on foreclosure procedures may delay recovery in respect of the
mortgaged property and, in some instances, limit the amount that may be
recovered by the foreclosing lender. Foreclosure procedures may vary from state
to state. Two primary methods of foreclosing a mortgage instrument are judicial
foreclosure, involving court proceedings, and non-judicial foreclosure pursuant
to a power of sale granted in the mortgage instrument. A foreclosure action is
subject to most of the delays and expenses of other lawsuits if defenses are
raised or counterclaims are asserted. Delays may also result from difficulties
in locating necessary defendants. Non-judicial foreclosures may be subject to
delays resulting from state laws mandating the recording of notice of default
and notice of sale and, in certain states, notice to any party having an
interest of record in the real property, including junior lienholders. Certain
states have adopted "anti-deficiency" statutes that limit the ability of a
lender to realize upon assets securing a mortgage loan. In addition, United
States courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions that are perceived by
the court as harsh or unfair. The effect of such statutes and judicial
principles may be to delay and/or reduce distributions in respect of the Bonds.
See "Certain Legal Aspects of Mortgage Loans--Foreclosure on Mortgage Loans."
RISKS OF MORTGAGE LOANS AND PROPERTY VALUE. An investment in securities
such as the Bonds that are secured by mortgage loans and/or manufactured housing
conditional sales contracts and installment loan agreements may be affected by,
among other things, a decline in real estate values and changes in the
borrowers' financial condition. No assurance can be given that values of the
Mortgaged Properties have remained or will remain at their levels on the dates
of origination of the related Mortgage Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In particular, Mortgage Loans with high
Loan-to-Value Ratios will be affected by any decline in real estate values. Any
decrease in the value of such Mortgage Loans may result in the allocation of
losses which are not covered by credit enhancement to the Bonds.
RISKS OF NON-CONFORMING MORTGAGE LOANS. Certain Mortgage Loans may be
underwritten in accordance with underwriting standards which are primarily
intended to provide single family mortgage loans for non-conforming credits. A
"non-conforming credit" means a mortgage loan which is ineligible for purchase
by FNMA or FHLMC due to credit characteristics that do not meet the FNMA or
FHLMC underwriting guidelines, including mortgagors whose creditworthiness and
repayment ability do not satisfy such FNMA or FHLMC underwriting guidelines and
mortgagors who may have a record of credit write-offs, outstanding judgments,
prior bankruptcies and other credit items that do not satisfy such FNMA or FHLMC
underwriting guidelines. Accordingly, Mortgage Loans underwritten under the
Originators' non-
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conforming credit underwriting standards are likely to experience rates of
delinquency, foreclosure and loss that are higher, and may be substantially
higher, than mortgage loans originated in accordance with the FNMA or FHLMC
underwriting guidelines. Any such losses, to the extent not covered by credit
enhancement, may affect the yield to maturity of the Bonds.
RISKS OF MORTGAGE LOANS WITH VARIABLE PAYMENTS. Certain of the types of
loans which may be included in the Mortgage Pools may involve additional
uncertainties not present in traditional types of loans. In the case of Mortgage
Loans that are subject to negative amortization, due to the addition to
principal balance of Deferred Interest, the principal balances of such Mortgage
Loans could be increased to an amount equal to or in excess of the value of the
underlying Mortgaged Properties, thereby increasing the likelihood of default.
In the case of Buydown Loans, the increase in the Monthly Payment by the
Mortgagor during and following the Buydown Period may result in an increased
risk of default on such Buydown Loan. Certain of the Mortgage Loans provide for
escalating or variable payments by the borrower under the Mortgage Loan (the
"Mortgagor"), as to which the Mortgagor is generally qualified on the basis of
the initial payment amount. In some instances, Mortgagors may not be able to
make their loan payments as such payments increase and thus the likelihood of
default will increase. Any risks associated with the variable payments of such
Mortgage Loans may affect the yield to maturity of the Bonds to the extent
losses caused by such risks which are not covered by credit enhancement are
allocated to the Bonds.
RISKS OF MORTGAGE LOANS WITH JUNIOR LIENS. Certain Mortgage Loans may
be secured by second liens on the related Mortgaged Properties. As to Mortgage
Loans secured by second mortgages, the proceeds from any liquidation, insurance
or condemnation proceedings will be available to satisfy the outstanding balance
of such Mortgage Loans only to the extent that the claims of such senior
mortgages have been satisfied in full, including any related foreclosure costs.
In addition, the holder of a Mortgage Loan secured by a junior mortgage may not
foreclose on the Mortgaged Property 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, although the Master Servicer or Subservicer may, at its option,
advance such amounts to the extent deemed recoverable and prudent. In the event
that such proceeds from a foreclosure or similar sale of the related Mortgaged
Property are insufficient to satisfy all senior liens and the Mortgage Loan in
the aggregate, the Trust Fund, as the holder of the junior lien, and,
accordingly, Holders of one or more classes of the Bonds, to the extent not
covered by credit enhancement, are likely to (i) incur losses in jurisdictions
in which a deficiency judgment against the borrower is not available, and (ii)
incur losses if any deficiency judgment obtained is not realized upon. In
addition, the rate of default of second mortgage loans may be greater than that
of mortgage loans secured by first liens on comparable properties.
RISKS OF MORTGAGE LOAN CONCENTRATION. Certain geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will experience higher rates
of loss and delinquency than will be experienced on mortgage loans generally.
For example, a region's economic condition and housing market may be directly,
or indirectly, adversely affected by natural disasters or civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots. The economic impact
of any of these types of events may also be felt in areas beyond the region
immediately affected by the disaster or disturbance. The Mortgage Loans securing
certain series of Bonds may be concentrated in these regions, and such
concentration may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration.
Moreover, as described below, any Mortgage Loan for which a breach of a
representation or warranty exists will remain in the related Trust Fund in the
event that a Seller is unable, or disputes its obligation, to repurchase such
Mortgage Loan and such a breach does not also constitute a breach of any
representation made by any
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other person. In such event, any resulting losses will be borne by the related
form of credit enhancement, to the extent available. Any risks associated with
Mortgage Loan concentration may affect the yield to maturity of the Bonds to the
extent losses caused by such risks which are not covered by credit enhancement
are allocated to the Bonds.
RISKS ASSOCIATED WITH BALLOON LOANS. Certain of the Mortgage Loans
included in a Trust Fund, particularly those secured by Multifamily Properties,
may not be fully amortizing (or may not amortize at all) over their terms to
maturity and, thus, will require substantial payments of principal and interest
(that is, balloon payments) at their stated maturity. Mortgage Loans of this
type involve a greater degree of risk than self-amortizing loans because the
ability of a Mortgagor to make a balloon payment typically will depend upon its
ability either to fully refinance the loan or to sell the related Mortgaged
Property at a price sufficient to permit the Mortgagor to make the balloon
payment. The ability of a Mortgagor to accomplish either of these goals will be
affected by a number of factors, including the value of the related Mortgaged
Property, the level of available mortgage rates at the time of sale or
refinancing, the Mortgagor's equity in the related Mortgaged Property,
prevailing general economic conditions, the availability of credit for loans
secured by comparable real properties and, in the case of Multifamily
Properties, the financial condition and operating history of the Mortgagor and
the related Mortgaged Property, tax laws and rent control laws. Any risks
associated with the Balloon Loans may affect the yield to maturity of the Bonds
to the extent losses caused by such risks which are not covered by credit
enhancement are allocated to the Bonds.
RISKS WITH RESPECT TO MORTGAGE LOANS WITH LIMITED RECOURSE. It is
anticipated that some or all of the Mortgage Loans included in any Trust Fund,
particularly Mortgage Loans secured by Multifamily Properties, will be
nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of Mortgagor
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the Mortgagor and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the other assets of the Mortgagor will
be sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property. Any risks
associated with Mortgage Loans with no or limited recourse may affect the yield
to maturity of the Bonds to the extent losses caused by such risks which are not
covered by credit enhancement are allocated to the Bonds.
RISKS ASSOCIATED WITH MULTIFAMILY LOANS. Mortgage Loans made on the
security of Multifamily Properties may entail risks of delinquency and
foreclosure, and risks of loss in the event thereof, that are greater than
similar risks associated with loans made on the security of Single Family
Properties. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower; thus, the value of an income-producing property is
directly related to the net operating income derived from such property. If the
net operating income of the property is reduced (for example, if rental or
occupancy rates decline or real estate tax rates or other operating expenses
increase), the borrower's ability to repay the loan may be impaired. In
addition, the concentration of default, foreclosure and loss risk for a pool of
Mortgage Loans secured by Multifamily Properties may be greater than for a pool
of Mortgage Loans secured by Single Family Properties of comparable aggregate
unpaid principal balance because the pool of Mortgage Loans secured by
Multifamily Properties is likely to consist of a smaller number of higher
balance loans. Any risks associated with the Multifamily Loans may affect the
yield to maturity of the Bonds to the extent losses caused by such risks which
are not covered by credit enhancement are allocated to the Bonds.
RISKS OF HIGH LTV LOANS. Some or all of the Mortgage Loans included in
any Trust Fund may be High LTV Loans. High LTV Loans with Combined Loan-to-Value
Ratios in excess of 100% may have
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been originated with a limited expectation of recovering any amounts from the
foreclosure of the related Mortgaged Property and are underwritten with an
emphasis on the creditworthiness of the related borrower. If such Mortgage Loans
go into foreclosure and are liquidated, there may be no amounts recovered from
the related Mortgaged Property unless the value of the property increases or the
principal amount of the related senior liens have been reduced such as to reduce
the current Combined Loan-toValue Ratio of the related Mortgage Loan to below
100%. Any such losses, to the extent not covered by credit enhancement, may
affect the yield to maturity of the Bonds.
RISKS OF UNDERWRITING STANDARDS OF UNAFFILIATED SELLERS. Mortgage Loans
to be included in a Mortgage Pool will have been purchased by the Company,
either directly or indirectly from Sellers. Such Mortgage Loans will generally
have been originated in accordance with underwriting standards acceptable to the
Company and generally described herein under "The Mortgage Pools--Underwriting
Standards" or such alternative underwriting criteria as may be described in the
related Prospectus Supplement.
However,
in some cases, particularly those involving Unaffiliated Sellers, the Company
may not be able to establish the underwriting standards used in the origination
of the related Mortgage Loans. In those cases, the related Prospectus Supplement
will include a statement to such effect and will reflect what, if any,
reunderwriting of the related Mortgage Loans was done by the Company or any of
its affiliates. To the extent the Mortgage Loans cannot be reunderwritten or the
underwriting criteria cannot be verified, the Mortgage Loans may suffer losses
greater than they would had they been directly underwritten by the Company or an
affiliate thereof. Any such losses, to the extent not covered by credit
enhancement, may affect the yield to maturity of the Bonds.
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LEGAL AND REGULATORY RISKS. Applicable federal and state laws generally
regulate interest rates and other charges, require certain disclosures, prohibit
unfair and deceptive practices, regulate debt collection, and require licensing
of the originators of the mortgage loans and contracts. Depending on the
provisions of the applicable law and the specified facts and circumstances
involved, violations of those laws, policies and principles may limit the
ability to collect all or part of the principal of or interest on the Mortgage
Loans and may entitle the borrower to a refund of amounts previously paid. See
"Certain Legal Aspects of Mortgage Loans" herein. To the extent such laws and
regulations result in losses on the mortgage loans, the yield to maturity of the
Bonds, to the extent not covered by credit enhancement, may be affected.
YIELD AND PREPAYMENT CONSIDERATIONS. The yield to maturity of the Bonds
of each series will depend on, among other things, the rate and timing of
principal payments (including prepayments, liquidations due to defaults, and
repurchases due to conversion of ARM Loans to fixed interest rate loans or
breaches of representations and warranties) on the related Mortgage Loans and
the price paid by Bondholders. Such yield may be adversely affected by a higher
or lower than anticipated rate of prepayments on the related Mortgage Loans. The
yield to maturity on Strip Bonds will be extremely sensitive to the rate of
prepayments on the related Mortgage Loans. In addition, the yield to maturity on
certain other types of classes of Bonds, including Accrual Bonds, Bonds with a
Interest Rate which fluctuates inversely with an index or certain other classes
in a series including more than one class of Bonds, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Bonds. In addition, to the extent amounts in any Funding Account have
not been used to purchase additional Mortgage Loans, holders of the Bonds may
receive an additional prepayment. Prepayments are influenced by a number of
factors, including prevailing mortgage market interest rates, local and regional
economic conditions and homeowner mobility. See "Yield Considerations" and
"Maturity and Prepayment Considerations" herein.
ENVIRONMENTAL RISKS OF THE MORTGAGE LOANS. To the extent the Master
Servicer acquires title to any Mortgaged Property with contaminated with or
affected by hazardous wastes or hazardous substances, or, with respect to any
Multifamily Property, not in compliance with environmental laws and regulations,
the Mortgage Loans may incur losses. See "Servicing of Mortgage
Loans--Realization Upon or Sale of Defaulted Mortgage Loans" and "Certain Legal
Aspects of Mortgage Loans--Environmental Legislation." To the extent such
environmental risks result in losses on the mortgage loans, the yield to
maturity of the Bonds, to the extent not covered by credit enhancement, may be
affected.
ERISA CONSIDERATIONS. Generally, ERISA applies to investments made by
employee benefit plans and transactions involving the assets of such plans. Due
to the complexity of regulations that govern such plans, prospective investors
that are subject to ERISA are urged to consult their own counsel regarding
consequences under ERISA of acquisition, ownership and disposition of the Bonds
of any series. See "ERISA Considerations".
THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist primarily of Mortgage Loans, minus the
Spread, if any, or any other interest retained by the Company or any affiliate
of the Company. The Mortgage Loans may consist of Single Family Loans,
Multifamily Loans and Contracts, each as described below.
The Mortgage Loans (other than the Contracts) will be evidenced by
promissory notes ("Mortgage Notes") and secured by mortgages, deeds of trust or
other similar security instruments ("Mortgages") that, in each case, create a
first or junior lien on the related Mortgagor's fee or leasehold interest in the
related
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Mortgaged Property. The Mortgaged Properties for such loans may consist of
attached or detached one-family dwelling units, two- to four-family dwelling
units, condominiums, townhouses, row houses, individual units in planned-unit
developments and certain other individual dwelling units (a "Single Family
Property" and the related loans, "Single Family Loans"), which in each case may
be owner-occupied or may be a vacation, second or non-owner-occupied home. The
Mortgaged Properties for such loans may also consist of residential properties
consisting of five or more rental or cooperatively-owned dwelling units in
high-rise, mid-rise or garden apartment buildings or projects ("Multifamily
Properties" and the related loans, "Multifamily Loans").
The "Contracts" will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
The "Manufactured Homes" securing the Contracts will consist of manufactured
homes within the meaning of 42 United States Code, Section 5402(6), which
defines a "manufactured home" as "a structure, transportable in one or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
Mortgaged Properties may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The Mortgage Loans will not be guaranteed or insured by the Company,
any of its affiliates or by any governmental agency or instrumentality. However,
if so specified in the related Prospectus Supplement, the Mortgage Loans may be
insured by the Federal Housing Administration (the "FHA" and such loans, "FHA
Loans"). See "Description of Primary Insurance Policies--FHA Insurance."
A Mortgage Pool may include Mortgage Loans that are delinquent or
non-performing as of the date the related series of Bonds is issued. In that
case, the related Prospectus Supplement will set forth, as to each such Mortgage
Loan, available information as to the period of such delinquency or
non-performance and any other information relevant for a prospective purchaser
to make an investment decision.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among those purchased by the Company, either directly or
through its affiliates, from banks, savings and loan associations, mortgage
bankers, investment banking firms, the Resolution Trust Corporation (the "RTC"),
the Federal Deposit Insurance Corporation (the "FDIC") and other mortgage loan
originators or sellers not affiliated with the Company ("Unaffiliated Sellers")
or from affiliates of the Company such as ICI Funding, Imperial Holdings,
Southern Pacific Thrift and Loan Association, Southern Pacific Funding
Corporation and Imperial Credit Industries, Inc. (collectively, the "Affiliated
Sellers"; Unaffiliated Sellers and Affiliated Sellers are collectively referred
to herein as "Sellers"). If a Mortgage Pool is composed of Mortgage Loans
acquired by the Company directly from Unaffiliated Sellers, the related
Prospectus Supplement will specify the extent of Mortgage Loans so acquired. The
characteristics of the Mortgage Loans are as described in the related Prospectus
Supplement. Other mortgage loans available for purchase by the Company may have
characteristics which would make them eligible for inclusion in a Mortgage Pool
but were not selected for inclusion in such Mortgage Pool.
Under certain circumstances, the Mortgage Loans to be included in a
Mortgage Pool will be delivered either directly or indirectly to the Company by
one or more Sellers identified in the related
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Prospectus Supplement, concurrently with the issuance of the related series of
Bonds (a "Designated Seller Transaction"). Such Bonds may be sold in whole or in
part to any such Seller in exchange for the related Mortgage Loans, or may be
offered under any of the other methods described herein under "Methods of
Distribution." The related Prospectus Supplement for a Mortgage Pool composed of
Mortgage Loans acquired by the Company pursuant to a Designated Seller
Transaction will generally include information, provided by the related Seller,
about the Seller, the Mortgage Loans and the underwriting standards applicable
to the Mortgage Loans. None of the Company or, unless it is the Seller, ICI
Funding or any of their affiliates will make any representation or warranty with
respect to such Mortgage Loans, or any representation as to the accuracy or
completeness of such information provided by the Seller.
THE MORTGAGE LOANS
Each of the Mortgage Loans will be a type of mortgage loan described or
referred to in paragraphs numbered (1) through (8) below, with any variations
described in the Prospectus Supplement:
(1) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of not more than
approximately 15 years;
(2) Fixed-rate, fully-amortizing mortgage loans (which may
include mortgage loans converted from adjustable-rate mortgage loans or
otherwise modified) providing for level monthly payments of principal
and interest and terms at origination or modification of more than 15
years, but not more than approximately 25 or 30 years;
(3) Fully-amortizing adjustable-rate mortgage loans ("ARM
Loans") having an original or modified term to maturity of not more
than approximately 25 or 30 years with a related interest rate (a
"Mortgage Rate") which generally adjusts initially either three months,
six months or one, three, five or seven years subsequent to the initial
payment date, and thereafter at either three-month, six-month, one-year
or other intervals (with corresponding adjustments in the amount of
monthly payments) over the term of the mortgage loan to equal the sum
of a fixed percentage set forth in the related Mortgage Note (the "Note
Margin") and an index*. The related Prospectus Supplement will set
forth the relevant index and the highest, lowest and weighted average
Note Margin with respect to the ARM Loans in the related Mortgage Pool.
The related Prospectus Supplement will also indicate any periodic or
lifetime limitations on changes in any per annum Mortgage Rate at the
time of any adjustment. If specified in the related Prospectus
Supplement, an ARM Loan may include a provision that allows the
Mortgagor to convert the adjustable Mortgage Rate to a fixed rate at
some point during the term of such ARM Loan generally not later than
six to ten years subsequent to the initial payment date;
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* The index (the "Index") for a particular Mortgage Pool will be
specified in the related Prospectus Supplement and may include one of
the following indexes: (i) the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of either six months or one
year, (ii) the weekly auction average investment yield of U.S. Treasury
bills of six months, (iii) the daily Bank Prime Loan rate made
available by the Federal Reserve Board, (iv) the cost of funds of
member institutions for the Federal Home Loan Bank of San Francisco,
(v) the interbank offered rates for U.S. dollar deposits in the London
market, each calculated as of a date prior to each scheduled interest
rate adjustment date which will be specified in the related Prospectus
Supplement or (vi) any other index described in the related Prospectus
Supplement.
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(4) Negatively-amortizing ARM Loans having original or
modified terms to maturity of not more than approximately 25 or 30
years with Mortgage Rates which generally adjust initially on the
payment date referred to in the related Prospectus Supplement, and on
each of certain periodic payment dates thereafter, to equal the sum of
the Note Margin and the index. The scheduled monthly payment will be
adjusted as and when described in the related Prospectus Supplement to
an amount that would fully amortize the Mortgage Loan over its
remaining term on a level debt service basis; provided that increases
in the scheduled monthly payment may be subject to certain limitations
as specified in the related Prospectus Supplement. If an adjustment to
the Mortgage Rate on a Mortgage Loan causes the amount of interest
accrued thereon in any month to exceed the scheduled monthly payment on
such mortgage loan, the resulting amount of interest that has accrued
but is not then payable ("Deferred Interest") will be added to the
principal balance of such Mortgage Loan;
(5) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of not more than approximately
15 years with monthly payments during the first year calculated on the
basis of an assumed interest rate which is a specified percentage below
the Mortgage Rate on such mortgage loan. Such monthly payments increase
at the beginning of the second year by a specified percentage of the
monthly payment during the preceding year and each year thereafter to
the extent necessary to amortize the mortgage loan over the remainder
of its approximately 15-year term. Deferred Interest, if any, will be
added to the principal balance of such mortgage loans;
(6) Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of not more than approximately
25 or 30 years with monthly payments during the first year calculated
on the basis of an assumed interest rate which is a specified
percentage below the Mortgage Rate. Such monthly payments increase at
the beginning of the second year by a specified percentage of the
monthly payment during the preceding year and each year thereafter to
the extent necessary to fully amortize the mortgage loan within its
approximately 25- or 30-year term. Deferred Interest, if any, will be
added to the principal balance of such mortgage loan; or
(7) Mortgage loans ("Balloon Loans") having payment terms
similar to those described in one of the preceding paragraphs numbered
(1) through (6), calculated on the basis of an assumed amortization
term, but providing for a payment (a "Balloon Payment") of all
outstanding principal and interest to be made at the end of a specified
term that is shorter than such assumed amortization term.
If provided in the related Prospectus Supplement, certain of the
Mortgage Pools may contain Single Family and Multifamily Loans secured by junior
liens, and the related senior liens ("Senior Liens") may not be included in the
Mortgage Pool. The primary risk to holders of such Mortgage Loans secured by
junior liens is the possibility that adequate funds will not be received in
connection with a foreclosure of the related Senior Liens to satisfy fully both
the Senior Liens and the Mortgage Loan. In the event that a holder of a Senior
Lien forecloses on a Mortgaged Property, the proceeds of the foreclosure or
similar sale will be applied first to the payment of court costs and fees in
connection with the foreclosure, second to real estate taxes, third in
satisfaction of all principal, interest, prepayment or acceleration penalties,
if any, and any other sums due and owing to the holder of the Senior Liens. The
claims of the holders of the Senior Liens will be satisfied in full out of
proceeds of the liquidation of the related Mortgaged Property, if such proceeds
are sufficient, before the Trust Fund as holder of the junior lien receives any
payments in respect of the Mortgage Loan. If the Master Servicer were to
foreclose on any such Mortgage Loan, it would do so subject to any related
Senior Liens. In order for the debt related to the Mortgage Loan to be paid in
full at such sale, a bidder at the foreclosure sale of such Mortgage Loan would
have to bid an amount sufficient to pay off all sums due under the Mortgage Loan
and the Senior Liens or purchase the
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Mortgaged Property subject to the Senior Liens. In the event that such proceeds
from a foreclosure or similar sale of the related Mortgaged Property are
insufficient to satisfy all Senior Liens and the Mortgage Loan in the aggregate,
the Trust Fund, as the holder of the junior lien, and, accordingly, holders of
one or more classes of the Bonds of the related series bear (i) the risk of
delay in distributions while a deficiency judgment against the borrower is
obtained and (ii) the risk of loss if the deficiency judgment is not realized
upon. Moreover, deficiency judgments may not be available in certain
jurisdictions or the Mortgage Loan may be nonrecourse. In addition, a junior
mortgagee may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
If so specified in the related Prospectus Supplement, a Mortgage Loan
may contain a prohibition on prepayment (the period of such prohibition, a
"Lock-out Period" and its date of expiration, a "Lock-out Expiration Date") or
require payment of a premium or a yield maintenance penalty (a "Prepayment
Penalty").
Certain information, including information regarding loan-to-value
ratios (each, a "Loan-to-Value Ratio") at origination of the Mortgage Loans
underlying each series of Bonds, will be supplied in the related Prospectus
Supplement. In the case of most Mortgage Loans, the "Loan-to-Value Ratio" at
origination is defined generally as the ratio, expressed as a percentage, of the
principal amount of the Mortgage Loan at origination (or, if appropriate, at the
time of an appraisal subsequent to origination), plus, in the case of a Mortgage
Loan secured by a junior lien, the outstanding principal balance of the related
Senior Liens, to the Value of the related Mortgaged Property. The "Value" of a
Mortgaged Property securing a Single Family or Multifamily Mortgage Loan will
generally be equal to the lesser of (x) the appraised value determined in an
appraisal obtained at origination of such Mortgage Loan, if any, or, if the
related Mortgaged Property has been appraised subsequent to origination, the
value determined in such subsequent appraisal and (y) the sales price for the
related Mortgaged Property (except in certain circumstances in which there has
been a subsequent appraisal). In the case of certain refinanced, modified or
converted Single Family or Multifamily Loans, the "Value" of the related
Mortgaged Property will generally be equal to the lesser of (x) the appraised
value of the related Mortgaged Property determined at origination or in an
appraisal, if any, obtained at the time of refinancing, modification or
conversion and (y) the sales price of the related Mortgage Property or, if the
Mortgage Loan is not a rate and term refinance Mortgage Loan and if the
Mortgaged Property was owned for a relatively short period of time prior to
refinancing, modification or conversion, the sum of the sales price of the
related Mortgaged Property plus the added value of any improvements. Certain
Mortgage Loans which are subject to negative amortization will have
Loan-to-Value Ratios which will increase after origination as a result of such
negative amortization. For purposes of calculating the Loan-to-Value Ratio of a
Contract relating to a new Manufactured Home, the "Value" is generally no
greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer (exclusive of freight to the
dealer site), including "accessories" identified in the invoice (the
"Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. With respect to a used
Manufactured Home, the "Value" is generally the least of the sale price, the
appraised value, and the National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable. Manufactured Homes are less likely than other types
of housing to experience appreciation in value and more likely to experience
depreciation in value over time.
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to
which a portion of the proceeds are used to refinance an existing mortgage loan,
and the remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net
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of related costs incurred by the Mortgagor) are used to refinance an existing
mortgage loan or loans (which may include a junior lien) primarily in order to
change the interest rate or other terms thereof. The Mortgage Loans may be
mortgage loans which have been consolidated and/or have had various terms
changed, mortgage loans which have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a Mortgaged Property may be
subject to secondary financing at the time of origination of the Mortgage Loan
or thereafter. In addition, certain or all of the Single Family Loans may have
Loan-toValue Ratios in excess of 80% and as high as 125% and will not be insured
by a Primary Insurance Policy (such Mortgage Loans, "High LTV Loans").
If provided for in the related Prospectus Supplement, a Mortgage Pool
may contain ARM Loans which allow the Mortgagors to convert the adjustable rates
on such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally not later than six to ten years subsequent to the date of origination,
depending upon the length of the initial adjustment period. If specified in the
related Prospectus Supplement, upon any conversion, the Company, the related
Master Servicer, the applicable Seller or a third party will purchase the
converted Mortgage Loan as and to the extent set forth in the related Prospectus
Supplement. Alternatively, if specified in the related Prospectus Supplement,
the Company or the related Master Servicer (or another party specified therein)
may agree to act as remarketing agent with respect to such converted Mortgage
Loans and, in such capacity, to use its best efforts to arrange for the sale of
converted Mortgage Loans under specified conditions. Upon the failure of any
party so obligated to purchase any such converted Mortgage Loan, the inability
of any remarketing agent to arrange for the sale of the converted Mortgage Loan
and the unwillingness of such remarketing agent to exercise any election to
purchase the converted Mortgage Loan for its own account, the related Mortgage
Pool will thereafter include both fixed rate and adjustable rate Mortgage Loans.
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be subject to temporary buydown plans ("Buydown Mortgage
Loans") pursuant to which the monthly payments made by the Mortgagor during the
early years of the Mortgage Loan (the "Buydown Period") will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) an amount (such amount, exclusive of investment earnings
thereon, being hereinafter referred to as "Buydown Funds") contributed by the
seller of the Mortgaged Property or another source and placed in a custodial
account (the "Buydown Account"), (ii) if the Buydown Funds are contributed on a
present value basis, investment earnings on such Buydown Funds or (iii)
additional buydown funds to be contributed over time by the Mortgagor's employer
or another source. See "Description of the Bonds--Payments on Mortgage Loans;
Deposits to Collection Account." Generally, the Mortgagor under each Buydown
Mortgage Loan will be qualified at the applicable lower monthly payment.
Accordingly, the repayment of a Buydown Mortgage Loan is dependent on the
ability of the Mortgagor to make larger level monthly payments after the Buydown
Funds have been depleted and, for certain Buydown Mortgage Loans, during the
Buydown Period.
The Prospectus Supplement for each series of Bonds will contain
information as to the type of Mortgage Loans that will be included in the
related Mortgage Pool. Each Prospectus Supplement applicable to a series of
Bonds will include certain information, generally as of the Cut-off Date and to
the extent then available to the Company, on an approximate basis, as to (i) the
aggregate principal balance of the Mortgage Loans, (ii) the type of property
securing the Mortgage Loans, (iii) the original or modified terms to maturity of
the Mortgage Loans, (iv) the range of principal balances of the Mortgage Loans
at origination or modification, (v) the earliest origination or modification
date and latest maturity date of the Mortgage Loans, (vi) the Loan-to-Value
Ratios of the Mortgage Loans, (vii) the Mortgage Rate or range of Mortgage Rates
borne by the Mortgage Loans, (viii) if any of the Mortgage Loans are ARM Loans,
the applicable Index, the range of Note Margins and the weighted average Note
Margin, (ix) the geographical
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distribution of the Mortgage Loans, (x) the number of Buydown Mortgage Loans, if
applicable, and (xi) the percent of ARM Loans which are convertible to
fixed-rate mortgage loans, if applicable. A Current Report on Form 8-K will be
available upon request to holders of the related series of Bonds and will be
filed, together with the related Master Servicing Agreement, Trust Agreement and
Indenture, with the Securities and Exchange Commission within fifteen days after
the initial issuance of such Bonds. In the event that Mortgage Loans are added
to or deleted from the Trust Fund after the date of the related Prospectus
Supplement, such addition or deletion will be noted in the Current Report on
Form 8-K.
The Company will cause the Mortgage Loans constituting each Mortgage
Pool to be assigned, without recourse, to the Indenture Trustee named in the
related Prospectus Supplement, for the benefit of the holders of all of the
Securities of a series (the "Securityholders"). Except to the extent that
servicing of any Mortgage Loan is to be transferred to a Special Servicer, the
Master Servicer named in the related Prospectus Supplement will service the
Mortgage Loans, directly or through other mortgage servicing institutions
("Subservicers"), pursuant to a Servicing Agreement and will receive a fee for
such services. See "Servicing of Mortgage Loans," "Description of the Bonds" and
"The Agreements." With respect to those Mortgage Loans serviced by the Master
Servicer through a Subservicer, the Master Servicer will remain liable for its
servicing obligations under the related Servicing Agreement as if the Master
Servicer alone were servicing such Mortgage Loans. The Master Servicer's
obligations with respect to the Mortgage Loans will consist principally of its
contractual servicing obligations under the related Servicing Agreement
(including its obligation to enforce certain purchase and other obligations of
Subservicers and Sellers, as more fully described herein under
"--Representations by Sellers" below, "Servicing of Mortgage
Loans--Subservicers," and "Description of the Bonds--Assignment of Trust Fund
Assets," and, if and to the extent set forth in the related Prospectus
Supplement, its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans as described
herein under "Description of the Bonds--Advances"). In addition to or in lieu of
the Master Servicer for a series of Bonds, the related Prospectus Supplement may
identify an Administrator for the Trust Fund. The Administrator may be an
affiliate of the Company. All references herein to "Master Servicer" and any
discussions of the servicing and administration functions of the Master Servicer
will also apply to the Administrator to the extent applicable.
UNDERWRITING STANDARDS
Mortgage Loans to be included in a Mortgage Pool will have been
purchased by the Company, either directly or indirectly from Sellers. Such
Mortgage Loans will generally have been originated in accordance with
underwriting standards acceptable to the Company or alternative underwriting
criteria. The underwriting standards for the Mortgage Loans included in each
Mortgage Pool are described below and in the related Prospectus Supplement.
However, in some cases, particularly those involving Unaffiliated Sellers, the
Company may not be able to establish the underwriting standards used in the
origination of the related Mortgage Loans. In those cases, the related
Prospectus Supplement will include a statement to such effect and will reflect
what, if any, re-underwriting of the related Mortgage Loans was done by the
Company or any of its affiliates.
The underwriting standards to be used in originating the Mortgage Loans
are primarily intended to assess the creditworthiness of the Mortgagor, the
value of the Mortgaged Property and the adequacy of such property as collateral
for the Mortgage Loan.
The primary considerations in underwriting a Single Family Loan or
Contract are the Mortgagor's employment stability and whether the Mortgagor has
sufficient monthly income available (i) to meet the Mortgagor's monthly
obligations on the proposed Mortgage Loan (generally determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the home (such as property taxes and hazard insurance) and (ii) to meet
monthly housing expenses and other financial
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obligations and monthly living expenses. However, the Loan-to-Value Ratio of the
Mortgage Loan is another critical factor. In addition, a Mortgagor's credit
history and repayment ability, as well as the type and use of the Mortgaged
Property, are also considerations.
High LTV Loans are underwritten with an emphasis on the
creditworthiness of the related Mortgagor. Such Mortgage Loans are underwritten
with a limited expectation of recovering any amounts from the foreclosure of the
related Mortgaged Property.
In the case of the Multifamily Loans, lenders typically look to the
Debt Service Coverage Ratio of a loan as an important measure of the risk of
default on such a loan. The "Debt Service Coverage Ratio" of a Multifamily Loan
at any given time is generally equal to the ratio of (i) the Net Operating
Income of the related Mortgaged Property for a twelve-month period to (ii) the
annualized scheduled payments on the Mortgage Loan and on any other loan that is
secured by a lien on the Mortgaged Property prior to the lien of the related
Mortgage. "Net Operating Income" generally means, for any given period, the
total operating revenues derived from a Multifamily Property during such period,
minus the total operating expenses incurred in respect of such property during
such period other than (i) non-cash items such as depreciation and amortization,
(ii) capital expenditures and (iii) debt service on loans (including the related
Mortgage Loan) secured by liens on such property. The Net Operating Income of a
Multifamily Property will fluctuate over time and may or may not be sufficient
to cover debt service on the related Mortgage Loan at any given time. As the
primary source of the operating revenues of a Multifamily Property, rental
income (and maintenance payments from tenant-stockholders of a cooperatively
owned Multifamily Property) may be affected by the condition of the applicable
real estate market and/or area economy. Increases in operating expenses due to
the general economic climate or economic conditions in a locality or industry
segment, such as increases in interest rates, real estate tax rates, energy
costs, labor costs and other operating expenses, and/or to changes in
governmental rules, regulations and fiscal policies, may also affect the risk of
default on a Multifamily Loan. Lenders also look to the Loan-to-Value Ratio of a
Multifamily Loan as a measure of risk of loss if a property must be liquidated
following a default.
It is expected that each prospective Mortgagor will complete a mortgage
loan application that includes information with respect to the applicant's
liabilities, income, credit history, employment history and personal
information. One or more credit reports on each applicant from national credit
reporting companies will generally be required. The 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. In the case of a Multifamily Loan,
the Mortgagor will also be required to provide certain information regarding the
related Multifamily Property, including a current rent roll and operating income
statements (which may be pro forma and unaudited). In addition, the originator
will generally also consider the location of the Multifamily Property, the
availability of competitive lease space and rental income of comparable
properties in the relevant market area, the overall economy and demographic
features of the geographic area and the Mortgagor's prior experience in owning
and operating properties similar to the Multifamily Properties.
Mortgaged Properties will generally be appraised by licensed
appraisers. The appraiser will generally address neighborhood conditions, site
and zoning status and condition and valuation of improvements. In the case of
Single Family Properties, the appraisal report will generally include a
reproduction cost analysis (when appropriate) based on the current cost of
constructing a similar home and a market value analysis based on recent sales of
comparable homes in the area. With respect to Multifamily Properties, the
appraisal must specify whether an income analysis, a market analysis or a cost
analysis was used. An appraisal employing the income approach to value analyzes
a property's projected net cash flow, capitalization and other operational
information in determining the property's value. The market approach to value
analyzes the prices paid for the purchase of similar properties in the
property's area, with adjustments made for variations between those other
properties and the property being appraised.
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The cost approach to value requires the appraiser to make an estimate of land
value and then determine the current cost of reproducing the improvements less
any accrued depreciation. In any case, the value of the property being financed,
as indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance. All
appraisals are usually required to conform to the Uniform Standards of
Professional Appraisal Practice and the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") and must be on forms acceptable to the
Federal National Mortgage Association ("FNMA") and/or the Federal Home Loan
Mortgage Corporation ("FHLMC").
Notwithstanding the foregoing, Loan-to-Value Ratios will not
necessarily constitute an accurate measure of the risk of liquidation loss in a
pool of Mortgage Loans. For example, the value of a Mortgaged Property as of the
date of initial issuance of the related series of Bonds may be less than the
Value determined at loan origination, and will likely continue to fluctuate from
time to time based upon changes in economic conditions and the real estate
market. Moreover, even when current, an appraisal is not necessarily a reliable
estimate of value for a Multifamily Property. As stated above, appraised values
of Multifamily Properties are generally based on the market analysis, the cost
analysis, the income analysis, or upon a selection from or interpolation of the
values derived from such approaches. Each of these appraisal methods can present
analytical difficulties. It is often difficult to find truly comparable
properties that have recently been sold; the replacement cost of a property may
have little to do with its current market value; and income capitalization is
inherently based on inexact projections of income and expenses and the selection
of an appropriate capitalization rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of default and
loss risks, is even more difficult.
If so specified in the related Prospectus Supplement, the underwriting
of a Multifamily Loan may also include environmental testing. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on 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 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 the borrower or
a prior owner. A lender also risks such liability on foreclosure of the
mortgage. See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation".
With respect to any FHA Loan the Mortgage Loan Seller will be required
to represent that it has complied with the applicable underwriting policies of
the FHA. See "Description of Primary Insurance Policies--FHA Insurance".
To the extent relevant and available, the related Prospectus Supplement
will include delinquency and foreclosure experience for the applicable
Seller(s).
QUALIFICATIONS OF ORIGINATORS AND SELLERS
Each Mortgage Loan will be originated, directly or through mortgage
brokers and correspondents, by a savings and loan association, savings bank,
commercial bank, credit union, insurance company, or similar institution which
is supervised and examined by a federal or state authority, or by a mortgagee
approved by the Secretary of Housing and Urban Development pursuant to sections
203 and 211 of the National Housing Act of 1934, as amended (the "Housing Act").
Except with respect to Designated Seller Transactions, each Seller must satisfy
certain criteria as to financial stability evaluated on a case-by-case basis by
the Company.
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REPRESENTATIONS BY SELLERS
Each Seller will generally have made representations and warranties in
respect of the Mortgage Loans sold by such Seller and evidenced by a series of
Bonds. In the case of Mortgage Loans, such representations and warranties will
generally include, among other things, that as to each such Mortgage Loan: (i)
any required hazard and primary mortgage insurance policies were effective at
the origination of such Mortgage Loan, and each such policy remained in effect
on the date of purchase of such Mortgage Loan from the Seller by or on behalf of
the Company; (ii) with respect to each Mortgage Loan other than a Contract,
either (A) a title insurance policy insuring (subject only to permissible title
insurance exceptions) the lien status of the Mortgage was effective at the
origination of such Mortgage Loan and such policy remained in effect on the date
of purchase of the Mortgage Loan from the Seller by or on behalf of the Company
or (B) if the Mortgaged Property securing such Mortgage Loan is located in an
area where such policies are generally not available, there is in the related
mortgage file an attorney's certificate of title indicating (subject to such
permissible exceptions set forth therein) the first lien status of the mortgage;
(iii) the Seller has good title to such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims except as may be provided under
the Relief Act and except to the extent that any buydown agreement exists for a
Buydown Mortgage Loan; (iv) there are no mechanics' liens or claims for work,
labor or material affecting the related Mortgaged Property which are, or may be
a lien prior to, or equal with, the lien of the related Mortgage (subject only
to permissible title insurance exceptions); (v) the related Mortgaged Property
is free from damage and in good repair; (vi) there are no delinquent tax or
assessment liens against the related Mortgaged Property; (vii) such Mortgage
Loan is not more than 60 days' delinquent as to any scheduled payment of
principal and/or interest; (viii) if a Primary Insurance Policy is required with
respect to such Mortgage Loan, such Mortgage Loan is the subject of such a
policy; and (ix) such Mortgage Loan was made in compliance with, and is
enforceable under, all applicable local, state and federal laws in all material
respects. In the event of a breach of a Seller's representation or warranty that
materially adversely affects the interests of the Securityholders in a Mortgage
Loan, the related Seller will be obligated to cure the breach or repurchase or,
if permitted, replace such Mortgage Loan as described below. However, there can
be no assurance that a Seller will honor its obligation to repurchase or, if
permitted, replace any Mortgage Loan as to which such a breach of a
representation or warranty arises.
All of the representations and warranties of a Seller in respect of a
Mortgage Loan will have been made as of the date on which such Mortgage Loan was
purchased from the Seller by or on behalf of the Company; the date as of which
such representations and warranties were made will be a date prior to the date
of initial issuance of the related series of Bonds or, in the case of a
Designated Seller Transaction, will be the date of closing of the related sale
by the applicable Seller. A substantial period of time may have elapsed between
the date as of which the representations and warranties were made and the later
date of initial issuance of the related series of Bonds. Accordingly, the
Seller's purchase obligation (or, if specified in the related Prospectus
Supplement, limited replacement option) described below will not arise if,
during the period commencing on the date of sale of a Mortgage Loan by the
Seller, an event occurs that would have given rise to such an obligation had the
event occurred prior to sale of the affected Mortgage Loan. The only
representations and warranties to be made for the benefit of holders of Bonds in
respect of any related Mortgage Loan relating to the period commencing on the
date of sale of such Mortgage Loan by the Seller to or on behalf of the Company
will be certain limited representations of the Company and the Master Servicer
described under "Description of the Bonds--Assignment of Trust Fund Assets"
below.
The Company will assign to the Indenture Trustee for the benefit of the
holders of the related series of Securities all of its right, title and interest
in each agreement by which it purchased a Mortgage Loan from a Seller insofar as
such agreement relates to the representations and warranties made by such Seller
in respect of such Mortgage Loan and any remedies provided for with respect to
any breach of such representations and warranties. If a Seller cannot cure a
breach of any representation or warranty made
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by it in respect of a Mortgage Loan which materially and adversely affects the
interests of the Securityholders therein within a specified period after having
discovered or received notice of such breach, then such Seller may be obligated
to purchase such Mortgage Loan at a price (the "Purchase Price") set forth in
the related Servicing Agreement which Purchase Price will generally be equal to
the principal balance thereof as of the date of purchase plus accrued and unpaid
interest through or about the date of purchase at the related Mortgage Rate (net
of any portion of such interest payable to such Seller in respect of master
servicing compensation, special servicing compensation or subservicing
compensation, as applicable, and the Spread, if any).
As to any Mortgage Loan required to be purchased by an Affiliated
Seller as provided above, rather than repurchase the Mortgage Loan, the Seller
may be entitled, at its sole option, to remove such Mortgage Loan (a "Deleted
Mortgage Loan") from the Trust Fund and substitute in its place another Mortgage
Loan of like kind (a "Qualified Substitute Mortgage Loan"). Except as otherwise
provided in the related Prospectus Supplement, any Qualified Substitute Mortgage
Loan generally will, on the date of substitution, (i) have an outstanding
principal balance, after deduction of the principal portion of the monthly
payment due in the month of substitution, not in excess of the outstanding
principal balance of the Deleted Mortgage Loan (the amount of any shortfall to
be deposited in the Collection Account by the Master Servicer in the month of
substitution for distribution to the Bondholders), (ii) have a Mortgage Rate and
a Net Mortgage Rate not less than (and not more than one percentage point
greater than) the Mortgage Rate and Net Mortgage Rate, respectively, of the
Deleted Mortgage Loan as of the date of substitution, (iii) have a Loan-to-Value
Ratio at the time of substitution no higher than that of the Deleted Mortgage
Loan at the time of substitution, (iv) have a remaining term to maturity not
greater than (and not more than one year less than) that of the Deleted Mortgage
Loan, (v) comply with all of the representations and warranties made by such
Affiliated Seller as of the date of substitution, and (vi) except in the case of
High LTV Loans, be covered under a primary insurance policy if such Mortgage
Loan has a Loan-to-Value Ratio greater than 80%. The related purchase agreement
may include additional requirements relating to ARM Loans or other specific
types of Mortgage Loans, or additional provisions relating to meeting the
foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously. An Unaffiliated Seller will generally have no option to
substitute for a Mortgage Loan that it is obligated to repurchase in connection
with a breach of a representation and warranty.
The Master Servicer will be required under the applicable Servicing
Agreement to use reasonable efforts to enforce this purchase or substitution
obligation for the benefit of the Indenture Trustee and the Securityholders,
following such practices it would employ in its good faith business judgment and
which are normal and usual in its general mortgage servicing activities;
provided, however, that this purchase or substitution obligation will not become
an obligation of the Master Servicer in the event the applicable Seller fails to
honor such obligation. In instances where a Seller is unable, or disputes its
obligation, to purchase affected Mortgage Loans, the Master Servicer, employing
the standards set forth in the preceding sentence, may negotiate and enter into
one or more settlement agreements with such Seller that could provide for, among
other things, the purchase of only a portion of the affected Mortgage Loans. Any
such settlement could lead to losses on the Mortgage Loans which would be borne
by the related Securities. In accordance with the above described practices, the
Master Servicer will not be required to enforce any purchase obligation of a
Seller arising from any misrepresentation by the Seller, if the Master Servicer
determines in the reasonable exercise of its business judgment that the matters
related to such misrepresentation did not directly cause or are not likely to
directly cause a loss on the related Mortgage Loan. If the Seller fails to
repurchase and no breach of any other party's representations has occurred, the
Seller's purchase obligation will not become an obligation of the Company or any
other party. In the case of a Designated Seller Transaction where the Seller
fails to repurchase a Mortgage Loan and neither the Company nor any other entity
has assumed the representations and warranties, such repurchase obligation of
the Seller will not become an obligation of the Company or any other party. The
foregoing obligations
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will constitute the sole remedies available to Securityholders or the Indenture
Trustee for a breach of any representation by a Seller or for any other event
giving rise to such obligations as described above.
Neither the Company nor the Master Servicer will be obligated to
purchase a Mortgage Loan if a Seller defaults on its obligation to do so, and no
assurance can be given that the Sellers will carry out such purchase
obligations. Such a default by a Seller is not a default by the Company or by
the Master Servicer. However, to the extent that a breach of the representations
and warranties of a Seller also constitutes a breach of a representation made by
the Company or the Master Servicer, as described below under "Description of the
Bonds--Assignment of Trust Fund Assets," the Company or the Master Servicer may
have a purchase or substitution obligation. Any Mortgage Loan not so purchased
or substituted for shall remain in the related Trust Fund and any losses related
thereto shall be allocated to the related credit enhancement, to the extent
available, and otherwise to one or more classes of the related series of Bonds.
If a person other than a Seller makes the representations and
warranties referred to in the first paragraph of this "--Representations by
Sellers" section, or a person other than a Seller is responsible for
repurchasing or replacing any Mortgage Loan in connection with a breach of such
representations and warranties, the identity of such person will be specified in
the related Prospectus Supplement.
SERVICING OF MORTGAGE LOANS
GENERAL
The Mortgage Loans included in each Mortgage Pool will be serviced and
administered pursuant to a Servicing Agreement. A form of Servicing Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. However, the provisions of each Servicing Agreement will
vary depending upon the nature of the related Mortgage Pool. The following
summaries describe certain servicing-related provisions that may appear in a
Servicing Agreement for a Mortgage Pool that includes Mortgage Loans. The
related Prospectus Supplement will describe any servicing-related provision of
such a Servicing Agreement that materially differs from the description thereof
contained in this Prospectus. The summaries herein do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all of
the provisions of the related Servicing Agreement and the description of such
provisions in the related Prospectus Supplement.
THE MASTER SERVICER
The master servicer (the "Master Servicer"), if any, for a series of
Bonds will be named in the related Prospectus Supplement and may be an affiliate
of the Company. The Master Servicer is required to maintain a fidelity bond and
errors and omissions policy with respect to its officers and employees and other
persons acting on behalf of the Master Servicer in connection with its
activities under a Servicing Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
The Master Servicer for any Mortgage Pool, directly or through
Subservicers, will be obligated under the Servicing Agreement to service and
administer the Mortgage Loans in such Mortgage Pool for the benefit of the
related Securityholders, in accordance with applicable law and the terms of such
Servicing Agreement, such Mortgage Loans and any instrument of credit
enhancement included in the related Trust Fund, and, to the extent consistent
with the foregoing, in the same manner as would prudent institutional mortgage
lenders servicing comparable mortgage loans for their own account in the
jurisdictions where the related Mortgaged Properties are located. Subject to the
foregoing, the Master
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Servicer will have full power and authority to do any and all things in
connection with such servicing and administration that it may deem necessary and
desirable.
As part of its servicing duties, a Master Servicer will be required to
make reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans that it services and will be obligated to
follow such collection procedures as it would follow with respect to mortgage
loans that are comparable to such Mortgage Loans and held for its own account,
provided such procedures are consistent with the terms of the related Servicing
Agreement, including the servicing standard specified therein and generally
described in the preceding paragraph (as such may be more particularly described
in the related Prospectus Supplement, the "Servicing Standard"), and do not
impair recovery under any instrument of credit enhancement included in the
related Trust Fund. Consistent with the foregoing, the Master Servicer will be
permitted, in its discretion, to waive any Prepayment Premium, late payment
charge or other charge in connection with any Mortgage Loan.
Under a Servicing Agreement, a Master Servicer will be granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. In
the case of Single Family Loans and Contracts, a Master Servicer may, among
other things, grant a period of temporary indulgence (generally up to four
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by such Mortgagor of delinquent amounts within a specified period
(generally up to one year) from the date of execution of the plan. However, the
Master Servicer must first determine that any such waiver or extension will not
impair the coverage of any related insurance policy or materially adversely
affect the security for such Mortgage Loan. In addition, if a material default
occurs or a payment default is reasonably foreseeable with respect to a
Multifamily Loan, the Master Servicer will be permitted, subject to any specific
limitations set forth in the related Servicing Agreement and described in the
related Prospectus Supplement, to modify, waive or amend any term of such
Mortgage Loan, including deferring payments, extending the stated maturity date
or otherwise adjusting the payment schedule, provided that such modification,
waiver or amendment (i) is reasonably likely to produce a greater recovery with
respect to such Mortgage Loan on a present value basis than would liquidation
and (ii) will not adversely affect the coverage under any applicable instrument
of credit enhancement.
In the case of Multifamily Loans, a Mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the mortgage debt, or may reflect the diversion of that income from
the servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the related Master Servicer will be required to
monitor any Multifamily Loan that is in default, evaluate whether the causes of
the default can be corrected over a reasonable period without significant
impairment of the value of the related Mortgaged Property, initiate corrective
action in cooperation with the Mortgagor if cure is likely, inspect the related
Mortgaged Property and take such other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the Master
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Master Servicer can make
the initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose (or accept a deed to a Mortgaged Property in
lieu of foreclosure) on behalf of the Securityholders of the related series may
vary considerably depending on the particular Multifamily Loan, the Mortgaged
Property, the Mortgagor, the presence of an acceptable party to assume the
Multifamily Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a Mortgagor files a bankruptcy petition, the Master
Servicer may not be permitted to accelerate the maturity of the related
Multifamily Loan or to foreclose on the Mortgaged Property for a considerable
period of time. See "Certain Legal Aspects of Mortgage Loans."
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Certain of the Mortgage Loans in a Mortgage Pool may contain a
due-on-sale clause that entitles the lender to accelerate payment of the
Mortgage Loan upon any sale or other transfer of the related Mortgaged Property
made without the lender's consent. Certain of the Multifamily Loans in a
Mortgage Pool may also contain a due-on-encumbrance clause that entitles the
lender to accelerate the maturity of the Mortgage Loan upon the creation of any
other lien or encumbrance upon the Mortgaged Property. In any case in which
property subject to a Single Family Loan or Contract is being conveyed by the
Mortgagor, unless the related Prospectus Supplement provides otherwise, the
Master Servicer will in general be obligated, to the extent it has knowledge of
such conveyance, to exercise its rights to accelerate the maturity of such
Mortgage Loan under any due-on-sale clause applicable thereto, but only if the
exercise of such rights is permitted by applicable law and only to the extent it
would not adversely affect or jeopardize coverage under any Primary Insurance
Policy or applicable credit enhancement arrangements. If the Master Servicer is
prevented from enforcing such due-on-sale clause under applicable law or if the
Master Servicer determines that it is reasonably likely that a legal action
would be instituted by the related Mortgagor to avoid enforcement of such
due-on-sale clause, the Master Servicer will 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 Loan subject to certain specified conditions. The original Mortgagor
may be released from liability on a Single Family Loan or Contract if the Master
Servicer shall have determined in good faith that such release will not
adversely affect the collectability of the Mortgage Loan. The Master Servicer
will determine whether to exercise any right the Owner Trustee may have under
any due-on-sale or due-on-encumbrance provision in a Multifamily Loan in a
manner consistent with the Servicing Standard. The Master Servicer will
generally be entitled to retain as additional servicing compensation any fee
collected in connection with the permitted transfer of a Mortgaged Property. See
"Certain Legal Aspects of Mortgage Loans--Enforceability of Certain Provisions."
FHA Loans contain no such clause and may be assumed by the purchaser of the
mortgaged property.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer may approve such a request if it has
determined, exercising its good faith business judgment in the same manner as it
would if it were the owner of the related Mortgage Loan, that such approval will
not adversely affect the security for, or the timely and full collectability of,
the related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Single Family and Multifamily Loans secured by junior
liens on the related Mortgaged Properties, the Master Servicer will be required
to file (or cause to be filed) of record a request for notice of any action by a
superior lienholder under the Senior Lien for the protection of the related
Indenture Trustee's interest, where permitted by local law and whenever
applicable state law does not require that a junior lienholder be named as a
party defendant in foreclosure proceedings in order to foreclose such junior
lienholder's equity of redemption. The Master Servicer also will be required to
notify any superior lienholder in writing of the existence of the Mortgage Loan
and request notification of any action (as described below) to be taken against
the Mortgagor or the Mortgaged Property by the superior lienholder. If the
Master Servicer is notified that any superior lienholder has accelerated or
intends to accelerate the obligations secured by the related Senior Lien, or has
declared or intends to declare a default under the mortgage or the promissory
note secured thereby, or has filed or intends to file an election to have the
related Mortgaged Property sold or foreclosed, then the Master Servicer will be
required to take, on behalf of the related Trust Fund, whatever actions are
necessary to protect the interests of the related Securityholders, and/or to
preserve the security of the related Mortgage Loan. The Master Servicer will
generally be required to advance the necessary funds to cure the default or
reinstate the superior lien, if such advance is in the best interests of the
related Securityholders and the Master Servicer determines such advances are
recoverable out of payments on or proceeds of the related Mortgage Loan.
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The Master Servicer for any Mortgage Pool will also be required to
perform other customary functions of a servicer of comparable loans, including
maintaining escrow or impound accounts for payment of taxes, insurance premiums
and similar items, or otherwise monitoring the timely payment of those items;
adjusting Mortgage Rates on ARM Loans; maintaining Buydown Accounts; supervising
foreclosures and similar proceedings; managing Mortgage Properties acquired
through or in lieu of foreclosure (each, an "REO Property"); and maintaining
servicing records relating to the Mortgage Loans in such Mortgage Pool. The
Master Servicer will generally be responsible for filing and settling claims in
respect of particular Mortgage Loans under any applicable instrument of credit
enhancement. See "Description of Credit Enhancement."
SUBSERVICERS
A Master Servicer may delegate its servicing obligations in respect of
the Mortgage Loans serviced by it to one or more third-party servicers (each, a
"Subservicer"), but the Master Servicer will remain liable for such obligations
under the related Servicing Agreement. The Master Servicer will be solely liable
for all fees owed by it to any Subservicer, irrespective of whether the Master
Servicer's compensation pursuant to the related Servicing Agreement is
sufficient to pay such fees. Each Subservicer will be entitled to reimbursement
for certain expenditures which it makes, generally to the same extent as would
the Master Servicer for making the same expenditures. See "--Servicing and Other
Compensation and Payment of Expenses; Spread" below and "Description of the
Bonds--The Collection Account."
SPECIAL SERVICERS
If and to the extent specified in the related Prospectus Supplement, a
special servicer (a "Special Servicer") may be a party to the related Servicing
Agreement or may be appointed by the Master Servicer or another specified party
to perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Master Servicer (for example, the
workout and/or foreclosure of defaulted Mortgage Loans). The rights and
obligations of any Special Servicer will be specified in the related Prospectus
Supplement, and the Master Servicer will be liable for the performance of a
Special Servicer only if, and to the extent, set forth in such Prospectus
Supplement.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below or in the related Prospectus Supplement, the
Master Servicer will be required, in a manner consistent with the Servicing
Standard, to foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Mortgage Loans in the related Mortgage Pool as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection therewith, the
Master Servicer will be authorized to institute foreclosure proceedings,
exercise any power of sale contained in the related Mortgage, obtain a deed in
lieu of foreclosure, or otherwise acquire title to the related Mortgaged
Property, by operation of law or otherwise, if such action is consistent with
the Servicing Standard. The Master Servicer's actions in this regard must be
conducted, however, in a manner that will permit recovery under any instrument
of credit enhancement included in the related Trust Fund. In addition, the
Master Servicer will not be required to expend its own funds in connection with
any foreclosure or to restore any damaged property unless it shall determine
that (i) such foreclosure and/or restoration will increase the proceeds of
liquidation of the Mortgage Loan to the related Securityholders after
reimbursement to itself for such expenses and (ii) such expenses will be
recoverable to it from related Insurance Proceeds, Liquidation Proceeds or
amounts drawn out of any fund or under any instrument constituting credit
enhancement (respecting which it shall have priority for purposes of withdrawal
from the Collection Account in accordance with the Servicing Agreement).
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Notwithstanding the foregoing, the Master Servicer may not acquire
title to any Multifamily Property securing a Mortgage Loan or take any other
action that would cause the related Indenture Trustee, for the benefit of
Securityholders of the related series, or any other specified person to be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws, unless the Master Servicer has previously
determined, based on a report prepared by a person who regularly conducts
environmental audits (which report will be an expense of the Trust Fund), that
either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions
as are necessary to bring the Mortgaged Property into compliance
therewith is reasonably likely to produce a greater recovery on a
present value basis than not taking such actions; and
(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if such circumstances or conditions are present for
which any such action could be required, taking such actions with
respect to the Mortgaged Property is reasonably likely to produce a
greater recovery on a present value basis than not taking such actions.
See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation."
In addition, the Master Servicer will not be obligated to foreclose
upon or otherwise convert the ownership of any Single Family Property securing a
Mortgage Loan if it has received notice or has actual knowledge that such
property may be contaminated with or affected by hazardous wastes or hazardous
substances; however, no environmental testing will generally be required. The
Master Servicer will not be liable to the Bondholders of the related series if,
based on its belief that no such contamination or effect exists, the Master
Servicer forecloses on a Mortgaged Property and takes title to such Mortgaged
Property, and thereafter such Mortgaged Property is determined to be so
contaminated or affected.
With respect to a Mortgage Loan in default, the Master Servicer may
pursue foreclosure (or similar remedies) concurrently with pursuing any remedy
for a breach of a representation and warranty. However, the Master Servicer is
not required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. Upon the first to
occur of final liquidation (by foreclosure or otherwise) and a repurchase or
substitution pursuant to a breach of a representation and warranty, such
Mortgage Loan will be removed from the related Trust Fund if it has not been
removed previously. The Master Servicer may elect to treat a defaulted Mortgage
Loan as having been finally liquidated if substantially all amounts expected to
be received in connection therewith have been received. Any additional
liquidation expenses relating to such Mortgage Loan thereafter incurred will be
reimbursable to the Master Servicer (or any Subservicer) from any amounts
otherwise distributable to holders of Securities of the related series, or may
be offset by any subsequent recovery related to such Mortgage Loan.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be distributed to Securityholders, the amount of any Realized Loss
or the amount required to be drawn under any applicable form of credit support,
the Master Servicer may take into account minimal amounts of additional receipts
expected to be received, as well as estimated additional liquidation expenses
expected to be incurred in connection with such defaulted Mortgage Loan. With
respect to certain series of Bonds, if so provided in the related Prospectus
Supplement, the applicable form of credit enhancement may provide, to the extent
of coverage thereunder, that a defaulted Mortgage Loan will be removed from the
Trust Fund prior to the final liquidation thereof. In addition, a Servicing
Agreement may grant to the Master Servicer, a Special Servicer, a provider of
credit enhancement and/or the holder or holders of certain classes of Securities
of the related series a right of first refusal to purchase from the Trust Fund,
at a predetermined purchase price (which, if insufficient to fully fund the
entitlements of Bondholders to
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principal and interest thereon, will be specified in the related Prospectus
Supplement), any Mortgage Loan as to which a specified number of scheduled
payments are delinquent. Furthermore, a Servicing Agreement may authorize the
Master Servicer to sell any defaulted Mortgage Loan if and when the Master
Servicer determines, consistent with the Servicing Standard, that such a sale
would produce a greater recovery to Securityholders on a present value basis
than would liquidation of the related Mortgaged Property.
In the event that title to any Mortgaged Property is acquired in
foreclosure, deed in lieu of foreclosure or otherwise, the deed or certificate
of sale will be issued to the Indenture Trustee or to its nominee on behalf of
Securityholders of the related series. Notwithstanding any such acquisition of
title and cancellation of the related Mortgage Loan, such Mortgage Loan (an "REO
Mortgage Loan") will be considered for most purposes to be an outstanding
Mortgage Loan held in the Trust Fund until such time as the Mortgaged Property
is sold and all recoverable Liquidation Proceeds and Insurance Proceeds have
been received with respect to such defaulted Mortgage Loan (a "Liquidated
Mortgage Loan"). For purposes of calculations of amounts distributable to
Securityholders in respect of an REO Mortgage Loan, the amortization schedule in
effect at the time of any such acquisition of title (before any adjustment
thereto by reason of any bankruptcy or any similar proceeding or any moratorium
or similar waiver or grace period) will be deemed to have continued in effect
(and, in the case of an ARM Loan, such amortization schedule will be deemed to
have adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor) so long as such REO Mortgage Loan is considered to
remain in the Trust Fund.
If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted Mortgage
Loan plus interest accrued thereon plus the aggregate amount of reimbursable
expenses incurred by the Master Servicer with respect to such Mortgage Loan, and
the shortfall is not covered under any applicable instrument or fund
constituting credit enhancement, the Trust Fund will realize a loss in the
amount of such difference. The Master Servicer will be entitled to reimburse
itself from the Liquidation Proceeds recovered on any defaulted Mortgage Loan,
prior to the distribution of such Liquidation Proceeds to Securityholders,
amounts that represent unpaid servicing compensation in respect of the Mortgage
Loan, unreimbursed servicing expenses incurred with respect to the Mortgage Loan
and any unreimbursed advances of delinquent payments made with respect to the
Mortgage Loan. If so provided in the related Prospectus Supplement, the
applicable form of credit enhancement may provide for reinstatement subject to
certain conditions in the event that, following the final liquidation of a
Mortgage Loan and a draw under such credit enhancement, subsequent recoveries
are received. If a gain results from the final liquidation of a defaulted
Mortgage Loan or an REO Mortgage Loan which is not required by law to be
remitted to the related Mortgagor, the Master Servicer will not be entitled to
retain such gain as additional servicing compensation unless the related
Prospectus Supplement provides otherwise. For a description of the Master
Servicer's (or other specified person's) obligations to maintain and make claims
under applicable forms of credit enhancement and insurance relating to the
Mortgage Loans, see "Description of Credit Enhancement" and "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; SPREAD
The principal servicing compensation to be paid to the Master Servicer
in respect of its master servicing activities for a series of Bonds will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each Mortgage Loan, and such compensation will be retained by it on a
monthly or other periodic basis from collections of interest on such Mortgage
Loan in the related Trust Fund at the time such collections are deposited into
the applicable Collection Account. This portion of the servicing fee will be
calculated with respect to each Mortgage Loan by multiplying such fee by the
principal balance of such Mortgage
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Loan. In addition, the Master Servicer will not retain any Prepayment Premiums,
assumption fees and late payment charges, to the extent collected from
Mortgagors, and any benefit which may accrue as a result of the investment of
funds in the applicable Collection Account. Any additional servicing
compensation will be described in the related Prospectus Supplement. Any
Subservicer will receive a portion of the Master Servicer's compensation as its
sub-servicing compensation.
In addition to amounts payable to any Subservicer, the Master Servicer
will pay or cause to be paid certain ongoing expenses associated with each Trust
Fund and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, if so specified in the related Prospectus
Supplement, payment of any fee or other amount payable in respect of any
alternative credit enhancement arrangements, payment of the fees and
disbursements of the Owner Trustee and the Indenture Trustee, any custodian
appointed by the Owner Trustee and the Bond Registrar, and payment of expenses
incurred in enforcing the obligations of Subservicers and Sellers. The Master
Servicer will be entitled to reimbursement of expenses incurred in enforcing the
obligations of Subservicers and Sellers under certain limited circumstances. In
addition, the Master Servicer will be entitled to reimbursements for certain
expenses incurred by it in connection with Liquidated Mortgage Loans and in
connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Securityholders to receive any
related Liquidation Proceeds or Insurance Proceeds. If and to the extent so
provided in the related Prospectus Supplement, the Master Servicer will be
entitled to receive interest on amounts advanced to cover such reimbursable
expenses for the period that such advances are outstanding at the rate specified
in such Prospectus Supplement, and the Master Servicer will be entitled to
payment of such interest periodically from general collections on the Mortgage
Loans in the related Trust Fund prior to any payment to Securityholders or as
otherwise provided in the related Servicing Agreement and described in such
Prospectus Supplement.
The Prospectus Supplement for a series of Bonds will specify whether
there will be any Spread retained. Any such Spread will be a specified portion
of the interest payable on each Mortgage Loan in a Mortgage Pool and will not be
part of the related Trust Fund. Any such Spread will be established on a
loan-by-loan basis and the amount thereof with respect to each Mortgage Loan in
a Mortgage Pool will be specified on an exhibit to the related Servicing
Agreement. Any partial recovery of interest in respect of a Mortgage Loan will
be allocated between the owners of any Spread and the holders of classes of
Securities entitled to payments of interest as provided in the related
Prospectus Supplement and the applicable Servicing Agreement.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to any Prepayment Interest
Shortfalls resulting from Mortgagor prepayments during such period. See "Yield
Considerations."
EVIDENCE AS TO COMPLIANCE
Each Servicing Agreement will provide that on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, a firm of independent public
accountants will furnish a statement to the Company and the Indenture Trustee to
the effect that, on the basis of an examination by such firm conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing of mortgage loans under agreements (including the related Servicing
Agreement) substantially similar to each other was conducted in compliance with
such agreements except for such significant exceptions or errors in records
that, in the opinion of the firm, the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC requires
it to report. In rendering its statement such firm may rely, as to the matters
relating to the direct servicing of mortgage
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loans by Subservicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered
within one year of such statement) of firms of independent public accountants
with respect to those Subservicers which also have been the subject of such an
examination.
Each Servicing Agreement will also provide for delivery to the
Indenture Trustee, on or before a specified date in each year, of an annual
statement signed by one or more officers of the Master Servicer to the effect
that, to the best knowledge of each such officer, the Master Servicer has
fulfilled in all material respects its obligations under the Servicing Agreement
throughout the preceding year or, if there has been a material default in the
fulfillment of any such obligation, such statement shall specify each such known
default and the nature and status thereof. Such statement may be provided as a
single form making the required statements as to more than one Servicing
Agreement.
Copies of the annual accountants' statement and the annual statement of
officers of a Master Servicer may be obtained by Bondholders without charge upon
written request to the Master Servicer or the Indenture Trustee.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds will be issued in series. Each series of Bonds (or, in
certain instances, two or more series of Bonds) will be issued pursuant to an
Indenture between the Company and the Indenture Trustee, similar to the form
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. Each Indenture, Trust Agreement and Servicing Agreement will be filed with
the Securities and Exchange Commission as an exhibit to a Current Report on Form
8-K. The following summaries (together with additional summaries under "The
Agreements" below) describe certain provisions relating to the Bonds common to
each of the Agreements. The summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Agreements for each Trust Fund and the related Prospectus
Supplement. Wherever particular sections or defined terms of the Agreements are
referred to herein, such sections or defined terms are thereby incorporated
herein by reference.
Bonds of each series covered by a particular Indenture will evidence
indebtedness of the related Issuer secured by a separate Trust Fund. A Trust
Fund will consist of, to the extent provided in the Indenture: (i) such Mortgage
Loans (and the related mortgage documents) or interests therein underlying a
particular series of Bonds as from time to time are subject to the Indenture,
exclusive of, if specified in the related Prospectus Supplement, any Spread or
other interest retained by the Company or any of its affiliates with respect to
each such Mortgage Loan; (ii) such assets including, without limitation, all
payments and collections in respect of the Mortgage Loans due after the related
Cut-off Date, as from time to time are identified as deposited in respect
thereof in the related Collection Account as described below; (iii) any property
acquired in respect of Mortgage Loans in the Trust Fund, whether through
foreclosure of such Mortgage Loans or by deed in lieu of foreclosure or
otherwise; (iv) hazard insurance policies, Primary Insurance Policies and FHA
insurance policies, if any, maintained in respect of Mortgage Loans in the Trust
Fund and certain proceeds of such policies; (v) certain rights of the Company
under any Mortgage Loan Purchase Agreement, including in respect of any
representations and warranties therein; and (vi) any combination, as and to the
extent specified in the related Prospectus Supplement, of a Financial Guaranty
Insurance Policy, Letter of Credit, Purchase Obligation, Mortgage Pool Insurance
Policy, Special Hazard Insurance Policy or Bankruptcy Bond as described under
"Description of Credit Enhancement." To the extent that any Trust Fund includes
certificates of interest or participations in
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Mortgage Loans, the related Prospectus Supplement will describe the material
terms and conditions of such certificates or participations.
Each series of Bonds may consist of any one or a combination of the
following: (i) a single class of Bonds; (ii) two or more classes of Bonds, one
or more classes of which will be senior ("Senior Bonds") in right of payment to
one or more of the other classes of Bonds, if any (collectively, the
"Subordinate Bonds"), and as to which certain classes of Bonds may be senior to
other classes of Senior Bonds or Subordinate Bonds, as described in the
respective Prospectus Supplement (any such series, a "Senior/Subordinate
Series"); (iii) two or more classes of Bonds, one or more classes ("Strip
Bonds") of which will be entitled to (a) principal distributions, with
disproportionate, nominal or no interest distributions or (b) interest
distributions, with disproportionate, nominal or no principal distributions;
(iv) two or more classes of Bonds which differ as to the timing, sequential
order, rate, pass-through rate or amount of distributions of principal or
interest or both, or as to which distributions of principal or interest or both
on any such class may be made upon the occurrence of specified events, in
accordance with a schedule or formula (including "planned amortization classes"
and "targeted amortization classes"), or on the basis of collections from
designated portions of the Mortgage Pool, and which classes may include one or
more classes of Bonds ("Accrual Bonds") with respect to which certain accrued
interest will not be distributed but rather will be added to the principal
balance thereof on each Distribution Date for the period described in the
related Prospectus Supplement; or (v) other types of classes of Bonds, as
described in the related Prospectus Supplement. The Certificates, insofar as
they represent the beneficial ownership interest in the Issuer, will be
subordinate to the Bonds. As to each series, all Bonds offered hereby (the
"Bonds") will be rated in one of the four highest rating categories by one or
more Rating Agencies. Credit support for the Bonds of each series may be
provided by a Financial Guaranty Insurance Policy, Mortgage Pool Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit,
Purchase Obligation, Overcollateralization or Reserve Fund as described under
"Description of Credit Enhancement," by the subordination of one or more other
classes of Subordinate Bonds or by any combination of the foregoing.
FORM OF BONDS
Except as described below, the Bonds of each series will be issued as
physical certificates in fully registered form only in the denominations
specified in the related Prospectus Supplement, and will be transferrable and
exchangeable at the corporate trust office of the registrar (the "Bond
Registrar") named in the related Prospectus Supplement. No service charge will
be made for any registration of exchange or transfer of Bonds, but the Indenture
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. The term "Bondholder" or "Holder" as used herein refers to
the entity whose name appears on the records of the Bond Registrar (consisting
of or including the "Bond Register") as the registered holder of a Bond, except
as otherwise indicated in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, specified classes
of a series of Bonds will be initially issued through the book-entry facilities
of The Depository Trust Company ("DTC"). As to any such class of Bonds ("DTC
Registered Bonds"), the record Holder of such Bonds will be DTC's nominee. DTC
is a limited-purpose trust company organized under the laws of the State of New
York, which holds securities for its participating organizations
("Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in the
accounts of Participants. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. Other institutions that are not Participants but clear through or
maintain a custodial relationship with Participants (such institutions,
"Intermediaries") have indirect access to DTC's clearance system.
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No person acquiring an interest in any DTC Registered Bonds (each such
person, a "Beneficial Owner") will be entitled to receive a Bond representing
such interest in registered, certificated form, unless either (i) DTC ceases to
act as depository in respect thereof and a successor depository is not obtained,
or (ii) the Company elects in its sole discretion to discontinue the
registration of such Bonds through DTC. Prior to any such event, Beneficial
Owners will not be recognized by the Indenture Trustee or the Master Servicer as
Holders of the related Bonds for purposes of the related Indenture, and
Beneficial Owners will be able to exercise their rights as owners of such Bonds
only indirectly through DTC, Participants and Intermediaries. Any Beneficial
Owner that desires to purchase, sell or otherwise transfer any interest in DTC
Registered Bonds may do so only through DTC, either directly if such Beneficial
Owner is a Participant or indirectly through Participants and, if applicable,
Intermediaries. Pursuant to the procedures of DTC, transfers of the beneficial
ownership of any DTC Registered Bonds will be required to be made in minimum
denominations specified in the related Prospectus Supplement. The ability of a
Beneficial Owner to pledge DTC Registered Bonds to persons or entities that are
not Participants in the DTC system, or to otherwise act with respect to such
Bonds, may be limited because of the lack of physical certificates evidencing
such Bonds and because DTC may act only on behalf of Participants.
Distributions in respect of the DTC Registered Bonds will be forwarded
by the Indenture Trustee or other specified person to DTC, and DTC will be
responsible for forwarding such payments to Participants, each of which will be
responsible for disbursing such payments to the Beneficial Owners it represents
or, if applicable, to Intermediaries. Accordingly, Beneficial Owners may
experience delays in the receipt of payments in respect of their Bonds. Under
DTC's procedures, DTC will take actions permitted to be taken by Holders of any
class of DTC Registered Bonds under the Indenture only at the direction of one
or more Participants to whose account the DTC Registered Bonds are credited and
whose aggregate holdings represent no less than any minimum amount of Percentage
Interests required therefor. DTC may take conflicting actions with respect to
any action of Holders of Bonds of any Class to the extent that Participants
authorize such actions. None of the Master Servicer, the Company, the Indenture
Trustee or any of their respective affiliates will have any liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the DTC Registered Bonds, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
ASSIGNMENT OF TRUST FUND ASSETS
At the time of issuance of a series of Bonds, the Company will assign,
or cause to be assigned, to the related Indenture Trustee (or its nominee),
without recourse, the Mortgage Loans being included in the related Trust Fund,
together with all principal and interest received on or with respect to such
Mortgage Loans after the Cut-off Date, other than principal and interest due on
or before the Cut-off Date. If specified in the related Prospectus Supplement,
the Company or any of its affiliates may retain the Spread, if any, for itself
or transfer the same to others. Each Mortgage Loan will be identified in a
schedule appearing as an exhibit to the related Servicing Agreement. Such
schedule will include, among other things, information as to the principal
balance of each Mortgage Loan in the related Trust Fund as of the Cut-off Date,
as well as information respecting the Mortgage Rate, the currently scheduled
monthly payment of principal and interest, the maturity of the Mortgage Note and
the Loan-to-Value Ratio at origination or modification (without regard to any
secondary financing).
As to each series of Bonds, the foregoing assignment of the Mortgage
Loans to the Indenture Trustee will be made for the purpose of granting a
security interest in the Mortgage Loans to the Indenture Trustee to secure the
Bonds. As to any series of Bonds where the Issuer is an owner trust, immediately
prior to such pledge to the Indenture Trustee, the Company will convey the
Mortgage Loans to the Owner Trustee pursuant to the Trust Agreement.
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In addition, the Company will, as to each Mortgage Loan (other than
Contracts), deliver, or cause to be delivered, to the related Indenture Trustee
(or to the custodian described below) the Mortgage Note endorsed, without
recourse, either in blank or to the order of the Indenture Trustee (or a nominee
thereof), the Mortgage with evidence of recording indicated thereon (except for
any Mortgage not returned from the public recording office), an assignment of
the Mortgage in blank or to the Indenture Trustee (or a nominee thereof) in
recordable form, together with any intervening assignments of the Mortgage with
evidence of recording thereon (except for any such assignment not returned from
the public recording office), and, if applicable, any riders or modifications to
such Mortgage Note and Mortgage, together with certain other documents at such
times as set forth in the related Servicing Agreement. Such assignments may be
blanket assignments covering Mortgages on Mortgaged Properties located in the
same county, if permitted by law. Notwithstanding the foregoing, a Trust Fund
may include Mortgage Loans where the original Mortgage Note is not delivered to
the Indenture Trustee if the Company delivers, or causes to be delivered, to the
related Indenture Trustee (or the custodian) a copy or a duplicate original of
the Mortgage Note, together with an affidavit certifying that the original
thereof has been lost or destroyed. In addition, if the Company cannot deliver,
with respect to any Mortgage Loan, the Mortgage or any intervening assignment
with evidence of recording thereon concurrently with the execution and delivery
of the related Servicing Agreement because of a delay caused by the public
recording office, the Company will deliver, or cause to be delivered, to the
related Indenture Trustee (or the custodian) a true and correct photocopy of
such Mortgage or assignment as submitted for recording. The Company will
deliver, or cause to be delivered, to the related Indenture Trustee (or the
custodian) such Mortgage or assignment with evidence of recording indicated
thereon after receipt thereof from the public recording office. If the Company
cannot deliver, with respect to any Mortgage Loan, the Mortgage or any
intervening assignment with evidence of recording thereon concurrently with the
execution and delivery of the related Servicing Agreement because such Mortgage
or assignment has been lost, the Company will deliver, or cause to be delivered,
to the related Indenture Trustee (or the custodian) a true and correct photocopy
of such Mortgage or assignment with evidence of recording thereon. Assignments
of the Mortgage Loans to the Indenture Trustee (or a nominee thereof) will be
recorded in the appropriate public recording office, except in states where, in
the opinion of counsel acceptable to the Indenture Trustee, such recording is
not required to protect the Indenture Trustee's interests in the Mortgage Loan
against the claim of any subsequent transferee or any successor to or creditor
of the Company or the originator of such Mortgage Loan, or except as otherwise
specified in the related Prospectus Supplement as to any series of Bonds. In
addition, unless specified in the related Prospectus Supplement, the Company
will, as to each Contract, deliver, or cause to be delivered, the original
Contract endorsed, without recourse, to the order of the Indenture Trustee and
copies of documents and instruments related to the Contract and the security
interest in the Manufactured Home securing the Contract, together with a blanket
assignment to the Indenture Trustee of all Contracts in the related Trust Fund
and such documents and instruments. In order to give notice of the right, title
and interest of the Bondholders to the Contracts, the Company will cause to be
executed and delivered to the Indenture Trustee a UCC-1 financing statement
identifying the Indenture Trustee as the secured party and identifying all
Contracts as collateral.
The Indenture Trustee (or the custodian hereinafter referred to) will
hold such documents in trust for the benefit of the related Securityholders, and
generally will review such documents within 90 days after receipt thereof in the
case of documents delivered concurrently with the execution and delivery of the
related Indenture, and within the time period specified in the related Indenture
in the case of all other documents delivered. If any such document is found to
be missing or defective in any material respect, the Indenture Trustee (or such
custodian) will be required to promptly so notify the Master Servicer, the
Company, and the related Seller. If the related Seller does not cure the
omission or defect within a specified period after notice is given thereto by
the Indenture Trustee, and such omission or defect materially and adversely
affects the interests of Securityholders in the affected Mortgage Loan, then the
related Seller will be obligated to purchase such Mortgage Loan from the
Indenture Trustee at its Purchase Price (or, if and to the extent it would
otherwise be permitted to do so for a breach of representation and
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warranty as described under "The Mortgage Pools--Representations of Sellers," to
substitute for such Mortgage Loan). The Indenture Trustee will be obligated to
enforce this obligation of the Seller to the extent described above under "The
Mortgage Pools--Representations by Sellers," but there can be no assurance that
the applicable Seller will fulfill its obligation to purchase (or substitute
for) the affected Mortgage Loan as described above. Except as described in the
Prospectus Supplement, neither the Master Servicer nor the Company will be
obligated to purchase or substitute for such Mortgage Loan if the Seller
defaults on its obligation to do so. This purchase or substitution obligation
generally constitutes the sole remedy available to the related Securityholders
and the related Indenture Trustee for omission of, or a material defect in, a
constituent document. Any affected Mortgage Loan not so purchased or substituted
for shall remain in the related Trust Fund.
The Indenture Trustee will be authorized at any time to appoint one or
more custodians pursuant to a custodial agreement to hold title to the Mortgage
Loans in any Mortgage Pool, and to maintain possession of and, if applicable, to
review, the documents relating to such Mortgage Loans, in any case as the agent
of the Indenture Trustee. The identity of any such custodian to be appointed on
the date of initial issuance of the Bonds will be set forth in the related
Prospectus Supplement. Any such custodian may be an affiliate of the Company or
the Master Servicer.
With respect to the Mortgage Loans in a Mortgage Pool, except in the
case of a Designated Seller Transaction, the Company will make certain
representations and warranties as to the types and geographical concentrations
of such Mortgage Loans and as to the accuracy, in all material respects, of
certain identifying information furnished to the related Indenture Trustee in
respect of each such Mortgage Loan (E.G., original Loan-to-Value Ratio,
principal balance as of the Cut-off Date, Mortgage Rate and maturity). Upon a
breach of any such representation which materially and adversely affects the
interests of the Securityholders in a Mortgage Loan, the Company will be
obligated to cure the breach in all material respects, to purchase the Mortgage
Loan at its Purchase Price or, if specified in the related Prospectus
Supplement, to substitute for such Mortgage Loan a Qualified Substitute Mortgage
Loan in accordance with the provisions for such substitution by Affiliated
Sellers as described above under "The Mortgage Pools--Representations by
Sellers." However, the Company will not be required to repurchase or substitute
for any Mortgage Loan in connection with a breach of a representation and
warranty if the substance of any such breach also constitutes fraud in the
origination of the related Mortgage Loan. This purchase or substitution
obligation generally constitutes the sole remedy available to Securityholders or
the Indenture Trustee for such a breach of representation by the Company. Any
Mortgage Loan not so purchased or substituted for shall remain in the related
Trust Fund.
Pursuant to the related Servicing Agreement, the Master Servicer for
any Mortgage Pool, either directly or through Subservicers, will service and
administer the Mortgage Loans included in such Mortgage Pool and assigned to the
related Indenture Trustee as more fully set forth under "Servicing of Mortgage
Loans." The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Servicing Agreement.
COLLECTION ACCOUNT
GENERAL. The Master Servicer and/or the Indenture Trustee will, as to
each Trust Fund, establish and maintain or cause to be established and
maintained one or more separate accounts for the collection of payments on the
related Mortgage Loans constituting such Trust Fund (collectively, the
"Collection Account"), which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of Bonds
of the related series. A Collection Account may be maintained either as an
interest-bearing or a non-interest-bearing account, and the funds held therein
may be held as cash or invested in United States government securities and other
investment grade obligations specified in the related Servicing Agreement or
Indenture ("Permitted Investments"). Any interest or other income
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earned on funds in the Collection Account will be not paid to the related Master
Servicer or Indenture Trustee as additional compensation. If permitted by such
Rating Agency or Agencies and so specified in the related Prospectus Supplement,
a Collection Account may contain funds relating to more than one series of
mortgage pass-through certificates and may contain other funds representing
payments on mortgage loans owned by the related Master Servicer or serviced by
it on behalf of others.
DEPOSITS. The related Master Servicer, Indenture Trustee or Special
Servicer will be required to deposit or cause to be deposited in the Collection
Account for each Trust Fund within a certain period following receipt (in the
case of collections and payments), the following payments and collections
received, or advances made, by the Master Servicer, the Indenture Trustee or any
Special Servicer subsequent to the Cut-off Date with respect to the Mortgage
Loans in such Trust Fund (other than payments due on or before the Cut-off
Date):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage
Loans, including any default interest collected, in each case net of
any portion thereof retained by the Master Servicer, any Special
Servicer or Sub-Servicer as its servicing compensation or as
compensation to the Indenture Trustee, and further net of any Spread;
(iii) all proceeds received under any hazard, title, primary
mortgage, FHA or other insurance policy that provides coverage with
respect to a particular Mortgaged Property or the related Mortgage Loan
(other than proceeds applied to the restoration of the property or
released to the related borrower in accordance with the customary
servicing practices of the Master Servicer (or, if applicable, a
Special Servicer) and/or the terms and conditions of the related
Mortgage (collectively, "Insurance Proceeds") and all other amounts
received and retained in connection with the liquidation of defaulted
Mortgage Loans or property acquired in respect thereof, by foreclosure
or otherwise ("Liquidation Proceeds"), together with the net operating
income (less reasonable reserves for future expenses) derived from the
operation of any Mortgaged Properties acquired by the Trust Fund
through foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any
fund that constitutes credit enhancement for the related series of
Bonds as described under "Description of Credit Enhancement";
(v) any advances made as described under "--Advances" below;
(vi) any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid to Bondholders, as described
below;
(vii) all proceeds of any Mortgage Loan purchased (or, in the
case of a substitution, certain amounts representing a principal
adjustment) by the Master Servicer, the Company, a Seller or any other
person pursuant to the terms of the related Servicing Agreement as
described under "The Mortgage Pools--Representations by Sellers,"
"Servicing of Mortgage Loans--Realization Upon and Sale of Defaulted
Mortgage Loans," "--Assignment of Trust Fund Assets" above, "The
Servicing Agreement--Termination" and "Purchase Obligations";
(viii) any amounts paid by the Master Servicer to cover
Prepayment Interest Shortfalls arising out of the prepayment of
Mortgage Loans as described under "Servicing of Mortgage
Loans--Servicing and Other Compensation and Payment of Expenses;
Spread";
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(ix) to the extent that any such item does not constitute
additional servicing compensation to the Master Servicer or a Special
Servicer, any payments on account of modification or assumption fees,
late payment charges or Prepayment Premiums on the Mortgage Loans;
(x) any amount required to be deposited by the Master Servicer
or the Indenture Trustee in connection with losses realized on
investments for the benefit of the Master Servicer or the Indenture
Trustee, as the case may be, of funds held in the Collection Account;
and
(xi) any other amounts required to be deposited in the
Collection Account as provided in the related Servicing Agreement and
described herein or in the related Prospectus Supplement.
With respect to each Buydown Mortgage Loan, the Master Servicer will be
required to deposit the related Buydown Funds provided to it in a Buydown
Account which will comply with the requirements set forth herein with respect to
the Collection Account. The terms of all Buydown Mortgage Loans provide for the
contribution of Buydown Funds in an amount equal to or exceeding either (i) the
total payments to be made from such funds pursuant to the related buydown plan
or (ii) if such Buydown Funds are to be deposited on a discounted basis, that
amount of Buydown Funds which, together with investment earnings thereon at a
rate as will support the scheduled level of payments due under the Buydown
Mortgage Loan. Neither the Master Servicer nor the Company will be obligated to
add to any such discounted Buydown Funds any of its own funds should investment
earnings prove insufficient to maintain the scheduled level of payments. To the
extent that any such insufficiency is not recoverable from the Mortgagor or, in
an appropriate case, from the Seller, distributions to Bondholders may be
affected. With respect to each Buydown Mortgage Loan, the Master Servicer will
be required monthly to withdraw from the Buydown Account and deposit in the
Collection Account as described above the amount, if any, of the Buydown Funds
(and, if applicable, investment earnings thereon) for each Buydown Mortgage Loan
that, when added to the amount due from the Mortgagor on such Buydown Mortgage
Loan, equals the full monthly payment which would be due on the Buydown Mortgage
Loan if it were not subject to the buydown plan. The Buydown Funds will in no
event be a part of the related Trust Fund.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan
in its entirety during the Buydown Period, the Master Servicer will be required
to withdraw from the Buydown Account and remit to the Mortgagor or such other
designated party in accordance with the related buydown plan any Buydown Funds
remaining in the Buydown Account. If a prepayment by a Mortgagor during the
Buydown Period together with Buydown Funds will result in full prepayment of a
Buydown Mortgage Loan, the Master Servicer will generally be required to
withdraw from the Buydown Account and deposit in the Collection Account the
Buydown Funds and investment earnings thereon, if any, which together with such
prepayment will result in a prepayment in full; provided that Buydown Funds may
not be available to cover a prepayment under certain Mortgage Loan programs. Any
Buydown Funds so remitted to the Master Servicer in connection with a prepayment
described in the preceding sentence will be deemed to reduce the amount that
would be required to be paid by the Mortgagor to repay fully the related
Mortgage Loan if the Mortgage Loan were not subject to the buydown plan. Any
investment earnings remaining in the Buydown Account after prepayment or after
termination of the Buydown Period will be remitted to the related Mortgagor or
such other designated party pursuant to the agreement relating to each Buydown
Mortgage Loan (the "Buydown Agreement"). If the Mortgagor defaults during the
Buydown Period with respect to a Buydown Mortgage Loan and the property securing
such Buydown Mortgage Loan is sold in liquidation (either by the Master
Servicer, the Primary Insurer, the insurer under the Mortgage Pool Insurance
Policy (the "Pool Insurer") or any other insurer), the Master Servicer will be
required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and either deposit the same in the
Collection Account or, alternatively, pay the same to the Primary Insurer or the
Pool Insurer, as the case may be, if the Mortgaged Property is transferred to
such insurer and such insurer pays all of the loss incurred in respect of such
default.
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WITHDRAWALS. A Master Servicer, Indenture Trustee or Special Servicer
may make withdrawals from the Collection Account for each Trust Fund for any of
the following purposes:
(i) to make distributions to the related Securityholders on
each Distribution Date;
(ii) to reimburse the Master Servicer or any other specified
person for unreimbursed amounts advanced by it as described under
"--Advances" below in respect of Mortgage Loans in the Trust Fund, such
reimbursement to be made out of amounts received which were identified
and applied by the Master Servicer as late collections of interest (net
of related servicing fees) on and principal of the particular Mortgage
Loans with respect to which the advances were made or out of amounts
drawn under any form of credit enhancement with respect to such
Mortgage Loans;
(iii) to reimburse the Master Servicer or a Special Servicer
for unpaid servicing fees earned by it and certain unreimbursed
servicing expenses incurred by it with respect to Mortgage Loans in the
Trust Fund and properties acquired in respect thereof, such
reimbursement to be made out of amounts that represent Liquidation
Proceeds and Insurance Proceeds collected on the particular Mortgage
Loans and properties, and net income collected on the particular
properties, with respect to which such fees were earned or such
expenses were incurred or out of amounts drawn under any form of credit
enhancement with respect to such Mortgage Loans and properties;
(iv) to reimburse the Master Servicer or any other specified
person for any advances described in clause (ii) above made by it and
any servicing expenses referred to in clause (iii) above incurred by it
which, in the good faith judgment of the Master Servicer or such other
person, will not be recoverable from the amounts described in clauses
(ii) and (iii), respectively, such reimbursement to be made from
amounts collected on other Mortgage Loans in the Trust Fund or, if and
to the extent so provided by the related Servicing Agreement and
described in the related Prospectus Supplement, only from that portion
of amounts collected on such other Mortgage Loans that is otherwise
distributable on one or more classes of Subordinate Bonds of the
related series;
(v) if and to the extent described in the related
Prospectus Supplement, to pay the Master Servicer, a Special Servicer
or another specified entity (including a provider of credit
enhancement) interest accrued on the advances described in clause (ii)
above made by it and the servicing expenses described in clause (iii)
above incurred by it while such remain outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the Trust
Fund for environmental site assessments performed with respect to
Multifamily Properties that constitute security for defaulted Mortgage
Loans, and for any containment, clean-up or remediation of hazardous
wastes and materials present on such Mortgaged Properties, as described
under "Servicing of Mortgage Loans--Realization Upon Defaulted Mortgage
Loans";
(vii) to reimburse the Master Servicer, the Company, or any
of their respective directors, officers, employees and agents, as the
case may be, for certain expenses, costs and liabilities incurred
thereby, as and to the extent described under "The Servicing
Agreement--Certain Matters Regarding the Master Servicer and the
Company";
(viii) if and to the extent described in the related
Prospectus Supplement, to pay the fees of the Owner Trustee and the
Indenture Trustee;
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(ix) to reimburse the Owner Trustee or the Indenture Trustee
or any of its directors, officers, employees and agents, as the case
may be, for certain expenses, costs and liabilities incurred thereby,
as and to the extent described under "The Agreements";
(x) if specified in the related Prospectus Supplement, to
pay the Master Servicer or the Indenture Trustee, as additional
compensation, interest and investment income earned in respect of
amounts held in the Collection Account;
(xi) to pay (generally from related income) for costs
incurred in connection with the operation, management and maintenance
of any Mortgaged Property acquired by the Trust Fund by foreclosure or
otherwise;
(xii) to pay for the cost of an independent appraiser or
other expert in real estate matters retained to determine a fair sale
price for a defaulted Mortgage Loan or a property acquired in respect
thereof in connection with the liquidation of such Mortgage Loan or
property;
(xiii) to pay for the cost of various opinions of counsel
obtained pursuant to the related Indenture for the benefit of the
related Bondholders;
(xiv) to pay to itself, the Company, a Seller or any other
appropriate person all amounts received with respect to each Mortgage
Loan purchased, repurchased or removed from the Trust Fund pursuant to
the terms of the related Servicing Agreement and not required to be
distributed as of the date on which the related Purchase Price is
determined;
(xv) to make any other withdrawals permitted by the related
Servicing Agreement and described in the related Prospectus Supplement;
and
(xvi) to clear and terminate the Collection Account upon the
termination of the Trust Fund.
DISTRIBUTIONS
Distributions on the Bonds of each series will be made by or on behalf
of the related Indenture Trustee or Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date. The "Available Distribution
Amount" for any series of Bonds and any Distribution Date will generally refer
to the total of all payments or other collections (or advances in lieu thereof)
on, under or in respect of the Mortgage Loans and any other Trust Fund Assets
included in the related Trust Fund that are available for distribution to the
Bondholders of such series on such date. The particular components of the
Available Distribution Amount for any series on each Distribution Date will be
more specifically described in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Bonds of each series (other than the final distribution in
retirement of any such Bond) will be made to the persons in whose names such
Bonds are registered at the close of business on the last business day of the
month preceding the month in which the applicable Distribution Date occurs (the
"Record Date"), and the amount of each distribution will be determined as of the
close of business on the date (the "Determination Date") specified in the
related Prospectus Supplement. All distributions with respect to each class of
Bonds on each Distribution Date will be allocated PRO RATA among the outstanding
Bonds in such class. Payments will be made either by wire transfer in
immediately available funds to the account of a Bondholder at a bank or other
entity having appropriate facilities therefor, if such Bondholder has provided
the Indenture
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Trustee or other person required to make such payments with wiring instructions
no later than five business days prior to the related Record Date or such other
date specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, such Bondholder holds Bonds in the requisite
amount or denomination specified therein), or by check mailed to the address of
such Bondholder as it appears on the Bond Register; provided, however, that the
final distribution in retirement of any class of Bonds will be made only upon
presentation and surrender of such Bonds at the location specified in the notice
to Bondholders of such final distribution. Payments will be made to each
Bondholder in accordance with such holder's Percentage Interest in a particular
class. The ("Percentage Interest") represented by a Bond of a particular class
will be equal to the percentage obtained by dividing the initial principal
balance or notional amount of such Bond by the aggregate initial amount or
notional balance of all the Bonds of such class. In addition, amounts remaining
in the Payment Account on each Payment Date after payments on the Bonds will be
applied for the purposes set forth in the Agreements, as described in the
related Prospectus Supplement, including distributions on the related
Certificates or release to the Company. Any amounts so distributed on the
Certificates or released to the Company will be released from the lien of the
Indenture.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE BONDS
Each class of Bonds of each series may have a different Interest Rate,
which may be fixed, variable or adjustable, or any combination of two or more
such rates. The related Prospectus Supplement will specify the Interest Rate or,
in the case of a variable or adjustable Interest Rate, the method for
determining the Interest Rate, for each class. Interest on the Bonds of each
series will be calculated on the basis of a specified period (generally one
month) and a 360-day year.
Distributions of interest in respect of the Bonds of any class (other
than any class of Accrual Bonds and other than any class of Strip Bonds that is
not entitled to any distributions of interest) will be made on each Distribution
Date based on the Accrued Bond Interest for such class and such Distribution
Date, subject to the sufficiency of the portion of the Available Distribution
Amount allocable to such class on such Distribution Date. Prior to the time
interest is distributable on any class of Accrual Bonds, the amount of Accrued
Bond Interest otherwise distributable on such class will be added to the
principal balance thereof on each Distribution Date. With respect to each class
of Bonds (other than certain classes of Strip Bonds), "Accrued Bond Interest"
for each Distribution Date will be equal to interest at the applicable Interest
Rate accrued for a specified period (generally one month) on the outstanding
principal balance thereof immediately prior to such Distribution Date. Accrued
Bond Interest for each Distribution Date on Strip Bonds entitled to
distributions of interest will be similarly calculated except that it will
accrue on a notional amount that is either (i) based on the principal balances
of some or all of the Mortgage Loans in the related Trust Fund or (ii) equal to
the principal balances of one or more other classes of Bonds of the same series.
Reference to such a notional amount with respect to a class of Strip Bonds is
solely for convenience in making certain calculations and does not represent the
right to receive any distribution of principal. If so specified in the related
Prospectus Supplement, the amount of Accrued Bond Interest that is otherwise
distributable on (or, in the case of Accrual Bonds, that may otherwise be added
to the principal balance of) one or more classes of the Bonds of a series will
be reduced to the extent that any Prepayment Interest Shortfalls, as described
under "Yield Considerations", exceed the amount of any sums (including, if and
to the extent specified in the related Prospectus Supplement, the Master
Servicer's servicing compensation) that are applied to offset such shortfalls.
The particular manner in which such shortfalls will be allocated among some or
all of the classes of Bonds of that series will be specified in the related
Prospectus Supplement. The related Prospectus Supplement will also describe the
extent to which the amount of Accrued Bond Interest that is otherwise
distributable on (or, in the case of Accrual Bonds, that may otherwise be added
to the principal balance of) a class of Bonds may be reduced as a result of any
other contingencies, including delinquencies, losses and Deferred Interest on or
in respect of the related Mortgage Loans or application of the Relief Act with
respect to such Mortgage Loans. Any reduction in
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the amount of Accrued Bond Interest otherwise distributable on a class of Bonds
by reason of the allocation to such class of a portion of any Deferred Interest
on or in respect of the related Mortgage Loans will result in a corresponding
increase in the principal balance of such class.
As and to the extent described in the related Prospectus Supplement,
distributions of principal with respect to a series of Bonds will be made on
each Distribution Date to the holders of the class or classes of Bonds of such
series entitled thereto until the principal balance(s) of such Bonds have been
reduced to zero. In the case of a series of Bonds which includes two or more
classes of Bonds, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Bonds or Subordinate Bonds), shall be as set
forth in the related Prospectus Supplement. Distributions of principal with
respect to one or more classes of Bonds may be made at a rate that is faster
(and, in some cases, substantially faster) than the rate at which payments or
other collections of principal are received on the Mortgage Loans in the related
Trust Fund, may not commence until the occurrence of certain events, such as the
retirement of one or more other classes of Bonds of the same series, or may be
made at a rate that is slower (and, in some cases, substantially slower) than
the rate at which payments or other collections of principal are received on
such Mortgage Loans. In addition, distributions of principal with respect to one
or more classes of Bonds may be made, subject to available funds, based on a
specified principal payment schedule and, with respect to one or more classes of
Bonds, may be contingent on the specified principal payment schedule for another
class of the same series and the rate at which payments and other collections of
principal on the Mortgage Loans in the related Trust Fund are received.
FUNDING ACCOUNT
If so specified in the related Prospectus Supplement, the Trust
Agreement or other agreement may provide for the transfer by the Sellers of
additional Mortgage Loans to the related Trust after the Closing Date. Such
additional Mortgage Loans will be required to conform to the requirements set
forth in the related Agreement or other agreement providing for such transfer,
and will generally be underwritten to the same standards as the Mortgage Loans
initially included in the Trust Fund. As specified in the related Prospectus
Supplement, such transfer may be funded by the establishment of a Funding
Account (a "Funding Account"). If a Funding Account is established, all or a
portion of the proceeds of the sale of one or more classes of Bonds of the
related series will be deposited in such account to be released as additional
Mortgage Loans are transferred. A Funding Account will be required to be
maintained as an Eligible Account, all amounts therein will be required to be
invested in Permitted Investments and the amount held therein shall at no time
exceed 25% of the aggregate outstanding principal balance of the Bonds. The
related Agreement or other agreement providing for the transfer of additional
Mortgage Loans will generally provide that all such transfers must be made
within 3 months after the Closing Date, and that amounts set aside to fund such
transfers (whether in a Funding Account or otherwise) and not so applied within
the required period of time will be deemed to be principal prepayments and
applied in the manner set forth in such Prospectus Supplement.
The Company will be required to provide data regarding the additional
Mortgage Loans to the Rating Agencies and the Credit Enhancer, if any,
sufficiently in advance of the scheduled transfer to permit review by such
parties. Transfer of the additional Mortgage Loans will be further conditioned
upon confirmation by the Rating Agencies that the addition of such Mortgage
Loans to the Trust Fund will not result in the downgrading of the Bonds or, in
the case of a series guaranteed or supported by a Credit Enhancer, will not
adversely affect the capital requirements of such Credit Enhancer. Finally, a
legal opinion to the effect that the conditions to the transfer of the
additional Mortgage Loans have been satisfied.
DISTRIBUTIONS ON THE BONDS IN RESPECT OF PREPAYMENT PREMIUMS
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If so provided in the related Prospectus Supplement, Prepayment
Premiums received on or in connection with the Mortgage Assets in any Trust Fund
will be distributed on each Distribution Date to the holders of the class of
Bonds of the related series entitled thereto in accordance with the provisions
described in such Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Loans in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of credit enhancement or by
overcollateralization) will be allocated among the respective classes of Bonds
of the related series in the priority and manner, and subject to the
limitations, specified in the related Prospectus Supplement. As described in the
related Prospectus Supplement, such allocations may result in reductions in the
entitlements to interest and/or principal balances of one or more such classes
of Bonds, or may be effected simply by a prioritization of payments among such
classes of Bonds.
ADVANCES
If and to the extent provided in the related Prospectus Supplement, and
subject to any limitations specified therein, the related Master Servicer may be
obligated to advance, or have the option of advancing, on or before each
Distribution Date, from its or their own funds or from excess funds held in the
related Collection Account that are not part of the Available Distribution
Amount for the related series of Bonds for such Distribution Date, an amount up
to the aggregate of any payments of principal (other than the principal portion
of any Balloon Payments) and interest that were due on or in respect of such
Mortgage Loans during the related Due Period and were delinquent on the related
Determination Date. A "Due Period" is the period between Distribution Dates, and
scheduled payments on the Mortgage Loans in any Trust Fund that became due
during a given Due Period will, to the extent received by the related
Determination Date or advanced by the related Master Servicer or other specified
person, be distributed on the Distribution Date next succeeding such
Determination Date.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Bonds entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made from the Master Servicer's own funds will be reimbursable out of
related recoveries on the Mortgage Loans (including amounts received under any
fund or instrument constituting credit enhancement) respecting which such
advances were made (as to any Mortgage Loan, "Related Proceeds") and such other
specific sources as may be identified in the related Prospectus Supplement,
including in the case of a series that includes one or more classes of
Subordinate Bonds, collections on other Mortgage Loans in the related Trust Fund
that would otherwise be distributable to the holders of one or more classes of
such Subordinate Bonds. No advance will be required to be made by the Master
Servicer if, in the good faith judgment of the Master Servicer, such advance
would not be recoverable from Related Proceeds or another specifically
identified source (any such advance, a "Nonrecoverable Advance"); and, if
previously made by a Master Servicer, a Nonrecoverable Advance will be
reimbursable from any amounts in the related Collection Account prior to any
distributions being made to the related series of Securities.
If advances have been made from excess funds in a Collection Account,
the Master Servicer that advanced such funds will be required to replace such
funds in the Collection Account on any future Distribution Date to the extent
that funds then in the Collection Account are insufficient to permit full
distributions to Securityholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer to make advances may
be secured by a cash advance reserve fund or a surety bond. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
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If any person other than the Master Servicer has any obligation to make
advances as described above, the related Prospectus Supplement will identify
such person.
If and to the extent so provided in the related Prospectus Supplement,
any entity making advances will be entitled to receive interest thereon for the
period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to Securityholders or as otherwise
provided in the related Indenture and described in such Prospectus Supplement.
REPORTS TO BONDHOLDERS
With each distribution to Bondholders of a particular class of Bonds,
the related Master Servicer or Indenture Trustee will forward or cause to be
forwarded to each holder of record of such class of Bonds a statement or
statements with respect to the related Trust Fund setting forth the information
specifically described in the related Indenture, which generally will include
the following as applicable except as otherwise provided therein:
(i) the amount, if any, of such distribution allocable to
principal;
(ii) the amount, if any, of such distribution allocable to
interest;
(iii) the amount, if any, of such distribution allocable to
Prepayment Premiums;
(iv) with respect to a series consisting of two or more
classes, the outstanding principal balance or notional amount of each
class after giving effect to the distribution of principal on such
Distribution Date;
(v) the amount of servicing compensation received by the
related Master Servicer (and, if payable directly out of the related
Trust Fund, by any Special Servicer and any Sub-Servicer);
(vi) the aggregate amount of advances included in the
distributions on such Distribution Date, and the aggregate amount of
unreimbursed advances at the close of business on such Distribution
Date;
(vii) the aggregate principal balance of the Mortgage Loans in
the related Mortgage Pool on, or as of a specified date shortly prior
to, such Distribution Date;
(viii) the number and aggregate principal balance of any
Mortgage Loans in the related Mortgage Pool in respect of which (A) one
scheduled payment is delinquent, (B) two scheduled payments are
delinquent, (C) three or more scheduled payments are delinquent and (D)
foreclosure proceedings have been commenced;
(ix) the book value of any real estate acquired by such Trust
Fund through foreclosure or grant of a deed in lieu of foreclosure;
(x) the balance of the Reserve Fund, if any, at the close of
business on such Distribution Date;
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(xi) the amount of coverage under any Financial Guaranty
Insurance Policy, Letter of Credit or Mortgage Pool Insurance Policy
covering default risk as of the close of business on the applicable
Determination Date and a description of any credit enhancement
substituted therefor;
(xii) the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
Distribution Date and a description of any change in the calculation of
such amounts; and
(xiii) in the case of Bonds benefiting from alternative credit
enhancement arrangements described in a Prospectus Supplement, the
amount of coverage under such alternative arrangements as of the close
of business on the applicable Determination Date.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per minimum denomination
of the relevant class of Bonds or per a specified portion of such minimum
denomination. In addition to the information described above, reports to
Bondholders will contain such other information as is set forth in the
applicable Indenture, which may include, without limitation, prepayments,
reimbursements to Subservicers and the Master Servicer and losses borne by the
related Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or Indenture Trustee will furnish a report to
each holder of record of a class of Bonds at any time during such calendar year
which, among other things, will include information as to the aggregate of
amounts reported pursuant to subclauses (i)-(iii) above for such calendar year
or, in the event such person was a holder of record of a class of Bonds during a
portion of such calendar year, for the applicable portion of such a year.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Credit support with respect to the Bonds of each series may be
comprised of one or more of the following components. Each component will have a
dollar limit and will provide coverage with respect to certain losses on the
related Mortgage Loans (as more particularly described in the related Prospectus
Supplement, "Realized Losses") that are (i) attributable to the Mortgagor's
failure to make any payment of principal or interest as required under the
Mortgage Note, but not including Special Hazard Losses, Extraordinary Losses or
other losses resulting from damage to a Mortgaged Property, Bankruptcy Losses or
Fraud Losses (any such loss, a "Defaulted Mortgage Loss"); (ii) of a type
generally covered by a Special Hazard Insurance Policy (as defined below) (any
such loss, a "Special Hazard Loss"); (iii) attributable to certain actions which
may be taken by a bankruptcy court in connection with a Mortgage Loan, including
a reduction by a bankruptcy court of the principal balance of or the Mortgage
Rate on a Mortgage Loan or an extension of its maturity (any such loss, a
"Bankruptcy Loss"); and (iv) incurred on defaulted Mortgage Loans as to which
there was fraud in the origination of such Mortgage Loans (any such loss, a
"Fraud Loss"). Defaulted Mortgage Losses, Special Hazard Losses, Bankruptcy
Losses and Fraud Losses in excess of the amount of coverage provided therefor
and losses occasioned by war, civil insurrection, certain governmental actions,
nuclear reaction and certain other risks ("Extraordinary Losses") will generally
not be covered. To the extent that the credit support for the Bonds of any
series is exhausted, the holders thereof will bear all further risks of loss not
otherwise insured against.
As set forth below and in the applicable Prospectus Supplement, (i)
coverage with respect to Defaulted Mortgage Losses may be provided by one or
more of a Financial Guaranty Insurance Policy,
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a Letter of Credit or a Mortgage Pool Insurance Policy, (ii) coverage with
respect to Special Hazard Losses may be provided by one or more of a Financial
Guaranty Insurance Policy, a Letter of Credit or a Special Hazard Insurance
Policy (any instrument, to the extent providing such coverage, a "Special Hazard
Instrument"), (iii) coverage with respect to Bankruptcy Losses may be provided
by one or more of a Financial Guaranty Insurance Policy, Letter of Credit or a
Bankruptcy Bond and (iv) coverage with respect to Fraud Losses may be provided
by one or more of a Financial Guaranty Insurance Policy, Letter of Credit,
Mortgage Pool Insurance Policy or mortgage repurchase bond. In addition, if
provided in the applicable Prospectus Supplement, in lieu of or in addition to
any or all of the foregoing arrangements, credit enhancement may be in the form
of a Reserve Fund to cover such losses, in the form of subordination provided by
one or more classes of Subordinate Bonds to provide credit support to one or
more classes of Senior Bonds, or in the form of Overcollateralization, or in the
form of a specified entity's agreement to repurchase certain Mortgage Loans or
fund certain losses pursuant to a Purchase Obligation, which obligations may be
supported by a Letter of Credit, surety bonds or other types of insurance
policies, certain other secured or unsecured corporate guarantees or in such
other form as may be described in the related Prospectus Supplement, or in the
form of a combination of two or more of the foregoing. The credit support may be
provided by an assignment of the right to receive certain cash amounts, a
deposit of cash into a Reserve Fund or other pledged assets, or by banks,
insurance companies, guarantees or any combination thereof identified in the
applicable Prospectus Supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to the Bonds of each series will
be set forth in the related Prospectus Supplement. To the extent provided in the
applicable Prospectus Supplement and the Indenture, the credit enhancement
arrangements may be periodically modified, reduced and substituted for based on
the aggregate outstanding principal balance of the Mortgage Loans covered
thereby. See "Description of Credit Enhancement--Reduction or Substitution of
Credit Enhancement." If specified in the applicable Prospectus Supplement,
credit support for the Bonds of one series may cover the Bonds of one or more
other series.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which are available upon request.
FINANCIAL GUARANTY INSURANCE POLICY
If so specified in the related Prospectus Supplement, a financial
guaranty insurance policy or surety bond (a "Financial Guaranty Insurance
Policy") may be obtained and maintained for a class or series of Bonds. The
issuer of the Financial Guaranty Insurance Policy (the "Insurer") will be
described in the related Prospectus Supplement and a copy of the form of
Financial Guaranty Insurance Policy will be filed with the related Current
Report on Form 8-K.
A Financial Guaranty Insurance Policy will be unconditional and
irrevocable and will guarantee to holders of the applicable Bonds that an amount
equal to the full amount of payments due to such holders will be received by the
Indenture Trustee or its agent on behalf of such holders for payment on each
Payment Date. The specific terms of any Financial Guaranty Insurance Policy will
be set forth in the related Prospectus Supplement. A Financial Guaranty
Insurance Policy may have limitations and generally will not insure the
obligation of the Sellers or the Master Servicer to purchase or substitute for a
defective Mortgage Loan and will not guarantee any specific rate of principal
prepayments. The Insurer will be subrogated to the rights of each holder to the
extent the Insurer makes payments under the Financial Guaranty Insurance Policy.
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SUBORDINATE BONDS
If so specified in the related Prospectus Supplement, one or more
classes of Bonds of a series may be Subordinate Bonds. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Bonds to receive distributions from the Collection Account on any Distribution
Date will be subordinated to the corresponding rights of the holders of Senior
Bonds. If so provided in the related Prospectus Supplement, the subordination of
a class may apply only in the event of (or may be limited to) certain types of
losses or shortfalls. The related prospectus Supplement will set forth
information concerning the manner and amount of subordination provided by a
class or classes of Subordinate Bonds in a series and the circumstances under
which such subordination will be available. The Bonds of any series may include
one or more classes of Subordinate Bonds.
If the Mortgage Loans in any Trust Fund are divided into separate
groups, each supporting a separate class or classes of Bonds of the related
series, credit enhancement may be provided by crosssupport provisions requiring
that distributions be made on Senior Bonds evidencing interests in one group of
Mortgage Loans prior to distributions on Subordinate Bonds evidencing interests
in a different group of Mortgage Loans within the Trust Fund. The Prospectus
Supplement for a series that includes a crosssupport provision will describe the
manner and conditions for applying such provisions.
LETTER OF CREDIT
If any component of credit enhancement as to the Bonds of any series is
to be provided by a letter of credit (the "Letter of Credit"), a bank (the
"Letter of Credit Bank") will deliver to the related Indenture Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the Mortgage Loans or, if specified in the related Prospectus
Supplement, support an entity's obligation pursuant to a Purchase Obligation to
make certain payments to the related Indenture Trustee with respect to one or
more components of credit enhancement. The Letter of Credit Bank, as well as the
amount available under the Letter of Credit with respect to each component of
credit enhancement, will be specified in the applicable Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Letter of Credit may
permit draws only in the event of certain types of losses and shortfalls. The
Letter of Credit may also provide for the payment of advances which the Master
Servicer would be obligated to make with respect to delinquent monthly mortgage
payments. The amount available under the Letter of Credit will, in all cases, be
reduced to the extent of the unreimbursed payments thereunder and may otherwise
be reduced as described in the related Prospectus Supplement. The Letter of
Credit will expire on the expiration date set forth in the related Prospectus
Supplement, unless earlier terminated or extended in accordance with its terms.
MORTGAGE POOL INSURANCE POLICIES
Any Mortgage Pool Insurance Policy obtained by the Company for each
Trust Fund will be issued by the Pool Insurer named in the applicable Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to the limitations
described below, cover Defaulted Mortgage Losses in an amount equal to a
percentage specified in the applicable Prospectus Supplement of the aggregate
principal balance of the Mortgage Loans on the Cut-off Date. As set forth under
"Maintenance of Credit Enhancement," the Master Servicer will use reasonable
efforts to maintain the Mortgage Pool Insurance Policy and to present claims
thereunder to the Pool Insurer on behalf of itself, the related Indenture
Trustee and the related Bondholders. The Mortgage Pool Insurance Policies,
however, are not blanket policies against loss, since claims thereunder may only
be made respecting particular defaulted Mortgage Loans and only upon
satisfaction of certain conditions precedent described below. Unless specified
in the related Prospectus
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Supplement, the Mortgage Pool Insurance Policies may not cover losses due to a
failure to pay or denial of a claim under a Primary Insurance Policy,
irrespective of the reason therefor.
Each Mortgage Pool Insurance Policy will generally provide that no
claims may be validly presented thereunder unless, among other things, (i) any
required Primary Insurance Policy is in effect for the defaulted Mortgage Loan
and a claim thereunder has been submitted and settled, (ii) hazard insurance on
the property securing such Mortgage Loan has been kept in force and real estate
taxes and other protection and preservation expenses have been paid by the
Master Servicer, (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its condition (reasonable wear and
tear excepted) at the Cut-off Date and (iv) the insured has acquired good and
merchantable title to the Mortgaged Property free and clear of liens except
certain permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Mortgage Loan at a price equal to the principal balance thereof plus
accrued and unpaid interest at the applicable Mortgage Rate to the date of
purchase and certain expenses incurred by the Master Servicer, Special Servicer
or Subservicer on behalf of the related Indenture Trustee and Bondholders, or
(b) to pay the amount by which the sum of the principal balance of the defaulted
Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under any related Primary
Insurance Policy. Bondholders will experience a shortfall in the amount of
interest payable on the related Bonds in connection with the payment of claims
under a Mortgage Pool Insurance Policy because the Pool Insurer is only required
to remit unpaid interest through the date a claim is paid rather than through
the end of the month in which such claim is paid. In addition, the Bondholders
will also experience losses with respect to the related Bonds in connection with
payments made under a Mortgage Pool Insurance Policy to the extent that the
Master Servicer expends funds to cover unpaid real estate taxes or to repair the
related Mortgaged Property in order to make a claim under a Mortgage Pool
Insurance Policy, as those amounts will not be covered by payments under such
policy and will be reimbursable to the Master Servicer from funds otherwise
payable to the Bondholders. If any Mortgaged Property securing a defaulted
Mortgage Loan is damaged and proceeds, if any (see "Special Hazard Insurance
Policies" below for risks which are not covered by such policies), from the
related hazard insurance policy or applicable Special Hazard Instrument are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the Mortgage Pool Insurance Policy, the Master Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (x) that such restoration will increase the proceeds to one or more
classes of Bondholders on liquidation of the Mortgage Loan after reimbursement
of the Master Servicer for its expenses and (y) that such expenses will be
recoverable by it through Liquidation Proceeds or Insurance Proceeds.
A Mortgage Pool Insurance Policy (and certain Primary Insurance
Policies) will likely not insure against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
Seller or other persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications.
Depending upon the nature of the event, a breach of representation made by a
Seller may also have occurred. Such a breach, if it materially and adversely
affects the interests of Bondholders and cannot be cured, would give rise to a
purchase obligation on the part of the Seller, as more fully described under
"The Mortgage Pools--Representations by Sellers." However, such an event would
not give rise to a breach of a representation and warranty or a purchase
obligation on the part of the Company or Master Servicer.
The original amount of coverage under each Mortgage Pool Insurance
Policy will be reduced over the life of the related series of Bonds by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties. The
amount of
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claims paid includes certain expenses incurred by the Master Servicer, Special
Servicer or Subservicer as well as accrued interest on delinquent Mortgage Loans
to the date of payment of the claim. Accordingly, if aggregate net claims paid
under any Mortgage Pool Insurance Policy reach the original policy limit,
coverage under that Mortgage Pool Insurance Policy will be exhausted and any
further losses will be borne by holders of the related series of Bonds. In
addition, unless the Master Servicer could determine that an advance in respect
of a delinquent Mortgage Loan would be recoverable to it from the proceeds of
the liquidation of such Mortgage Loan or otherwise, the Master Servicer would
not be obligated to make an advance respecting any such delinquency since the
advance would not be ultimately recoverable to it from either the Mortgage Pool
Insurance Policy or from any other related source. See "Description of the
Bonds--Advances."
Since each Mortgage Pool Insurance Policy will require that the
property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy will not
provide coverage against hazard losses. As set forth under "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder," the hazard policies covering
the Mortgage Loans typically exclude from coverage physical damage resulting
from a number of causes and, even when the damage is covered, may afford
recoveries which are significantly less than full replacement cost of such
losses. Further, no coverage in respect of Special Hazard Losses, Fraud Losses
or Bankruptcy Losses will cover all risks, and the amount of any such coverage
will be limited. See "Special Hazard Insurance Policies" below. As a result,
certain hazard risks will not be insured against and will therefore be borne by
the related Bondholders.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust Fund will be issued by
the insurer named in the applicable Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described below, protect holders
of the related series of Bonds from (i) losses due to direct physical damage to
a Mortgaged Property other than any loss of a type covered by a hazard insurance
policy or a flood insurance policy, if applicable, and (ii) losses from partial
damage caused by reason of the application of the co-insurance clauses contained
in hazard insurance policies ("Special Hazard Losses"). See "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder." However, a Special Hazard
Insurance Policy will not cover losses occasioned by war, civil insurrection,
certain governmental actions, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear reaction, chemical contamination,
waste by the Mortgagor and certain other risks. Aggregate claims under a Special
Hazard Insurance Policy will be limited to the amount set forth in the related
Prospectus Supplement and will be subject to reduction as described in such
related Prospectus Supplement. A Special Hazard Insurance Policy will provide
that no claim may be paid unless hazard and, if applicable, flood insurance on
the property securing the Mortgage Loan has been kept in force and other
protection and preservation expenses have been paid by the Master Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy
will provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
Special Servicer or the Subservicer, the insurer will pay the lesser of (i) the
cost of repair or replacement of such property or (ii) upon transfer of the
property to the insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer, Special
Servicer or Subservicer with respect to such property. If the property is
transferred to a third party in a sale approved by the issuer of the Special
Hazard Insurance Policy (the "Special Hazard Insurer"), the
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amount that the Special Hazard Insurer will pay will be the amount under (ii)
above reduced by the net proceeds of the sale of the property. No claim may be
validly presented under the Special Hazard Insurance Policy unless hazard
insurance on the property securing a defaulted Mortgage Loan has been kept in
force and other reimbursable protection, preservation and foreclosure expenses
have been paid (all of which must be approved in advance by the Special Hazard
Insurer). If the unpaid principal balance plus accrued interest and certain
expenses is paid by the insurer, the amount of further coverage under the
related Special Hazard Insurance Policy will be reduced by such amount less any
net proceeds from the sale of the property. Any amount paid as the cost of
repair of the property will further reduce coverage by such amount. Restoration
of the property with the proceeds described under (i) above will satisfy the
condition under each Mortgage Pool Insurance Policy that the property be
restored before a claim under such Mortgage Pool Insurance Policy may be validly
presented with respect to the defaulted Mortgage Loan secured by such property.
The payment described under (ii) above will render presentation of a claim in
respect of such Mortgage Loan under the related Mortgage Pool Insurance Policy
unnecessary. Therefore, so long as a Mortgage Pool Insurance Policy remains in
effect, the payment by the insurer under a Special Hazard Insurance Policy of
the cost of repair or of the unpaid principal balance of the related Mortgage
Loan plus accrued interest and certain expenses will not affect the total
Insurance Proceeds paid to Bondholders, but will affect the relative amounts of
coverage remaining under the related Special Hazard Insurance Policy and
Mortgage Pool Insurance Policy.
As and to the extent set forth in the applicable Prospectus Supplement,
coverage in respect of Special Hazard Losses for a series of Bonds may be
provided, in whole or in part, by a type of Special Hazard Instrument other than
a Special Hazard Insurance Policy or by means of the special hazard
representation of the Company.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a Mortgagor, it is possible
that the bankruptcy court may establish the value of the Mortgaged Property of
such Mortgagor at an amount less than the then outstanding principal balance of
the Mortgage Loan secured by such Mortgaged Property (a "Deficient Valuation").
The amount of the secured debt could then be reduced to such value, and, thus,
the holder of such Mortgage Loan would become an unsecured creditor to the
extent the outstanding principal balance of such Mortgage Loan exceeds the value
assigned to the Mortgaged Property by the bankruptcy court. In addition, certain
other modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including a reduction in the amount of the Monthly Payment on the
related Mortgage Loan (a "Debt Service Reduction"; Debt Service Reductions and
Deficient Valuations, collectively referred to herein as Bankruptcy Losses). See
"Certain Legal Aspects of Mortgage Loans and Related Matters--Anti-Deficiency
Legislation and Other Limitations on Lenders." Any Bankruptcy Bond to provide
coverage for Bankruptcy Losses for proceedings under the federal Bankruptcy Code
obtained by the Company for a Trust Fund will be issued by an insurer named in
the applicable Prospectus Supplement. The level of coverage under each
Bankruptcy Bond will be set forth in the applicable Prospectus Supplement.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, interest
collections on the Mortgage Loans may exceed interest payments on the Bonds for
the related Payment Date (such excess referred to as "Excess Interest"). Such
Excess Interest may be deposited into a Reserve Fund or applied as a payment of
principal on the Bonds. To the extent Excess Interest is applied as principal
payments on the Bonds, the effect will be to reduce the principal balance of the
Bonds relative to the outstanding balance of the Mortgage Loans, thereby
creating "Overcollateralization" and additional protection to the Bondholders,
as specified in the related Prospectus Supplement. If so provided in the related
Prospectus Supplement,
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Overcollateralization may also be provided as to any series of Bonds by the
issuance of Bonds in an initial aggregate principal amount (together with the
related Certificates, if any) which is less than the aggregate principal amount
of the related Mortgage Loans.
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, or any other instrument satisfactory
to the relevant Rating Agency or Agencies, which will be applied and maintained
in the manner and under the conditions specified in such Prospectus Supplement.
In the alternative or in addition to such deposit, to the extent described in
the related Prospectus Supplement, a Reserve Fund may be funded through
application of all or a portion of amounts otherwise payable on any related
Subordinate Bonds, from the Spread or otherwise. To the extent that the funding
of the Reserve Fund is dependent on amounts otherwise payable on related
Subordinate Bonds, Spread or other cash flows attributable to the related
Mortgage Loans or on reinvestment income, the Reserve Fund may provide less
coverage than initially expected if the cash flows or reinvestment income on
which such funding is dependent are lower than anticipated. In addition, with
respect to any series of Bonds as to which credit enhancement includes a Letter
of Credit, if so specified in the related Prospectus Supplement, under certain
circumstances the remaining amount of the Letter of Credit may be drawn by the
Indenture Trustee and deposited in a Reserve Fund. Amounts in a Reserve Fund may
be distributed to Bondholders, or applied to reimburse the Master Servicer for
outstanding advances, or may be used for other purposes, in the manner and to
the extent specified in the related Prospectus Supplement. Any such Reserve Fund
will generally not be deemed to be part of the related Trust Fund. If set forth
in the related Prospectus Supplement, a Reserve Fund may provide coverage to
more than one series of Bonds.
In connection with the establishment of any Reserve Fund, the Reserve
Fund will be structured so that the Indenture Trustee will have a perfected
security interest for the benefit of the Bondholders in the assets in the
Reserve Fund. However, to the extent that the Company, any affiliate thereof or
any other entity has an interest in any Reserve Fund, in the event of the
bankruptcy, receivership or insolvency of such entity, there could be delays in
withdrawals from the Reserve Fund and corresponding payments to the Bondholders
which could adversely affect the yield to investors on the related Bonds.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the applicable Prospectus Supplement does not
expressly provide for alternative credit enhancement arrangements in lieu of
some or all of the arrangements mentioned below, the following paragraphs shall
apply.
If a Letter of Credit or alternate form of credit enhancement has been
obtained for a series of Bonds, the Master Servicer will be obligated to
exercise reasonable efforts to keep or cause to be kept such Letter of Credit
(or an alternate form of credit support) in full force and effect throughout the
term of the applicable Indenture, unless coverage thereunder has been exhausted
through payment of claims or otherwise, or substitution therefor is made as
described below under "--Reduction or Substitution of Credit Enhancement." If a
Letter of Credit obtained for a series of Bonds is scheduled to expire prior to
the date the final distribution on such Bonds is made and coverage under such
Letter of Credit has not been
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exhausted and no substitution has occurred, the Indenture Trustee will draw the
amount available under the Letter of Credit and maintain such amount in trust
for such Bondholders.
If a Mortgage Pool Insurance Policy has been obtained for a series of
Bonds, the Master Servicer will be obligated to exercise reasonable efforts to
keep such Mortgage Pool Insurance Policy (or an alternate form of credit
support) in full force and effect throughout the term of the applicable
Indenture, unless coverage thereunder has been exhausted through payment of
claims or until such Mortgage Pool Insurance Policy is replaced in accordance
with the terms of the applicable Indenture. The Master Servicer will generally
agree to pay the premiums for each Mortgage Pool Insurance Policy on a timely
basis. In the event the Pool Insurer ceases to be a Qualified Insurer (such term
being defined to mean a private mortgage guaranty insurance company duly
qualified as such under the laws of the state of its incorporation and each
state having jurisdiction over the insurer in connection with the Mortgage Pool
Insurance Policy and approved as an insurer by FHLMC, FNMA or any successor
entity) because it ceases to be qualified under any such law to transact such
insurance business or coverage is terminated for any reason other than
exhaustion of such coverage, the Master Servicer will use reasonable efforts to
obtain from another Qualified Insurer a replacement insurance policy comparable
to the Mortgage Pool Insurance Policy with a total coverage equal to the then
outstanding coverage of such Mortgage Pool Insurance Policy, provided that, if
the cost of the replacement policy is greater than the cost of such Mortgage
Pool Insurance Policy, the coverage of the replacement policy will, unless
otherwise agreed to by the Company, be reduced to a level such that its premium
rate does not exceed the premium rate on such Mortgage Pool Insurance Policy. In
the event that the Pool Insurer ceases to be a Qualified Insurer because it
ceases to be approved as an insurer by FHLMC, FNMA or any successor entity, the
Master Servicer will be obligated to review, not less often than monthly, the
financial condition of the Pool Insurer with a view toward determining whether
recoveries under the Mortgage Pool Insurance Policy are jeopardized for reasons
related to the financial condition of the Pool Insurer. If the Master Servicer
determines that recoveries are so jeopardized, it will be obligated to exercise
its best reasonable efforts to obtain from another Qualified Insurer a
replacement insurance policy as described above, subject to the same cost limit.
Any losses associated with any reduction or withdrawal in rating by an
applicable Rating Agency shall be borne by the related Bondholders.
In lieu of the Master Servicer's obligation to maintain a Letter of
Credit or Mortgage Pool Insurance Policy as provided above, the Master Servicer
may obtain a substitute Letter of Credit, Mortgage Pool Insurance Policy or an
alternate form of credit enhancement. If the Master Servicer obtains such a
substitute Letter of Credit or Mortgage Pool Insurance Policy, it will maintain
and keep such Letter of Credit, Mortgage Pool Insurance Policy or alternate form
of credit enhancement in full force and effect as provided herein. Prior to its
obtaining any substitute Letter of Credit, Mortgage Pool Insurance Policy or
alternate form of credit enhancement, the Master Servicer will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Bonds that the substitution of such Mortgage Pool Insurance Policy, Letter of
Credit, or alternate form of credit enhancement for the existing credit
enhancement will not adversely affect the then-current ratings assigned to such
Bonds by such Rating Agency or Agencies.
If a Special Hazard Instrument has been obtained for a series of Bonds,
the Master Servicer will also be obligated to exercise reasonable efforts to
maintain and keep such Special Hazard Instrument in full force and effect
throughout the term of the applicable Indenture, unless coverage thereunder has
been exhausted through payment of claims or otherwise or substitution therefor
is made as described below under "--Reduction or Substitution of Credit
Enhancement." If the Special Hazard Instrument takes the form of a Special
Hazard Insurance Policy, such policy will provide coverage against risks of the
type described herein under "Description of Credit Enhancement--Special Hazard
Insurance Policies." The Master Servicer may obtain a substitute Special Hazard
Instrument for the existing Special Hazard Instrument if prior to such
substitution the Master Servicer obtains written confirmation from the Rating
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Agency or Agencies that rated the related Bonds that such substitution shall not
adversely affect the then-current ratings assigned to such Bonds by such Rating
Agency or Agencies.
If a Bankruptcy Bond has been obtained for a series of Bonds, the
Master Servicer will be obligated to exercise reasonable efforts to maintain and
keep such Bankruptcy Bond in full force and effect throughout the term of the
Indenture, unless coverage thereunder has been exhausted through payment of
claims or substitution therefor is made as described below under "--Reduction or
Substitution of Credit Enhancement." The Master Servicer may obtain a substitute
Bankruptcy Bond or other credit enhancement for the existing Bankruptcy Bond if
prior to such substitution the Master Servicer obtains written confirmation from
the Rating Agency or Agencies that rated the related Bonds that such
substitution shall not adversely affect the then-current ratings assigned to
such Bonds by such Rating Agency or Agencies.
See "--Bankruptcy Bonds" above.
The Master Servicer, on behalf of itself, the Indenture Trustee and
Bondholders, will provide the Indenture Trustee information required for the
Indenture Trustee to draw under the Letter of Credit and will present claims to
the provider of any Purchase Obligation, to each Pool Insurer, to the issuer of
each Special Hazard Insurance Policy or other Special Hazard Instrument, to the
issuer of each Bankruptcy Bond and, in respect of defaulted Mortgage Loans for
which there is no Subservicer, to each Primary Insurer and take such reasonable
steps as are necessary to permit recovery under such Letter of Credit, Purchase
Obligation, insurance policies or comparable coverage respecting defaulted
Mortgage Loans or Mortgage Loans which are the subject of a bankruptcy
proceeding. Additionally, the Master Servicer will present such claims and take
such steps as are reasonably necessary to provide for the performance by the
provider of the Purchase Obligation of its Purchase Obligation. As set forth
above, all collections by the Master Servicer under any Purchase Obligation, any
Mortgage Pool Insurance Policy, any Primary Insurance Policy or any Bankruptcy
Bond and, where the related property has not been restored, any Special Hazard
Instrument, are to be deposited in the related Collection Account, subject to
withdrawal as described above. All draws under any Letter of Credit are also to
be deposited in the related Collection Account. In those cases in which a
Mortgage Loan is serviced by a Subservicer, the Subservicer, on behalf of
itself, the Indenture Trustee and the Bondholders will present claims to the
Primary Insurer, and all collections thereunder shall initially be deposited in
a subservicing account that generally meets the requirements for the Collection
Account prior to being delivered to the Master Servicer for deposit in the
related Collection Account.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any Financial Guaranty Insurance
Policy, Letter of Credit, Mortgage Pool Insurance Policy or any related Primary
Insurance Policy, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines (i) that such restoration will
increase the proceeds to one or more classes of Bondholders on liquidation of
the Mortgage Loan after reimbursement of the Master Servicer for its expenses
and (ii) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds. If recovery under any Financial Guaranty
Insurance Policy, Letter of Credit, Mortgage Pool Insurance Policy, other credit
enhancement or any related Primary Insurance Policy is not available because the
Master Servicer has been unable to make the above determinations, has made such
determinations incorrectly or recovery is not available for any other reason,
the Master Servicer is nevertheless obligated to follow such normal practices
and procedures (subject to the preceding sentence) as it deems necessary or
advisable to realize upon the defaulted Mortgage Loan and in the event such
determination has been incorrectly made, is entitled to reimbursement of its
expenses in connection with such restoration.
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REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided pursuant to any form of credit
enhancement may be reduced under certain specified circumstances. In most cases,
the amount available pursuant to any form of credit enhancement will be subject
to periodic reduction in accordance with a schedule or formula on a
nondiscretionary basis pursuant to the terms of the related Indenture.
Additionally, in most cases, such form of credit support (and any replacements
therefor) may be replaced, reduced or terminated, and the formula used in
calculating the amount of coverage with respect to Bankruptcy Losses, Special
Hazard Losses or Fraud Losses may be changed, without the consent of the
Bondholders, upon the written assurance from each applicable Rating Agency that
the then-current rating of the related series of Bonds will not be adversely
affected. Furthermore, in the event that the credit rating of any obligor under
any applicable credit enhancement is downgraded, the credit rating(s) of the
related series of Bonds may be downgraded to a corresponding level, and the
Master Servicer will not be obligated to obtain replacement credit support in
order to restore the rating(s) of the related series of Bonds. The Master
Servicer will also be permitted to replace such credit support with other credit
enhancement instruments issued by obligors whose credit ratings are equivalent
to such downgraded level and in lower amounts which would satisfy such
downgraded level, provided that the then-current rating(s) of the related series
of Bonds are maintained. Where the credit support is in the form of a Reserve
Fund, a permitted reduction in the amount of credit enhancement will result in a
release of all or a portion of the assets in the Reserve Fund to the Company,
the Master Servicer or such other person that is entitled thereto. Any assets so
released will not be available for distributions in future periods.
PURCHASE OBLIGATIONS
With respect to certain types of Mortgage Loans to be included in any
Mortgage Pool, if specified in the related Prospectus Supplement, the Mortgage
Loans may be sold subject to a Purchase Obligation as described below that would
become applicable on a specified date or upon the occurrence of a specified
event. For example, with respect to certain types of ARM Loans as to which the
Mortgage Rate is fixed for the first five years, a Purchase Obligation may apply
on the first date that the Mortgage Rate of such Mortgage Loan is adjusted, and
such obligation may apply to the Mortgage Loans or to the related Bonds
themselves, or to a corresponding Purchase Obligation of the Company or another
person as specified in the related Prospectus Supplement. With respect to any
Purchase Obligation, such obligation will be an obligation of an entity (which
may include a bank or other financial institution or an insurance company)
specified in the related Prospectus Supplement, and an instrument evidencing
such obligation (a "Purchase Obligation") shall be delivered to the related
Indenture Trustee for the benefit of the Bondholders to the related series.
The specific terms and conditions applicable to any Purchase Obligation
will be described in the related Prospectus Supplement, including the purchase
price, the timing of and any limitations and conditions to any such purchase.
Any Purchase Obligation will be payable solely to the Indenture Trustee for the
benefit of the Bondholders of the related series and will be nontransferable.
Each Purchase Obligation will be a general unsecured obligation of the provider
thereof, and prospective purchasers of Bonds must look solely to the credit of
such entity for payment under the Purchase Obligation.
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER
GENERAL
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Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below) and, if required as described below, a Primary
Insurance Policy. The following is only a brief description of certain insurance
policies and does not purport to summarize or describe all of the provisions of
these policies. Such insurance is subject to underwriting and approval of
individual Mortgage Loans by the respective insurers. The descriptions of any
insurance policies described in this Prospectus or any Prospectus Supplement and
the coverage thereunder do not purport to be complete and are qualified in their
entirety by reference to such forms of policies, sample copies of which are
available upon request.
PRIMARY MORTGAGE INSURANCE POLICIES
Except in the case of High LTV Loans and as otherwise provided in the
related Prospectus Supplement, each Single Family Loan having a Loan-to-Value
Ratio at origination of over 80% will generally be required by the Company to be
covered by a primary mortgage guaranty insurance policy (a "Primary Insurance
Policy") insuring against default on such Mortgage Loan as to at least the
principal amount thereof exceeding 75% of the Value of the related Mortgaged
Property at origination of the Mortgage Loan, unless and until the principal
balance of the Mortgage Loan is reduced to a level that would produce a
Loan-to-Value Ratio equal to or less than at least 80%. The Company will
represent and warrant that, to the best of the Company's knowledge, such
Mortgage Loans are so covered. However, the foregoing standard may vary
significantly depending on the characteristics of the Mortgage Loans and the
applicable underwriting standards, and any variation will be described in the
related Prospectus Supplement. A Mortgage Loan will not be considered to be an
exception to the foregoing standard if no Primary Insurance Policy was obtained
at origination but the Mortgage Loan has amortized to below an 80% Loan-to-Value
Ratio level as of the applicable Cut-off Date. Mortgage Loans which are subject
to negative amortization will only be covered by a Primary Insurance Policy if
such coverage was so required upon their origination, notwithstanding that
subsequent negative amortization may cause such Mortgage Loan's Loan-to-Value
Ratio (based on the then-current balance) to subsequently exceed the limits
which would have required such coverage upon their origination. Multifamily
Loans will not be covered by a Primary Insurance Policy, regardless of the
related Loan-to-Value Ratio.
While the terms and conditions of the Primary Insurance Policies issued
by one primary mortgage guaranty insurer (a "Primary Insurer") will differ from
those in Primary Insurance Policies issued by other Primary Insurers, each
Primary Insurance Policy will in general provide substantially the following
coverage. The amount of the loss as calculated under a Primary Insurance Policy
covering a Mortgage Loan (herein referred to as the "Loss") will generally
consist of the unpaid principal amount of such Mortgage Loan and accrued and
unpaid interest thereon and reimbursement of certain expenses, less (i) rents or
other payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from the related Mortgaged Property, (ii)
hazard insurance proceeds in excess of the amount required to restore such
Mortgaged Property and which have not been applied to the payment of the
Mortgage Loan, (iii) amounts expended but not approved by the Primary Insurer,
(iv) claim payments previously made on such Mortgage Loan and (v) unpaid
premiums and certain other amounts.
The Primary Insurer will generally be required to pay either: (i) the
insured percentage of the Loss; (ii) the entire amount of the Loss, after
receipt by the Primary Insurer of good and merchantable title to, and possession
of, the Mortgaged Property; or (iii) at the option of the Primary Insurer under
certain Primary Insurance Policies, the sum of the delinquent monthly payments
plus any advances made by the insured, both to the date of the claim payment
and, thereafter, monthly payments in the amount that would have become due under
the Mortgage Loan if it had not been discharged plus any advances made by the
insured until the earlier of (a) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (b) an approved sale.
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As conditions precedent to the filing or payment of a claim under a
Primary Insurance Policy, in the event of default by the Mortgagor, the insured
will typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or damage
to the Mortgaged Property, have the Mortgaged Property restored to at least its
condition at the effective date of the Primary Insurance Policy (ordinary wear
and tear excepted); and (iii) tender to the Primary Insurer good and
merchantable title to, and possession of, the Mortgaged Property.
For any Bonds offered hereunder, the Master Servicer will maintain or
cause each Subservicer to maintain, as the case may be, in full force and effect
and to the extent coverage is available a Primary Insurance Policy with regard
to each Single Family Loan for which such coverage is required under the
standard described above, provided that such Primary Insurance Policy was in
place as of the Cut-off Date and the Company had knowledge of such Primary
Insurance Policy. In the event that the Company gains knowledge that as of the
Closing Date, a Mortgage Loan had a Loan-to-Value Ratio at origination in excess
of 80% and was not the subject of a Primary Insurance Policy (and was not
included in any exception to such standard disclosed in the related Prospectus
Supplement) and that such Mortgage Loan has a then current Loan-to-Value Ratio
in excess of 80%, then the Master Servicer is required to use reasonable efforts
to obtain and maintain a Primary Insurance Policy to the extent that such a
policy is obtainable at a reasonable price. The Master Servicer or, in the case
of a Designated Seller Transaction, the Seller will not cancel or refuse to
renew any such Primary Insurance Policy in effect at the time of the initial
issuance of a series of Bonds that is required to be kept in force under the
applicable Servicing Agreement unless the replacement Primary Insurance Policy
for such cancelled or non-renewed policy is maintained with an insurer whose
claims-paying ability is acceptable to the Rating Agency or Agencies that rated
such series of Bonds for mortgage pass-through certificates having a rating
equal to or better than the highest then-current rating of any class of such
series of Bonds. For further information regarding the extent of coverage under
any Mortgage Pool Insurance Policy or Primary Insurance Policy, see "Description
of Credit Enhancement--Mortgage Pool Insurance Policies."
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a
hazard insurance policy for their Mortgage Loan. Additionally, the Servicing
Agreement will require the Master Servicer to cause to be maintained for each
Mortgage Loan a hazard insurance policy providing for no less than the coverage
of the standard form of fire insurance policy with extended coverage customary
in the state in which the property is located. Such coverage generally will be
in an amount equal to the lesser of the principal balance owing on such Mortgage
Loan or 100% of the insurable value of the improvements securing the Mortgage
Loan except that, if generally available, such coverage must not be less than
the minimum amount required under the terms thereof to fully compensate for any
damage or loss on a replacement cost basis. The ability of the Master Servicer
to ensure that hazard insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any hazard insurance
policy and under any flood insurance policy referred to below, or upon the
extent to which information in this regard is furnished to the Master Servicer
by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under
any hazard policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited in the related
Collection Account. The Servicing Agreement will provide that the Master
Servicer may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on the Mortgage Loans. If
such blanket policy contains a deductible clause, the Master Servicer will
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deposit in the applicable Collection Account all sums which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. Where
the improvements securing a Mortgage Loan are located in a federally designated
flood area at the time of origination of such Mortgage Loan, the Servicing
Agreement requires the Master Servicer to cause to be maintained for each such
Mortgage Loan serviced, flood insurance (to the extent available) in an amount
equal in general to the lesser of the amount required to compensate for any loss
or damage on a replacement cost basis or the maximum insurance available under
the federal flood insurance program.
The hazard insurance policies covering the Mortgaged Properties
typically contain a co-insurance clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(i) the replacement cost of the improvements damaged or destroyed less physical
depreciation or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement--Special Hazard Insurance Policies"
for a description of the limited protection afforded by any Special Hazard
Insurance Policy against losses occasioned by hazards which are otherwise
uninsured against (including losses caused by the application of the
co-insurance clause described in the preceding paragraph).
Under the terms of the Mortgage Loans, Mortgagors are generally
required to present claims to insurers under hazard insurance policies
maintained on the Mortgaged Properties. The Master Servicer, on behalf of the
Indenture Trustee and Bondholders, is obligated to present claims under any
Special Hazard Insurance Policy or other Special Hazard Instrument and any
blanket insurance policy insuring against hazard losses on the Mortgaged
Properties. However, the ability of the Master Servicer to present such claims
is dependent upon the extent to which information in this regard is furnished to
the Master Servicer or the Subservicers by Mortgagors.
FHA INSURANCE
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
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There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow the Department of Housing and Urban Development ("HUD") to insure mortgage
loans that are secured by newly constructed and substantially rehabilitated
multifamily rental projects. Section 244 of the Housing Act provides for
co-insurance of such mortgage loans made under Sections 221(d)(3) and (d)(4) by
HUD/FHA and a HUD-approved co-insurer. Generally the term of such a mortgage
loan may be up to 40 years and the ratio of the loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer will generally be obligated to
purchase any such debenture issued in satisfaction of a defaulted FHA insured
Mortgage Loan serviced by it for an amount equal to the principal amount of any
such debenture.
The Master Servicer will be required to take such steps as are
reasonably necessary to keep FHA insurance in full force and effect.
THE COMPANY
The Company is a limited-purpose wholly-owned subsidiary of Imperial
Credit Mortgage Holdings, Inc. ("Imperial Holdings"), a publicly traded real
estate investment trust ("REIT"). The Company was incorporated in the State of
California on April 12, 1996. The Company was organized for the purpose of
serving as a private secondary mortgage market conduit.
The Company maintains its principal office at 20371 Irvine Avenue,
Suite 200, Santa Ana Heights, California 92707. Its telephone number is (909)
788-7808.
ICI FUNDING CORPORATION
ICI Funding Corporation ("ICI Funding") is an affiliate of the
Company and may from time to time be a Seller or act as Master Servicer with
respect to a Mortgage Pool. ICI Funding is a mortgage banking conduit that
acquires conventional one-to four-family residential mortgage loans nationwide.
ICI Funding is a non-consolidating subsidiary of Imperial Holdings. ICI Funding
primarily acquires mortgage loans from approved correspondents. ICI Funding's
executive offices are located at 20371 Irvine Avenue, Suite 200, Santa Ana
Heights, California 92707, and its telephone number is (714) 556-0122.
Prior to November 1995, ICI Funding was a division of Imperial
Credit Industries, Inc. ("ICII"), a California corporation. ICII is a publicly
traded mortgage banking company. In November 1995, ICII restructured its
operations pursuant to which ICI Funding became a separate corporation and ICII
contributed, among other things, all of the outstanding nonvoting preferred
stock of ICI Funding,
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which represents 99% of the economic interest in ICI Funding, to Imperial
Holdings, in exchange for approximately 10% of the common stock of Imperial
Holdings. All of the outstanding shares of common stock of ICI Funding were
retained by ICII.
THE AGREEMENTS
The following summaries describe certain provisions of the Trust
Agreement, the Indenture and Servicing Agreement relating to a series of Bonds
(each, an "Agreement" and, collectively, the "Agreements"). The summaries do not
purport to be complete and are qualified entirely by reference to the actual
terms of the Agreements relating to a series of Bonds.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
SERVICING AGREEMENT
A "Servicing Default" under the Servicing Agreement in respect of a
series of Securities generally will include: (i) any failure by the Master
Servicer to make a required deposit to the Collection Account or, if the Master
Servicer is so required, to distribute to the holders of any class of Securities
of such series any required payment which continues unremedied for five business
days (or other period of time described in the related Prospectus Supplement)
after the giving of written notice of such failure to the Master Servicer by the
Indenture Trustee or the Issuer; (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any other of its covenants or
agreements in the Servicing Agreement with respect to such series of Securities
which continues unremedied for 45 days after the giving of written notice of
such failure to the Master Servicer by the Indenture Trustee or the Issuer (or
the Pool Insurer, if applicable); (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings regarding the Master Servicer and certain actions by the Master
Servicer indicating its insolvency or inability to pay its obligations and (iv)
any other Servicing Default as set forth in the Servicing Agreement.
So long as a Servicing Default remains unremedied, either the Company
or the Indenture Trustee may (except as otherwise provided for in the related
Agreement with respect to the Pool Insurer, if applicable), by written
notification to the Master Servicer and to the Issuer or the Indenture Trustee
or Trust Fund, as applicable, terminate all of the rights and obligations of the
Master Servicer under the Servicing Agreement (other than any right of the
Master Servicer as Securityholder and other than the right to receive servicing
compensation and expenses for servicing the Mortgage Loans during any period
prior to the date of such termination), whereupon the Indenture Trustee will
succeed to all responsibilities, duties and liabilities of the Master Servicer
under such Servicing Agreement (other than the obligation to purchase Mortgage
Loans under certain circumstances) and will be entitled to similar compensation
arrangements. In the event that the Indenture Trustee would be obligated to
succeed the Master Servicer but is unwilling so to act, it may appoint (or if it
is unable so to act, it shall appoint) or petition a court of competent
jurisdiction for the appointment of an approved mortgage servicing institution
with a net worth of at least $10,000,000 to act as successor to the Master
Servicer under the Servicing Agreement (unless otherwise set forth in the
Servicing Agreement). Pending such appointment, the Indenture Trustee is
obligated to act in such capacity. The Indenture Trustee and such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Master Servicer under the Servicing
Agreement.
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INDENTURE
An "Event of Default" under the Indenture in respect of each series of
Bonds, generally will include: (i) a default for five days or more (or other
period of time described in the related Prospectus Supplement) in the payment of
any principal of or interest on any Bond of such series; (ii) failure to perform
any other covenant of the Company or the Trust Fund in the Indenture which
continues for a period of thirty days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement
(and if the Pool Insurer defaults in the performance of its obligations, if
applicable); (iii) any representation or warranty made by the Company or the
Trust Fund in the Indenture 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 thirty days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iv) certain events of bankruptcy, insolvency, receivership or liquidation of
the Company or the Trust Fund (and if the Pool Insurer defaults in the
performance of its obligations, if applicable); or (v) any other Event of
Default provided with respect to Bonds of that series.
If an Event of Default with respect to the Bonds of any series at the
time outstanding occurs and is continuing, either the Indenture Trustee, the
Pool Insurer (if applicable) or the holders of a majority of the then aggregate
outstanding amount of the Bonds of such series may declare the principal amount
(or, if the Bonds of that series are Accrual Bonds, such portion of the
principal amount as may be specified in the terms of that series, as provided in
the related Prospectus Supplement) of all the Bonds of such series to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the holders of a majority in aggregate outstanding
amount of the related Bonds.
If following an Event of Default with respect to any series of Bonds,
the Bonds of such series have been declared to be due and payable, the Indenture
Trustee (with the consent of the Pool Insurer, if applicable) may, in its
discretion, notwithstanding such acceleration, elect to maintain possession of
the collateral securing the Bonds of such series and to continue to apply
payments 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 Bonds of such series as they would have become
due if there had not been such a declaration. In addition, the Indenture Trustee
may not sell or otherwise liquidate the collateral securing the Bonds of a
series following an Event of Default, unless (a) the holders of 100% of the then
aggregate outstanding amount of the Bonds of such series 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 Bonds of
such series (and to reimburse the Pool Insurer, if applicable) at the date of
such sale or (c) the Indenture Trustee determines that such collateral would not
be sufficient on an ongoing basis to make all payments on such Bonds as such
payments would have become due if such Bonds had not been declared due and
payable, and the Indenture Trustee obtains the consent of the holders of 66 2/3%
of the then aggregate outstanding amount of the Bonds of such series (and the
Pool Insurer, if applicable).
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default, the Indenture provides that the Indenture
Trustee will 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 payments to the Bondholders would be less than
would otherwise be the case. However, the Indenture 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 Indenture for the benefit of
the Bondholders after the occurrence of such an Event of Default.
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In the event the principal of the Bonds of a series is declared due and
payable, as described above, the holders of any such Bonds 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 that is unamortized.
No Securityholder generally will have any right under a Trust Agreement
or Indenture to institute any proceeding with respect to such Agreement unless
(a) such holder previously has given to the Indenture Trustee written notice of
default and the continuance thereof, (b) the holders of Securities of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class (i) have made written request upon the Indenture Trustee to institute
such proceeding in its own name as Indenture Trustee thereunder and (ii) have
offered to the Indenture Trustee reasonable indemnity, (c) the Indenture Trustee
has neglected or refused to institute any such proceeding for 60 days after
receipt of such request and indemnity and (d) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60 day
period by the Holders of a majority of the Bond Balances of such class (except
as otherwise provided for in the related Agreement with respect to the Pool
Insurer). However, the Indenture Trustee will be under no obligation to exercise
any of the trusts or powers vested in it by the applicable Agreement or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the holders of Securities covered by
such Agreement, unless such Securityholders have offered to the Indenture
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto (except as
otherwise provided for in the related Agreement with respect to the Pool
Insurer) without the consent of any of the holders of Securities covered by such
Agreement, (i) to cure any ambiguity; (ii) to correct or supplement any
provision therein which may be inconsistent with any other provision therein or
to correct any error; (iii) to change the timing and/or nature of deposits in
the Collection Account or to change the name in which the Collection Account is
maintained (except that (a) deposits to the Payment Account may not occur later
than the related Payment Date, (b) such change may not adversely affect in any
material respect the interests of any Securityholder, as evidenced by an opinion
of counsel, and (c) such change may not adversely affect the then-current rating
of any rated Bonds, as evidenced by a letter from each applicable Rating
Agency); or (iv) to make any other provisions with respect to matters or
questions arising under such Agreement which are not materially inconsistent
with the provisions thereof, so long as such action will not adversely affect in
any material respect the interests of any Securityholder.
Each Agreement may also be amended by the parties thereto (except as
otherwise provided for in the related Agreement with respect to the Pool
Insurer) with the consent of the holders of Securities of each class affected
thereby evidencing, in each case, not less than 66% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement or
of modifying in any manner the rights of the related Securityholders, except
that no such amendment may (i) reduce in any manner the amount of, or delay the
timing of, payments received on Mortgage Loans which are required to be paid on
a Security of any class without the consent of the holder of such Security, (ii)
impair the right of any Securityholder to institute suit for the enforcement of
the provisions of the Agreements or (iii) reduce the percentage of Securities of
any class the holders of which are required to consent to any such amendment
unless the holders of all Securities of such class have consented to the change
in such percentage.
TERMINATION; REDEMPTION OF BONDS
TRUST AGREEMENT
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The obligations created by the Trust Agreement for each series of
Securities (other than certain limited payment and notice obligations of the
Owner Trustee and the Company, respectively) will terminate upon the payment to
the related Securityholders (including, the Bonds issued pursuant to the related
Indenture) of all amounts held by the Master Servicer and required to be paid to
Securityholders following the earlier of (i) the final payment or other
liquidation or disposition (or any advance with respect thereto) of the last
Mortgage Loan subject thereto and all property acquired upon foreclosure or deed
in lieu of foreclosure of any such Mortgage Loan and (ii) the purchase, in whole
but not in part, by the Master Servicer or the Company or a person specified in
the related Prospectus Supplement (other than any Bondholder) of the Bonds of
such series; provided, however, that no such purchase shall be made unless the
aggregate Bond Principal Balance as of such date is equal to or less than 25% of
the aggregate Bond Principal Balance as of the Delivery Date or a period of
seven years has elapsed since the initial Payment Date. Any purchase pursuant to
clause (ii) above will be at a purchase price equal to 100% of the aggregate
Bond Principal Balance of the Bonds redeemed, plus any accrued and unpaid
interest thereon, plus, if applicable, other amounts described in the Prospectus
Supplement.
INDENTURE
The Indenture will be discharged with respect to a series of Bonds
(except with respect to certain continuing rights specified in the Indenture)
upon the distribution to Bondholders of all amounts required to be distributed
pursuant to the Indenture.
THE OWNER TRUSTEE
The Owner Trustee under the Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank or trust company serving as
Owner Trustee may have normal banking relationships with the Company and/or its
affiliates, including Imperial Holdings.
The Owner Trustee may resign at any time, in which event the
Administrator or the Indenture Trustee will be obligated to appoint a successor
owner trustee as set forth in the Agreements. The Administrator or the Indenture
Trustee may also remove the Owner Trustee if the Owner Trustee ceases to be
eligible to continue as such under the Trust Agreement or if the Owner Trustee
becomes insolvent. Upon becoming aware of such circumstances, the Administrator
or the Indenture Trustee will be obligated to appoint a successor Owner Trustee.
Any resignation or removal of the Owner Trustee and appointment of a successor
Owner Trustee will not become effective until acceptance of the appointment by
the successor Owner Trustee.
THE INDENTURE TRUSTEE
The Indenture Trustee under the Indenture will be named in the related
Prospectus Supplement. The commercial bank or trust company serving as Indenture
Trustee may have normal banking relationships with the Company and/or its
affiliates, including Imperial Holdings.
The Indenture Trustee may resign at any time, in which event the
Company, the Owner Trustee or the Administrator will be obligated to appoint a
successor indenture trustee as set forth in the Indenture. The Company, the
Owner Trustee or the Administrator as set forth in the Indenture may also remove
the Indenture Trustee if the Indenture Trustee ceases to be eligible to continue
as such under the Indenture or if the Indenture Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Company, the Owner Trustee or the
Administrator will be obligated to appoint a successor Indenture Trustee. If so
specified in the Indenture, the Indenture Trustee may also be removed at any
time by the holders of a majority principal balance of the Bonds. Any
resignation or removal of the Indenture Trustee and
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appointment of a successor Indenture Trustee will not become effective until
acceptance of the appointment by the successor Indenture Trustee.
YIELD CONSIDERATIONS
The yield to maturity of an Bond will depend on the price paid by the
holder for such Bond, the Interest Rate on any such Bond entitled to payments of
interest (which Interest Rate may vary if so specified in the related Prospectus
Supplement) and the rate and timing of principal payments (including
prepayments, defaults, liquidations and repurchases) on the Mortgage Loans and
the allocation thereof to reduce the principal balance of such Bond (or notional
amount thereof if applicable) and other factors.
A class of Bonds may be entitled to payments of interest at a fixed
Interest Rate, a variable Interest Rate or adjustable Interest Rate, or any
combination of such Interest Rates, each as specified in the related Prospectus
Supplement. A variable Interest Rate may be calculated based on the weighted
average of the Mortgage Rates (in each case, net of the per annum rate or rates
applicable to the calculation of servicing and administrative fees and any
Spread (each, a "Net Mortgage Rate")) of the related Mortgage Loans for the
month preceding the Distribution Date if so specified in the related Prospectus
Supplement. As will be described in the related Prospectus Supplement, the
aggregate payments of interest on a class of Bonds, and the yield to maturity
thereon, will be affected by the rate of payment of principal on the Bonds (or
the rate of reduction in the notional balance of Bonds entitled only to payments
of interest) and, in the case of Bonds evidencing interests in ARM Loans, by
changes in the Net Mortgage Rates on the ARM Loans. See "Maturity and Prepayment
Considerations" below. The yield on the Bonds will also be affected by
liquidations of Mortgage Loans following Mortgagor defaults and by purchases of
Mortgage Loans in the event of breaches of representations made in respect of
such Mortgage Loans by the Company, the Master Servicer and others, or
conversions of ARM Loans to a fixed interest rate. See "The Mortgage
Pools--Representations by Sellers" and "Descriptions of the Bonds--Assignment of
Trust Fund Assets" above. Holders of certain Strip Bonds or a class of Bonds
having a Interest Rate that varies based on the weighted average Mortgage Rate
of the underlying Mortgage Loans will be affected by disproportionate
prepayments and repurchases of Mortgage Loans having higher Net Mortgage Rates
or rates applicable to the Strip Bonds, as applicable.
With respect to any series of Bonds, a period of time will elapse
between the date upon which payments on the related Mortgage Loans are due and
the Distribution Date on which such payments are passed through to Bondholders.
That delay will effectively reduce the yield that would otherwise be produced if
payments on such Mortgage Loans were distributed to Bondholders on or near the
date they were due.
In general, if a class of Bonds is purchased at initial issuance at a
premium and payments of principal on the related Mortgage 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. Conversely, if
a class of Bonds is purchased at initial issuance at a discount and payments of
principal on the related Mortgage 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 Bonds 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 and any faster than anticipated
rate of prepayments will adversely affect the yield to holders thereof. In
certain circumstances extremely 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 Bonds, including Accrual Bonds,
Bonds with a Interest Rate which
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fluctuates inversely with or at a multiple of an index or certain other classes
in a series including more than one class of Bonds, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Bonds.
The timing of changes in the rate of principal payments on or
repurchases of the Mortgage 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 Mortgage 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 Bonds would
not be fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is generally charged interest only for the period from the due date of
the preceding scheduled payment up to the date of such prepayment, instead of
for the full accrual period, that is, the period from the due date of the
preceding scheduled payment up to the due date for the next scheduled payment.
In addition, a partial principal prepayment may likewise be applied as of a date
prior to the next scheduled due date (and, accordingly, be accompanied by
interest thereon for less than the full accrual period). However, interest
accrued on any series of Bonds and distributable thereon on any Distribution
Date will generally correspond to interest accrued on the principal balance of
Mortgage Loans for their respective full accrual periods. Consequently, if a
prepayment on any Mortgage Loan is distributable to Bondholders on a particular
Distribution Date, but such prepayment is not accompanied by interest thereon
for the full accrual period, the interest charged to the borrower (net of
servicing and administrative fees and any Spread) may be less (such shortfall, a
"Prepayment Interest Shortfall") than the corresponding amount of interest
accrued and otherwise payable on the Bonds of the related series. If and to the
extent that any such shortfall is allocated to a class of Bonds, the yield
thereon will be adversely affected. The Prospectus Supplement for a series of
Bonds will describe the manner in which any such shortfalls will be allocated
among the classes of such Bonds. If so specified in the related Prospectus
Supplement, the Master Servicer will be required to apply some or all of its
servicing compensation for the corresponding period to offset the amount of any
such shortfalls. The related Prospectus Supplement will also describe any other
amounts available to offset such shortfalls. See Servicing of Mortgage
Loans--Servicing and Other Compensation and Payment of Expenses; Spread".
The Trust Fund with respect to any series may include Convertible
Mortgage Loans. As is the case with conventional, fixed-rate mortgage loans
originated in a high interest rate environment which may be subject to a greater
rate of principal prepayments when interest rates decrease, Convertible Mortgage
Loans may be subject to a greater rate of principal prepayments (or purchases by
the related Subservicer or the Master Servicer) due to their refinancing or
conversion to fixed interest rate loans in a low interest rate environment. For
example, if prevailing interest rates fall significantly, Convertible Mortgage
Loans could be subject to higher prepayment and conversion rates than if
prevailing interest rates remain constant because the availability of fixed-rate
or other adjustable-rate mortgage loans at competitive interest rates may
encourage Mortgagors to refinance their adjustable-rate mortgages to "lock in" a
lower fixed interest rate or to take advantage of the availability of such other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in a
rising interest rate environment as Mortgagors attempt to limit their risk of
higher rates. Such a rising interest rate environment may also result in an
increase in the rate of defaults on the Mortgage Loans. If the related
Subservicer or the Master Servicer purchases Convertible Mortgage Loans, a
Mortgagor's exercise of the conversion option will result in a distribution of
the principal portion thereof to the Bondholders, as described herein.
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Alternatively, to the extent Subservicers or the Master Servicer fail to
purchase Converting Mortgage Loans, the Mortgage Pool will include fixed-rate
Mortgage Loans.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans and thus the yield on the
Bonds. In general, defaults on Single Family Loans are expected to occur with
greater frequency in their early years. However, there is a risk that Mortgage
Loans, including Multifamily Loans, that require Balloon Payments may default at
maturity, or that the maturity of such a Mortgage Loan may be extended in
connection with a workout. The rate of default on Single Family Loans which are
refinance or limited documentation mortgage loans, and on Mortgage Loans,
including Multifamily Loans, with high Loan-to-Value Ratios, may be higher than
for other types of Mortgage Loans. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans will be affected by
the general economic condition of the region of the country in which the related
Mortgaged Properties are located. The risk of delinquencies and loss is greater
and prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See "Risk Factors."
With respect to certain Mortgage Loans including ARM Loans, the
Mortgage Rate at origination may be below the rate that would result if the
index and margin relating thereto were applied at origination. Under the
applicable underwriting standards, the Mortgagor under each Mortgage Loan
generally will be qualified, or the Mortgage Loan otherwise approved, on the
basis of the Mortgage Rate in effect at origination. The repayment of any such
Mortgage Loan may thus be dependent on the ability of the mortgagor to make
larger level monthly payments following the adjustment of the Mortgage Rate. In
addition, the periodic increase in the amount paid by the Mortgagor of a Buydown
Mortgage Loan during or at the end of the applicable Buydown Period may create a
greater financial burden for the Mortgagor, who might not have otherwise
qualified for a mortgage under applicable underwriting guidelines, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the Indices applicable at origination and the related Bond Margins), the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest which will be added to the principal balance thereof
and will bear interest at the applicable Mortgage Rate. The addition of any such
Deferred Interest to the principal balance of any related class or classes of
Bonds will lengthen the weighted average life thereof and may adversely affect
yield to holders thereof, depending upon the price at which such Bonds 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 Mortgage 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 the principal balance
of the related class or classes of Bonds, the weighted average life of such
Bonds will be reduced and may adversely affect yield to holders thereof,
depending upon the price at which such Bonds were purchased.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Bonds will contain information with respect to the
types and maturities of the Mortgage Loans in the related Mortgage Pool.
Mortgage Loans may
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generally be prepaid without penalty in full or in part at any time. The
prepayment experience with respect to the Mortgage Loans in a Mortgage Pool will
affect the life and yield of the related series of Bonds.
With respect to Balloon Loans, payment of the Balloon Payment (which,
based on the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such Mortgage Loans or to sell the Mortgaged Property prior to
the maturity of the Balloon Loan. The ability to obtain refinancing will depend
on a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the Mortgagor's financial
situation, prevailing mortgage loan interest rates, the Mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. None of the Company, the Master Servicer, or any of their affiliates
will be obligated to refinance or repurchase any Mortgage Loan or to sell the
Mortgaged Property.
The extent of prepayments of principal of the Mortgage Loans may be
affected by a number of factors, including, without limitation, solicitations
and the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located and, in the case of
Multifamily Loans, the quality of management of the Mortgage Properties, the
servicing of the Mortgage Loans, possible changes in tax laws and other
opportunities for investment. In addition, the rate of principal payments on the
Mortgage Loans may be affected by the existence of Lock-out Periods and
requirements that principal prepayments be accompanied by Prepayment Premiums,
as well as due-on-sale and due-on-encumbrance provisions, and by the extent to
which such provisions may be practicably enforced. See "Servicing of Mortgage
Loans--Collection and Other Servicing Procedures" and "Certain Legal Aspects of
the Mortgage Loans--Enforceability of Certain Provisions" for a description of
certain provisions of the Indenture and certain legal developments that may
affect the prepayment experience on the Mortgage Loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (i) converting
to a fixed rate loan and thereby "locking in" such rate or (ii) taking advantage
of the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. Moreover, although the Mortgage Rates on ARM
Loans will be subject to periodic adjustments, such adjustments generally will
(i) not increase or decrease such Mortgage Rates by more than a fixed percentage
amount on each adjustment date, (ii) not increase such Mortgage 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 Bond Margin (which may be different from margins being used at
the time for newly originated adjustable rate mortgage loans). As a result, the
Mortgage Rates on the ARM Loans 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 Mortgage Rates on ARM Loans
that the rate of prepayment may increase as a result of refinancings. There can
be no certainty as to the rate of prepayments on the Mortgage Loans during any
period or over the life of any series of Bonds.
If the applicable Agreement for a series of Bonds provides for a
Funding Account or other means of funding the transfer of additional Mortgage
Loans to the related Trust Fund, as described under "Description of the
Bonds--Funding Account" herein, and the Trust Fund is unable to acquire such
additional Mortgage Loans within any applicable time limit, the amounts set
aside for such purpose may
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be applied as principal payments on one or more classes of Bonds of such series.
See "Risk Factors--Yield and Prepayment Considerations."
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Company is not aware of any publicly available statistics relating to
the principal prepayment experience of diverse portfolios of mortgage loans such
as the Mortgage Loans over an extended period of time. All statistics known to
the Company 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. No representation is made as to the particular
factors that will affect the prepayment of the Mortgage Loans or as to the
relative importance of such factors.
Under certain circumstances, the Master Servicer, the Company or a
person specified in the related Prospectus Supplement may have the option to
purchase the assets in a Trust Fund and effect early retirement of the related
series of Bonds. See "The Agreements--Termination; Redemption of Bonds."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS
GENERAL. Each Single Family and Multifamily Loan will be evidenced by a
note or bond and secured by an instrument granting a security interest in real
property, which may be a mortgage, deed of trust or a deed to secure debt,
depending upon the prevailing practice and law in the state in which the related
Mortgaged Property is located. Mortgages, deed of trust and deeds to secure debt
are herein collectively referred to as "mortgages". A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties to
the mortgage and, generally, the order of recordation of the mortgage in the
appropriate public recording office. However, the lien of a recorded mortgage
will generally be subordinate to later-arising liens for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS. There are two parties to a mortgage: a
mortgagor (the borrower and usually the owner of the subject property) and a
mortgagee (the lender). In contrast, a deed of trust is a three-party
instrument, among a trustor (the equivalent of a borrower), a trustee to whom
the real property is conveyed, and a beneficiary (the lender) for whose benefit
the conveyance is made. Under a deed of trust, the trustor grants the property,
irrevocably until the debt is paid, in trust and generally with a power of sale,
to the trustee to secure repayment of the indebtedness evidenced by the related
note. A deed to secure debt typically has two parties. The borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with a
power of sale, until such time as the debt is repaid. In a case where the
borrower is a land trust, there would be an additional party because legal title
to the property is held by a land trustee under a land trust agreement for the
benefit of the borrower. At origination of a
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mortgage loan involving a land trust, the borrower executes a separate
undertaking to make payments on the mortgage note. The mortgagee's authority
under a mortgage, the trustee's authority under a deed of trust and the
grantee's authority under a deed to secure debt are governed by the express
provisions of the related instrument, the law of the state in which the real
property is located, certain federal laws (including, without limitation, the
Relief Act) and, in some deed of trust transactions, the directions of the
beneficiary.
LEASES AND RENTS. Mortgages that encumber income-producing multifamily
properties often contain an assignment of rents and leases, pursuant to which
the borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived therefrom, while (unless rents
are to be paid directly to the lender) retaining a revocable license to collect
the rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
CONTRACTS
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Such financing statements are
effective for five years and must be renewed at the end of each five years. The
certificate of title laws adopted by the majority of states provide that
ownership of motor vehicles and manufactured housing shall be evidenced by a
certificate of title issued by the motor vehicles department (or a similar
entity) of such state. In the states that have enacted certificate of title
laws, a security interest in a unit of manufactured housing, so long as it is
not attached to land in so permanent a fashion as to become a fixture, is
generally perfected by the recording of such interest on the certificate of
title to the unit in the appropriate motor vehicle registration office or by
delivery of the required documents and payment of a fee to such office,
depending on state law.
The Master Servicer will be required under the related Servicing
Agreement to effect such notation or delivery of the required documents and
fees, and to obtain possession of the certificate of title, as appropriate under
the laws of the state in which any Manufactured Home is registered. In the event
the Master Servicer fails, due to clerical errors or otherwise, to effect such
notation or delivery, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in a few
states), the Indenture Trustee may not have a first priority security interest
in the Manufactured Home securing a Contract. As manufactured homes have become
larger and often have been attached to their sites without any apparent
intention by the borrowers to move them, courts in many states have held that
manufactured homes may, under certain circumstances, become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located. Generally,
Contracts will contain provisions prohibiting the obligor from permanently
attaching the Manufactured Home to its site. So long as the obligor does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to its site, other parties could obtain an interest in the Manufactured Home
that is prior to the security interest originally retained by the Seller and
transferred to the Company.
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The Company will assign or cause to be assigned a security interest in
the Manufactured Homes to the Indenture Trustee, on behalf of the Bondholders.
Neither the Company, the Master Servicer nor the Indenture Trustee will amend
the certificates of title to identify the Indenture Trustee, on behalf of the
Bondholders, as the new secured party and, accordingly, the Company or the
Seller will continue to be named as the secured party on the certificates of
title relating to the Manufactured Homes. In most states, such assignment is an
effective conveyance of such security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds to
the Company's rights as the secured party. However, in some states there exists
a risk that, in the absence of an amendment to the certificate of title, such
assignment of the security interest might not be held effective against
creditors of the Company or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Company on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Indenture Trustee against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home. If there are any Manufactured Homes as to
which the Company has failed to perfect or cause to be perfected the security
interest assigned to the Trust Fund, such security interest would be subordinate
to, among others, subsequent purchasers for value of Manufactured Homes and
holders of perfected security interests. There also exists a risk in not
identifying the Indenture Trustee, on behalf of the Bondholders, as the new
secured party on the certificate of title that, through fraud or negligence, the
security interest of the Indenture Trustee could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and re-register
the Manufactured Home in such state, and if the Company did not take steps to
re-perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Company must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the Company would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Company would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Servicing Agreement, the Master Servicer will be
obligated to take such steps, at the Master Servicer's expense, as are necessary
to maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Company will obtain the representation of the related Seller that it has no
knowledge of any such liens with respect to any Manufactured Home securing a
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Indenture Trustee or Bondholders in the
event such a lien arises.
FORECLOSURE ON MORTGAGES
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Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust
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 addition to any notice
requirements contained in a deed of trust, 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 notice of default and notice of
sale. In addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within a specified
period, a notice of sale must be posted in a public place and, in most states,
published for a specific period of time in one or more newspapers. In addition,
some state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the real
property.
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 may occasionally result from difficulties in locating
necessary parties. Judicial foreclosure proceedings are often not contested by
any of the applicable parties. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the
loan at any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
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 a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during 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 a credit bid less than or equal to the unpaid
principal amount of the mortgage or deed of trust, accrued and unpaid interest
and the expense of foreclosure. Generally, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender. 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 and making
such repairs at its own expense as are necessary to render the property suitable
for sale. The lender will commonly obtain the services of a real estate broker
and pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property and, in some
states, subject to the terms of the loan, the lender may be entitled to a
deficiency judgment. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
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 prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Single Family and
Multifamily Loans which are junior mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens. The proceeds received
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by the referee or trustee from the sale are applied first to the costs, fees and
expenses of sale and then in satisfaction of the indebtedness secured by the
mortgage or deed of trust under which the sale was conducted. Any remaining
proceeds are generally payable to the holders of junior mortgages or deeds of
trust and other liens and claims in order of their priority, whether or not the
borrower is in default. Any additional proceeds are generally payable to the
mortgagor or trustor. The payment of the proceeds to the holders of junior
mortgages may occur in the foreclosure action of the senior mortgagee or may
require the institution of separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily-prescribed minimums. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
REPOSSESSION WITH RESPECT TO CONTRACTS
GENERAL. Repossession of manufactured housing is governed by state law.
A few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive
notice of the right to cure a default, repossession can commence
immediately upon default without prior notice. Repossession may be
effected either through self-help (peaceable retaking without court
order), voluntary repossession or through judicial process
(repossession pursuant to court-issued writ of replevin). The self-help
and/or voluntary repossession methods are more commonly employed, and
are accomplished simply by retaking possession of the manufactured
home. In cases in which the debtor objects or raises a defense to
repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance
with that order. Whether the method employed is self-help, voluntary
repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured
home to a secure location for refurbishment and resale or by removing
the occupants and their belongings from the manufactured home and
maintaining possession of the manufactured home on the location where
the occupants were residing. Various factors may affect whether the
manufactured home is physically removed or left on location, such as
the nature and term of the lease of the site on which it is located and
the condition of the unit. In many cases, leaving the
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manufactured home on location is preferable, in the event that the home
is already set up, because the expenses of retaking and redelivery will
be saved. However, in those cases where the home is left on location,
expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for
the subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method,
manner, time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession
expenses (expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the
full amount of the indebtedness, the remainder may be sought from the
debtor in the form of a deficiency judgement in those states that do
not prohibit or limit such judgments. The deficiency judgment is a
personal judgment against the debtor for the shortfall. Occasionally,
after resale of a manufactured home and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC
requires the party suing for the deficiency judgment to remit the
surplus to the debtor. Because the defaulting owner of a manufactured
home generally has very little capital or income available following
repossession, a deficiency judgment may not be sought in many cases or,
if obtained, will be settled at a significant discount in light of the
defaulting owner's strained financial condition.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
RIGHTS OF REDEMPTION
SINGLE FAMILY PROPERTIES AND MULTIFAMILY Properties. The purposes of a
foreclosure action in respect of a Single Family Property or Multifamily
Property are to enable the lender to realize upon its security and to bar the
borrower, and all persons who have interests in the property that are
subordinate to that of the foreclosing lender, from exercise of their "equity of
redemption". The doctrine of equity of
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redemption provides that, until the property encumbered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having interests that are subordinate to that of the foreclosing lender
have an equity of redemption and may redeem the property by paying the entire
debt with interest. Those having an equity of redemption must generally be made
parties and joined in the foreclosure proceeding in order for their equity of
redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which
should be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the property. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted 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 because the exercise of a right of redemption would
defeat the title of any purchase through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
MANUFACTURED HOMES. While state laws do not usually require notice to
be given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
SINGLE FAMILY LOANS AND MULTIFAMILY Loans. 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 including California,
statutes limit the right of the beneficiary or mortgagee to obtain a deficiency
judgment against the borrower following foreclosure. 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. In the case of a Mortgage Loan
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust, even if obtainable under applicable
law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. In the case
of a Mortgage Loan secured by a property owned by a trust where the Mortgage
Note is executed on behalf of the trust, a deficiency judgment against the trust
following foreclosure or sale under a deed of trust, even if obtainable under
applicable law, may be of little value to the mortgagee or beneficiary if there
are no trust assets against which such deficiency judgment may be executed.
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, in those states permitting such election, is that lenders
will usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in certain other states, statutory
provisions limit any deficiency judgment against the former borrower following a
foreclosure to the excess of the outstanding debt over the fair value of the
property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary
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or mortgagee from obtaining a large deficiency judgment against the former
borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, under the federal Bankruptcy
Code, as amended from time to time (Title 11 of the United States Code) (the
"Bankruptcy Code"), virtually all actions (including foreclosure actions and
deficiency judgment proceedings) to collect a debt are automatically stayed upon
the filing of the bankruptcy petition and, often, no interest or principal
payments are made during the course of the bankruptcy case. The delay and the
consequences thereof caused by such automatic stay can be significant. Also,
under the Bankruptcy Code, the filing of a petition in a bankruptcy by or on
behalf of a junior lienor may stay the senior lender from taking action to
foreclose out of such junior lien. Moreover, with respect to federal bankruptcy
law, a court with federal bankruptcy jurisdiction may permit a debtor through
his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on a debtor's residence by paying
arrearage within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearage over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt 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. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period.
In the case of income-producing multifamily properties, federal
bankruptcy law may also have the effect of interfering with or affecting the
ability of the secured lender to enforce the borrower's assignment of rents and
leases related to the mortgaged property. Under Section 362 of the Bankruptcy
Code, the lender will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended (the "Code"), may in certain circumstances provide priority over the
lien of a mortgage or deed of trust. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination and the
servicing of single family mortgage loans by numerous federal and some state
consumer protection laws. These laws include the federal Truth-in-Lending Act,
Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act and related statutes. These federal laws
impose specific statutory liabilities upon lenders who originate mortgage loans
and who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the mortgage loans.
CONTRACTS. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing
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a home, and, as part of the rehabilitation plan, reduce the amount of the
secured indebtedness to the market value of the home at the time of bankruptcy
(as determined by the court), leaving the party providing financing as a general
unsecured creditor for the remainder of the indebtedness. A bankruptcy court may
also reduce the monthly payments due under a contract or change the rate of
interest and time of repayment of the indebtedness.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are junior to senior mortgages or deeds of trust which are not
part of the Trust Fund. The rights of the Bondholders as the holders of a junior
deed of trust or a junior mortgage are subordinate in lien priority and in
payment priority to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive and
apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure on Mortgages" above.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Under the related Servicing Agreement, late charges will not be
retained by the Master Servicer as additional servicing compensation, and any
inability to collect these amounts will not affect payments to Bondholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
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The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder. Most of the Contracts in a Trust Fund will be subject to the
requirements of the FTC Rule. Accordingly, the Trust Fund, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related manufactured home may assert against the seller of the manufactured
home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party which
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the Bonds of the related series might realize
a loss if such costs were required to be paid by the Trust Fund.
ENFORCEABILITY OF CERTAIN PROVISIONS
TRANSFER OF SINGLE FAMILY PROPERTIES AND MULTIFAMILY Properties. Unless
the related Prospectus Supplement indicates otherwise, the Single Family Loans
and Multifamily Loans generally contain due-on-sale clauses. These clauses
permit the lender to accelerate the maturity of the loan if the borrower sells,
transfers or conveys the property. The enforceability of these clauses has been
the subject of legislation or litigation in many states, and in some cases the
enforceability of these clauses was limited or denied. However, the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act") preempts
state constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St Germain Act
does "encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by the
buyer rather than being paid off, which may have an impact upon the average life
of the Mortgage Loans and the number of Mortgage Loans which may be outstanding
until maturity.
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TRANSFER OF MANUFACTURED HOMES. Generally, manufactured housing
contracts contain provisions prohibiting the sale or transfer of the related
manufactured homes without the consent of the obligee on the contract and
permitting the acceleration of the maturity of such contracts by the obligee on
the contract upon any such sale or transfer that is not consented to. The Master
Servicer will, to the extent it has knowledge of such conveyance or proposed
conveyance, exercise or cause to be exercised its rights to accelerate the
maturity of the related Contracts through enforcement of due-on-sale clauses,
subject to applicable state law. In certain cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a due-on-sale clause in respect
of certain Manufactured Homes.
LATE PAYMENT CHARGES AND PREPAYMENT RESTRICTIONS. Mortgage notes and
mortgages, as well as manufactured housing conditional sales contracts and
installment loan agreements, may contain provisions that obligate the borrower
to pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. 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. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository 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. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision is authorized to issue rules
and regulations and to publish interpretations governing implementation of Title
V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal
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law. 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. Certain states have taken action to reimpose
interest rate limits or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to 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. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
As indicated above under "The Mortgage Pools--Representations by
Sellers," each Seller of a Mortgage Loan will have represented that such
Mortgage Loan was originated in compliance with then applicable state laws,
including usury laws, in all material respects. However, the Mortgage Rates on
the Mortgage Loans will be subject to applicable usury laws as in effect from
time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subjected to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks, state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions, and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The Company is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
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Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. In the event an obligor
is successful in asserting such a claim, the related Bondholders could suffer a
loss if (i) the related Seller fails or cannot be required to repurchase the
affected Contract for a breach of representation and warranty and (ii) the
Master Servicer or the Indenture Trustee were unsuccessful in asserting any
claim of contribution or subrogation on behalf of the Bondholders against the
manufacturer or other persons who were directly liable to the plaintiff for the
damages. Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), 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. The Relief Act applies to
individuals who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to Mortgagors
who enter military service (including reservists who are called to active duty)
after origination of the related Mortgage Loan, no information can be provided
as to the number of loans that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the Master Servicer to collect full amounts of interest on certain of
the Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Bonds, and would not
be covered by advances or by any Letter of Credit provided in connection with
the related series of Bonds. In addition, the Relief Act imposes limitations
that would impair the ability of the Master Servicer to foreclose on an affected
Mortgage Loan or enforce rights under a Contract during the Mortgagor's period
of active duty status, and, under certain circumstances, during an additional
three month period thereafter. Thus, in the event that the Relief Act or similar
legislation or regulations applies to any Mortgage Loan which goes into default,
there may be delays in payment and losses on the related Bonds in connection
therewith. Any other interest shortfalls, deferrals or forgiveness of payments
on the Mortgage Loans resulting from similar legislation or regulations may
result in delays in payments or losses to Bondholders of the related series.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the Bonds
offered hereunder to the extent it relates to matter of law or legal conclusions
with respect thereto, represents the opinion of counsel to the Depositor with
respect to that series on the material matters associated with such
consequences, subject to any qualifications set forth herein. This discussion
has been prepared with the advice of Thacher Proffitt & Wood, counsel to the
Company. This discussion is directed solely to Bondholders that hold the Bonds
as capital assets within the meaning of Section 1221 of the Code and does not
purport to discuss all federal
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income tax consequences that may be applicable to particular categories of
investors, some of which (such as banks, insurance companies and foreign
investors) may be subject to special rules. Further, the authorities on which
this discussion, and the opinion referred to below, are based are subject to
change or differing interpretations, which could apply retroactively.
Prospective investors should note that no rulings have been or will be sought
from the Internal Revenue Service ("IRS") with respect to any of the federal
income tax consequences discussed below, and no assurance can be given the IRS
will not take contrary positions. Taxpayers and preparers of tax returns should
be aware that under applicable Treasury regulations a provider of advice on
specific issues of law is not considered an income tax return preparer unless
the advice (i) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (ii) is directly relevant to the determination of an
entry on a tax return. Accordingly, taxpayers should consult their tax advisors
and tax return preparers regarding the preparation of any item on a tax return,
even where the anticipated tax treatment has been discussed herein. In addition
to the federal income tax consequences described herein, potential investors
should consider the state and local tax consequences, if any, of the purchase,
ownership and disposition of the Bonds. See "State and Other Tax Consequences."
Bondholders are advised to consult their tax advisors concerning the federal,
state, local or other tax consequences to them of the purchase, ownership and
disposition of the Bonds offered hereunder.
Taxable mortgage pool ("TMP") rules enacted as part of the Tax Reform
Act of 1986 treat certain arrangements that securitize real estate mortgages as
taxable corporations. An entity will be characterized as a TMP if (i)
substantially all of its assets are debt obligations and more than 50 percent of
such debt obligations consist of real estate mortgages or interests therein,
(ii) the entity is the obligor under debt obligations with two or more
maturities, and (iii) payments on the debt obligations referred to in (ii) bear
a relationship to payments on the debt obligations referred to in (i).
Furthermore, a group of assets held by an entity can be treated as a separate
TMP if the assets are expected to produce significant cash flow that will
support one or more of the entity's issues of debt obligation.
It is possible that the Issuer or a portion of the Issuer relating to
the ownership of the Mortgage Loans and the issuance of the Bonds could be
treated as a TMP. The related Prospectus Supplement for each series of Bonds
will discuss whether the Issuer is anticipated to be characterized as a TMP for
federal income tax purposes. Such characterization would require that the Issuer
be treated as a "separate" corporation and not includible with any other
corporation in a consolidated return, therefore subjecting the Issuer to
corporate income tax. However, it is anticipated that for federal income tax
purposes the Issuer will be treated as a grantor trust, one hundred percent of
which will be owned by the Company which is a "qualified REIT subsidiary" (as
defined in Section 856(i)(2) of the Code) of Imperial Holdings, which itself is
a REIT. Characterization of the Issuer as a TMP would result only in the
shareholders of Imperial Holdings being required to include in income, as
"excess inclusion" income, some or all of their allocable share of the Issuer's
net income that would be excess inclusion income, if any, if the Issuer were
treated as a REMIC. Such characterization of the Issuer as a grantor trust or a
"qualified REIT subsidiary" would not result in entity-level, corporate income
taxation with respect to the Issuer. If the Issuer were to fail to qualify as a
grantor trust and fail to continue to be treated as a "qualified REIT
subsidiary" by reason of the Company's failure to continue to qualify as a
"qualified REIT subsidiary" for federal income tax purposes, or for any other
reason, the net income of the Issuer would be subject to corporate income tax
and the Issuer would not be permitted to be included on a consolidated income
tax return of another corporate entity. No assurance can be given with regard to
the prospective qualification of the Issuer as either a grantor trust or a
"qualified REIT subsidiary" or of the Company as a "qualified REIT subsidiary"
for federal income tax purposes.
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Upon the issuance of the Bonds, Thacher Proffitt & Wood ("Tax
Counsel"), counsel to the Company, will deliver its opinion generally to the
effect that, for federal income tax purposes, assuming compliance with all
provisions of the Indenture and certain related documents, the Bonds will be
treated as indebtedness. The following discussion is based in part upon the
rules governing original issue discount that are set forth in Sections 1271-1273
and 1275 of the Code and in the Treasury regulations issued thereunder (the "OID
Regulations"). For purposes of this tax discussion, references to a "Bondholder"
or a "holder" are to the beneficial owner of a Bond.
STATUS AS REAL PROPERTY LOANS. (i) Bonds held by a domestic building
and loan association will not constitute "loans...secured by an interest in real
property" within the meaning of Code section 7701(a)(19)(C)(v); (ii) Bonds held
by a real estate investment trust will not constitute "real estate assets"
within the meaning of Code section 856(c)(5)(A); and (iii) interest on Bonds
will not be considered "interest on obligations secured by mortgages on real
property" within the meaning of Code section 856(c)(3)(B).
INTEREST AND ORIGINAL ISSUE DISCOUNT. The related Prospectus Supplement
for a series of Bonds will disclose whether such Bonds are anticipated to be
issued with original issue discount. Any holders of Bonds issued with original
issue discount generally will be required to include original issue discount in
income as it accrues, in accordance with the method described below, in advance
of the receipt of the cash attributable to such income. In addition, Section
1272(a)(6) of the Code provides special rules applicable to any class of Bonds
issued with original issue discount. Regulations have not been issued under that
section.
Under the OID Regulations, a holder of a Bond issued with a DE MINIMIS
amount of original issue discount must include such DE MINIMIS discount in
income, on a PRO RATA basis, as principal payments are made on the Bond. Stated
interest on the Bonds will be taxable to a Bondholder as ordinary interest
income when received or accrued in accordance with such Bondholder's method of
tax accounting.
Section 1272(a)(6) of the Code requires that a prepayment assumption
(the "Prepayment Assumption") be used with respect to the collateral underlying
debt instruments in computing the accrual of original issue discount if payments
under such debt instruments may be accelerated by reason of prepayments of other
obligations securing such debt instruments, and that adjustments be made in the
amount and rate of accrual of such discount to reflect differences between the
actual prepayment rate and the Prepayment Assumption. The Prepayment Assumption
is to be determined in a manner prescribed in Treasury regulations; as noted
above, those regulations have not been issued. The Conference Committee Report
(the "Committee Report") accompanying the Tax Reform Act of 1986 indicates that
the regulations will provide that the Prepayment Assumption used with respect to
a Bond must be the same as that used in pricing the initial offering of such
Bond. The Prepayment Assumption used by the Issuer in reporting original issue
discount for each series of Bonds will be consistent with this standard and will
be disclosed in the related Prospectus Supplement. However, no representation
will be made that the Mortgage Loans will in fact prepay at a rate conforming to
the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a Bond would be the excess of
its stated redemption price at maturity over its issue price. The issue price of
a particular class of Bonds will be the first cash price at which a substantial
amount of Bonds of that class is sold (excluding sales to bond houses, brokers
and underwriters). If less than a substantial amount of a particular class of
Bonds is sold for cash on or prior to the date of their initial issuance (the
"Closing Date"), the issue price for such class will be treated as the fair
market value of such class on the Closing Date. Under the OID Regulations, the
stated redemption price of a Bond is equal to the total of all payments to be
made on such Bond other than "qualified stated interest." "Qualified stated
interest" includes interest that is unconditionally payable at least annually at
a single fixed rate, or in the case of a variable rate debt instrument, at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one
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"qualified inverse floating rate," or a combination of "qualified floating
rates" that generally does not operate in a manner that accelerates or defers
interest payments on such Bond.
In the case of Bonds bearing adjustable interest rates, the
determination of the total amount of original issue discount and the timing of
the inclusion thereof will vary according to the characteristics of such Bonds.
If the original issue discount rules apply to such Bonds, the related Prospectus
Supplement will describe the manner in which such rules will be applied by the
Issuer with respect to those Bonds in preparing information returns to the
Bondholders and the IRS.
Certain classes of the Bonds may provide for the first interest payment
with respect to such Bonds to be made more than one month after the date of
issuance, a period which is longer than the subsequent monthly intervals between
interest payments. Assuming the "accrual period" (as defined below) for original
issue discount is each monthly period that ends on a Distribution Date, in some
cases, as a consequence of this "long first accrual period," some or all
interest payments may be required to be included in the stated redemption price
of the Bond and accounted for as original issue discount.
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a Bond will reflect such
accrued interest. In such cases, information returns to the Bondholders and the
IRS will be based on the position that the portion of the purchase price paid
for the interest accrued with respect to periods prior to the Closing Date is
treated as part of the overall purchase price of such Bond (and not as a
separate asset the purchase price of which is recovered entirely out of interest
received on the next Distribution Date) and that portion of the interest paid on
the first Distribution Date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
Distribution Date should be included in the stated redemption price of such
Bond. However, the OID Regulations state that all or some portion of such
accrued interest may be treated as a separate asset the cost of which is
recovered entirely out of interest paid on the first Distribution Date. It is
unclear how an election to do so would be made under the OID Regulations and
whether such an election could be made unilaterally by a Bondholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a Bond will be considered to be DE MINIMIS if it is
less than 0.25% of the stated redemption price of the Bond multiplied by its
weighted average maturity. For this purpose, the weighted average maturity of
the Bond is computed as the sum of the amounts determined, as to each payment
included in the stated redemption price of such Bond, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such Bond. Under the OID Regulations, original issue discount of
only a DE MINIMIS amount (other than DE MINIMIS original issue discount
attributable to a so-called "teaser" interest rate or an initial interest
holiday) will be included in income as each payment of stated principal is made,
based on the product of the total amount of such DE MINIMIS original issue
discount and a fraction, the numerator of which is the amount of such principal
payment and the denominator of which is the outstanding stated principal amount
of the Bond. The OID Regulations also would permit a Bondholder to elect to
accrue DE MINIMIS original issue discount into income currently based on a
constant yield method. See "--Market Discount" for a description of such
election under the OID Regulations.
If original issue discount on a Bond is in excess of a DE MINIMIS
amount, the holder of such Bond must include in ordinary gross income the sum of
the "daily portions" of original issue discount for each day during its taxable
year on which it held such Bond, including the purchase date but excluding the
disposition date. In the case of an original holder of a Bond, the daily
portions of original issue discount will be determined as follows.
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As to each "accrual period," that is each period that ends on a date
that corresponds to a Distribution Date and begins on the first day following
the immediately preceding accrual period (or in the case of the first such
period, begins on the Closing Date), a calculation will be made of the portion
of the original issue discount that accrued during such accrual period. The
portion of original issue discount that accrues in any accrual period will equal
the excess, if any, of (i) the sum of (A) the present value, as of the end of
the accrual period, of all of the distributions remaining to be made on the
Bond, if any, in future periods and (B) the distributions made on such Bond
during the accrual period of amounts included in the stated redemption price,
over (ii) the adjusted issue price of such Bond at the beginning of the accrual
period. The present value of the remaining distributions referred to in the
preceding sentence will be calculated (1) assuming that distributions on the
Bonds will be received in future periods based on the Mortgage Loans being
prepaid at a rate equal to the Prepayment Assumption and (2) using a discount
rate equal to the original yield to maturity of the Bond. For these purposes,
the original yield to maturity of the Bond will be calculated based on its issue
price and assuming that distributions on the Bond will be made in all accrual
periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption. The adjusted issue price of a Bond at the beginning of
any accrual period will equal the issue price of such Bond, increased by the
aggregate amount of original issue discount that accrued with respect to such
Bond in prior accrual periods, and reduced by the amount of any distributions
made on such Bond in prior accrual periods of amounts included in its stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a Bond that purchases such Bond at a price
(excluding any portion of such price attributable to accrued qualified stated
interest) less than its remaining stated redemption price will also be required
to include in gross income the daily portions of any original issue discount
with respect to such Bond. However, each such daily portion will be reduced, if
such cost is in excess of its "adjusted issue price," in proportion to the ratio
such excess bears to the aggregate original issue discount remaining to be
accrued on such Bond. The adjusted issue price of a Bond on any given day equals
the sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Bond at the beginning of the accrual period
which includes such day and (ii) the daily portions of original issue discount
for all days during such accrual period prior to such day.
MARKET DISCOUNT. A Bondholder that purchases a Bond at a market
discount, that is, in the case of a Bond issued without original issue discount,
at a purchase price less than its remaining stated principal amount, or in the
case of a Bond issued with original issue discount, at a purchase price less
than its adjusted issue price will recognize gain upon receipt of each
distribution representing stated redemption price. In particular, under Section
1276 of the Code, such a Bondholder generally will be required to allocate the
portion of each such distribution representing stated redemption price first to
accrued market discount not previously included in income, and to recognize
ordinary income to that extent. A Bondholder may elect to include market
discount in income currently as it accrues rather than including it on a
deferred basis in accordance with the foregoing. If made, such election will
apply to all market discount bonds acquired by such Bondholder on or after the
first day of the first taxable year to which such election applies. In addition,
the OID Regulations permit a Bondholder to elect to accrue all interest,
discount (including DE MINIMIS market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
made with respect to a Bond with market discount, the Bondholder would be deemed
to have made an election to include currently market discount in income with
respect to all other debt instruments having market discount that such
Bondholder acquires during the taxable year of the election or thereafter, and
possibly previously acquired instruments. Similarly, a Bondholder that made this
election for a Bond that is acquired at a premium would be deemed to have made
an election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Bondholder owns or acquires. See "-Premium"
below. Each of these elections to accrue
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interest, discount and premium with respect to a Bond on a constant yield method
or as interest would be irrevocable.
However, market discount with respect to a Bond will be considered to
be DE MINIMIS for purposes Section 1276 of the Code if such market discount is
less than 0.25% of the remaining stated redemption price of such Bond multiplied
by the number of complete years to maturity remaining after the date of its
purchase. In interpreting a similar rule with respect to original issue discount
on obligations payable in installments, the OID Regulations refer to the
weighted average maturity of obligations, and it is likely that the same rule
will be applied with respect to market discount, presumably taking into account
the Prepayment Assumption. If market discount is treated as DE MINIMIS under
this rule, it appears that the actual discount would be treated in a manner
similar to original issue discount of a DE MINIMIS amount. See "-Original Issue
Discount" above. Such treatment would 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 above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on Bonds should accrue, at the
Bondholder's option: (i) on the basis of a constant yield method, (ii) in the
case of a Bond issued without original issue discount, in an amount that bears
the same ratio to the total remaining market discount as the stated interest
paid in the accrual period bears to the total amount of stated interest
remaining to be paid on the Bonds as of the beginning of the accrual period or
(iii) in the case of a Bond issued with original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the Bond at the beginning of the accrual period. Moreover,
the Prepayment Assumption used in calculating the accrual of original issue
discount is also used in calculating the accrual of market discount. Because the
regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect such regulations might have on the tax treatment
of a Bond purchased at a discount in the secondary market.
To the extent that Bonds provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
slower than the rate at which such discount would accrue if it were original
issue discount. Moreover, in any event a holder of a Bond generally will be
required to treat a portion of any gain on the sale or exchange of such Bond as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income.
Further, under Section 1277 of the Code, a holder of a Bond may be
required to defer a portion of its interest deductions for the taxable year
attributable to any indebtedness incurred or continued to purchase or carry a
Bond purchased with market discount. For these purposes, the DE MINIMIS rule
referred to above applies. Any such deferred interest expense would not exceed
the market discount that accrues during such taxable year and is, in general,
allowed as a deduction not later than the year in which such market discount is
includible in income. If such holder elects to include market discount in income
currently as it accrues on all market discount instruments acquired by such
holder in that taxable year or thereafter, the interest deferral rule described
above will not apply.
PREMIUM. A Bond purchased at a cost (excluding any portion of such cost
attributable to accrued qualified stated interest) greater than its remaining
stated redemption price will be considered to be purchased at a premium. The
holder of such a Bond may elect under Section 171 of the Code to amortize such
premium under the constant yield method over the remaining term of the Bond. If
made, such an
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election will apply to all debt instruments having amortizable bond premium that
the holder owns or subsequently acquires. Amortizable premium will be treated as
an offset to interest income on the related Bond, rather than as a separate
interest deduction. The OID Regulations also permit Bondholders to elect to
include all interest, discount and premium in income based on a constant yield
method, further treating the Bondholder as having made the election to amortize
premium generally. See "-Market Discount" above. The Committee Report states
that the same rules that apply to accrual of market discount (which rules may
require use of a prepayment assumption in accruing market discount with respect
to Bonds without regard to whether such Bonds have original issue discount)
would also apply in amortizing bond premium under Section 171 of the Code.
REALIZED LOSSES. Under Section 166 of the Code, both corporate holders
of the Bonds and noncorporate holders of the Bonds that acquire such Bonds in
connection with a trade or business should be allowed to deduct, as ordinary
losses, any losses sustained during a taxable year in which their Bonds become
wholly or partially worthless as the result of one or more realized losses on
the Mortgage Loans. However, it appears that a noncorporate holder that does not
acquire a Bond in connection with a trade or business will not be entitled to
deduct a loss under Section 166 of the Code until such holder's Bond becomes
wholly worthless (i.e., until its outstanding principal balance has been reduced
to zero) and that the loss will be characterized as a short-term capital loss.
Each holder of a Bond will be required to accrue interest and original
issue discount with respect to such Bond, without giving effect to any
reductions in distributions attributable to defaults or delinquencies on the
Mortgage Loans until it can be established that any such reduction ultimately
will not be recoverable. As a result, the amount of taxable income reported in
any period by the holder of a Bond could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a Bond
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
SALES OF BONDS. If a Bond is sold, the selling Bondholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the Bond. The adjusted basis of a Bond
generally will equal the cost of such Bond to such Bondholder, increased by
income reported by such Bondholder with respect to such Bond (including original
issue discount and market discount income) and reduced (but not below zero) by
any amortized premium and any distributions on such bond received by such
Bondholder. Except as provided in the following two paragraphs, any such gain or
loss will be capital gain or loss, provided such Bond is held as a capital asset
(generally, property held for investment) within the meaning of Section 1221 of
the Code. The Code as of the date of this Prospectus provides for a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain recognized on the sale of a Bond by a seller who purchased such
Bond at a market discount will be taxable as ordinary income in an amount not
exceeding the portion of such discount that accrued during the period such Bond
was held by such holder, reduced by any market discount included in income under
the rules described above under "-Market Discount" and "-Premium."
A portion of any gain from the sale of a Bond that might otherwise be
capital gain may be treated as ordinary income to the extent that such Bond is
held as part of a "conversion transaction" within the meaning of Section 1258 of
the Code. A conversion transaction generally is one in which the taxpayer has
taken two or more positions in the same or similar property that reduce or
eliminate market risk, if substantially all of the taxpayer's return is
attributable to the time value of the taxpayer's net investment in such
transaction. The amount of gain so realized in a conversion transaction that is
recharacterized as
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ordinary income generally will not exceed the amount of interest that would have
accrued on the taxpayer's net investment at 120% of the appropriate "applicable
Federal rate" (which rate is computed and published monthly by the IRS) at the
time the taxpayer enters into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income items from
the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Payments of interest and
principal, as well as payments of proceeds from the sale of Bonds, may be
subject to the "backup withholding tax" under Section 3406 of the Code at a rate
of 31% if recipients of such payments fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of payments that is required to supply information but
that does not do so in the proper manner.
The Issuer will report to the Holders and to the IRS for each calendar
year the amount of any "reportable payments" during such year and the amount of
tax withheld, if any, with respect to payments on the Bonds.
TAX TREATMENT OF FOREIGN INVESTORS. Interest paid on a Bond to a
nonresident alien individual, foreign partnership or foreign corporation that
has no connection with the United States other than holding Bonds
("Nonresidents"), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the Company, or (ii) the recipient
is a controlled foreign corporation to which the Company is a related person)
and will be exempt from federal income tax. Upon receipt of appropriate
ownership statements, the Issuer normally will be relieved of obligations to
withhold tax from such 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 such 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. For
these purposes a Bondholder may be considered to be related to the Company by
holding a Bond or by having common ownership with any other holder of a Bond or
any affiliate thereof.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Bonds offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the certificates
offered hereunder.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts (and, as applicable, insurance company general accounts)
in which such plans, accounts or arrangements are invested that are subject to
the fiduciary responsibility provisions of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Bonds without regard to the
ERISA considerations described below, subject to the provisions of other
applicable federal and state law. Any such plan which is qualified and exempt
from taxation under Sections 401(a) and 501(a) of the Code, however, is subject
to the prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons (parties in interest under ERISA and disqualified persons under the
Code, collectively, "Parties in Interest") who have certain specified
relationships to the Plan unless a statutory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
The Trust Fund, the Company, any underwriter, the Owner
Trustee, the Indenture Trustee, the Master Servicer, any Administrator, any
Servicer, any provider of credit support or any of their affiliates may be
considered to be or may become Parties in Interest (or Disqualified Persons)
with respect to certain Plans. Prohibited transactions under Section 406 of
ERISA and Section 4975 of the Code may arise if a Bond is acquired by a Plan
with respect to which such persons are Parties in Interest (or Disqualified
Persons) unless such transactions are subject to one or more statutory or
administrative exemptions, such as: Prohibited Transaction Class Exemption
("PTCE") 75-1, which exempts certain transactions involving Plans and certain
broker-dealers, reporting dealers and banks; PTCE 90-1, which exempts certain
transactions between insurance company separate accounts and Parties in Interest
(or Disqualified Persons); PTCE 91-38, which exempts certain transactions
between bank collective investment funds and Parties in Interest (or
Disqualified Persons); PTCE 95-60, which exempts certain transactions between
insurance company general accounts and Parties in Interest (or Disqualified
Persons); or PTCE 84-14, which exempts certain transactions effected on behalf
of a Plan by a "qualified professional asset manager". There can be no assurance
that any of these class exemptions will apply with respect to any particular
Plan investment in Bonds or, even if it were deemed to apply, that any exemption
would apply to all prohibited transactions that may occur in connection with
such investment. Accordingly, prior to making an investment in the Bonds,
investing Plans should determine whether the Trust Fund, the Company, any
underwriter, the Owner Trustee, the Indenture Trustee, the Master Servicer, any
Administrator, any Servicer, any provider of credit support or any of their
affiliates is a Party in Interest (or Disqualified Person) with respect to such
Plan and, if so, whether such transaction is subject to one or more statutory or
administrative exemptions.
Any Plan fiduciary considering whether to invest in Bonds on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction
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provisions of ERISA and the Code to such investment. Each Plan fiduciary also
should determine whether, under the general fiduciary standards of investment
prudence and diversification, an investment in the Bonds is appropriate for the
Plan considering the overall investment policy of the Plan and the composition
of the Plan's investment portfolio as well as whether such investment is
permitted under the governing Plan instruments.
TAX-EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to
Section 501 of the Code (a "Tax-Exempt Investor") nonetheless will be subject to
federal income taxation to the extent that its income is "unrelated business
taxable income" ("UBTI") within the meaning of Section 512 of the Code.
LEGAL INVESTMENT MATTERS
Each class of Bonds offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Each such class that is rated
in one of the two highest rating categories by at least one Rating Agency will
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"), and, as such, will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions, life
insurance companies and pension funds) created pursuant to or existing under the
laws of the United States or of any State whose authorized investments are
subject to state regulation to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
such entities. Under SMMEA, if a State enacted legislation on or prior to
October 3, 1991 specifically limiting the legal investment authority of any such
entities with respect to "mortgage related securities," such securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain States have enacted legislation which
overrides the preemption provisions of SMMEA. SMMEA provides, however, that in
no event will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in "mortgage related
securities," or require the sale or other disposition of such securities, so
long as such contractual commitment was made or such securities acquired prior
to the enactment of such legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS with an effective date of
February 10, 1992. The Policy Statement generally indicates that a mortgage
derivative product will be deemed to be high risk if it exhibits greater price
volatility than a standard fixed rate thirty-year mortgage security. According
to the Policy Statement, prior to purchase, a depository institution will be
required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the proposed acquisition
would reduce the institution's overall interest rate risk. Reliance on analysis
and documentation obtained from a securities dealer or other outside party
without internal
-92-
<PAGE>
analysis by the institution would be unacceptable. There can be no assurance as
to which classes of Bonds will be treated as high-risk under the Policy
Statement.
The predecessor to the Office of Thrift Supervision ("OTS") issued a
bulletin, entitled, "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin established
guidelines for the investment by savings institutions in certain "high-risk"
mortgage derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Bonds. In addition, the National Credit Union Administration has issued
regulations governing federal credit union investments which prohibit investment
in certain specified types of securities, which may include certain classes of
Bonds. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
Certain classes of Bonds offered hereby, including any class that is
not rated in one of the two highest rating categories by at least one Rating
Agency, will not constitute "mortgage related securities" for purposes of SMMEA.
Any such class of Bonds will be identified in the related Prospectus Supplement.
Prospective investors in such classes of Bonds, in particular, should consider
the matters discussed in the following paragraph.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Bonds or to purchase any class of Bonds
representing more than a specified percentage of the investors' assets. The
Company will make no representations as to the proper characterization of any
class of Bonds for legal investment or other purposes, or as to the ability of
particular investors to purchase any class of Bonds under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of any class of Bonds. Accordingly, all investors whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Bonds of any class
thereof constitute legal investments or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
Bonds will be applied by the Company to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the Mortgage Loans in the
respective Mortgage Pools, and to pay other expenses. The Company expects that
it will make additional sales of securities similar to the Bonds from time to
time, but the timing and amount of any such additional offerings will be
dependent upon a number of factors, including the volume of mortgage loans
purchased by the Company, prevailing interest rates, availability of funds and
general market conditions.
METHODS OF DISTRIBUTION
The Bonds offered hereby and by the related Prospectus Supplements 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 net proceeds to the
Company from such sale.
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<PAGE>
The Company intends that Bonds 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 the Bonds of a particular
series 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 Company with institutional investors
through dealers; and
3. By direct placements by the Company with institutional
investors.
If underwriters are used in a sale of any Bonds (other than in
connection with an underwriting on a best efforts basis), such Bonds 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. Such underwriters may be broker-dealers
affiliated with the Company whose identities and relationships to the Company
will be as set forth in the related Prospectus Supplement. The managing
underwriter or underwriters with respect to the offer and sale of the Bonds of a
particular series 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 Bonds, underwriters may receive
compensation from the Company or from purchasers of such Bonds in the form of
discounts, concessions or commissions. Underwriters and dealers participating in
the distribution of the Bonds may be deemed to be underwriters in connection
with such Bonds, and any discounts or commissions received by them from the
Company and any profit on the resale of Bonds by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended (the "Securities Act").
It is anticipated that the underwriting agreement pertaining to the
sale of Bonds of any series 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 Bonds if any are purchased
(other than in connection with an underwriting on a best efforts basis) and
that, in limited circumstances, the Company will indemnify the several
underwriters and the underwriters will indemnify the Company 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 Company and
purchasers of Bonds of such series.
The Company anticipates that the Bonds offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Bonds, 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
such Bonds. Holders of Bonds should consult with their legal advisors in this
regard prior to any such reoffer or sale.
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<PAGE>
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters, in
connection with the Bonds of each series will be passed upon for the Company by
Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
A new Trust fund will be formed with respect to each series of Bonds,
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Bonds. Accordingly,
no financial statements with respect to any Trust Fund will be included in this
Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Bonds that they shall
have been rated not lower than investment grade, that is, in one of the four
highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with such certificates, the nature
of the underlying mortgage assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, Bondholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE
----
1986 Act......................................................................83
Accrual Bonds..............................................................6, 37
Accrued Bond Interest.........................................................45
Administrator..................................................................5
Affiliated Sellers............................................................19
Agreements....................................................................62
ARM Loans.....................................................................20
Available Distribution Amount.................................................44
Balloon Loans.................................................................21
Balloon Payment...............................................................21
Bankruptcy Code...............................................................77
Bankruptcy Loss...............................................................49
Beneficial Owner..............................................................37
Bond Register.................................................................37
Bond Registrar................................................................37
Bondholder....................................................................37
Bonds...................................................................1, 4, 37
Buydown Account...............................................................23
Buydown Agreement.............................................................42
Buydown Funds.................................................................23
Buydown Mortgage Loans........................................................23
Buydown Period................................................................23
CERCLA........................................................................26
Certificates...................................................................4
Closing Date..................................................................85
Code..........................................................................78
Collection Account............................................................40
Commission.....................................................................3
Company.....................................................................1, 4
Contracts.....................................................................19
Convertible Mortgage Loan.....................................................23
Debt Service Coverage Ratio...................................................25
Debt Service Reduction........................................................54
Defaulted Mortgage Loss.......................................................49
Deferred Interest.............................................................21
Deficient Valuation...........................................................54
Deleted Mortgage Loan.........................................................28
Designated Seller Transaction.................................................20
Determination Date............................................................44
Distribution Date..............................................................8
DTC...........................................................................37
DTC Registered Bonds..........................................................37
Due Period....................................................................47
ERISA.....................................................................12, 90
Event of Default..............................................................63
Excess Interest...............................................................54
Exchange Act...................................................................3
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Extraordinary Losses..........................................................49
FDIC..........................................................................19
FHA...........................................................................19
FHA Loans.....................................................................19
FHLMC.........................................................................26
Financial Guaranty Insurance Policy...........................................50
FIRREA........................................................................26
FNMA..........................................................................26
Fraud Loss....................................................................49
FTC Rule......................................................................79
Funding Account...............................................................46
Garn-St Germain Act...........................................................80
High LTV Loans................................................................23
Holder........................................................................37
Housing Act...................................................................26
HUD...........................................................................61
ICI Funding................................................................4, 62
ICII..........................................................................62
Imperial Holdings..............................................................4
Indenture...................................................................1, 4
Indenture Trustee..............................................................5
Index.........................................................................20
Insurance Proceeds............................................................41
Insurer.......................................................................50
Interest Rate..................................................................6
Intermediaries................................................................37
IRS...........................................................................83
Letter of Credit..............................................................51
Letter of Credit Bank.........................................................51
Liquidated Mortgage Loan......................................................34
Liquidation Proceeds..........................................................41
Loan-to-Value Ratio...........................................................22
Lock-out Expiration Date......................................................22
Lock-out Period...............................................................22
Loss..........................................................................59
Manufactured Homes............................................................19
Manufacturer's Invoice Price..................................................22
Master Servicer.........................................................1, 5, 29
Mortgage Loans..............................................................1, 5
Mortgage Notes................................................................18
Mortgage Pool...............................................................1, 7
Mortgage Rate.................................................................20
Mortgaged Property.............................................................7
Mortgages.....................................................................18
Mortgagor.....................................................................15
Multifamily Loans.............................................................19
Multifamily Properties........................................................19
Multifamily Property...........................................................7
Net Mortgage Rate.............................................................66
Net Operating Income..........................................................25
Non-conforming credit.........................................................14
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Nonrecoverable Advance........................................................47
Nonresidents..................................................................89
Note Margin...................................................................20
OID Regulations...............................................................84
OTS...........................................................................92
Overcollateralization.........................................................54
Owner Trust....................................................................4
Owner Trustee..................................................................4
Participants..................................................................37
Parties in Interest...........................................................90
Percentage Interest...........................................................45
Permitted Investments.........................................................40
Plan......................................................................12, 90
Policy Statement..............................................................92
Pool Insurer..................................................................42
Prepayment Interest Shortfall.................................................67
Prepayment Penalty............................................................22
Primary Insurance Policy......................................................58
Primary Insurer...............................................................59
Prospectus Supplement..........................................................1
PTCE..........................................................................90
Purchase Obligation...........................................................58
Purchase Price................................................................28
Qualified Substitute Mortgage Loan............................................28
Rating Agency.................................................................11
Realized Losses...............................................................49
Record Date...................................................................44
REIT..........................................................................62
Related Proceeds..............................................................47
Relief Act....................................................................82
REMIC..........................................................................1
REO Mortgage Loan.............................................................34
REO Property..................................................................32
Reserve Fund..................................................................54
RTC...........................................................................19
Securities..................................................................1, 4
Securities Act.............................................................3, 93
Securityholders...............................................................24
Seller.........................................................................8
Sellers....................................................................1, 19
Senior Bonds...............................................................6, 37
Senior Liens..................................................................21
Senior/Subordinate Series.....................................................37
Servicing Default.............................................................62
Servicing Standard............................................................30
Single Family Loans...........................................................19
Single Family Property........................................................19
SMMEA.....................................................................11, 91
Special Hazard Instrument.....................................................49
Special Hazard Insurance Policy...............................................53
Special Hazard Insurer........................................................53
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Special Hazard Loss...........................................................49
Special Hazard Losses.........................................................53
Special Servicer...........................................................5, 32
Spread.........................................................................5
Strip Bonds................................................................6, 37
Subordinate Securities.....................................................6, 37
Subservicer...................................................................32
Subservicers..................................................................24
Tax Counsel...................................................................84
Title V.......................................................................81
Title VIII....................................................................81
TMP...........................................................................83
Trust Agreement.............................................................1, 4
Trust Fund..................................................................1, 5
Trust Fund Assets...........................................................1, 5
Unaffiliated Sellers..........................................................19
Value.........................................................................22
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance
and distribution of the Bonds being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement....... $ 303,030
Legal Fees and Expenses..................... 375,000
Accounting Fees and Expenses................ 160,000
Trustee's Fees and Expenses
(including counsel fees)............. 75,000
Printing and Engraving Fees................. 125,000
Rating Agency Fees.......................... 250,000
Miscellaneous............................... 12,500
------------
Total ..................................... $ 1,300,530
============
Indemnification of Directors and Officers (Item 15 of Form S-3).
The Servicing Agreements and the Trust Agreements will provide that no
director, officer, employee or agent of the Registrant is liable to the Trust
Fund or the Bondholders, except for such person's own willful misfeasance, bad
faith or gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Servicing Agreements and the Trust Agreements will
further provide that, with the exceptions stated above, a director, officer,
employee or agent of the Registrant is entitled to be indemnified against any
loss, liability or expense incurred in connection with legal action relating to
such and related Bonds other than such expenses related to particular Mortgage
Loans.
Any underwriters who execute an Underwriting Agreement in the form
filed as Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities Act of 1933
from certain information furnished to the Registrant by or on behalf of such
indemnifying party.
Section 317 of the California Corporations Code allows for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article VI of the Registrant's
Articles of Incorporation (Exhibit 3.1 hereto) and Article XI of the
Registrant's Bylaws (Exhibit 3.2 hereto) provide for indemnification of the
Registrant's directors, officers, employees and other agents to
<PAGE>
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the extent and under the circumstances permitted by the California Corporations
Code. The Registrant has also entered into agreements with its directs and
executive officers that would require the Registrant, among other things, to
indemnify them against certain liabilities that may arise by reason of their
status or service as directors to the fullest extent not prohibited by law.
Exhibits (Item 16 of Form S-3).
Exhibits--
1.1 -- Form of Underwriting Agreement.*
3.1 -- Amended Articles of Incorporation.*
3.2 -- By-Laws.*
4.1 -- Form of Servicing Agreement.*
4.2 -- Form of Trust Agreement.*
4.3 -- Form of Indenture.*
5.1 -- Opinion of Thacher Proffitt & Wood with respect to
legality.
8.1 -- Opinion of Thacher Proffitt & Wood with respect to
certain tax matters (included with Exhibit 5.1).
23.1 -- Consent of Thacher Proffitt & Wood (included as part of
Exhibit 5.1 and Exhibit 8.1).
24.1 -- Power of Attorney.*
25.1 -- Statement of Eligibility and Qualification of Trustee
under the Trust Indenture Act of 1939 for Bankers Trust
Company of California, N.A.*
- -----------------
* Incorporated by reference from Registration Statement on Form S-3 (File No.
333-6637).
Undertakings (Item 17 of Form S-3).
(a) The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement (or
the most recent post-effective amendment hereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement; and
<PAGE>
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(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(j) The Registrant hereby undertakes to file an application for the purpose of
determining the eligibility of the trustee to act under subsection (a) of
Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Trust
Indenture Act.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, IMH
Assets Corp. certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3, reasonably believes that the
security rating requirement contained in Transaction Requirement B.5 of Form S-3
will be met by the time of the sale of the securities registered hereunder, and
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Santa Ana Heights, State
of California, on the 28th day of October, 1997.
IMH ASSETS CORP.
By /s/William Ashmore
--------------------------
Name: William Ashmore
Title: Director and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ William Ashmore Director and October 28, 1997
- ------------------------------------------ President
William Ashmore (Principal Executive
Officer)
* Director, Chief Financial October 28, 1997
- ------------------------------------------ Officer and Secretary
Richard Johnson (Principal Financial Officer
and Principal Accounting Officer)
* Director October 28, 1997
- ------------------------------------------
Lee Bromiley
*By:/s/ William Ashmore
-------------------------
William Ashmore
Attorney-in-fact pursuant to a power of attorney filed with Registration Statement No. 333-6637.
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION SEQUENTIALLY
NUMBER NUMBERED PAGE
1.1 Form of Underwriting Agreement.*
3.1 Amended Certificate of Incorporation.*
3.2 By-Laws.*
4.1 Form of Servicing Agreement.*
4.2 Form of Trust Agreement.*
4.3 Form of Indenture.*
5.1 Opinion of Thacher Proffitt & Wood with
respect to legality.
8.1 Opinion of Thacher Proffitt & Wood with
respect to certain tax matters
(included as part of Exhibit 5.1).
23.1 Consent of Thacher Proffitt & Wood
(included as part of Exhibit 5.1).
24.1 Power of Attorney.*
25.1 Statement of Eligibility and Qualification of
Trustee under the Trust Indenture Act of 1939
for Bankers Trust Company of California,
N.A.*
*Incorporated by reference from Registration Statement
on Form S-3 (File No. 333-6637).
Exhibit 5.1
-----------
(Includes Exhibits 8.1 and 23.1)
October 28, 1997
IMH Assets Corp.
20371 Irvine Avenue, Suite 200
Santa Ana Heights, California 92707
Re: IMH Assets Corp.
Collateralized Mortgage Bonds
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to IMH Assets
Corp., a California corporation (the "Registrant") in connection
with the registration under the Securities Act of 1933, as
amended (the "Act"), of Collateralized Mortgage Bonds (the
"Bonds"), and the related preparation and filing of a
Registration Statement on Form S-3 (the "Registration
Statement"). The Bonds are issuable in series under separate
indentures (each such agreement, an "Indenture"), between an
issuer and an indenture trustee, each to be identified in the
prospectus supplement for such series of Bonds. Each Indenture
will be substantially in the respective form filed as an Exhibit
to the Registration Statement.
In connection with rendering this opinion
letter, we have examined the form of the Indenture contained as
an Exhibit in the Registration Statement, the Registration
Statement and such records and other documents as we have deemed
necessary. As to matters of fact, we have examined and relied
upon representations or certifications of officers of the
Registrant or public officials. We have assumed the authenticity
of all documents submitted to us as originals, the
<PAGE>
IMH Assets Corp.
October 28, 1997 Page 2.
genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents. We
have assumed that all parties, other than the Registrant, had the
corporate power and authority to enter into and perform all
obligations thereunder, and, as to such parties, we also have
assumed the due authorization by all requisite corporate action
and the enforceability of such documents.
In rendering this opinion letter, we express no
opinion as to the laws of any jurisdiction other than the laws of
the State of New York and the corporate laws of the State of
Delaware, nor do we express any opinion, either implicitly or
otherwise, on any issue not expressly addressed below. In
rendering this opinion letter, we have not passed upon and do not
pass upon the application of "doing business" or the securities
laws of any jurisdiction. This opinion letter is further subject
to the qualification that enforceability may be limited by (i)
bankruptcy, insolvency, liquidation, receivership, moratorium,
reorganization or other laws affecting the enforcement of the
rights of creditors generally and (ii) general principles of
equity, whether enforcement is sought in a proceeding in equity
or at law.
Based on the foregoing, we are of the opinion
that:
1. When an Indenture for a series of Bonds has
been duly authorized by all necessary action and duly executed
and delivered by the parties thereto, such Indenture will be a
legal and valid obligation of the applicable issuer.
2. When an Indenture for a series of Bonds has
been duly authorized by all necessary action and duly executed
and delivered by the parties thereto, and when the Bonds of such
series have been duly executed and authenticated in accordance
with the provisions of that Indenture, and issued and sold as
contemplated in the Registration Statement and the prospectus and
prospectus supplement delivered in connection therewith, such
Bonds will be legally and validly issued and outstanding, fully
paid and non-assessable, and will be binding obligations of the
applicable issuer, and the holders of such Bonds will be entitled
to the benefits of that Indenture.
3. The description of federal income tax
consequences appearing under the heading "Certain Federal Income
Tax Consequences" in the prospectus relating to the Bonds
contained in the Registration Statement, while not purporting to
discuss all possible federal income tax consequences of an
investment in the Bonds, is accurate with respect to those tax
consequences which are discussed.
We hereby consent to the filing of this opinion
letter as an Exhibit to the Registration Statement, and to the
use of our name in the prospectus and prospectus supplement
relating to the Bonds included in the Registration Statement
under the heading "Legal Matters", and in the prospectus relating
to the Bonds included in the Registration Statement under the
heading "Certain Federal Income Tax Consequences", without
admitting that we are "experts"
<PAGE>
IMH Assets Corp.
October 28, 1997 Page 3.
within the meaning of the Act, and the rules and regulations thereunder, with
respect to any part of the Registration Statement, including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By /s/ Thacher Proffitt & Wood
----------------------------
