PROSPECTUS SUPPLEMENT
(To Prospectus Dated November 7, 1996)
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$185,188,000
Access Financial(TM) Mortgage Loan Trust 1997-2
Mortgage Loan Pass-Through Certificates, Series 1997-2
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$39,812,000 Class A-1 Group I Certificates, Variable Pass-Through Rate
$21,165,000 Class A-2 Group I Certificates, 7.000% Pass-Through Rate
$10,000,000 Class A-3 Group I Certificates, 7.300% Pass-Through Rate
$ 8,175,000 Class A-4 Group I Certificates, 7.675% Pass-Through Rate
$10,000,000 Class A-5 Group I Certificates, 7.275% Pass-Through Rate
$96,036,000 Class A-6 Group II Certificates, Variable Pass-Through Rate
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[LOGO] Access Financial Lending Corp.
Company and Master Servicer
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The Access Financial Mortgage Loan Pass-Through Certificates, Series 1997-2 (the
"Certificates") will consist of six classes of offered certificates, the Class
A-1 Group I Certificates, the Class A-2 Group I Certificates, the Class A-3
Group I Certificates, the Class A-4 Group I Certificates, the Class A-5 Group I
Certificates (collectively, the "Class A Group I Certificates" or the "Group I
Certificates") and the Class A-6 Group II Certificates (the "Class A-6 Group II
Certificates" or the "Group II Certificates", together with the Group I
Certificates the "Class A Certificates") which represent beneficial ownership
interests in Access Financial Mortgage Loan Trust 1997-2 (the "Trust"). The
assets of the Trust consist primarily of a pool (the "Pool") of fixed and
adjustable rate, amortizing mortgage loans which are secured by first or second
liens on residential properties (the "Mortgage Loans"), and the Certificate
Insurance Policy (as defined below; see the Index of Principal Definitions on
page i hereof) covering the Class A Certificates.
The Company will have obtained on or before the Closing Date a financial
guaranty insurance policy (the "Certificate Insurance Policy") from Financial
Security Assurance Inc. (the "Certificate Insurer") which will unconditionally
and irrevocably guarantee payment of certain amounts due to the Owners of the
Class A Certificates to the extent described herein; see "The Certificate
Insurance Policy and the Certificate Insurer -- The Certificate Insurance
Policy" in this Prospectus Supplement.
(Cover continued on next page)
[LOGO] FSA
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For a discussion of certain risk factors regarding an investment in the Class A
Certificates, see "Risk Factors" on page S-17 herein and on page 15 of the
accompanying Prospectus.
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Prudential Securities Incorporated and J.P. Morgan Securities, Inc. (the
"Underwriters") have agreed to purchase from the Trust the Class A-1 Group I
Certificates at an aggregate price of 99.75% of the principal amount thereof,
the Class A-2 Group I Certificates at an aggregate price of 99.75% of the
principal amount thereof, the Class A-3 Group I Certificates at an aggregate
price of 99.75% of the principal amount thereof, the Class A-4 Group I
Certificates at an aggregate price of 99.75% of the principal amount thereof,
the Class A-5 Group I Certificates at an aggregate price of 99.75% of the
principal amount thereof and the Class A-6 Group II Certificates at an aggregate
price of 99.75% of the principal amount thereof (representing $184,725,030
aggregate proceeds to the Company before deducting expenses payable by the
Company, estimated at $350,000) plus accrued interest, if any, from May 2, 1997
to the Closing Date for the Class A-2, A-3, A-4 and A-5 Group I Certificates
subject to the terms and conditions set forth in the Underwriting Agreement
dated May 22, 1997 among the Underwriters and the Company. See "Underwriting" in
this Prospectus Supplement.
The Underwriters propose to offer the Class A Certificates from time to time for
sale in negotiated transactions or otherwise, at market prices prevailing at the
time of sale or at negotiated prices. For further information with respect to
the plan of distribution and any discounts, commissions or profits on resale
that may be deemed underwriting discounts or commissions, see "Underwriting" in
this Prospectus Supplement.
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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 NOR 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.
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The Class A Certificates are offered hereby by the Underwriters when, as and if
issued by the Trust, delivered and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that delivery
of the Class A Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company, CEDEL, S.A. and Euroclear on or
about May 29, 1997 against payment in immediately available funds.
Prudential Securities Incorporated J.P. Morgan & Co.
May 22, 1997
<PAGE>
(Cover continued from previous page)
The Class A Group I Certificates will represent undivided ownership interests in
a group ("Group I") of Mortgage Loans in the Trust which bear fixed rates of
interest, and the Class A-6 Group II Certificates will represent undivided
ownership interests in a group ("Group II") of Mortgage Loans in the Trust which
bear adjustable rates of interest. Group I and Group II are collectively
referred to herein as the "Mortgage Loan Groups" and each singularly, a
"Mortgage Loan Group".
The Certificates will be issued pursuant to a Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement") among Access Financial Lending Corp. as
the Company (the "Company"), and as Master Servicer (the "Master Servicer"),
Access Financial Receivables Corp., a Delaware corporation (the "Transferor"),
and The Chase Manhattan Bank (the "Trustee"). On or prior to the Closing Date,
the Company will acquire the Mortgage Loans from the Originators, as described
herein. Pursuant to a Purchase and Sale Agreement dated as of May 1, 1997 (the
"Sale Agreement"), the Company will sell the Mortgage Loans to the Transferor.
The Transferor will in turn sell the Mortgage Loans to the Trust pursuant to the
Pooling and Servicing Agreement. In addition to the Class A Certificates, the
Trust will also issue a subordinate Class of Certificates with respect to Group
I and Group II (the "Class B Certificates"), and one or more Classes of Residual
Certificates. Only the Class A Certificates are offered hereby. Distributions of
interest on the Class A Certificates are of an equal priority to the extent
described herein, and distributions on the Class B Certificates and on the
Residual Certificates are subordinate to distributions on the Class A
Certificates to the extent described herein. See "Description of the
Certificates" herein.
All of the Mortgage Loans were originated under the Company's Mortgage Loan
Program by unaffiliated originators (the "Originators"). Except for certain
representations and warranties relating to the Mortgage Loans and certain other
matters, Access Financial Lending Corp., Access Financial Receivables Corp.,
Financial Security Assurance Inc., the Master Servicer, any Sub-Servicers and
the Originators will have no obligations with respect to the Certificates.
Distributions of principal and interest on the Class A Certificates will be made
to the extent funds are available therefor on the 18th day of each month or if
such day is not a business day, on the next succeeding business day commencing
June 18, 1997 (each, a "Payment Date") to holders of record as of the close of
business on the first business day of the current calendar month (with respect
to the Class A Fixed Rate Certificates) or as of the close of business on the
business day immediately preceding such Payment Date (with respect to the Class
A-1 Group I Certificates and the Class A-6 Group II Certificates), except in the
case of the first Payment Date, on which distributions will be made to holders
of record as of the Closing Date (each such date being the applicable "Record
Date").
An ERISA Plan purchasing the Class A Certificates should consult with its legal
advisors concerning the impact of ERISA and the Code with respect to such
purchase. See "Risk Factors" and "ERISA Considerations" herein.
There is currently no secondary market for any Class of the Class A
Certificates. There can be no assurance that a secondary market for any of the
Class A Certificates will develop, or if it does develop, that it will continue.
One or more elections will be made to treat certain assets of the Trust as "real
estate mortgage investment conduits" ("REMICs") for federal income tax purposes,
pursuant to the Internal Revenue Code of 1986, as amended (the "Code").
See "Federal Tax Consequences" herein.
S-2
<PAGE>
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE SECURITIES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE SECURITIES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE CLASS A CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF ACCESS FINANCIAL LENDING CORP., ACCESS
FINANCIAL RECEIVABLES CORP., THE TRUSTEE, THE CERTIFICATE INSURER, ANY
SUB-SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES, EXCEPT TO THE EXTENT
DESCRIBED HEREIN. THE CLASS A CERTIFICATES AND THE MORTGAGE LOANS ARE NOT
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, NOR HAS ANY GOVERNMENTAL
AGENCY PASSED UPON THE ACCURACY OF THE INFORMATION CONTAINED IN THIS PROSPECTUS.
AVAILABLE INFORMATION
The Company has filed a Registration Statement under the Securities Act of
1933, as amended, (the "1933 Act") with the Securities and Exchange Commission
(the "Commission") on behalf of the Trust with respect to the Class A
Certificates offered pursuant to this Prospectus Supplement and the related
Prospectus. For further information, reference is made to the Registration
Statement and amendments thereof and to the exhibits thereto, which are
available for inspection without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
7 World Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison
Street, Chicago, Illinois 60661. Copies of the Registration Statement and
amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. In addition, the Commission maintains a site on the
World Wide Web at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
REPORTS TO THE HOLDERS
So long as the Class A Certificates are in book-entry form, monthly and
annual reports concerning such Certificates and the Trust will be sent by the
Trustee to Cede & Co. ("Cede"), as the nominee of The Depository Trust Company
("DTC") and as registered holder of the Class A Certificates pursuant to the
Pooling and Servicing Agreement. DTC will forward such reports to the
Participants and indirect participants by mail for forwarding to the Owner of
any Class A Certificates (the "Owner" or "Certificateholder"). See "Risk
Factors" and "Description of the Certificates -- Reports to Owners". The Trust
will not provide any financial information to the Owners which has been examined
and reported upon, with an opinion expressed by, an independent public
accountant. The Company and the Transferor have determined that their respective
financial statements are not material to the offering made hereby. The Trust
will have no assets or obligations prior to issuance of the Certificates and
will engage in no activities other than those described herein. Accordingly, no
financial statements with respect to the Trust are included in this Prospectus
Supplement and the related Prospectus.
S-3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described in the accompanying Prospectus under
"Incorporation of Certain Documents by Reference," the financial statements of
the Certificate Insurer included in, or as exhibits to, the following documents
which have been filed with the Commission by Financial Security Assurance
Holdings Ltd. ("Holdings"), are hereby incorporated by reference in the
Registration Statement of which this Prospectus and Prospectus Supplement form a
part:
(1) Annual Report on Form 10-K for the year ended December 31, 1996, and
(2) Quarterly Report on Form 10-Q for the period ended March 31, 1997.
The Company will provide, without charge, to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for such copies should be sent to Access Financial Lending
Corp., attention: Law Department, 400 Highway 169 South, Suite 400, St. Louis
Park, MN 55426-1106, (612) 542-6500. All financial statements of the Certificate
Insurer included in documents filed by Holdings pursuant to Section 13(a), 14 or
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") subsequent to
the date of this Prospectus Supplement and prior to the termination of the
offering of the Securities shall be deemed to be incorporated by reference into
this Prospectus Supplement and to be a part hereof from the respective dates of
filing of such documents.
S-4
<PAGE>
SUMMARY
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Indices of Principal
Definitions for the location in either the Prospectus or this Prospectus
Supplement of the definitions of certain capitalized terms.
Issuer Access Financial Mortgage Loan Trust 1997-2 (the
"Trust").
Securities Offered $39,812,000 aggregate principal amount of Class
A-1 Group I Certificates, Variable Pass-Through
Rate; $21,165,000 aggregate principal amount of
Class A-2 Group I Certificates, 7.000%
Pass-Through Rate; $10,000,000 aggregate principal
amount of Class A-3 Group I Certificates, 7.300%
Pass-Through Rate; $8,175,000 aggregate principal
amount of Class A-4 Group I Certificates, 7.675%
Pass-Through Rate; $10,000,000 aggregate principal
amount of Class A-5 Group I Certificates, 7.275%
Pass-Through Rate; and $96,036,000 aggregate
principal amount of Class A-6 Group II
Certificates.
Company Access Financial Lending Corp., a Delaware
corporation (the "Company") and a wholly-owned
subsidiary of Access Financial Holdings Corp.
Transferor Access Financial Receivables Corp., a Delaware
corporation (the "Servicer").
Trustee The Chase Manhattan Bank (the "Trustee").
Originators of the
Mortgage Loans The Mortgage Loans to be acquired by the Trust
have been acquired by the Company from the
Originators, in accordance with the Company's
underwriting criteria.
Original Pool Principal
Balance $185,196,880.19 as of the close of business on the
Cut-Off Date.
Original Group I
Pool Principal Balance $89,156,666.34 as of the close of business on the
Cut-Off Date.
Original Group II
Pool Principal Balance $96,040,213.85 as of the close of business on the
Cut-Off Date.
Closing Date On or about May 29, 1997.
Cut-Off Date May 1, 1997.
Description of the
Certificates The Certificates will be issued by the Trust
pursuant to a Pooling and Servicing Agreement to
be dated as of May 1, 1997 (the "Pooling and
Servicing Agreement") among the Master Servicer,
the Company, the Transferor and the Trustee. The
$89,152,000 aggregate principal amount of Class A
Group I Certificates (collectively, the "Class A
Group I Certificates" or the "Group I
Certificates"), and the $96,036,000 aggregate
principal amount of Class A-6 Group II
Certificates (the "Class A-6 Group II
Certificates" or the "Group II Certificates"), are
senior certificates as described herein.
S-5
<PAGE>
The assets of the Trust initially will include two
groups (each, a "Mortgage Loan Group") of
closed-end mortgage loans (the "Mortgage Loans")
secured by mortgages or deeds of trust (the
"Mortgages") on one-to-four family residential
properties (the "Mortgaged Properties") to be
conveyed to the Trust on the Closing Date. The
Group I Certificates will represent undivided
ownership interests in a group of fixed-rate
Mortgage Loans ("Group I"). The Group II
Certificates will represent undivided ownership
interests in a group of adjustable-rate Mortgage
Loans ("Group II").
The Trust will issue a subordinate Class of
Certificates with respect to Group I and Group II
(the "Class B Certificates"), which are
subordinated to the Class A Group I Certificates
and the Class A-6 Group II Certificates. The Class
B Certificates are not being offered hereby. The
Trust will also issue one residual class of
Certificates with respect to each REMIC election
made by the Trust (the "Residual Certificates")
which are not being offered hereby and will
initially be retained by the Company or its
affiliates. The Class A Group I Certificates, the
Class A-6 Group II Certificates, the Class B
Certificates and the Residual Certificates are
collectively referred to as the "Certificates".
The Class A Group I Certificates and the Class A-6
Group II Certificates are collectively referred to
as the "Class A Certificates".
A. Class A Group I
Certificates The Class A Group I Certificates represent senior
beneficial ownership interests in Group I. One
hundred percent (100%) of the Group I Insured
Distribution Amount (as described herein under
"Description of the Certificates") due to the
Owners of the Class A Group I Certificates on each
Payment Date is guaranteed by the Certificate
Insurer. The final scheduled Payment Date for the
Class A-1 Group I Certificates is March 18, 2012,
for the Class A-2 Group I Certificates is June 18,
2016, for the Class A-3 Group I Certificates is
October 18, 2023, for the Class A-4 Group I
Certificates is June 18, 2027 and for the Class
A-5 Group I Certificates is June 18, 2027. Each
Class of Class A Group I Certificates is issuable
in original principal amounts of $1,000 and
integral multiples thereof except that one
certificate for each Class of Class A Group I
Certificates may be issued in a different amount.
B. Class A-6 Group
II Certificates The Class A-6 Group II Certificates represent
senior beneficial ownership interests in Group II.
One hundred percent (100%) of the Group II Insured
Distribution Amount (as described herein under
"Description of the Certificates") due to the
Owners of the Class A-6 Group II Certificates on
each Payment Date is guaranteed by the Certificate
Insurer. The final scheduled Payment Date for the
Class A-6 Group II Certificates is May 18, 2027.
The Class A-6 Group II Certificates are issuable
in original principal amounts of $1,000 and
integral multiples thereof except that one
certificate may be issued in a different amount.
The Mortgage Loan
Pool The statistical information concerning the Pool of
Mortgage Loans is based upon Pool information as
of the close of business on May 1, 1997 (the
"Cut-Off Date").
The Pool of Mortgage Loans consists of Notes
secured by mortgages, deeds of trust or other
instruments creating liens or estates in fee
simple interests ("Mortgages") on one- to
four-family residential properties, including
investment properties. The Mortgage Loans will not
be insured by primary mortgage
S-6
<PAGE>
insurance policies, nor will any pool insurance
insure the Mortgage Loans. The Mortgage Loans are
not guaranteed by the Company, the Master
Servicer, the Sub-Servicers, the Trustee or any of
their respective affiliates. The Mortgage Loans
will be serviced by the Master Servicer on a
"scheduled/actual" basis (i.e., "scheduled"
interest and "actual" principal receipts are
required to be remitted by the Master Servicer to
the Trustee each month).
Each Mortgage Loan in the Trust will be assigned
to one of two mortgage loan groups ("Group I" or
"Group II", each, a "Mortgage Loan Group")
comprised of Mortgage Loans which bear
fixed-interest rates only in the case of Group I,
and Mortgage Loans which bear adjustable interest
rates only in the case of Group II. As of the
Cut-Off Date, the Mortgage Loans in Group I had an
aggregate principal balance of approximately
$89,156,666.34 (the "Original Group I Pool
Principal Balance") and the Mortgage Loans in
Group II had an aggregate principal balance of
approximately $96,040,213.85 (the "Original Group
II Pool Principal Balance"). The sum of the
Original Group I Pool Principal Balance and the
Original Group II Pool Principal Balance is equal
to the "Original Pool Principal Balance".
The Pool of Mortgage Loans in Group I consists of
approximately 1,502 Mortgages secured by Mortgaged
Properties located in 42 states and the District
of Columbia. The Pool of Mortgage Loans in Group I
consists as of the Cut-Off Date and as a
percentage of the Original Group I Pool Principal
Balance, of approximately 95.98% of loans secured
by first liens on the related Mortgaged Properties
and approximately 4.02% of loans secured by second
liens on the related Mortgaged Properties. The
Pool of Mortgage Loans in Group I consists of
approximately 94.69% of loans secured by primary
residences. 51.11% of the Mortgage Loans in Group
I will be fully amortizing and 48.89% of the
Mortgage Loans in Group I are partially amortizing
loans ("Balloon Loans"). The weighted average
Combined Loan-to-Value Ratio (with property values
calculated as of the time of origination of the
related Mortgage Loan) of the Pool of Mortgage
Loans in Group I is approximately 74.246% with a
range from approximately 11.000% to approximately
90.000%; the weighted average stated remaining
term to maturity is approximately 233 months, with
a range from 56 months to 360 months; the weighted
average number of months since origination is
approximately 2 months; the average principal
balance of the Mortgage Loans in Group I is
approximately $59,358.63, the highest principal
balance is approximately $479,199.96 and the
lowest principal balance is approximately
$10,000.00; the coupon rates (the "Coupon Rates")
of the Mortgage Loans in Group I range from 7.500%
per annum to 17.950% per annum, with a weighted
average Coupon Rate of approximately 11.594% per
annum.
The Pool of Mortgage Loans in Group II consists of
approximately 1,059 Mortgages secured by Mortgaged
Properties located in 40 states and the District
of Columbia. The Pool of Mortgage Loans in Group
II consists as of the Cut-Off Date and as a
percentage of the Original Group II Pool Principal
Balance, of 100% of loans secured by first liens
on the related Mortgaged Properties. The Pool of
Mortgage Loans in Group II consists of
approximately 96.50% of loans secured by primary
residences. 99.96% of the Mortgage Loans in Group
II will be fully amortizing and 0.04% of the
Mortgage Loans in Group II are Balloon Loans. The
weighted average Loan-to-Value Ratio (with
property values calculated as of the time of
origination of the related Mortgage Loan) of the
Pool of Mortgage Loans in Group II is
approximately 77.657% with a range from
S-7
<PAGE>
approximately 28.000% to approximately 90.000%;
the weighted average stated remaining term to
maturity is approximately 358 months, with a range
from 171 months to 360 months; the weighted
average number of months since origination is
approximately 1 month; the average principal
balance of the Mortgage Loans in Group II is
approximately $90,689.53, the highest principal
balance is approximately $450,000.00 and the
lowest principal balance is approximately
$13,921.17; the Coupon Rates of the Mortgage Loans
in Group II range from 6.990% per annum to 14.250%
per annum, with a weighted average Coupon Rate of
approximately 10.242% per annum; the margins of
the Mortgage Loans in Group II range from 3.625%
to 9.750% with a weighted average margin of
approximately 6.453% per annum. The Coupon Rates
of Mortgage Loans in Group II bear interest rates
that adjust semi-annually based on six-month
LIBOR. In general the interest rates on the
Mortgage Loans in Group II are subject to periodic
interest rate caps and lifetime interest rate
ceilings. 45.37% of the aggregate principal
balance of the Mortgage Loans in Group II were
fixed rate loans that, in 2 years from
origination, will be converted into variable rate
loans and 0.47% of the aggregate principal balance
of the Mortgage Loans in Group II were fixed rate
loans that, in 3 years from origination, will be
converted into variable rate loans.
Class A-1 Pass-
Through Rate On each Payment Date, the "Class A-1 Pass-Through
Rate" will be equal to the lesser of (i) the
London interbank offered rate for one-month United
States dollar deposits ("LIBOR") (calculated as
described under "Description of the Certificates
-- Calculation of LIBOR") as of the second to last
business day prior to the immediately preceding
Payment Date (or as of the second to the last
business day prior to the Closing Date in the case
of the first Payment Date) plus 0.10% per annum
and (ii) the weighted average net coupon rate
(i.e., the weighted average coupon rate on the
Mortgage Loans in Group I less the sum of the per
annum rates at which the Servicing Fees, Trustee
fees and Certificate Insurer premiums are
calculated, which sum shall not exceed 0.75% for
any Payment Date) for Group I for such Payment
Date (the "Group I Available Funds Pass-Through
Rate").
Class A-2 Pass-
Through Rate 7.000% per annum.
Class A-3 Pass-
Through Rate 7.300% per annum.
Class A-4 Pass-
Through Rate 7.675% per annum; provided, that on no
Payment Date will the Class A-4 PassThrough Rate
be greater than the Group I Available Funds
Pass-Through Rate.
Class A-5 Pass-
Through Rate 7.275% per annum.
Class A-6 Pass-
Through Rate On each Payment Date, the "Class A-6
Pass-Through Rate" will be equal to the lesser of
(i) LIBOR as of the second to last business day
prior to the immediately preceding Payment Date
(or as of the second to the last business day
prior to the Closing Date in the case of the first
Payment Date) plus 0.23% per annum, and (ii) the
weighted average net coupon rate (i.e., the
weighted average coupon rate
S-8
<PAGE>
on the Mortgage Loans in Group II less the sum of
the per annum rates at which the Servicing Fees,
Trustee fees and Certificate Insurer premiums are
calculated, which sum shall not exceed 0.75% for
any Payment Date) for Group II for such Payment
Date and less 0.50% on the 13th Payment Date and
thereafter (the "Class A-6 Available Funds
Pass-Through Rate").
The "Class A-6 Formula Pass-Through Rate" for a
Payment Date is the rate described in clause (i)
of the definition of "Class A-6 Group II
Pass-Through Rate" on such Payment Date. The
excess, if any, of (x) the interest due on the
Class A-6 Certificates on any Payment Date
calculated at the Class A-6 Formula Pass-Through
Rate over (y) the interest due on the Class A-6
Certificates calculated at the Class A-6 Available
Funds Pass-Through Rate is the "Group II
Supplemental Interest Amount" for such Payment
Date.
If, on any Payment Date, there is a Group II
Supplemental Interest Amount calculated for any
Payment Date, such amount shall be payable from
amounts that would otherwise be distributed to the
Owners of the Class B Certificates, and the Owners
of certain of the Class R Certificates have agreed
to pay any remaining amounts. If the full amount
of the Group II Supplemental Interest Amount is
not paid on a Payment Date, then the amount not
paid will accrue interest at the Class A-6 Formula
Pass-Through Rate until actual payment.
The Certificate Insurer does not guarantee the
payment of, nor do the ratings assigned to the
Class A-6 Certificates address the likelihood of
the payment of, any Supplemental Interest Amount.
Payment Dates, Record Dates
and Accrual Periods On the 18th day of each month, or, if such day is
not a business day, then the next succeeding
business day, commencing June 18, 1997 (each such
day being a "Payment Date"), the Trustee will be
required to distribute to the Owners of record of
the Certificates as of the close of business on
the first business day of the current calendar
month (with respect to the Class A Fixed Rate
Certificates) or as of the close of business on
the business day immediately preceding such
Payment Date (with respect to the Class A-1 Group
I Certificates and the Class A-6 Group II
Certificates), except in the case of the first
Payment Date, on which distributions will be made
to holders of record as of the Closing Date (each
such date being the applicable "Record Date") such
Owners' Percentage Interests in the amounts
required to be distributed to the Owners of each
Class of Certificates on such Payment Date.
Interest will accrue on each Class A-2, A-3, A-4
and A-5 Group I Certificate during the period from
and including the second day of the month
preceding the month in which a Payment Date occurs
through and including the first day of the month
in which such Payment Date occurs and on each
Class A-1 Group I Certificate and Class A-6 Group
II Certificate from and including each Payment
Date (or the Closing Date, with respect to the
initial Payment Date) to and including the day
preceding the current Payment Date. Each period
referred to in the immediately preceding sentence
relating to the accrual of interest is the
"Accrual Period" for the related Class of
Certificates. Interest will be calculated on the
basis of a 360-day year consisting of twelve
30-day months for the Class A-2, A-3, A-4 and A-5
Group I Certificates. Interest for the Class A-1
Group I Certificates and the Class A-6 Group II
Certificates will be calculated based upon the
actual number of days in the related Accrual
Period, divided by 360.
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Distributions on the
Certificates
A. Priority of
Distributions As more fully described herein, each Class of
Certificates has a specified priority to the
collections on the Pool of Mortgage Loans which
comprise the related Mortgage Loan Group, subject
to the credit enhancement and cross-
collateralization provisions hereinafter
described. In addition, Financial Security
Assurance Inc., as Certificate Insurer, is
required pursuant to the Certificate Insurance
Policy to make available to the Trustee on each
Payment Date 100% of the related Class A Insured
Distribution Amount for the related Mortgage Loan
Group to the extent that available funds remaining
after payment of the Trustee's fee are
insufficient to cover such amount.
The Owners of the Class A Group I Certificates and
the Class A-6 Group II Certificates will receive
certain monthly distributions of principal on each
Payment Date which generally reflect collections
of principal during the prior Remittance Period
with respect to the related Mortgage Loan Group.
The Certificate Insurance Policy only guarantees
the amount by which the sum of the related
Interest Distribution Amount and the related
Subordination Deficit, if any, exceeds Total
Available Funds.
B. Distributions on the
Class A Certificates
1. Interest
Distributions Interest will accrue on each Class of Class A
Certificates at the related Class A Pass-Through
Rate during each Accrual Period for such Class of
Certificates, and will be distributed, to the
extent of the Total Available Funds for the
related Mortgage Loan Group plus the proceeds of
any Insured Payments, on each Payment Date.
Interest accruing during the related Accrual
Period at the related Class A Pass-Through Rate on
the related Class A Principal Balance immediately
preceding such Payment Date is referred to herein
as the "Class A Interest Distribution Amount" for
the related Class of Class A Certificates. The
"Class A Interest Distribution Amount" does not
include the amounts, if any, of the Supplemental
Interest Amount applicable to the Class A-6 Group
II Certificates. See "Description of the
Certificates -- Flow of Funds and Distributions on
the Class A Certificates" herein.
2. Principal
Distributions The Holders of the Class A Certificates issued
with respect to each Mortgage Loan Group will be
entitled to receive on each Payment Date a
distribution allocable to principal (the "Class A
Principal Distribution Amount" for such Mortgage
Loan Group and Payment Date) which will be equal
to the lesser of:
(a) the Total Available Funds for the related
Mortgage Loan Group plus any related Insured
Payment minus the interest then due on account
of the related Class A Certificates; and
(b) (i) the sum, without duplication, of:
(x) for the Mortgage Loans in the related
Mortgage Loan Group, the sum of (i) the
principal portion of all scheduled and
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unscheduled payments received on the
Mortgage Loans during the related
Remittance Period, including (a) any full
or partial principal prepayments of any
Mortgage Loans ("Prepayments") received
during the related Remittance Period, (b)
the proceeds received on any insurance
policy relating to a Mortgage Loan, a
Mortgaged Property or a REO Property, net
of proceeds to be applied to the repair of
the Mortgaged Property or released to the
Mortgagor (as defined herein) and net of
expenses reimbursable therefrom
("Insurance Proceeds"), (c) proceeds
received in connection with the
liquidation of any defaulted Mortgage
Loans, whether by trustee's sale,
foreclosure sale or otherwise
("Liquidation Proceeds"), net of fees and
advances reimbursable therefrom ("Net
Liquidation Proceeds") and (d) proceeds
received in connection with a taking of a
Mortgaged Property by condemnation or the
exercise of eminent domain or in
connection with a release of part of the
Mortgaged Property from the related lien
("Released Mortgaged Property Proceeds"),
(ii) the principal portion of all amounts
deposited into the Principal and Interest
Account on the related Remittance Date in
connection with the repurchase of, or the
substitution of a substantially similar
mortgage loan for, a Mortgage as to which
there is defective documentation or a
breach of a representation or warranty
contained in the Pooling and Servicing
Agreement, and (iii) the proceeds received
by the Trustee in connection with any
termination of the Trust, to the extent
that such proceeds relate to principal.
(y) the amount of any Subordination Deficit
with respect to the related Mortgage Loan
Group for such Payment Date; and
(z) the amount of any Subordination Increase
Amount with respect to the related
Mortgage Loan Group for such Payment Date;
minus
(ii) the amount of any Subordination Reduction
Amount with respect to the related Mortgage
Loan Group for such Payment Date.
The amount of any Subordination Deficit or
Subordination Increase Amount to be paid to the
Holders of the Class A Certificates will be paid
to the Holders of the Class A Certificates then
entitled to receive distributions of principal.
Similarly, the amount of any Subordination
Reduction Amount to be deducted from the Class A
Principal Distribution Amount for the Class A
Certificates will be deducted from such amounts
otherwise due to the Holders of the Class A
Certificates then entitled to receive
distributions of principal.
The amount of any loss on a Liquidated Mortgage
Loan in the related Mortgage Loan Group (i.e., a
Realized Loss) may or may not be allocated to the
Owners of the Class A Certificates issued with
respect to such Mortgage Loan Group on the Payment
Date which immediately follows the event of loss.
However, the Owners of each Class of the Class A
Certificates are entitled to receive ultimate
recovery of 100% of the original principal balance
for such Class.
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<PAGE>
Principal distributions with respect to the Class
A Group I Certificates will generally be
distributed in a sequential-pay fashion, subject
to the "lockout" provisions applicable to the
Class A-5 Group I Certificates.
The Owners of the Class A-5 Group I Certificates
are entitled to receive payments of the Class A-5
Lockout Distribution Amount specified herein;
provided, that if on any Payment Date the Class
A-4 Certificate Principal Balance is zero, the
Owners of the Class A-5 Group I Certificates will
be entitled to receive the entire Class A
Principal Distribution Amount for Group I for such
Payment Date.
The "Class A-5 Lockout Distribution Amount" for
any Payment Date will be the product of (i) the
applicable Class A-5 Lockout Percentage for such
Payment Date and (ii) the Class A-5 Lockout Pro
Rata Distribution Amount for such Payment Date.
The "Class A-5 Lockout Percentage" for each
Payment Date shall be as follows:
Payment Dates Lockout Percentage
------------- ------------------
June 1997 - May 2000 0%
June 2000 - May 2002 45%
June 2002 - May 2003 80%
June 2003 - May 2004 100%
June 2004 and thereafter 140%
The "Class A-5 Lockout Pro Rata Distribution
Amount" for any Payment Date will be an amount
equal to the product of (x) a fraction, the
numerator of which is the Certificate Principal
Balance of the Class A-5 Group I Certificates
immediately prior to such Payment Date and the
denominator of which is the aggregate Certificate
Principal Balance of all Classes of the Group I
Certificates immediately prior to such Payment
Date and (y) the Class A Principal Distribution
Amount for Group I for such Payment Date.
After payment of the Class A-5 Lockout
Distribution Amount, the remaining Class A
Principal Distribution Amount for Group I shall be
paid to the Owners of the other Classes of Class A
Group I Certificates sequentially, such that the
Class A-4 Group I Certificates are entitled to
receive no principal distributions until the Class
A-3 Certificate Principal Balance has been reduced
to zero, the Class A-3 Group I Certificates are
entitled to receive no principal distributions
until the Class A-2 Certificate Principal Balance
has been reduced to zero, the Class A-2 Group I
Certificates are entitled to receive no principal
distributions until the Class A-1 Certificate
Principal Balance has been reduced to zero.
As of any Payment Date, the "Class A Certificate
Principal Balance" for a Class of Class A
Certificates, prior to any distribution on such
Payment Date, will equal the original Class A
Certificate Principal Balance of such Class less
the sum of all amounts previously distributed to
the Owners of the related Class of Class A
Certificates on account of principal. "Class A
Group I Certificate Principal Balance" refers to
the Class A Group I Certificates and the "Class A
Group II Certificate Principal Balance" refers to
the Class A-6 Group II Certificates.
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<PAGE>
C. Class A
Distribution Amounts
and Class A Insured
Distribution Amounts The "Class A Distribution Amount" with respect to
each Class of Class A Certificates and Payment
Date is the sum, without duplication, of (x) the
Class A Interest Distribution Amount with respect
to such Class and Payment Date, (y) the Class A
Principal Distribution Amount, if any, with
respect to such Class and Payment Date and (z) the
Class A Carry-Forward Amount, if any, with respect
to such Class and Payment Date.
The "Class A Carry-Forward Amount" means, with
respect to each Class of Class A Certificates and
Payment Date, the sum, without duplication, of (a)
the amount, if any, by which (x) the Class A
Distribution Amount for the related Class of Class
A Certificates as of the immediately preceding
Payment Date exceeded (y) the amount of the actual
distribution, exclusive of any portion thereof
representing the proceeds of an Insured Payment,
to the Owners of the related Class of Class A
Certificates on such immediately preceding Payment
Date and (b) interest on the amount, if any,
described in clause (a) at the related Class A
Pass-Through Rate from such immediately preceding
Payment Date.
The "Class A Insured Distribution Amount" with
respect to each Class of Class A Certificates and
Payment Date is the sum, without duplication, of
(x) the Class A Interest Distribution Amount with
respect to such Class and Payment Date, less
interest shortfalls arising from Prepayments of
principal and from application of the Soldiers'
and Sailors' Civil Relief Act of 1940, as amended
(the "Relief Act") and (y) the amount of any
Subordination Deficit with respect to such Class
and Payment Date.
To the extent that the Certificate Insurer pays
Insured Payments the Certificate Insurer, as
subrogee, will be entitled to receive the Class A
Carry-Forward Amount.
The Pooling and Servicing Agreement provides that
to the extent any portion of a Class A
Carry-Forward Amount relates to principal such
portion shall be treated as a distribution of
principal, with any portion which relates to
interest being treated as a distribution of
interest.
Registration of the
Class A Certificates The Class A Certificates will initially be issued
in book-entry form. Persons acquiring beneficial
ownership interests in such Class A Certificates
("Beneficial Certificate Owners") may elect to
hold their interests through The Depository Trust
Company ("DTC"), in the United States, or Centrale
de Livraison de Valeurs Mobiliers, S.A. ("CEDEL")
or the Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, CEDEL or Euroclear, as the
case may be, will be in accordance with the usual
rules and operating procedures of the relevant
system. So long as the Class A Certificates are
book-entry certificates, such Class A Certificates
will be evidenced by one or more Class A
Certificates registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one of the
relevant depositories (collectively, the "European
Depositories"). Cross-market transfers between
persons holding directly or indirectly through
DTC, on the one hand, and counterparties holding
directly or indirectly through CEDEL or Euroclear,
on the other, will be effected in DTC through
Citibank N.A. ("Citibank") or The Chase Manhattan
Bank ("Chase"), the relevant depositories of CEDEL
or
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<PAGE>
Euroclear, respectively, and each a participating
member of DTC. The Class A Certificates will
initially be registered in the name of Cede. The
interests of the Owners of such Class A
Certificates will be represented by book-entries
on the records of DTC and participating members
thereof. No Beneficial Certificate Owner will be
entitled to receive a definitive certificate
representing such person's interest, except in the
event that Definitive Certificates (as defined
herein) are issued under the limited circumstances
described herein. All references herein to any
Class A Certificates reflect the rights of
Beneficial Certificate Owners only as such rights
may be exercised through DTC and its participating
organizations for so long as such Class A
Certificates are held by DTC. See "Risk Factors"
and "Description of the Certificates -- Book-Entry
Registration of the Class A Certificates" herein.
Servicing of the
Mortgage Loans The Master Servicer has agreed to service the
Mortgage Loans in accordance with the Pooling and
Servicing Agreement. In certain limited
circumstances and with the consent of the
Certificate Insurer, the Master Servicer may be
removed as Master Servicer under the Pooling and
Servicing Agreement. In the event that Access
Financial Lending Corp. is removed as Master
Servicer under the Pooling and Servicing
Agreement, a successor Master Servicer will be
appointed thereunder.
The Master Servicer has entered into a
Sub-Servicing Agreement with respect to the
Mortgage Loans. See "The Company" and "Servicing"
herein.
Monthly Servicing Fee The Master Servicer will retain fees not in excess
of 0.50% per annum (the "Servicing Fee"), payable
monthly at one-twelfth the annual rate, of the
then outstanding principal amount of each Mortgage
Loan serviced by it as of the close of business on
the first day of the preceding calendar month.
Subordination of Class B
Certificates The Class B Certificates are subordinated to the
Class A Certificates. Such subordination is
intended to enhance the likelihood that the Owners
of the Class A Certificates will receive full and
timely receipt of all amounts due to them. See
"Description of the Certificates -- Subordination
of Class B Certificates" herein.
Certificate Insurer Financial Security Assurance Inc., a New York
monoline insurance company.
Certificate
Insurance Policy Pursuant to an Insurance and Indemnity Agreement
dated as of May 1, 1997 (the "Insurance
Agreement"), the Company will obtain the
Certificate Insurance Policy, which is
non-cancelable, in favor of the Trustee on behalf
of the Owners of the Class A Certificates. On each
Payment Date, the Certificate Insurer is required
to make available to the Trustee the amount of any
insufficiency in Total Available Funds for the
related Mortgage Loan Group as of such Payment
Date necessary, after the application of the
cross-collateralization provisions described
herein, to distribute the Class A Insured
Distribution Amount with respect to the related
Mortgage Loan Group. The Certificate Insurance
Policy does not guarantee any specified rate of
Prepayments. See "The Certificate Insurance Policy
and the Certificate Insurer" and "Description of
the Certificates -- Subordination of Class B
Certificates" herein.
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<PAGE>
The Trustee or paying agent will (i) receive as
attorney-in-fact of each Owner of the Class A
Certificates, any Insured Payment from the
Certificate Insurer and (ii) disburse the same to
each Owner of the related Class A Certificates in
accordance with the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement
will provide that to the extent the Certificate
Insurer makes Insured Payments, either directly or
indirectly (as by paying through the Trustee or a
paying agent), to the Owners of any Class A
Certificates, the Certificate Insurer will be
subrogated to the rights of such Owners of such
Class A Certificates with respect to such Insured
Payments. The Certificate Insurer will receive
reimbursement for such Insured Payments, but only
from the sources and in the manner provided in the
Pooling and Servicing Agreement. Such subrogation
and reimbursement will have no effect on the
Certificate Insurer's obligations under the
Certificate Insurance Policy.
Optional
Termination The Company will have the right to purchase all
the Mortgage Loans on any Payment Date when the
aggregate principal balances of the Mortgage Loans
has declined to ten percent or less of the
Original Pool Principal Balance (the "Company
Optional Termination Date"), subject to the
consent of the Certificate Insurer in certain
circumstances. See "Description of the
Certificates -- Optional Termination by the
Company" herein.
Auction Sale The Pooling and Servicing Agreement requires that,
within ninety days following the Company Optional
Termination Date, if the Company has not exercised
its optional termination right by such date, the
Trustee solicit bids for the purchase of all
Mortgage Loans remaining in the Trust. In the
event that satisfactory bids are received as
described in the Pooling and Servicing Agreement,
the net sale proceeds will be distributed to
Certificateholders, in the same order of priority
as collections received in respect of the Mortgage
Loans. If satisfactory bids are not received, the
Trustee shall decline to sell the Mortgage Loans
and shall not be under any obligation to solicit
any further bids or otherwise negotiate any
further sale of the Mortgage Loans. Such sale and
consequent termination of the Trust must
constitute a "qualified liquidation" of each REMIC
established by the Trust under Section 860F of the
Internal Revenue Code of 1986, as amended,
including, without limitation, the requirement
that the qualified liquidation takes place over a
period not to exceed 90 days. Such sale shall be
subject to the consent of the Certificate Insurer
in certain circumstances.
Ratings It is a condition of the original issuance of the
Class A Certificates that the Class A Certificates
receive ratings of AAA or Aaa by Standard &
Poor's, a division of the McGraw-Hill Companies
("S&P") and Moody's Investors Service ("Moody's"),
respectively. A security rating is not a
recommendation to buy, sell or hold securities,
and may be subject to revision or withdrawal at
any time by the assigning entity.
Such ratings address credit risk, but do not
purport to address any prepayment risk associated
with the Class A Certificates, nor do such ratings
cover the payment of the Supplemental Interest
Amounts.
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<PAGE>
Federal Income
Tax Consequences One or more elections will be made to treat
certain assets of the Trust as one or more REMICs
for federal income tax purposes. Each Class of the
Class A Certificates will be designated as a
"regular interest" in a REMIC and a separate class
of certificates will be designated as the
"residual interest" with respect to each REMIC.
Certificateholders that would otherwise report
income under a cash method of accounting will be
required to include in income interest on the
Class A Certificates (including original issue
discount, if any) in accordance with an accrual
method of accounting. See "Federal Income Tax
Consequences" herein and in the Prospectus.
ERISA Considerations As described under "ERISA Considerations" herein,
the Class A Certificates may be purchased by a
pension or other employee benefit plan subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or by individual
retirement accounts or Keogh plans covering only a
sole proprietor or partner which are not subject
to ERISA but are subject to Section 4975 of the
Code ("Plans"). See "ERISA Considerations" herein
and in the Prospectus.
Legal Investment
Considerations The Class A Certificates will not constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA"). Accordingly, many institutions may not
be legally authorized to invest in the Class A
Certificates.
Risk Factors For a discussion of certain factors that should be
considered by prospective investors in the Class A
Certificates, see "Risk Factors" herein and in the
accompanying Prospectus.
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<PAGE>
RISK FACTORS
Prospective investors should consider, among other \ things, the following
factors (as well as the factors set forth under "Risk Factors" in the
accompanying Prospectus) in connection with the purchase of the Class A
Certificates.
Maturity and Prepayment Considerations. All of the Mortgage Loans are
prepayable in full or in part at any time. The rate of Prepayments on the
Mortgage Loans may be influenced by a variety of economic, social and other
factors, including interest rates, the availability of alternative financing and
homeowner mobility. Although there is little significant data available on the
effects of interest rates on prepayment rates for non-purchase money,
non-conforming credit mortgage loans, a number of factors suggest that the
prepayment behavior of a pool of such mortgage loans may be significantly
different from that of a pool of purchase money, conforming-credit mortgage
loans. One such factor is the typically smaller principal balance of the average
non-purchase money mortgage loan than that of the average purchase money
mortgage conventional loan in the typical pool. A smaller principal balance is
easier for a borrower to prepay than a larger balance and therefore a higher
prepayment rate may result for a non-purchase money mortgage loan pool than for
a pool of purchase money mortgage loans, irrespective of the relative average
interest rates in the two pools and the general interest rate environment. A
small principal balance, however, also may make refinancing a non-purchase money
mortgage loan at a lower loan rate less attractive to the borrower relative to
refinancing a larger principal balance non-purchase money mortgage loan, as the
perceived impact to the borrower of lower interest rates on the size of the
monthly payment on a mortgage loan is much less than for a larger principal
balance non-purchase money mortgage loan. Other factors that might be expected
to affect the prepayment rate of a pool of mortgage loans include the amounts
of, and interest rates on, the related senior mortgage loans, if one exists, and
the use of the first mortgage loans as long-term financing for home purchase and
junior mortgage loans as shorter-term financing for a variety of purposes,
including debt consolidation, home improvement, education expenses and purchases
of consumer durables such as automobiles. See "Risk Factors" in the accompanying
Prospectus.
The weighted average life of a pool of loans is the average amount of time
for which each dollar of principal on such loans is outstanding. Because it is
expected that there will be payments of principal of Mortgage Loans in advance
of the scheduled due date for the payments of such principal (the "Prepayments")
and defaults on the Mortgage Loans, the actual weighted average life of the
Mortgage Loans is expected to vary substantially from the weighted average life
of the Mortgage Loans based upon their amortization schedules. Prepayments may
result from voluntary early payments by borrowers (including payments in
connection with refinancings of the related first mortgage loans or the Mortgage
Loan itself), the sale of Properties subject to due-on-sale clauses, and
liquidations due to default, as well as the receipt of proceeds from physical
damage insurance policies. In addition, repurchases of Mortgage Loans from the
Trust will have the same effect as Prepayments of the related Mortgage Loans.
Substantially all of the Mortgage Loans contain "due-on-sale" provisions, and
the Pooling and Servicing Agreement generally requires the Master Servicer to
enforce such provisions unless such enforcement is not permitted by applicable
law. See "Description of the Certificates -- Flow of Funds and Distributions on
the Class A Certificates", " -- General Servicing Procedures", " -- Termination
of the Trust", "Legal Investment Considerations", and "Maturity, Prepayment and
Yield Considerations" herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
48.89% of the Original Group I Pool Principal Balance of the Mortgage Loans in
Group I, and 0.04% of the Original Group II Pool Principal Balance of the
Mortgage Loans in Group II are Balloon Loans. See "Risk Factors" in the
accompanying Prospectus.
Geographic Concentration of Mortgage Loans. Approximately 44.30% of the
Original Group I Pool Principal Balance represents Mortgage Loans relating to
Mortgaged Properties located in five states: Florida 13.35%, Michigan 11.31%,
Ohio 7.39%, Georgia 6.27% and North Carolina 5.98%. Approximately 51.53% of the
Original Group II Pool Principal Balance represents Mortgage Loans relating to
Mortgaged Properties located in five states: Michigan 18.11%, Minnesota 10.84%,
Wisconsin 7.89%, Illinois 7.71% and Texas 6.98%. See "Risk Factors" in the
Prospectus.
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<PAGE>
Risk of Higher Default Rates for Junior Lien Loans. 4.02% of the Original
Group I Pool Principal Balance of the Mortgage Loans relates to Mortgage Loans
secured by liens which are in a second position. See "Risk Factors" in the
Prospectus.
Risk of Potential Termination of Trust. The Trust may be terminated subject
to the consent of the Certificate Insurer in certain circumstances, when the
aggregate principal balances of the Mortgage Loans has declined to ten percent
or less of the Original Pool Principal Balance, either by the Company,
exercising its optional termination right, or pursuant to the Auction Sale. See
"Description of Certificates -- Optional Termination by the Company" and
"Description of the Certificates -- Auction Sale". Such a termination would be
the equivalent of a prepayment of all the Mortgage Loans. The Owners of the
Class A Certificates would receive from the proceeds resulting from any such
termination, any interest accrued and unpaid, together with any distribution of
principal owed and unpaid, in the order of priority set forth under "Description
of Certificates -- Distributions on the Class A Certificates". Any such
termination of the Trust will reduce the yield to maturity on Class A
Certificates purchased at a premium. See "Description of the Certificates --
Termination of the Trust" herein.
Effect of Mortgage Loan Yield on Class A-1 and Class A-6 Pass-Through Rate.
The Class A-1 Pass-Through Rate is based upon the value of an adjustable index
(one-month LIBOR), while the Coupon Rates on the Group I Mortgage Loans are
fixed. Consequently, the interest which becomes due on such Mortgage Loans in
Group I (net of the Servicing Fees, the Trustee fees and the Certificate Insurer
premiums) during any Remittance Period may be less than the amount of interest
that would accrue at one-month LIBOR plus the margin on the Class A-1 Group I
Certificates, during the related Accrual Period, and will be limited to such
lower amount. The Class A-1 Group I Certificates do not contain any
"carry-forward" or "catch-up" feature if the amount of interest paid is so
limited.
The Class A-6 Group II Pass-Through Rate is based upon the value of an
index (one-month LIBOR) which is different from the value of the indices
applicable to the Mortgage Loans in Group II, as described under "The Mortgage
Pool -- Group II" (either as a result of the use of a different index, rate
determination date, rate adjustment date or rate cap or floor). The Mortgage
Loans in Group II primarily adjust semi-annually based upon a six-month LIBOR
index whereas the Class A-6 Group II Pass-Through Rate adjusts monthly based on
a one-month LIBOR index and is limited by the Class A-6 Available Funds
Pass-Through Rate, unless Supplemental Interest Amounts (the payment of which is
not insured by the Certificate Insurer and which is not rated) are funded in
full. Consequently the actual Class A-6 Pass-Through Rate for a Payment Date may
not equal the Class A-6 Formula Pass-Through Rate, for such Payment Date. In
particular, the interest rates on the Mortgage Loans in Group II adjust less
frequently, with the result that the actual Class A-6 Pass-Through Rate may be
lower than the Class A-6 Formula Pass-Through Rate, for extended periods in a
rising interest rate environment. In addition, one-month LIBOR and six-month
LIBOR may respond to different economic and market factors, and there is not
necessarily any correlation between them. Thus, it is possible, for example,
that one-month LIBOR may rise during periods in which one or more Indices are
falling or that, even if both one-month LIBOR and six-month LIBOR Indices rise
during the same period, one-month LIBOR may rise much more rapidly than
six-month LIBOR. See "Class A-6 Pass-Through Rate" in the Summary for this
Prospectus Supplement.
USE OF PROCEEDS
The Trust will acquire the Mortgage Loans from the Transferor (the
Transferor having obtained the Mortgage Loans from the Company) concurrently
with the sale of the Certificates and the net proceeds from the sale of the
Certificates will be paid to the Company. Such net proceeds (together with the
Residual Certificates retained by the Company or its affiliates) will, in
effect, represent the purchase price paid by the Trust to the Company for the
Mortgage Loans. The net proceeds, after funding transaction costs, to be
received from the sale of the Mortgage Loans will be added to the Company's
general funds and will be available for general corporate purposes.
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<PAGE>
THE COMPANY
Access Financial Lending Corp. (the "Company"), a Delaware corporation,
provides housing finance programs to consumers throughout the United States
through its Mortgage Lending and Manufactured Housing Programs. The Company is
the successor by merger of Access Financial Lending Corp., a Delaware
corporation (formerly Equicon Corporation), whose principal business was the
purchase of non-conforming mortgages, and Access Financial Corp., whose
principal business was the retail financing of manufactured housing. The merger
occurred on July 1, 1996.
The Company is a wholly-owned subsidiary of Access Financial Holdings Corp.
("AFH"), which is a Delaware corporation and wholly-owned subsidiary of Cargill
Financial Services Corporation ("CFSC"). AFH was formed in January 1996 to
facilitate the continued growth of the housing finance business.
The Company maintains its principal offices at 400 Highway 169 South, Suite
400, St. Louis Park, Minnesota 55426-1106.
As described herein, the Company will be obligated to repurchase certain
Mortgage Loans pursuant to certain representations and warranties made with
respect to the Mortgage Loans. See "The Mortgage Loan Pool -- Mortgage Loan
Program -- Underwriting Standards; Representations" herein and "Mortgage Loan
Program" in the accompanying Prospectus.
SERVICING
The Master Servicer
As Master Servicer, Access Financial Lending Corp. will be obligated to
service the Mortgage Loans pursuant to the Pooling and Servicing Agreement. See
"Description of the Certificates -- General Servicing Procedures" herein. The
Master Servicer has entered into a sub-servicing agreement with LSI Financial
Group, which provides for servicing and administration of the Mortgage Loans.
Notwithstanding such sub-servicing agreement, the Master Servicer shall be
obligated to the same extent and under the same terms and conditions under the
Pooling and Servicing Agreement as if it alone were servicing and administering
the Mortgage Loans. See "Description of the Certificates--General Servicing
Procedures" herein.
The Sub-Servicer
LSI is an approved HUD Title I and Title II servicer. LSI services several
securitized and whole loan portfolios comprised of single family mortgage
products. LSI's corporate offices are located at 17500 Chenal Parkway, Little
Rock, Arkansas 72211. LSI commenced mortgage servicing operations in 1990 and
since then has managed and serviced sub-prime conduit programs, distressed RTC
portfolios, and third-party mortgage loan portfolios.
Ability to Terminate Sub-Servicing Agreement
The Pooling and Servicing Agreement permits the Master Servicer to
terminate the sub-servicing agreement with LSI, and assume directly the
servicing of the Mortgage Loans, at any time. Such termination is subject to the
prior consent of the Certificate Insurer and the Rating Agencies but does not
require the prior consent of the Owners of any Certificates.
Any such termination of the sub-servicing agreement and direct assumption
of servicing by the Master Servicer would result in what is commonly referred to
as a "servicing transfer", i.e., the transfer of the day-to-day responsibility
of posting payments, collections, and loan enforcement from one entity to
another. Industry experience has shown that servicing transfers, however well
planned, may result in a temporary increase in delinquencies and losses, due to
systems conversions, changes in personnel and other factors associated with the
transfer.
S-19
<PAGE>
Delinquency Experience on the Company's
Portfolio of Mortgage Loans(1)
<TABLE>
<CAPTION>
As of
------------------------------------------------------------------------------------------------------------
March 31, December 31, June 30, December 31, June 30, December 31, June 30, December 31,
1997 1996 1996 1995 1995 1994 1994 1993
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Mortgage
Loans............... 18,677 16,561 11,242 7,115 4,524 2,756 1,829 983
Dollar amount of
Mortgage Loans...... $1,377,105,891 $1,232,077,129 $811,283,083 $506,475,487 $320,202,611 $220,664,420 $147,335,800 $71,604,504
Delinquency Period
30-59 Days
% of number of
loans (2)........ 3.54% 3.72% 4.10% 3.32% 2.52% 0.87% 1.86% 0.30%
% of dollar amount
of loans (3)..... 3.22% 3.23% 3.67% 2.86% 2.08% 0.79% 2.08% 0.31%
60-89 days
% of number of
loans (2)........ 0.84% 0.99% 1.07% 0.97% 1.33% 0.07% 0.16% 0.41%
% of dollar amount
of loans (3)..... 0.84% 1.00% 0.95% 0.94% 1.12% 0.05% 0.12% 0.42%
90 days and over (4)
% of number
of loans (2)..... 3.30% 2.89% 2.35% 1.04% 0.42% 0.22% 0.38% 0.51%
% of dollar amount
of loans (3)..... 3.45% 2.81% 2.34% 1.02% 0.46% 0.20% 0.11% 0.26%
Foreclosed
Properties (4)
% of number
of loans (2).... 0.45% 0.43% 0.16% 0.82% 0.69% 0.65% 0.27% 0.00%
% of dollar amount
of loans (3).... 0.48% 0.47% 0.14% 0.79% 0.64% 0.74% 0.38% 0.00%
</TABLE>
- ----------
(1) The Mortgage Loans comprising the Company's portfolio were originated
beginning in April 1992. The variable rate program commenced in April 1994.
(2) The number of delinquent Mortgage Loans or the number of foreclosed
properties as a percentage of the total "Number of Mortgage Loans" as of
the date indicated.
(3) The dollar amount of delinquent Mortgage Loans or the dollar amount of
foreclosed properties as a percentage of the total "Dollar amount of
Mortgage Loans" as of the date indicated.
(4) For the period ended December 31, 1995 and all prior periods, "Foreclosed
Properties" included all REO Properties and "In-Substance Foreclosures", or
Mortgage Loans identified by the servicers as in the process of foreclosure
but not yet REO Properties. For the periods ended June 30, 1996 and
thereafter, "Foreclosed Properties" only includes REO Properties.
"In-Substance Foreclosures" have been included in the appropriate
Delinquency Period numbers.
S-20
<PAGE>
LOAN LOSS EXPERIENCE ON THE COMPANY'S
PORTFOLIO OF MORTGAGE LOANS
Prior to June 14, 1995, the Company experienced no losses since the
Company's program began.
For the For the Three
Twelve Months Ended Months Ended
December 31, 1996 March 31, 1997
------------------------------------------
Average amount outstanding(1)......... $860,482,062 $1,346,334,954
Gross losses(2)....................... 2,303,269 1,371,860
Recoveries(3)......................... 1,515,013 944,584
Net losses(4)......................... 788,256 427,276
Net losses as a percentage of average
amount outstanding ................. 0.09% 0.03%
(1) "Average Amount Outstanding" during the period is the arithmetic average of
the principal balances of the mortgage loans outstanding on the last
business day of each month during the period.
(2) "Gross Losses" are the principal amounts of the mortgage loans for each
respective period which have been determined to be uncollectible.
(3) "Recoveries" represent the excess of (x) the sum of recoveries from
liquidation proceeds and deficiency judgments over (y) the sum of expenses
and accrued interest.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
While the above delinquency and loan loss experience represents the recent
experience of the Company's portfolio of Mortgage Loans, there can be no
assurance that the future delinquency and loan loss experience on the Mortgage
Loans included in the Pool will be similar. The Company can neither quantify the
impact of any recent property value declines on the Mortgage Loans nor predict
whether, to what extent or how long such declines may continue. In a period of
such decline, the rates of delinquencies, foreclosures and losses on the
Mortgage Loans could be higher than those heretofore experienced in the mortgage
lending industry in general. In addition, adverse economic conditions (which may
or may not affect real property values) may affect the timely payment by
borrowers of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies, foreclosures and losses.
THE MORTGAGE LOAN POOL
General
The statistical information concerning the Pool of Mortgage Loans is based
upon Pool information as of the close of business on May 1, 1997 (the "Cut-Off
Date").
The Mortgage Loans consist of 2,561 mortgage loans evidenced by promissory
notes (the "Notes") secured by deeds of trust, security deeds or mortgages on
the properties (the "Properties" or "Mortgaged Properties"), which are located
in 43 states and the District of Columbia. The Properties securing the Mortgage
Loans consist of one- to four-family residences (which may be detached, part of
a one- to four-family dwelling, a manufactured home, modular housing, a
condominium unit, a townhouse, rowhouse or a unit in a planned unit
development). The Properties may be owner-occupied (which includes second and
vacation homes) and non-owner occupied investment properties.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups: "Group I" or "Group II", (each a "Mortgage Loan Group") comprised
of Mortgage Loans which bear fixed interest rates only, in the case of Group I,
and Mortgage Loans which bear adjustable interest rates only, in the case of
Group II.
S-21
<PAGE>
The Class A Group I Certificates will be issued in respect of Group I, and the
Class A-6 Group II Certificates will be issued in respect of Group II.
The Mortgage Loans in Group I consist of 51.11% of fully amortizing
mortgage loans and 48.89% of Balloon Loans; consist of approximately 95.98% of
loans secured by first liens on the related Properties, with the remainder
representing second liens; and consist of approximately 94.69% of loans secured
by primary residences. No Group I Mortgage Loan is more than 60 days
contractually delinquent as of the Cut-Off Date.
The Mortgage Loans in Group II consist of 99.96% of fully amortizing
mortgage loans and 0.04% of Balloon Loans; consist of 100% of loans secured by
first liens on the related Properties; and consist of approximately 96.50% of
Loans secured by primary residences. No Group II Mortgage Loan is more than 60
days contractually delinquent as of the Cut-Off Date.
Group I
The Mortgage Loans in Group I consist of approximately 1,502 loans under
which the related Mortgaged Properties are located in 42 states and the District
of Columbia as set forth herein. As of the CutOff Date, the Mortgage Loans in
Group I had an aggregate principal balance of $89,156,666.34, the maximum
principal balance of any of the Mortgage Loans in Group I was $479,199.96, the
minimum principal balance thereof was $10,000.00, and the principal balance of
the Mortgage Loans in Group I averaged $59,358.63. As of the Cut-Off Date,
Coupon Rates on the Mortgage Loans in Group I ranged from 7.500% to 17.950% per
annum, and the weighted average Coupon Rate of the Mortgage Loans in Group I was
11.594% per annum. As of the Cut-Off Date, the original term to stated maturity
of the Mortgage Loans in Group I ranged from 60 months to 360 months, the
remaining term to stated maturity ranged from 56 months to 360 months, the
weighted average original term to stated maturity was 235 months and the
weighted average remaining term to stated maturity was 233 months. No Mortgage
Loan in Group I had a stated maturity later than May 1, 2027. 51.11% of the
aggregate principal balance of the Mortgage Loans in Group I require monthly
payments of principal that will fully amortize the Mortgage Loans by their
respective maturity dates, and 48.89% of the aggregate principal balance of the
Mortgage Loans in Group I are Balloon Loans.
The sum of the percentage columns set forth in the following tables may not
equal 100% due to rounding.
S-22
<PAGE>
Geographic Distribution
Group I
Number Aggregate Unpaid % of
of Principal Balance Aggregate
Mortgage as of the Principal
State Loans Cut-Off Date Balance
- ----------------------- --------- ----------------- ----------
Alabama 82 $ 4,639,325.94 5.20%
Alaska 1 101,250.00 0.11
Arizona 4 181,474.70 0.20
California 15 1,856,895.44 2.08
Colorado 11 864,919.96 0.97
Connecticut 2 203,000.00 0.23
Delaware 2 137,949.60 0.15
District of Columbia 5 482,262.00 0.54
Florida 204 11,904,704.20 13.35
Georgia 83 5,590,687.98 6.27
Illinois 41 2,505,296.71 2.81
Indiana 67 2,881,360.12 3.23
Iowa 5 315,602.72 0.35
Kansas 4 149,987.76 0.17
Kentucky 25 1,290,125.83 1.45
Louisiana 42 2,262,245.14 2.54
Maryland 14 876,664.53 0.98
Massachusetts 8 713,000.55 0.80
Michigan 188 10,087,830.83 11.31
Minnesota 86 4,892,435.24 5.49
Mississippi 26 934,926.75 1.05
Missouri 30 1,739,706.43 1.95
Nebraska 1 36,684.79 0.04
Nevada 4 284,400.12 0.32
New Hampshire 1 57,966.69 0.07
New Jersey 31 2,966,782.93 3.33
New Mexico 1 24,000.00 0.03
New York 34 2,855,471.83 3.20
North Carolina 102 5,331,373.70 5.98
North Dakota 1 62,650.00 0.07
Ohio 118 6,588,965.70 7.39
Oklahoma 9 340,021.91 0.38
Oregon 8 545,005.48 0.61
Pennsylvania 21 1,473,122.55 1.65
Rhode Island 1 85,575.71 0.10
South Carolina 68 3,342,361.92 3.75
Tennessee 22 1,341,705.42 1.50
Texas 43 3,712,518.40 4.16
Utah 15 707,785.83 0.79
Virginia 22 1,505,125.19 1.69
Washington 7 791,874.83 0.89
West Virginia 3 144,413.48 0.16
Wisconsin 45 2,347,207.43 2.63
- ------------------------------------------------------------------------------
TOTAL 1,502 $ 89,156,666.34 100.00%
==============================================================================
The combined loan-to-value ratio of a Mortgage Loan is equal to the ratio
(expressed as a percentage) of (x) the sum of the (i) original principal balance
of such Mortgage Loan and (ii) the outstanding principal balances of any senior
mortgage loans (computed at the date of origination of such Mortgage Loan) to
(y) the appraised value of the related Mortgaged Property at the time of
origination or in the case of a purchase money mortgage loan the lesser of the
purchase price or the appraised value at the time of origination (the "Combined
Loan-to-Value Ratio"). The Combined Loan-to-Value Ratios are distributed as
follows:
S-23
<PAGE>
Combined Loan-To-Value Ratio Distribution
Group I
Number Aggregate Unpaid % of
of Principal Balance Aggregate
Range of Combined Mortgage as of the Principal
Loan-to-Value Ratios Loans Cut-Off Date Balance
-------------------- ----- ------------ -------
10.000 <Comb LTV<= 15.000 3 $ 49,769.71 0.06%
15.000 <Comb LTV<= 20.000 2 40,082.27 0.04
20.000 <Comb LTV<= 25.000 9 217,856.02 0.24
25.000 <Comb LTV<= 30.000 10 357,253.46 0.40
30.000 <Comb LTV<= 35.000 13 454,889.40 0.51
35.000 <Comb LTV<= 40.000 27 849,670.47 0.95
40.000 <Comb LTV<= 45.000 30 1,275,688.43 1.43
45.000 <Comb LTV<= 50.000 37 1,407,827.19 1.58
50.000 <Comb LTV<= 55.000 34 1,535,770.68 1.72
55.000 <Comb LTV<= 60.000 71 3,786,551.98 4.25
60.000 <Comb LTV<= 65.000 129 6,313,050.15 7.08
65.000 <Comb LTV<= 70.000 185 9,864,948.23 11.06
70.000 <Comb LTV<= 75.000 260 16,063,359.15 18.02
75.000 <Comb LTV<= 80.000 485 30,793,119.36 34.54
80.000 <Comb LTV<= 85.000 144 10,427,840.66 11.70
85.000 <Comb LTV<= 90.000 63 5,718,989.18 6.41
- --------------------------------------------------------------------------------
TOTAL 1,502 $89,156,666.34 100.00%
================================================================================
The Combined Loan-to-Value Ratios shown above were calculated based upon
the appraised values of the Properties at the time of origination of the
Mortgage Loans or in the case of a purchase money mortgage loan the lesser of
the purchase price or the appraised value at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the unpaid principal balances of
the Mortgage Loans, together with the unpaid principal balances of any senior
mortgage loans, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
S-24
<PAGE>
Coupon Rate Distribution
Group I
Number Aggregate Unpaid
of Principal Balance % of
Range of Mortgage as of the Aggregate
Coupon Rates (%) Loans Cut-Off Date Principal Balance
- --------------------------- --------- ----------------- -----------------
7.00 <Gross Coupon<= 7.50 1 $ 135,074.86 0.15%
7.50 <Gross Coupon<= 8.00 2 240,122.89 0.27
8.00 <Gross Coupon<= 8.50 3 203,952.52 0.23
8.50 <Gross Coupon<= 9.00 9 700,021.16 0.79
9.00 <Gross Coupon<= 9.50 42 2,416,908.89 2.71
9.50 <Gross Coupon<= 10.00 116 8,297,052.39 9.31
10.00 <Gross Coupon<= 10.50 131 9,553,791.67 10.72
10.50 <Gross Coupon<= 11.00 227 14,665,548.60 16.45
11.00 <Gross Coupon<= 11.50 174 11,079,781.08 12.43
11.50 <Gross Coupon<= 12.00 216 12,505,212.92 14.03
12.00 <Gross Coupon<= 12.50 164 9,999,395.82 11.22
12.50 <Gross Coupon<= 13.00 152 7,881,780.43 8.84
13.00 <Gross Coupon<= 13.50 81 3,806,929.62 4.27
13.50 <Gross Coupon<= 14.00 82 4,044,488.52 4.54
14.00 <Gross Coupon<= 14.50 31 1,113,438.70 1.25
14.50 <Gross Coupon<= 15.00 31 1,193,094.96 1.34
15.00 <Gross Coupon<= 15.50 13 491,626.06 0.55
15.50 <Gross Coupon<= 16.00 13 407,267.46 0.46
16.00 <Gross Coupon<= 16.50 5 176,004.17 0.20
16.50 <Gross Coupon<= 17.00 3 73,938.65 0.08
17.00 <Gross Coupon<= 17.50 3 57,867.06 0.06
17.50 <Gross Coupon<= 18.00 3 113,367.91 0.13
- --------------------------------------------------------------------------------
TOTAL 1,502 $89,156,666.34 100.00%
================================================================================
S-25
<PAGE>
Distribution of Unpaid Principal Balances as of the Cut-Off Date
Group I
Number Aggregate Unpaid
of Principal Balance % of
Range of Unpaid Mortgage as of the Aggregate
Principal Balances ($) Loans Cut-Off Date Principal Balance
---------------------- -------- ----------------- -----------------
0 < Balance <= 25,000 167 $ 3,326,151.84 3.73%
25,000 < Balance <= 50,000 619 23,568,606.65 26.44
50,000 < Balance <= 100,000 544 37,121,367.54 41.64
100,000 < Balance <= 150,000 120 14,306,567.46 16.05
150,000 < Balance <= 200,000 31 5,209,108.98 5.84
200,000 < Balance <= 250,000 13 2,895,413.91 3.25
250,000 < Balance <= 300,000 3 838,000.00 0.94
300,000 < Balance <= 350,000 2 646,250.00 0.72
350,000 < Balance <= 400,000 2 766,000.00 0.86
450,000 < Balance <= 500,000 1 479,199.96 0.54
- --------------------------------------------------------------------------------
TOTAL 1,502 $89,156,666.34 100.00%
================================================================================
Lien Status and Occupancy Status
Group I
Number Aggregate Unpaid
of Principal Balance % of
Lien Status and Mortgage as of the Aggregate
Occupancy Status Loans Cut-Off Date Principal Balance
---------------- -------- ----------------- -----------------
1st Lien Owner Occupied 1,290 $80,909,966.05 90.75%
1st Lien Non Owner Occupied 94 4,335,108.35 4.86
1st Lien Second Home 8 324,898.20 0.36
2nd Lien Owner Occupied 108 3,515,190.57 3.94
2nd Lien Non Owner Occupied 2 71,503.17 0.08
- --------------------------------------------------------------------------------
TOTAL 1,502 $89,156,666.34 100.00%
================================================================================
Distribution of Age (in months) from Origination to the Cut-Off Date
Group I
Number Aggregate Unpaid
of Principal Balance % of
Months Elapsed Mortgage as of the Aggregate
Since Origination Loans Cut-Off Date Principal Balance
- ----------------- ----- ------------ -----------------
Age = 0 316 $20,056,562.00 22.50%
0 < Age <= 6 1,168 67,993,304.54 76.26
6 < Age <= 12 9 492,708.06 0.55
12 < Age <= 18 1 53,468.17 0.06
18 < Age <= 24 3 177,274.94 0.20
24 < Age <= 36 2 97,114.31 0.11
36 < Age <= 48 1 45,031.45 0.05
48 < Age <= 60 1 139,122.89 0.16
60 < Age <= 72 1 102,079.98 0.11
- --------------------------------------------------------------------------------
TOTAL 1,502 $89,156,666.34 100.00%
================================================================================
S-26
<PAGE>
Property Type
Group I
Number Aggregate Unpaid
of Principal Balance % of
Mortgage as of the Aggregate
Property Type Loans Cut-Off Date Principal Balance
- ---------------------- -------- ----------------- -----------------
3/4 Units 14 $ 1,243,600.77 1.39%
Condominium 27 1,489,676.86 1.67
Duplex 64 3,875,025.96 4.35
Manufactured Home 46 1,749,235.59 1.96
Modular Housing 6 342,178.96 0.38
Row House 17 828,330.64 0.93
Single Family 1,314 78,909,300.61 88.51
Townhouse 14 719,316.95 0.81
- --------------------------------------------------------------------------------
TOTAL.................... 1,502 $89,156,666.34 100.00%
================================================================================
Distribution of Remaining Term to Maturity
(in months) as of the Cut-Off Date
Group I
Number Aggregate Unpaid
of Principal Balance % of
Months Remaining Mortgage as of the Aggregate
to Maturity Loans Cut-Off Date Principal Balance
- ---------------------- -------- ----------------- -----------------
48 < Rem Term <= 60 3 $ 101,584.16 0.11%
72 < Rem Term <= 84 4 109,297.55 0.12
108 < Rem Term <= 120 37 1,218,753.73 1.37
120 < Rem Term <= 132 1 23,661.00 0.03
132 < Rem Term <= 144 1 49,166.55 0.06
144 < Rem Term <= 156 3 115,653.39 0.13
156 < Rem Term <= 168 2 237,154.84 0.27
168 < Rem Term <= 180 928 54,688,105.56 61.34
180 < Rem Term <= 192 1 139,122.89 0.16
216 < Rem Term <= 228 1 61,202.64 0.07
228 < Rem Term <= 240 142 7,388,242.26 8.29
312 < Rem Term <= 324 1 45,031.45 0.05
336 < Rem Term <= 348 1 53,468.17 0.06
348 < Rem Term <= 360 377 24,926,222.15 27.96
- --------------------------------------------------------------------------------
TOTAL........................ 1,502 $89,156,666.34 100.00%
================================================================================
S-27
<PAGE>
Group II
The Mortgage Loans in Group II consist of approximately 1,059 loans under
which the related Mortgaged Properties are located in 40 states and the District
of Columbia as set forth herein. As of the CutOff Date, the Mortgage Loans in
Group II had an aggregate principal balance of $96,040,213.85, the maximum
principal balance of any of the Mortgage Loans in Group II was $450,000.00, the
minimum principal balance thereof was $13,921.17 and the principal balance of
the Mortgage Loans in Group II averaged $90,689.53. As of the Cut-Off Date,
Coupon Rates of the Mortgage Loans in Group II ranged from 6.990% per annum to
14.25% per annum. As of the Cut-Off Date, the weighted average Coupon Rate of
the Mortgage Loans in Group II was 10.242%. As of the Cut-Off Date, margins of
the Mortgage Loans in Group II ranged from 3.625% per annum to 9.750% per annum,
and the weighted average margin was 6.453%. As of the Cut-Off Date, the maximum
coupons of the Mortgage Loans in Group II ranged from 11.875% per annum to
20.675% per annum, and the weighted average maximum coupon was 16.976%. 97.85%
of the aggregate principal balance of the Mortgage Loans in Group II had a
periodic interest rate cap of 1.00% and 2.15% of the aggregate principal balance
of the Mortgage Loans in Group II had a periodic interest rate cap of 1.50%.
45.37% of the aggregate principal balance of the Mortgage Loans in Group II were
fixed rate loans that, in 2 years from origination, will be converted into
variable rate loans with an interest rate cap of 3.00% on the date of such
conversion and with a periodic interest rate cap of 1.00% or 1.50% thereafter.
0.47% of the aggregate principal balance of the Mortgage Loans in Group II were
fixed rate loans that, in 3 years from origination, will be converted into
variable rate loans with an interest rate cap of 3.00% on the date of such
conversion and with a periodic interest rate cap of 1.00% thereafter.
As of the Cut-Off Date, the original term to stated maturity of the
Mortgage Loans in Group II ranged from 180 months to 360 months, the remaining
term to stated maturity ranged from 171 months to 360 months, the weighted
average original term to stated maturity was 359 months and the weighted average
remaining term to stated maturity was 358 months. No Mortgage Loan in Group II
had a stated maturity later than May 1, 2027. 99.96% of the aggregate principal
balance of the Mortgage Loans in Group II require monthly payments of principal
that will fully amortize the Mortgage Loans by their respective dates and 0.04%
of the aggregate principal balance of the Mortgage Loans in Group II are Balloon
Loans.
The Coupon Rates of the Mortgage Loans in Group II adjust semi-annually
based on six month LIBOR.
S-28
<PAGE>
The sum of the percentage columns set forth on the following tables may not
equal 100% due to rounding.
Geographic Distribution
Group II
Number Aggregate Unpaid
of Principal Balance % of
Mortgage as of the Aggregate
State Loans Cut-Off Date Principal Balance
- --------------------- -------- ------------------- -----------------
Alabama 12 $ 847,565.17 0.88%
Arizona 8 697,650.00 0.73
California 31 4,101,348.75 4.27
Colorado 24 2,396,478.71 2.50
Connecticut 6 648,286.49 0.68
Delaware 4 415,670.23 0.43
District of Columbia 3 387,243.54 0.40
Florida 41 3,801,043.33 3.96
Georgia 7 732,027.50 0.76
Illinois 75 7,401,108.09 7.71
Indiana 9 535,545.62 0.56
Iowa 16 1,297,120.20 1.35
Kansas 6 448,370.22 0.47
Kentucky 3 147,483.68 0.15
Louisiana 1 141,000.00 0.15
Maryland 24 2,649,096.71 2.76
Massachusetts 19 2,371,690.65 2.47
Michigan 219 17,396,345.99 18.11
Minnesota 127 10,414,992.62 10.84
Missouri 16 1,158,272.85 1.21
Nebraska 1 47,929.45 0.05
Nevada 6 729,059.89 0.76
New Hampshire 3 161,772.72 0.17
New Jersey 31 3,492,183.90 3.64
New Mexico 5 498,850.00 0.52
New York 8 1,315,294.32 1.37
North Carolina 8 956,933.57 1.00
Ohio 67 4,766,654.38 4.96
Oklahoma 10 957,662.60 1.00
Oregon 16 1,823,969.43 1.90
Pennsylvania 37 2,959,297.49 3.08
Rhode Island 12 1,165,624.57 1.21
South Carolina 1 163,000.00 0.17
South Dakota 1 52,800.00 0.05
Tennessee 3 403,174.31 0.42
Texas 59 6,699,695.69 6.98
Utah 19 1,934,747.47 2.01
Virginia 8 920,829.67 0.96
Washington 11 1,243,815.20 1.30
West Virginia 2 178,750.00 0.19
Wisconsin 100 7,579,828.84 7.89
- --------------------------------------------------------------------------------
TOTAL 1,059 $ 96,040,213.85 100.00%
================================================================================
S-29
<PAGE>
The combined loan-to-value ratio of a Mortgage Loan is equal to the ratio
(expressed as a percentage) of (x) the sum of the (i) original principal balance
of such Mortgage Loan and (ii) the outstanding principal balances of any senior
mortgage loans (computed at the date of origination of such Mortgage Loan) to
(y) the appraised value of the related Mortgaged Property at the time of
origination or in the case of a purchase money mortgage loan the lesser of the
purchase price or the appraised value at the time of origination (the "Combined
Loan-to-Value Ratio"). The Combined Loan-to-Value Ratios are distributed as
follows:
Combined Loan-To-Value Ratio Distribution
Group II
Number Aggregate Unpaid
of Principal Balance % of
Range of Combined Mortgage as of the Aggregate
Loan-to-Value Ratios Loans Cut-Off Date Principal Balance
- ----------------------- -------- ------------------ -----------------
25.000 < LTV <= 30.000 2 $ 83,500.00 0.09%
30.000 < LTV <= 35.000 3 267,066.69 0.26
35.000 < LTV <= 40.000 9 400,980.81 0.42
40.000 < LTV <= 45.000 6 389,000.00 0.41
45.000 < LTV <= 50.000 14 951,573.28 0.99
50.000 < LTV <= 55.000 22 1,596,045.16 1.66
55.000 < LTV <= 60.000 35 1,948,079.45 2.03
60.000 < LTV <= 65.000 51 4,043,634.32 4.21
65.000 < LTV <= 70.000 113 9,170,014.21 9.55
70.000 < LTV <= 75.000 139 12,575,346.99 13.09
75.000 < LTV <= 80.000 419 38,396,578.56 39.98
80.000 < LTV <= 85.000 142 14,266,718.72 14.85
85.000 < LTV <= 90.000 104 11,971,675.66 12.47
- --------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
================================================================================
The Combined Loan-to-Value Ratios shown above were calculated based upon
the appraised values of the Properties at the time of origination of the
Mortgage Loans or in the case of a purchase money mortgage loan the lesser of
the purchase price or the appraised value at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the unpaid principal balances of
the Mortgage Loans, together with the unpaid principal balances of any senior
mortgage loans, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
S-30
<PAGE>
Distribution of Unpaid Principal Balances as of the Cut-Off Date
Group II
Number Aggregate Unpaid % of
of Principal Balance Aggregate
Range of Unpaid Mortgage as of the Principal
Principal Balances ($) Loans Cut-Off Date Balance
- ---------------------------- -------- ----------------- ----------
0 < Balance <= 25,000 15 $ 298,798.57 0.31%
25,000 < Balance <= 50,000 188 7,524,590.85 7.83
50,000 < Balance <= 100,000 523 38,400,123.07 39.98
100,000 < Balance <= 150,000 215 25,847,479.65 26.91
150,000 < Balance <= 200,000 71 12,113,149.53 12.61
200,000 < Balance <= 250,000 27 5,841,557.93 6.08
250,000 < Balance <= 300,000 13 3,566,152.55 3.71
300,000 < Balance <= 350,000 5 1,623,361.70 1.69
350,000 < Balance <= 400,000 1 375,000.00 0.39
400,000 < Balance <= 450,000 1 450,000.00 0.47
- --------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
================================================================================
Lien Status and Occupancy Status
Group II
Number Aggregate Unpaid
of Principal Balance % of
Lien Status and Mortgage as of the Aggregate
Occupancy Status Loans Cut-Off Date Principal Balance
- ------------------------------ ----- ----------------- -----------------
First Lien Owner Occupied 1,008 $92,674,141.20 96.50%
Non-Owner Occupied 46 2,839,846.63 2.96
Second Home 5 526,226.02 0.55
- --------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
================================================================================
Distribution of Age (in months) from Origination to the Cut-Off Date
Group II
Number Aggregate Unpaid
of Principal Balance % of
Months Elapsed Mortgage as of the Aggregate
Since Origination Loans Cut-Off Date Principal Balance
- ----------------- ----- ------------------ -----------------
Age = 0 417 $37,291,014.00 38.83%
0 < Age <= 6 636 58,242,036.77 60.64
6 < Age <= 12 6 507,163.08 0.53
- --------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
================================================================================
S-31
<PAGE>
Property Type
Group II
Number Aggregate Unpaid
of Principal Balance % of
Mortgage as of the Aggregate
Property Type Loans Cut-Off Date Principal Balance
------------- ----- ------------------ -----------------
3-4 Units 2 $ 164,477.79 0.17%
Condominium 32 2,452,978.18 2.55
Duplex 42 3,207,930.29 3.34
Manufactured Home 9 627,955.88 0.65
Modular Housing 7 545,924.99 0.57
Row House 10 585,322.53 0.61
Single Family 941 87,124,461.10 90.72
Townhouse 16 1,331,163.09 1.39
- --------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
================================================================================
Distribution of Remaining Term to Maturity
(in months) as of the Cut-Off Date
Group II
Number Aggregate Unpaid
of Principal Balance % of
Months Remaining Mortgage as of the Aggregate
to Maturity Loans Cut-Off Date Principal Balance
- --------------------- -------- ------------------ -----------------
168 < Rem Term <= 180 9 $ 500,312.94 0.52%
228 < Rem Term <= 240 3 254,885.05 0.27
348 < Rem Term <= 360 1,047 95,285,015.86 99.21
- --------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
================================================================================
Distribution of Current Coupon Rates
as of the Cut Off Date
Group II
Number Aggregate Unpaid
of Principal Balance
Mortgage as of the % of Aggregate
Current Coupon Rates (%) Loans Cut-Off Date Principal Balance
- ------------------------------ -------- ----------------- -----------------
6.50% < Gross Coupon <= 7.00% 1 $ 114,275.57 0.12%
7.00 < Gross Coupon <= 7.50 1 54,441.48 0.06
7.50 < Gross Coupon <= 8.00 17 1,610,962.16 1.68
8.00 < Gross Coupon <= 8.50 35 3,246,990.32 3.38
8.50 < Gross Coupon <= 9.00 93 9,343,384.67 9.73
9.00 < Gross Coupon <= 9.50 125 12,134,939.09 12.64
9.50 < Gross Coupon <= 10.00 190 19,173,105.59 19.96
10.00 < Gross Coupon <= 10.50 149 14,865,350.62 15.48
10.50 < Gross Coupon <= 11.00 173 14,496,353.10 15.09
11.00 < Gross Coupon <= 11.50 99 7,874,649.99 8.20
11.50 < Gross Coupon <= 12.00 70 5,949,529.46 6.19
12.00 < Gross Coupon <= 12.50 65 4,233,048.61 4.41
12.50 < Gross Coupon <= 13.00 25 1,997,255.49 2.08
13.00 < Gross Coupon <= 13.50 9 680,202.10 0.71
13.50 < Gross Coupon <= 14.00 4 147,050.12 0.15
14.00 < Gross Coupon <= 14.50 3 118,675.48 0.12
- --------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
================================================================================
S-32
<PAGE>
Distribution of Maximum Coupon Rates
Group II
Number Aggregate Unpaid
of Principal Balance
Mortgage as of the % of Aggregate
Maximum Coupon Rates (%) Loans Cut-Off Date Principal Balance
- ---------------------------- -------- ---------------- -----------------
11.500% < LIFE CAP <= 12.000% 1 $ 93,500.00 0.10%
13.000 < LIFE CAP <= 13.500 1 48,000.00 0.05
13.500 < LIFE CAP <= 14.000 11 1,004,855.15 1.05
14.000 < LIFE CAP <= 14.500 10 935,702.90 0.97
14.500 < LIFE CAP <= 15.000 37 3,775,252.73 3.93
15.000 < LIFE CAP <= 15.500 54 4,800,907.36 5.00
15.500 < LIFE CAP <= 16.000 103 10,563,992.15 11.00
16.000 < LIFE CAP <= 16.500 138 13,281,359.39 13.83
16.500 < LIFE CAP <= 17.000 198 18,522,744.52 19.29
17.000 < LIFE CAP <= 17.500 134 12,955,504.49 13.49
17.500 < LIFE CAP <= 18.000 153 13,287,302.74 13.84
18.000 < LIFE CAP <= 18.500 90 6,744,912.15 7.02
18.500 < LIFE CAP <= 19.000 54 4,546,875.39 4.73
19.000 < LIFE CAP <= 19.500 43 3,240,305.12 3.37
19.500 < LIFE CAP <= 20.000 19 1,576,388.86 1.64
20.000 < LIFE CAP <= 20.500 10 571,760.78 0.60
20.500 < LIFE CAP <= 21.000 3 90,850.12 0.09
- ------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
================================================================================
Distribution of Margins
as of the Cut Off Date
Group II
Number Aggregate Unpaid
of Principal Balance
Mortgage as of the % of Original Pool
Margins (%) Loans Cut-Off Date Principal Balance
- ----------------------- -------- ----------------- -------------------
3.50% < Margin <= 3.75% 12 1,098,861.12 1.14%
3.75 < Margin <= 4.00 1 104,850.00 0.11
4.00 < Margin <= 4.25 5 337,646.81 0.35
4.25 < Margin <= 4.50 11 1,230,323.14 1.28
4.50 < Margin <= 4.75 13 1,726,497.50 1.80
4.75 < Margin <= 5.00 20 1,594,475.78 1.66
5.00 < Margin <= 5.25 39 3,350,258.66 3.49
5.25 < Margin <= 5.50 63 5,990,476.86 6.24
5.50 < Margin <= 5.75 84 8,787,888.66 9.15
5.75 < Margin <= 6.00 86 8,561,950.05 8.91
6.00 < Margin <= 6.25 93 8,068,713.86 8.40
6.25 < Margin <= 6.50 109 10,770,753.63 11.21
6.50 < Margin <= 6.75 97 9,209,252.88 9.59
6.75 < Margin <= 7.00 105 9,770,926.34 10.17
7.00 < Margin <= 7.25 85 7,027,619.79 7.32
7.25 < Margin <= 7.50 61 5,741,352.15 5.98
7.50 < Margin <= 7.75 61 4,834,456.52 5.03
7.75 < Margin <= 8.00 34 3,143,059.92 3.27
8.00 < Margin <= 8.25 25 1,589,051.50 1.65
8.25 < Margin <= 8.50 7 471,259.87 0.49
8.50 < Margin <= 8.75 16 828,909.29 0.86
8.75 < Margin <= 9.00 7 561,976.57 0.59
9.00 < Margin <= 9.25 12 719,538.65 0.75
9.25 < Margin <= 9.50 7 294,200.95 0.31
9.50 < Margin <= 9.75 6 225,913.35 0.24
- --------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
================================================================================
S-33
<PAGE>
Next Interest Adjustment Date
Group II
Number Aggregate Unpaid
of Principal Balance
Next Interest Mortgage as of the % of Aggregate
Adjustment Date Loans Cut-Off Date Principal Balance
- --------------- -------- ----------------- -----------------
06/01/97 16 $ 1,184,425.63 1.23%
07/01/97 47 5,102,888.50 5.31
08/01/97 159 14,266,813.97 14.86
09/01/97 160 14,238,324.83 14.83
10/01/97 140 12,088,627.58 12.59
11/01/97 59 5,139,890.75 5.35
11/01/98 2 198,026.18 0.21
12/01/98 2 148,689.82 0.15
01/01/99 23 2,505,260.04 2.61
02/01/99 59 6,334,420.28 6.60
03/01/99 106 9,333,441.44 9.72
04/01/99 155 14,223,324.39 14.81
05/01/99 128 10,825,963.00 11.27
02/01/00 1 70,824.51 0.07
03/01/00 2 379,292.93 0.39
- --------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
================================================================================
Distribution of Minimum
Coupon Rates
Group II
Number Aggregate Unpaid
of Principal Balance
Minimum Mortgage as of the % of Aggregate
Coupon Rates (%) Loans Cut-Off Date Principal Balance
- -------------------------------- --------- ------------------ -----------------
3.500% < Life Floor <= 4.000% 11 $ 998,361.12 1.04%
4.000 < Life Floor <= 4.500 2 228,979.89 0.24
4.500 < Life Floor <= 5.000 1 118,800.00 0.12
5.000 < Life Floor <= 5.500 8 739,719.51 0.77
5.500 < Life Floor <= 6.000 13 1,310,481.99 1.36
6.000 < Life Floor <= 6.500 19 2,046,154.76 2.13
6.500 < Life Floor <= 7.000 21 1,965,446.34 2.05
7.000 < Life Floor <= 7.500 28 2,751,988.22 2.87
7.500 < Life Floor <= 8.000 38 3,494,803.02 3.64
8.000 < Life Floor <= 8.500 51 4,095,725.61 4.26
8.500 < Life Floor <= 9.000 88 8,440,923.83 8.79
9.000 < Life Floor <= 9.500 116 10,839,207.24 11.29
9.500 < Life Floor <= 10.000 171 16,778,035.43 17.47
10.000 < Life Floor <= 10.500 127 12,835,434.95 13.36
10.500 < Life Floor <= 11.000 130 11,097,428.76 11.55
11.000 < Life Floor <= 11.500 78 6,146,908.43 6.40
11.500 < Life Floor <= 12.000 61 5,375,921.78 5.60
12.000 < Life Floor <= 12.500 57 3,887,135.26 4.05
12.500 < Life Floor <= 13.000 24 1,977,655.49 2.06
13.000 < Life Floor <= 13.500 9 680,202.10 0.71
13.500 < Life Floor <= 14.000 4 147,050.12 0.15
14.000 < Life Floor <= 14.500 2 83,850.00 0.09
- -------------------------------------------------------------------------------
TOTAL 1,059 $96,040,213.85 100.00%
===============================================================================
S-34
<PAGE>
The Mortgage Loan Program -- Underwriting Standards; Representations
The Mortgage Loans were acquired by the Company from 92 Unaffiliated
Originators. Not more than 11.58% of the Original Pool Principal Balance
represents Mortgage Loans purchased from any single Unaffiliated Originator. All
of the Mortgage Loans will be originated or acquired by the Originators
generally in accordance with underwriting criteria satisfactory to the Company.
The Company will make representations and warranties with respect to the
Mortgage Loans sold to the Trust as of the Closing Date pursuant to the Pooling
and Servicing Agreement. The Company shall be obligated to repurchase the
Mortgage Loans in respect of which a breach of representation or warranty has
occurred or shall be obligated to otherwise remedy such breach. See "Mortgage
Loan Program" in the accompanying Prospectus.
The Company's Guidelines provide that each borrower is required to provide,
and the Originator is generally required to verify, personal financial
information. The borrower's total monthly obligations (including principal and
interest on each mortgage, tax assessments, other loans, charge accounts and all
other scheduled indebtedness) should not exceed 60% of the borrower's monthly
income. Borrowers who are salaried employees must provide current employment
information, in addition to prior employment history. The Originator verifies
this information for salaried borrowers based on a current pay stub and either
(i) a written verification of income signed by their employer or (ii) two years'
W-2 forms. A self-employed applicant is generally required to be successfully
self-employed in the same field for a minimum of two years. A self-employed
borrower is generally required to provide financial statements and signed copies
of federal income tax returns (including schedules) filed for the most recent
two years. The borrower's debt-to-income ratio is calculated based on income as
generally verified by the Originator and must be reasonable.
The Mortgage Loans were underwritten pursuant to the Company's "Full
Documentation Program," "Alternative Income Documentation Program" and "Stated
Income Program," as set forth in the Company's Guidelines. Under each of the
programs, the Originator reviews the loan applicant's source of income,
calculates the amount of income from sources indicated on the loan application
or similar documentation, reviews the credit history of the applicant,
calculates the debt service-to-income ratio to determine the applicant's ability
to repay the loan, reviews the type and use of the property being financed and
reviews the property for compliance with its standards. In determining the
ability of the applicant to repay an adjustable rate Mortgage Loan, the
Originators use a rate (the "Qualifying Rate") that generally is a rate equal to
the fullyindexed Mortgage interest rate for such adjustable rate Mortgage Loan.
The Company's Guidelines are applied in a standardized procedure that complies
with applicable federal and state laws and regulations.
Under the Full Documentation Program, the income of each applicant and the
source of funds (if any) required to be deposited by an applicant into a bank
account will be verified by the Originators. Applicants are generally required
to submit a current pay stub and either (i) a written verification of income
signed by their employer or (ii) two years' W-2 forms. Under the Alternative
Income Documentation Program, a self-employed applicant is required to provide
the applicant's business' profit and loss statement, and bank account statements
supporting such statement for the prior calendar year and any completed calendar
quarter of the current year and a current copy of a business license. Both the
Alternative Income Program and the Stated Income Program generally require (i)
that the applicant's income be reasonable for its business/profession, (ii) that
the business has been in existence for three years or more and (iii) that the
loan-to-value ratio be reduced. In addition, the Mortgage Loan will generally
improve the applicant's cash flow. Verification of the source of funds (if any)
required to be deposited by the applicant into a bank account is generally
required under all documentation programs in the form of a standard verification
of deposit or two months' consecutive bank statements or other acceptable
documentation. Twelve months' mortgage payment or rental history is generally
required to be verified by the applicant's current lender or landlord. If
appropriate compensating factors exist, the Originators and the Company may
waive certain documentation requirements for individual applicants.
S-35
<PAGE>
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
Class A Certificates
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will be directly related to the rate
of payment of principal of the Mortgage Loans in the related Mortgage Loan
Group, including for this purpose Prepayments, liquidations due to defaults,
casualties and condemnations, and repurchases of Mortgage Loans by the Company,
or purchases of Mortgage Loans by the Master Servicer or a Sub-Servicer. The
Mortgage Loans in the related Mortgage Loan Group may be prepaid by the related
obligors on the Notes ("Mortgagors") at any time. The actual rate of principal
prepayments on pools of mortgage loans is influenced by a variety of economic,
tax, geographic, demographic, social, legal and other factors and has fluctuated
considerably in recent years. In addition, the rate of principal prepayments may
differ among pools of mortgage loans at any time because of specific factors
relating to the mortgage loans in the particular pool, including, among other
things, the age of the mortgage loans, the geographic locations of the
properties securing the loans, the extent of the mortgagors' equity in such
properties, and changes in the mortgagors' housing needs, job transfers and
unemployment.
Generally, however, because the Mortgage Loans in Group I bear interest at
fixed rates, and the rate of prepayment on fixed rate mortgage loans is
sensitive to prevailing interest rates, if prevailing interest rates were to
fall, the Mortgage Loans in Group I may be subject to higher prepayment rates.
Conversely, if prevailing interest rates were to rise, the rate of prepayments
on Mortgage Loans in Group I would be likely to decrease.
If purchased at other than par, the yield to maturity on a Class A
Certificate will be affected by the rate of the payment of principal of the
Mortgage Loans in the related Mortgage Loan Group. If the actual rate of
payments on the Mortgage Loans in the related Mortgage Loan Group is slower than
the rate anticipated by an investor who purchases a Class A Certificate at a
discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the Mortgage Loans in the
related Mortgage Loan Group is faster than the rate anticipated by an investor
who purchases a Class A Certificate at a premium, the actual yield to such
investor will be lower than such investor's anticipated yield.
All of the Mortgage Loans in Group II are adjustable rate mortgage loans.
As is the case with conventional fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed rate mortgage loans at competitive interest rates may
encourage Mortgagors to refinance their adjustable rate mortgage loans to "lock
in" a lower fixed interest rate. However, no assurance can be given by the
Company as to the level of prepayments that the Mortgage Loans in Group II will
experience.
The final scheduled Payment Date for the A-1 Group I Certificates is March
18, 2012, for the Class A-2 Group I Certificates is June 18, 2016, for the Class
A-3 Group I Certificates is October 18, 2023, for the A-4 Group I Certificates
is June 18, 2027, for the A-5 Group I Certificates is June 18, 2027, and for the
Class A-6 Group II Certificates is May 18, 2027. Such dates are the dates on
which the related Class A Certificate Principal Balance would be reduced to
zero, assuming, among other things that with respect to the Class A-1 Group I
Certificates, the Class A-2 Group I Certificates and the Class A-3 Group I
Certificates (i) no Prepayments are received on any of the Mortgage Loans, (ii)
distributions of principal and interest on each of the Mortgage Loans is timely
received, (iii) Class B Interest will not be used to make accelerated payments
of principal (i.e. Subordination Increase Amounts) to the Holders of the Class A
Certificates and (iv) the Mortgage Loans in each Mortgage Loan Group have the
applicable characteristics set forth in the "Weighted Average Lives of Class A
Certificates" section herein. The final scheduled Payment Date for the Class A-4
Group I Certificates and the Class A-5 Group I Certificates is the Payment Date
in the calendar month after the month in which the stated maturity of the
Mortgage Loan in the related Mortgage Loan Group having the latest stated
maturity occurs. The final scheduled Payment Date for the Class A-6 Group II
Certificates is the Payment Date in the calendar month in which the stated
maturity of the Mortgage Loan in Group II having the last stated maturity
occurs. The weighted average life of the Class A Certificates of each Class is
likely to be shorter than
S-36
<PAGE>
would be the case if payments actually made on the Mortgage Loans in the related
Mortgage Loan Group conformed to the foregoing assumptions, and the final
Payment Dates with respect to the Class A Certificates of each Class could occur
significantly earlier than such final scheduled Payment Dates because (i)
Prepayments are likely to occur, (ii) the Company may repurchase Mortgage Loans
in the related Mortgage Loan Group in the event of breaches of representations
and warranties and (iii) subject to the Certificate Insurer's consent in certain
circumstances, the Company may cause, and the Trustee may, pursuant to the
Auction Sale, cause a termination of the Trust when the Pool Principal Balance
has declined to ten percent or less of the Original Pool Principal Balance.
"Weighted average life" refers to the average amount of time from the date
of issuance of a security until each dollar of principal of such security will
be repaid to the investor. The weighted average lives of the Classes of Class A
Certificates will be influenced by the rate at which principal payments
(including scheduled payments and prepayments) on the Mortgage Loans in the
related Mortgage Loan Group are made. Principal payments on Mortgage Loans may
be in the form of scheduled amortization or prepayments (for this purpose, the
term "prepayment" includes prepayments and liquidations due to a default or
other dispositions of the Mortgage Loans). The weighted average lives of the
Class A Certificates will also be influenced by delays associated with realizing
on defaulted Mortgage Loans in the related Mortgage Loan Group. The model used
in this Prospectus Supplement assumes that, (i) with respect to Group I, the
pool of loans prepays in the first month at a constant prepayment rate of 2.4%
and increases by an additional 2.4% each month thereafter until the tenth month,
where it remains at a constant prepayment rate equal to 24% (the "Home Equity
Prepayment" Model or "HEP"), and (ii) with respect to Group II, the pool of
loans prepays a constant prepayment rate equal to 26% ("CPR") ((i) and (ii)
together, the "Prepayment Assumption"). HEP represents an assumed annualized
rate of prepayment relative to the then outstanding principal balance on a pool
of new mortgage loans.
Weighted Average Lives of Class A Certificates
For the purpose of the tables below, it is assumed that: (i) the Mortgage
Loans of each Mortgage Loan Group consist of pools of loans with level-pay and
balloon amortization methodologies, Cut-Off Date principal balances, gross
coupon rates, net coupon rates, original and remaining terms to maturity, and
original amortization terms as applicable, as set forth below, (ii) the Closing
Date for the Certificates occurs on May 29, 1997, (iii) distributions on the
Certificates are made on the 18th day of each month regardless of the day on
which the Payment Date actually occurs, commencing in June 18, 1997 in
accordance with the priorities described herein, (iv) the difference between the
gross coupon rate and the net coupon rate is sufficient to pay Servicer Fees,
Trustee fees and Certificate Insurer premiums (the sum of which is assumed to be
0.69%), (v) the Mortgage Loans' prepayment rates are a multiple of the
Prepayment Assumption, (vi) prepayments include 30 days' interest thereon, (vii)
optional termination is not exercised, (viii) the Specified Subordinated Amount
for each Mortgage Loan Group is set initially as specified in the Insurance
Agreement and thereafter changes in accordance with the provisions of the
Insurance Agreement, (ix) no delinquencies in the payment by Mortgagors of
principal and interest on the Mortgage Loans are experienced, (x) no Mortgage
Loan is repurchased for breach of a representation and warranty or otherwise,
(xi) the Coupon Rate for each Mortgage Loan in Group II is adjusted on its next
rate adjustment date (and on subsequent rate adjustment dates, if necessary) to
equal the sum of (a) an assumed level of the applicable index (5.6875%) and (b)
the respective gross margin (such sum being subject to the applicable periodic
adjustment cap and maximum interest rate), (xii) the Class A-1 Group I
Pass-Through Rate remains constant at 5.7875%, and (xiii) the Class A-6 Group II
Pass-Through Rate remains constant at 5.9175%.
S-37
<PAGE>
GROUP I CHARACTERISTICS
<TABLE>
<CAPTION>
Original Remaining Original
Term to Term to Amortization
Pool Principal Gross Coupon Net Coupon Maturity Maturity Term Amortization
Number Balance Rate (%) Rate (%) (in months) (in months) (in months) Method
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 $12,995,869.70 11.5310 11.0810 174 172 174 Level
2 7,551,524.88 11.6230 11.1730 240 237 240 Level
3 25,024,721.77 11.4030 10.9530 360 358 360 Level
4 43,584,549.99 11.7170 11.2670 180 178 360 Balloon
</TABLE>
GROUP II CHARACTERISTICS
<TABLE>
<CAPTION>
Net Original Remaining Original
Gross Net Months Maximum Term to Term to Amortization
Pool Principal Coupon Coupon to Rate Interest Maturity Maturity Term Periodic Amortization
Number Balance (1) Rate (%) Rate (%) Change Margin (%) Rate (%) (in months)(in months)(in months) Cap (%) Method
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $1,184,425.63 9.7130 9.2630 1 5.6710 15.6060 347 343 347 1.0000 Level
2 5,102,888.50 10.2130 9.7630 2 6.8780 16.3480 358 355 358 1.0000 Level
3 14,266,813.97 9.5950 9.1450 3 6.3690 15.7690 358 356 358 1.0130 Level
4 14,238,324.83 9.6880 9.2380 4 6.6780 16.0110 356 355 356 1.0170 Level
5 12,088,627.58 10.0370 9.5870 5 6.7260 16.1910 359 359 359 1.0070 Level
6 5,139,890.75 9.7140 9.2640 6 6.2810 15.7930 360 359 360 1.0330 Level
7 2,851,976.04 10.5200 10.0700 20 6.7090 16.8860 360 357 360 1.0000 Level
8 6,334,420.28 10.6110 10.1610 21 6.3440 16.9180 360 358 360 1.0220 Level
9 9,333,441.44 11.0570 10.6070 22 6.4150 17.3260 359 358 359 1.0000 Level
10 14,223,324.39 10.6370 10.1870 23 6.1310 17.0910 360 360 360 1.0000 Level
11 11,276,080.44 10.8360 10.3860 24 6.3810 17.3200 360 360 360 1.0180 Level
</TABLE>
(1) With respect to the pools numbered 7, 8, 9, 10 and 11, the aggregate
principal balance of the Mortgage Loans are fixed rate loans that, within 2
years from origination, will be converted into variable rate loans with an
interest rate cap of 3% on the date of such conversion.
S-38
<PAGE>
PERCENTAGE OF CERTIFICATE PRINCIPAL BALANCE (1)
<TABLE>
<CAPTION>
Class A-1 Group I Certificates Class A-2 Group I Certificates
HEP HEP
Payment Date 0% 15% 18% 21% 24% 28% 0% 15% 18% 21% 24% 28%
-- --- --- --- --- --- -- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1998 91.4 65.5 60.3 55.1 49.8 42.8 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1999 89.2 34.5 24.4 14.6 5.2 0.0 100.0 100.0 100.0 100.0 100.0 86.8
May 18, 2000 86.8 8.2 0.0 0.0 0.0 0.0 100.0 100.0 90.8 67.8 47.4 22.6
May 18, 2001 84.3 0.0 0.0 0.0 0.0 0.0 100.0 77.2 51.4 28.5 8.1 0.0
May 18, 2002 81.4 0.0 0.0 0.0 0.0 0.0 100.0 46.7 20.8 0.0 0.0 0.0
May 18, 2003 78.4 0.0 0.0 0.0 0.0 0.0 100.0 23.8 0.0 0.0 0.0 0.0
May 18, 2004 75.0 0.0 0.0 0.0 0.0 0.0 100.0 5.6 0.0 0.0 0.0 0.0
May 18, 2005 71.5 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2006 67.5 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2007 63.0 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2008 57.9 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2009 52.3 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2010 45.9 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2011 38.7 0.0 0.0 0.0 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2012 0.0 0.0 0.0 0.0 0.0 0.0 19.1 0.0 0.0 0.0 0.0 0.0
May 18, 2013 0.0 0.0 0.0 0.0 0.0 0.0 14.2 0.0 0.0 0.0 0.0 0.0
May 18, 2014 0.0 0.0 0.0 0.0 0.0 0.0 8.6 0.0 0.0 0.0 0.0 0.0
May 18, 2015 0.0 0.0 0.0 0.0 0.0 0.0 2.4 0.0 0.0 0.0 0.0 0.0
May 18, 2016 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2017 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2018 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2019 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2020 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2021 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2022 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2023 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2024 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2025 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2026 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2027 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2028 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Weighted Avg Life
years(2) 10.4 1.6 1.3 1.2 1.1 0.9 15.2 5.1 4.2 3.5 3.0 2.6
Class A-3 Group I Certificates
HEP
Payment Date 0% 15% 18% 21% 24% 28%
-- --- --- --- --- ---
Initial Balance 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1998 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1999 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 2000 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 2001 100.0 100.0 100.0 100.0 100.0 66.7
May 18, 2002 100.0 100.0 100.0 96.5 55.8 10.9
May 18, 2003 100.0 100.0 97.4 53.5 17.6 0.0
May 18, 2004 100.0 100.0 62.5 23.2 0.0 0.0
May 18, 2005 100.0 83.1 37.9 3.3 0.0 0.0
May 18, 2006 100.0 57.9 16.8 0.0 0.0 0.0
May 18, 2007 100.0 35.9 0.0 0.0 0.0 0.0
May 18, 2008 100.0 16.8 0.0 0.0 0.0 0.0
May 18, 2009 100.0 0.3 0.0 0.0 0.0 0.0
May 18, 2010 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2011 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2012 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2013 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2014 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2015 100.0 0.0 0.0 0.0 0.0 0.0
May 18, 2016 90.5 0.0 0.0 0.0 0.0 0.0
May 18, 2017 76.1 0.0 0.0 0.0 0.0 0.0
May 18, 2018 67.0 0.0 0.0 0.0 0.0 0.0
May 18, 2019 56.8 0.0 0.0 0.0 0.0 0.0
May 18, 2020 45.3 0.0 0.0 0.0 0.0 0.0
May 18, 2021 32.4 0.0 0.0 0.0 0.0 0.0
May 18, 2022 18.0 0.0 0.0 0.0 0.0 0.0
May 18, 2023 1.8 0.0 0.0 0.0 0.0 0.0
May 18, 2024 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2025 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2026 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2027 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2028 0.0 0.0 0.0 0.0 0.0 0.0
Weighted Avg Life
years(2) 22.4 9.5 7.6 6.3 5.3 4.3
</TABLE>
- --------------
(1) For purposes of calculating the percentages and the weighted average lives
with respect to the Group I Certificates, the Mortgage Loans in Group II
are assumed to prepay at 26% CPR and for purposes of calculating the
percentages and the weighted average lives with respect to the Group II
Certificates, the Mortgage Loans in Group I are assumed to prepay at 24%
HEP.
(2) The weighted average life of the Class A Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years
from the Closing Date to the related Payment Date, (ii) adding the results,
and (iii) dividing the sum by the initial respective Certificate Principal
Balance for such Class of Class A Certificates.
S-39
<PAGE>
PERCENTAGE OF CERTIFICATE PRINCIPAL BALANCE (1)
<TABLE>
<CAPTION>
Class A-4 Group I Certificates Class A-5 Group I Certificates
HEP HEP
Payment Date 0% 15% 18% 21% 24% 28% 0% 15% 18% 21% 24% 28%
-- --- --- --- --- --- -- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1998 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1999 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 2000 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 2001 100.0 100.0 100.0 100.0 100.0 100.0 99.4 92.1 90.7 89.5 88.0 85.9
May 18, 2002 100.0 100.0 100.0 100.0 100.0 100.0 98.8 85.0 82.5 80.0 77.3 73.7
May 18, 2003 100.0 100.0 100.0 100.0 100.0 75.7 97.5 73.7 69.5 65.4 61.3 56.0
May 18, 2004 100.0 100.0 100.0 100.0 90.7 53.5 95.6 61.5 55.9 50.7 45.7 39.6
May 18, 2005 100.0 100.0 100.0 100.0 72.2 41.9 92.7 47.5 41.1 35.4 30.2 23.8
May 18, 2006 100.0 100.0 100.0 83.6 56.5 31.4 89.5 36.5 30.0 24.5 19.7 13.8
May 18, 2007 100.0 100.0 98.7 66.5 43.0 22.6 86.0 28.0 21.9 16.9 12.5 7.8
May 18, 2008 100.0 100.0 80.3 51.7 32.0 15.6 82.0 21.3 15.8 11.3 7.7 4.2
May 18, 2009 100.0 100.0 64.5 39.5 23.2 10.2 77.7 16.1 11.3 7.4 4.6 2.1
May 18, 2010 100.0 82.9 50.7 29.6 16.2 6.0 72.9 12.0 7.8 4.8 2.7 0.9
May 18, 2011 100.0 67.6 39.3 21.6 10.8 2.8 67.6 8.8 5.3 2.9 1.4 0.3
May 18, 2012 100.0 21.2 10.5 3.8 0.0 0.0 9.5 0.5 0.1 0.0 0.0 0.0
May 18, 2013 100.0 16.2 7.1 1.5 0.0 0.0 8.9 0.4 0.1 0.0 0.0 0.0
May 18, 2014 100.0 12.0 4.3 0.0 0.0 0.0 8.2 0.2 0.0 0.0 0.0 0.0
May 18, 2015 100.0 8.5 2.0 0.0 0.0 0.0 7.5 0.1 0.0 0.0 0.0 0.0
May 18, 2016 100.0 5.5 0.2 0.0 0.0 0.0 6.6 0.1 0.0 0.0 0.0 0.0
May 18, 2017 100.0 3.1 0.0 0.0 0.0 0.0 5.9 0.0 0.0 0.0 0.0 0.0
May 18, 2018 100.0 1.4 0.0 0.0 0.0 0.0 5.4 0.0 0.0 0.0 0.0 0.0
May 18, 2019 100.0 0.0 0.0 0.0 0.0 0.0 4.9 0.0 0.0 0.0 0.0 0.0
May 18, 2020 100.0 0.0 0.0 0.0 0.0 0.0 4.3 0.0 0.0 0.0 0.0 0.0
May 18, 2021 100.0 0.0 0.0 0.0 0.0 0.0 3.7 0.0 0.0 0.0 0.0 0.0
May 18, 2022 100.0 0.0 0.0 0.0 0.0 0.0 3.1 0.0 0.0 0.0 0.0 0.0
May 18, 2023 100.0 0.0 0.0 0.0 0.0 0.0 2.4 0.0 0.0 0.0 0.0 0.0
May 18, 2024 79.6 0.0 0.0 0.0 0.0 0.0 1.7 0.0 0.0 0.0 0.0 0.0
May 18, 2025 52.9 0.0 0.0 0.0 0.0 0.0 0.9 0.0 0.0 0.0 0.0 0.0
May 18, 2026 22.8 0.0 0.0 0.0 0.0 0.0 0.3 0.0 0.0 0.0 0.0 0.0
May 18, 2027 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2028 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Weighted Avg Life
years(2) 28.0 14.8 13.1 11.5 10.0 8.1 14.0 8.3 7.8 7.4 7.0 6.6
</TABLE>
Class A-6 Group II Certificates
CPR
Payment Date 0% 15% 18% 21% 26% 30%
-- --- --- --- --- ---
Initial Balance 100.0 100.0 100.0 100.0 100.0 100.0
May 18, 1998 95.5 80.6 77.6 74.6 69.6 65.7
May 18, 1999 95.1 67.6 62.6 57.8 50.2 44.5
May 18, 2000 94.6 56.6 50.4 44.7 36.8 31.1
May 18, 2001 94.1 47.2 40.8 35.2 27.1 21.7
May 18, 2002 93.6 39.8 33.3 27.6 19.9 15.1
May 18, 2003 93.0 33.6 27.1 21.7 14.6 10.5
May 18, 2004 92.3 28.4 22.1 17.0 10.8 7.3
May 18, 2005 91.5 23.9 18.0 13.3 7.9 5.0
May 18, 2006 90.5 20.1 14.6 10.4 5.8 3.3
May 18, 2007 89.5 16.9 11.8 8.1 4.1 2.1
May 18, 2008 88.4 14.2 9.6 6.4 2.9 1.3
May 18, 2009 87.0 11.9 7.7 4.9 2.0 0.8
May 18, 2010 85.6 10.0 6.2 3.7 1.3 0.4
May 18, 2011 83.9 8.3 5.0 2.7 0.8 0.1
May 18, 2012 82.0 6.9 3.9 2.0 0.4 0.0
May 18, 2013 79.8 5.7 3.0 1.4 0.2 0.0
May 18, 2014 77.4 4.6 2.3 1.0 0.0 0.0
May 18, 2015 74.6 3.7 1.7 0.6 0.0 0.0
May 18, 2016 71.5 2.9 1.2 0.4 0.0 0.0
May 18, 2017 67.9 2.3 0.9 0.1 0.0 0.0
May 18, 2018 63.9 1.7 0.6 0.0 0.0 0.0
May 18, 2019 59.4 1.3 0.3 0.0 0.0 0.0
May 18, 2020 54.2 0.9 0.1 0.0 0.0 0.0
May 18, 2021 48.4 0.6 0.0 0.0 0.0 0.0
May 18, 2022 42.2 0.3 0.0 0.0 0.0 0.0
May 18, 2023 35.3 0.1 0.0 0.0 0.0 0.0
May 18, 2024 27.6 0.0 0.0 0.0 0.0 0.0
May 18, 2025 18.8 0.0 0.0 0.0 0.0 0.0
May 18, 2026 8.9 0.0 0.0 0.0 0.0 0.0
May 18, 2027 0.0 0.0 0.0 0.0 0.0 0.0
May 18, 2028 0.0 0.0 0.0 0.0 0.0 0.0
Weighted Avg Life
years(2) 21.4 5.4 4.5 3.8 3.0 2.6
(1) For purposes of calculating the percentages and the weighted average lives
with respect to the Group I Certificates, the Mortgage Loans in Group II
are assumed to prepay at 26% CPR and for purposes of calculating the
percentages and the weighted average lives with respect to the Group II
Certificates, the Mortgage Loans in Group I are assumed to prepay at 24%
HEP.
(2) The weighted average life of the Class A Certificates is determined by (i)
multiplying the amount of each principal payment by the number of years
from the Closing Date to the related Payment Date, (ii) adding the results,
and (iii) dividing the sum by the initial respective Certificate Principal
Balance for such Class of Class A Certificates.
S-40
<PAGE>
The Mortgage Loans will not have the characteristics assumed above, and
there can be no assurance that (i) the Mortgage Loans will prepay at any of the
rates shown in the table or at any other particular rate or will prepay
proportionately or (ii) the weighted average lives of each Class of the Class A
Group I Certificates, or the weighted average life of the Class A-6 Group II
Certificates will be as calculated above. Because the rate of distributions of
principal of the Class A Certificates will be a result of the actual
amortization (including prepayments) of the Mortgage Loans in the related
Mortgage Loan Group, which will include Mortgage Loans that have remaining terms
to stated maturity shorter or longer than those assumed and Coupon Rates higher
or lower than those assumed, the weighted average lives of the Class A Group I
Certificates and the Class A-6 Group II Certificates will differ from those set
forth above, even if all of the Mortgage Loans in the related Mortgage Loan
Group prepay at the indicated constant prepayment rates.
Payment Delay Feature of Class A-2, A-3, A-4 and A-5 Group I Certificates
The effective yield to the Owners of the Class A-2, A-3, A-4 and A-5 Group
I Certificates will be lower than the yield which would otherwise apply because
distributions will not be payable to such Owners until at least the 18th day of
the month in which the related Accrual Period ends, without any additional
distribution of interest or earnings thereon in respect of such delay.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued in classes (each, a "Class") pursuant to a
Pooling and Servicing Agreement to be dated as of May 1, 1997 (the "Pooling and
Servicing Agreement") among the Master Servicer, the Company, the Transferor and
the Trustee. The Trustee will make available for inspection a copy of the
Pooling and Servicing Agreement (without exhibits or schedules) to the Owners of
the Certificates on written request. The following describes certain terms of
the Pooling and Servicing Agreement, but does not purport to be complete and is
qualified in its entirety by reference to the Pooling and Servicing Agreement.
The Class A-1 Group I Certificates, the Class A-2 Group I Certificates, the
Class A-3 Group I Certificates, the Class A-4 Group I Certificates, the Class
A-5 Group I Certificates and the Class A-6 Group II Certificates are senior
certificates as described herein. The Class B Certificates are not being offered
hereby. Each Class of Class A Certificates will be issued in original principal
amounts of $1,000 and integral multiples thereof, except that one certificate
for each class of Class A Certificates may be issued in a different amount. The
Trust will also issue a residual class in each REMIC created by the Trust (the
"Residual Certificates") which are not being offered hereby and will initially
be retained by the Company or its affiliates. The Class A Certificates, the
Class B Certificates and the Residual Certificates are collectively referred to
as the "Certificates".
Payment Dates and Distributions
On the 18th day of each month, or, if such day is not a business day then
the next succeeding business day, commencing June 18, 1997 (each such day being
a "Payment Date"), the Trustee will be required to distribute to the Owners of
record of the Certificates as of the related Record Date, such Owners'
Percentage Interest in the amounts required to be distributed to the Owners of
each Class of Certificates on such Payment Date. For so long as any Class A
Certificate is in book-entry form with DTC, the only "Owner" of such Class A
Certificates will be Cede. See " -- Book-Entry Registration of the Class A
Certificates" herein.
Each Owner of record of a Certificate as of each Record Date will be
entitled to receive such Owner's Percentage Interest in the amounts due on the
related Payment Date to the Owners of the related Class of Certificates. The
"Percentage Interest" of each Class A Certificate as of any date of
determination will be equal
S-41
<PAGE>
to the percentage obtained by dividing the principal balance of such Class A
Certificate as of the Cut-Off Date by the related Class A Certificate Principal
Balance as of the Cut-Off Date.
Flow of Funds and Distributions on the Class A Certificates
The Principal and Interest Account. The Pooling and Servicing Agreement
requires the Master Servicer to establish a custodial account (the "Principal
and Interest Account") on behalf of the Trustee at a depository institution
meeting the requirements set forth in the Pooling and Servicing Agreement. The
Pooling and Servicing Agreement requires the Master Servicer to deposit all
collections (other than amounts escrowed for taxes and insurance) related to the
Mortgage Loans to the Principal and Interest Account on a daily basis (but no
later than the first business day after receipt). All funds in the Principal and
Interest Account can only be invested in Eligible Investments. Investment
earnings on funds held in the Principal and Interest Account are for the account
of the Master Servicer, and the Master Servicer will be responsible for any
losses.
The Master Servicer is required pursuant to the Pooling and Servicing
Agreement on the thirteenth day or, if such day is not a business day, on the
next following business day (the "Remittance Date") of each month to remit to
the Trustee the following amounts with respect to the Mortgage Loans in each
Mortgage Loan Group: (i) an amount equal to the sum, without duplication, of (x)
the aggregate portions of the interest payments (whether or not collected)
becoming due on the Mortgage Loans during the immediately preceding Remittance
Period, and (y) any Compensating Interest calculated at the Coupon Rate on the
related Mortgage Loan, less the Servicing Fee with respect to the Mortgage Loans
serviced by the Master Servicer due with respect to such Mortgage Loans with
respect to the immediately preceding Remittance Period (the amount described in
this clause (i) for the Mortgage Loans in Group I being the "Group I Interest
Remittance Amount" and the amount in this clause (i) for the Mortgage Loans in
Group II being the "Group II Interest Remittance Amount"), (ii) an amount equal
to the sum, without duplication, of (x) the aggregate portions of the scheduled
principal payments, but only to the extent collected, on the Mortgage Loans
during the immediately preceding Remittance Period, (y) any Prepayments,
Insurance Proceeds and Net Liquidation Proceeds (but only to the extent that
such Net Liquidation Proceeds do not exceed the principal balance of the related
Mortgage Loan) and Released Mortgaged Property Proceeds, in each case only to
the extent collected on the Mortgage Loans during the preceding Remittance
Period and (z) all Loan Purchase Prices and Substitution Amounts with respect to
the related Mortgage Loans at such Remittance Date paid or received by the
Master Servicer for deposit to the Principal and Interest Account (the amount
described in this clause (ii) for the Mortgage Loans in Group I being the "Group
I Principal Remittance Amount", and the amount described in this clause (ii) for
the Mortgage Loans in Group II being the "Group II Principal Remittance Amount".
For any Remittance Date, the sum of the Group I Interest Remittance Amount and
the Group I Principal Remittance Amount is the "Group I Monthly Remittance" for
such Remittance Date and the sum of the Group II Interest Remittance Amount and
the Group II Principal Remittance Amount is the "Group II Monthly Remittance"
for such Remittance Date. The sum of the Group I Interest Remittance Amount and
the Group II Interest Remittance Amount is the "Interest Remittance Amount". The
sum of the Group I Principal Remittance Amount and the Group II Principal
Remittance Amount is equal to the "Principal Remittance Amount". For any
Remittance Date, the sum of the Interest Remittance Amount and the Principal
Remittance Amount is the "Monthly Remittance" for such Remittance Date.
A "Remittance Period" is the period commencing at the opening of business
on the second day of each month and ending at the close of business on the first
day of the following month.
Delinquency Advances. The Pooling and Servicing Agreement requires that if,
on any Remittance Date, the amount then on deposit in the Principal and Interest
Account from Mortgage Loan collections and relating to interest is less than the
Interest Remittance Amount applicable to such Remittance Period, then the Master
Servicer is required to deposit into the Principal and Interest Account a
sufficient amount of its own funds ("Delinquency Advances") to make such amount
equal to such Interest Remittance Amount. The Master Servicer is not required to
make a Delinquency Advance if it believes that such Delinquency Advance will not
be recoverable from the related Mortgage Loan. The Trustee, as successor Master
Servicer, will not be required
S-42
<PAGE>
to make a Delinquency Advance if it believes that such Delinquency Advance will
not be recoverable from the related Mortgage Loan.
The Certificate Account. The Pooling and Servicing Agreement provides that
the Trustee shall create and maintain one or more accounts for the purpose of
funding distributions to the Owners (collectively, the "Certificate Account").
The Pooling and Servicing Agreement provides that the Trustee shall deposit to
the Certificate Account monthly, the Monthly Remittance received from the Master
Servicer on the related Remittance Date.
The Policy Payments Account. The Pooling and Servicing Agreement requires
that the Trustee shall establish a separate special purpose trust account for
the benefit of Owners of the Class A Certificates and the Certificate Insurer
(the "Policy Payments Account"). On the second business day prior to each
Payment Date, in preparation of making distributions on such Payment Date, if
the Trustee determines with respect to either Mortgage Loan Group that the Total
Available Funds to be on deposit in the Certificate Account with respect to such
Mortgage Loan Group will be insufficient to pay the full amount of the related
Insured Distribution Amount and the fees of the Trustee for such Payment Date,
the Trustee will then be required to make a draw on the Certificate Insurance
Policy for the deficiency (the amount of any such deficiency being the amount of
the "Insured Payment" required to be made) and to deposit the amount received
with respect to such draw into the Policy Payments Account. The Trustee will
then distribute such amount only for purposes of payment to Owners of Class A
Certificates of the Insured Payments for which a claim was made.
The Supplemental Interest Account. The Pooling and Servicing Agreement also
establishes the "Group II Supplemental Interest Account" (the "Supplemental
Interest Account") which is held in trust by the Trustee, but does not
constitute a part of the Trust. The Supplemental Interest Account will hold
certain amounts and other property relating to the funding of Supplemental
Interest Amounts, if any, to the Owners of the Class A-6 Group II Certificates.
"Group II Supplemental Interest Amounts" are payments due on any Payment Date
which result from any shortfall between Class A-6 Group II Certificate interest
calculated at the Class A-6 Formula Pass-Through Rate, and such interest
calculated at the Class A-6 Available Funds PassThrough Rate.
Distributions on the Class A Certificates. On each Payment Date, the
Trustee shall be required to make the following disbursements and transfers from
the Certificate Account in the following order of priority, and each such
transfer and disbursement shall be treated as having occurred only after all
preceding transfers and disbursements have occurred:
(i) first, the Trustee shall pay first, to itself the Trustee's fees
then due;
(ii) second, the Trustee shall pay to the Certificate Insurer the
premium amount then due and any other amounts then due the Certificate
Insurer under the Insurance Agreement;
(iii) third, the Trustee shall pay, pari passu, to the Owners of each
of the Class A Certificates, the related Class A Distribution Amount for
such Class and such Payment Date; and
(iv) fourth, the Trustee shall distribute any remaining amount in the
Certificate Account to the Owners of the related Class B Certificates and
as otherwise required by the Pooling and Servicing Agreement.
Principal distributions with respect to the Class A Group I Certificates
will generally be distributed in a sequential-pay fashion, subject to the
"lockout" provisions applicable to the Class A-5 Group I Certificates.
The Owners of the Class A-5 Group I Certificates are entitled to receive
payments of the Class A-5 Lockout Distribution Amount specified herein;
provided, that if on any Payment Date the Class A-4 Certificate
S-43
<PAGE>
Principal Balance is zero, the Owners of the Class A-5 Group I Certificates will
be entitled to receive the entire Class A Principal Distribution Amount for
Group I for such Payment Date.
The "Class A-5 Lockout Distribution Amount" for any Payment Date will be
the product of (i) the applicable Class A-5 Lockout Percentage for such Payment
Date and (ii) the Class A-5 Lockout Pro Rata Distribution Amount for such
Payment Date.
The "Class A-5 Lockout Percentage" for each Payment Date shall be as
follows:
Payment Dates Lockout Percentage
------------- ------------------
June 1997 - May 2000 0%
June 2000 - May 2002 45%
June 2002 - May 2003 80%
June 2003 - May 2004 100%
June 2004 and thereafter 140%
The "Class A-5 Lockout Pro Rata Distribution Amount" for any Payment Date
will be an amount equal to the product of (x) a fraction, the numerator of which
is the Certificate Principal Balance of the Class A-5 Group I Certificates
immediately prior to such Payment Date and the denominator of which is the
aggregate Certificate Principal Balance of all Classes of the Group I
Certificates immediately prior to such Payment Date and (y) the Class A
Principal Distribution Amount for Group I for such Payment Date.
After payment of the Class A-5 Lockout Distribution Amount, the remaining
Class A Principal Distribution Amount for Group I shall be paid to the Owners of
the other Classes of Class A Group I Certificates sequentially, such that the
Class A-4 Group I Certificates are entitled to receive no principal
distributions until the Class A-3 Certificate Principal Balance has been reduced
to zero, the Class A-3 Group I Certificates are entitled to receive no principal
distributions until the Class A-2 Certificate Principal Balance has been reduced
to zero, and the Class A-2 Group I Certificates are entitled to receive no
principal distributions until the Class A-1 Certificate Principal Balance has
been reduced to zero.
The Pooling and Servicing Agreement provides that to the extent the
Certificate Insurer makes Insured Payments, the Certificate Insurer will be
subrogated to the rights of the Owners of the related Class A Certificates with
respect to such Insured Payments and shall be deemed, to the extent of the
payments so made, to be a registered Owner of Class A Certificates and shall be
entitled to reimbursement for such Insured Payments, as provided in the Pooling
and Servicing Agreement.
Calculation of LIBOR
On the second business day preceding each Payment Date or, in the case of
the first Payment Date, on the second business day preceding the Closing Date
(each such date, an "Interest Determination Date"), the Trustee will determine
the London interbank offered rate for one-month U.S. dollar deposits ("LIBOR")
for the next Accrual Period for the Class A-1 Group I Certificates and the Class
A-6 Group II Certificates on the basis of the offered rates of the Reference
Banks for one-month U.S. dollar deposits, as such rates appear on the Reuters
Screen LIBO Page, as of 11:00 a.m. (London time) on such Interest Determination
Date. As used in this section, "business day" means a day on which banks are
open for dealing in foreign currency and exchange in London and New York City;
"Reuters Screen LIBO Page" means the display designated as page "LIBO" on the
Reuter Monitor Money Rates Service (or such other page as may replace the LIBO
page on that service for the purpose of displaying London interbank offered
rates of major banks); and "Reference Banks" means leading banks selected by the
Trustee and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Reuters Screen LIBO Page on the Interest
Determination Date in question, (iii) which have been
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designated as such by the Trustee and (iv) not controlling, controlled by, or
under common control with, the Company or the Trustee.
On each Interest Determination Date, LIBOR for the related Accrual Period
for the Class A-1 Group I Certificates and the Class A-6 Group II Certificates
will be established by the Trustee as follows:
(a) If on such Interest Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the related Accrual Period for the
Class A-1 Group I and the Class A-6 Group II Certificates shall be the
arithmetic mean of such offered quotations (rounded upwards if necessary to the
nearest whole multiple of 1/16%).
(b) If on such Interest Determination Date fewer than two Reference Banks
provide such offered quotations, LIBOR for the related Accrual Period for the
Class A-1 Group I and the Class A-6 Group II Certificates shall be the higher of
(x) LIBOR as determined on the previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate per annum
that the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 1/16%) of the one-month
U.S. dollar lending rates which New York City banks selected by the Trustee are
quoting on the relevant Interest Determination Date to the principal London
offices of leading banks in the London interbank market or, in the event that
the Trustee can determine no such arithmetic mean, (ii) the lowest one-month
U.S. dollar lending rate which New York City banks selected by the Trustee are
quoting on such Interest Determination Date to leading European banks.
The establishment of LIBOR on each Interest Determination Date by the
Trustee and the Trustee's calculation of the rate of interest applicable to the
Class A-1 Group I and the Class A-6 Group II Certificates for the related
Accrual Period shall (in the absence of manifest error) be final and binding.
Each such rate of interest may be obtained by telephoning the Trustee at (212)
946-3237.
Subordination of Class B Certificates
The Class B Certificates are subordinated to the Class A Certificates. Such
subordination is intended to enhance the likelihood that the Owners of the Class
A Certificates will receive full and timely receipt of all amounts due to them.
The Pooling and Servicing Agreement requires that the excess of the
aggregate principal balance of the Mortgage Loans in Group I over the Class A
Certificate Principal Balance for all Classes of the Class A Group I
Certificates be maintained at a certain amount (which amount may vary over time)
over the life of the transaction, which amount is specified by the Certificate
Insurer. The actual amount of this excess is the "Subordinated Amount" for Group
I, and the specified target amount of the excess at a point in time is the
"Specified Subordinated Amount" for Group I.
Similarly, the Pooling and Servicing Agreement requires that the excess of
the Group II Pool Principal Balance over the Class A Certificate Principal
Balance for the Class A-6 Group II Certificates be maintained at a certain
amount (which amount may vary over time) over the life of the transaction, which
amount is specified by the Certificate Insurer. The actual amount of this excess
is the "Subordinated Amount" for Group II, and the specified target amount of
the excess at a point in time is the "Specified Subordinated Amount" for Group
II.
The Certificate Insurer may permit the reduction of the Specified
Subordinated Amount without the consent of, or the giving of notice to, the
Owners of the related Class A Certificates; provided, that the Certificate
Insurer is not then in default; and provided, further, that such reduction would
not change materially the weighted average life of the related Class A
Certificates or the current rating thereof.
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The Pooling and Servicing Agreement generally provides that the Owners of
the Class B Certificates will only receive distributions of principal to the
extent that the actual related Subordinated Amount exceeds the then related
Specified Subordinated Amount; i.e., to the extent that there is a level of
subordination greater than that required by the Certificate Insurer, as will be
the case when the Specified Subordinated Amount decreases or "steps down" in
accordance with its terms. Consequently, unless there exists on any particular
Payment Date such related excess subordination, the Owners of the related Class
A Certificates will be entitled to receive 100% of the principal to be
distributed on such Payment Date with respect to the related Mortgage Loan
Group.
Subject to the prior rights of the Owners of the Class A Certificates to
receive Class B Interest as discussed below, the Class B Certificates are also
entitled to receive all excess interest available on any Payment Date for the
related Mortgage Loan Group, i.e., the interest remitted by the Master Servicer
to the Trustee relating to the prior Remittance Period (which interest
remittance is itself net of the aggregate monthly Servicing Fees) less the
interest due and payable to the Owners of the related Class A Certificates,
together with the fees and premium due and payable to the Trustee and the
Certificate Insurer (such interest to which the related Class B Certificates are
entitled, the "Class B Interest" for the related Mortgage Loan Group).
On each Payment Date the Class B Interest will be used, to the extent
available and prior to any distribution thereof to the Class B Certificates, to
fund any shortfalls in amounts due to the Owners of the Class A Certificates on
such Payment Date. In addition, to the extent that the related Specified
Subordinated Amount increases or "steps up" due to the effect of the triggers
set forth in the definition thereof, or if, due to Realized Losses, the related
Subordinated Amount has been reduced below the related Specified Subordinated
Amount, the Pooling and Servicing Agreement requires that Class B Interest be
used to make payments of principal to the Owners of the Class A Group I
Certificates and the Class A-6 Group II Certificates for the purposes of
accelerating the amortization thereof relative to the amortization of the
Mortgage Loans in the related Mortgage Loan Group. Such accelerated payments of
principal will be made to the extent necessary to increase the related
Subordinated Amount to its then-applicable Specified Subordinated Amount. To the
extent that, on any Payment Date, the actual related Subordinated Amount is less
than the related Specified Subordinated Amount, a "Subordination Deficiency"
will exist. The Insurance Agreement defines a "Group I Subordination Deficit"
with respect to a Payment Date to be the amount, if any, by which (x) the
aggregate Certificate Principal Balance of the Class A Group I Certificates as
of such Payment Date, and following the making of all distributions to be made
on such Payment Date (except for any payment to be made as to principal from
proceeds of the Certificate Insurance Policy), exceeds (y) an amount equal to
the aggregate principal balances of the Mortgage Loans in Group I as of the
close of business on the last day of the preceding Remittance Period and a
"Group II Subordination Deficit" with respect to a Payment Date is the amount,
if any, by which (x) the aggregate Certificate Principal Balance of the Class
A-6 Group II Certificates as of such Payment Date, and following the making of
all distributions to be made on such Payment Date (except for any payment to be
made as to principal from proceeds of the Certificate Insurance Policy) exceeds
(y) the aggregate principal balances of the Mortgage Loans in Group II as of the
close of business on the last day of the preceding Remittance Period.
"Subordination Increase Amount" means, as of any Payment Date and with
respect to the related Mortgage Loan Group, the lesser of (i) the Subordination
Deficiency applicable to such Mortgage Loan Group as of such Payment Date and
(ii) the sum of (x) the actual amount available to pay the Class B Interest on
the related Mortgage Loan Group and (y) the actual amount allocable to the Class
A Certificates for such Mortgage Loan Group from the Class B Interest with
respect to the other Mortgage Loan Group, on such Payment Date.
"Subordination Reduction Amount" means, with respect to any Payment Date
and with respect to the related Mortgage Loan Group, an amount equal to the
lesser of (x) the excess of the actual Subordinated Amount applicable to such
Mortgage Loan Group over the Specified Subordinated Amount for such Payment Date
and (y) the amount described in clause (b)(i)(x) of the definition of Class A
Principal Distribution Amount for such Payment Date.
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Overcollateralization and the Certificate Insurance Policy. The Pooling and
Servicing Agreement requires the Trustee to make a claim for an Insured Payment
under the Certificate Insurance Policy not later than 12:00 p.m., New York City
time on the second business day prior to any Payment Date as to which the
Trustee has determined that a Subordination Deficit will occur for the purpose
of applying the proceeds of such Insured Payment to the extent of such
Subordination Deficit as a payment of principal to the Owners of the Class A
Group I Certificates or the Class A-6 Group II Certificates, as the case may be,
on such Payment Date. Investors in the Class A Group I Certificates of each
Class and the Class A-6 Group II Certificates should realize that, under extreme
loss or delinquency scenarios applicable to the related Mortgage Loan Pool, they
may temporarily receive no distributions of principal.
Crosscollateralization Provisions
The Pooling and Servicing Agreement provides that the Class B Interest
generated by a Mortgage Loan Group may be used to fund certain shortfalls with
respect to the other Mortgage Loan Group, provided that such Class B Interest
must first be applied to fund certain required payments with respect to the
related Mortgage Loan Group. Specifically, the Class B Interest generated by one
Mortgage Loan Group is to be applied in the following order of priority: (i)
first, to fund a Subordination Increase Amount payment in response to a
Subordination Deficit in the related Mortgage Loan Group; (ii) second, to fund a
Subordination Increase Amount payment in response to a Subordination Deficit or
interest shortfall in the other Mortgage Loan Group; (iii) third, to fund a
Subordination Increase Amount payment in response to a Subordination Deficiency
in the related Mortgage Loan Group; and (iv) fourth, to fund a Subordination
Increase Amount payment in response to a Subordination Deficiency with respect
to the other Mortgage Loan Group.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the subordination provisions and by
the Certificate Insurance Policy is protection for credit risk and not for
prepayment risk. The subordination provisions may not be adjusted, nor may a
claim be made under the Certificate Insurance Policy to guarantee or insure that
any particular rate of prepayment is experienced by either of the two Mortgage
Loan Groups.
Class A Certificate Distributions and Insured Payments
No later than the second business day prior to each Payment Date the
Trustee will be required to determine the amounts to be on deposit in the
Certificate Account on such Payment Date, following (i) payment of the
applicable Trustee's fee and the premiums due the Certificate Insurer and (ii)
the application of the cross-collateralization provisions described above with
respect to each of the two Mortgage Loan Groups, such amounts being the "Group I
Total Available Funds" and the "Group II Total Available Funds", respectively,
or, collectively, the "Total Available Funds". If the aggregate Class A Insured
Distribution Amount related to the Class A Group I Certificates for any Payment
Date exceeds the Group I Total Available Funds for such Payment Date and the
amounts available by reason of the application of the cross-collateralization
provisions described above, the Trustee will be required to draw the amount of
such insufficiency from the Certificate Insurer under the Certificate Insurance
Policy. If on any Payment Date the Class A Insured Distribution Amount related
to the Class A-6 Group II Certificates exceeds the Group II Total Available
Funds for such Payment Date and the amounts available by reason of the
application of the cross-collateralization provisions described above, the
Trustee will be required to draw the amount of such insufficiency from the
Certificate Insurer under the Certificate Insurance Policy. The Trustee will be
required to deposit to the Policy Payments Account the amount of any Insured
Payment made by the Certificate Insurer. The Pooling and Servicing Agreement
provides that amounts which cannot be distributed to the Owners of the
Certificates as a result of final, non-appealable proceedings under the United
States Bankruptcy Code or similar insolvency laws will not be considered in
determining the amount of Total Available Funds with respect to any Payment
Date.
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Book-Entry Registration of the Class A Certificates
The Class A Certificates will be book-entry certificates (the "Book-Entry
Certificates"). The Beneficial Certificate Owners may elect to hold their Class
A Certificates through DTC in the United States, or CEDEL or Euroclear (in
Europe) if they are participants of such systems ("Participants"), or indirectly
through organizations which are Participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates per class of Class A
Certificates which in the aggregate equal the principal balance of such Class A
Certificates and will initially be registered in the name of Cede, the nominee
of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositories which in turn will hold such
positions in customers' securities accounts in the depositories' names on the
books of DTC. Citibank will act as depository for CEDEL and Chase will act as
depository for Euroclear (in such capacities, individually the "Relevant
Depository" and collectively the "European Depositories"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000. Except as described
below, no Beneficial Certificate Owner will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Owner" of such Class A Certificates will be Cede, as nominee of DTC. Beneficial
Certificate Owners will not be Owners as that term is used in the Pooling and
Servicing Agreement. Beneficial Certificate Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
The Beneficial Certificate Owner's ownership of a Book-Entry Certificate
will be recorded on the records of the brokerage firm, bank, thrift institution
or other financial intermediary (each, a "Financial Intermediary") that
maintains the Beneficial Certificate Owner's account for such purpose. In turn,
the Financial Intermediary's Ownership of such Book-Entry Certificate will be
recorded on the records of DTC (or of a participating firm that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, or, if the Beneficial Certificate Owner's Financial Intermediary
is not a DTC Participant, then on the records of CEDEL or Euroclear, as
appropriate).
Beneficial Certificate Owners will receive all distributions of principal
of, and interest on, the Class A Certificates from the Trustee through DTC and
DTC Participants. While such Class A Certificates are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Class A Certificates.
Participants and indirect participants with whom Beneficial Certificate Owners
have accounts with respect to Class A Certificates are similarly required to
make book-entry transfers and receive and transmit such distributions on behalf
of their respective Beneficial Certificate Owners. Accordingly, although
Beneficial Certificate Owners will not possess certificates, the Rules provide a
mechanism by which Beneficial Certificate Owners will receive distributions and
will be able to transfer their interest.
Beneficial Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Certificate Owners who are
not Participants may transfer ownership of Class A Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Certificate Owners.
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Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlements in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "Federal Income Tax Consequences -- Foreign
Investors" and " -- Backup Withholding" in the Prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures -Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depository; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depository to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositories.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its Participants ("DTC Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 31 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and
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borrowing and interfaces with domestic markets in several countries generally
similar to the arrangements for cross-market transfers with DTC described above.
Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust
Company of New York (the "Euroclear Operator"), under contract with Euroclear
Clearance Systems S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
Securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear operator, not the Cooperative. The Cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each Payment
Date by the Trustee to DTC. DTC will be responsible for crediting the amount of
such payments to the accounts of the applicable DTC Participants in accordance
with DTC's normal procedures. Each DTC Participant will be responsible for
disbursing such payment to the Beneficial Certificate Owners of the Book-Entry
Certificates that it represents and to each Financial Intermediary for which it
acts as agent. Each such Financial Intermediary will be responsible for
disbursing funds to the Beneficial Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Beneficial Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Class A Certificates held through CEDEL or Euroclear will be credited to the
cash accounts of CEDEL Participants or Euroclear Participants in accordance with
the relevant system's rules and procedures, to the extent received by the
Relevant Depository. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. Because DTC can
only act on behalf of Financial Intermediaries, the ability of a Beneficial
Certificate Owner to pledge Book-Entry Certificates, to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust provided by the Master Servicer to
Cede, as nominee of DTC, may be made available to Beneficial Certificate Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Certificate Owners are
credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
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Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. CEDEL or the Euroclear Operator, as the case may be, will take any
action permitted to be taken by an Owner under the Pooling and Servicing
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depository to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Class A Certificates which conflict with actions taken with respect to
other Class A Certificates.
Definitive Certificates will be issued to Beneficial Certificate Owners of
the Book-Entry Certificates, or their nominees, rather than to DTC, only if (a)
DTC or the Company advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Company or the
Trustee is unable to locate a qualified successor, (b) the Company, at its sole
option, elects to terminate a book-entry system through DTC or (c) DTC, at the
direction of the Beneficial Certificate Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial
Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Certificate Owners of the occurrence of such event and the availability through
DTC of Definitive Certificates. Upon surrender by DTC of the global certificate
or certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among Participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Certain Activities
The Trust has not and will not: (i) issue securities (except for the
Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities
for the purpose of exercising control; (v) underwrite securities; (vi) except as
provided in the Pooling and Servicing Agreement, engage in the purchase and sale
(or turnover) of investments; (vii) offer securities (except the Certificates)
in exchange for property; or (viii) repurchase or otherwise reacquire its
securities. See "Reports to the Holders" for information regarding reports to
the Certificateholders.
General Servicing Procedures
Acting directly or through one or more sub-servicers, Access Financial
Lending Corp. (the "Master Servicer") is required to service and administer the
Mortgage Loans in accordance with the Pooling and Servicing Agreement.
The Master Servicer in its own name or in the name of a sub-servicer is
authorized and empowered pursuant to the Pooling and Servicing Agreement (i) to
execute and deliver any and all instruments of satisfaction or cancellation or
of partial or full release or discharge and all other comparable instruments
with respect to the Mortgage Loans and with respect to the Properties, (ii) to
institute foreclosure proceedings or obtain a deed in lieu of foreclosure so as
to effect ownership of any Property in its own name on behalf of the Trustee,
and (iii) to hold title in the name of the Trust to any Property upon such
foreclosure or deed in lieu of foreclosure on behalf of the Trustee; provided,
however, that to the extent any instrument described in clause (i) would be
delivered by the Master Servicer outside of its ordinary procedures for mortgage
loans held for its own account, the Master Servicer is required, prior to
executing and delivering such instrument, to obtain the prior written consent of
the Certificate Insurer.
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The Master Servicer, in its own name or in the name of a Sub-Servicer, has
the right to approve requests of Mortgagors for consent to (i) partial releases
of Mortgages and (ii) alterations, removal, demolition or division of Properties
subject to Mortgages. The Pooling and Servicing Agreement provides that no such
request shall be approved by the Master Servicer unless: (i) (x) the provisions
of the related Note and Mortgage have been complied with, (y) the Combined
Loan-to-Value Ratio (which may, for this purpose, be determined at the time of
any such action in a manner reasonably acceptable to the Certificate Insurer)
after any release does not exceed the Combined Loan-to-Value Ratio set forth for
such Mortgage Loan in the Schedule of Mortgage Loans, and (z) the lien priority
of the related Mortgage is not affected; or (ii) the Certificate Insurer shall
have approved the granting of such request.
On the tenth day of each month (or the immediately following business day
if the tenth day does not fall on a business day), the Master Servicer or
Sub-Servicer shall send to the Trustee a report detailing the payments on the
Mortgage Loans serviced by it in each of the two Mortgage Loan Groups during the
prior Remittance Period.
Collection of Certain Mortgage Loan Payments
The Master Servicer is required generally to service the Mortgage Loan Pool
in a prudent manner consistent with its general servicing standards for similar
mortgage loans and to make reasonable efforts to collect all payments called for
under the terms and provisions of the Mortgage Loans, and shall, to the extent
such procedures shall be consistent with the provisions of the Pooling and
Servicing Agreement, follow collection procedures for all Mortgage Loans at
least as rigorous as those the Master Servicer would take in servicing loans and
in collecting payments thereunder for its own account.
Consistent with the foregoing, the Master Servicer, in its own name or in
the name of a Sub-Servicer, may (i) in its discretion waive or permit to be
waived any late payment charge or assumption fee or any other fee or charge
which the Master Servicer would be entitled to retain as servicing compensation,
(ii) extend the due date for payments due on a Note for a period (with respect
to each payment as to which the due date is extended) not greater than 125 days
after the initially scheduled due date for such payment, and (iii) amend any
Note to extend the maturity thereof, provided that no maturity shall be extended
beyond the maturity date of the Mortgage Loan with the latest maturity date and
that no more than 1.0% of the Original Pool Balance of the Mortgage Loans shall
have a maturity date which has been extended beyond the maturity date thereof at
the Cut-Off Date; provided that such action does not violate applicable REMIC
provisions. In the event the Master Servicer, in its own name or in the name of
a Sub-Servicer, consents to the deferment of the due dates for payments due on a
Note, the Master Servicer or Sub-Servicer is nonetheless required to make
payment of any required Delinquency Advance with respect to the payments so
extended to the same extent as if such installment were due, owing and
delinquent and had not been deferred.
Generally the Class A Certificate Owners would prefer that "due-on-sale"
clauses be waived in the event of a sale of the underlying Mortgaged Property,
that extensions and accommodations be made with delinquent Mortgagors, and that
liquidations of Mortgage Loans be deferred, since upon prepayment due to sale or
upon liquidation such Owners will receive a payment of principal in connection
with such prepayment or liquidation. If attractive re-investment opportunities
are available at the time, Class A Certificate Owners may prefer that
"due-on-sale" clauses not be waived and that no such extensions, accommodations
or deferments be made, thus hastening the return of principal to such Owners.
Owners do not have the right under the Pooling and Servicing Agreement to
make decisions with respect to Mortgagor accounts. Such decisions are in the
nature of mortgage servicing and the Master Servicer generally has the right to
make such decisions without the requirement of consent of the Owners, the
Trustee or the Certificate Insurer. The Master Servicer will generally be
required under the Pooling and Servicing Agreement to enforce "due-on-sale"
clauses, and will make decisions with respect to liquidations in accordance with
the Pooling and Servicing Agreement.
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Under certain limited circumstances the Pooling and Servicing Agreement may
require the Master Servicer to obtain the consent of the Certificate Insurer
before taking certain actions with respect to defaulted Mortgage Loans and in
connection with the waiver of "due-on-sale" clauses. Since the Certificate
Insurer's exposure increases, to the extent of interest accrued, the longer the
liquidation process, it is likely to be the case that the Certificate Insurer
will favor quick liquidations in those situations in which its consent is
required. Similarly, the Certificate Insurer would favor the enforcement of a
"due-on-sale" clause, since a prepayment in the event of a sale also reduces its
exposure by limiting the accrual of interest.
Principal and Interest Account
The Master Servicer, in its own name or in the name of a Sub-Servicer, is
required to deposit to the Principal and Interest Account all collections on the
Mortgage Loans, certain proceeds received by the Master Servicer in connection
with the termination of the Trust, Loan Purchase Prices and Substitution Amounts
received or paid by the Master Servicer, insurance and condemnation proceeds
received by the Master Servicer, other amounts related to the Mortgage Loans
received by the Master Servicer, including any income from REO Properties (net
of Servicing Advances made with respect to such REO Properties), and Delinquency
Advances together with any amounts which are reimbursable from the Principal and
Interest Account, but net of the Servicing Fee with respect to each Mortgage
Loan serviced by the Master Servicer and other servicing compensation to the
Master Servicer as permitted by the Pooling and Servicing Agreement.
The Master Servicer or Sub-Servicer may make withdrawals from the Principal
and Interest Account only for the following purposes: (a) to effect the timely
remittance to the Trustee of the Monthly Remittance due on the Remittance Date;
(b) to withdraw investment earnings on amounts on deposit in the Principal and
Interest Account; (c) to withdraw amounts that have been deposited to the
Principal and Interest Account in error; (d) to pay certain miscellaneous
amounts over to the Company and (e) to clear and terminate the Principal and
Interest Account.
On each Remittance Date the Master Servicer and any Sub-Servicer is
required to remit the Monthly Remittance amount inclusive of all Delinquency
Advances and Compensating Interest to the Trustee by wire transfer, or otherwise
make funds available in immediately available funds.
Servicing Advances
The Pooling and Servicing Agreement obligates the Master Servicer to pay
all reasonable and customary "out-of-pocket" costs and expenses (including
reasonable legal fees) incurred in the performance of its servicing obligations
including, but not limited to, the cost of (i) preservation expenses, (ii) any
enforcement or judicial proceedings, including foreclosures, (iii) the
management and liquidation of REO Property (including, without limitation,
realtors' commissions) and (iv) advances made for taxes, insurance and other
charges against a Property. Each such expenditure will constitute a "Servicing
Advance". The Master Servicer may recover Servicing Advances from the Mortgagors
to the extent permitted by the Mortgage Loans or, if not theretofore recovered
from the Mortgagor on whose behalf such Servicing Advance was made, from
Liquidation Proceeds realized upon the liquidation of the related Mortgage Loan.
In no case may the Master Servicer recover Servicing Advances from the principal
and interest payments on any Mortgage Loan or from any amounts relating to any
other Mortgage Loan. The Master Servicer is not required to make a Servicing
Advance if it believes that such Servicing Advance will not be recoverable from
the related Mortgage Loan.
Compensating Interest
A full month's interest on each Mortgage Loan, calculated at a rate equal
to such Mortgage Loan's Coupon Rate less the Servicing Fee is due to the Trustee
on the outstanding principal balance of each Mortgage Loan as of the beginning
of each Remittance Period. If a Prepayment of a Mortgage Loan occurs during any
calendar month, any difference between the interest collected from the Mortgagor
during such calendar month and the full month's interest at such rate
("Compensating Interest") that is due is required to be deposited by
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the Master Servicer to the Principal and Interest Account (without any right of
reimbursement therefor) and shall be included in the Monthly Remittance and made
available to the Trustee on the next succeeding Remittance Date.
Maintenance of Insurance
The Master Servicer is required to cause to be maintained with respect to
each Mortgage Loan that it services and related Property a hazard insurance
policy with a carrier licensed in the state in which such Property is located
that provides for fire and extended coverage, and which provides for a recovery
by the Trust of insurance proceeds relating to such Mortgage Loan in an amount
not less than the least of (i) the outstanding principal balance of the Mortgage
Loan (together in the case of a Junior Mortgage, with the outstanding principal
balance of the senior lien), or (ii) the minimum amount required to compensate
for loss or damage on a replacement cost basis, or (iii) the full insurable
value of the premises.
If a Mortgage Loan relates to a Mortgaged Property in an area identified in
the Federal Register by the Federal Emergency Management Agency as having
special flood hazards, the Master Servicer, in its own name or in the name of a
Sub-Servicer, will be required to maintain with respect thereto a flood
insurance policy in a form meeting the requirements of the then-current
guidelines of the Federal Insurance Administration with a generally acceptable
carrier in an amount representing coverage, and which provides for recovery by
the Master Servicer or a Sub-Servicer on behalf of the Trust of insurance
proceeds relating to such Mortgage Loan, of not less than the least of (i) the
outstanding principal balance of the Mortgage Loan, or (ii) the minimum amount
required to compensate for damage or loss on a replacement cost basis, or (iii)
the maximum amount of insurance that is available under the Flood Disaster
Protection Act of 1973, as amended.
In the event that the Master Servicer or a Sub-Servicer obtains and
maintains a blanket policy insuring against fire and other hazards with extended
coverage and against flood hazards on all of the Mortgage Loans that it
services, then, to the extent such policy names the Master Servicer or a
Sub-Servicer as loss payee and provides coverage in an amount equal to the
aggregate unpaid principal balance on the Mortgage Loans without co-insurance,
and otherwise complies with the requirements of the Pooling and Servicing
Agreement, the Master Servicer shall be deemed conclusively to have satisfied
its obligations with respect to fire and hazard insurance coverage under the
Pooling and Servicing Agreement. Such blanket policy may contain a deductible
clause, in which case the Master Servicer will be required, in the event that
there shall not have been maintained on the related Mortgaged Property a policy
complying with the Pooling and Servicing Agreement, and there shall have been a
loss that would have been covered by such policy, to deposit in the Principal
and Interest Account from the Master Servicer's own funds the difference, if
any, between the amount that would have been payable under a policy complying
with the Pooling and Servicing Agreement and the amount paid under such blanket
policy.
Pursuant to the Pooling and Servicing Agreement, the Master Servicer will
be required to indemnify the Trust out of its own funds for any loss to the
Trust resulting from the Master Servicer's failure to maintain any required
insurance.
Due-on-Sale Clauses
When a Property has been or is about to be conveyed by the Mortgagor, the
Master Servicer or a SubServicer, to the extent it has knowledge of such
conveyance or prospective conveyance, is required to exercise its rights to
accelerate the maturity of the related Mortgage Loan under any "due on sale"
clause contained in the related Mortgage or Note; provided, however, that the
Master Servicer will not be required to exercise any such right if the
"due-on-sale" clause, in the reasonable belief of the Master Servicer, is not
enforceable under applicable law; and provided further, that the Master Servicer
may refrain from exercising any such right if the Certificate Insurer gives its
prior consent to such non-enforcement.
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Realization Upon Defaulted Mortgage Loans
The Master Servicer, in its own name or in the name of a Sub-Servicer, is
required to foreclose upon or otherwise comparably effect the ownership in the
name of the Trust, on behalf of the Trustee, of Properties relating to defaulted
Mortgage Loans that it services as to which no satisfactory arrangements can be
made for collection of delinquent payments and which the Master Servicer has not
purchased pursuant to its purchase option described below, unless the Master
Servicer reasonably believes that Net Liquidation Proceeds with respect to such
Mortgage Loan would not be increased as a result of such foreclosure or other
action, in which case such Mortgage Loan will be charged off and will become a
Liquidated Mortgage Loan. In connection with such foreclosure or other
conversion, the Master Servicer is required to exercise or use foreclosure
procedures with the same degree of care and skill as it would exercise or use
under the circumstances in the conduct of its own affairs. Any amounts advanced
in connection with such foreclosure or other action shall constitute "Servicing
Advances".
The Master Servicer, in its own name or in the name of a Sub-Servicer, is
required to sell any REO Property within 23 months of its acquisition by the
Trustee, unless the Master Servicer obtains for the Trustee an opinion of
counsel experienced in federal income tax matters, addressed to the Trustee and
the Master Servicer, to the effect that the holding by the Trust of such REO
Property for a greater specified period will not result in the imposition of
taxes on "prohibited transactions" of the Trust as defined in Section 860F of
the Code or cause the Trust to fail to qualify as a REMIC.
In accordance with the Pooling and Servicing Agreement, if the Master
Servicer has actual knowledge that a Property which it is contemplating
acquiring in foreclosure or by deed in lieu of foreclosure contains
environmental or hazardous waste risks known to it, the Master Servicer shall
notify the Certificate Insurer and the Trustee prior to acquiring the Property.
The Master Servicer is not permitted to take any action with respect to such a
Property without the prior written approval of the Certificate Insurer.
The Master Servicer is required to determine, with respect to each
defaulted Mortgage Loan that it services, when it has recovered, whether through
trustee's sale, foreclosure sale or otherwise, all amounts, if any, it expects
to recover from or on account of such defaulted Mortgage Loan, whereupon such
Mortgage Loan shall become a "Liquidated Mortgage Loan".
Servicing Compensation
As compensation for its servicing activities under the Pooling and
Servicing Agreement, the Master Servicer shall be entitled to retain the amount
of the Servicing Fee with respect to each Mortgage Loan that it services.
Additional servicing compensation in the form of release fees, bad check
charges, assumption fees, late payment charges, and any other servicing-related
fees, and similar items may, to the extent collected from Mortgagors, be
retained by the Master Servicer.
Annual Statement as to Compliance
The Master Servicer is required to deliver, on its own behalf, to the
Trustee, the Company and the Certificate Insurer, annually, commencing in 1998,
an Officer's Certificate stating, as to each signer thereof, that (i) a review
of the activities of the Master Servicer during such preceding calendar year and
of performance under the Pooling and Servicing Agreement has been made under
such officer's supervision, and (ii) to the best of such officer's knowledge,
based on such review, the Master Servicer has fulfilled all its obligations
under the Pooling and Servicing Agreement for such year, or, if there has been a
default in the fulfillment of all such obligations, specifying each such default
known to such officer and the nature and status thereof including the steps
being taken by the Master Servicer to remedy such default.
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Annual Independent Certified Public Accountants' Reports
Annually, commencing in 1998, the Master Servicer is required to cause to
be delivered, on its own behalf, to the Trustee and the Certificate Insurer a
letter or letters of a firm of independent, nationally recognized certified
public accountants reasonably acceptable to the Certificate Insurer stating that
such firm has, with respect to the Master Servicer's overall servicing
operations (i) performed applicable tests in accordance with the compliance
testing procedures as set forth in Appendix 3 of the Audit Guide for Audits of
HUD Approved Nonsupervised Mortgagees or (ii) examined such operations in
accordance with the requirements of the Uniform Single Attestation Program for
Mortgage Bankers, and stating such firm's conclusions relating thereto.
Assignment of Agreement
The Master Servicer may not assign its obligations under the Pooling and
Servicing Agreement, in whole or in part, unless it shall have first obtained
the written consent of the Company, the Trustee and the Certificate Insurer;
provided, however, that any assignee must meet the eligibility requirements set
forth in the Pooling and Servicing Agreement for a successor Master Servicer.
Removal and Resignation of the Master Servicer; Events of Default
The Certificate Insurer, or with the consent of the Certificate Insurer,
the Company or the Owners of Class A Certificates owning a majority in
Percentage Interest in the Class A Certificates may remove the Master Servicer
upon the occurrence of any of the following events (each, an "Event of
Default"):
(i) The Master Servicer shall (I) apply for or consent to the
appointment of a receiver, trustee, liquidator or custodian or similar
entity with respect to itself or its property, (II) admit in writing its
inability to pay its debts generally as they become due, (III) make a
general assignment for the benefit of creditors, (IV) be adjudicated
bankrupt or insolvent, (V) commence a voluntary case under the federal
bankruptcy laws of the United States of America or file a voluntary
petition or answer seeking reorganization, an arrangement with creditors or
an order for relief or seeking to take advantage of any insolvency law or
file an answer admitting the material allegations of a petition filed
against it in any bankruptcy, reorganization or insolvency proceeding or
(VI) cause corporate action to be taken by it for the purpose of effecting
any of the foregoing; or
(ii) If without the application, approval or consent of the Master
Servicer, a proceeding shall be instituted in any court of competent
jurisdiction, under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, seeking in respect of the Master
Servicer an order for relief or an adjudication in bankruptcy,
reorganization, dissolution, winding up, liquidation, a composition or
arrangement with creditors, a readjustment of debts, the appointment of a
trustee, receiver, liquidator or custodian or similar entity with respect
to the Master Servicer or of all or any substantial part of its assets, or
other like relief in respect thereof under any bankruptcy or insolvency
law, and, if such proceeding is being contested by the Master Servicer in
good faith, the same shall (A) result in the entry of an order for relief
or any such adjudication or appointment or (B) continue undismissed or
pending and unstayed for any period of sixty (60) consecutive days; or
(iii) The Master Servicer shall fail to perform any one or more of its
obligations under the Pooling and Servicing Agreement (other than its
obligations referenced in clauses (vi) and (vii) below) and shall continue
in default thereof for a period of thirty (30) days after the earlier to
occur of (x) the date on which an authorized officer of the Master Servicer
knows or reasonably should know of such failure or (y) receipt by the
Master Servicer of a written notice by the Trustee, any Owner, the Company
or the Certificate Insurer of said failure; or
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(iv) The Master Servicer shall fail to cure any breach of any of its
representations and warranties set forth in the Pooling and Servicing
Agreement which materially and adversely affects the interests of the
Owners or Certificate Insurer for a period of thirty (30) days after the
earlier of (x) the date on which an authorized officer of the Master
Servicer knows or reasonably should know of such breach or (y) receipt by
the Master Servicer of a written notice from the Trustee, any Owner, the
Company or the Certificate Insurer of such breach;
(v) If the Certificate Insurer pays out any money under the
Certificate Insurance Policy, or if the Certificate Insurer otherwise funds
any shortfall with its own money, because the amounts available to the
Trustee (other than from the Certificate Insurer) are insufficient to make
required distributions on the Class A Certificates;
(vi) The failure by the Master Servicer to make any required Servicing
Advance for a period of 30 days following the earlier of (x) the date on
which an authorized officer of the Master Servicer knows or reasonably
should know of such failure or (y) receipt by the Master Servicer of a
written notice from the Trustee, any Owner, the Company or the Certificate
Insurer of such failure;
(vii) The failure by the Master Servicer to make any required
Delinquency Advance or to pay any Compensating Interest or to pay over the
Monthly Remittance;
(viii) If the delinquency or loss levels applicable to the Mortgage
Loans serviced by the Master Servicer exceed certain "trigger" levels set
forth in the Insurance Agreement; or
(ix) An "Event of Default" exists and is continuing under the
Insurance Agreement;
provided, however, that (x) prior to any removal of the Master Servicer pursuant
to clauses (ii) through (iv) and (vi) above, any applicable grace period granted
by any such clause shall have expired prior to the time such occurrence shall
have been remedied and (y) in the event of the refusal or inability of the
Master Servicer to comply with its obligations described in clause (vii) above,
such removal shall be effective (without the requirement of any action on the
part of the Company, the Trustee or the Certificate Insurer) at 4 p.m. (New York
City time) on the second business day following the day on which the Trustee
notifies the Master Servicer that a required amount described in clause (vii)
above has not been received by the Trustee, unless the required amount described
in clause (vii) above is paid by the Master Servicer prior to such time or the
Certificate Insurer grants an additional grace period for such payment. Upon the
Trustee's determination that a required amount described in clause (vii) above
has not been made by the Master Servicer, the Trustee shall so notify the Master
Servicer, the Company and the Certificate Insurer as soon as is reasonably
practical.
The Master Servicer may not resign from the obligations and duties imposed
on it under the Pooling and Servicing Agreement, except upon determination that
its duties thereunder are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Pooling and Servicing Agreement. Any such determination permitting the
resignation of the Master Servicer shall be evidenced by an opinion of counsel
to such effect which shall be delivered to the Trustee, the Company and the
Certificate Insurer.
No removal or resignation of the Master Servicer shall become effective
until the Trustee or a successor servicer shall have assumed the Master
Servicer's responsibilities and obligations in accordance with the Pooling and
Servicing Agreement.
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Successor Master Servicer
Upon removal or resignation of Access Financial Lending Corp. as Master
Servicer under the Pooling and Servicing Agreement, the Trustee (x) may solicit
bids for a successor Master Servicer under the Pooling and Servicing Agreement,
which successor Master Servicer must be acceptable to the Certificate Insurer,
and (y) pending the appointment of a successor Master Servicer under the Pooling
and Servicing Agreement, as a result of soliciting such bids, is required to
serve as Master Servicer under the Pooling and Servicing Agreement, unless
Access Financial Lending Corp. has been removed without cause, in which event
the Trustee prior to any such removal must designate a successor Master Servicer
under the Pooling and Servicing Agreement acceptable to the Certificate Insurer.
The Trustee, if it is unable to obtain a qualifying bid and is prevented by law
from acting as Master Servicer under the Pooling and Servicing Agreement, may
appoint, or petition a court of competent jurisdiction to appoint, any housing
and home finance institution, bank or mortgage servicing institution which has
been designated as an approved seller-servicer by FNMA or FHLMC for first and
second mortgage loans and having equity of not less than $15,000,000, as
determined in accordance with generally accepted accounting principles, and
acceptable to the Certificate Insurer.
The Trustee, or any other successor Master Servicer, upon assuming the
duties of the Master Servicer, is required immediately to make payment of all
Compensating Interest and all Delinquency Advances which the Master Servicer has
theretofore failed to remit with respect to the Mortgage Loans; provided,
however, that if the Trustee is acting as successor Master Servicer, the Trustee
is only required to make Delinquency Advances (including the Delinquency
Advances described in this sentence) if, in the Trustee's reasonable good faith
judgment, such Delinquency Advances will ultimately be recoverable from the
related Mortgage Loans.
Investment of Accounts
All or a portion of the Principal and Interest Account, the Certificate
Account and any other account which may be created by the Trustee (each, an
"Account"), may be invested and reinvested in an Eligible Investment bearing
interest or sold at a discount. The bank serving as Trustee or any affiliate
thereof, may be the obligor on any investment in any Account which otherwise
qualifies as an Eligible Investment. No investment in any Account held by the
Trustee may mature later than the business day immediately preceding the next
succeeding Payment Date; provided, however, that if the investment is an
investment of the bank serving as Trustee, then it may mature on the Payment
Date.
The Trustee will not in any way be held liable by reason of any
insufficiency in any Account resulting from any loss on any Eligible Investment
included therein (except to the extent that the bank serving as Trustee is the
obligor thereon).
All income or other gain from investments in any Account will be required
to be deposited in such Account immediately upon receipt, and any loss resulting
from such investments will be required to be charged to such Account (except
with respect to the Principal and Interest Account, as to which the Master
Servicer is entitled to retain any gain from investments and is required to
deposit an amount equal to any loss into the Principal and Interest Account from
its own funds).
Eligible Investments
The following are "Eligible Investments":
(a) Direct general obligations of the United States or the obligations
of any agency or instrumentality of the United States, the timely payment
or the guarantee of which constitutes a full faith and credit obligation of
the United States;
(b) Federal Housing Administration debentures, but excluding any such
securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption;
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(c) FHLMC senior debt obligations, but excluding any such securities
whose terms do not provide for payment of a fixed dollar amount upon
maturity or call for redemption;
(d) FNMA senior debt obligations, but excluding any such securities
whose terms do not provide for payment of a fixed dollar amount upon
maturity or call for redemption;
(e) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more than 365
days) of any domestic bank, the short-term debt obligations of which have
been rated A-1 or better by S&P and P-1 by Moody's;
(f) Deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least $50,000,000
which deposits are not in excess of the applicable limits insured by the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC,
provided that the long-term deposits of such bank or savings and loan
association are rated at least "BBB" by S&P and "Baa3" by Moody's;
(g) Commercial paper (having original maturities of not more than 270
days) rated A-1 or better by S&P and P-1 by Moody's;
(h) Investments in money market funds rated AAAm or AAAm-G by S&P and
Aaa or P-1 by Moody's; and
(i) Such other investments as have been approved in writing by S&P,
Moody's and the Certificate Insurer;
provided that no instrument described above is permitted to evidence either
the right to receive (a) only interest with respect to obligations underlying
such instrument or (b) both principal and interest payments derived from
obligations underlying such instrument and the interest and principal payments
with respect to such instrument provided a yield to maturity at par greater than
120% of the yield to maturity at par of the underlying obligations; and
provided, further, that no instrument described above may be purchased at a
price greater than par if such instrument may be prepaid or called at a price
less than its purchase price prior to stated maturity.
Amendments
The Trustee, the Master Servicer and the Company may at any time and from
time to time, with the prior written consent of the Certificate Insurer but
without the consent of the Owners, amend the Pooling and Servicing Agreement,
for the purposes of (a) curing any ambiguity, or correcting or supplementing any
provision of any such agreement which may be inconsistent with any other
provision of such agreement, (b) if accompanied by an approving opinion of
counsel experienced in federal income tax matters, removing the restriction
against the transfer of a Residual Certificate to a Disqualified Organization
(as such term is defined in the Code) or (c) complying with the requirements of
the Code; provided, however, that such action shall not, as evidenced by an
opinion of counsel delivered to the Trustee, materially and adversely affect the
interests of any Owner or materially and adversely affect (without its written
consent) the rights and interests of the Certificate Insurer.
The Pooling and Servicing Agreement may also be amended by the Trustee, the
Master Servicer and the Company, as applicable, at any time and from time to
time, with the prior written approval of the Certificate Insurer and of not less
than 66 2/3% of the Percentage Interest represented by each affected Class of
Certificates then outstanding, for the purpose of adding any provisions or
changing in any manner or eliminating any of the provisions thereof or of
modifying in any manner the rights of the Owners thereunder; provided, however,
that no such amendment shall (a) change in any manner the amount of, or delay
the timing of, payments which are required to be distributed to any Owner
without the consent of the Owner of such
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Certificate or (b) change the aforesaid percentages of Percentage Interest which
are required to consent to any such amendments, without the consent of the
Owners of all Certificates of the Class or Classes affected then outstanding.
Any such amendment must be accompanied by an opinion of tax counsel as to REMIC
matters.
The Trustee will be required to furnish a copy of any such amendment to
each Owner in the manner set forth in the Pooling and Servicing Agreement.
Termination of the Trust
The Pooling and Servicing Agreement provides that the Trust will terminate
upon the payment to the Owners of all Certificates from amounts other than those
available under the Certificate Insurance Policy all amounts required to be paid
to such Owners upon the final payment and other liquidation (or any advance made
with respect thereto) of the last Mortgage Loan.
Optional Termination by the Company
At its option, but subject to the consent of the Certificate Insurer in
certain circumstances, the Company may purchase from the Trust all (but not
fewer than all) remaining Mortgage Loans and other property, acquired by
foreclosure, deed in lieu of foreclosure, or otherwise, then constituting the
Trust Estate, and thereby effect early retirement of the Certificates, on any
Payment Date when the Pool Principal Balance has declined to ten percent or less
of the Original Pool Principal Balance.
The termination of the Trust by the preceding method is equivalent to a
prepayment of all the Mortgage Loans and a liquidation of the Trust. The Owners
of the Class A Certificates would receive from the proceeds of such purchase any
interest owed (including any accrued but unpaid Supplemental Interest Amounts)
and the Owners of the Class A Certificates would receive any principal not yet
paid, in the order of priority set forth under "Description of Certificates --
Distributions on Class A Certificates". Consequently, a termination of the Trust
pursuant to the preceding methods, if such Certificates were purchased at a
price in excess of par, reduces the yield to maturity on the Class A
Certificates.
Auction Sale
The Pooling and Servicing Agreement requires that, within ninety days
following the Company Optional Termination Date, if the Company has not
exercised its optional termination right by such date, the Trustee solicit bids
for the purchase of all Mortgage Loans remaining in the Trust. In the event that
satisfactory bids are received as described in the Pooling and Servicing
Agreement, the net sale proceeds will be distributed to Certificateholders, in
the same order of priority as collections received in respect of the Mortgage
Loans. If satisfactory bids are not received, the Trustee shall decline to sell
the Mortgage Loans and shall not be under any obligation to solicit any further
bids or otherwise negotiate any further sale of the Mortgage Loans. Such sale
and consequent termination of the Trust must constitute a "qualified
liquidation" of each REMIC established by the Trust under Section 860F of the
Internal Revenue Code of 1986, as amended, including, without limitation, the
requirement that the qualified liquidation takes place over a period not to
exceed 90 days. Such Auction Sale shall be subject to the consent of the
Certificate Insurer in certain circumstances.
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THE TRUSTEE
Pursuant to the Pooling and Servicing Agreement, The Chase Manhattan Bank
will serve as trustee of the Trust. The Pooling and Servicing Agreement sets
forth provisions regarding the Trustee, certain of which are described below.
Certain Covenants of the Trustee
Withholding. The Trustee is required to comply with all requirements of the
Code or any applicable state or local law with respect to the withholding from
any distributions made by it to any Owner of any applicable withholding taxes
imposed thereon and with respect to any applicable reporting requirements in
connection therewith.
Unclaimed Moneys. Any money held by the Trustee in trust for the payment of
any amount due with respect to any Class A Certificate and remaining unclaimed
for the period then specified in the escheat laws of the State of New York after
such amount has become due and payable will be discharged from such trust and be
paid to the Company, and the Owner of such Class A Certificate shall thereafter,
as an unsecured general creditor, look only to the Company for payment thereof
(but only to the extent of the amounts so paid to the Company), and all
liability of the Trustee with respect to such trust money will thereupon cease;
provided, however, that the Trustee, before being required to make any such
payment, may at the expense of the Company cause to be published once, in the
eastern edition of The Wall Street Journal, notice that such money remains
unclaimed and that, after a date specified therein, which shall be not less than
30 days from the date of such publication, any unclaimed balance of such money
then remaining will be paid to the Company. The Trustee may also adopt and
employ, at the expense of the Company, any other reasonable means of
notification of such payment (including but not limited to mailing notice of
such payment to Owners whose right to or interest in moneys due and payable but
not claimed is determinable from the Register at the last address of record for
each such Owner).
Protection of Trust Estate. The trust estate (the "Trust Estate") of the
Trust primarily consists of (i) the Mortgage Loans, (ii) all moneys held in the
Accounts and (iii) the Certificate Insurance Policy. The Trustee is required to
hold the Trust Estate in Trust for the benefit of the Owners and, upon request
of and at the expense of the Company and at the expense of the requesting party,
will from time to time execute and deliver all such supplements and amendments
to the Pooling and Servicing Agreement, instruments of further assurance and
other instruments, and will take such other action upon such request as it deems
reasonably necessary or advisable, to more effectively hold in trust all or any
portion of the Trust Estate.
The Trustee has the power to enforce, and is required to enforce the
obligations of the other parties to the Pooling and Servicing Agreement by
action, suit or proceeding at law or equity, and also has the power to enjoin,
by action or suit, any acts or occurrences which may be unlawful or in violation
of the rights of the Owners; provided, however, that nothing in the Pooling and
Servicing Agreement requires any action by the Trustee unless the Trustee shall
first (i) have been furnished indemnity satisfactory to it and (ii) when
required by the Pooling and Servicing Agreement, have been requested to take
such action by the Owners and provided, further, that certain obligations may be
enforced by the Trustee only with the consent of the Certificate Insurer.
Performance and Enforcement of Obligations. The Pooling and Servicing
Agreement provides that the Trustee is under no obligation to exercise any of
the rights or powers vested in it by the Pooling and Servicing Agreement at the
request or direction of any of the Owners, unless such Owners shall have offered
to the Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction.
The Trustee may execute any of the rights or powers granted by the Pooling
and Servicing Agreement or perform any duties thereunder either directly or by
or through agents or attorneys, and the Trustee is
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responsible for any misconduct or negligence on the part of any agent or
attorney appointed and supervised with due care by it thereunder.
Pursuant to the Pooling and Servicing Agreement, the Trustee is not liable
for any action it takes or omits to take in good faith which it reasonably
believes to be authorized by an authorized officer of any person or within its
rights or powers under the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement provides that no Owner has any right to
institute any proceeding, judicial or otherwise, with respect to the Pooling and
Servicing Agreement or the Certificate Insurance Policy, or for the appointment
of a receiver or trustee under the Pooling and Servicing Agreement, unless:
(1) such Owner has previously given written notice to the Company, the
Certificate Insurer and the Trustee of such Owner's intention to institute
such proceeding, and the Certificate Insurer consents thereto;
(2) the Owners of not less than 25% of the Percentage Interests
represented by any Class of Class A Certificates then outstanding or, if
there are no Class A Certificates then outstanding, by such Percentage
Interest represented by the Class B Certificates then outstanding, shall
have made written request to the Trustee to institute such proceeding in
its own name as representative of the Owners;
(3) such Owner or Owners have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 30 days after its receipt of such notice, request
and offer of indemnity, has failed to institute such proceeding; and
(5) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Owners of a majority of the
Percentage Interests represented by each Class of Class A Certificates then
outstanding or, if there are no Class A Certificates then outstanding, by a
majority of the Percentage Interests represented by the Class B
Certificates then outstanding.
The Pooling and Servicing Agreement provides that no one or more Owners
shall have any right in any manner whatever by virtue of, or by availing
themselves of, any provision of the Pooling and Servicing Agreement to affect,
disturb or prejudice the rights of any other Owner of the same Class or to
obtain or to seek to obtain priority or preference over any other Owner of the
same Class or to enforce any right under the Pooling and Servicing Agreement,
except in the manner herein provided and for the equal and ratable benefit of
all the Owners of the same Class.
In the event the Trustee receives conflicting or inconsistent requests and
indemnity from two or more groups of Owners, each representing less than a
majority of the applicable Class of Certificates, the Trustee shall follow the
directions of the Certificate Insurer.
The Certificate Insurer or, with the consent of the Certificate Insurer,
the Owners of a majority of the Percentage Interests represented by each Class
of Class A Certificates then outstanding or, if there are no Class A
Certificates then outstanding, by such majority of the Percentage Interests
represented by the Class B Certificates then outstanding, may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee with respect to the Certificates or exercising any trust or power
conferred on the Trustee with respect to the Certificates or the Trust Estate
provided that: (1) such direction is not in conflict with any rule of law or
with the Pooling and Servicing Agreement; (2) the Trustee has been provided with
indemnity satisfactory to it; and (3) the Trustee may take any other action
deemed proper by the Trustee which is not inconsistent with such direction;
provided, however, that the Trustee need not take any action which it determines
might involve it in liability or may be unjustly prejudicial to the Owners not
so directing.
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Disposition of Trust Estate. The Trustee covenants not to permit the Trust
to sell, transfer, exchange or otherwise dispose of any of the Trust Estate
except as expressly permitted by the Pooling and Servicing Agreement.
Reporting Requirements. On each Payment Date the Trustee is required to
report in writing to each Owner and to the Certificate Insurer, among other
things: (i) the amount of the distribution with respect to the Class A
Certificates, the Class B Certificates and the Residual Certificates; (ii) the
amount of such distributions allocable to principal, separately identifying the
aggregate amount of any Prepayments or other recoveries of principal included
therein; (iii) the amount of such distributions allocable to interest; (iv) the
amount of such distributions allocable to the Class A Carry-Forward Amount or
the Class B Carry-Forward Amount; (v) the amount of any Insured Payment made
with respect to such Payment Date; (vi) the Class A Principal Balance as of such
Payment Date, together with the principal amount of each Class A Certificate
(based on a Certificate in the original principal amount of $1,000) then
outstanding, in each case after giving effect to any payment of principal on
such Payment Date; (vii) the Class B Principal Balance as of such Payment Date,
together with the principal amount of each Class B Certificate (based on a
Certificate in the original principal amount of $1,000) then outstanding, in
each case after giving effect to any payment of principal on such Payment Date;
(viii) the total of any Substitution Amounts and any Loan Purchase Prices
included in such distribution; (ix) the amount of the Servicing Fee paid with
respect to such Payment Date; and (x) the Subordinated Amount as of such Payment
Date.
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any of the following
events (whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) the Trustee shall fail to distribute to the Owners entitled
thereto on any Payment Date amounts available for distribution in
accordance with the terms of the Pooling and Servicing Agreement; or
(2) the Trustee shall fail in the performance of, or breach, any
covenant or agreement of the Trustee in the Pooling and Servicing
Agreement, or if any representation or warranty of the Trustee made in the
Pooling and Servicing Agreement or in any certificate or other writing
delivered pursuant thereto or in connection therewith shall prove to be
incorrect in any material respect as of the time when the same shall have
been made, and such failure or breach shall continue or not be cured for a
period of 30 days after, there shall have been given, by registered or
certified mail, to the Trustee by the Company or by the Certificate Insurer
or by the Owners of at least 25% of the aggregate Percentage Interest
represented by any Class of Class A Certificates then outstanding, or, if
there are no Class A Certificates then outstanding, by such Percentage
Interest represented by the Class B Certificates then outstanding, a
written notice specifying such failure or breach and requiring it to be
remedied; or
(3) certain insolvency events related to the Trustee.
If any event described above occurs and is continuing, then and in every
such case (x) the Company or the Certificate Insurer or (y) with the consent of
the Certificate Insurer, the Owners of a majority Percentage Interest
represented by any Class of Class A Certificates or, if there are no Class A
Certificates then outstanding, by such Percentage Interest represented by the
Class B Certificates then outstanding, may immediately appoint a successor
trustee.
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Liability of the Trustee
The Trustee, prior to the occurrence of an Event of Default and after the
curing of all Events of Default which may have occurred, undertakes to perform
such duties and only such duties as are specifically set forth in the Pooling
and Servicing Agreement. If an Event of Default has occurred and has not been
cured or waived, the Trustee shall exercise such of the rights and powers vested
in it by the Pooling and Servicing Agreement, and use the same degree of care
and skill in its exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs. Prior to the
occurrence of an Event of Default, and after the curing of all such Events of
Default which may have occurred, the Trustee (i) undertakes to perform such
duties and only such duties as are specifically set forth in the Pooling and
Servicing Agreement, and no implied covenants or obligations shall be read into
the Pooling and Servicing Agreement against the Trustee and (ii) in the absence
of bad faith on its part, may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished pursuant to and conforming to the
requirements of the Pooling and Servicing Agreement; provided, however, that
such provisions do not protect the Trustee or any such person against any
liability which would otherwise be imposed by reason of negligent action,
negligent failure to act or willful misconduct in the performance of duties or
by reason of reckless disregard of obligations and duties thereunder.
The Trustee and any director, officer, employee or agent of the Trustee may
rely and will be protected in acting or refraining from acting in good faith in
reliance on any certificate, notice or other document of any kind prima facie
properly executed and submitted by the authorized officer of any person
respecting any matters arising under the Pooling and Servicing Agreement.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
Certificate Insurer
The following information under this heading "Certificate Insurer" has been
obtained from Financial Security Assurance Inc. (hereinafter in this section,
"Certificate Insurer" or "Financial Security") and has not been verified by the
Company, the Master Servicer or the Underwriters. No representation or warranty
is made by the Company, the Master Servicer, or the Underwriters with respect
thereto.
Financial Security is a monoline insurance company incorporated in 1984
under the laws of the State of New York. Financial Security is licensed to
engage in the financial guaranty insurance business in all 50 states, the
District of Columbia and Puerto Rico.
Financial Security and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities - thereby enhancing the credit rating of those securities -
in consideration for the payment of a premium to the insurer. Financial Security
and its subsidiaries principally insure asset-backed, collateralized and
municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. Financial Security insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy Financial Security's underwriting criteria.
Financial Security is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
US WEST Capital Corporation and The Tokio Marine and Fire Insurance Co. Ltd. No
shareholder of Holdings is obligated to pay any debt of Financial Security or
any claim under any
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insurance policy issued by Financial Security or to make any additional
contribution to the capital of Financial Security.
The principal executive offices of Financial Security are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that location
is (212) 826-0100.
Reinsurance. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by
Financial Security or any of its domestic operating insurance company
subsidiaries are reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, Financial
Security reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is utilized
by Financial Security as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit Financial
Security's obligations under any financial guaranty insurance policy.
Rating of Claims-Paying Ability. Financial Security's claims-paying ability
is rated "Aaa" by Moody's and "AAA" by S&P, Nippon Investors Service Inc. and
Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies.
Capitalization. The following table sets forth the capitalization of
Financial Security and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of March 31, 1997 (in thousands):
March 31, 1997
(Unaudited)
--------------
Deferred Premium Revenue (net of prepaid reinsurance
premiums)...................................................... $ 361,589
----------
Shareholder's Equity:
Common Stock................................................... 15,000
Additional Paid-In Capital..................................... 654,127
Unrealized Gain (Loss) on Investments (net of deferred
income taxes).................................................. (2,030)
Accumulated Earnings........................................... 157,842
----------
Total Shareholder's Equity..................................... 824,939
----------
Total Deferred Premium Revenue and
Shareholder's Equity........................................ $1,186,528
==========
For further information concerning Financial Security, see the Consolidated
Financial Statements of Financial Security and Subsidiaries, and the notes
thereto, incorporated by reference herein. Copies of the statutory quarterly and
annual statements filed with the State of New York Insurance Department by
Financial Security are available upon request to the State of New York Insurance
Department.
Insurance Regulation. Financial Security is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, Financial Security and
its insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, Financial Security is subject to Article 69 of the New York Insurance
Law which, among other things, limits the business of each such insurer to
financial guaranty insurance and
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related lines, requires that each such insurer maintain a minimum surplus to
policyholders, establishes contingency, loss and unearned premium reserve
requirements for each such insurer, and limits the size of individual
transactions ("single risks") and the volume of transactions ("aggregate risks")
that may be underwritten by each such insurer. Other provisions of the New York
Insurance Law, applicable to non-life insurance companies such as Financial
Security, regulate, among other things, permitted investments, payment of
dividends, transactions with affiliates, mergers, consolidations, acquisitions
or sales of assets and incurrence of liability for borrowings.
The Certificate Insurance Policy
The Company will obtain the Certificate Insurance Policy, issued by the
Certificate Insurer, in favor of the Owners of the Class A Certificates. The
Certificate Insurance Policy provides for 100% coverage of the related Insured
Distribution Amount.
The Certificate Insurance Policy unconditionally guarantees the payment of
Insured Payments on the Class A Certificates. The Certificate Insurer is
required to make Insured Payments to the Trustee for the benefit of the Class A
Certificateholders on the later of the Payment Date or on the second Business
Day next following the day on which the Certificate Insurer and its fiscal
agent, if any, shall have received an appropriate written notice of claim from
the Trustee that an Insured Payment is due.
If payment of any amount avoided as a preference under applicable
bankruptcy, insolvency, receivership or similar law is required to be made under
the Certificate Insurance Policy, the Certificate Insurer will cause such
payment to be made on the later of (a) the date when due to be paid pursuant to
the Order referred to below or (b) the first to occur of (i) the fourth Business
Day following Receipt by the Certificate Insurer from the Trustee of (A) a
certified copy of the order (the "Order") of the court or other governmental
body which exercised jurisdiction to the effect that the applicable Owner of the
Class A Certificates is required to return the amount of any Class A Insured
Distribution Amount distributed with respect to the Class A Certificates during
the term of the Certificate Insurance Policy because such distributions were
avoidable as preference payments under applicable bankruptcy law, (B) a
certificate of such Owner of the Class A Certificates that the Order has been
entered and is not subject to any stay and (C) an assignment duly executed and
delivered by such Owner of the Class A Certificates, in such form as is
reasonably required by the Certificate Insurer and provided to such Owner of the
Class A Certificates by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of such Owner of the Class A
Certificates relating to or arising under the Class A Certificates against the
debtor which made the preference payment or otherwise with respect to such
preference payment, or (ii) the date of Receipt by the Certificate Insurer from
the Trustee of the items referred to in clauses (A), (B) and (C) above if, at
least four Business Days prior to such date of Receipt, the Certificate Insurer
has Received written notice from the Trustee that such items were to be
delivered on such date and such date was specified in such notice. Such payment
will be disbursed to the receiver, conservator, debtor-in-possession or trustee
in bankruptcy named in the Order and not to the Trustee or any Owner of the
Class A Certificates directly (unless an Owner of the Class A Certificates has
previously paid such amount to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Order, in which case such payment will be
disbursed to the Trustee for distribution to such Owner of the Class A
Certificates upon proof of such payment reasonably satisfactory to the
Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Certificate
Insurance Policy, shall mean actual delivery to the Certificate Insurer and to
the fiscal agent, if any, prior to 12:00 noon, New York City time, on a Business
Day; delivery either on a day that is not a Business Day or after 12:00 noon,
New York City time, shall be deemed to be Received on the next Business Day. If
any notice or certificate given under the Certificate Insurance Policy by the
Trustee is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Certificate
Insurer or its fiscal agent will promptly so advise the Trustee and the Trustee
may submit an amended notice.
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Under the Certificate Insurance Policy, "Business Day" means any day other
than a Saturday, Sunday or other day on which commercial banking institutions or
trust companies in New York, New York, or the principal place of business of any
successor Trustee is authorized or required to be closed.
The Certificate Insurance Policy is noncancelable.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The Certificate Insurer's obligation under the Certificate Insurance Policy
will be discharged to the extent that funds are received by the Trustee for
distribution to the Class A Certificateholders, whether or not such funds are
properly distributed by the Trustee.
The Certificate Insurance Policy does not guarantee to the Owners of the
Class A Certificates any specific rate of prepayments of principal of the
Mortgage Loans. Also, the Certificate Insurance Policy does not guarantee the
payment of any Group II Supplemental Interest Amount and does not cover interest
shortfalls arising from Prepayments or the application of the Relief Act.
Claims under the Certificate Insurance Policy will rank equally with any
other unsecured debt and unsubordinated obligations of the Certificate Insurer
except for certain obligations in respect of tax and other payments to which
preference is or may become afforded by statute. Claims against the Certificate
Insurer under the Certificate Insurance Policy constitute pari passu claims
against the general assets of the Certificate Insurer. The terms of the
Certificate Insurance Policy cannot be modified or altered by any other
agreement or instrument, or by the merger, consolidation or dissolution of the
Company. The Certificate Insurance Policy may not be cancelled or revoked prior
to payment in full of the Class A Certificates.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer default exists, the Certificate Insurer shall be deemed to
be the Certificateholders for all purposes (other than with respect to payment
on the Certificates), will be entitled to exercise all rights of the Class A
Certificateholders thereunder, without the consent of such Certificateholders,
and the Class A Certificateholders may exercise such rights only with the prior
written consent of the Certificate Insurer. In addition, the Certificate Insurer
will, as a third party beneficiary to the Pooling and Servicing Agreement, have
among others, the following rights: (i) the right to give notices of breach or
to terminate the rights and obligations of the Master Servicer under the Pooling
and Servicing Agreement in the event of an Event of Default by the Master
Servicer; (ii) the right to direct the actions of the Trustee during the
continuation of a Master Servicer default; (iii) the right to require the
Company to repurchase Mortgage Loans for breach of representation and warranty
or defect in documentation; and (iv) the right to direct foreclosures upon the
failure of the Master Servicer to do so in accordance with the Pooling and
Servicing Agreement. The Certificate Insurer's consent will be required prior
to, among other things, (i) the appointment of any successor Trustee or Master
Servicer or (ii) any amendment to the Pooling and Servicing Agreement (which
consent will not be unreasonably withheld).
Pursuant to the Pooling and Servicing Agreement, the Certificate Insurer is
subrogated to the rights of the Owners of the Class A Certificates to the extent
of any such payment under the Certificate Insurance Policy.
Credit Enhancement Does Not Apply to Prepayment Risk
In general, the protection afforded by the Certificate Insurance Policy is
protection for credit risk and not for prepayment risk. A claim may not be made
under the Certificate Insurance Policy in an attempt to guarantee or insure that
any particular rate of prepayment is experienced by the Trust.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the material federal income tax consequences of
the purchase, ownership and disposition of the Class A Certificates is to be
considered only in connection with "Federal Income Tax Considerations" in the
Prospectus. The discussion herein and in the Prospectus is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below and in the Prospectus does not purport to deal with
all federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. Investors should consult their own tax
advisors in determining the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of the Class A Certificates.
REMIC Election
The Trustee will cause one or more elections to be made with respect to
certain specified assets of the Trust as real estate mortgage investment
conduits ("REMICs") within the meaning of Code Section 860D. Dewey Ballantine,
special tax counsel, will advise that, in its opinion, for federal income tax
purposes, assuming the REMIC elections are made and compliance with the Pooling
and Servicing Agreement, each Class of Class A Certificates will be treated as a
"regular interest" in a REMIC.
For federal income tax purposes, regular interests in a REMIC are treated
as debt instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Owners of
Class A Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to such Certificates
under an accrual method. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount on the Class A
Certificates is the "Prepayment Assumption." See "Maturity, Prepayment and Yield
Considerations" herein and "Federal Income Tax Considerations -- Discount and
Premium" in the Prospectus.
The Owners of the Class A-6 Group II Certificates will be treated for tax
purposes as owning two separate investments: (i) Class A-6 Group II
Certificates, without the right to receive Supplemental Interest Amounts, and
(ii) the right to receive Supplemental Interest Amounts. The Owners of the Class
A-6 Group II Certificates must allocate the purchase price of their Certificates
between these two investments based on their relative fair market values. The
purchase price allocated to the first investment will be the issue price of the
Class A-6 Group II Certificates for calculating accruals of OID (if any). See
"Federal Income Tax Consequences--Discount and Premium" in the Prospectus.
An Owner of a Class A-6 Group II Certificate and the related rights to
receive Supplemental Interest Amounts will be treated for federal income tax
purposes as having entered into a notional principal contract on the date that
it purchases its Certificate. Treasury Regulations under Section 446 of the Code
relating to notional principal contracts (the "Notional Principal Contract
Regulations") provide that taxpayers must recognize periodic payments with
respect to a notional principal contract under the accrual method of accounting.
Any Supplemental Interest Amounts will be periodic payments. Income with respect
to periodic payments under a notional principal contract for a taxable year
should constitute ordinary income. The purchase price allocated to the right to
receive the related Supplemental Interest Amounts will be treated as a
nonperiodic payment under the Notional Principal Contract Regulations. Such a
nonperiodic payment may be amortized using several methods, including the level
payment method described in the Notional Principal Contract Regulations.
The right to receive the Supplemental Interest Amounts will not constitute:
(i) a "real estate asset" within the meaning of section 858(c)(5)(A) of the
Internal Revenue Code (the "Code") if held by a real estate investment trust;
(ii) a "qualified mortgage" within the meaning of section 860G(a)(3) of the Code
or a "permitted investment" within the meaning of section 860G(a)(5) of the Code
if held by a REMIC, or (iii) an asset described in section 7701(a)(19)(C)(xi) of
the Code if held by a thrift. Moreover, other special rules may apply to certain
investors, including dealers in securities and dealers in notional principal
contracts.
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Taxation of Foreign Investors
In general, foreign investors will not be subject to U.S. withholding on
income from the Class A Certificates. See "Federal Income Tax Considerations --
Foreign Investors -- Grantor Trust Securities and REMIC Regular Securities" in
the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on those employee benefit plans to which it applies
("ERISA Plan") and on those persons who are fiduciaries with respect to such
ERISA Plans. Certain employee benefit plans, such as governmental plans (as
defined in ERISA Section 3(32)) and certain church plans (as defined in ERISA
Section 3(33)), are not subject to ERISA. In accordance with ERISA's general
fiduciary standards, before investing in a Class A Certificate, an ERISA Plan
fiduciary should determine whether such an investment is permitted under the
governing ERISA Plan instruments and is appropriate for the ERISA Plan in view
of its overall investment policy and the composition and diversification of its
portfolio.
In addition, provisions of ERISA, and the corresponding provisions of the
Code, prohibit a broad range of transactions involving assets of ERISA Plans,
individual retirement accounts, and Keogh plans covering only a sole proprietor
or partners (collectively, the "Plans") and persons having certain specified
relationships to such a Plan ("parties in interest" and "disqualified persons").
Such transactions are treated as "prohibited transactions" under Sections 406
and 407 of ERISA and excise taxes are imposed upon such persons by Section 4975
of the Code. Certain affiliates of the Originators, the Company, the Master
Servicer, the Transferor, any Sub-Servicer, and of the Trustee might be
considered "parties in interest" or "disqualified persons" with respect to a
Plan. If so, the acquisition or holding of Class A Certificates by or on behalf
of such Plan could be considered to give rise to a "prohibited transaction"
within the meaning of ERISA or the Code unless an exemption is available.
Furthermore, if an investing Plan's assets were deemed to include an interest in
the assets of the Mortgage Loans which constitute the Trust Estate and not
merely an interest in the Class A Certificates, transactions occurring in the
servicing of the Mortgage Loans might constitute prohibited transactions unless
an administrative exemption applies.
The DOL has issued to Prudential Securities Incorporated an administrative
exemption, Prohibited Transaction Exemption 90-32 (the "Exemption"), which
generally exempts from the application of the prohibited transaction provisions
of Section 406(a), Section 406(b)(1) and Section 406(b)(2) of ERISA and the
excise taxes imposed pursuant to Sections 4975(a) and (b) of the Code, certain
transactions relating to the servicing and operation of asset pools, including
pools of mortgage loans, and the purchase, sale and holding of asset-backed
pass-through certificates, including pass-through certificates evidencing
interests in mortgage loans, such as the Class A Certificates underwritten by
Prudential Securities Incorporated and certain of its affiliates, provided that
certain conditions set forth in the Exemption are satisfied.
If the general conditions of Section II of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(A) through (D) of
the Code) in connection with the direct or indirect sale, exchange or transfer
of Class A Certificates by Plans in the initial issue of Certificates, the
holding of Class A Certificates by Plans or the direct or indirect acquisition
or disposition in the secondary market of Class A Certificates by Plans.
However, no exemption is provided from the restrictions of Section 406(a)(1)(E),
406(a)(2) and 407 of ERISA for the acquisition or holding of a Class A
Certificate on behalf of an "Excluded Plan" (defined below) by any person who
has discretionary authority or renders investment advice with respect to the
assets of such Excluded Plan. For purposes of the Class A Certificates, an
Excluded Plan is a Plan sponsored by (1) the Underwriters, (2) the Master
Servicer and any SubServicer, (3) the Certificate Insurer, (4) the Trustee, (5)
the Company, (6) the Transferor, (7) any Mortgagor with respect to Mortgage
Loans constituting more than 5 percent of the aggregate unamortized principal
balance
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of the Mortgage Loans as of the date of initial issuance and (8) any affiliate
or successor of a person described in (1) to (7) above (the "Restricted Group").
If the specific conditions of paragraph I.B of Section I of the Exemption
are also satisfied, the Exemption may provide an exemption from the restrictions
imposed by Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the
Code in connection with (1) the direct or indirect sale, exchange or transfer of
Class A Certificates in the initial issuance of Class A Certificates between the
Company, the Underwriters and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in Class A Certificates is (a) a mortgagor with respect to 5 percent or
less of the fair market value of the Mortgage Loans or (b) an affiliate of such
a person, (2) the direct or indirect acquisition or disposition in the secondary
market of Class A Certificates by Plans and (3) the holding of Class A
Certificates by Plans.
If the specific conditions of paragraph I.C of Section I of the Exemption
are satisfied, the Exemptions may provide an exemption from the restrictions
imposed by Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the Trust.
The Exemption may provide an exemption from the restrictions imposed by
Section 406(a) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" or a "disqualified person" with respect to an
investing Plan by virtue of providing services to the Plan (or by virtue of
having certain specified relationships to such a person) solely as a result of
such Plan's ownership of Class A Certificates.
The Exemption sets forth the following seven general conditions which must
be satisfied for a transaction to be eligible for exemptive relief thereunder.
(1) The acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's length transaction with an
unrelated party;
(2) The rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(3) The certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from either Standard & Poor's, a division of the
McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's"),
Duff & Phelps Rating Co. ("D&P") or Fitch Investors Service, Inc.
("Fitch");
(4) The trustee is not an affiliate of any other member of the
Restricted Group (as defined above);
(5) The sum of all payments made to and retained by the Underwriters
in connection with the distribution of certificates represents not more
than reasonable compensation for underwriting the certificates. The sum of
all payments made and retained by the seller pursuant to the assignment of
the loans to the trust fund represents not more than the fair market value
of such loans. The sum of all payments made to and retained by the servicer
represents not more than reasonable compensation for such person's services
under the pooling and servicing agreement and reimbursement of such
person's reasonable expenses in connection therewith; and
(6) The Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933.
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(7) The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest generic rating categories of S&P,
Moody's, Fitch or D&P for at least one year prior to the Plan's
acquisition of certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of certificates.
It is a condition of issuance of the Class A Certificates that they be
rated AAA or Aaa by S&P and Moody's, respectively. Before purchasing a Class A
Certificate, based on the Exemption, a fiduciary of a Plan should itself confirm
(1) that such Certificate constitutes a "certificate" for purposes of the
Exemption and (2) that the specific conditions set forth in Section I of the
Exemption, the general conditions set forth in Section II of the Exemption and
the other requirements set forth in the Exemption would be satisfied.
Any person purchasing a Class A-6 Group II Certificate and the related
right to receive Supplemental Interest Amounts will have acquired for purposes
of ERISA and for federal income tax purposes, such Class A-6 Group II
Certificate without the right to receive the Supplemental Interest Amounts,
together with the right to receive the Supplemental Interest Amounts. The
Exemption does not apply to the acquisition, holding or resale of the right to
receive the Supplemental Interest Amounts. Accordingly, the acquisition of the
right to receive the Supplemental Interest Amounts by a Plan could result in a
prohibited transaction unless another administrative exemption to ERISA's
prohibited transaction rules is applicable. One or more alternative exemptions
may be available with respect to certain prohibited transaction rules of ERISA
that might apply in connection with the initial purchase, holding and resale of
the right to receive the Supplemental Interest Amounts, including, but not
limited to: (i) Prohibited Transaction Class Exemption ("PTCE") 91-38, regarding
investments by bank collective investment funds; (ii) PTCE 90-1, regarding
investments by insurance company pooled separate accounts; (iii) PTCE 84-14,
regarding transactions negotiated by qualified professional asset managers; or
(iv) PTCE 75-1, Part II, regarding principal transactions by broker-dealers (the
"Principal Transactions Exemption"). It is believed that the conditions of the
Principal Transactions Exemption will be met with respect to the acquisition of
a right to receive the Supplemental Interest Amounts by a Plan, so long as such
Underwriter is not a fiduciary with respect to the Plan (and is not a party in
interest with respect to the Plan by reason of being a participating employer or
affiliate thereof). Before purchasing Class A-6 Group II Certificates based on
an administrative exemption (or exemptions), a fiduciary of a Plan should
determine whether the conditions of such exemption (or exemptions) would be met
and whether the scope of the relief provided by such exemption (or exemptions)
would cover all acts that might be construed as prohibited transactions.
Prospective Plan investors in the Class A Certificates should consult with
their legal advisors concerning the impact of ERISA and the Code, the
applicability of the Exemption, and the potential consequences in their specific
circumstances, prior to making an investment in the Class A Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification an investment in
the Class A Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
In addition to the matters described above, purchasers of a Class A
Certificate that are insurance companies should consult with their counsel with
respect to the United States Supreme Court case interpreting the fiduciary
responsibility rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris
Trust and Savings Bank, 114 S.CT. 517 (1993). In John Hancock, the Supreme Court
ruled that assets held in an insurance company's general account may be deemed
to be "plan assets" for ERISA purposes under certain
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circumstances. Prospective purchasers using insurance company general account
assets should determine whether the decision affects their ability to make
purchases of the Class A Certificates.
Non-ERISA Plans
Employee benefit plans that are governmental plans (as defined in Section
3(32) of ERISA) and certain church plans (as defined in Section 3(33) of ERISA)
are not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Class A Certificates without regard to the ERISA restrictions
described above, subject to applicable provisions of other federal and state
laws.
RATINGS
Ratings which are assigned to securities such as the Class A Certificates
generally evaluate the ability of the issuer (i.e., the Trust) and any guarantor
(i.e., the Certificate Insurer) to make timely payment when such payments are
due, as required by such securities. The amounts which are "due" with respect to
the Class A Certificates consist of principal and interest. In general, ratings
address credit risk and not prepayment risk. The ratings issued with respect to
the Class A-6 Group II Certificates do not cover the payment of the Supplemental
Interest Amounts.
It is a condition of the original issuance of the Class A Certificates that
they receive ratings of AAA or Aaa by S&P and Moody's, respectively.
Explanations of the significance of such rating may be obtained from such rating
agency. The ratings will be the views only of such rating agencies. There is no
assurance that any such ratings will continue for any period of time or that
such ratings will not be revised or withdrawn. Any such revision or withdrawal
of such ratings may have an adverse effect on the market price of the Class A
Certificates. A security rating is not a recommendation to buy, sell or hold
securities.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Accordingly, many institutions may not be legally authorized to invest in the
Class A Certificates.
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated May 22, 1997 (the "Underwriting Agreement"), Prudential
Securities Incorporated and J.P. Morgan Securities, Inc. (together, the
"Underwriters") have agreed to purchase, and the Company has agreed to sell, the
Class A Certificates offered hereby.
In the Underwriting Agreement, each of the Underwriters has agreed, subject
to the terms and conditions set forth therein, to purchase, the principal amount
of the Class A Certificates set forth opposite its name below.
Principal Amount of
Underwriter Class A Certificates
----------- --------------------
Prudential Securities Incorporated......................... $ 92,594,000
J.P. Morgan Securities, Inc................................ 92,594,000
------------
Total................................................. $185,188,000
============
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The Underwriters have advised the Company that they propose to offer the
Class A Certificates for sale from time to time in one or more transactions
(which may include block transactions), in negotiated transactions or otherwise,
or a combination of such methods of sale, at market prices prevailing at the
time of sale or at negotiated prices. The Underwriters may effect such
transactions by selling the Class A Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters and/or the purchasers of the
Class A Certificates for whom they may act as agents. In connection with the
sale of the Class A Certificates, the Underwriters may be deemed to have
received compensation from the Company in the form of underwriting discounts,
and the Underwriters may also receive commissions from purchasers of the Class A
Certificates for whom it may act as agent. The Underwriters and any dealers that
participate with the Underwriters in the distribution of the Class A
Certificates may be deemed to be underwriters, and any discounts or commissions
received by them and any profit on the resale of the Class A Certificates by
them may be deemed to be underwriting discounts or commissions.
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all the Class A Certificates offered
hereby if any are purchased.
The Class A Certificates are a new issue of securities with no established
trading market. The Underwriters have advised the Company that they intend to
act as market makers for the Class A Certificates. However, the Underwriters are
not obligated to do so and may discontinue any market making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Class A Certificates.
The Company has agreed to indemnify each Underwriter against certain
liabilities, including civil liabilities under the Securities Act of 1933, or
contribute to payments which either Underwriter may be required to make in
respect thereof.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries, as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholder's equity and cash flows for each of
the three years in the period ended December 31, 1996, incorporated by reference
in this Prospectus Supplement, have been incorporated herein in reliance upon
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters concerning the issuance of the Certificates will be
passed upon by Dewey Ballantine.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Access
Financial Mortgage Loan Trust 1997-2 Class A Certificates (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, CEDEL or
Euroclear. The Global Securities will be tradeable as home market instruments in
both the European and U.S. domestic markets. settlement and all secondary trades
will settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositories of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Settlement
All Global Securities will be held in book-entry form by DTC in the name of
Cede as nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their Relevant Depository
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior home
equity loan asset-backed certificates issues in same-day funds.
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Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Company and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depository, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depository to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depository for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Company and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depository, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depository, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of CEDEL Participant or Euroclear
Participant the
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following day, and receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). In the event
that the CEDEL Participant or Euroclear Participant have a line of credit with
its respective clearing system and elect to be in debt in anticipation of
receipt of the sale proceeds in its account, the back-valuation will extinguish
any overdraft incurred over that one-day period. If settlement is not completed
on the intended value date (i.e., the trade fails), receipt of the cash proceeds
in the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Certificate Owners of
Global Securities that are Non-U.S. Persons (as defined below) can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Certificate Owners or their agent.
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Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global Security
or, in the case of a Form 1001 or a Form 4224 filer, his agent, files for
exemption by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 each are effective for three
calendar years and Form 4224 is effective for one calendar year.
On April 22, 1996 the IRS issued proposed regulations relating to (i)
withholding income tax on U.S.source income paid to Non-U.S. Persons; (ii)
claiming Non-U.S. Person status to avoid backup withholding; and (iii) reporting
to the IRS of payments to Non-U.S. Persons. The proposed regulations would
substantially revise some aspects of the current system for withholding on and
reporting amounts paid to Non-U.S. Persons. The regulations unify current
certification procedures and forms and reliance standards are clarified. Most
forms are proposed to be combined into a single form: Form W-8. The regulations
are proposed to be effective for payments made after December 31, 1997.
Certificates issued, however, on or before the date that is 60 days after the
proposed regulations are made final will continue to be valid until they expire.
All proposed regulations are subject to change before adoption in their final
form. No reliable prediction can be made as to when, if ever, the proposed
regulations will be made final and if so, as to their final form.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate that is subject to U.S. federal income tax regardless of the source of
its income or (iv) a trust if a court within the United States can exercise
primary supervision over its administration and at least one United States
fiduciary has the authority to control all substantial decisions of the trust.
The term "Non-U.S. Person" means any person who is not a U.S. Person. This
discussion does not deal with all aspects of U.S. Federal income tax withholding
that may be relevant to foreign holders of the Global Securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the Global Securities.
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INDEX OF PRINCIPAL DEFINITIONS
1933 Act .......................................................... 3
Account ........................................................... 58
Accrual Period .................................................... 9
AFH ............................................................... 19
Appraised Values .................................................. 24, 30
Balloon Loans ..................................................... 7
Beneficial Certificate Owners ..................................... 13
Book-Entry Certificates ........................................... 48
Cede .............................................................. 3, 13
CEDEL ............................................................. 13
CEDEL Participants ................................................ 49
Certificate Account ............................................... 43
Certificate Insurance Policy ...................................... 1
Certificate Insurer ............................................... 1
Certificateholder ................................................. 3
Certificates ...................................................... 1, 6, 41
Chase ............................................................. 13
Citibank .......................................................... 13
Class ............................................................. 41
Class A Carry-Forward Amount 13
Class A Certificate Principal Balance ............................. 12
Class A Certificates .............................................. 1, 6
Class A Distribution Amount ....................................... 13
Class A Fixed Rate Certificates ................................... 1
Class A Group I Certificate Principal Balance ..................... 12
Class A Group I Certificates ...................................... 1, 5
Class A Group II Certificate Principal Balance .................... 12
Class A Insured Distribution Amount ............................... 13
Class A Interest Distribution Amount .............................. 10
Class A Principal Distribution Amount ............................. 10
Class A-1 Pass-Through Rate ....................................... 8
Class A-5 Lockout Percentage ...................................... 12, 44
Class A-5 Lockout Pro Rata Distribution Amount .................... 12, 44
Class A-6 Available Funds Pass-Through Rate ....................... 9
Class A-6 Formula Pass-Through Rate ............................... 9
Class A-6 Group II Certificates ................................... 1, 5
Class A-6 Pass-Through Rate ....................................... 8
Class B Certificates .............................................. 3, 6
Class B Interest .................................................. 46
Closing Date ...................................................... 5
Code .............................................................. 2
Combined Loan-to-Value Ratio ..................................... 23, 30
Commission ........................................................ 3
Company ........................................................... 5, 19
Company Optional Termination Date ................................. 15
Compensating Interest ............................................. 53
Cooperative ....................................................... 50
Coupon Rates ...................................................... 7
Cut-Off Date ...................................................... 6, 21
D&P ............................................................... 70
Definitive Certificate ............................................ 48
Delinquency Advances .............................................. 42
i
<PAGE>
Description of the Certificates ................................... 6
Disqualified persons .............................................. 69
DTC ............................................................... 3, 13
DTC Participants .................................................. 49
Eligible Investments .............................................. 58
ERISA ............................................................. 16, 69
ERISA Plan ........................................................ 69
Euroclear ......................................................... 13
Euroclear Operator ................................................ 50
Euroclear Participants ............................................ 49
European Depositories ............................................. 13, 48
Event of Default .................................................. 56
Exchange Act ...................................................... 4
Excluded Plan ..................................................... 69
Exemption ......................................................... 69
Financial Intermediary ............................................ 48
Fitch ............................................................. 70
Global Securities ................................................. 1
Group I ........................................................... 3, 6, 7
Group I Certificates .............................................. 1, 5
Group I Interest Remittance Amount ................................ 42
Group I Monthly Remittance ........................................ 42
Group I Principal Remittance Amount ............................... 42
Group I Subordination Deficit ..................................... 46
Group I Total Available Funds ..................................... 47
Group II .......................................................... 3, 6, 7
Group II Certificates ............................................. 1, 5
Group II Interest Remittance Amount ............................... 42
Group II Monthly Remittance ....................................... 42
Group II Principal Remittance Amount .............................. 42
Group II Subordination Deficit .................................... 46
Group II Supplemental Interest Account ............................ 43
Group II Supplemental Interest Amount ............................. 9
Group II Supplemental Interest Amounts ............................ 43
Group II Total Available Funds .................................... 47
Insurance Agreement ............................................... 14
Insurance Proceeds ................................................ 11
Insured Payment ................................................... 43
Interest Determination Date ....................................... 44
Interest Remittance Amount ........................................ 42
LIBOR ............................................................. 8, 44
Liquidated Mortgage Loan .......................................... 55
Liquidation Proceeds .............................................. 11
Master Servicer ................................................... 3, 51
Monthly Remittance ................................................ 42
Moody's ........................................................... 15, 70
Mortgage Loan Group ............................................... 3, 6, 7, 21
Mortgage Loans .................................................... 1, 6
Mortgaged Properties .............................................. 6, 21
Mortgages ......................................................... 6
Mortgagors ........................................................ 36
Net Liquidation Proceeds .......................................... 11
Non-U.S. Person ................................................... 4
Notes ............................................................. 21
ii
<PAGE>
Original Group I Pool Principal Balance ........................... 7
Original Group II Pool Principal Balance .......................... 7
Original Pool Principal Balance ................................... 7
Originators ....................................................... 2
Owner ............................................................. 3
Participants ...................................................... 48
Parties in interest ............................................... 69
Payment Date ...................................................... 2, 9, 41
Percentage Interest ............................................... 41
Plans ............................................................. 16, 69
Policy Payments Account ........................................... 43
Pool .............................................................. 1
Pooling and Servicing Agreement ................................... 3, 5, 41
Prepayments ....................................................... 11, 17
Principal and Interest Account .................................... 42
Principal Remittance Amount ....................................... 42
Properties ........................................................ 21
Qualifying Rate ................................................... 35
Record Date ....................................................... 2, 9
Reference Banks ................................................... 44
Released Mortgaged Property Proceeds .............................. 11
Relevant Depository ............................................... 48
Relief Act ........................................................ 13
REMICs ............................................................ 2, 68
Remittance Date ................................................... 42
Remittance Period ................................................. 42
Reserve Interest Rate ............................................. 45
Residual Certificates ............................................. 6, 41
Restricted Group .................................................. 70
Reuters Screen LIBO Page .......................................... 44
Rules ............................................................. 48
S&P ............................................................... 15, 70
Servicing Advances ................................................ 55
Servicing Fee ..................................................... 14
SMMEA ............................................................. 16, 72
Specified Subordinated Amount ..................................... 45
Subordinated Amount ............................................... 45
Subordination Deficiency .......................................... 46
Subordination Increase Amount ..................................... 46
Subordination Reduction Amount .................................... 46
Supplemental Interest Account ..................................... 43
Terms and Conditions .............................................. 50
Total Available Funds ............................................. 47
Transferor ........................................................ 3
Trust ............................................................. 1, 5
Trust Estate ...................................................... 61
Trustee ........................................................... 3, 5
U.S. Person ....................................................... 4
Underwriters ...................................................... 1, 72
Underwriting Agreement ............................................ 72
Weighted average life ............................................. 37
iii
<PAGE>
PROSPECTUS
Asset Backed Securities, issuable in Series
Access Financial Lending Corp.
Company
This Prospectus describes certain Asset Backed Securities (the " Securities")
that may be issued from time to time in series and certain classes of which may
be offered hereby from time to time as described in the related Prospectus
Supplement. The Securities will consist of two basic types: (i) Securities of
the fixed-income type ("Fixed-Income Securities" or "Offered Securities") and
(ii) Securities of the equity participation type ("Equity Securities"). No Class
of Equity Securities will be offered pursuant to this Prospectus or any
Prospectus Supplement related hereto. Each series of Securities will be issued
by a separate trust (each, a "Trust"). The primary assets of each Trust will
consist of a segregated pool (a "Loan Pool") of (A) (i) conventional one- to
four-family residential mortgage loans, (ii) multi-family residential mortgage
loans, (iii) mortgage loans secured by mortgages on small properties used
primarily for residential purposes but also commercial purposes (the "Mixed Use
Loans"), (iv) cooperative apartment loans secured by security interests in
shares issued by a cooperative housing corporation or (v) home improvement loans
each of which is secured by a "dwelling or mixed residential and commercial
structure" within the meaning of Section 3(a)(41)(A)(i) of the Securities
Exchange Act of 1934, as amended (collectively, the "Mortgage Loans") or (B)
contracts for manufactured homes (the "Contracts") (the Mortgage Loans and the
Contracts together, the "Loans"), to be acquired by such Trust from Access
Financial Lending Corp. ("AFL") or one or more subsidiaries or other affiliated
institutions of AFL (together, the "Company"). The Company will originate the
Loans or acquire the Loans from one or more affiliated or unaffiliated dealers,
brokers, or other financial institutions (the "Originators"). See "The Loan
Pools."
The Loans in each Loan Pool and certain other assets described herein under "The
Trusts" and in the related Prospectus Supplement (collectively with respect to
each Trust, the "Trust Estate") will be held by the related Trust for the
benefit of the holders of the related series of Securities (the
"Securityholders") pursuant to a Pooling and Servicing Agreement to the extent
and as more fully described herein under "the Pooling and Servicing Agreement"
and in the related Prospectus Supplement. Each Loan Pool will consist of one or
more of the various types of Loans described under "The Loan Pools."
Each series of Securities will include one or more classes. The Securities of
any particular class may represent beneficial ownership interests in the related
Loans held by the related Trust, or may represent debt secured by such Loans, as
described herein under "Description of the Securities" and in the related
Prospectus Supplement. A series may include one or more classes of Securities
entitled to principal distributions, with disproportionate, nominal or no
interest distributions, or to interest distributions, with disproportionate,
nominal or no principal distributions. The rights of one or more classes of
Securities of any series may be senior or subordinate to the rights of one or
more of the other classes of Securities. A series may include two or more
classes of Securities which differ as to the timing, sequential order, priority
of payment, interest rate or amount of distributions of principal or interest or
both. Information regarding each class of Securities of a series, and certain
characteristics of the Loans to be evidenced by such Securities, will be set
forth in the related Prospectus Supplement.
(cover continued on next page)
-------------
THE ASSETS OF THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
COMPANY, THE SERVICER OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN
UNDER "UNDERWRITING PROGRAM" AND "DESCRIPTION OF THE SECURITIES" AND IN THE
RELATED PROSPECTUS SUPPLEMENT. NEITHER THE SECURITIES NOR THE UNDERLYING LOANS
WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR
BY THE COMPANY, THE SERVICER OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN
THE RELATED PROSPECTUS SUPPLEMENT. SEE ALSO "RISK FACTORS" ON PAGE 15 HEREOF.
-------------
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.
-------------
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 November 7, 1996.
<PAGE>
(continued from previous page)
The Company's only obligations with respect to a series of Securities will be
pursuant to certain representations and warranties made by the Company. The
Prospectus Supplement for each series of Securities will name one or more
servicers (the "Servicer(s)") which will act directly or through one or more
sub-servicers (the "Sub-Servicer(s)"). The principal obligations of the Servicer
will be pursuant to its contractual servicing obligations (which may include a
limited obligation to make certain advances in the event of delinquencies in
payments on the Loans and interest shortfalls due to prepayment of Loans). See
"Description of the Securities."
If so specified in the related Prospectus Supplement, the Trust Estate for a
series of Securities may include any combination of a mortgage pool insurance
policy, letter of credit, financial guaranty insurance policy, bankruptcy bond,
special hazard insurance policy, reserve fund or other form of credit
enhancement (collectively, "Credit Enhancement"). In addition to or in lieu of
the foregoing, Credit Enhancement with respect to certain classes of Securities
of any series may be provided by means of subordination, cross-support among
Loans or over-collateralization. See "Description of Credit Enhancement."
The rate of payment of principal of each class of Securities entitled to
principal payments will depend on the priority of payment of such class and the
rate of payment (including prepayments, defaults, liquidations and repurchases
of Loans) of the related Loans. A rate of principal payment lower or higher than
that anticipated may affect the yield on each class of Securities in the manner
described herein under "Maturity and Prepayment Considerations" and in the
related Prospectus Supplement. The various types of Securities, the different
classes of such Securities and certain types of Loans in a given Loan Pool may
have different prepayment risks and credit risks. The Prospectus Supplement for
a series of Securities or the related Current Report on Form 8-K will contain
information as to (i) types, maturities and certain statistical information
relating to credit risks of the Loans in the related Loan Pool, (ii) the effect
of certain rates of prepayment, based upon certain specified assumptions for a
series of Securities and (iii) priority of payment and maturity dates of the
Securities. An investor should carefully review the information in the related
Prospectus Supplement concerning the different consequences of the risks
associated with the different types and classes of Securities. See "Maturity and
Prepayment Considerations" herein. A Trust may be subject to early termination
under the circumstances described herein under "The Pooling and Servicing
Agreement -- Termination; Retirement of Securities" and in the related
Prospectus Supplement.
One or more separate elections may be made to treat a Trust, or one or more
segregated pools of assets held by such Trust, as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes. If applicable, the
Prospectus Supplement for a series of Securities will specify which class or
classes of the related series of Securities will be considered to be regular
interests in a REMIC and which classes of Securities or other interests will be
designated as the residual interest in a REMIC. Alternatively, a Trust may be
treated as a grantor trust or as a partnership for federal income tax purposes,
or may be treated for federal income tax purposes as a mere security device
which constitutes a collateral arrangement for the issuance of secured debt. See
"Federal Income Tax Considerations" herein.
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described under "Methods
of Distribution" herein and in the related Prospectus Supplement. There will be
no secondary market for any series of Securities prior to the offering thereof.
There can be no assurance that a secondary market for any of the Securities will
develop or, if it does develop, that it will offer sufficient liquidity of
investment or will continue.
2
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement, and, if given or made, such
information must not be relied upon as having been authorized by the Company or
any dealer, salesman, or any other person. Neither the delivery of this
Prospectus or the related Prospectus Supplement nor any sale made hereunder or
thereunder shall under any circumstances create an implication that there has
been no change in the information herein or therein since the date hereof. This
Prospectus and the related Prospectus Supplement are not an offer to sell or a
solicitation of an offer to buy any security in any jurisdiction in which it is
unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Caption Page
- ------- ----
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE ............................................................... 5
SUMMARY OF PROSPECTUS ..................................................... 6
RISK FACTORS .............................................................. 15
Risks Associated with the Securities ................................. 15
Risks associated with the Loans ...................................... 16
Risks associated with the Mortgage Loans ............................. 16
Risks Associated with the Contracts .................................. 18
Legal Considerations ................................................. 19
THE TRUSTS ................................................................ 22
THE LOAN POOLS ............................................................ 28
General .............................................................. 28
The Loan Pools ....................................................... 28
UNDERWRITING PROGRAM ...................................................... 30
General .............................................................. 30
Mortgage Loan Program ................................................ 31
Manufactured Housing Contract Program ................................ 34
DESCRIPTION OF THE SECURITIES ............................................. 35
General .............................................................. 35
Form of Securities ................................................... 38
Assignment of Loans .................................................. 39
Forward Commitments;
Pre-Funding .......................................................... 40
Payments on Loans; Deposits to Distribution Account .................. 41
Withdrawals from the Principal and Interest Account .................. 44
Distributions ........................................................ 45
Principal and Interest on the Securities ............................. 45
Advances ............................................................. 46
Reports to Securityholders ........................................... 47
Collection and Other Servicing Procedures ............................ 48
Realization Upon Defaulted Loans ..................................... 50
Master Servicer ...................................................... 50
Sub-Servicing ........................................................ 51
SUBORDINATION ............................................................. 52
DESCRIPTION OF CREDIT ENHANCEMENT ......................................... 53
HAZARD INSURANCE; CLAIMS THEREUNDER ....................................... 58
Hazard Insurance Policies ............................................ 58
THE COMPANY ............................................................... 59
THE SERVICER .............................................................. 59
THE POOLING AND SERVICING AGREEMENT ....................................... 59
Servicing and Other Compensation and
Payment of Expenses .................................................. 60
Evidence as to Compliance ............................................ 60
Removal and Resignation of the Servicer .............................. 61
Resignation of the Master Servicer ................................... 62
Amendments ........................................................... 62
Termination; Retirement of Securities ................................ 62
THE TRUSTEE ............................................................... 63
YIELD CONSIDERATIONS ...................................................... 65
MATURITY AND PREPAYMENT
CONSIDERATIONS ....................................................... 67
CERTAIN LEGAL ASPECTS OF THE LOANS
AND RELATED MATTERS .................................................. 69
Mortgage Loans ....................................................... 69
Manufactured Housing Contracts ....................................... 76
FEDERAL INCOME TAX CONSIDERATIONS ......................................... 82
General .............................................................. 82
Grantor Trust Securities ............................................. 82
REMIC Securities ..................................................... 84
Debt Securities ...................................................... 90
Discount and Premium ................................................. 91
Backup Withholding ................................................... 94
Foreign Investors .................................................... 94
Taxation of the Securities Classified as
Partnership Interests ............................................ 95
STATE TAX CONSIDERATIONS .................................................. 95
ERISA CONSIDERATIONS ...................................................... 95
LEGAL INVESTMENT MATTERS .................................................. 98
USE OF PROCEEDS ........................................................... 99
METHODS OF DISTRIBUTION ................................................... 99
LEGAL MATTERS ............................................................. 100
ADDITIONAL INFORMATION .................................................... 100
INDEX OF PRINCIPAL DEFINITIONS ............................................ 101
3
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the related Securities, 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.
4
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by each respective Trust pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Securities of
such Trust offered hereby shall be deemed to be incorporated by reference into
this Prospectus when delivered with respect to such Trust. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than the documents expressly incorporated therein by reference). Requests
should be directed to Access Financial Lending Corp., 400 Highway 169 South,
Suite 400, Post Office Box 26365, St. Louis Park, Minnesota 55426-0365,
Attention: Corporate Compliance (telephone number 612-542-6500).
5
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. Capitalized terms used
in this summary that are not otherwise defined shall have the meanings ascribed
thereto in this Prospectus. An index indicating where certain terms used herein
are defined appears at the end of this Prospectus.
Securities Offered.................. Asset Backed Securities (the "Securities").
Company............................. Access Financial Lending Corp., together
with one or more subsidiaries and
affiliated institutions from which any
Trust may acquire Loans.
Servicer............................ One or more servicers for each series of
Securities will be specified in the
related Prospectus Supplement. The
Company may act as Servicer.
Master Servicer..................... A master servicer (the "Master Servicer")
may be specified in the related
Prospectus Supplement for the related
series of Securities. The Company may act
as Master Servicer. See "Description of
the Securities -- Master Servicer."
Sub-Servicers....................... The Servicer may service the Loans directly
or through one or more sub-servicers
(each, a "Sub-Servicer") (any servicer,
Sub-Servicer and Master Servicer,
collectively the "Servicer") pursuant to
one or more sub-servicing agreements. See
"Description of the Securities --
Sub-Servicing."
Trustee............................. The trustee (the "Trustee") for each series
of Securities will be specified in the
related Prospectus Supplement.
The Securities...................... Issuance of Securities. Each series of
Securities will be issued at the
direction of the Company by a separate
Trust (each, a "Trust"). The primary
assets of each Trust will consist of a
segregated pool (each, a "Loan Pool") of
(A) (i) conventional one- to four-family
residential mortgage loans, (ii)
multi-family residential mortgage loans,
(iii) mixed use mortgage loans, (iv)
cooperative apartment loans secured by
security interests in shares issued by a
cooperative housing corporation, or (v)
home improvement loans (collectively, the
"Mortgage Loans") or (B) installment loan
contracts and installment loan agreements
for manufactured homes (the "Contracts")
(the Mortgage Loans and the Contracts
together, the "Loans"), acquired by such
Trust from the Company. The Company will
originate the Loans or acquire the Loans
from one or more originators. The
Securities issued by any Trust may
represent beneficial ownership interests
in the related Loans held by the related
Trust, or may represent debt secured by
such Loans, as described herein and in
the related Prospectus Supplement.
Securities which represent beneficial
ownership interests in the related Trust
will be referred to as "Certificates" in
the related Prospectus Supplement;
Securities which represent debt issued by
the related Trust will be referred to as
"Notes" in the related Prospectus
Supplement.
Each Trust will be established pursuant
to to an agreement (each, a "Trust
Agreement") byand between the Company and
the Trustee named therein. Each Trust
Agreement will describe the related pool
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
of assets to be held in trust (each such
asset pool, the "Trust Estate"), which
will include the related Loans and, if so
specified in the related Prospectus
Supplement, may include any combination
of a mortgage pool insurance policy,
letter of credit, financial guaranty
insurance policy, special hazard policy,
reserve fund or other form of Credit
Enhancement.
The Loans held by each Trust will be
serviced by the Servicer pursuant to a
servicing agreement (each, a "Servicing
Agreement") by and among the Company, the
related Servicer and the related Trustee.
With respect to Securities that represent
debt issued by the related Trust, the
related Trust will enter into an
indenture (each, an "Indenture") by and
between such Trust and the trustee named
on such Indenture (the "Indenture
Trustee"), as set forth in the related
Prospectus Supplement. Securities that
represent beneficial ownership interests
in the related Trust will be issued
pursuant to the related Trust Agreement.
In the case of any individual Trust, the
contractual arrangements relating to the
establishment of the Trust, the servicing
of the related Loans and the issuance of
the related Securities may be contained
in a single agreement, or in several
agreements which combine certain aspects
of the Trust Agreement, the Servicing
Agreement and the Indenture described
above (for example, a pooling and
servicing agreement, or a servicing and
collateral management agreement). For
purposes of this Prospectus, the term
"Pooling and Servicing Agreement" as used
with respect to a Trust means,
collectively, and except as otherwise
specified, any and all agreements
relating to the establishment of the
related Trust, the servicing of the
related Loans and the issuance of the
related Securities.
Securities Will Be Recourse to the Assets
of the Related Trust Only. The sole
source of payment for any series of
Securities will be the assets of the
related Trust (i.e., the related Trust
Estate). The Securities will not be
obligations, either recourse or
non-recourse (except for certain
non-recourse debt described under
"Federal Income Tax Considerations"), of
the Company, the Servicer, any
Sub-Servicer or any Person other than the
related Trust. In the case of Securities
that represent beneficial ownership
interest in the related Trust Estate,
such Securities will represent the
ownership of such Trust Estate; with
respect to Securities that represent debt
issued by the related Trust, such
Securities will be secured by the related
Trust Estate. Notwithstanding the
foregoing, certain types of Credit
Enhancement, such as a financial guaranty
insurance policy or a letter of credit,
may constitute a full recourse obligation
of the issuer of such Credit Enhancement
if so specified in the related Prospectus
Supplement.
General Nature of the Securities as
Investments. The Securities will consist
of two basic types: (i) Securities of the
fixed-income type (" Fixed-Income
Securities" or "Offered Securities") and
(ii) Securities of the equity
participation type ("Equity Securities").
No Class of Equity Securities will be
offered pursuant to this Prospectus or
any Prospectus Supplement related hereto.
Fixed-Income Securities will generally be
styled as debt instruments, having a
principal balance and a specified
interest rate (" Interest Rate").
Fixed-Income Securities may be either
beneficial ownership interests in the
related Loans held by the related Trust,
or may represent debt secured by such
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
Loans. Each series or class of
Fixed-Income Securities may have a
different Interest Rate, which may be a
fixed or adjustable Interest Rate. The
related Prospectus Supplement will
specify the Interest Rate for each series
or class of Fixed-Income Securities, or
the initial Interest Rate and the method
for determining subsequent changes to the
Interest Rate.
A series may include one or more classes
of Fixed-Income Securities ("Strip
Securities") entitled (i) to principal
distributions, with disproportionate,
nominal or no interest distributions, or
(ii) to interest distributions, with
disproportionate, nominal or no principal
distributions. In addition, a series may
include two or more classes of
Fixed-Income Securities that differ as to
timing, sequential order, priority of
payment, Interest 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 related Loan Pool, which series may
include one or more classes of
Fixed-Income Securities ("Accrual
Securities"), as to which certain accrued
interest will not be distributed but
rather will be added to the principal
balance (or nominal principal balance, in
the case of Accrual Securities which are
also Strip Securities) thereof on each
Payment Date, as hereinafter defined and
in the manner described herein under
"Description of the Securities --
General" and specified in the related
Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of Securities may
include one or more other classes of
Fixed-Income Securities (collectively,
the "Senior Securities") that are senior
to one or more other classes of
Fixed-Income Securities (collectively,
the "Subordinate Securities") in respect
of certain distributions of principal and
interest and allocations of losses on
Loans. In addition, certain classes of
Senior (or Subordinate) Securities may be
senior to other classes of Senior (or
Subordinate) Securities in respect of
such distributions or losses.
Equity Securities will represent the
right to receive the proceeds of the
related Trust Estate after all required
payments have been made to the
Securityholders of the related
Fixed-Income Securities (both Senior
Securities and Subordinate Securities),
and following any required deposits to
any reserve account which may be
established for the benefit of the
Fixed-Income Securities. Equity
Securities may constitute what are
commonly referred to as the "residual
interest", "seller's interest" or the
"general partnership interest", depending
upon the treatment of the related Trust
for federal income tax purposes. As
distinguished from the Fixed-Income
Securities, the Equity Securities will
not be styled as having principal and
interest components. Any losses suffered
by the related Trust will first be
absorbed by the related class of Equity
Securities, as described herein under
"Description of the Securities --General"
and specified in the related Prospectus
Supplement.
No Class of Equity Securities will be
offered pursuant to this Prospectus or
any Prospectus Supplement related hereto.
Equity Securities may be offered on a
private placement basis or pursuant to a
separate Registration Statement to be
filed by the Company. In addition, the
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
Company may initially or permanently hold
any Equity Securities issued by any
Trust.
General Payment Terms of Securities. As
provided in the related Pooling and
Servicing Agreement and as described
herein under "Description of the
Securities -- General" and as specified
in the related Prospectus Supplement,
Securityholders will be entitled to
receive payments on their Securities on
specified dates (each, a "Payment Date").
Payment Dates with respect to
Fixed-Income Securities will occur
monthly, quarterly or semi-annually, as
specified in the related Prospectus
Supplement; Payments on Equity
Securities, if any, will occur monthly,
quarterly or semi-annually as specified
in the related Prospectus Supplement.
The related Prospectus Supplement will
specify a date (the "Record Date")
preceding such Payment Date, as of which
the Trustee or its paying agent will fix
the identity of the Securityholders for
the purpose of receiving payments on the
next succeeding Payment Date.
Each Pooling and Servicing Agreement will
specify a period (each, a " Remittance
Period") antecedent to each Payment Date
(for example, in the case of monthly-pay
Securities, the calendar month preceding
the month in which a Payment Date occurs
or such other specified period).
Collections received on or with respect
to the related Loans during a Remittance
Period will be required to be remitted by
the Servicer to the related Trustee prior
to the related Payment Date and will be
used to fund payments to Securityholders
on such Payment Date. The related
Prospectus Supplement will specify
whether the related Pooling and Servicing
Agreement will provide that all or a
portion of the principal collected on or
with respect to the related Loans may be
applied by the related Trustee to the
acquisition of additional Loans during a
specified period (rather than be used to
fund payments of principal to
Securityholders during such period) with
the result that the related securities
will possess an interest-only period,
also commonly referred to as a revolving
period, which will be followed by an
amortization period. Any such
interest-only or revolving period may,
upon the occurrence of certain events
described herein under "Description of
the Securities -- General" and as
specified in the related Prospectus
Supplement, terminate prior to the end of
the specified period and result in the
earlier than expected amortization of the
related Securities.
In addition, the related Prospectus
Supplement will specify whether the
related Pooling and Servicing Agreement
may provide that all or a portion of such
collected principal may be retained by
the Trustee (and held in certain
temporary investments, including Loans)
for a specified period prior to being
used to fund payments of principal to
Securityholders.
The result of such retention and
temporary investment by the Trustee of
such principal would be to slow the
amortization rate of the related
Securities relative to the amortization
rate of the related Loans, or to attempt
to match the amortization rate of the
related Securities to an amortization
schedule established at the time such
Securities are issued. Any such feature
applicable to any Securities may
terminate upon the occurrence of events
described herein under "Description of
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the Securities -- General" and as
specified in the related Prospectus
Supplement, resulting in the current
distribution of principal payments to the
specified Securityholders and an
acceleration of the amortization of such
Securities.
Neither the Securities nor the underlying
Loans will be guaranteed or insured by
any governmental agency or
instrumentality or the Company, the
Servicer, any Master Servicer, any
Sub-Servicer or any of their affiliates.
No Investment Companies............. Neither the Company nor any Trust will
register as an "investment company" under
the Investment Company Act of 1940, as
amended (the "Investment Company Act").
Cross-Collateralization............ The source of payment for Securities of
each series will be the assets of the
related Trust Estate only. However, the
related Prospectus Supplement may specify
that a Trust Estate includes the right to
receive moneys from a common pool of
Credit Enhancement which may be available
for more than one series of Securities,
such as a master reserve account or a
master insurance policy. Notwithstanding
the foregoing, no collections on any
Loans held by any Trust may be applied to
the payment of Securities issued by any
other Trust (except to the limited extent
that certain collections in excess of
amounts needed to pay the related
Securities may be deposited in a common,
master reserve account that provides
Credit Enhancement for more than one
series of Securities).
The Loan Pools...................... Each Trust Estate will consist primarily
of Loans secured by liens on one-to
four-family residential properties,
multi-family residential properties,
mixed use properties, cooperative
apartments or installment loan contracts
and installment loan agreements for
manufactured homes (such liens, the
"Mortgages", and such property, the "
Property"), located in any one of the
fifty states, the District of Columbia,
Puerto Rico or any other Territories of
the United States. All Loans will have
been acquired by the related Trust from
the Company or at the Company's direction
from one or more originators. All Loans
will have been originated either by (i)
one or more institutions affiliated with
the Company, (ii) one or more
institutions unaffiliated with the
Company or (iii) the Company. In
addition, the Loans may be purchased by
the Company as bulk acquisitions ("Bulk
Acquisitions") or on a "spot" or
negotiated basis ("Negotiated
Transactions"). The Loans generally will
have been originated pursuant to the
Company's underwriting guidelines in
effect as of the date on which the Loan
was submitted to the Company pursuant to
the Company's Loan Program (as defined
herein). See "Underwriting Program." For
a description of the types of Loans that
may be included in the Loan Pools, see
"The Loan Pools--The Loans."
If specified in the related Prospectus
Supplement, Loans that are converted from
an adjustable rate to a fixed rate will
be repurchased by the Company or
purchased by the applicable Sub-Servicer,
Servicer or another party, or a
designated remarketing agent will use its
best efforts to arrange the sale thereof
as further described herein. See "The
Loan Pools."
A Current Report on Form 8-K will be
available to purchasers or underwriters
of the related series of Securities and
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will generally be filed, together with
the related Pooling and Servicing
Agreement, with the Securities and
Exchange Commission within fifteen days
after the initial issuance of such
series.
Forward Commitments;
Pre-Funding....................... A Trust may enter into an agreement (each,
a "Forward Purchase Agreement") with the
Company whereby the Company will agree to
transfer additional Loans (the "
Subsequent Loans") to such Trust from
time to time during the time period
specified in the related Prospectus
Supplement (the "Funding Period"). Any
Forward Purchase Agreement will require
that any Loans so transferred to a Trust
conform to the requirements specified in
such Forward Purchase Agreement, this
Prospectus and the related Prospectus
Supplement. In addition, the Forward
Purchase Agreement will state that the
Company shall only transfer the
Subsequent Loans upon the satisfaction of
certain conditions, including that the
Company shall have delivered opinions of
counsel (including bankruptcy, corporate
and tax opinions) with respect to the
transfer of the Subsequent Loans to the
Certificate Insurer, the Rating Agencies
and the Trustee. If a Forward Purchase
Agreement is to be utilized, the related
Trustee will be required to deposit in a
segregated account (each, a "Pre-Funding
Account") a portion of the proceeds
received by the Trustee in connection
with the sale of one or more classes of
Securities of the related series (such
amount, the "Pre-Funded Amount"). Prior
to the investment of the Pre-Funded
Amount in additional Loans, such
Pre-Funded Amount will be invested in one
or more Eligible Investments. Any
Eligible Investment must mature no later
than the Business Day prior to the next
Distribution Date.
During any Funding Period, the Company
will be obligated (subject only to the
availability thereof) to transfer to the
related Trust Fund, additional Loans from
time to time during such Funding Period.
Such additional Loans will be required to
satisfy certain eligibility criteria more
fully set forth in the related Prospectus
Supplement which eligibility criteria
will be consistent with the eligibility
criteria of the Loans included in the
Trust Fund as of the Closing Date subject
to such exceptions as are expressly
stated in such Prospectus Supplement.
Although the specific parameters of the
Pre-Funding Account with respect to any
issuance of Securities will be specified
in the related Prospectus Supplement, it
is anticipated that: (a) the Funding
Period will not exceed 120 days from the
related Closing Date, (b) that the
additional Loans to be acquired during
the Funding Period will be subject to the
same representations and warranties as
the Loans included in the related Trust
Fund on the Closing Date and (c) that the
Pre-Funded Amount will not exceed 25% of
the principal amount of the Securities
issued pursuant to a particular offering.
Credit Enhancement.................. If so specified in the Prospectus
Supplement, the Trust Estate with respect
to any series of Securities may include
any one or any combination of a letter of
credit, mortgage pool insurance policy,
special hazard insurance policy,
bankruptcy bond, financial guaranty
insurance policy, reserve fund or other
type of Credit Enhancement to provide
full or partial coverage for certain
defaults and losses relating to the
Loans. Credit support also may be
provided in the form of the related class
of Equity Securities, and/or by
subordination of one or more classes of
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Fixed-Income Securities in a series under
which losses in excess of those absorbed
by any related class of Equity Securities
are first allocated to any Subordinate
Securities up to a specified limit,
cross-support among groups of Loans or
overcollateralization. If specified in
the related Prospectus Supplement, the
mortgage pool insurance policy will have
certain exclusions from coverage
thereunder, which may be accompanied by
one or more separate Credit Enhancements
that may be obtained to cover certain of
such exclusions. 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 Securities. See "Description of
Credit Enhancement" and "Subordination."
Advances............................ If specified in the related Prospectus
Supplement, the Servicer may be obligated
to make certain advances with respect to
payments of delinquent scheduled interest
and/or principal on the Loans, but only
to the extent that the Servicer believes
that such amounts will be recoverable by
it. Any such advance made by the Servicer
with respect to a Loan is recoverable by
it as provided herein under "Description
of the Securities--Advances" either from
recoveries on the specific Loan or, with
respect to any such advance subsequently
determined to be nonrecoverable, out of
funds otherwise distributable to the
holders of the related series of
Securities, which may include the holders
of any Senior Securities of such series.
If specified in the related Prospectus
Supplement, the Servicer may be required
to advance Compensating Interest as
defined hereafter under "Description of
the Securities--Advances."
In addition, the Servicer will be
required to pay all "out of pocket" costs
and expenses incurred in the performance
of its servicing obligations, but only to
the extent that the Servicer reasonably
believes that such amounts will increase
Net Liquidation Proceeds on the related
Loan. See "Description of the
Securities--Advances."
Optional Termination................ The Servicer, the Company, or, if specified
in the related Prospectus Supplement, the
holders of the related class of Equity
Securities or the Credit Enhancer may at
their respective option effect early
retirement of a series of Securities
through the purchase of the Loans and
other assets in the related Trust Estate
under the circumstances and in the manner
set forth herein under "The Pooling and
Servicing Agreement--Termination;
Retirement of Securities" and in the
related Prospectus Supplement. Generally
such parties will have the repurchase
option only after the aggregate Pool
principal balance has declined to ten
percent or a percentage to be set forth
in the related Prospectus Supplement of
the initial Pool principal balance.
Mandatory Termination;
Auction Sale...................... The Trustee, the Servicer or certain other
entities specified in the related
Prospectus Supplement may be required to
effect early retirement of a series of
Securities by soliciting competitive bids
for the purchase of the related Trust
Estate or otherwise, under other
circumstances and in the manner specified
in "The Pooling and Servicing
Agreement--Termination; Retirement of
Securities" and in the related Prospectus
Supplement.
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If set forth in the related Prospectus
Supplement, the mandatory termination may
take the form of an auction sale. Within
a certain period following the first
Remittance Date as of which the aggregate
Pool principal balance is less than 10%
or a percentage set forth in the related
Prospectus Supplement of the initial
aggregate Pool principal balance, if the
optional termination right has not been
exercised by the parties having such
right by such date, the Trustee shall
solicit bids for the purchase of all
Loans remaining in the Trust. In the
event that satisfactory bids are received
as specified in the related Pooling and
Servicing Agreement, the net sale
proceeds will be distributed to
Certificateholders, in the same order of
priority as collections received in
respect of the Loans. If satisfactory
bids are not received, the Trustee shall
decline to sell the Loans and shall not
be under any obligation to solicit any
further bids or otherwise negotiate any
further sale of the Loans. Such sale and
consequent termination of the Trust must
constitute a "qualified liquidation" of
each REMIC established by the Trust under
Section 860F of the Internal Revenue Code
of 1986, as amended, including, without
limitation, the requirement that the
qualified liquidation takes place over a
period not to exceed 90 days.
Legal Investment.................... Not all of the Loans in a particular Loan
Pool may represent first liens.
Accordingly, as disclosed in the related
Prospectus Supplement, certain classes of
Offered Securities and by the related
Prospectus Supplement may not constitute
"mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") and, if
so, will not be legal investments for
certain types of institutional investors
under SMMEA.
Institutions whose investment activities
are subject to legal investment laws and
regulations or to review by certain
regulatory authorities may be subject to
additional restrictions on investment in
certain classes of Securities. Any such
institution should consult its own legal
advisors in determining whether and to
what extent a class of Securities
constitutes legal investments for such
investors. See "Legal Investment" herein.
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 such entity, a "Plan") should
carefully review with its legal advisors
whether the purchase or holding of
Securities 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 Prospectus Supplement.
Federal Income Tax
Considerations.................... Securities of each series offered hereby
will, for federal income tax purposes,
constitute either (i) interests ("Grantor
Trust Securities") in a Trust treated as
a grantor trust under applicable
provisions of the Code, (ii) "regular
interests" ("REMIC Regular Securities")
or "residual interests" ("REMIC Residual
Securities") in a Trust treated as a
REMIC (or, in certain instances,
containing one or more REMIC's) under
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Sections 860A through 860G of the Code,
(iii) debt issued by a Trust ("Debt
Securities") or (iv) interests in a Trust
which is treated as a partnership ("
Partnership Interests").
Investors are advised to consult their
tax advisors and to review "Federal
Income Tax Considerations" herein and in
the related Prospectus Supplement.
Registration of
Securities........................ Securities may be represented by global
securities registered in the name of Cede
& Co. ("Cede"), as nominee of The
Depository Trust Company ("DTC"), or
another nominee as specified in the
related Prospectus Supplement. In such
case, Securityholders will not be
entitled to receive definitive securities
representing such Securityholders'
interests, except in certain
circumstances described herein and in the
related Prospectus Supplement. See
"Description of the Securities--Form of
Securities" herein.
Ratings............................. Each class of Fixed-Income Securities
offered pursuant to the related
Prospectus Supplement will be rated in
one of the four highest rating categories
by one or more "national statistical
rating organizations", as defined in the
Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and
commonly referred to as "Rating
Agencies". Such ratings will address, in
the opinion of such Rating Agencies, the
likelihood that the related Trust will be
able to make timely payment of all
amounts due on the related Fixed-Income
Securities in accordance with the terms
thereof. Such ratings will neither
address any prepayment or yield
considerations applicable to any
Securities nor constitute a
recommendation to buy, sell or hold any
Securities.
Equity Securities generally will not be
rated, but if such Securities are rated,
they likely will be rated below
investment grade.
The ratings expected to be received with
respect to any Securities will be set
forth in the related Prospectus
Supplement.
Risk Factors........................ For a discussion of certain factors that
should be considered by prospective
investors in the Securities, see "Risk
Factors" herein and in the related
Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Risks associated with the Securities
The assets of the Trust Fund, as well as any applicable Credit
Enhancement, will be limited and, if such assets and/or Credit Enhancement
becomes insufficient to service the related Securities, losses may result. The
Securities will not represent an interest in or obligation, either recourse or
non-recourse (except for certain non-recourse debt described under "Federal
Income Tax Considerations"), of the Company, the Servicer, the Master Servicer,
if any, or any person other than the related Trust. The only obligations of the
foregoing entities with respect to the Securities or the Loans will be the
obligations (if any) of the Company, the Servicer and the Master Servicer, if
any, pursuant to certain limited representations and warranties made with
respect to the Loans, the Servicer's servicing obligations under the related
Pooling and Servicing Agreement (including its limited obligation, if any, to
make certain advances in the event of delinquencies on the Loans, but only to
the extent deemed recoverable) and, if and to the extent expressly specified in
the related Prospectus Supplement, certain limited obligations of the Company,
Servicer, applicable Sub-Servicer, or another party in connection with a
purchase obligation ("Purchase Obligation") or an agreement to purchase or act
as remarketing agent with respect to a Convertible Loan (as defined herein) upon
conversion to a fixed rate. Notwithstanding the foregoing, and as to be
specified in the related Prospectus Supplement, certain types of Credit
Enhancement, such as a financial guaranty insurance policy or a letter of
credit, may constitute a full recourse obligation of the issuer of such Credit
Enhancement. See "Description of Credit Enhancement" herein. Unless specified in
the related Prospectus Supplement, neither the Securities nor the underlying
Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Company, the Trustee, the Servicer, the Master
Servicer, if any, any Sub-Servicer or any of their affiliates. Proceeds of the
assets included in the related Trust Estate for each series of Securities
(including the Loans and any form of Credit Enhancement) will be the sole source
of payments on the Securities, and there will be no recourse to the Company or
any other entity in the event that such proceeds are insufficient or otherwise
unavailable to make all payments provided for under the Securities.
An investment in any Security may be an Illiquid Investment, which may
result in the Securityholder holding such investment to maturity. There can be
no assurance that a secondary market for the Securities of any series or class
will develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or that it will continue for the life of the Securities
of any series. The Prospectus Supplement for any series of Securities may
indicate that an underwriter specified therein intends to establish a secondary
market in such Securities; however, no underwriter will be obligated to do so.
The Securities will not be listed on any securities exchange.
Credit Enhancement will be limited in amount and scope of coverage and
may not be sufficient to cover losses. With respect to each series of
Securities, Credit Enhancement will be provided in limited amounts to cover
certain types of losses on the underlying Loans. Credit Enhancement will be
provided in one or more of the forms referred to herein, including, but not
limited to: a letter of credit; a Purchase Obligation; a mortgage pool insurance
policy; a special hazard insurance policy; a bankruptcy bond; a reserve fund; a
financial guaranty insurance policy or other type of Credit Enhancement to
provide partial coverage for certain defaults and losses relating to the Loans.
Credit Enhancement also may be provided in the form of the related class of
Equity Securities, subordination of one or more classes of Fixed-Income
Securities in a series under which losses in excess of those absorbed by any
related class of Equity Securities are first allocated to any Subordinate
Securities up to a specified limit, cross-support among groups of Loans and/or
overcollateralization. In addition, Credit Enhancement may take the form of a
master reserve account, into which certain collections in excess of amounts
needed to pay the related Securities may be deposited, which provides support
for more than one series of Securities. See "Subordination" and "Description of
Credit Enhancement" herein. Regardless of the form of Credit Enhancement
provided, the 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, and may provide no coverage as to certain other
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<PAGE>
types of losses. Generally, Credit Enhancements do not directly or indirectly
guarantee to the investors any specified rate of prepayments. 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 Securities. See "Description of Credit Enhancement" and "Subordination."
Risks associated with the Loans
Bankruptcy of Obligors may cause losses. General economic conditions
have an impact on the ability of an obligor of a Loan (an "Obligor") to repay
the Loan. Loss of earnings, illness and other similar factors also may lead to
an increase in delinquencies and bankruptcy filings by Obligors. In the event of
personal bankruptcy of an Obligor, it is possible that a Trust could experience
a loss with respect to such Obligor's Loan. In conjunction with an Obligor's
bankruptcy, a bankruptcy court may suspend or reduce the payments of principal
and interest to be paid with respect to such Loan or permanently reduce the
principal balance of such Loan thereby either delaying or permanently limiting
the amount received by the Trust with respect to such Loan. Moreover, in the
event a bankruptcy court prevents the transfer of the related Property to a
Trust, any remaining balance on such Loan may not be recoverable.
Certain Loans may be originated or structured in "non-traditional"
ways, which could increase risk. The Company's underwriting standards consider,
among other things, an obligor's credit history, repayment ability and debt
service-to-income ratio, as well as the value of the property; however, the
Company's Loan Program (as hereinafter defined) generally provides for the
origination of Loans relating to non-conforming credits. Certain of the types of
loans that may be included in the Loan Pools may involve additional
uncertainties not present in traditional types of loans. For example, certain of
the Loans may provide for escalating or variable payments by the borrower under
the Loan, as to which the Obligor is generally qualified on the basis of the
initial payment amount. In some instances the Obligors' income may not be
sufficient to enable them to continue to make their loan payments as such
payments increase and thus the likelihood of default will increase. For a more
detailed discussion, see "Loan Program."
Certain risks relating to differing underwriting criteria. The Loans
used in a particular Trust Fund may have been purchased by the Company from one
or more originators, and may, to the extent specified in the related Prospectus
Supplement, have been originated using underwriting criteria different from that
of the Company. However, the Loans included in a particular Trust Fund will
satisfy the criteria set forth in the related Prospectus Supplement.
Risks associated with the Mortgage Loans
Junior Liens may experience higher rates of delinquencies and losses.
Certain of the Mortgage Loans will be secured by junior liens subordinate to the
rights of the mortgagee or beneficiary under each related senior mortgage or
deed of trust. As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the principal balance of a
mortgage loan only to the extent that the claims, if any, of each such senior
mortgagee or beneficiary are satisfied in full, including any related
foreclosure costs. In addition, a mortgagee secured by a junior lien may not
foreclose on the related mortgaged property unless it forecloses subject to the
related senior mortgage or mortgages, in which case it must either pay the
entire amount of each senior mortgage to the applicable mortgagee at or prior to
the foreclosure sale or undertake the obligation to make payments on each senior
mortgage in the event of default thereunder. In servicing junior lien loans, a
Servicer generally would satisfy each such senior mortgage at or prior to the
foreclosure sale only to the extent that it determines any amounts so paid will
be recoverable from future payments and collections on such junior lien loans or
otherwise. The Trusts will not have any source of funds to satisfy any such
senior mortgage or make payments due to any senior mortgagee. See "Certain Legal
Aspects of the Loans and Related Matters--Foreclosure."
Property values may decline, leading to higher losses. An investment in
securities such as the Securities that generally represent beneficial ownership
interests in the Mortgage Loans or debt secured by such Mortgage Loans may be
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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
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 any senior liens, the Mortgage Loans and any secondary
financing on the Properties in a particular Loan Pool become equal to or greater
than the value of the Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the nonconforming credit mortgage lending industry. Such a decline could
extinguish the interest of the related Trust in the Properties before having any
effect on the interest of the related senior mortgagee. In addition, in the case
of Mortgage Loans that are subject to negative amortization, due to the addition
to principal balance of deferred interest ("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 Properties, thereby increasing the
likelihood of default. To the extent that such losses are not covered by the
applicable Credit Enhancement, holders of Securities of the series evidencing
interests in the related Loan Pool will bear all risk of loss resulting from
default by Obligors and will have to look primarily to the value of the
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans.
Balloon Loans may experience higher rates of delinquencies and losses.
Certain of the Mortgage Loans may constitute " Balloon Loans." Balloon Loans are
originated with a stated maturity of less than the period of time of the
corresponding amortization schedule. Consequently, upon the maturity of a
Balloon Loan, the Obligor will be required to make a "balloon" payment that will
be significantly larger than such Obligor's previous monthly payments. The
ability of such a Obligor to repay a Balloon Loan at maturity frequently will
depend on such Obligor's ability to refinance the Mortgage Loan. The ability of
a Obligor to refinance such a Mortgage Loan will be affected by a number of
factors, including the level of available mortgage rates at the time, the value
of the related Property, the Obligor's equity in the related Property, the
financial condition of the Obligor, the tax laws and general economic conditions
at the time.
Although a low interest rate environment may facilitate the refinancing
of a balloon payment, the receipt and reinvestment by Securityholders of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Mortgage Loan. Conversely, a high interest
rate environment may make it more difficult for the Obligor to accomplish a
refinancing and may result in delinquencies or defaults. None of the Company,
the Servicer, the Master Servicer, if any, any Sub-Servicer or the Trustee will
be obligated to provide funds to refinance any Mortgage Loan, including Balloon
Loans.
Foreclosure of Properties may be subject to substantial delay,
resulting in longer maturity securities as well as higher losses. Even assuming
that the Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans and corresponding delays in the receipt of related
proceeds by the Securityholders could occur. An action to foreclose on a
Property securing a Mortgage Loan is regulated by state statutes, rules and
judicial decisions and is subject to many of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a Property.
In the event of a default by a Obligor, these restrictions, among other things,
may impede the ability of the Servicer to foreclose on or sell the Property or
to obtain liquidation proceeds (net of expenses) ("Liquidation Proceeds")
sufficient to repay all amounts due on the related Mortgage Loan. The Servicer
will be entitled to deduct from Liquidation Proceeds all expenses reasonably
incurred in attempting to recover amounts due on the related liquidated Mortgage
Loan (" Liquidated Mortgage Loan") and not yet repaid, including payments to
prior lienholders, accrued Servicing Fees, legal fees and costs of legal action,
real estate taxes, and maintenance and preservation expenses. In the event that
any Properties fail to provide adequate security for the related Mortgage Loans
and insufficient funds are available from any applicable Credit Enhancement,
Securityholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loan at the
time of default. Therefore, assuming that a servicer takes the same steps in
realizing upon a defaulted Mortgage Loan having a small remaining principal
balance as it would in the case of a defaulted Mortgage Loan having a larger
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principal balance, the amount realized after expenses of liquidation would be
less as a percentage of the outstanding principal balance of the smaller
principal balance Mortgage Loan than would be the case with a larger principal
balance Mortgage Loan.
Under environmental legislation and judicial decisions applicable in
various states, a secured party that takes a deed in lieu of foreclosure, or
acquires at a foreclosure sale a Property that, prior to foreclosure, has been
involved in decisions or actions which may lead to contamination of a Property,
may be liable for the costs of cleaning up the purportedly contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a holder of a mortgage Note (such as a Trust) which, under the terms
of the Pooling and Servicing Agreement, is not required to take an active role
in operating the Properties. See "Certain Legal Aspects of Loans and Related
Matters--Environmental Legislation."
Certain of the Properties relating to Mortgage Loans may not be owner
occupied. It is possible that the rate of delinquencies, foreclosures and losses
on Mortgage Loans secured by non-owner occupied properties could be higher than
for loans secured by the primary residence of the Obligor.
Geographic Concentration of Properties may result in higher losses, if
particular regions experience downturns. Certain geographic regions from time to
time will experience weaker regional economic conditions and housing markets
than will other regions, and, consequently, will experience higher rates of loss
and delinquency on mortgage loans generally. The Mortgage Loans underlying
certain series of Securities may be concentrated in such regions, and such
concentrations may present risk considerations in addition to those generally
present for similar mortgage loan asset-backed securities without such
concentrations. Information with respect to geographic concentration of
Properties will be specified in the related Prospectus Supplement or related
Current Report on Form 8-K.
Risks associated with the Contracts
Security Interests in the Manufactured Homes may not be perfected and
the Trust may not realize upon the full amount due under the related Contract.
Each Contract is secured by a security interest in a Manufactured Home together
with, in the case of land secured contracts, the real estate on which the
related Manufactured home is located (such Contracts, the "Land Secured
Contracts"). Perfection of security interests in the Manufactured Homes and
enforcement of rights to realize upon the value of the Manufactured Homes as
collateral for the Contracts are subject to a number of federal and state laws,
including the Uniform Commercial Code (the "UCC") as adopted in the states in
which the Manufactured Homes are located and such states' certificate of title
statutes, but generally not their real estate laws. Under such federal and state
laws, a number of factors may limit the ability of a holder of a perfected
security interest in Manufactured Homes to realize upon such Manufactured Homes
or may limit the amount realized to less than the amount due under the related
Contract. See "Certain Legal Aspects of the Loans -Contracts."
In addition, because of the expense and administrative inconvenience
involved, the Company will not amend any certificates of title related to any
Manufactured Home to change the lienholder specified therein to the Trustee, and
will not execute any transfer instrument (including, among other instruments,
UCC-3 assignments) relating to any Manufactured Home in favor of the Trustee or
note thereon the Trustee's interest. Such amendment would require, consistent
with the law of the related State, filings at the state or county level for each
Contract. The Company believes it is industry practice not to make such
amendments, and does not do so for its own benefit. As a result, the Company
will remain the lienholder on the certificate of title relating to the
Manufactured Home. In some states, in the absence of such an amendment,
execution or notation, the assignment to the Trustee of the security interest in
the Manufactured Homes located therein may not be effective or such security
interest may not be perfected. If any otherwise effectively assigned security
interest in favor of the Trustee is not perfected, such assignment of the
security interest to the Trustee may not be effective against creditors of the
Company to the extent it continues to be specified as lienholder on any
certificate of title or as secured party on any UCC filing, or against a trustee
in bankruptcy of the Company.
Each Contract (other than a Land Secured Contract) will be "chattel
paper" as defined in the UCC in effect in Minnesota (where the Company's
executive office is currently located), and the jurisdiction in which the
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related Manufactured Home was located at origination. Under the UCC as in effect
in each such jurisdiction, the sale of chattel paper is treated in a manner
similar to perfection of a security interest in chattel paper. Under the Pooling
and Servicing Agreement, the Trustee will have possession of the Contracts. In
addition, the Company will make appropriate filings of UCC-1 financing
statements in the office of the Secretary of State of the state where its
principal place of business is located to give notice of the Trustee's ownership
of the Contracts. The Trustee's interest in the Contracts could, through the
fraud or negligence of the Trustee, be defeated if a subsequent purchaser were
able to take physical possession of the Contracts without notice of such
assignment.
Further, because of the expenses and administrative inconvenience
involved, the assignment of mortgages or deeds of trust to the Trustee will not
be recorded with respect to the mortgages or deeds of trust (each, a "Mortgage")
securing each Land Secured Contract. Recordation of such assignments would
require the Company to retain counsel in the respective state, and make the
appropriate filing at the local level. The Company believes the industry
practice not to make such filings, and does not do so for its own benefit. The
failure to record the assignments to the Trustee of the Mortgage securing Land
Secured Contracts may result in the sale of such Contracts or the Trustee's
rights in the land secured by the Mortgage being ineffective against creditors
of the Company or against a trustee in bankruptcy of the Company or against a
subsequent purchaser of such Contracts from the Company, without notice of the
sale to the Trustee. See "The Loan Pool" herein for a description of the
programs under which Contracts are originated or purchased by the Company.
Legal Considerations
Bankruptcy of the Company could prevent timely payment of amounts due
to the Trust. In the event of the bankruptcy of the Company at a time when it
holds an Equity Security, a trustee in bankruptcy of the Company, or its
creditors could attempt to recharacterize the sale of the Loans to the related
Trust as a borrowing by the Company, with the result, if such recharacterization
is upheld, that the Securityholders would be deemed creditors of the Company,
secured by a pledge of the Loans. In such a case, a bankruptcy court may suspend
or reduce the payment of principal and interest to the Securityholders or
permanently reduce the principal balance of the Securities, thereby delaying or
permanently limiting the amounts received by the Securityholders. In addition,
if the Company is the Servicer, a bankruptcy of the Company may disrupt
servicing of the Loans, causing losses or a delay in timely payment of amounts
due the Securityholders. The Pooling and Servicing Agreement will provide that
bankruptcy of the Servicer is an event of default and the Back-up Servicer may
take over servicing in such a case. However, a bankruptcy court may hold that
such provision is unenforceable as an executory contract triggered only by the
bankruptcy of the contracting party.
Prepayments and repurchases may adversely affect the yield to maturity
of the Securities. The yield to maturity of the Securities of each series will
depend on the rate of payment of principal (including prepayments, liquidations
due to defaults, and repurchases due to conversion of adjustable-rate mortgage
loans ("ARM Loans") to fixed-rate loans or breaches of representations and
warranties) on the Loans and the price paid by Securityholders. Such yield may
be adversely affected by a higher or lower than anticipated rate of prepayments
on the related Loans. The yield to maturity on Strip Securities or Securities
purchased at premiums or discounted to par will be extremely sensitive to the
rate of prepayments on the related Loans. In addition, the yield to maturity on
certain other types of classes of Securities, including Accrual Securities or
certain other classes in a series including more than one class of Securities,
may be relatively more sensitive to the rate of prepayment on the related Loans
than other classes of Securities.
The Loans may be prepaid in full or in part at any time; however, a
prepayment penalty or premium may be imposed in connection therewith. Such
penalties will not be property of the related Trust. The rate of prepayments of
the Loans cannot be predicted and is influenced by a wide variety of economic,
social, and other factors, including prevailing mortgage market interest rates,
the availability of alternative financing, local and regional economic
conditions and homeowner mobility. Therefore, no assurance can be given as to
the level of prepayments that a Trust will experience.
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Prepayments may result from mandatory prepayments relating to unused
moneys held in Pre-Funding Accounts, if any, voluntary early payments by
Obligors (including payments in connection with refinancings of the related
senior Loan or Loans), sales of Properties subject to "due-on-sale" provisions
and liquidations due to default, as well as the receipt of proceeds from
physical damage, credit life and disability insurance policies. In addition,
repurchases or purchases from a Trust of Loans or substitution adjustments
required to be made under the Pooling and Servicing Agreement will have the same
effect on the Securityholders as a prepayment of such Loans. All of the Loans
contain "due-on-sale" provisions, and the Servicer will be required to enforce
such provisions unless (i) the "due-on-sale" clause, in the reasonable belief of
the Servicer, is not enforceable under applicable law or (ii) the Servicer
reasonably believes that to permit an assumption of the Loan would not
materially and adversely affect the interests of the Securityholders or of the
related Credit Enhancer, if any. See "The Pooling and Servicing Agreement" in
the related Prospectus Supplement.
Collections on the Loans may vary due to the level of incidence of
delinquent payments and of prepayments. Collections on the Loans may also vary
due to seasonal purchasing and payment habits of Obligors.
Co-mingling of collections with the Servicer's general funds could
cause losses to the Trust. To the extent that the ratings, if any, then assigned
to the unsecured debt of the Servicer or of the Servicer's corporate parent are
satisfactory to the Rating Agencies, the Servicer may be permitted to co-mingle
Loan payments and collections with the Servicer's general funds rather than be
required to deposit such amounts in a segregated Principal and Interest Account.
In the event of fraud or mistake, the Servicer may utilize amounts due the Trust
for its own purposes, resulting in a delay in payment or losses to the
Securityholders.
State Credit Protection Laws May Limit Collection of Principal and
Interest on the Loans. Applicable state laws generally regulate interest rates
and other charges, require certain disclosures, and require licensing of the
originators, the Trustee, the Servicer and Sub-Servicers. In addition, most
states have other laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and practices
that may apply to the origination, servicing and collection of the Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the Obligor to a refund of amounts previously
paid and, in addition, could subject the Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of Loans and Related Matters."
Federal Credit Protection Laws May Limit Collection of Principal and
Interest on the Loans. The Loans may also be subject to federal laws, including:
(i) the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and
the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Loans; (ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit Protection
Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the Obligor's credit
experience. Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and general
principles of equity may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Loans, may entitle the Obligor to
rescind the loan or to a refund of amounts previously paid and, in addition,
could subject the Servicer to damages and administrative sanctions. If the
Servicer is unable to collect all or part of the principal or interest on the
Loans because of a violation of the aforementioned laws, public policies or
general principles of equity then the Trust may be delayed or unable to repay
all amounts owed to the Securityholders. Furthermore, depending upon whether
damages and sanctions are assessed against the Servicer or the Company, such
violations may materially impact the financial ability of the Servicer to
continue to act as Servicer or the ability of the Company to repurchase or
replace Loans if such violation breaches a representation or warranty contained
in a Pooling and Servicing Agreement.
Certain additional provisions under the Federal Truth-in-Lending Act
become effective on October 1, 1995. These provisions apply to certain types of
mortgage loans, generally as a result of such loan's coupon rate being 10% or
more greater than the yield on United States Treasury Securities of comparable
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maturity, or if the "total points and fees" payable by the obligor exceed a
specified level. If the requirements are triggered, certain additional
disclosures are required to be made to the obligor and certain other
restrictions on the loan and its terms apply (e.g., restrictions relating to
prepayment penalties and balloon maturities.)
These provisions further require persons who sell or assign mortgages
which are subject to these requirements to furnish a notice to such effect to
the purchaser or assignee. Such purchasers or assignees may under certain
circumstances be liable for the failure of the originating lender to provide the
required disclosures or for the inclusion in the loan of any prohibited terms.
Book-Entry registration may limit the liquidity of the Securities, the
ability of Securityholders to pledge the Securities, and may delay
Securityholders' receipt of distributions. Issuance of the Securities in
book-entry form may reduce the liquidity of such Securities in the secondary
trading market since investors may be unwilling to purchase Securities for which
they cannot obtain definitive physical securities representing such
Securityholders' interests, except in certain circumstances described herein and
in the related Prospectus Supplement. See "Description of the Securities -- Form
of Securities" herein.
Since transactions in Securities will, in most cases, be able to be
effected only through DTC, direct or indirect participants in DTC's book-entry
system ("Direct or Indirect Participants") and certain banks, the ability of a
Securityholder to pledge a Security to persons or entities that do not
participate in the DTC system, or otherwise to take actions in respect of such
Securities, may be limited due to lack of a physical security representing the
Securities.
Securityholders may experience some delay in their receipt of
distributions of interest on and principal of the Securities since distributions
may be required to be forwarded by the Trustee to DTC and, in such a case, DTC
will be required to credit such distributions to the accounts of its
Participants which thereafter will be required to credit them to the accounts of
the applicable class of Securityholders either directly or indirectly through
Indirect Participants. See "Description of the Securities--Form of Securities."
The Soldiers' and Sailors' Civil Relief Act of 1940 could limit or
delay collection of amounts due under certain Loans. Generally, under the terms
of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief
Act"), or similar state legislation, an Obligor who enters military service
after the origination of the related Loan (including an Obligor who is a member
of the National Guard or is in reserve status at the time of the origination of
the Loan and is later called to active duty) may not be charged interest
(including fees and charges) above an annual rate of 6% during the period of
such Obligor's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action could have an effect,
for an indeterminate period of time, on the ability of the Servicer to collect
full amounts of interest on certain of the Loans. In addition, the Relief Act
imposes limitations that would impair the ability of the Servicer to foreclose
on an affected Loan during the Obligor's period of active duty status. Thus, in
the event that such a Loan goes into default, there may be delays and losses
occasioned by the inability of the Servicer to realize upon the Property in a
timely fashion.
Reduction in the rating of any credit enhancer would likely cause the
reduction in the rating of the Securities. The rating of Securities credit
enhanced through external Credit Enhancement such as a letter of credit,
financial guaranty insurance policy or mortgage pool insurance will depend
primarily on the creditworthiness of the issuer of such external Credit
Enhancement device (a "Credit Enhancer"). Any reduction in the rating assigned
to the claims-paying ability of the related Credit Enhancer below the rating
initially given to the Securities would likely result in a reduction in the
rating of the Securities. See "Ratings" in the Prospectus Supplement.
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THE TRUSTS
A Trust for any series of Securities will consist of a segregated pool
(a "Loan Pool") comprised of (A) (i) conventional one-to-four-family residential
mortgage loans (" Single Family Loans"), (ii) multi-family residential mortgage
loans ("Multi-family Loans"), (iii) mortgage loans secured by mortgages on small
properties used primarily for residential purposes but also used for commercial
purposes (the "Mixed Use Loans"), (iv) cooperative apartment loans secured by
security interests in shares issued by a cooperative housing corporation
("Cooperative Loans") or (v) home improvement loans ("Home Improvement Loans")
each of which is secured by a mortgage on a "dwelling or mixed residential and
commercial structure" within the meaning of Section 3(a)(41)(A)(i) of the
Securities Exchange Act of 1934, as amended (collectively, the "Mortgage Loans")
or (B) contracts for manufactured homes ("Contracts"), in each case, as
specified in the related Prospectus Supplement (the Mortgage Loans and the
Contracts together, the "Loans"), together with payments with respect to the
Loans and certain other accounts, obligations or agreements, in each case, as
specified in the related Prospectus Supplement.
The Securities will be entitled to payment only from the assets of the
related Trust (i.e. the related Trust Estate) and will not be entitled to
payments in respect of the assets of any other related Trust Estate established
by the Company. If specified in the related Prospectus Supplement, certain
Securities will evidence the entire fractional undivided ownership interest in
the related Loans held by the related Trust or may represent debt secured by the
related Loans.
The following is a brief description of the Loans expected to be
included in the related Trusts. If specific information respecting the Loans is
not known at the time the related series of Securities initially is offered,
information of the nature described below will be provided in the Prospectus
Supplement, and specific information will be set forth in a report on Form 8-K
to be filed with the Commission within fifteen days after the initial issuance
of such Securities (the "Detailed Description"). A copy of the Pooling and
Servicing Agreement with respect to each Series of Securities will be attached
to the Form 8-K and will be available for inspection at the corporate trust
office of the Trustee specified in the related Prospectus Supplement. A schedule
of the Loans relating to such Series (the "Loan Schedule") will be attached to
the Pooling and Servicing Agreement delivered to the Trustee upon delivery of
the Securities.
The Loans--General
The real properties, interests in a Cooperative (as defined herein) and
Manufactured Homes (as defined herein), as the case may be, that secure
repayment of the Loans (the "Properties") may be located in any one of the fifty
states, the District of Columbia, Puerto Rico or any other Territories of the
United States. The Mortgage Loans will be "Conventional Loans" (i.e., loans that
are not insured or guaranteed by any governmental agency). Loans will not be
covered wholly or partially by primary mortgage insurance policies. All of the
Loans will be covered by standard hazard insurance policies providing for fire
and extended coverage with a generally acceptable carrier (which may be in the
form of a blanket or forced placed hazard insurance policy) generally in an
amount not less than the lesser of (i) the outstanding principal loan balance,
(ii) the minimum amount required to compensate for losses on a replacement cost
basis and (iii) the insurable value of the Property. The existence, extent and
duration of any such coverage will be specified in the applicable Prospectus
Supplement. The Loans will not be guaranteed or insured by any government agency
or other insurer.
All of the Loans in a Loan Pool will provide for payments to be made
monthly ("monthly pay") or bi-weekly. The payment terms of the Loans to be
included in a Trust will be specified in the related Prospectus Supplement and
may include any of the following features or combination thereof or other
features specified in the related Prospectus Supplement:
(a) Interest may be payable at a Fixed Rate, or an Adjustable Rate
(i.e., a rate that is adjustable from time to time in relation to an index,
a rate that is fixed for period of time and under certain circumstances is
followed by an adjustable rate, a rate that otherwise varies from time to
time, or a rate that is convertible from an adjustable rate to a fixed
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rate). The specified rate of interest on a Loan is its "Loan Rate." Changes
to an Adjustable Rate may be subject to periodic limitations, maximum
rates, minimum rates or a combination of such limitations. Accrued interest
may be deferred and added to the principal of a Loan for such periods and
under such circumstances as may be specified in the related Prospectus
Supplement. If provided for in the Prospectus Supplement, certain Loans may
be subject to temporary buydown plans (" Buydown Loans") pursuant to which
the monthly payments made by the Obligor during the early years of the Loan
(the " Buydown Period") will be less than the scheduled monthly payments on
the Loan, and the amount of any difference may be contributed from (i) an
amount (such amount, exclusive of investment earnings thereon, being
hereinafter referred to as "Buydown Funds") funded by the originator of the
Loan or another source (including the Servicer or the builder of the
Property) and placed in a custodial account (the "Buydown Account") and
(ii) if the Buydown Funds are contributed on a present value basis,
investment earnings on such Buydown Funds.
(b) Principal may be payable on a level debt service basis to fully
amortize the Loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Loan Rate, or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due
on maturity ("balloon" payments). Principal may include interest that has
been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Loan, may increase over a specified period of time ("graduated
payments") or may change from period to period. Loans may include limits on
periodic increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments. Loans having
graduated payment provisions may provide for deferred payment of a portion
of the interest due monthly during a specified period, and recoup the
deferred interest through negative amortization during such period whereby
the difference between the interest paid during such period and interest
accrued during such period is added monthly to the outstanding principal
balance. Other Loans sometimes referred to as "growing equity" loans may
provide for periodic scheduled payment increases for a specified period
with the full amount of such increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment fee, if
allowed by state or applicable law, which may be fixed for the life of the
Loan or may decline over time, and may be prohibited for the life of the
Loan or for certain periods ("lockout periods"). Certain Loans may permit
prepayments after expiration of the applicable lockout period and may
require the payment of a prepayment fee in connection therewith. Other
Loans may permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The Loans may include due-on-sale
clauses which permit the mortgagee to demand payment of the entire Loan in
connection with the sale or certain transfers of the related Property.
Other Loans may be assumable by persons meeting the then applicable
underwriting standards of the Servicer and/or the Company.
As specified in the related Prospectus Supplement or in the related
Current Report on Form 8-K, interest will be calculated on each Loan pursuant to
one of three methods:
Date of Payment Loans. Date of Payment Loans provide that interest is
charged to the Obligor at the applicable Loan Rate on the outstanding principal
balance of such Note and calculated based on the number of days elapsed between
receipt of the Obligor's last payment through receipt of the Obligor's most
current payment. Such interest is deducted from the Obligor's payment amount and
the remainder, if any, of the payment is applied as a reduction to the
outstanding principal balance of such Note. Although the Obligor is required to
remit equal monthly payments on a specified monthly payment date that would
reduce the outstanding principal balance of such Note to zero at such Note's
maturity date, payments that are made by the Obligor after the due date therefor
would cause the outstanding principal balance of such Note not to be reduced to
zero. In such a case, the Obligor would be required to make an additional
principal payment at the maturity date for such Note. On the other hand, if an
Obligor makes a payment (other than a prepayment) before the due date therefor,
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the reduction in the outstanding principal balance of such Note would occur over
a shorter period of time than it would have occurred had it been based on the
original amortization schedule of such Note.
Actuarial Loans. Actuarial Loans provide that interest is charged to
the Obligor thereunder, and payments are due from such Obligor, as of a
scheduled day of each month which is fixed at the time of origination. Scheduled
monthly payments made by the Obligors on the Actuarial Loans either earlier or
later than the scheduled due dates thereof will not affect the amortization
schedule or the relative application of such payments to principal and interest.
Rule of 78's Loans. A Rule of 78's Loan provides for the payment by the
related Obligor of a specified total amount of payments, payable in equal
monthly installments on each due date, which total represents the principal
amount financed and add-on interest in an amount calculated on the basis of the
stated Loan Rate for the term of the Loan. The rate at which such amount of
add-on interest is earned and, correspondingly, the amount of each fixed monthly
payment allocated to reduction of the outstanding principal are calculated in
accordance with the "Rule of 78's". Under a Rule of 78's Loan, the amount of a
payment allocable to interest is determined by multiplying the total amount of
add-on interest payable over the term of the loan by a fraction derived as
described below.
The fraction used in the calculation of add-on interest earned each
month under a Rule of 78's Loan has as it denominator a number equal to the sum
of a series of numbers. The series of numbers begins with one and ends with the
number of monthly payments due under the loan. For example, with a loan
providing for 12 payments, the denominator of each month's fraction will be 78,
the sum of the series of numbers from 1 to 12. The numerator of the fraction for
a given month is the number of original payments to stated maturity less the
number of payments made up to but not including the current month. Accordingly,
in the example of a twelve-month loan, the fraction for the first payment is
12/78, for the second payment 11/78, for the third party 10/78, and so on
through the final payment, for which the fraction is 1/78. The applicable
fraction is then multiplied by the total add-on interest payable over the entire
term of the loan, and the resulting amount is the amount of add-on interest
"earned" that month. The difference between the amount of the monthly payment by
the obligor and the amount of earned add-on interest calculated for the month is
applied to principal reduction. Rule of 78's Loans are non-level yield
instruments. The yield in the initial months of a Rule of 78's Loans is somewhat
higher than the stated Loan Rate (computed on an actuarial basis) and the yield
in the later months of the loan is somewhat less than such stated Loan Rate.
The Prospectus Supplement for each series of Securities or the Current
Report on Form 8-K will contain certain information with respect to the Loans
(or a sample thereof) contained in the related Loan Pool; such information,
insofar as it may relate to statistical information relating to such Loans will
be presented as of a date certain (the "Statistic Calculation Date") which may
also be the related cut-off date (the "Cut-Off Date"). Such information will
include to the extent applicable to the particular Loan Pool (in all cases as of
the Cut-Off Date) (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans, (ii) the largest principal
balance and the smallest principal balance of any of the Loans, (iii) the types
of Property securing the Loans (e.g., one- to four-family houses, vacation and
second homes, Manufactured Homes, multifamily apartments or other real
property), (iv) the original terms to stated maturity of the Loans, (v) the
weighted average remaining term to maturity of the Loans and the range of the
remaining terms to maturity; (vi) the earliest origination date and latest
maturity date of any of the Loans, (vii) the weighted average CLTV and the range
of CLTV's of the Loans at origination, (viii) the weighted average Loan Rate or
annual percentage rate (as determined under Regulation Z) (the "APR") and ranges
of Loan Rates or APRs borne by the Loans, (ix) in the case of Loans having
adjustable rates, the weighted average of the adjustable rates and indices, if
any; (x) the aggregate outstanding principal balance, if any, of Buy-Down Loans
and Loans having graduated payment provisions; (xi) the amount of any mortgage
pool insurance policy, special hazard insurance policy or bankruptcy bond to be
maintained with respect to such Loan Pool; (xii) a description of any standard
hazard insurance required to be maintained with respect to each Loan; (xiii) a
description of any Credit Enhancement to be provided with respect to all or any
Loans or the Loan Pool; and (xiv) the geographical distribution of the Loans on
a state-by-state basis. In addition, preliminary or more general information of
the nature described above may be provided in the Prospectus Supplement, and
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specific or final information may be set forth in a Current Report on Form 8-K,
together with the related Pooling and Servicing Agreement, which will be filed
with the Securities and Exchange Commission and will be made available to
holders of the related series of Securities within fifteen days after the
initial issuance of such Securities.
The loan-to-value ratio (the "LTV") of a Loan is equal to the ratio
(expressed as a percentage) of the original principal balance of such Loan to
appraised value of the related Property (less the amount, if any, of the premium
for any credit life insurance) at the time of origination of the Loan or, in the
case where the Loan represents a purchase money instrument, the lesser of (a)
the appraised value or (b) the purchase price. The combined loan-to-value ratio
(the "CLTV") of a Loan at any given time is the ratio, expressed as a
percentage, determined by dividing (x) the sum of the original principal balance
of such Loan (less the amount,if any, of the premium for any credit life
insurance) plus the then-current principal balance of all mortgage loans (each,
a "Senior Lien") secured by liens on the related Property having priorities
senior to that of the lien which secures such Loan, by (y) the value of the
related Property, based upon the appraisal or valuation (which may in certain
instances include estimated increases in value as a result of certain home
improvements to be financed with the proceeds of such Loan) made at the time of
origination of the Loan. If the related Obligor will use the proceeds of the
Loan to refinance an existing Loan which is being serviced directly or
indirectly by the Servicer, the requirement of an appraisal or other valuation
at the time the new Loan is made may be waived. For purposes of calculating the
CLTV of a Contract relating to a new Manufactured Home, the value of such
Manufactured Home will be 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. The value of a
used Manufactured Home will be the least of the sales price, appraised value,
and National Automobile Dealer's Association book value plus prepaid taxes and
hazard insurance premiums. The appraised value of a Manufactured Home will be
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.
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related
Mortgage Loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding principal balances
of the Mortgage Loans (plus any additional financing by other lenders on the
same Properties) in a particular Pool become equal to or greater than the value
of such Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the non-conforming
credit mortgage lending industry. An overall decline in the market value of
residential real estate, the general condition of a Property, or other factors,
could adversely affect the values of the Properties such that the outstanding
balances of the Mortgage Loans, together with any additional liens on the
Properties, equal or exceed the value of the Properties. Under such
circumstances, the actual rates of delinquencies, foreclosures and losses could
be higher than those now generally experienced in the non-conforming credit
mortgage lending industry.
Certain Loans may be secured by junior liens ("Junior Lien Loans")
subordinate to the rights of the obligee under any related Senior Liens. The
proceeds from any liquidation, insurance or condemnation of Properties relating
to Junior Lien Loans in a Loan Pool will be available to satisfy the principal
balance of such Junior Lien Loans only to the extent that the claims, if any, of
all related senior obligees, including any related foreclosure costs, are
satisfied in full. In addition, the Servicer may not foreclose on a Property
relating to a Junior Lien Loan unless it forecloses subject to the related
senior lien or liens, in which case it must either pay the entire amount of each
senior lien to the applicable obligee at or prior to the foreclosure sale or
undertake the obligation to make payments on each Senior Lien in the event of
default thereunder. Generally, in servicing Junior Lien Loans, it is standard
practice for a Servicer to satisfy each Senior Lien at or prior to a foreclosure
sale only to the extent that it determines any amounts so paid will be
recoverable from future payments and collections on the Loans or otherwise. The
Trusts will not have any source of funds to satisfy any such senior lien or make
payments due to any senior obligee. See "Certain Legal Aspects of Loans and
Related Matters--Foreclosure."
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Other factors affecting obligors' ability to repay Loans include
excessive building resulting in an oversupply of housing stock or a decrease in
employment reducing the demand for units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Properties. To the extent that losses on the
Loans are not covered by Credit Enhancements, such losses will be borne, at
least in part, by the Securityholders of the related series.
The Company will cause the Loans comprising each Loan Pool to be
assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the Securityholders of the related series. The Servicer will service
the Loans, either directly or through Sub-Servicers, pursuant to the Pooling and
Servicing Agreement and will receive a fee for such services. See "Loan Program"
and "The Pooling and Servicing Agreement." With respect to Loans serviced
through a Sub-Servicer, the Servicer will remain liable for its servicing
obligations under the related Pooling and Servicing Agreement as if the Servicer
alone were servicing such Loans.
The only obligations of the Company with respect to a series of
Securities will be to provide (or, where the Company acquired a Loan from
another originator, obtain from such originator) certain representations and
warranties concerning the Loans and to assign to the Trustee for such series of
Securities such Company's rights with respect to such representations and
warranties. See "The Pooling and Servicing Agreement." The obligations of the
Servicer with respect to the Loans will consist principally of its contractual
servicing obligations under the related Pooling and Servicing Agreement and its
obligation, as described herein and in the related Prospectus Supplement, to
make certain cash advances in the event of delinquencies in payments on, or
prepayments received with respect to, the Loans in the amounts described herein
under "Description of the Securities--Advances." The obligations of a Servicer
to make advances may be subject to limitations, to the extent provided herein
and in the related Prospectus Supplement.
Single Family and Mixed Use Loans
Single Family Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first or junior
liens on one-to four-family properties. The Properties relating to Single Family
Loans will consist of detached or semi-detached one-family dwelling units, twoto
four-family dwelling units, townhouses, rowhouses, individual condominium units
in condominium developments, individual units in planned unit developments, and
certain other dwelling units. Such Mortgage Properties may include
owner-occupied (which includes vacation and second homes) and non-owner occupied
investment properties.
If so specified, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low- or high-rise condominium developments together with such
condominium units' appurtenant interests in the common elements of such
condominium developments.
Mixed Use Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first or junior
mortgages on small properties used primarily for residential purposes but also
commercial purposes.
Multi-family and Cooperative Loans
Multi-family Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first or junior
liens on rental apartment buildings or projects containing five or more
residential units.
Cooperative Loans will be secured by security interests in or similar
liens on stock, shares or membership certificates issued by private cooperative
housing corporations (" Cooperative") in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings.
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Properties that secure Multi-family Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multi-family Loans may be secured
by apartment buildings owned by Cooperatives. In such cases, the Cooperative
owns all the apartment units in the building and all common areas. The
Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements that confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Cooperative's payments for its mortgage loan, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the Cooperative. The Cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A Cooperative's ability to meet debt service
obligations on a Multi-family Loan, as well as all other operating expenses,
will be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
Home Improvement Loans
Home Improvement Loans may be secured by first or junior liens on
conventional one-to four-family residential properties and multi-family
residential properties. Home Improvement Loans generally will be conventional,
or if specified in the related Prospectus Supplement, may be partially insured
by the Federal Housing Administration ("FHA") or another federal or state
agency. The loan proceeds from such Home Improvement Loans are typically
disbursed to an escrow agent which, according to the Company's Guidelines,
Approved Guidelines or Bulk Guidelines, releases such proceeds to the contractor
upon completion of the improvements or in draws as the work on the improvements
progresses. Costs incurred by the Obligor for loan origination including
origination points and appraisal, legal and title fees, are often included in
the amount financed. In addition, Home Improvement Loans generally provide
additional security to a first or junior mortgage loan because home improvements
typically retain or increase the value of a property.
Contracts
Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured partially by the FHA
or partially guaranteed by the Veterans Administration, as specified in the
related Prospectus Supplement. Each Contract will be fully amortizing and will
bear interest at its APR.
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."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust, among other things, the date of origination of
the Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios; the
minimum and maximum outstanding principal balances as of the Cut-Off Date and
the average outstanding principal balance; the outstanding principal balances of
the Contracts included in the related Trust; and the original maturities of the
Contracts and the last maturity date of any Contract.
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THE LOAN POOLS
General
Each Loan Pool will consist primarily of (i) Loans, minus any other
interest retained by the Company evidenced by promissory notes (the "Notes")
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on, or security interest in, (a) one- to four-family residential
properties, (b) multi-family residential properties, (c) mixed use properties,
(d) apartment units in a Cooperative or (e) Manufactured Homes or (ii)
certificates of interest or participations in such Mortgage Notes. The
Properties will consist primarily of attached or detached one-family dwelling
units, two- to four-family dwelling units, condominiums, townhouses, row houses,
individual units in planned-unit developments, mixed use properties and certain
other dwelling units, and the fee, leasehold or other interests in the
underlying real property. The Properties may also consist of apartment units in
Cooperatives and Manufactured Homes. The Properties may be owner-occupied (which
includes second and vacation homes) and non-owner occupied investment
properties. If specified in the related Prospectus Supplement relating to a
series of Securities, a Loan Pool may contain Cooperative Loans evidenced by
promissory notes ("Cooperative Notes") secured by security interests in shares
issued by Cooperatives and in the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific dwelling units in the
related buildings. As used herein, unless the context indicates otherwise,
"Loans" include Cooperative Loans, "Properties" include shares in the related
cooperative and the related proprietary leases or occupancy agreements securing
Cooperative Notes, "Notes" include Cooperative Notes and "Loans" include
security agreements with respect to Cooperative Notes.
Each Loan will be selected by the Company for inclusion in a Loan Pool
from among loans originated by the Company or one or more originators, including
banks, savings and loan associations, mortgage bankers, mortgage brokers,
investment banking firms, the FDIC and other mortgage loan originators or
purchasers not affiliated with the Company, all as described below under "Loan
Program." The characteristics of the Loans will be described in the related
Prospectus Supplement. Other loans available for acquisition by a Trust may have
characteristics that would make them eligible for inclusion in a Loan Pool but
may not be selected by the Company for inclusion in such Loan Pool.
Each Security will evidence an interest in only the related Loan Pool
and corresponding Trust Estate, and not in any other Loan Pool or any other
Trust Estate (except in those situations whereby certain collections on any
Loans in a related Loan Pool in excess of amounts needed to pay the related
securities may be deposited in a common, master reserve account that provides
Credit Enhancement for more than one series of Securities).
The Loan Pools
All of the Loans in a Loan Pool will (i) have payments that are due
monthly or bi-weekly, (ii) be secured by Properties located in any of the fifty
states, the District of Columbia, Puerto Rico or any other Territories of the
United States and (iii) consist of one or more of the following types of loans:
(1) Fixed-rate, fully-amortizing loans (which may include loans
converted from adjustable-rate loans or otherwise modified) providing for
level monthly payments of principal and interest and terms at origination
or modification of generally not more than 30 years;
(2) ARM Loans having original or modified terms to maturity of
generally not more than 30 years with a related Loan Rate that adjusts
periodically, at the intervals specified in the related Prospectus
Supplement (which may have adjustments in the amount of monthly payments at
periodic intervals) over the term of the loan to equal the sum of a fixed
percentage set forth in the related Mortgage Note (the "Note Margin") and
an index (the "Index") to be specified in the related Prospectus
Supplement, such as, by way of example: (i) U.S. Treasury securities of a
specified constant maturity, (ii) weekly auction average investment yield
of U.S. Treasury bills of specified maturities, (iii) the daily Bank Prime
Loan rate made available by the Federal Reserve Board or as quoted by one
or more specified lending institutions, (iv) the cost of funds of member
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institutions for the Federal Home Loan Bank of San Francisco, or (v) the
interbank offered rates for U.S. dollar deposits in the London Markets,
each calculated as of a date prior to each scheduled interest rate
adjustment date that will be specified in the related Prospectus
Supplement. The related Prospectus Supplement will set forth the relevant
Index, and the related Prospectus Supplement or the related Current Report
on Form 8-K will indicate the highest, lowest and weighted-average Note
Margin with respect to the ARM Loans in the related Loan Pool. If specified
in the related Prospectus Supplement, an ARM Loan may include a provision
that allows the Obligor to convert the adjustable Loan Rate to a fixed rate
at some point during the term of such ARM Loan subsequent to the initial
payment date;
(3) Fixed-rate, graduated payment loans having original or modified
terms to maturity of generally not more than 30 years with monthly payments
during the first year calculated on the basis of an assumed interest rate
that will be lower than the Loan Rate applicable to such loan in subsequent
years. Deferred Interest, if any, will be added to the principal balance of
such loans;
(4) Balloon loans ("Balloon Loans"), which are loans having original
or modified terms to maturity of generally 5 to 15 years as specified in
the related Prospectus Supplement, which may have level monthly payments of
principal and interest based generally on a 10- to 30-year amortization
schedule. The amount of the monthly payment may remain constant until the
maturity date, upon which date the full outstanding principal balance on
such Balloon Loan will be due and payable (such amount, the "Balloon
Amount"); or
(5) Modified loans ("Modified Loans"), which are fixed or
adjustable-rate loans providing for terms at the time of modification of
generally not more than 30 years. Modified Loans may be loans which have
been consolidated and/or have had various terms changed, loans which have
been converted from adjustable rate loans to fixed rate loans, or
construction loans which have been converted to permanent loans.
If provided for in the related Prospectus Supplement, a Loan Pool may
contain ARM Loans which allow the Obligors to convert the adjustable rates on
such Loans to a fixed rate at some point during the life of such Loans (each
such Loan, a " Convertible Loan"). If specified in the related Prospectus
Supplement, upon any conversion, the Company will repurchase or the Servicer,
the applicable Sub-Servicer, or a third party will purchase the converted 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 Servicer (or another party specified therein) may agree to act as
remarketing agent with respect to such converted Loans and, in such capacity, to
use its best efforts to arrange for the sale of converted Loans under specific
conditions. Upon the failure of any party so obligated to purchase any such
converted Loan, the inability of any remarketing agent to so arrange for the
sale of the converted Loan and the unwillingness of the remarketing agent to
exercise any election to purchase the converted Loan for its own account, the
related Loan Pool will thereafter include both fixed rate and adjustable rate
Loans.
If provided for in the related Prospectus Supplement, certain of the
Loans may be Buydown Loans pursuant to which the monthly payments made by the
Obligor during the Buydown Period will be less than the scheduled monthly
payments on the Loan, the resulting difference to be made up from (i) Buydown
Funds funded by the originator of the Loan or another source (including the
Servicer, the Company or the related originator) and placed in the Buydown
Account and (ii) if the Buydown Funds are contributed on a present value basis,
investment earnings on such Buydown Funds. See "Description of the
Securities--Payments on Loans; Deposits to Distribution Account." The terms of
the Buydown Loans, if such loans are included in a Trust, will be as set forth
in the related Prospectus Supplement.
The Company will cause the Loans constituting each Loan Pool to be
assigned to the Trustee named in the related Prospectus Supplement, for the
benefit of the holders of all of the Securities of a series and such Trustee
will receive a fee for its services. The Servicer named in the related
Prospectus Supplement will service the Loans, either directly or through other
mortgage servicing institutions (Sub-Servicers), pursuant to a Pooling and
Servicing Agreement and will receive a fee for such services. See "Loan Program"
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and "Description of the Securities." With respect to those Loans serviced by the
Servicer through a Sub-Servicer, the Servicer will remain liable for its
servicing obligations under the related Pooling and Servicing Agreement as if
the Servicer alone were servicing such Loans.
As described herein and in the related Prospectus Supplement, the
Company may make certain representations and warranties regarding the Loans, but
the assignment of the Loans to the Trustee will be without recourse. See
"Description of the Securities--Assignment of Loans." The Servicer's obligations
with respect to the Loans will consist principally of its contractual servicing
obligations under the related Pooling and Servicing Agreement (including its
obligation to enforce certain purchase and other obligations of the Company, as
more fully described herein under "Loan Program--Representations" and
"Description of the Securities--Assignment of Loans," and its obligation, if
any, to make certain cash advances in the event of delinquencies in payments on
or with respect to the Loans and interest shortfalls due to prepayment of Loans,
in amounts described herein under "Description of the Securities--Advances").
Generally, the obligation of the Servicer to make delinquency advances will be
limited to amounts which the Servicer believes ultimately would be reimbursable
out of the proceeds of liquidation of the Loans. See "Description of the
Securities--Advances."
UNDERWRITING PROGRAM
General
The Company's finance programs consist of a Mortgage Loan Program and a
Manufactured Housing Program, each of which is described
below.
Loans originated or purchased by originators and acquired by the
Company generally will have been originated in accordance with the Company's
guidelines (the "Guidelines"). Management permits deviations from the specific
criteria of the Company's Guidelines to reflect local economic trends, real
estate valuations, and credit factors specific to each Loan. The Company
generally will review or cause to be reviewed all of the Loans in any delivery
of Loans from Originators for conformity with the Company's Guidelines.
The Company will make representations and warranties with respect to
the Loans sold to the Trust pursuant to the Pooling and Servicing Agreement. The
Company may be obligated to repurchase the Loans in respect of which a breach of
representation or warranty has occurred.
Representations. The Company will make representations and warranties
in respect of the Loans sold by the Company to the Trust and evidenced by a
series of Securities. Such representations and warranties generally include,
among other things, that at the time of the sale to the Trust of each Loan: (i)
the information with respect to each Loan set forth in the Schedule of Loans is
true and correct; (ii) all real estate appraisals have been performed in
accordance with industry standards; (iii) no Loan is in violation of any
applicable state or federal law or regulation; (iv) each Loan had, at the time
of origination, either an attorney's certification of title or a title search or
title policy; (v) as of the related settlement date, each Loan is secured by a
valid and subsisting lien of record on the Property having the priority
indicated in the related Loan file subject in all cases to exceptions to title
set forth in the title insurance policy, if any, with respect to the related
Loan; (vi) the Company held good and indefeasible title to, and was the sole
owner of, each Loan conveyed by it; and (vii) each Loan was originated in
accordance with law and is the valid, legal and binding obligation of the
related Obligor.
If the Company cannot cure a breach of any representation or warranty
made by it in respect of a Loan that materially and adversely affects the
interests of the Securityholders in such Loan within a time period specified in
the related Pooling and Servicing Agreement, the Company will be obligated to
purchase from the related Trust such Loan at a price (the "Loan Purchase Price")
set forth in the related Pooling and Servicing Agreement which Loan Purchase
Price will be equal to the principal balance thereof as of the date of purchase
plus one month's interest at the Loan Rate less the amount, expressed as a
percentage per annum, payable in respect of servicing compensation, Trustee
compensation and REMIC reporting compensation, as applicable, together with,
without duplication, the aggregate amount of all delinquent interest, if any.
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As to any such Loan required to be purchased by the Company, as
provided above, rather than repurchase the Loan, the Servicer may, at its sole
option, remove such Loan (a "Deleted Loan") from the related Trust and cause the
Company to substitute in its place another Loan of like kind (a "Qualified
Replacement Loan" as such term is defined in the related Pooling and Servicing
Agreement). With respect to a Trust for which a REMIC election is to be made,
except as otherwise provided in the Prospectus Supplement relating to a series
of Securities, such substitution of a defective Loan must be effected within two
years of the date of the initial issuance of the Securities, and may not be made
if such substitution would cause the Trust to not qualify as a REMIC or result
in a prohibited transaction tax under the Code. The Company generally will have
no option to substitute for a Loan that it is obligated to repurchase in
connection with a breach of a representation and warranty.
The Servicer will be required under the applicable Pooling and
Servicing Agreement to enforce such purchase or substitution obligations for the
benefit of the Trustee and the Securityholders, following the practices it would
employ in its good faith business judgment if it were the owner of such Mortgage
Loan; provided, however, that this purchase or substitution obligation will in
no event become an obligation of the Servicer in the event the Company fails to
honor such obligation. The foregoing will constitute the sole remedy available
to Securityholders or the Trustee for a breach of representation by the Company.
Mortgage Loan Program
The Mortgage Loans will be originated by the Company or acquired by the
Company from originators. All of the Mortgage Loans will be originated or
acquired by Originators generally in accordance with the Company's Guidelines.
As more fully described below and in the related Prospectus Supplement,
under the Company's Loan Program, the Company will originate Loans or purchase
Loans from originators: (1) in accordance with its loan program (the "Company's
Loan Program") described in the Company's Seller's Guide, as modified from time
to time (the "Company's Seller's Guide"), (2) on a "spot" or negotiated basis
("Negotiated Transactions"), and (3) as bulk acquisitions ("Bulk Acquisitions").
The Company's Loan Program, Negotiated Transactions, Bulk Acquisitions and the
respective underwriting guidelines relating thereto are described below.
The Company's Loan Program. Mortgage Loans originated or purchased by
Originators and acquired by the Company generally have been originated in
accordance with the Guidelines as set forth in the Company's Seller's Guide.
Management permits deviations from the specific criteria of the Guidelines to
reflect local economic trends, real estate valuations, and credit factors
specific to each Mortgage Loan. The Company generally reviews or causes to be
reviewed all of the Mortgage Loans in any delivery of Mortgage Loans from
Originators for conformity with the Company's Seller's Guide. See "Quality
Control."
The following is a brief description of the Guidelines set forth in the
Company's Seller's Guide currently employed by the Company. The Company believes
that these standards are consistent with those generally used by lenders in the
business of making mortgage loans based on non-conforming credits. The
underwriting process is intended to assess both the borrower's willingness and
ability to repay its debts and the adequacy of the real property as collateral
for the Mortgage Loan.
The Guidelines permit the origination and purchase of mortgage loans
with multitiered credit characteristics tailored to individual credit profiles.
In general, the Guidelines require an analysis of the equity in the collateral,
the credit history and debt-to-income ratio of the borrower, the property type
and the characteristics of the underlying first mortgage, if any. A lower
maximum CLTV is required for lower gradations of credit quality and higher
property values.
The Guidelines permit the origination or purchase of fixed or
adjustable rate Mortgage Loans that either fully amortize over a period
generally not to exceed 30 years or, in the case of a balloon mortgage,
generally amortize based on a 30-year or less amortization schedule with a due
date and a "balloon" payment at the end of 15 years. The loan amounts generally
range from a minimum of $15,000 to a maximum of $500,000.
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The Mortgaged Properties used for collateral to secure the Mortgage
Loans may be either owner occupied (which includes second and vacation homes) or
non-owner occupied investor properties which, in either case are residential
properties (which may be detached, part of a two-to four-family dwelling, a
condominium unit, a unit in a planned unit development or manufactured housing).
Each Mortgaged Property generally has a minimum appraised fair market value of
$30,000. Cooperatives, commercial properties or agricultural land are not
accepted as collateral.
The Guidelines require that the CLTV of a Mortgage Loan generally may
not exceed 80%. If a senior mortgage exists, the Originator must first review
the senior mortgage documentation. If it contains open end advance or negative
amortization provisions, the maximum potential senior mortgage balance is used
in calculating the CLTV which determines the maximum loan amount. The Guidelines
generally do not permit the purchase of Mortgage Loans where the senior mortgage
contains a provision pursuant to which the senior mortgagee may share in any
appreciation of the Mortgaged Property, where the senior mortgage is privately
held or where the senior mortgage has a "balloon" payment due at any time prior
to twelve months following the due date of the Mortgage Loan.
The value of each property proposed as security for a Mortgage Loan is
required to be appraised by licensed appraisers, if state or applicable law so
requires, and shall have been performed in accordance with industry standards in
the appraising industry in the area where the Mortgaged Property is located.
The Guidelines provide that each borrower is required to provide, and
the Originator is required to verify, personal financial information. The
borrower's total monthly obligations (including principal and interest on each
mortgage, tax assessments, other loans, charge accounts and all other scheduled
indebtedness) should not exceed 60% of the borrower's monthly income. Borrowers
who are salaried employees must provide current employment information, in
addition to recent employment history. The Originator verifies this information
for salaried borrowers based on a current pay stub and either (i) a written
verification of income signed by their employer or (ii) two years' W-2 forms. A
self-employed borrower is generally required to be successfully self-employed in
the same field for a minimum of two years. A self-employed borrower is generally
required to provide financial statements and signed copies of federal income tax
returns (including schedules) filed for the most recent two years. The
borrower's debt-to-income ratio is calculated based on income as verified by the
Originator and must be reasonable.
The Mortgage Loans are underwritten pursuant to the Company's "Full
Documentation Program," "Alternative Income Documentation Program" and "Stated
Income Program," as set forth in the Guidelines. Under each of the programs, the
Originator reviews the loan applicant's source of income, calculates the amount
of income from sources indicated on the loan application or similar
documentation, reviews the credit history of the borrower, reviews the type and
use of the property being financed and reviews the property for compliance with
its underwriting guidelines. In determining the ability of the borrower to repay
a Variable Rate Mortgage Loan, the Originators use a rate that generally is a
rate equal to the fully-indexed Mortgage interest rate for such ARM Loan. The
Guidelines are applied in a standardized procedure that complies with applicable
federal and state laws and regulations.
Under the Full Documentation Program, the income of each borrower and
the source of funds (if any) required to be deposited by a borrower into a bank
account or an escrow account is verified by the Originators. Borrowers are
generally required to submit a current pay stub and either (i) a written
verification of income signed by their employer or (ii) two years' W-2 forms.
Under the Alternative Income Documentation Program, a self-employed borrower is
generally required to provide the borrower's business' profit and loss
statement, and bank account statements supporting such statement for the prior
calendar year and any completed calendar quarter of the current year and a
current copy of a business license. Both the Alternative Income Program and the
Stated Income Program generally require (i) that the borrower's income be
reasonable for its business/profession, (ii) that the business has been in
existence for three years or more and (iii) that the loan-to-value ratio be
reduced. In addition, the Mortgage Loan generally improves the borrower's cash
flow. Verification of the source of funds (if any) required to be deposited by
the borrower into a bank account or an escrow account is generally required
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under all documentation programs in the form of a standard verification of
deposit or two months' consecutive bank statements or other acceptable
documentation. Twelve months' mortgage payment or rental history is generally
required to be verified by the borrower's current lender or landlord. If
appropriate compensating factors exist, the Originators and the Company, upon
the purchase of such Mortgage Loan from an Originator, may waive certain
documentation requirements for individual borrowers.
A credit report by an independent, nationally recognized credit
reporting agency is required reflecting the borrower's complete credit history.
The credit report should reflect all repossessions, judgments, foreclosures,
garnishments, bankruptcies and similar instances of adverse credit that can be
discovered by a search of public records. Verification is required to be
obtained of the senior mortgage balance, if any, the status and whether local
taxes, interest, insurance and assessments are included in the borrower's
monthly payment. All taxes and assessments not included in the payment are
required to be verified as current.
Certain laws protect borrowers obtaining certain types of Mortgage
Loans by requiring a time-frame after loan documents are signed, termed the
rescission period, during which the borrower has the right to rescind or cancel
the Mortgage Loan. The Guidelines provide that the rescission period may not be
waived by the borrower except as specifically provided by applicable law. The
rescission period must have expired prior to the purchase of a Mortgage Loan by
the Company.
The Originator agreements with the Company generally require title
insurance coverage issued by an insurance company that is qualified to do
business in the jurisdiction where the Mortgaged Property is located on each
Mortgage Loan it purchases. The Company's assignees or the related Originator
and its assignees generally are named as the insured. Title insurance policies
indicate the lien position of the Mortgage Loan and protect the insured against
loss if the title or lien position is not as indicated.
The Originator agreements with the Company generally require flood
insurance coverage, to the extent required by the Flood Disaster Protection Act
of 1973, as amended, issued by an insurance company that is qualified to do
business in the jurisdiction where the Mortgaged Property is located. The
Company's assignees or the related Originator and its assignees are generally
named as the insured.
The Originator agreements with the Company generally require property
hazard insurance in an amount sufficient to cover the new loan and any prior
mortgage. If the sum of the outstanding first mortgage, if any, and the related
Mortgage Loan exceeds replacement value (the cost of rebuilding the subject
property, which generally does not include land value), insurance equal to
replacement value may be accepted. The Company's assignees or the related
Originator and its assignees generally are named as the insured.
Negotiated Transactions. The Company may acquire Mortgage Loans on a
"spot" basis or in Negotiated Transactions, and such Negotiated Transactions may
be governed by agreements (" Master Commitments") relating to ongoing
acquisitions of Mortgage Loans by the Company, from Originators who represent
that the Mortgage Loans have been originated in accordance with underwriting
guidelines agreed to by the Company.
The underwriting standards utilized in Negotiated Transactions may vary
substantially from the Guidelines described above. All of the underwriting
guidelines will provide an underwriter with information to evaluate either the
security for the related Mortgage Loan, which security consists primarily of the
borrower's repayment ability or the adequacy of the Mortgaged Property as
collateral, or a combination of both. There can be no assurance that every
Mortgage Loan was originated in conformity with the underwriting guidelines
related thereto in all material respects, or that the quality or performance of
Mortgage Loans underwritten pursuant to varying guidelines as described above
will be equivalent under all circumstances.
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Bulk Acquisitions. Bulk portfolios of Mortgage Loans may be originated
by a variety of Originators under several different underwriting guidelines.
Mortgage Loans that conform to the related underwriting guidelines of the
Originator of the portfolio of such Mortgage Loans acquired by the Company in a
Bulk Acquisition may not conform to the requirements of the Company's
Guidelines. Bulk Acquisition portfolios may be purchased servicing released or
retained. If servicing is retained, the Company may require the Originator to
meet certain minimum requirements with respect to the servicing of such Mortgage
Loans. The Company generally will cause the Mortgage Loans acquired in a Bulk
Acquisition to be re-underwritten on a sample basis. Such re-underwriting may be
performed by the Company or by a third party acting at the direction of the
Company.
Quality Control. The Company maintains a quality control department
which generally will review loans acquired from all Originators. The quality
control department selects a random and adverse portion of the files for
underwriting review. For the random sample, employment and mortgage information
is reverified and a full review of legal documentation and reunderwriting the
Mortgage Loans is performed. The Company also performs field and desk appraisal
reviews on a random sample of Mortgage Loans.
With respect to the Mortgage Loan Program, certain Bulk Acquisitions,
and certain Negotiated Transactions, the Company will cause a percentage of the
Mortgage Loans acquired from Originators to be (i) reunderwritten for the
purpose of determining whether such Mortgage Loans were originated in accordance
with the Guidelines, (ii) reappraised to assess the accuracy of the appraised
values, and (iii) audited to determine the accuracy of the loan data in the loan
files. Such process may consist of a review of all such Mortgage Loans or may be
performed on a sample basis.
Qualifications of Originators. Each Originator from which a Mortgage
Loan is acquired has been approved by the Company for participation in the
Mortgage Loan Program. Originators enter into agreements to sell Mortgage Loans
to the Company pursuant to the Mortgage Loan Program which provides for the
periodic, "spot," or negotiated transaction or bulk acquisition purchase and
sale of loans meeting the Company's Guidelines generally. As part of the
qualification process, the Company determines whether each Originator has a
specified minimum level of equity and experience in originating non-conforming
credit Mortgage Loans. Notwithstanding this process, however, there can be no
assurance that any Originator presently meets such qualifications or will
continue to meet such qualifications at the time of inclusion of Mortgage Loans
sold by it and included in the Trust Estate for a series of Securities, or
thereafter. In addition, the Company may waive or modify in an appropriate case
any of the foregoing requirements for Originators.
All Originators must have received a satisfactory on-site review by the
Company of its operating procedures. All Originators are required to originate
mortgage loans in accordance with the applicable industry underwriting standards
and federal and state laws and regulations. However, with respect to any
Originator, some of the generally applicable underwriting standards described
herein and in the Guidelines may be modified or waived with respect to certain
Mortgage Loans acquired from such Originators.
Manufactured Housing Contract Program
General. All manufactured housing contracts that are purchased by the
Company from dealers or originated by the Company through a broker are written
on forms provided by the Company and are purchased or underwritten, as the case
may be, on an individually approved basis. With respect to each retail
manufactured housing contract to be purchased from a dealer or submitted by a
broker and underwritten, as the case be, the Company's general practice is to
have the dealer or broker submit the customer's credit application,
manufacturer's invoice (if the contract is for a new home) and certain other
information relating to the contract to the applicable regional office of the
Company. Personnel at the regional office make an analysis of the
creditworthiness of the obligor and of other aspects of the proposed
transaction. If the credit worthiness of the obligor and other aspects of the
transaction are approved by the regional office, the Company purchases the
contract after the manufactured home is delivered and set up.
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Because manufactured homes generally depreciate in value, the Company's
management believes that the creditworthiness of a potential obligor under a
manufactured housing contract should be the most important criterion in
determining whether to approve the purchase or origination of such manufactured
housing contract. In this regard, the Company uses an underwriting guideline
matrix based upon each applicant's credit history, residence history, employment
history, debt-to-income ratio and down payment percentage. Although, with
respect to certain of these criteria, the Company has minimum requirements, the
Company management does not believe that these minimum requirements are
themselves generally sufficient to warrant a credit approval of an applicant.
Thus, there were and are no requirements on the basis of which, if they are met,
credit is routinely approved, and if they are not met, credit is routinely
denied. Rather, if an applicant has a low rating with respect to one of the
criteria mentioned above, there generally must be a compensating higher rating
with respect to other items in order for such applicant to be approved. In
addition, in certain cases, credit applications are approved even if certain of
the minimum criteria are not met. The ultimate decision to approve or reject a
credit application is thus the result of a judgment made by either regional
management or the Company's senior management.
The Company's policy is to approve or reject each credit application
within 72 hours of receipt. Thus, there is generally less time for credit
investigation than is the case, for instance, with loans for site-built homes.
Although the Company's management believes that the 72 hour period for approval
or rejection of each credit application is in line with industry practice, no
assurance can be given that any credit application that was approved in 72 hours
would have been approved if a longer period had been provided for credit
investigation.
The qualifications of all regional office personnel authorized to
approve or reject credit applications are reviewed by the President and/or the
Chief Executive Officer of the Company. All such personnel have certain lending
limits applicable to their approval authority. The Company has no set
qualifications for any employees to whom authority to approve or reject credit
applications may be delegated.
The credit review and approval practices of each regional office are
subject to internal reviews and audits that, through sampling, examine the
nature of the verification of credit histories, residence histories, employment
histories and debt-to-income ratios of the applicants and evaluate the credit
risks associated with the contracts purchased through such regional office by
rating the obligors on such contracts according to their credit histories,
residence histories, employment histories, debt-to-income ratios and down
payment percentages. Selection of underwriting files for review is generally
made by the personnel performing the examination, without prior knowledge on the
part of the regional office personnel of the files to be selected for review.
However, the Company has no requirement that any specific random selection
procedures be followed, and no assurance can be given that the files reviewed in
any examination process are representative of the contract originations in the
related regional office. In addition, no statistical analysis is performed on
the results of any such examination of underwriting files.
Underwriting policies for the Company's origination or purchase on an
individual basis of manufactured housing contracts are established by the
Company's senior management and are applicable to all regional offices in the
Company's manufactured housing regional office system.
DESCRIPTION OF THE SECURITIES
General
The Securities will be issued in series. Each series of Securities (or,
in certain instances, two or more series of Securities) will be issued pursuant
to a Pooling and Servicing Agreement. The following (together with additional
summaries under "The Pooling and Servicing Agreement" below) describes all
material terms and provisions relating to the Securities common to each Pooling
and Servicing Agreement. The following does not purport to be complete and are
subject to, and is qualified in their entirety by reference to, all of the
provisions of the Pooling and Servicing Agreement for the related Trust and the
related Prospectus Supplement.
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The Securities will consist of two basic types: (i) Securities of the
fixed-income type ("Fixed-Income Securities") and (ii) Securities of the equity
participation type ("Equity Securities"). No Class of Equity Securities will be
offered pursuant to this Prospectus or any Prospectus Supplement related hereto.
Fixed-Income Securities generally will be styled as debt instruments, having a
principal balance and a specified interest rate ("Interest Rate"). Fixed-Income
Securities may be either beneficial ownership interests in the related Loans
held by the related Trust, or may represent debt secured by such Loans. Each
series or class of Fixed-Income Securities may have a different Interest Rate,
which may be a fixed, variable or adjustable Interest Rate. The related
Prospectus Supplement will specify the Interest Rate for each series or class of
Fixed-Income Securities, or the initial Interest Rate and the method for
determining subsequent changes to the Interest Rate.
A series may include one or more classes of Fixed-Income Securities
("Strip Securities") entitled to (i) principal distributions, with
disproportionate, nominal or no interest distributions, or (ii) interest
distributions, with disproportionate, nominal or no principal distributions. In
addition, a series may include two or more classes of Fixed-Income Securities
that differ as to timing, sequential order, priority of payment, Interest 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 related Loan Pool,
which series may include one or more classes of Fixed-Income Securities
("Accrual Securities"), as to which certain accrued interest will not be
distributed but rather will be added to the principal balance (or nominal
principal balance in the case of Accrual Securities which are also Strip
Securities) thereof on each Payment Date, as hereinafter defined.
If so provided in the related Prospectus Supplement, a series of
Securities may include one or more classes of Fixed-Income Securities
(collectively, the "Senior Securities") that are senior to one or more classes
of Fixed-Income Securities (collectively, the "Subordinate Securities") in
respect of certain distributions of principal and interest and allocations of
losses on Loans. In addition, certain classes of Senior (or Subordinate)
Securities may be senior to other classes of Senior (or Subordinate) Securities
in respect of such distributions or losses.
Equity Securities will represent the right to receive the proceeds of
the related Trust Estate after all required payments have been made to the
Securityholders of the related Fixed-Income Securities (both Senior Securities
and Subordinate Securities), and following any required deposits to any reserve
account that may be established for the benefit of the Fixed-Income Securities.
Equity Securities may constitute what are commonly referred to as the "residual
interest", "seller's interest" or the "general partnership interest", depending
upon the treatment of the related Trust for federal income tax purposes. As
distinguished from the Fixed-Income Securities, the Equity Securities will not
be styled as having principal and interest components. Any losses suffered by
the related Trust first will be absorbed by the related class of Equity
Securities, as described herein and in the related Prospectus Supplement.
No Class of Equity Securities will be offered pursuant to this
Prospectus or any Prospectus Supplement related hereto. Equity Securities may be
offered on a private placement basis or pursuant to a separate Registration
Statement to be filed by the Company. In addition, the Company and its
affiliates may initially or permanently hold any Equity Securities issued by any
Trust.
General Payment Terms of Securities. As provided in the related Pooling
and Servicing Agreement and as specified in the related Prospectus Supplement,
Securityholders will be entitled to receive payments on their Securities on
specified dates ("Payment Dates"). Payment Dates with respect to Fixed-Income
Securities will occur monthly, quarterly or semi-annually, as described in the
related Prospectus Supplement; Payments on Equity Securities will be made
monthly, quarterly or semi-annually, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify a date (the "Record
Date") preceding such Payment Date, as of which the Trustee or its paying agent
will fix the identity of the Securityholders for the purpose of receiving
payments on the next succeeding Payment Date.
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The related Prospectus Supplement and the Pooling and Servicing
Agreement will specify a period (a "Remittance Period") antecedent to each
Payment Date (for example, in the case of monthly-pay Securities, the calendar
month preceding the month in which a Payment Date occurs or such other specified
period). Collections received on or with respect to the related Loans during a
Remittance Period will be required to be remitted by the Servicer to the related
Trustee prior to the related Payment Date and will be used to distribute
payments to Securityholders on such Payment Date. The related Prospectus
Supplement will specify whether the related Pooling and Servicing Agreement will
provide that all or a portion of the principal collected on or with respect to
the related Loans may be applied by the related Trustee to the acquisition of
additional Loans during a specified period (rather than used to distribute
payments of principal to Securityholders during such period) with the result
that the related Securities possess an interest-only period, also commonly
referred to as a revolving period, which will be followed by an amortization
period. Any such interest-only or revolving period may terminate prior to the
end of the specified period and result in the earlier than expected amortization
of the related Securities upon the occurrence of certain events, which may
include (i) default in payment of interest or principal to the
Certificateholders, (ii) breach of the Company's representations and warranties
that materially and adversely affects the Certificateholders, which continues
for a period of 30 days after notice to the Company, (iii) the commencement of
proceedings against the Company to adjudicate it insolvent, (iv) an Event of
Servicing Termination has occurred, (v) the Certificate Insurer has made
payments to the Trustee, (vi) that the ratio of delinquent Loans to the
aggregate Loan Balance exceeds a percentage set forth in the related Prospectus
Supplement or (vii) the ratio of defaulted Loans to the aggregate Loan Balance
exceeds a percentage set forth in the related Prospectus Supplement.
In addition, the related Prospectus Supplement will specify whether the
related Pooling and Servicing Agreement will provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Loans) for a specified period prior to being
used to distribute payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Loans, or to attempt to match
the amortization rate of the related Securities to an amortization schedule
established at the time such Securities are issued. Any such feature applicable
to any Securities may terminate, resulting in the current funding of principal
payments to the related Securityholders and an acceleration of the amortization
of such Securities upon the occurrence of certain events, which may include (i)
default in payment of interest or principal to the Certificateholders, (ii)
breach of the Company's representations and warranties that materially and
adversely affects the Certificateholders, which continues for a period of 30
days after notice to the Company, (iii) the commencement of proceedings against
the Company to adjudicate it insolvent, (iv) an Event of Servicing Termination
has occurred, (v) the Certificate Insurer has made payments to the Trustee, (vi)
that the ratio of delinquent Loans to the aggregate Loan Balance exceeds a
percentage set forth in the related Prospectus Supplement or (vii) the ratio of
defaulted Loans to the aggregate Loan Balance exceeds a percentage set forth in
the related Prospectus Supplement.
Neither the Securities nor the underlying Loans will be guaranteed or
insured by any governmental agency or instrumentality or the Company, the
Servicer, the Master Servicer, if any, any Sub-Servicer, any Originator or any
of their affiliates.
Securities of each series covered by a particular Pooling and Servicing
Agreement will evidence specified beneficial ownership interest in a separate
Trust Estate created pursuant to such Pooling and Servicing Agreement. A Trust
Estate will consist of, to the extent provided in the Pooling and Servicing
Agreement: (i) a pool of Loans (and the related Loan documents) or certificates
of interest or participations therein underlying a particular series of
Securities as from time to time are subject to the Pooling and Servicing
Agreement, exclusive of, if specified in the related Prospectus Supplement, any
interest retained by the related Originator, the Company or any of their
affiliates with respect to each such Loan; (ii) payments and collections in
respect of the Loans due, accrued or received, as specified in the related
Prospectus Supplement, on and after the related Cut-Off Date, as from time to
time are identified as deposited in respect thereof in the Principal and
Interest Account and in the related Distribution Account; (iii) property
acquired by foreclosure of the Loans or deed in lieu of foreclosure; (iv) hazard
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and flood insurance policies and primary mortgage insurance policies, if any,
and certain proceeds thereof; and (v) any combination, as specified in the
related Prospectus Supplement, of a letter of credit, financial guaranty
insurance policy, purchase obligation, mortgage pool insurance policy, special
hazard insurance policy, bankruptcy bond, reserve fund or other type of Credit
Enhancement as described under "Description of Credit Enhancement."
Form of Securities
The Securities of each series will be issued as physical certificates
("Physical Certificates") in fully registered form only in the denominations
specified in the related Prospectus Supplement, and will be transferable and
exchangeable at the corporate trust office of the registrar of the Securities
(the "Security Registrar") named in the related Prospectus Supplement. No
service charge will be made for any registration of exchange or transfer of
Securities, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede, the
nominee of DTC. DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations (" Participants") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as brokers, dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participant").
Under a book-entry format, Securityholders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of Securities registered in the name of Cede, as nominee of DTC, may
do so only through Participants and Indirect Participants. In addition, such
Securityholders will receive all distributions of principal of and interest on
the Securities from the Trustee through DTC and its Participants. Under a
book-entry format, Securityholders will receive payments after the related
Payment Date because, while payments are required to be forwarded to Cede, as
nominee for DTC, on each such date, DTC will forward such payments to its
Participants, which thereafter will be required to forward such payments to
Indirect Participants or Securityholders. Unless and until Physical Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Pooling and Servicing
Agreement. The beneficial holders of such Securities will only be permitted to
exercise the rights of Securityholders under the Pooling and Servicing Agreement
indirectly through DTC and its Participants who in turn will exercise their
rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to their Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Securityholders. Accordingly, although Securityholders will not
possess Securities, the rules provide a mechanism by which Securityholders will
receive distributions and will be able to transfer their interests.
Unless and until Physical Certificates are issued, Securityholders who
are not Participants may transfer ownership of Securities only through
Participants by instructing such Participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
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respective Participants at DTC will be debited and credited. Similarly, the
respective Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a Physical Certificate for such
Securities.
DTC in general advises that it will take any action permitted to be
taken by a Securityholder under a Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account with DTC the related
Securities are credited. Additionally, DTC in general advises that it will take
such actions with respect to specified percentages of the Securityholders only
at the direction of and on behalf of Participants whose holdings include current
principal amounts of outstanding Securities that satisfy such specified
percentages. DTC may take conflicting actions with respect to other current
principal amounts of outstanding Securities to the extent that such actions are
taken on behalf of Participants whose holdings include such current principal
amounts of outstanding Securities.
Any Securities initially registered in the name of Cede, as nominee of
DTC, will be issued in fully registered, certificated form to Securityholders or
their nominees ("Physical Certificates"), rather than to DTC or its nominee only
under the events specified in the related Pooling and Servicing Agreement. Upon
the occurrence of any of the events specified in the related Pooling and
Servicing Agreement and the Prospectus Supplement, (which may include the
following events: (a) DTC or the Company advises the Trustee in writing that DTC
is no longer willing, qualified or able to discharge properly its
responsibilities as a nominee and depository with respect to the Book-Entry
Certificates and the Company or the Trustee is unable to locate a qualified
successor, (b) the Company, at its sole option, elects to terminate a book-entry
system through DTC or (c) DTC, at the direction of the Securityholders
representing a majority of the outstanding Percentage Interests of the specified
class of Securities, advises the Trustee in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of the Securityholders) DTC will be required to notify all
Participants of the availability through DTC of Physical Certificates. Upon
surrender by DTC of the securities representing the Securities and instruction
for re-registration, the Trustee will issue the Securities in the form of
Physical Certificates, and thereafter the Trustee will recognize the holders of
such Physical Certificates as Securityholders. Thereafter, payments of principal
of and interest on the Securities will be made by the Trustee directly to
Securityholders in accordance with the procedures set forth herein and in the
Pooling and Servicing Agreement. The final distribution of any Security (whether
Physical Certificates or Securities registered in the name of Cede), however,
will be made only upon presentation and surrender of such Securities on the
final Payment Date at such office or agency as is specified in the notice of
final payment to Securityholders.
Assignment of Loans
At the time of issuance of a series of Securities, the Company will
cause the Loans being included in the related Trust Estate to be assigned to the
Trustee together with all payments and collections in respect of the Loans due,
accrued or received, as specified in the related Prospectus Supplement on or
after the related Cut-Off Date. The Trustee will, concurrently with such
assignment, deliver a series of Securities to the Company in exchange for the
Loans. Each Loan will be identified in a schedule appearing as an exhibit to the
related Pooling and Servicing Agreement. Such schedule will include, among other
things, information as to the principal balance of each Loan as of the Cut-Off
Date, as well as information regarding the Loan Rate, the currently scheduled
monthly payment of principal and interest and the maturity of the Note.
A typical provision relating to document delivery requirements would
provide that the Company deliver to the Trustee a file consisting of (i) the
original Notes or certified copies thereof, endorsed in blank or to the order of
the holder, (ii) originals of all intervening assignments, showing a complete
chain of title from origination to the applicable Originators, if any, including
warehousing assignments, with evidence of recording thereon, (iii) originals of
all assumption and modification agreements, if any, and, unless such Loan is
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covered by a counsel's opinion as described in the next paragraph, (iv) either:
(a) the original Loan, with evidence of recording thereon, (b) a true and
accurate copy of the Loan where the original has been transmitted for recording,
until such time as the original is returned by the public recording office or
(c) a copy of the Loan certified by the public recording office in those
instances where the original recorded Loan has been lost. To the extent that
such a file containing all or a portion of such items has been delivered to the
Trustee, the Trustee will generally be required, for the benefit of the
Securityholders, to review each such file within a specified period, generally
not exceeding 90 days, to ascertain that all required documents (or certified
copies of documents) have been executed and received.
Generally, transfer documentation from the Originators to the Company
will have been prepared and filed prior to the execution and delivery of the
Pooling and Servicing Agreement. A typical provision relating to the preparation
and filing of transfer documentation will require the Company to cause to be
prepared and recorded, within a specified period, generally not exceeding 75
business days of the execution and delivery of the applicable Pooling and
Servicing Agreement (or, if original recording information is unavailable,
within such later period as is permitted by the Pooling and Servicing Agreement)
assignments of the Mortgages from the Company to the Trustee, in the appropriate
jurisdictions in which such recordation is necessary to perfect the lien thereof
as against creditors of or purchasers from the Company, to the Trustee;
provided, however, that if the Company furnishes to the Trustee an opinion of
counsel to the effect that no such recording is necessary to perfect the
Trustee's interests in the Mortgages with respect to one or more jurisdictions,
then such recording will not be required with respect to such jurisdictions.
If any such document is found to be missing or defective in any
material respect, the Trustee (or such custodian) shall promptly so notify the
Company, which may notify the related Sub-Servicer or Originator, as the case
may be. If the Company or the Originator does not cure the omission or defect
within a specified period, generally not exceeding 60 days after notice is given
to the Company or Originator, as the case may be, the Company or such Originator
will be obligated to purchase on the next succeeding Remittance Date the related
Loan from the Trustee at its Loan Purchase Price (or, if specified in the
related Prospectus Supplement, will be permitted to substitute for such Loan
under the conditions specified in the related Prospectus Supplement). The
Servicer will be obligated to enforce this obligation of the Originator, as the
case may be, to the extent described above under "Underwriting
Program--Representations." Neither the Servicer nor the Company will, however,
be obligated to purchase or substitute for such Loan if the Originator defaults
on its obligation to do so, and there can be no assurance that an Originator, as
the case may be, will carry out any such obligation. Such purchase obligation
constitutes the sole remedy available to the Securityholders or the Trustee for
omission of, or a material defect in, a constituent document.
The Trustee will be authorized at any time to appoint a custodian
pursuant to a custodial agreement to maintain possession of and, if applicable,
to review the documents relating to the Loans as the agent of the Trustee. The
identity of any such custodian to be appointed on the date of initial issuance
of the Securities will be set forth in the related Prospectus Supplement.
Pursuant to each Pooling and Servicing Agreement, the Servicer, either
directly or through Sub-Servicers, will service and administer the Loans
assigned to the Trustee as more fully set forth below.
Forward Commitments; Pre-Funding
A Trust may enter into an agreement (each, a "Forward Purchase
Agreement") with the Company whereby the Company will agree to transfer
additional Loans to such Trust following the date on which such Trust is
established and the related Securities are issued. The Trust may enter into
Forward Purchase Agreements to permit the acquisition of additional Loans (the
"Subsequent Loans") that could not be delivered by the Company or have not
formally completed the origination process, in each case prior to the date on
which the Securities are delivered to the Securityholders (the "Closing Date").
Any Forward Purchase Agreement will require that any Loans so transferred to a
Trust conform to the requirements specified in such Forward Purchase Agreement,
this Prospectus and the related Prospectus Supplement. In addition, the Forward
Purchase Agreement will state that the Company shall only transfer the
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Subsequent Loans upon the satisfaction of certain conditions, including that the
Company shall have delivered opinions of counsel (including bankruptcy,
corporate and tax opinions) with respect to the transfer of the Subsequent Loans
to the Certificate Insurer, if any, the Rating Agencies, the Servicer and the
Trustee.
If a Forward Purchase Agreement is to be utilized, the related Trustee
will be required to deposit in a segregated account (each, a "Pre-Funding
Account") a portion of the net proceeds received by the Trustee in connection
with the sale of one or more classes of Securities of the related series (such
amount, the "Pre-Funded Amount"); the additional Loans will be transferred to
the related Trust in exchange for money released to the Company from the related
Pre-Funding Account. Each Forward Purchase Agreement will set a specified period
(the " Funding Period") during which any such transfers must occur The Forward
Purchase Agreement or the related Pooling and Servicing Agreement will require
that if all moneys originally deposited to such Pre-Funding Account are not so
used by the end of the related Funding Period, then any remaining moneys will be
applied as a mandatory prepayment of the related class or classes of Securities
as specified in the related Prospectus Supplement.
During the Funding Period, the moneys deposited to the Pre-Funding
Account will either (i) be held uninvested or (ii) will be invested in one or
more Eligible Investments. On payment dates that occur during the Funding
Period, the Trustee will transfer any earnings on the moneys in the Pre-Funding
Account to the Certificate Account for distribution to the Securityholders.
Although the specific parameters of the Pre-Funding Account with
respect to any issuance of Securities will be specified in the related
Prospectus Supplement, it is anticipated that: (a) the Funding Period will not
exceed 120 days from the related Closing Date, (b) that the Additional Loans to
be acquired during the Funding Period will be subject to the same
representations and warranties as the Loans included in the related Trust Fund
on the Closing Date and (c) that the Pre-Funded Amount will not exceed 25% of
the principal amount of the Securities issued pursuant to a particular offering.
The Pre-Funding Account will be maintained by a Trustee, which must be
a bank having combined capital and surplus, generally, of a least $100,000,000,
long-term, unsecured debt rated at least investment grade and a long-term
deposit rating of at least investment grade.
Payments on Loans; Deposits to Distribution Account
Each Sub-Servicer servicing a Loan pursuant to a Sub-Servicing
Agreement will establish and maintain an account (the "Sub-Servicing Account")
that is acceptable to the Servicer. A Sub-Servicing Account must be established
with a Federal Home Loan Bank or with a depository institution (including the
Sub-Servicer itself) whose accounts are insured by the National Credit Union
Share Insurance Fund or the FDIC. Except as otherwise permitted by the
applicable Rating Agencies, a Sub-Servicing Account must be segregated and may
not be established as a general ledger account.
A Sub-Servicer is required to deposit into its Sub-Servicing Account on
a daily basis all amounts that are received by it in respect of the Loans, less
its servicing or other compensation. On or before the date specified in the
Sub-Servicing Agreement (which date may be no later than the business day prior
to the Determination Date referred to below or, if such day is not a business
day, the preceding business day), the Sub-Servicer must remit or cause to be
remitted to the Servicer all funds held in the Sub-Servicing Account with
respect to Loans that are required to be so remitted. A Sub-Servicer may also be
required to make such Servicing Advances and Delinquency Advances and to pay
Compensating Interest as set forth in the related Sub-Servicing Agreement.
The Servicer will deposit or will cause to be deposited into the
Principal and Interest Account on a daily basis certain payments and collections
due, accrued or received, as specified in the related Prospectus Supplement on
or after to the Cut-Off Date, as specifically set forth in the related Pooling
and Servicing Agreement, such as the following:
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(i) all payments on account of principal, including principal payments
received in advance of the date on which the related monthly payment is due
(the "Due Date") (" Principal Prepayments"), on the Loans comprising a
Trust Estate;
(ii) all payments on account of interest on the Loans comprising such
Trust Estate, net of the portion of each payment thereof retained by the
Sub-Servicer, if any, as its servicing or other compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed advances made, by the related
Sub-Servicer) received and retained, if any, in connection with the
liquidation of any defaulted Loan, by foreclosure, deed in lieu of
foreclosure or otherwise ("Liquidation Proceeds"), including all proceeds
of any special hazard insurance policy, bankruptcy bond, mortgage pool
insurance policy, financial guaranty insurance policy and any title, hazard
or other insurance policy covering any Loan in such Loan Pool (together
with any payments under any letter of credit, "Insurance Proceeds") , other
than proceeds to be applied to the restoration of the related property or
released to the Obligor in accordance with the Servicer's normal servicing
procedures (such amounts, net of related unreimbursed expenses and advances
of the Servicer, "Net Liquidation Proceeds");
(iv) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be paid to Securityholders, as described below;
(v) all proceeds of any Loan in such Trust Estate purchased (or, in
the case of a substitution, certain amounts representing a principal
adjustment) by the Servicer, the Company, any Sub-Servicer or Originator or
any other person pursuant to the terms of the Pooling and Servicing
Agreement. See "Underwriting Program--Representations," "--Assignment of
Loans" above;
(vi) any amounts required to be deposited by the Servicer in
connection with losses realized on investments of funds held in the
Principal and Interest Account, as described below;
(vii) any amounts required to be deposited in connection with the
liquidation of the related Trust; and
(viii) any amounts required to be transferred from the Distribution
Account to the Principal and Interest Account.
In addition to the Principal and Interest Account, the Trustee will
establish and maintain, at the corporate trust office of the Trustee, in the
name of the Trust for the benefit of the holders of each series of Securities,
an account for the disbursement of payments on the Loans evidenced by each
series of Securities (the "Distribution Account"). The Principal and Interest
Account and the Distribution Account each must be maintained with a Designated
Depository Institution. A " Designated Depository Institution" is an institution
whose deposits are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the FDIC, the long-term deposits of which have a rating
satisfactory to the Rating Agencies and the related Credit Enhancer, if any, and
which is any of the following: (i) a federal savings and loan association duly
organized, validly existing and in good standing under the federal banking laws,
(ii) an institution duly organized, validly existing and in good standing under
the applicable banking laws of any state, (iii) a national banking association
duly organized, validly existing and in good standing under the federal banking
laws, (iv) a principal subsidiary of a bank holding company, or (v) approved in
writing by the related Credit Enhancer, if any, each Rating Agency and, in each
case acting or designated by the Servicer as the depository institution for the
Principal and Interest Account; provided, however, that any such institution or
association will generally be required to have combined capital, surplus and
undivided profits of at least $100,000,000. Notwithstanding the foregoing, the
Principal and Interest Account may be held by an institution otherwise meeting
the preceding requirements except that the only applicable rating requirement
shall be that the unsecured and uncollateralized debt obligations thereof shall
be rated at a level satisfactory to one or more Rating Agencies if such
institution has trust powers and the Principal and Interest Account is held by
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such institution in its trust capacity and not in its commercial capacity. The
Distribution Account, the Principal and Interest Account are together referred
to as "Accounts." All funds in the Distribution Account shall be invested and
reinvested by the Trustee for the benefit of the Securityholders and the related
Credit Enhancer, if any, as directed by the Servicer, in one or more Eligible
Investments. An "Eligible Investment" is any of the following, in each case as
determined at the time of the investment or contractual commitment to invest
therein (to the extent such investments would not require registration of the
Trust Fund as an investment company pursuant to the Investment Company Act of
1940): (a) negotiable instruments or securities represented by instruments in
bearer or registered or book-entry form which evidence: (i) obligations which
have the benefit of the full faith and credit of the United States of America,
including depository receipts issued by a bank as custodian with respect to any
such instrument or security held by the custodian for the benefit of the holder
of such depository receipt, (ii) demand deposits or time deposits in, or
bankers' acceptances issued by, any depository institution or trust company
incorporated under the laws of the United States of America or any state thereof
and subject to supervision and examination by Federal or state banking or
depository institution authorities; provided that at the time of the Trustee's
investment or contractual commitment to invest therein, the certificates of
deposit or short-term depositors (if any) or long-term unsecured debt
obligations (other than such obligations whose rating is based on collateral or
on the credit of a Person other than such institution or trust company) of such
depository institution or trust company has a credit rating in the highest
category from each Rating Agency, (iii) certificates of deposit having a rating
in the highest rating category by the Rating Agencies, or (iv) investments in
money market funds which are (or which are composed of instruments or other
investments which are) rated in the highest rating category from each Rating
Agency; (b) demand deposits in the name of the Trustee in any depository
institution or trust company referred to in clause (a)(ii) above; (c) commercial
paper (having original or remaining maturities of no more than 270 days) having
a credit rating in the highest rating category from each Rating Agency; (d)
Eurodollar time deposits that are obligations of institutions whose time
deposits carry a credit rating in the highest rating category from each Rating
Agency; (e) repurchase agreements involving any Eligible Investment described in
any of clauses (a)(i), (a)(iii) or (d) above, so long as the other party to the
repurchase agreement has its long-term unsecured debt obligations rated in the
highest rating category from each Rating Agency; and (f) any other investment
with respect to which each Rating Agency rating such Securities indicates will
not result in the reduction or withdrawal of its then-existing rating of the
Securities. Any Eligible Investment must mature not later than the Business Day
prior to the next Distribution Date. The Principal and Interest Account may
contain funds relating to more than one series of Securities as well as payments
received on other loans serviced or master serviced by it that have been
deposited into the Principal and Interest Account. All funds in the Principal
and Interest Account will be required to be held (i) uninvested, up to limits
insured by the FDIC or (ii) invested in Eligible Investments. The Servicer will
be entitled to any interest or other income or gain realized with respect to the
funds on deposit in the Principal and Interest Account.
To the extent that the ratings, if any, then assigned to the unsecured
debt of the Servicer or of the Servicer's corporate parent are satisfactory to
the Rating Agencies, the Servicer may be permitted to co-mingle Loan payments
and collections with the Servicer's general funds rather than be required to
deposit such amounts into a segregated Principal and Interest Account.
On the day seven days preceding each Payment Date (the " Remittance
Date"), the Servicer will withdraw from the Principal and Interest Account and
remit to the Trustee for deposit in the applicable Distribution Account, in
immediately available funds, the amount to be distributed therefrom to
Securityholders on such Payment Date. The Servicer will remit to the Trustee for
deposit into the Distribution Account the amount of any advances made by the
Servicer as described herein under "--Advances," any amounts required to be
transferred to the Distribution Account from a Reserve Fund, as described under
"Credit Enhancement" below, any amounts required to be paid by the Servicer out
of its own funds due to the operation of a deductible clause in any blanket
policy maintained by the Servicer to cover hazard losses on the Loans as
described under "Hazard Insurance; Claims Thereunder--Hazard Insurance Policies"
below and any other amounts as specifically set forth in the related Pooling and
Servicing Agreement. The Trustee will cause all payments received by it from any
Credit Enhancer to be deposited in the Distribution Account not later than the
related Payment Date.
Funds on deposit in the Principal and Interest Account attributable to
Loans underlying a series of Securities may be invested in Eligible Investments
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maturing in general not later than the business day preceding the next Payment
Date. All income and gain realized from any such investment will be for the
account of the Servicer. Funds on deposit in the related Distribution Account
may be invested in Eligible Investments maturing, in general, no later than the
business day preceding the next Payment Date.
With respect to each Buydown Loan, the Servicer will deposit the
related Buydown Funds provided to it in a Buydown Account. The terms of all
Buydown 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 set forth by the Company from time
to time, will support the scheduled level of payments due under the Buydown
Loan. Neither the 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 Obligor or, in an appropriate
case, from the related Originator or the related Servicer, distributions to
Securityholders may be affected. With respect to each Buydown Loan, the Servicer
will withdraw from the Buydown Account and deposit into the Principal and
Interest Account on or before the date specified in the Pooling and Servicing
Agreement the amount, if any, of the Buydown Funds (and, if applicable,
investment earnings thereon) for each Buydown Loan that, when added to the
amount due from the Obligor on such Buydown Loan, equals the full monthly
payment which would be due on the Buydown Loan if it were not subject to the
buydown plan.
If the Obligor on a Buydown Loan prepays such Loan in its entirety
during the Buydown Period, the Servicer will withdraw from the Buydown Account
and remit to the Obligor or such other designated party in accordance with the
related buydown plan any Buydown Funds remaining in the Buydown Account. If a
prepayment by an Obligor during the Buydown Period together with Buydown Funds
will result in full prepayment of a Buydown Loan, the Servicer will generally be
required to withdraw from the Buydown Account and deposit into the Principal and
Interest 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 Loan programs. Any Buydown Funds relating to a prepayment described in
the preceding sentence will be deemed to reduce the amount that would be
required to be paid by the Obligor to repay fully the related Loan if the 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 Obligor or such other designated party pursuant to
the agreement relating to each Buydown Loan (the "Buydown Agreement"). If the
Obligor defaults during the Buydown Period with respect to a Buydown Loan and
the property securing such Buydown Loan is sold in liquidation (either by the
Servicer, the primary insurer, the insurer under the mortgage pool insurance
policy (the "Credit Enhancer") or any other insurer), the Servicer will be
required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and pay the same to the primary insurer or
the Credit Enhancer, as the case may be, if the Property is transferred to such
insurer and such insurer pays all of the loss incurred in respect of such
default.
Withdrawals from the Principal and Interest Account
The Servicer may, from time to time, make withdrawals from the
Principal and Interest Account for certain purposes, as specifically set forth
in the related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to effect the timely remittance to the Trustee for deposit to the
Distribution Account in the amounts and in the manner provided in the
Pooling and Servicing Agreement and described in "--Payments on Loans;
Deposits to Distribution Account" above;
(ii) to reimburse itself or any Sub-Servicer for Delinquency Advances
and Servicing Advances as to any Property, out of late payments or
collections on the related Loan with respect to which such Delinquency
Advances or Servicing Advances were made;
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(iii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iv) to withdraw amounts that have been deposited in the Principal and
Interest Account in error;
(v) to clear and terminate the Principal and Interest Account in
connection with the termination of the Trust Estate pursuant to the Pooling
and Servicing Agreement, as described in "The Pooling and Servicing
Agreement--Termination, Retirement of Securities;" and
(vi) to invest in Eligible Investments.
Distributions
Beginning on the Payment Date in the month following the month (or, in
the case of quarterly-pay Securities, the third month following such month and
each third month thereafter or, in the case of semi-annually-pay Securities, the
sixth month following such month and each sixth month thereafter) in which the
Cut-Off Date occurs (or such other date as may be set forth in the related
Prospectus Supplement) for a series of Securities, distributions of principal
and interest (or, where applicable, of principal only or interest only) on each
class of Securities entitled thereto will be made either by the Trustee or a
paying agent appointed by the Trustee (the "Paying Agent"), to the persons who
are registered as Securityholders at the close of business on the Record Date in
proportion to their respective Percentage Interests. Interest that accrues and
is not payable on a class of Securities will be added to the principal balance
of each Security of such class in proportion to its Percentage Interest. The
undivided percentage interest (the "Percentage Interest") represented by a
Security of a particular class will be equal to the percentage obtained by
dividing the initial principal balance or notional amount of such Security by
the aggregate initial amount or notional balance of all the Securities of such
class. Distributions will be made in immediately available funds (by wire
transfer or otherwise) to the account of a Securityholder at a bank or other
entity having appropriate facilities therefor, if such Securityholder has so
notified the Trustee or the Paying Agent, as the case may be, and the applicable
Pooling and Servicing Agreement provides for such form of payment, or by check
mailed to the address of the person entitled thereto as it appears on the
Security Register; provided, however, that the final distribution in retirement
of the Securities (other than any Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the office or agency of the
Trustee specified in the notice to Securityholders of such final distribution.
Principal and Interest on the Securities
The method of determining, and the amount of, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on a particular series of Securities is described below and will be
specified in the related Prospectus Supplement. Each class of Securities (other
than certain classes of Strip Securities) may bear interest at a different
interest rate (the "Pass-Through Rate"), which may be a fixed or adjustable
Pass-Through Rate. The related Prospectus Supplement will specify the
Pass-Through Rate for each class, or in the case of an adjustable Pass-Through
Rate, the initial Pass-Through Rate and the method for determining the
Pass-Through Rate. Interest on the Securities will be calculated on the basis of
a 360-day year consisting of twelve 30-day months.
On each Payment Date for a series of Securities, the Trustee will
distribute or cause the Paying Agent to distribute, as the case may be, to each
holder of record on the Record Date of a class of Securities, an amount equal to
the Percentage Interest represented by the Security held by such holder
multiplied by such class' Distribution Amount. The Distribution Amount for a
class of Securities for any Payment Date will be the portion, if any, of the
principal distribution amount (generally the sum of all amounts received by the
Servicer in respect of principal during the related collection period, as may be
adjusted to maintain any subordination levels specified in the related
Prospectus Supplement) (as defined in the related Prospectus Supplement)
allocable to such class for such Payment Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Payment Date, the interest accrued at the applicable Pass-Through Rate
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on the principal balance or notional amount of such class, as specified in the
applicable Prospectus Supplement, less the amount of any Deferred Interest added
to the principal balance of the Loans and/or the outstanding balance of one or
more classes of Securities on the related Due Date and any other interest
shortfalls allocable to Securityholders which are not covered by advances or the
applicable Credit Enhancement, in each case in such amount that is allocated to
such class on the basis set forth in the Prospectus Supplement.
The related Prospectus Supplement will specify whether the related
Pooling and Servicing Agreement will provide that all or a portion of the
principal collected on or with respect to the related Loans may be applied by
the related Trustee to the acquisition of additional Loans during a specified
period (rather than used to fund payments of principal to Securityholders during
such period) with the result that the related securities will possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any such interest-only or revolving
period may terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities upon the occurrence
of certain events, which may include (i) default in payment of interest or
principal to the Certificateholders, (ii) breach of the Company's
representations and warranties that materially and adversely affects the
Certificateholders, which continues for a period of 30 days after notice to the
Company, (iii) the commencement of proceedings against the Company to adjudicate
it insolvent, (iv) an Event of Servicing Termination has occurred, (v) the
Certificate Insurer has made payments to the Trustee, (vi) that the ratio of
delinquent Loans to the aggregate Loan Balance exceeds a percentage set forth in
the related Prospectus Supplement or (vii) the ratio of defaulted Loans to the
aggregate Loan Balance exceeds a percentage set forth in the related Prospectus
Supplement.
In addition, the related Prospectus Supplement, will specify whether
the related Pooling and Servicing Agreement will provide that all or a portion
of such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
In the case of a series of Securities that includes two or more classes
of Securities, 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 Securities or Subordinate Securities) of each
such class shall be as provided in the related Prospectus Supplement.
Distributions in respect of principal of any class of Securities will be made on
a pro rata basis among all of the Securities of such class.
On or prior to the third business day next preceding the Payment Date
(or such earlier day as shall be agreed by the related Credit Enhancer, if any,
and the Trustee) of the month of distribution (the "Determination Date"), the
Trustee will determine the amounts of principal and interest which will be
passed through to Securityholders on the immediately succeeding Payment Date. If
the amount in the Distribution Account is insufficient to cover the amount to be
passed through to Securityholders, the Trustee will be required to notify the
related Credit Enhancer, if any, pursuant to the related Pooling and Servicing
Agreement for the purpose of funding such deficiency.
Advances
The Servicer will be required, not later than each Remittance Date, to
deposit into the Principal and Interest Account an amount equal to the sum of
the principal and interest portions (net of the Servicing Fees) due, but not
collected, with respect to delinquent Loans directly serviced by the Servicer
during the prior Remittance Period, but only if, in its good faith business
judgment, the Servicer believes that such amount will ultimately be recovered
from the related Loan. The related Prospectus Supplement will specify whether
the Servicer may also be required to advance delinquent payments of principal.
Any such amounts so advanced are "Delinquency Advances". The Servicer will be
permitted to fund its payment of Delinquency Advances on any Remittance Date
from collections on any Loan deposited to the Principal and Interest Account
subsequent to the related Remittance Period, and will be required to deposit
into the Principal and Interest Account with respect thereto (i) collections
from the Obligor whose delinquency gave rise to the shortfall which resulted in
such Delinquency Advance and (ii) Net Liquidation Proceeds recovered on account
of the related Loan to the extent of the amount of aggregate Delinquency
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Advances related thereto. A Sub-Servicer will be permitted to fund its payment
of Delinquency Advances as set forth in the related Sub-Servicing Agreement.
A Loan is "delinquent" if any payment due thereon is not made by the
close of business on the day such payment is scheduled to be due.
On or prior to each Remittance Date, the Servicer will be required to
deposit in the Principal and Interest Account with respect to any full
prepayment received on a Loan directly serviced by the Servicer during the
related Remittance Period out of its own funds without any right of
reimbursement therefor, an amount equal to the difference between (x) 30 days'
interest at the Loan's Loan Rate (less the related Base Servicing Fees) on the
principal balance of such Loan as of the first day of the related Remittance
Period and (y) to the extent not previously advanced, the interest (less the
Servicing Fee) paid by the Obligor with respect to the Loan during such
Remittance Period (any such amount paid by the Servicer, "Compensating
Interest"). The Servicer shall not be required to pay Compensating Interest with
respect to any Remittance Period in an amount in excess of the aggregate related
Base Servicing Fees received by the Servicer with respect to all Loans directly
serviced by such Servicer for such Remittance Period.
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations, but only to
the extent that the Servicer reasonably believes that such amounts will increase
Net Liquidation Proceeds on the related Loan. Each such amount so paid will
constitute a "Servicing Advance". The Servicer may recover Servicing Advances to
the extent permitted by the Loans or, if not theretofore recovered from the
Obligor on whose behalf such Servicing Advance was made, from Liquidation
Proceeds realized upon the liquidation of the related Loan or, in certain cases,
from excess cash flow otherwise payable to the holders of the related Equity
Securities.
Notwithstanding the foregoing, if the Servicer exercises its option, if
any, to purchase the assets of a Trust Estate as described under "The Pooling
and Servicing Agreement--Termination; Retirement of Securities" below, the
Servicer will be deemed to have been reimbursed for all related advances
previously made by it and not theretofore reimbursed to it. The Servicer's
obligation to make advances may be supported by Credit Enhancement as described
in the related Pooling and Servicing Agreement. In the event that the Credit
Enhancer is downgraded by a Rating Agency rating the related Securities or if
the collateral supporting such obligation is not performing or is removed
pursuant to the terms of any agreement described in the related Prospectus
Supplement, the Securities may also be downgraded.
Reports to Securityholders
With each distribution to Securityholders of a particular class the
Trustee will forward or cause to be forwarded to each holder of record of such
class of Securities a statement or statements with respect to the related Trust
setting forth the information specifically described in the related Pooling and
Servicing Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount of the distribution with respect to each class of
Securities;
(ii) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any prepayments or other
recoveries of principal included therein;
(iii) the amount of such distribution allocable to interest;
(iv) the aggregate unpaid Principal Balance of the Loans after giving
effect to the distribution of principal on such Payment Date;
(v) 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 Payment Date;
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(vi) the amount of coverage under any letter of credit, mortgage pool
insurance policy or other form of Credit Enhancement covering default risk
as of the close of business on the applicable Determination Date and a
description of any Credit Enhancement substituted therefor;
(vii) information furnished by the Company pursuant to section
6049(d)(7)(C) of the Code and the regulations promulgated thereunder to
assist Securityholders in computing their market discount;
(viii) the total of any substitution amounts and any Loan Purchase
Price amounts included in such distribution; and
(ix) a number with respect to each class (the "Pool Factor") computed
by dividing the principal balance of all Securities in such class (after
giving effect to any distribution of principal to be made on such Payment
Date) by the original principal balance of the Securities of such class on
the Closing Date.
Items (i) through (iii) above shall, with respect to each class of
Securities, be presented on the basis of a certificate having a $1,000
denomination. In addition, by January 31 of each calendar year during which
Securities are outstanding, the Trustee shall furnish a report to each
Securityholder at any time during each calendar year as to the aggregate amounts
reported pursuant to (i), (ii) and (iii) with respect to the Securities for such
calendar year. If a class of Securities are in book-entry form, DTC will supply
such reports to the Securityholders in accordance with its procedures.
In addition, on each Payment Date the Trustee will forward or cause to
be forwarded additional information, as of the close of business on the last day
of the prior calendar month, as more specifically described in the related
Pooling and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the total number of Loans and the aggregate principal balances
thereof, together with the number, percentage (based on the
then-outstanding principal balances) and aggregate principal balances of
Loans (a) 30-59 days delinquent, (b) 60-89 days delinquent and (c) 90 or
more days delinquent;
(ii) the number, percentage (based on the then-outstanding principal
balances), aggregate Loan balances and status of all Loans in foreclosure
proceedings (and whether any such Loans are also included in any of the
statistics described in the foregoing clause (i));
(iii) the number, percentage (based on the then-outstanding principal
balances) and aggregate Loan balances of all Loans relating to Obligors in
bankruptcy proceedings (and whether any such Loans are also included in any
of the statistics described in the foregoing clause (i));
(iv) the number, percentage (based on the then-outstanding principal
balances) and aggregate Loan balances of all Loans relating to the status
of any Properties as to which title has been taken in the name of, or on
behalf of the Trustee (and whether any such Loans are also included in any
of the statistics described in the foregoing clause (i)); and
(v) the book value of any Property acquired through foreclosure or
grant of a deed in lieu of foreclosure.
Collection and Other Servicing Procedures
Acting directly or through one or more Sub-Servicers as provided in the
related Pooling and Servicing Agreement, the Servicer, is required to service
and administer the Loans in accordance with the Pooling and Servicing Agreement
and with reasonable care, and using that degree of skill and attention that the
Servicer exercises with respect to comparable mortgage loans that it services
for itself or others.
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The duties of the Servicer include collecting and posting of all
payments, responding to inquiries of Obligors or by federal, state or local
government authorities with respect to the Loans, investigating delinquencies,
reporting tax information to Obligors in accordance with its customary practices
and accounting for collections and furnishing monthly and annual statements to
the Trustee with respect to distributions and making Delinquency Advances and
Servicing Advances to the extent described above under "-- Advances" and
specified in the related Prospectus Supplement and the related Pooling and
Servicing Agreement. The Servicer is required to follow its customary standards,
policies and procedures in performing its duties as Servicer.
The Servicer (i) is authorized and empowered to execute and deliver, on
behalf of itself, the Securityholders and the Trustee or any of them, any and
all instruments of satisfaction or cancellation, or of partial or full release
or discharge and all other comparable instruments, with respect to the Loans and
with respect to the related Properties; (ii) may consent to any modification of
the terms of any Note not expressly prohibited by the Pooling and Servicing
Agreement if the effect of any such modification (x) will not materially and
adversely affect the security afforded by the related Property or the timing of
receipt of any payments required thereunder (in each case other than as
permitted by the related Pooling and Servicing Agreement); and (y) will not
cause a Trust which is a REMIC to fail to qualify as a REMIC.
The related Pooling and Servicing Agreement will require the Servicer
to follow such collection procedures as it follows from time to time with
respect to mortgage loans in its servicing portfolio that are comparable to the
Loans; provided that the Servicer is required always at least to follow
collection procedures that are consistent with or better than standard industry
practices. The Servicer may in its discretion (i) waive any assumption fees,
late payment charges, charges for checks returned for insufficient funds, if
any, or the fees which may be collected in the ordinary course of servicing the
Loans, (ii) if an Obligor is in default or about to be in default because of an
Obligor's financial condition, arrange with the Obligor a schedule for the
payment of delinquent payments due on the related Loan; provided, however, the
Servicer shall generally not be permitted to reschedule the payment of
delinquent payments more than one time in any twelve consecutive months with
respect to any Obligor or (iii) modify payments of monthly principal and
interest on any Loan becoming subject to the terms of the Relief Act in
accordance with the Servicer's general policies of the comparable loans subject
to such Relief Act.
When a Property (other than Manufactured Housing or Property subject to
an ARM Loan) has been or is about to be conveyed by the Obligor, the Servicer
will be required, to the extent it has knowledge of such conveyance or
prospective conveyance, to exercise its rights to accelerate the maturity of the
related Loan under any "due-on-sale" clause contained in the related Mortgage or
Note; provided, however, that the Servicer will not be required to exercise any
such right if (i) the "due-on-sale" clause, in the reasonable belief of the
Servicer, is not enforceable under applicable law or (ii) the Servicer
reasonably believes that to permit an assumption of the Loan would not
materially and adversely affect the interests of Securityholders or the related
Credit Enhancer or jeopardize coverage under any primary insurance policy or
applicable Credit Enhancement arrangements. In such event, the Servicer will be
required to enter into an assumption and modification agreement with the person
to whom such Property has been or is about to be conveyed, pursuant to which
such person becomes liable under the Mortgage Note and, unless prohibited by
applicable law or the related documents, the Obligor remains liable thereon. If
the foregoing is not permitted under applicable law, the Servicer will be
authorized to enter into a substitution of liability agreement with such person,
pursuant to which the original Obligor is released from liability and such
person is substituted as Obligor and becomes liable under the Mortgage Note. The
assumed Loan must conform in all respects to the requirements, representations
and warranties of the Pooling and Servicing Agreement.
An ARM Loan may be assumed if such ARM Loan is by its terms assumable
and if, in the reasonable judgment of the Servicer or the Sub-Servicer, the
proposed transferee of the related Property establishes its ability to repay the
loan and the security for such ARM Loan would not be impaired by the assumption.
If a Obligor transfers the Property subject to an ARM Loan without consent, such
ARM Loan may be declared due and payable. Any fee collected by the Servicer or
Sub-Servicer for entering into an assumption or substitution of liability
agreement will be retained by the Servicer or Sub-Servicer as additional
servicing compensation. See "Certain Legal Aspects of Loans and Related
Matters--Enforceability of Certain Provisions" herein.
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The Servicer will have the right under the Pooling and Servicing
Agreement to approve applications of Obligors seeking consent for (i) partial
releases of Liens, (ii) alterations and (iii) removal, demolition or division of
Properties. No application for consent may be approved by the Servicer unless:
(i) the provisions of the related Note and Lien have been complied with; (ii)
the credit profile of the related Loan after any release is consistent with the
underwriting guidelines then applicable to such Loan; and (iii) the lien
priority of the related Lien is not reduced.
Realization Upon Defaulted Loans
The Servicer shall foreclose upon or otherwise comparably effect the
ownership of Properties relating to defaulted Mortgage Loans as to which no
satisfactory arrangements can be made for collection of delinquent payments and
which the Servicer has not purchased pursuant to the related Pooling and
Servicing Agreement (such Mortgage Loans, "REO Property"). In connection with
such foreclosure or other conversion, the Servicer shall exercise such of the
rights and powers vested in it, and use the same degree of care and skill in
their exercise or use, as prudent mortgage lenders would exercise or use under
the circumstances in the conduct of their own affairs, including, but not
limited to, making Servicing Advances for the payment of taxes, amounts due with
respect to Senior Liens, and insurance premiums. The Servicer shall sell any REO
Property within 23 months of its acquisition by the Trust. The Pooling and
Servicing Agreements generally will permit the Servicer to cease further
collection and foreclosure activity if the Servicer reasonably determines that
such further activity would not increase collections or recoveries to be
received by the related Trust with respect to the related Loan. In addition, any
required Delinquency Advancing may be permitted to cease at this point.
Notwithstanding the generality of the foregoing provisions, the
Servicer will be required to manage, conserve, protect and operate each REO
Property for the Securityholders solely for the purpose of its prompt
disposition and sale as "foreclosure property" within the meaning of Section
860G(a)(8) of the Code or result in the receipt by the Trust of any "income from
non-permitted assets" within the meaning of Section 860F(a)(2)(B) of the Code or
any "net income from foreclosure property" which is subject to taxation under
the REMIC Provisions. Pursuant to its efforts to sell such REO Property, the
Servicer shall either itself or through an agent selected by the Servicer
protect and conserve such REO Property in the same manner and to such extent as
is customary in the locality where such REO Property is located and may,
incident to its conservation and protection of the interests of the
Securityholders, rent the same, or any part thereof, as the Servicer deems to be
in the best interest of the Securityholders for the period prior to the sale of
such REO Property. The Servicer shall take into account the existence of any
hazardous substances, hazardous wastes or solid wastes, as such terms are
defined in the Comprehensive Environmental Response Compensation and Liability
Act, the Resource Conservation and Recovery Act of 1976, or other federal, state
or local environmental legislation, on a Property in determining whether to
foreclose upon or otherwise comparably convert the ownership of such Property.
The Servicer shall determine, with respect to each defaulted Loan, when
it has recovered, whether through trustee's sale, foreclosure sale or otherwise,
all amounts it expects to recover from or on account of such defaulted Loan,
whereupon such Loan shall become a Liquidated Loan. A Loan which is
"charged-off", i.e., as to which the Servicer ceases further collection and/or
foreclosure activity as a result of a determination that such further actions
will not increase collections or recoveries to be received by the related Trust
is also a "Liquidated Loan".
If a loss is realized on a defaulted Loan or REO Property upon the
final liquidation thereof that is not covered by any applicable form of Credit
Enhancement or other insurance, the Securityholders will bear such loss.
However, if a gain results from the final liquidation of an REO Property that is
not required by law to be remitted to the related Obligor, the Servicer will be
entitled to retain such gain as additional servicing compensation. For a
description of the Servicer's obligations to maintain and make claims under
applicable forms of Credit Enhancement and insurance relating to the Loans, see
"Description of Credit Enhancement" and "Hazard Insurance; Claims Thereunder;
Hazard Insurance Policies."
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Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement
for the related series of Securities. Customary servicing functions with respect
to Loans constituting the Loan Pool in the Trust Estate will be provided by the
Servicer directly or through one or more Sub-Servicers subject to supervision by
the Master Servicer. If the Master Servicer is not directly servicing the Loans,
then the Master Servicer will (i) administer and supervise the performance by
the Servicer of its servicing responsibilities under the Pooling and Servicing
Agreement with the Master Servicer, (ii) review monthly servicing reports and
data relating to the Loan Pool for discrepancies and errors, and (iii) act as
back-up Servicer during the term of the transaction unless the Servicer is
terminated or resigns, in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Pooling and Servicing
Agreement for any Series for which Loans comprise the Trust Estate. The Master
Servicer will be required to meet the requirements set forth in the related
Pooling and Servicing Agreement and, in the case of FHA Loans, approved by HUD
as an FHA mortgagee. The Master Servicer will be compensated for the performance
of its services and duties under each Pooling and Servicing Agreement as
specified in the related Prospectus Supplement.
Sub-Servicing
The Servicer may assign its servicing duties to designated
Sub-Servicers and enter into Sub-Servicing Agreements with Sub-Servicers that
may include affiliates of the Company. While such a Sub-Servicing Agreement will
be a contract solely between the Servicer and the Sub-Servicer, the Pooling and
Servicing Agreement pursuant to which a series of Securities is issued will
provide that, if for any reason the Servicer for such series of Securities is no
longer the Servicer of the related Loans, the Trustee or any successor Servicer
must recognize the Sub-Servicer's rights and obligations under such
Sub-Servicing Agreement.
With the approval of the Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but such Sub-Servicer will
remain obligated under the related Sub-Servicing Agreement. Each Sub-Servicer
will be required to perform the customary functions of a servicer, including
collection of payments from Obligors and remittance of such collections to the
Servicer; maintenance of hazard insurance and flood insurance, if applicable,
and filing and settlement of claims thereunder, subject in certain cases to the
right of the Servicer to approve in advance any such settlement; maintenance of
escrow or impound accounts of Obligors for payment of taxes, insurance and other
items required to be paid by the Obligor pursuant to the Loan; processing of
assumptions or substitutions; attempting to cure delinquencies; supervising
foreclosures; inspecting and managing Properties under certain circumstances;
and maintaining accounting records relating to the Loans. A Sub-Servicer also
may be obligated to make advances to the Servicer in respect of delinquent
installments of principal and/or interest (net of any sub-servicing or other
compensation) on Loans, as described more fully under "Description of the
Securities--Advances," and in respect of certain taxes and insurance premiums
not paid on a timely basis by Obligors. A Sub-Servicer may also be obligated to
deposit amounts in respect of Compensating Interest to the related Principal and
Interest Account in connection with prepayments of principal received and
applied to reduce the outstanding principal balance of a Loan. No assurance can
be given that the Sub-Servicers will carry out their advance or payment
obligations, if any, with respect to the Loans.
As compensation for its servicing duties, the Sub-Servicer may be
entitled to a Base Servicing Fee. The Sub-Servicer may also be entitled to
collect and retain, as part of its servicing compensation, any late charges or
prepayment penalties provided in the Note or related instruments. The
Sub-Servicer will be entitled to reimbursement for certain expenditures that it
makes, generally to the same extent that the Servicer would be reimbursed under
the applicable Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses."
Each Sub-Servicer will be required to agree to indemnify the Servicer
for any liability or obligation sustained by the Servicer in connection with any
act or failure to act by the Sub-Servicer in its servicing capacity. Each
Sub-Servicer is required to maintain a fidelity bond and an errors and omission
policy with respect to its officers, employees and other persons acting on its
behalf or on behalf of the Servicer.
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Each Sub-Servicer will be required to service each Loan pursuant to the
terms of the Sub-Servicing Agreement for the entire term of such Loan, unless
the Sub-Servicing Agreement is terminated earlier by the Servicer or unless
servicing is released to the Servicer. The Servicer generally may terminate a
Sub-Servicing Agreement immediately upon the giving of notice upon certain
stated events, including the violation of such Sub-Servicing Agreement by the
Sub-Servicer, or following a specified period after notice to the Sub-Servicer
without cause upon payment of an amount equal to a specified termination fee
calculated as a specified percentage of the aggregate outstanding principal
balance of all loans, including the Loans serviced by such Sub-Servicer pursuant
to a Sub-Servicing Agreement and certain transfer fees.
The Servicer may agree with a Sub-Servicer to amend a Sub-Servicing
Agreement. Upon termination of a Sub-Servicing Agreement, the Servicer may act
as servicer of the related Loans or enter into one or more new Sub-Servicing
Agreements. If the Servicer acts as servicer, it will not assume liability for
the representations and warranties of the Sub-Servicer that it replaces. If the
Servicer enters into a new Sub-Servicing Agreement, each new Sub-Servicer must
have such servicing experience that is otherwise satisfactory to the Servicer.
The Servicer may make reasonable efforts to have the new Sub-Servicer assume
liability for the representations and warranties of the terminated Sub-Servicer,
but no assurance can be given that such an assumption will occur and, in any
event, if the new Sub-Servicer is an affiliate of the Servicer, the liability
for such representations and warranties will not be assumed by such new
Sub-Servicer. In the event of such an assumption, the Servicer may in the
exercise of its business judgment release the terminated Sub-Servicer from
liability in respect of such representations and warranties. Any amendments to a
Sub-Servicing Agreement or to a new Sub-Servicing Agreement may contain
provisions different from those described above that are in effect in the
original Sub-Servicing Agreements. However, the Pooling and Servicing Agreement
for each Trust Estate will provide that any such amendment or new agreement may
not be inconsistent with such Pooling and Servicing Agreement to the extent that
it would materially and adversely affect the interests of the Securityholders.
SUBORDINATION
A Senior/Subordinate Series of Securities will consist of one or more
classes of Senior Securities and one or more classes of Subordinate Securities,
as specified in the related Prospectus Supplement. Only the Senior Securities
will be offered hereby. Subordination of the Subordinate Securities of any
Senior/Subordinate Series of Securities will be effected by the following
method. In addition, certain classes of Senior (or Subordinate) Securities may
be senior to other classes of Senior (or Subordinate) Securities, as specified
in the related Prospectus Supplement, in which case the following discussion is
qualified in its entirety by reference to the related Prospectus Supplement with
respect to the various priorities and other rights as among the various classes
of Senior Securities or Subordinate Securities, as the case may be.
With respect to any Senior/Subordinate Series of Securities, the total
amount available for distribution on each Payment Date, as well as the method
for allocating such amount among the various classes of Securities included in
such series, will be as set forth in the related Prospectus Supplement.
Generally, the amount available for contribution will be allocated first to
interest on the Senior Securities of such series, and then to principal of the
Senior Securities up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Securities of such
series.
In the event of any Realized Losses (as defined below) on Loans not in
excess of the limitations described below, other than Extraordinary Losses, the
rights of the Subordinate Securityholders to receive distributions with respect
to the Loans will be subordinate to the rights of the Senior Securityholders.
With respect to any defaulted Loan that becomes a Liquidated Loan, through
foreclosure sale, disposition of the related Property if acquired by deed in
lieu of foreclosure, "charged-off" or otherwise, the amount of loss realized, if
any (as more fully described in the related Pooling and Servicing Agreement, a
"Realized Loss"), will equal the portion of the stated principal balance
remaining, after application of all amounts recovered (net of amounts
reimbursable to the Servicer for related advances and expenses) towards interest
and principal owing on the Loan. With respect to a Loan the principal balance of
which has been reduced in connection with bankruptcy proceedings, the amount of
such reduction will be treated as a Realized Loss.
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Except as noted below, all Realized Losses will be allocated to the
Subordinate Securities of the related series, until the Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Securities
thereof has been reduced to zero. Any additional Realized Losses will be
allocated to the Senior Securities (or, if such series includes more than one
class of Senior Securities, either on a pro-rata basis among all of the Senior
Securities in proportion to their respective outstanding Principal Balances or
as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage
to Properties that are generally of the same type as are covered under a special
hazard insurance policy, the amount thereof that may be allocated to the
Subordinate Securities of the related series may be limited to an amount (the
"Special Hazard Amount") specified in the related Prospectus Supplement. See
"Description of Credit Enhancement--Special Hazard Insurance Policies." If so,
any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Securities of the related series,
either on a pro-rata basis in proportion to their outstanding Security Principal
Balances, regardless of whether any Subordinate Securities remain outstanding,
or as otherwise provided in the related Prospectus Supplement. The respective
amounts of other specified types of losses (including Fraud Losses and
Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be
similarly limited to an amount (with respect to Fraud Losses, the "Fraud Loss
Amount" and with respect to Bankruptcy Losses, the " Bankruptcy Loss Amount"),
and the Subordinate Securities may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro-rata basis
among all outstanding classes of Securities.
Any allocation of a Realized Loss (including a Special Hazard Loss) to
a Security in a Senior/Subordinate Series will be made by reducing the Security
Principal Balance thereof as of the Payment Date following the calendar month in
which such Realized Loss was incurred.
In lieu of the foregoing provisions, subordination may be effected in
the following manner. The rights of the holders of Subordinate Securities to
receive any or a specified portion of distributions with respect to the Loans
may be subordinated to the extent of the amount set forth in the related
Prospectus Supplement (the "Subordinate Amount"). As specified in the related
Prospectus Supplement, the Subordinate Amount may be subject to reduction based
upon the amount of losses borne by the holders of the Subordinate Securities as
a result of such subordination, a specified schedule or such other method of
reduction as such Prospectus Supplement may specify. If so specified in the
related Prospectus Supplement, additional credit support for this form of
subordination may be provided by the establishment of a reserve fund for the
benefit of the holders of the Senior Securities (which may, if such Prospectus
Supplement so provides, initially be funded by a cash deposit by the Originator)
into which certain distributions otherwise allocable to the holders of the
Subordinate Securities may be placed; such funds would thereafter be available
to cure shortfalls in distributions to holders of the Senior Securities.
DESCRIPTION OF CREDIT ENHANCEMENT
Each series of Securities may have credit support comprised of one or
more of the following components. Each component will have a monetary limit and
will provide coverage with respect to Realized Losses that are (i) attributable
to the Obligor'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 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
Loan, including a reduction by a bankruptcy court of the principal balance of or
the Loan Rate on a Loan or an extension of its maturity (any such loss, a
"Bankruptcy Loss"); and (iv) incurred on defaulted Loans as to which there was
fraud in the origination of such Loans (any such loss, a "Fraud Loss"). Losses
occasioned by war, civil insurrection, certain governmental actions, nuclear
reaction and certain other risks ("Extraordinary Losses") will not be covered.
To the extent that the Credit Enhancement for any series of Securities is
exhausted, the Securityholders will bear all further risks of loss not otherwise
insured against.
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As set forth below and in the applicable Prospectus Supplement, Credit
Enhancement may be provided with respect to one or more classes of a series of
Securities or with respect to the Loans in the related Trust. Credit Enhancement
may be in the form of (i) the subordination of one or more classes of
Subordinate Securities to provide credit support to one or more classes of
Senior Securities as described under "Subordination," (ii) the use of a mortgage
pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve
fund, letter of credit, financial guaranty insurance policy, other third party
guarantees, or the use of a cross-support feature or overcollateralization, or
(iii) any combination of the foregoing. Any Credit Enhancement will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal balance of the Securities and interest thereon. If losses occur
that exceed the amount covered by Credit Enhancement or are not covered by the
Credit Enhancement, holders of one or more classes of Securities will bear their
allocable share of deficiencies. If a form of Credit Enhancement applies to
several classes of Securities, and if principal payments equal to the aggregate
principal balances of certain classes will be distributed prior to such
distributions to the classes, the classes that receive such distributions at a
later time are more likely to bear any losses that exceed the amount covered by
Credit Enhancement.
The amounts and type of Credit Enhancement arrangement as well as the
provider thereof, if applicable, with respect to each series of Securities will
be set forth in the related Prospectus Supplement. To the extent provided in the
applicable Prospectus Supplement and the Pooling and Servicing Agreement, the
Credit Enhancement arrangements may be periodically modified, reduced and
substituted for based on the aggregate outstanding principal balance of the
Loans covered thereby. See "Description of Credit Enhancement--Reduction or
Substitution of Credit Enhancement." If specified in the applicable Prospectus
Supplement, Credit Enhancement for a series of Securities may cover one or more
other series of Securities.
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.
Letter of Credit. If any component of Credit Enhancement as to any
series of Securities is to be provided by a letter of credit (the "Letter of
Credit"), a bank (the "Letter of Credit Bank") will deliver to the Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the related Securities or, if specified in the related
Prospectus Supplement, support the Company' or any other person's obligation
pursuant to a Purchase Obligation to make certain payments to the 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. 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. On or before each Payment Date, either
the Letter of Credit Bank or the Trustee (or other obligor under a Purchase
Obligation) will be required to make the payments specified in the related
Prospectus Supplement after notification from the Trustee, to be deposited in
the related Distribution Account, if and to the extent covered, under the
applicable Letter of Credit.
Pool Insurance Policies. Any pool insurance policy ("Pool Insurance
Policy") obtained by the Company for each related Trust Estate will be issued by
the Credit Enhancer named in the related Prospectus Supplement. Each Pool
Insurance Policy will, subject to limitations specified in the related
Prospectus Supplement described below, cover Defaulted Losses in an amount equal
to a percentage specified in the related Prospectus Supplement (or in a Current
Report on Form 8-K) of the aggregate principal balance of the Loans on the
Cut-Off Date. As set forth under "Maintenance of Credit Enhancement," the
Servicer will use reasonable efforts to maintain the Pool Insurance Policy and
to present claims thereunder to the Credit Enhancer on behalf of itself, the
Trustee and the Securityholders. The Pool Insurance Policies, however, are not
blanket policies against loss (typically, such policies do not cover Special
Hazard Losses, Fraud Losses and Bankruptcy Losses), since claims thereunder may
only be made respecting particular defaulted Loans and only upon satisfaction of
certain conditions precedent described below due to a failure to pay
irrespective of the reason therefor.
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Special Hazard Insurance Policies. Any insurance policy covering
Special Hazard Losses (a "Special Hazard Insurance Policy") obtained by the
Company for a Trust Estate will be issued by the insurer named in the related
Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to
limitations described in the related Prospectus Supplement, protect holders of
the related series of Securities from (i) losses due to direct physical damage
to a 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. See "Hazard Insurance; Claims Thereunder." A Special
Hazard Insurance Policy will not cover Extraordinary Losses. Aggregate claims
under a Special Hazard Insurance Policy will be limited to a maximum amount of
coverage, as set forth in the related Prospectus Supplement or in a Current
Report on Form 8-K. 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 Loan has been kept in force and other protection and preservation
expenses have been paid by the Servicer.
Subject to the foregoing limitations, in general a Special Hazard
Insurance Policy will provide that, where there has been damage to property
securing a foreclosed 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 Obligor or the Servicer or the
Sub-Servicer, 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 Loan Rate to the date of claim settlement and certain
expenses incurred by the Servicer or the Sub-Servicer 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 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.
As indicated under "Description of the Securities--Assignment of Loans"
above and to the extent set forth in the related Prospectus Supplement, coverage
in respect of Special Hazard Losses for a series of
Securities 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 Obligor,
it is possible that the bankruptcy court may establish the value of the Property
of such Obligor at an amount less than the then-outstanding, principal balance
of the Loan secured by such Property (a "Deficient Valuation"). The amount of
the secured debt then could be reduced to such value, and, thus, the holder of
such Loan would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value assigned to the Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding, including a reduction in the
amount of the monthly payment on the related Mortgage Loan or a reduction in the
mortgage interest rate (a "Debt Service Reduction"; Debt Service Reductions and
Deficient Valuations, collectively referred to herein as "Bankruptcy Losses").
See "Certain Legal Aspects of Loans and Related Matters--Anti-Deficiency
Legislation and Other Limitations on Lenders." Any bankruptcy bond (" Bankruptcy
Bond") to provide coverage for Bankruptcy Losses for proceedings under the
federal Bankruptcy Code obtained by the Company for a Trust Estate will be
issued by an insurer named in the related Prospectus Supplement. The level of
coverage under each Bankruptcy Bond will be set forth in the applicable
Prospectus Supplement or in a Current Report on Form 8-K.
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 Eligible Investments in specified amounts, amounts otherwise distributable
to Subordinate Securityholders, or any other instrument satisfactory to the
Rating Agency or Agencies, which will be applied and maintained in the manner
and under the conditions specified in such Prospectus Supplement. In addition,
with respect to any series of Securities 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 Trustee and deposited in a Reserve Fund. Amounts in a Reserve Fund may be
distributed to Securityholders, or applied to reimburse the Servicer for
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outstanding advances or may be used for other purposes, in the manner and to the
extent specified in the related Prospectus Supplement. A Trust Estate may
contain more than one Reserve Fund, each of which may apply only to a specified
class of Securities or to specified Loans.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. A copy of any such Financial Guaranty Insurance Policy
will be attached as an exhibit to the related Prospectus Supplement.
A Financial Guaranty Insurance Policy will unconditionally and
irrevocably guarantee to Securityholders that an amount equal to each full and
complete insured payment will be received by an agent of the Trustee (an
"Insurance Paying Agent") on behalf of Securityholders, for distribution by the
Trustee to each Securityholder. The "insured payment" will be defined in the
related Prospectus Supplement, and will generally equal the full amount of the
distributions of principal and interest to which Securityholders are entitled
under the related Pooling and Servicing Agreement plus any other amounts
specified therein or in the related Prospectus Supplement (the "Insured
Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Property level and only to specified
Loans.
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Company to repurchase
or substitute for any Loans, Financial Guaranty Insurance Policies will not
guarantee any specified rate of prepayments and/or to provide funds to redeem
Securities on any specified date.
Subject to the terms of the related Pooling and Servicing Agreement,
the Financial Guaranty Insurer may be subrogated to the rights of each
Securityholder to receive payments under the Securities to the extent of any
payment by such Financial Guaranty Insurer under the related Financial Guaranty
Insurance Policy.
Other Insurance, Guarantees and Similar Instruments or Agreements. If
specified in the related Prospectus Supplement, a Trust may include in lieu of
some or all of the foregoing or in addition thereto third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on all or any specified portion of the assets included
in such Trust, paying administrative expenses, or accomplishing such other
purpose as may be described in the Prospectus Supplement. The Trust may include
a guaranteed investment contract or reinvestment agreement pursuant to which
funds held in one or more accounts will be invested at a specified rate. If any
class of Securities has a floating interest rate, or if any of the Loans bears
interest at a floating interest rate, the Trust may include an interest rate
swap contract, an interest rate cap agreement or similar contract providing
limited protection against interest rate risks.
Cross Support. If specified in the Prospectus Supplement, the
beneficial ownership of separate groups of assets included in a Trust may be
evidenced by separate classes of the related series of Securities. In such case,
credit support may be provided by a cross-support feature which requires that
distributions be made with respect to one class of Securities may be made from
excess amounts available from other asset groups within the same Trust which
support other classes of Securities. The Prospectus Supplement for a series that
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trusts. If applicable, the Prospectus Supplement will identify the Trusts to
which such credit support relates and the manner of determining the amount of
the coverage provided thereby and of the application of such coverage to the
identified Trusts.
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Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Securities relative to the
amortization of the related Loans. The accelerated amortization is achieved by
the application of certain excess interest to the payment of principal of one or
more classes of Securities. This acceleration feature creates, with respect to
the Loans or groups thereof, overcollateralization which results from the excess
of the aggregate principal balance of the related Loans, or a group thereof,
over the principal balance of the related class of Securities. Such acceleration
may continue for the life of the related Security, or may be limited. In the
case of limited acceleration, once the required level of overcollateralization
is reached, and subject to certain provisions specified in the related
Prospectus Supplement, such limited acceleration feature may cease, unless
necessary to maintain the required level of overcollateralization.
Maintenance of Credit Enhancement. To the extent that the applicable
Prospectus Supplement does not expressly provide for Credit Enhancement
arrangements in lieu of some or all of the arrangements mentioned below, the
following paragraphs shall apply.
If a form of Credit Enhancement has been obtained for a series of
Securities, the Company will be obligated to exercise its best reasonable
efforts to keep or cause to be kept such form of credit support in full force
and effect throughout the term of the applicable Pooling and Servicing
Agreement, 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."
In lieu of the Company's obligation to maintain a particular form of
Credit Enhancement, the Company may obtain a substitute or alternate form of
Credit Enhancement. If the Servicer obtains such a substitute form of Credit
Enhancement, it will maintain and keep such form of Credit Enhancement in full
force and effect as provided herein. Prior to its obtaining any substitute or
alternate form of Credit Enhancement, the Company will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Securities that the substitution or alternate form of Credit Enhancement for the
existing Credit Enhancement will not adversely affect the then- current ratings
assigned to such Securities by such Rating Agency or Agencies.
The Servicer, on behalf of itself, the Trustee and Securityholders,
will provide the Trustee information required for the Trustee to draw under a
Letter of Credit or Financial Guaranty Insurance Policy, will present claims to
each Credit Enhancer, to the issuer of each Special Hazard Insurance Policy or
other special hazard instrument, to the issuer of each Bankruptcy Bond and will
take such reasonable steps as are necessary to permit recovery under such Letter
of Credit, Financial Guaranty Insurance Policy, Purchase Obligation, insurance
policies or comparable coverage respecting defaulted Loans or Loans which are
the subject of a bankruptcy proceeding. Additionally, the Servicer will present
such claims and take such steps as are reasonably necessary to provide for the
performance by another party of its Purchase Obligation. As set forth above, all
collections by the Servicer under any Purchase Obligation, any Pool Insurance
Policy, or any Bankruptcy Bond and, where the related property has not been
restored, any Special Hazard Insurance Policy, are to be deposited initially in
the Principal and Interest Account and ultimately in the Distribution Account,
subject to withdrawal as described above. All draws under any Letter of Credit
or Financial Guaranty Insurance Policy will be deposited directly in the
Distribution Account.
If any Property securing a defaulted 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 applicable form of Credit Enhancement,
the 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 Securityholders on liquidation of the Loan
after reimbursement of the Servicer for its expenses and (ii) that such expenses
will be recoverable by it through Liquidation Proceeds or Insurance Proceeds. If
recovery under any applicable form of Credit Enhancement is not available
because the Servicer has been unable to make the above determinations, has made
such determinations incorrectly or recovery is not available for any other
reason, the Servicer is nevertheless obligated to follow such normal practices
and procedures (subject to the preceding sentence) as it deems necessary or
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advisable to realize upon the defaulted Loan and in the event such determination
has been incorrectly made, is entitled to reimbursement of its expenses in
connection with such restoration.
Reduction or Substitution of Credit Enhancement. The amount of credit
support provided pursuant to any of the Credit Enhancements (including, without
limitation, a Pool Insurance Policy, Financial Guaranty Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, or any
alterative form of Credit Enhancement) may be reduced under certain specified
circumstances. In addition, if so described in the related Prospectus
Supplement, any formula used in calculating the amount or degree of Credit
Enhancement may be changed without the consent of the Securityholders upon
written confirmation from each Rating Agency then rating the Securities that
such change will not adversely affect the then-current rating or ratings
assigned to the Securities. In most cases, the amount available pursuant to any
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 Pooling and Servicing Agreement as the aggregate outstanding principal
balance of the Loans declines. Additionally, in certain cases, such credit
support (and any replacements therefor) may be replaced, reduced or terminated
upon the written assurance from each applicable Rating Agency that the then
current rating of the related series of Securities 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 of the
related Securities may be downgraded to a corresponding level, and the Company
thereafter will not be obligated to obtain replacement credit support in order
to restore the rating of the Securities, and also will 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, albeit downgraded, rating of the related series of Securities is
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
Servicer or such other person that is entitled thereto. Any assets so released
will not be available to fund distribution obligations in future periods.
HAZARD INSURANCE; CLAIMS THEREUNDER
Each Loan will be required to be covered by a hazard insurance policy
(as described below). 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 Loans by the respective insurers. The descriptions of any
insurance policies described in the 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 from the Trustee upon request.
Hazard Insurance Policies
The terms of the Loans require each Obligor to maintain a hazard
insurance policy for the Loan. Additionally, the Pooling and Servicing Agreement
will require the Servicer to cause to be maintained with respect to each Loan a
hazard insurance policy with a generally acceptable carrier that provides for
fire and extended coverage relating to such Loan in an amount not less than the
least of (i) the outstanding principal balance of the Loan, (ii) the minimum
amount required to compensate for damage or loss on a replacement cost basis or
(iii) the full insurable value of the premises.
If a Mortgage Loan relates to a Property in an area identified in the
Federal Register by the Federal Emergency Management Agency as having special
flood hazards, the Servicer will be required or cause to be required to maintain
with respect thereto a flood insurance policy in a form meeting the requirements
of the then-current guidelines of the Federal Insurance Administration with a
generally acceptable carrier in an amount representing coverage, and which
provides for recovery by the Servicer on behalf of the Trust of insurance
proceeds relating to such Mortgage Loan of not less than the least of (i) the
outstanding principal balance of the Mortgage Loan, (ii) the minimum amount
required to compensate for damage or loss on a replacement cost basis, (iii) the
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maximum amount of insurance that is available under the Flood Disaster
Protection Act of 1973, as amended. Pursuant to the related Pooling and
Servicing Agreement, the Servicer will be required to indemnify the Trust out of
the Servicer's own funds for any loss to the Trust resulting from the Servicer's
failure to maintain such flood insurance.
In the event that the Servicer obtains and maintains a blanket policy
insuring against fire with extended coverage and against flood hazards on all of
the Mortgage Loans, then, to the extent such policy names the Servicer as loss
payee and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without co-insurance, and otherwise complies with
the requirements of the Pooling and Servicing Agreement, the Servicer shall be
deemed conclusively to have satisfied its obligations with respect to fire and
hazard insurance coverage under the Pooling and Servicing Agreement. Such
blanket policy may contain a deductible clause, in which case the Servicer will
be required, in the event that there shall not have been maintained on the
related Property a policy complying with the Pooling and Servicing Agreement,
and there shall have been a loss that would have been covered by such policy, to
deposit in the Principal and Interest Account from the Servicer's own funds the
difference, if any, between the amount that would have been payable under a
policy complying with the Pooling and Servicing Agreement and the amount paid
under such blanket policy.
While the Servicer does not actively monitor the maintenance of hazard
insurance by borrowers (other than borrowers for Manufactured Housing), it
responds to the notices of cancellation or expiration as joint-loss payee by
requiring verification of replacement coverage.
THE COMPANY
Access Financial Lending Corp. ("AFL" or the "Company"), a Delaware
corporation, provides housing finance programs to consumers throughout the
United States through its Mortgage Lending and Manufactured Housing Programs.
The Company is the successor by merger of Access Financial Lending Corp., a
Delaware corporation (formerly Equicon Corporation), whose principal business
was the purchase of non-conforming mortgages, and Access Financial Corp., whose
principal business was the retail financing of manufactured housing. The merger
occurred on July 1, 1996.
The Company is a wholly-owned subsidiary of Access Financial Holdings
Corp. ("AFH"), which is a Delaware corporation and wholly-owned subsidiary of
Cargill Financial Services Corporation. AFH was formed in January 1996 to
facilitate the continued growth of the housing finance business.
The Company maintains its principal offices at 400 Highway 169 South,
Suite 400, St. Louis Park, Minnesota 55426-0365.
THE SERVICER
The Servicer for each series of Securities will be specified in the
related Prospectus Supplement.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Securities--General," each
series of Securities will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following describes certain
additional provisions common to each Pooling and Servicing Agreement.
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Servicing and Other Compensation and Payment of Expenses
Each servicer, whether the Servicer, any Sub-Servicer and any Master
Servicer (either the Servicer or any Sub-Servicer or any Master Servicer being a
"Servicer"), will retain a fee in connection with its servicing activities for
each series of Securities equal to the percentage per annum specified in the
related Prospectus Supplement (the "Base Servicing Fee"), generally payable
monthly with respect to each Loan directly serviced by such Servicer at
one-twelfth the annual rate, of the then-outstanding principal amount of each
such Loan as of the first day of each calendar month. The Master Servicer acting
as master servicer with respect to Loans being serviced directly by a
Sub-Servicer will retain a fee equal to the percentage per annum specified in
the related Prospectus Supplement or Current Report on Form 8-K ("Master
Servicing Fee"), generally payable monthly on one-twelfth the annual rate, of
the then-outstanding principal amount of each such Loan as of the first day of
each calendar month. The Base Servicing Fees and the Master Servicing Fee are
collectively referred to as the "Servicing Fee."
In addition to the Base Servicing Fee, each Servicer will generally be
entitled under the Pooling and Servicing Agreement to retain additional
servicing compensation in the form of release fees, bad check charges,
assumption fees, late payment charges, or any other servicing-related fees, Net
Liquidation Proceeds not required to be deposited in the Principal and Interest
Account pursuant to the Pooling and Servicing agreement, and similar items.
The Master Servicer will pay or cause to be paid certain ongoing
expenses associated with each Trust Estate and incurred by it in connection with
its responsibilities under the Pooling and Servicing Agreement, including,
without limitation, payment of any fee or other amount payable in respect of any
alternative Credit Enhancement arrangements, payment of the fees and
disbursements of the Master Servicer, the Trustee or accountant, any custodian
appointed by the Trustee, the Security Registrar and any Paying Agent, and
payment of expenses incurred in enforcing the obligations of Sub-Servicers and
Originators. The Master Servicer may be entitled to reimbursement of expenses
incurred in enforcing the obligations of Sub-Servicers and Originators under
certain limited circumstances. In addition, as indicated in the preceding
section, the Master Servicer will be entitled to reimbursements for certain
expenses incurred by it in connection with Liquidated Loans and in connection
with the restoration of Properties, such right of reimbursement being prior to
the rights of Securityholders to receive any related Liquidation Proceeds
(including Insurance Proceeds).
The Prospectus Supplement for a series of Securities will specify if
there was any stripped portion of the interest payments due under the related
Note that was retained by the originator or broker (the "Originator's Retained
Yield"). Any such Originator's Retained Yield will be a specified portion of the
interest payable on each Loan in a Loan Pool. Any such Originator's Retained
Yield will be established on a loan-by-loan basis and the amount thereof with
respect to each Loan in a Loan Pool will be specified on an exhibit to the
related Pooling and Servicing Agreement. Any Originator's Retained Yield in
respect of a Loan will represent a specified portion of the interest payable
thereon and will not be part of the related Trust Estate. Any partial recovery
of interest in respect of a Loan will be allocated between the owners of any
Originator's Retained Yield and the holders of classes of Securities entitled to
payments of interest as provided in the Prospectus Supplement and the applicable
Pooling and Servicing Agreement.
Evidence as to Compliance
Each Pooling and Servicing Agreement will require the Servicer to
deliver annually to the Trustee and any Credit Enhancer, an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Servicer during such preceding year and of performance under
the related Pooling and Servicing Agreement has been made under such officers'
supervision, and (ii) to the best of such officers' knowledge, based on such
review, the Servicer has fulfilled all its obligations under the related Pooling
and Servicing Agreement for such year, or, if there has been a default in the
fulfillment of any such obligations, specifying each such default known to such
officers and the nature and status thereof including the steps being taken by
the Servicer to remedy such defaults.
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Each Pooling and Servicing Agreement will require the Servicer to cause
to be delivered to the Trustee and any Credit Enhancer a letter or letters of a
firm of independent, nationally recognized certified public accountants
reasonably acceptable to the Credit Enhancer, if applicable, stating that such
firm has, with respect to the Servicer's overall servicing operations (i)
performed applicable tests in accordance with the compliance testing procedures
as set forth in Appendix 3 of the Audit Guide for Audits of HUD Approved
Nonsupervised Mortgagees or (ii) examined such operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and in
either case stating such firm's conclusions relating thereto.
Copies of the annual accountants' statement and the annual statement of
officers of the Servicer may be obtained by Securityholders without charge upon
written request to the Servicer.
Removal and Resignation of the Servicer
Each Pooling and Servicing Agreement will provide that the Servicer may
not resign from its obligations and duties thereunder, except in connection with
a permitted transfer of servicing, unless 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 subject to the consent of the Master Servicer and the Trustee. No
such resignation will become effective until the Trustee, the Master Servicer or
a Successor Servicer has assumed the Servicer's obligations and duties under the
Pooling and Servicing Agreement. The Trustee, the Master Servicer, the
Securityholders or a Credit Enhancer, if applicable, will have the right,
pursuant to the related Pooling and Servicing Agreement, to remove the Servicer
upon the occurrence of any of (a) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings regarding the
Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations; (b) the failure of the Servicer to perform any
one or more of its material obligations under the Pooling and Servicing
Agreement as to which the Servicer shall continue in default with respect
thereto for a specified period, generally of sixty (60) days, after notice by
the Trustee, the Master Servicer or any Credit Enhancer (if required by the
Pooling and Servicing Agreement) of said failure; or (c) the failure of the
Servicer to cure any breach of any of its representations and warranties set
forth in the Pooling and Servicing Agreement which materially and adversely
affects the interests of the Securityholders or any Credit Enhancer, for a
specified period, generally of thirty (30) days after the Servicer's discovery
or receipt of notice thereof.
The Pooling and Servicing Agreement may also provide that the Company
or the related Credit Enhancer may remove the Servicer upon the occurrence of
any of certain events including:
(i) with respect to any Payment Date, if the total available funds
with respect to the Loans Group will be less than the related distribution
amount on the class of credit-enhanced securities in respect of such
Payment Date;
(ii) the failure by the Servicer to make any required Servicing
Advance;
(iii) the failure of the Servicer to perform one or more of its
material obligations under the Pooling and Servicing Agreement;
(iv) the failure by the Servicer to make any required Delinquency
Advance or to pay any Compensating Interest; or
(v) without cause on the part of the Servicer; provided that the
Certificate Insurer consents to such removal (each such event, an "Event of
Servicing Termination");
provided, however, that prior to any removal of the Servicer by the Company, or
the related Credit Enhancer pursuant to clauses (i), (ii) or (iii) above the
Servicer shall first have been given by the Company or the related Credit
Enhancer notice of the occurrence of one or more of the events set forth in
clauses (i) or (ii) above and the Servicer shall not have remedied, or shall not
have taken action satisfactory to the Company or such Credit Enhancer to remedy,
such event or events within a specified period, generally 30 days (60 days with
respect to clause (iii)) after the Servicer's receipt of such notice; and
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provided, further, that in the event of the refusal or inability of the Servicer
to make any required Delinquency Advance or to pay any Compensating Interest as
described in clause (iv) above, such removal shall be effective (without the
requirement of any action on the part of the Company or such Credit Enhancer or
of the Trustee) not later than a shorter specified period, generally not in
excess of five business days, following the day on which the Trustee notifies an
authorized officer of the Servicer that a required Delinquency Advance or to pay
any Compensating Interest has not been received by the Trustee.
Resignation of the Master Servicer
Each Pooling and Servicing Agreement provides that the Master Servicer,
if any, may not resign from its obligations and duties thereunder, unless such
duties and obligations are no longer permissible under applicable law. No such
resignation is acceptable until a successor Master Servicer assumes such duties
and obligations.
Amendments
The Company, the Servicer, the Master Servicer and the Trustee may at
any time and from time to time, with the prior approval of the related Credit
Enhancer, if required, but without the giving of notice to or the receipt of the
consent of the Securityholders, amend a Pooling and Servicing Agreement, and the
Trustee will be required to consent to such amendment, for the purposes of (x)
(i) curing any ambiguity, or correcting or supplementing any provision of such
Pooling and Servicing Agreement which may be inconsistent with any other
provision of the Pooling and Servicing Agreement, (ii) in connection with a
Trust making REMIC elections, if accompanied by an approving opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a REMIC residual security to a Disqualified Organization (as such
term is defined in the Code) or (iii) complying with the requirements of the
Code and the regulations proposed or promulgated thereunder; provided, however,
that such action shall not, as evidenced by an opinion of counsel delivered to
the Trustee, materially and adversely affect the interests of any Securityholder
(without its written consent) or (y) such other purposes set forth in the
related Pooling and Servicing Agreement.
Each Pooling and Servicing Agreement may also be amended by the
Trustee, the Company, the Servicer and the Master Servicer at any time and from
time to time, with the prior written approval of the related Credit Enhancer, if
required, and not less than a majority of the Percentage Interest represented by
each related class of Securities then outstanding, for the purpose of adding any
provisions or changing in any manner or eliminating any of the provisions of
such Pooling and Servicing Agreement or of modifying in any manner the rights of
the Securityholders thereunder; provided, however, that no such amendment shall
(a) change in any manner the amount of, or delay the timing of, payments which
are required to be distributed to any Securityholders without the consent of the
holder of such Security or (b) change the aforesaid percentages of Percentage
Interest which are required to consent to any such amendments, without the
consent of the holders of all Securities of the class or classes affected then
outstanding.
Termination; Retirement of Securities
Each Pooling and Servicing Agreement will provide that a Trust will
terminate upon the earlier of (i) the payment to the Securityholders of all
Securities issued by the Trust from amounts other than those available under, if
applicable, the related Credit Enhancement of all amounts required to be paid to
such Securityholders upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Loan in the
Trust Estate or (b) the disposition of all property acquired in respect of any
Loan remaining in the Trust Estate, (ii) any time when a Qualified Liquidation
(as defined in the Code) of the Trust Estate (if the related Trust is a REMIC)
is effected. In no event, however, will the trust created by the Pooling and
Servicing Agreement continue beyond the expiration of 21 years from the death of
the survivor of certain persons named in such Pooling and Servicing Agreement.
Written notice of termination of the Pooling and Servicing Agreement will be
given to each Securityholder, and the final distribution will be made only upon
surrender and cancellation of the Securities at an office or agency appointed by
the Trustee that will be specified in the notice of termination. If the
Securityholders are permitted to terminate the trust under the applicable
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Pooling and Servicing Agreement, a penalty may be imposed upon the
Securityholders based upon the fee that would be foregone by the Servicer
because of such termination.
Any purchase of Loans and property acquired in respect of Loans
evidenced by a series of Securities shall be made at the option of the Servicer,
the Company or, if applicable, the holder of the REMIC Residual Securities at
the price specified in the related Prospectus Supplement. The exercise of such
right will effect earlier than expected retirement of the Securities of that
series, but the right of the Servicer, the Company or, if applicable, such
holder to so purchase is subject to the aggregate principal balance of the Loans
for that series as of any Remittance Date being less than ten percent or a
percentage set forth in the related Prospectus Supplement of the aggregate
principal balance of the Loans at the Cut-Off Date for that series. The
Prospectus Supplement for each series of Securities will set forth the amounts
that the holders of such Securities will be entitled to receive upon such
earlier than expected retirement. If a REMIC election has been made, the
termination of the related Trust Estate will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
If set forth in the related Prospectus Supplement, termination of the
Trust may be effected by an auction sale. Within a period following a Remittance
Date as of which the aggregate Pool principal balance is less than 10% of the
initial aggregate Pool principal balance, if the optional termination rights
have not been exercised by the parties having such rights by such date, the
Trustee shall solicit bids for the purchase of all Loans remaining in the Trust.
In the event that satisfactory bids are received as described in the Pooling and
Servicing Agreement, the net sale proceeds will be distributed to
Certificateholders, in the same order of priority as collections received in
respect of the Loans. The Trustee, however, will not accept any bid for the
Loans unless certain requirements are met. The sale of the Loans must be for an
amount no less than fair market value. If satisfactory bids are not received,
the Trustee shall decline to sell the Loans and shall not be under any
obligation to solicit any further bids or otherwise negotiate any further sale
of the Loans. Such sale and consequent termination of the Trust must constitute
a "qualified liquidation" of each REMIC established by the Trust under Section
860F of the Internal Revenue Code of 1986, as amended, including, without
limitation, the requirement that the qualified liquidation takes place over a
period not to exceed 90 days.
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in
the related Prospectus Supplement. Each Pooling and Servicing Agreement will
provide that the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by the Pooling and Servicing Agreement at the
request or direction of any of the Securityholders, unless such Securityholders
shall have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance with
such request or direction.
The Trustee may execute any of the trusts or powers granted by each
Pooling and Servicing Agreement or perform any duties thereunder either directly
or by or through agents or attorneys, and the Trustee will not be responsible
for any misconduct or negligence on the part of any agent or attorney appointed
and supervised with due care by it thereunder.
Pursuant to each Pooling and Servicing Agreement, the Trustee will not
be liable for any action it takes or omits to take in good faith which it
reasonably believes to be authorized by an authorized officer of any person or
within its rights or powers under the Pooling and Servicing Agreement.
Each Pooling and Servicing Agreement will permit the removal of the
Trustee upon the occurrence and continuance of one of the following events:
(1) the Trustee shall fail to distribute to the Securityholders
entitled thereto on any Payment Date amounts available for distribution in
accordance with the terms of the Pooling and Servicing Agreement; or
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(2) the Trustee shall default in the performance of, or breach, any
covenant or agreement of the Trustee in the Pooling and Servicing
Agreement, or if any representation or warranty of the Trustee made in the
Pooling and Servicing Agreement or in any certificate or other writing
delivered pursuant thereto or in connection therewith shall prove to be
incorrect in any material respect as of the time when the same shall have
been made, and such default or breach shall continue or not be cured for
the period then specified in the related Pooling and Servicing Agreement
after the Trustee shall have received notice specifying such default or
breach and requiring it to be remedied; or
(3) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Trustee,
and such decree or order shall have remained in force undischarged or
unstayed for the period then specified in the related Pooling and Servicing
Agreement; or
(4) a conservator or receiver or liquidator or sequestrator or
custodian of the property of the Trustee is appointed in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings of or relating to the Trustee or relating to all or
substantially all of its property; or
(5) the Trustee shall become insolvent (however insolvency is
evidenced), generally fail to pay its debts as they come due, file or
consent to the filing of a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors, voluntarily suspend payment of its obligations, or take
corporate action for the purpose of any of the foregoing.
If an event described above occurs and is continuing, then, and in
every such case (i) the Company, (ii) the Securityholders (on the terms set
forth in the related Pooling and Servicing Agreement), or (iii) if there is a
Credit Enhancer, such Credit Enhancer may, whether or not the Trustee has
resigned, immediately, concurrently with the giving of notice to the Trustee,
and without delay, appoint a successor Trustee pursuant to the terms of the
Pooling and Servicing Agreement.
No Securityholder will have any right to institute any proceeding,
judicial or otherwise, with respect to a Pooling and Servicing Agreement or any
Credit Enhancement, if applicable, or for the appointment of a receiver or
trustee, or for any other remedy under the Pooling and Servicing Agreement,
unless:
(1) such Securityholder has previously given written notice to the
Company and the Trustee of such Securityholder's intention to institute
such proceeding;
(2) the Securityholders of not less than 25% of the Percentage
Interests represented by certain specified classes of Securities then
outstanding shall have made written request to the Trustee to institute
such proceeding;
(3) such Securityholder or Securityholders have offered to the Trustee
reasonable indemnity, against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for the period specified in the related Pooling and
Servicing Agreement, generally not in excess of 60 days after receipt of
such notice, request and offer of indemnity, has failed to institute such
proceeding;
(5) as long as such action affects any credit-enhanced class of
Securities outstanding, the related Credit Enhancer has consented in
writing thereto; and
(6) no direction inconsistent with such written request has been given
to the Trustee during such specified period by the Securityholders of a
majority of the Percentage Interests represented by certain specified
classes of Securities;
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No one or more Securityholders will have any right in any manner whatever by
virtue of, or by availing themselves of, any provision of the Pooling and
Servicing Agreement to affect, disturb or prejudice the rights of any other
Securityholder of the same class or to obtain or to seek to obtain priority or
preference over any other Securityholder of the same class or to enforce any
right under the Pooling and Servicing Agreement, except in the manner provided
in the Pooling and Servicing Agreement and for the equal and ratable benefit of
all of the Securityholders of the same class.
In the event the Trustee receives conflicting or inconsistent requests
and indemnity from two or more groups of Securityholders, each representing less
than a majority of the applicable class of Securities, the Trustee in its sole
discretion may determine what action, if any, shall be taken, notwithstanding
any other provision of the Pooling and Servicing Agreement.
Notwithstanding any other provision in the Pooling and Servicing
Agreement, the Securityholder of any Security has the right, which is absolute
and unconditional, to receive distributions to the extent provided in the
Pooling and Servicing Agreement with respect to such Security or to institute
suit for the enforcement of any such distribution, and such right shall not be
impaired without the consent of such Security.
Either (i) the Securityholders of a majority of the Percentage
Interests represented by certain specified classes of Securities then
outstanding or (ii) if there is a Credit Enhancer, such Credit Enhancer may
direct the time, method and place of conducting any proceeding for any remedy
available to the Company with respect to the Certificates or exercising any
trust or power conferred on the Trustee with respect to such Certificates;
provided that:
(1) such direction shall not be in conflict with any rule of law or
with a Pooling and Servicing Agreement;
(2) the Company or the Trustee, as the case may be, shall have been
provided with indemnity satisfactory to them; and
(3) the Company or the Trustee, as the case may be, may take any other
action deemed proper by the Trustee which is not inconsistent with such
direction; provided, however, that the Company or the Trustee, as the case
may be, need not take any action which they determine might involve them in
liability or may be unjustly prejudicial to the Securityholders not so
directing.
The Trustee will be liable under the Pooling and Servicing Agreement
only to the extent of the obligations specifically imposed upon and undertaken
by the Trustee therein. Neither the Trustee nor any of the directors, officers,
employees or agents of the Trustee will be under any liability on any Security
or otherwise to any Account, the Company, the Servicer, the Master Servicer or
any Securityholder for any action taken or for refraining from the taking of any
action in good faith under a Pooling and Servicing Agreement, or for errors in
judgment; provided, however, that such provision shall not protect the Trustee
or any such person against any liability which would otherwise be imposed by
reason of negligent action, negligent failure to act or willful misconduct in
the performance of duties or by reason of reckless disregard of obligations and
duties thereunder.
YIELD CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by
the holder for such Security, the Pass-Through Rate on any such Security
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate of payment of
principal on such Security (or the rate at which the notional amount thereof is
reduced if such Security is not entitled to payments of principal) and other
factors.
Each month the interest payable on an actuarial type of Loan will be
calculated as one-twelfth of the applicable Loan Rate multiplied by the
principal balance of such Loan outstanding as of a specified day, usually the
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first day of the month prior to the month in which the Payment Date for the
related series of Securities occurs, after giving effect to the payment of
principal due on such day, subject to any Deferred Interest. With respect to
date of payment Loans, interest is charged to the Obligor at the Loan Rate on
the outstanding principal balance of such Note and calculated based on the
number of days elapsed between receipt of the Obligor's last payment through
receipt of the Obligor's most current payments. The amount of such payments with
respect to each Loan distributed (or accrued in the case of Deferred Interest or
Accrual Securities) either monthly, quarterly or semi-annually to holders of a
class of Securities entitled to payments of interest will be similarly
calculated on the basis of such class' specified percentage of each such payment
of interest (or accrual in the case of Accrual Securities) and will be expressed
as a fixed, adjustable or variable Pass-Through Loan Rate payable on the
outstanding principal balance or notional amount of such Security, calculated as
described herein and in the related Prospectus Supplement. Holders of Strip
Securities or a class of Securities having a fixed Pass-Through Rate that varies
based on the weighted average Loan Rate of the underlying Loans will be affected
by disproportionate prepayments and repurchases of Loans having higher Net Loan
Rates or rates applicable to the Strip Securities, as applicable.
The effective yield to maturity to each holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable Pass-Through Rate and purchase price of such Security because, while
interest will accrue on each Loan from the first day of each month, the
distribution of such interest will be made once a month on the date set forth in
the related Prospectus Supplement (the " Interest Payment Date") or, in the case
of quarterly-pay Securities, on the Interest Payment Date of every third month
or, in the case of semi-annual-pay Securities, on the Interest Payment Date of
every sixth month following the month or months of accrual.
A class of Securities may be entitled to payments of interest at a
fixed Pass-Through Rate specified in the related Prospectus Supplement, a
variable Pass-Through Rate or adjustable Pass-Through Rate calculated based on
the weighted average of the Loan Rates (net of Servicing Fees (each, a "Net Loan
Rate")) of the related Loans for the designated periods preceding the Payment
Date if so specified in the related Prospectus Supplement, or at such other
variable rate as may be specified in the related Prospectus Supplement.
The aggregate payments of interest on a class of Securities, and the
yield to maturity thereon, will be affected by the rate of payment of principal
on the Securities (or the rate of reduction in the notional balance of
Securities entitled only to payments of interest) and, in the case of Securities
evidencing interests in ARM Loans, by changes in the Net Loan Rates on the ARM
Loans. See "Maturity and Prepayment Considerations" below. The yield on the
Securities also will be affected by liquidations of Loans following Obligor
defaults and by purchases of Loans required by the Pooling and Servicing
Agreement in the event of breaches of representations made in respect of such
Loans by the Company, the Originators, the Servicer and others, or repurchases
due to conversions of ARM Loans to a fixed interest rate. See "Underwriting
Program--Representations" and "Descriptions of the Securities--Assignment of
Loans" above. In general, if a class of Securities is purchased at initial
issuance at a premium and payments of principal on the related Loans occur at a
rate faster than anticipated at the time of purchase, the purchaser's actual
yield to maturity will be lower than that assumed at the time of purchase.
Conversely, if a class of Securities is purchased at initial issuance at a
discount and payments of principal on the related Loans occur at a rate slower
than that assumed at the time of purchase, the purchaser's actual yield to
maturity will be lower than that originally anticipated. The effect of principal
prepayments, liquidations and purchases on yield will be particularly
significant in the case of a series of Securities having a class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which such class is entitled. Such a
class likely will be sold at a substantial premium to its principal balance, if
any, and any faster than anticipated rate of prepayments will adversely affect
the yield to holders thereof. In certain circumstances, rapid prepayments may
result in the failure of such holders to recoup their original investment. In
addition, the yield to maturity on certain other types of classes of Securities,
including Accrual Securities or certain other classes in a series including more
than one class of Securities, may be relatively more sensitive to the rate of
prepayment on the related Loans than other classes of Securities.
The timing of changes in the rate of principal payments on or
repurchases of the Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over time
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is consistent with an investor's expectation. In general, the earlier a
prepayment of principal on the underlying Loans or a repurchase thereof, the
greater will be the effect on an investor's yield to maturity. As a result, the
effect on an investor's yield of principal payments and repurchases occurring at
a rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of a series of Securities would not be
fully offset by a subsequent like reduction (or increase) in the rate of
principal payments.
The Loan Rates on certain ARM Loans subject to negative amortization
adjust monthly and their amortization schedules adjust less frequently. During a
period of rising interest rates as well as immediately after origination
(initial Loan Rates are generally lower than the sum of the Indices applicable
at origination and the related Note Margins) the amount of interest accruing on
the principal balance of such Loans may exceed the amount of the minimum
scheduled monthly payment thereon. As a result, a portion of the accrued
interest on negatively amortizing Loans may become Deferred Interest that will
be added to the principal balance thereof and will bear interest at the
applicable Loan Rate. The addition of any such Deferred Interest to the
principal balance will lengthen the weighted average life of the Securities
evidencing interests in such Loans and may adversely affect yield to holders
thereof depending upon the price at which such Securities were purchased. In
addition, with respect to certain ARM Loans subject to negative amortization,
during a period of declining interest rates, it might be expected that each
minimum scheduled monthly payment on such a Loan would exceed the amount of
scheduled principal and accrued interest on the principal balance thereof, and
since such excess will be applied to reduce such principal balance, the weighted
average life of such Securities will be reduced and may adversely affect yield
to holders thereof depending upon the price at which such Securities were
purchased.
For each Loan Pool, if all necessary advances are made and if there is
no unrecoverable loss on any Loan and if the related Credit Enhancer is not in
default under its obligations or other Credit Enhancement has not been
exhausted, the net effect of each distribution respecting interest will be to
pass-through to each holder of a class of Securities entitled to payments of
interest an amount which is equal to one month's interest (or, in the case of
quarterly-pay Securities, three month's interest or, in the case of
semi-annually-pay Securities, six month's interest) at the applicable
Pass-Through Rate on such class' principal balance or notional balance, as
adjusted downward to reflect any decrease in interest caused by any principal
prepayments and the addition of any Deferred Interest to the principal balance
of any Loan. "Description of the Securities--Principal and Interest on the
Securities."
With respect to certain of the ARM Loans, the Loan Rate at origination
may be below the rate that would result if the index and margin relating thereto
were applied at origination. Under typical underwriting standards, the Obligor
under each Loan will be qualified on the basis of the Loan Rate in effect at
origination. The repayment of any such Loan may thus be dependent on the ability
of the Obligor to make larger level monthly payments following the adjustment of
the Loan Rate.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Loan Pools," the original terms to
maturity of the Loans in a given Loan Pool will vary depending upon the type of
Loans included in such Loan Pool. The Prospectus Supplement for a series of
Securities will contain information with respect to the types and maturities of
the Loans in the related Loan Pool. The prepayment experience with respect to
the Loans in a Loan Pool will affect the maturity, average life and yield of the
related series of Securities.
With respect to Balloon Loans, payment of the Balloon Amount (which,
based on the amortization schedule of such Loans, may be a substantial amount)
will generally depend on the Obligor's ability to obtain refinancing of such
Loan or to sell the 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 Obligor's financial situation, prevailing mortgage loan
interest rates, the Obligor's equity in the related Property, tax laws and
prevailing general economic conditions. Neither the Company, the Servicer, the
Master Servicer, nor any of their affiliates will be obligated to refinance or
repurchase any Loan or to sell the Property.
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A number of factors, including obligor mobility, economic conditions,
enforceability of due-on-sale clauses, loan market interest rates and the
availability of funds, affect prepayment experience. The Loans will generally
contain due-on-sale provisions permitting the obligee to accelerate the maturity
of the Loan upon sale or certain transfers by the Obligor of the underlying
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Property and it is entitled to do so under applicable law; provided,
however, that the Servicer will not take any action in relation to the
enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Certain ARM Loans may
be assumable under certain conditions if the proposed transferee of the related
Property establishes its ability to repay the Loan and, in the reasonable
judgment of the Servicer, the Master Servicer or the related Sub-Servicer, the
security for the ARM Loan would not be impaired or might be improved by the
assumption. The extent to which ARM Loans are assumed by purchasers of the
Properties rather than prepaid by the related Obligors in connection with the
sales of the Properties will affect the weighted average life of the related
series of Securities. See "Description of the Securities--Collection and Other
Servicing Procedures" and "Certain Legal Aspects of the Loans and Related
Matters--Enforceability of Certain Provisions" for a description of certain
provisions of the Pooling and Servicing Agreement and certain legal developments
that may affect the prepayment experience on the Loans.
There can be no assurance as to the rate of prepayment of the Loans.
The Company is not aware of any reliable, publicly available statistics relating
to the principal prepayment experience of diverse portfolios of loans such as
the Loans over an extended period of time. All statistics known to the Company
that have been compiled with respect to prepayment experience on loans indicates
that while some loans may remain outstanding until their stated maturities, a
substantial number will be paid prior to their respective stated maturities.
Although the Loan Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will (i) not increase or decrease such Loan Rates
by more than a fixed percentage amount on each adjustment date, (ii) not
increase such Loan Rates over a fixed percentage amount during the life of any
ARM Loan and (iii) be based on an index (which may not rise and fall
consistently with interest rates) plus the related Note Margin (which may be
different from margins being used at the time for newly originated adjustable
rate loans). As a result, the Loan Rates on the ARM Loans in a Loan Pool at any
time may not equal the prevailing rates for similar, newly originated adjustable
rate loans. In certain rate environments, the prevailing rates on fixed-rate
loans may be sufficiently low in relation to the then-current Loan Rates on ARM
Loans that the rate of prepayment may increase as a result of refinancings.
There can be no certainty as to the rate of prepayments on the Loans during any
period or over the life of any series of Securities.
The related Prospectus Supplement will specify whether the related
Pooling and Servicing Agreement may provide that all or a portion of the
principal collected on or with respect to the related Loans may be applied by
the related Trustee to the acquisition of additional Loans during a specified
period (rather than used to fund payments of principal to Securityholders during
such period) with the result that the related securities possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any such interest-only or revolving
period may terminate prior to the end of the specified period and result in the
earlier than expected amortization of the related Securities upon the occurrence
of certain events, which may include (i) default in payment of interest or
principal to the Certificateholders, (ii) breach of the Company's
representations and warranties that materially and adversely affects the
Certificateholders, which continues for a period of 30 days after notice to the
Company, (iii) the commencement of proceedings against the Company to adjudicate
it insolvent, (iv) an Event of Servicing Termination has occurred, (v) the
Certificate Insurer has made payments to the Trustee, (vi) that the ratio of
delinquent Loans to the aggregate Loan Balance exceeds a percentage set forth in
the related Prospectus Supplement or (vii) the ratio of defaulted Loans to the
aggregate Loan Balance exceeds a percentage set forth in the related Prospectus
Supplement.
In addition, the related Prospectus Supplement will specify whether the
related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
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The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Loans, or to attempt to match
the amortization rate of the related Securities to an amortization schedule
established at the time such Securities are issued. Any such feature applicable
to any Securities may terminate upon the occurrence of events described herein
under "Description of the Securities -- General" and as specified in the related
Prospectus Supplement, resulting in the current funding of principal payments to
the related Securityholders and an acceleration of the amortization of such
Securities.
Under certain circumstances, the Servicer, the Company or, if specified
in the related Prospectus Supplement, the holders of the REMIC Residual
Securities or the Credit Enhancer may have the option to purchase the Loans in a
Trust Estate. See "The Pooling and Servicing Agreement--Termination; Retirement
of Securities."
CERTAIN LEGAL ASPECTS OF THE LOANS AND RELATED MATTERS
Mortgage Loans
The following discussion contains 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
following does 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 Properties
may be situated. In the event that a particular Trust Fund contains mortgage
loans with a concentration in a particular state, and such state's laws vary
materially from the general discussion below, the related Prospectus Supplement
will elaborate on the relevant laws of such state. The following is qualified in
its entirety by reference to the applicable federal and state laws governing the
Mortgage Loans. Any particular legal matters related to specific types of
Mortgage Loans will be set forth in the related Prospectus Supplement.
General
The Mortgage Loans will be secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
Property subject to a Mortgage Loan is located. In some states, a mortgage
creates a lien upon the real property encumbered by the mortgage. In other
states, the mortgage conveys legal title to the property to the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness secured
thereby). The mortgage is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
between mortgages depends on their terms in some cases or on the terms of
separate subordination or intercreditor agreements, and generally on the order
of recordation of the mortgage in the appropriate recording office. There are
two parties to a mortgage, the mortgagor, who is the obligor and homeowner, and
the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the obligor is the beneficiary; at
origination of a mortgage loan, the obligor executes a separate undertaking to
make payments on the mortgage note. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties; the obligor-homeowner called the
trustor (similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the obligor grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by law, the express provisions of the
deed of trust or mortgage, and, in some cases, the directions of the
beneficiary.
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Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Securities, the Mortgage Loans also may consist of Cooperative Loans evidenced
by Cooperative Notes secured by security interests in shares issued by
cooperatives, which are private corporations that are entitled to be treated as
housing cooperatives under federal tax law, and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which it covers,
the priority of which will depend on the terms of the particular security
agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each cooperative share owns in fee or has a leasehold interest in all
the real property and owns in fee or leases the building and all separate
dwelling units therein. The cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
or mortgages on the cooperative buildings or underlying land, as is generally
the case, or an underlying lease of the land, as is the case in some instances,
the cooperative, as property mortgagor, or lessee, as the case may be, also is
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's buildings or the obtaining of
capital by the cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that cooperative is the landlord
generally is subordinate to the interest of the holder of a blanket mortgage and
to the interest of the holder of a land lease. If the cooperative is unable to
meet the payment obligations (i) arising under a blanket mortgage, the mortgagee
holding a blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements.
Also, a blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one final payment at maturity. The inability of the cooperative to
refinance a mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee. Similarly, a land lease has an
expiration date and the inability of the cooperative to extend its term or, in
the alterative, to purchase the land could lead to termination of the
cooperative's interest in the property and termination of all proprietary leases
and occupancy agreements. In either event, a foreclosure by the holder of a
blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender who
financed the purchase by an individual tenant-stockholder of cooperative shares
or, in the case of the Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary leases or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of cooperative shares. See "Foreclosure on Shares of
Cooperatives" below.
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Foreclosure
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale (private sale) under a specific provision in the
deed of trust and state laws which authorize the trustee to sell the property
upon any default by the borrower under the terms of the note or deed of trust.
Beside the non-judicial remedy, a deed of trust may be judicially foreclosed. In
addition to any notice requirements contained in a deed of trust, in some
states, the trustee must record a notice of default and within a certain period
of time 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 local 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 unless there is a great deal of economic incentive for the new
purchaser to purchase the subject property at the 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, the lender may be entitled to a
deficiency judgment. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
Foreclosure on Shares of Cooperatives
The cooperative shares and proprietary lease or occupancy agreement
owned by the tenant-stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the cooperative for failure by the tenant
stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative buildings
incurred by such tenant-stockholder. Commonly, rent and other obligations and
charges arising under a proprietary lease or occupancy agreement that are owed
to the cooperative are made liens upon the shares to which the proprietary lease
or occupancy agreement relates. In addition, the proprietary lease or occupancy
agreement generally permits the cooperative to terminate such lease or agreement
in the event the borrower defaults in the performance of covenants thereunder.
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Typically, the lender and the cooperative enter into a recognition agreement
that, together with any lender protection provisions contained in the
proprietary lease, establishes the rights and obligations of both parties in the
event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement usually will constitute a
default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the cooperative will
recognize the lender's lien against proceeds from a sale of the cooperative
apartment, subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement or sums that have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the amount realized
upon a sale of the collateral below the outstanding principal balance of the
Cooperative Loan and accrued and unpaid interest thereon.
Recognition agreements generally also provide that in the event of a
foreclosure on a Cooperative Loan, the lender must obtain the approval or
consent of the cooperative as required by the proprietary lease before
transferring the cooperative shares or assigning the proprietary lease.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholder.
In New York, foreclosure on the cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
sale and the sale price. Generally, a sale conducted according to the usual
practice of banks selling similar collateral will be considered reasonably
conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the borrower and foreclosed junior obligors or other parties are
given a statutory period in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The rights
of redemption would defeat the title of any purchaser subsequent to foreclosure
or sale under a deed of trust. 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,
there is no right to redeem property after a trustee's sale under a deed of
trust.
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Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure. A
deficiency judgment is a personal judgment against the former borrower equal in
most cases to the difference between the amount due to the lender and the net
amount realized upon the public sale of the real property. In the case of a 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 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, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction also have 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.
Certain states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related 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, lenders
have been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, such courts have limited the right of the lender to foreclose if
the default under the loan is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second deed of
trust affecting the property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
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upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include, by example, the federal Truth-in-Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and the California Fair Debt
Collection Practices Act. These laws and regulations impose specific statutory
liabilities upon lenders who originate mortgage loans and fail to comply with
the provisions of the law. In some cases, this liability may affect assignees of
the mortgage loans.
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 generally will 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 some states, however, such a lien will not
have priority over prior recorded liens of a deed of trust. In addition, under
federal environmental legislation and under state law in a number of states, a
secured party which takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale or assumes active control over the operation or
management of a property so as to be deemed an "owner" or "operator" of the
property may be liable for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a lender (such as a Trust Estate) secured by residential real
property. In the event that title to a Property securing a Mortgage Loan in a
Trust Estate was acquired by the Trust and cleanup costs were incurred in
respect of the Property, the holders of the related series of Securities might
realize a loss if such costs were required to be paid by the Trust.
Enforceability of Certain Provisions
Generally all of the Loans 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 a
new home buyer rather than being paid off, that may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans that may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles generally are designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include 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
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
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the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
Certain Provisions of California Deeds of Trust
Most institutional lenders in California use a form of deed of trust
that confers on the beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the deed of trust, in such order as the beneficiary may
determine, provided, however, that California law prohibits the beneficiary from
applying insurance and condemnation proceeds to the indebtedness secured by the
deed of trust unless the beneficiary's security has been impaired by the
casualty or condemnation, and, if such security has been impaired, permits such
proceeds to be so applied only to the extent of such impairment. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, and, as a
result thereof, the beneficiary's security is impaired, the beneficiary under
the underlying first deed of trust will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the first deed of trust. Proceeds in excess of the
amount of indebtedness secured by a first deed of trust will, in most cases, be
applied to the indebtedness of a junior deed of trust.
Another provision typically found in the forms of deed of trust used by
most institutional lenders in California obligates the trustor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the deed
of trust, to provide and maintain fire insurance on the property, to maintain
and repair the property and not to commit or permit any waste thereof, and to
appear in and defend any action or proceeding purporting to affect the property
or the rights of the beneficiary under the deed of trust. Upon a failure of the
trustor to perform any of these obligations, the beneficiary is given the right
under the deed of trust to perform the obligation itself, at its election, with
the trustor agreeing to reimburse the beneficiary for any sums expended by the
beneficiary on behalf of the trustor. All sums so expended by the beneficiary
become part of the indebtedness secured by the deed of trust.
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 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.
As indicated above under "Underwriting Program--Representations," each
Originator 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 Loan Rates on the Mortgage Loans will be
subject to applicable usury laws as in effect from time to time.
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Alternative Mortgage Instruments
Alternative mortgage instruments, including ARM 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 alterative 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.
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 Obligor who enters military service after the
origination of such Obligor's Mortgage Loan (including a Obligor 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 Obligor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
Obligors 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 Obligors 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 effected by the Relief Act. Application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of the 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 Securities, and would
not be covered by advances, any Letter of Credit or any other form of Credit
Enhancement provided in connection with the related series of Securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the Obligor'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
Securities 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 Securityholders of
the related series.
Manufactured Housing Contracts
General
The following discussion of certain legal aspects of the Contracts is
general in nature. Because certain of such legal aspects are governed by
applicable state law (which laws may differ substantially), the following does
not purport to be complete nor reflect the laws of any particular state, nor
encompass the laws of all states in which the properties securing the Contracts
are situated. In the event that a particular Trust Fund contains Contracts with
a concentration in a particular state, and such state's laws vary materially
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from the general discussion below, the related Prospectus Supplement will
elaborate on the relevant laws of such state. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Contracts.
As a result of the assignment of the Contracts in a Loan Pool to the
Trustee, the Trust will succeed collectively to all of the rights (including the
right to receive payment on such Contracts), and will assume the obligations of
the obligee, under such Contracts. Each Contract evidences both (a) the
obligation of the Obligor to repay the loan evidenced thereby, and (b) the grant
of a security interest in the Manufactured Home. Certain aspects of both
features of the Contracts are described more fully below.
The following discussion focuses on issues relating generally to the
Company's or any lender's interest in manufactured housing contracts.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be located in all 50
states and the District of Columbia. Security interests in Manufactured Homes,
similar to the ones securing the Contracts, ("Manufactured Homes") generally may
be perfected either by notation of the secured party's lien on the certificate
of title or by delivery of the required documents and payment of a fee to the
state motor vehicle authority, depending on state law. In some non-title states,
perfection pursuant to the provisions of the UCC is required. Generally, with
respect to manufactured housing Contracts individually originated or purchased
by the Company, the Company effects such notation or delivery of the required
documents and fees, and obtains possession of the certificate of title or a lien
certificate, as appropriate, under the laws of the state in which any
Manufactured Home securing a manufactured housing conditional sales Contract is
registered. If the Company 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 Company 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 to move them, courts in many states have held that Manufactured Homes,
under certain circumstances, may 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 Manufactured 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 Manufactured Home is located. These filings must be made in
the real estate records office of the county where the Manufactured Home is
located. Most of the Contracts in any Loan Pool will contain provisions
prohibiting the Obligor from permanently attaching the Manufactured Home to its
site if it was not so attached on the date of the Contract. As long as each
Manufactured Home was not so attached on the date of the Contract and 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
Company's security interest in the Manufactured Home. Upon the conveyance of
each Contract to the Company, the Company will represent that it had obtained a
perfected first-priority security interest in the Manufactured Home securing the
related Contract. Such representation, however, will not be based upon an
inspection of the site of any Manufactured Home to determine if the Manufactured
Home had become permanently attached to its site.
In the absence of fraud, forgery or permanent affixation of a
Manufactured Home to its site by the obligor, 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 (or if applicable,
perfection under the UCC) will be sufficient to protect the Company 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 security interest in favor of the Company is not
perfected, such security interest would be subordinate to the claims of, among
others, subsequent purchasers for value of and holders of perfected security
interests in such Manufactured Homes.
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In the event that the Obligor 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 Obligor registers the Manufactured Home in such state. If
the Obligor were to relocate a Manufactured Home to another state and were to
re-register the Manufactured Home in such state, and if steps are not taken by
the Company or the applicable Trust, to re-perfect an existing 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 such Manufactured Home. The Company must therefore surrender possession
if it holds the certificate of title to such Manufactured Home or, in the case
of Manufactured Homes registered in states which provide for notation of lien,
the Company would receive notice of surrender if its 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 which do not require a
certificate of title for registration of a Manufactured Home, re-registration
could defeat the perfection. In the ordinary course of servicing its
manufactured housing Contracts, the Company takes steps to effect such
re-perfection upon receipt of notice of re-registration or information from the
Obligor as to relocation. Similarly, when an Obligor under a Contract sells a
Manufactured Home, the Company must surrender possession of the certificate of
title or the Company will receive notice as a result of its lien noted thereon
and accordingly the Company will have an opportunity to require satisfaction of
the related Contract before release of the lien. Such protections generally
would not be available in the case of security, interests in Manufactured Homes
located in non-title states where perfection of such security interest is
achieved by appropriate filings under the UCC (as in effect in such state).
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority over a
perfected security interest in the Manufactured Home. Upon the conveyance of
each Contract to the Trust, the Company will represent that it had obtained a
perfected first-priority security interest in the Manufactured Home securing the
related Contract. However, such warranty will not be based on any lien searches
or other review. In addition, such liens could arise after the date of initial
issuance of the Securities. Notice may not be given to the Company, the
Servicer, the Trustee or Securityholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent required by the
Pooling and Servicing Agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such defaulted Contracts. In general,
as long as a Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a manufactured housing
Contract generally must give the obligor a number of days' notice prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the obligor and commercial reasonableness in effecting such a sale.
The law in most states also requires that the obligor be given notice of any
sales prior to resale of the unit so that the obligor may redeem at or before
such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency, judgment from an obligor for any deficiency on repossession
and resale of the Manufactured Home securing such obligor's Contract. However,
some states impose prohibitions or limitations on deficiency judgments, and in
many cases the defaulting obligor would have no assets with which to pay a
judgment.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the Company's ability to repossess and resell any Manufactured Home or
enforce a deficiency judgment.
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Land Secured Contracts
General. The Land Secured Contract will, to the extent described under
"The Loan Pool," be secured by Mortgages on the property on which the related
Manufactured Homes are located. The Mortgages will either be mortgages or deeds
of trust, depending on the general real estate practice in the state in which
the Property is located. A mortgage creates a lien upon the real property
described in the mortgage. There are two parties to a mortgage: the mortgagor,
who is the borrower, and the mortgagee, who is the lender. The mortgagor
delivers to the mortgagee a note or bond evidencing the loan and the mortgage. A
deed of trust normally has three parties: the real property owner called the
trustor (similar to a mortgagor), a lender called the beneficiary (similar to
the mortgagee) and a third-party grantee called the trustee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, "in
trust with power of sale" to the trustee to secure payment of the obligation.
Non-Recordation. Because of the expenses and administrative
inconvenience involved, the assignment of mortgages or deeds of trust to the
Trustee will not be recorded with respect to the Mortgages securing each Land
Secured Contract. The failure to record the assignments to the Trustee of the
Mortgage securing Land Secured Contracts may result in the sale of such
Contracts or the Trustee's rights in the land secured by the Mortgage being
ineffective against creditors of the Company or against a trustee in bankruptcy
of the Company or against a subsequent purchaser of such Contracts from the
Company, without notice of the sale to the Trustee.
Foreclosure. Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal pleadings upon
all parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating and serving necessary parties. Judicial foreclosure proceedings are
generally not contested by any of the parties due to the lack of the mortgagor's
equity in the property. However, when the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be time
consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court issues a judgment of foreclosure and a court officer
conducts the sale of the property.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages.
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, 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. Certain state laws control the amount of foreclosure expenses and
costs, including attorneys' fees, which may be recovered by a lender.
The sale must be conducted by public auction and must be held in the
county where all or some part of the property subject to the mortgage is
located. 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
not common for a third party to purchase the property at the foreclosure sale.
Rather, the lender generally purchases the property for an amount equal to the
unpaid principal amount of the note, accrued and unpaid interest and the
expenses of foreclosure. 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 commonly will obtain the services of a real estate
broker and pay the broker a 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.
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Rights of Redemption. In some states, after a sale pursuant to a deed
of trust or a foreclosure of a mortgage, the borrower and certain foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. Redemption may occur upon payment of the entire principal
balance of the loan, accrued statutory interest and expenses of foreclosure. The
effect of a right of redemption is to diminish the ability of the lender to sell
the foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure and before
expiration of the redemption period. 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.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory restrictions that limit the remedies of a
mortgagee under a mortgage relating to a single family residence. In some
states, statutes limit the right of the lender to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the borrower equal in most
cases to the difference between the amount due to the lender and the net amount
realized upon the foreclosure sale.
Some state statutes may require the lender to exhaust the security
afforded under a mortgage or deed of trust 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.
Other statutory provisions may limit any deficiency judgment against
the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of such
sale. The purpose of these statutes is to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided
for in certain instances where the value of the lender's security has been
impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In addition to anti-deficiency and related legislation, numerous other
federal and state, statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. A bankruptcy court may
grant the debtor a reasonable time to cure a payment default, and in the case of
a mortgage loan not secured by the debtor's principal residence, also may reduce
the monthly payments due under such mortgage loan, change the rate of interest
and alter the mortgage loan repayment schedule. Certain court decisions have
applied such relief to claims secured by, the debtor's principal residence.
The Code provides priority to certain tax liens over the lien of the
mortgage or deed of trust. The laws of some states provide priority to certain
tax liens over the lien of the mortgage or deed of trust. Numerous federal and
some state consumer protection laws impose substantive requirements upon
mortgage lenders in connection with the origination, servicing and enforcement
of mortgage loans. 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 and regulations.
These federal laws and state laws impose specific statutory liabilities upon
lenders who originate or service 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.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction
(and certain related lenders and assignees) to transfer such contract free of
notice of claims by the obligor thereunder. The effect of this rule is to
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subject the assignee of such a contract to all claims and defenses which the
obligor could assert against the seller of goods. Liability under this rule is
limited to amounts paid under such a contract; however, the obligor also may be
able to assert the rule to set off remaining amounts due as a defense against a
claim brought by the assignee against such obligor. Generally, this rule will
apply to any Contracts conveyed to the Trustee and to any claims made by the
Servicer on behalf of the Trustee, as the assignee of the Company. Numerous
other federal and state consumer protection laws impose requirements applicable
to the origination and lending pursuant to such Contracts, including the Truth
in Lending Act, the Federal Trade Commission Act, the Fair Credit Billing Act,
the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt
Collection Practices Act and the Uniform Consumer Credit Code. In the case of
some of these laws, the failure to comply with their provisions may affect the
enforceability of the related Contract or create liability for the Trust.
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), if so required by a obligor under a manufactured
housing contract who enters military service after the origination of such
obligor's contract (including a obligor who is a member of the National Guard or
is in reserve status at the time of the origination of the contract and is later
called to active duty), such obligor may not be charged interest above an annual
rate of 6% during the period of such obligor's active duty status, unless a
court orders otherwise upon application of the lender. In addition, the Relief
Act imposes limitations which would impair the ability of any lender to
foreclose on an affected contract during the obligor's period of active duty
status. It is possible that application of the Relief Act to certain of the
Contracts could have an effect, for an indeterminate period of time, on the
ability of the Servicer to collect full amounts of interest or foreclose on such
Contracts and to the extent not covered by a Credit Facility, could result in
delays in payment or losses to the holders of the related Certificates. The
Company will not make any representation or warranty as to whether any Contract
is or could become subject to the Relief Act.
Transfers of Manufactured Homes; Enforceability of
Restrictions on Transfer
The Contracts comprising any Loan Pool generally will prohibit the sale
or transfer of the related Manufactured Homes without the consent of the Obligee
and permit the acceleration of the maturity of the Contracts by the Obligee upon
any such sale or transfer that is not consented to. Under the Pooling and
Servicing Agreement, the Servicer may be required to consent to any such
transfer and to permit the assumption of the related Contract if the proposed
buyer meets the Servicer's underwriting standards and enters into an assumption
agreement, the Servicer determines that permitting such assumption will not
materially increase the risk of nonpayment of the Contract and such action will
not adversely affect or jeopardize any coverage under any insurance policy
required by the Agreement. If the Servicer determines that these conditions have
not been fulfilled, then it may be required to withhold its consent to the
transfer, but only to the extent permitted under the Contract and applicable law
and governmental regulations and only to the extent that such action will not
adversely affect or jeopardize any coverage under any insurance policy required
by the Agreement. In certain cases, a delinquent Obligor may attempt to transfer
a Manufactured Home in order to avoid a repossession proceeding with respect to
such Manufactured Home.
In the case of a transfer of a Manufactured Home after which the
Obligee desires to accelerate the maturity of the related Contract, the
Obligee's ability to do so will depend on the enforceability under state law of
the clause permitting acceleration on transfer. The Garn-St. Germain Depositary
Institutions Act of 1982 preempts, subject to certain exceptions and conditions,
state laws prohibiting enforcement of such clauses applicable to Manufactured
Homes. To the extent such exceptions and conditions apply in some states, the
Servicer may be prohibited from enforcing such a clause in respect of certain
Manufactured Homes.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Controls Act of 1980, as amended ("Title V"), provides that, subject to the
following conditions, state usury limitations shall not apply to any loan which
is secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered under Title V if, among other things, they satisfy
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certain conditions 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 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.
Upon the conveyance of each Contract to the Trust, Receivables Corp. will
represent that such Contract complied with applicable usury laws.
FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a general discussion of the material anticipated
federal income tax considerations to investors of the purchase, ownership and
disposition of the Offered Securities. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
considerations applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities.
Dewey Ballantine, New York, New York has delivered its opinion to the
effect that the following discussion accurately describes the material federal
income tax consequences to the holders of the Offered Securities. With respect
to any tax opinion to be given by special tax counsel to the Company with
respect to a series of Securities, such counsel will file its opinion on Form
8-K with the Commission prior to issuance of such Securities.
The following discussion addresses securities of three types: (i)
securities ("Grantor Trust Securities") representing interests in a Trust (a
"Grantor Trust") which the Company will covenant not to elect to have treated as
a real estate mortgage investment conduit (a "REMIC"); (ii) securities ("REMIC
Securities") representing interests in a Trust, or a portion thereof, which the
Company will covenant to elect to have treated as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of 1986, as amended (the "Code"); and
(iii) securities ("Debt Securities") that are intended to be treated for federal
income tax purposes as indebtedness secured by the underlying Loans. This
Prospectus does not address the tax treatment of partnership interests. Such a
discussion will be set forth in the related Prospectus Supplement for any Trust
issuing Securities characterized as partnership interests. The Prospectus
Supplement for each series of Securities will indicate whether a REMIC election
(or elections) will be made for the related Trust and, if a REMIC election is to
be made, will identify all "regular interests" and "residual interests" in the
REMIC. For purposes of this discussion, references to a "Securityholder" or a
"Holder" are to the beneficial owner of a Security.
Grantor Trust Securities
With respect to each series of Grantor Trust Securities, Dewey
Ballantine, special tax counsel to the Company, will deliver its opinion to the
Company that the related Grantor Trust will be classified as a grantor trust and
not as a partnership or an association taxable as a corporation. Accordingly,
each Holder of a Grantor Trust Security will be treated as the owner of an
interest in the Loans included in the Grantor Trust.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Loans constituting the related Grantor Trust, together with interest thereon at
a pass-through rate, will be referred to as a "Grantor Trust Fractional Interest
Security." A Grantor Trust Security representing ownership of all or a portion
of the difference between interest paid on the Loans constituting the related
Grantor Trust and interest paid to the Holders of Grantor Trust Fractional
Interest Securities issued with respect to such Grantor Trust will be referred
to as a "Grantor Trust Strip Security."
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Special Tax Attributes
Dewey Ballantine, special tax counsel to the Company, will deliver its
opinion to the Company that (a) Grantor Trust Fractional Interest Securities
will represent interests in (i) "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code; and (ii)
"obligation[s] (including any participation or certificate of beneficial
ownership therein) which . . . [are] principally secured by an interest in real
property" within the meaning of Section 860G(a)(3)(A) of the Code; and (b)
interest on Grantor Trust Fractional Interest Securities will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Section 856(c)(3)(B) of the Code. In
addition, the Grantor Trust Strip Securities will be "obligation[s] (including
any participation or certificate of beneficial ownership therein) . . .
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Holders of Grantor Trust Securities
Holders of Grantor Trust Fractional Interest Securities will be
required to report on their federal income tax returns their respective shares
of the income from the Loans (including amounts used to pay reasonable servicing
fees and other expenses but excluding amounts payable to Holders of any
corresponding Grantor Trust Strip Securities) and, subject to the limitations
described below, will be entitled to deduct their shares of any such reasonable
servicing fees and other expenses. If a Holder acquires a Grantor Trust
Fractional Interest Security for an amount that differs from its outstanding
principal amount, the amount includible in income on a Grantor Trust Fractional
Interest Security may differ from the amount of interest distributable thereon.
See "--Discount and Premium." Individuals holding a Grantor Trust Fractional
Interest Security directly or through certain pass-through entities will be
allowed a deduction for such reasonable servicing fees and expense only to the
extent that the aggregate of such Holder's miscellaneous itemized deductions
exceeds 2% of such Holder's adjusted gross income. Further, Holders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining alternative minimum taxable
income.
Holders of Grantor Trust Strip Securities will be required to treat such
Securities as "stripped coupons" under Section 1286 of the Code. Accordingly,
such a Holder will be required to treat the excess of the total amount of
payments on such a Security over the amount paid for such Security as original
issue discount and to include such discount in income as it accrues over the
life of such Security. See "--Discount and Premium."
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under "--Discount and Premium." The coupon stripping rules will not apply,
however, if (i) the pass-through rate is no more than 100 basis points lower
than the gross rate of interest payable on the underlying Loans and (ii) the
difference between the outstanding principal balance on the Security and the
amount paid for such Security is less than 0.25% of such principal balance times
the weighted average remaining maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security
(equal to the difference between the amount realized on the sale and the
adjusted basis of such Grantor Trust Security) will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under Section 582(c) of the Code. The adjusted
basis of a Grantor Trust Security will generally equal its cost, increased by
any income reported by the seller (including original issue discount and market
discount income) and reduced (but not below zero) by any previously reported
losses, any amortized premium and by any distributions of principal.
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Grantor Trust Reporting
The Trustee will furnish to each Holder of a Grantor Trust Fractional
Interest Security with each distribution a statement setting forth the amount of
such distribution allocable to principal on the underlying Loans and to interest
thereon at the rate at which interest is payable on such Security. In addition,
within a reasonable time after the end of each calendar year, based on
information provided by the Servicer, the Trustee will furnish to each Holder
during such year such customary factual information as the Servicer deems
necessary or desirable to enable Holders of Grantor Trust Securities to prepare
their tax returns and will furnish comparable information to the Internal
Revenue Service (the "IRS") as and when required to do so by law.
REMIC Securities
If provided in a related Prospectus Supplement, an election will be
made to treat a Trust as one or more REMICs under the Code. Qualification as a
REMIC requires ongoing compliance with certain conditions. With respect to each
series of Securities for which such an election is made, Dewey Ballantine,
special tax counsel to the Company, will deliver its opinion to the Company
that, assuming compliance with the Agreement, the Trust will be treated as a
REMIC for federal income tax purposes. A Trust for which a REMIC election is
made will be referred to herein as a "REMIC Trust." The Securities of each class
will be designated as "regular interests" in the REMIC Trust except that a
separate class will be designated as the "residual interest" in the REMIC Trust.
The Prospectus Supplement for each series of Securities will state whether
Securities of each class will constitute a regular interest (a "REMIC Regular
Security") or a residual interest (a "REMIC Residual Security").
A REMIC Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances
described below. See "--Taxes on a REMIC Trust." Generally, the total income
from the Loans in a REMIC Trust will be taxable to the Holders of the Securities
of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC Regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
Special Tax Attributes
REMIC Regular Securities and REMIC Residual Securities will be "regular
or residual interests in a REMIC" within the meaning of Section
7701(a)(19)(C)(xi) of the Code and "real estate assets" within the meaning of
Section 856(c)(5)(A) of the Code. If at any time during a calendar year less
than 95% of the assets of a REMIC Trust consist of "qualified mortgages" (within
the meaning of Section 860G(a)(3) of the Code) then the portion of the REMIC
Regular Securities and REMIC Residual Securities that are qualifying assets
under those Sections during such calendar year may be limited to the portion of
the assets of such REMIC Trust that are qualified mortgages. Similarly, income
on the REMIC Regular Securities and REMIC Residual Securities will be treated as
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, subject to the same limitation as
set forth in the preceding sentence. For purposes of applying this limitation, a
REMIC Trust should be treated as owning the assets represented by the qualified
mortgages. REMIC Regular Securities and REMIC Residual securities held by a
financial institution to which Section 585 or 586 of the Code applies will be
treated as evidences of indebtedness for purposes of Section 582(c)(1) of the
Code. REMIC Regular Securities will also be qualified mortgages with respect to
other REMICs.
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Taxation of Holders of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the
REMIC Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Closing Date") and not as ownership interests in the REMIC
Trust or its assets. Holders of REMIC Regular Securities that otherwise report
income under a cash method of accounting will be required to report income with
respect to such Securities under an accrual method. For additional tax
consequences relating to REMIC Regular Securities purchased at a discount or
with premium, see "-Discount and Premium," below.
Taxation of Holders of REMIC Residual Securities
Daily Portions. Except as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among the
Holders of REMIC Residual Securities (on such day) in accordance with their
percentage interests on such day. Any amount included in the gross income or
allowed as a loss of any Holder of a REMIC Residual Security by virtue of this
paragraph will be treated as ordinary income or loss.
The requirement that each Holder of a REMIC Residual Security report
its daily portion of the taxable income or net loss of the REMIC Trust will
continue until there are no Securities of any class outstanding, even though the
Holder of the REMIC Residual Security may have received full payment of the
stated interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of
each series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications.
First, a deduction will be allowed for accruals of interest (including any
original issue discount, but without regard to the investment interest
limitation in Section 163(d) of the Code) on the REMIC Regular Securities (but
not the REMIC Residual securities), even though REMIC Regular Securities are for
non-tax purposes evidences of beneficial ownership rather than indebtedness of a
REMIC Trust. Second, market discount or premium equal to the difference between
the total stated principal balances of the qualified mortgages and the basis of
the REMIC Trust therein generally will be included in income (in the case of
discount) or deductible (in the case of premium) by the REMIC Trust as it
accrues under a constant yield method, taking into account the "Prepayment
Assumption" (as defined in the related Prospectus Supplement, see "--Discount
and Premium--Original Issue Discount," below). The basis of a REMIC Trust in the
qualified mortgages is the aggregate of the issue prices of all the REMIC
Regular Securities and REMIC Residual Securities in the REMIC Trust on the
related Closing Date. If, however, a substantial amount of a class of REMIC
Regular Securities or REMIC Residual Securities has not been sold to the public,
then the fair market value of all the REMIC Regular Securities or REMIC Residual
Securities in that class as of the related Closing Date should be substituted
for the issue price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "-Taxes on a REMIC Trust-Prohibited Transactions")
will be taken into account. Fourth, a REMIC Trust generally may not deduct any
item that would not be allowed in calculating the taxable income of a
partnership by virtue of Section 703(a)(2) of the Code. Finally, the limitation
on miscellaneous itemized deductions imposed on individuals by Section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
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fees (See, however, "--Pass-Through of Servicing and Guaranty fees to
Individuals.") In addition, under the REMIC Regulations, any expenses that are
incurred in connection with the formation of a REMIC Trust and the issuance of
the REMIC Regular Securities and REMIC Residual Securities are not treated as
expenses of the REMIC Trust for which a deduction is allowed. If the deductions
allowed to a REMIC Trust exceed its gross income for a calendar quarter, such
excess will be a net loss for the REMIC Trust for that calendar quarter. The
REMIC Regulations also provide that any gain or loss to a REMIC Trust from the
disposition of any asset, including a qualified mortgage or "permitted
investment" (as defined in Section 860G(a)(5) of the Code) will be treated as
ordinary gain or loss.
A Holder of a REMIC Residual Security may be required to recognize
taxable income without being entitled to receive a corresponding amount of cash.
This could occur, for example, if the qualified mortgages are considered to be
purchased by the REMIC Trust at a discount, some or all of the REMIC Regular
Securities are issued at a discount, and the discount included as a result of a
prepayment on a Loan that is used to pay principal on the REMIC Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such REMIC Regular Securities. Taxable income may also be
greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular Securities,
may increase over time as the earlier classes of REMIC Regular Securities are
paid, whereas interest income with respect to any given Loan expressed as a
percentage of the outstanding principal amount of that Loan, will remain
constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual security
has an initial basis in its Security equal to the amount paid for such REMIC
Residual Security. Such basis is increased by amounts included in the income of
the Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into
account any net loss for any calendar quarter to the extent such net loss
exceeds such Holder's adjusted basis in its REMIC Residual Security as of the
close of such calendar quarter (determined without regard to such net loss). Any
loss disallowed by reason of this limitation may be carried forward indefinitely
to future calendar quarters and, subject to the same limitation, may be used
only to offset income from the REMIC Residual Security.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC
Residual Security are subject to certain special tax rules. With respect to a
Holder of a REMIC Residual Security, the "excess inclusions" for any calendar
quarter is defined as the excess (if any) of the daily portions of taxable
income over the sum of the "daily accruals" for each day during such quarter
that such REMIC Residual Security was held by such Holder. The "daily accruals"
are determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Security at the beginning of the calendar quarter and 120% of the "federal
long-term rate" in effect on the Settlement Date, based on quarterly compounding
and properly adjusted for the length of such quarter. For this purpose, the
"adjusted issue price" of a REMIC Residual Security as of the beginning of any
calendar quarter is equal to the "issue price" of the REMIC Residual Security,
increased by the amount of daily accruals for all prior quarters and decreased
by any distributions made with respect to such REMIC Residual Security before
the beginning of such quarter. The "issue price" of a REMIC Residual Security is
the initial offering price to the public (excluding bond houses and brokers) at
which a substantial number of the REMIC Residual Security was sold. The "federal
long-term rate" is a blend of current yields on Treasury securities having a
maturity of more than nine years, computed and published monthly by the IRS.
Holders of REMIC Residual Securities cannot offset any excess
inclusions with losses from other activities. For Holders that are subject to
tax only on unrelated business taxable income (as defined in Section 511 of the
Code), an excess inclusion of such Holder is treated as unrelated business
taxable income. With respect to variable contracts (within the meaning of
Section 817 of the Code), a life insurance company cannot adjust its reserve to
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the extent of any excess inclusion, except as provided in regulations. The REMIC
Regulations indicate that if a Holder of a REMIC Residual Security is a member
of an affiliated group filing a consolidated income tax return, the taxable
income of the affiliated group cannot be less than the sum of the excess
inclusions attributable to all residual interests in REMICS held by members of
the affiliated group. For a discussion of the effect of excess inclusions on
certain foreign investors that own REMIC Residual Securities, see "--Foreign
Investors" below.
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have significant value. Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for significant value that is contained in the REMIC
Regulations and discussed in the two preceding paragraphs would be applicable.
If no such rule is applicable, excess inclusions would be calculated as
discussed above. For this purpose, a REMIC Residual Security has "significant
value" under the REMIC Regulations if (i) its issue price is at least 2% of the
aggregate of the issue prices of all the REMIC Regular Securities and REMIC
Residual Securities in that REMIC Trust and (ii) its "anticipated weighted
average life" is at least 20% of the anticipated weighted average life of such
REMIC Trust.
In determining whether a REMIC Residual Security has significant value,
the "anticipated weighted average life" of such Security is based in part on the
Prepayment Assumption, except that all anticipated payments on such Security are
taken into account, regardless to their designation as principal or interest.
The anticipated weighted average life of a REMIC Trust is the weighted average
of the anticipated weighted average lives of the Securities.
In the case of any REMIC Residual Securities that are held by a real
estate investment trust, the aggregate excess inclusions with respect to such
REMIC Residual Securities reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain) will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Security as if held directly by such
shareholder. Similar rules will apply in the case of regulated investment
companies, common trust funds and certain cooperatives that hold a REMIC
Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of
a REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to
100% of the net income derived from "prohibited transactions." In general, a
"prohibited transaction" means the disposition of a qualified mortgage other
than pursuant to certain specified exceptions, the receipt of investment income
from a source other than a qualified mortgage or certain other permitted
investments, the receipt of compensation for services, or the disposition of an
asset purchased for temporary investment with payments on qualified mortgages
pending distributions on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax
on a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day" (generally the same as the related Closing Date).
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Exceptions are provided for contributions to a REMIC (i) during the three-month
period beginning on the startup day, (ii) made to a qualified reserve fund by a
Holder of a residual interest, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of two years, with
possible extensions. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a REMIC Regular or Residual
Security is sold, the seller will recognize gain or loss equal to the difference
between the amount realized on the sale and its "adjusted basis" in the
Security. The "adjusted basis" of a REMIC Regular Security generally will equal
the cost of such Security to the seller, increased by any original issue
discount or market discount included in the seller's gross income with respect
to such Security and reduced by distribution on such Security previously
received by the seller of amounts included in the stated redemption price at
maturity and by any premium that has reduced the seller's interest income with
respect to such Security. See "--Discount and Premium." The adjusted basis of a
REMIC Residual Security is determined as described above under "--Taxation of
Holder of REMIC Residual Securities-- Basis Rules and Distributions". Except as
provided in the following paragraphs or under Section 582(c) of the Code, any
such gain or loss will be capital gain or loss, provided such Security is held
as a "capital asset" (generally, property held for investment) within the
meaning of Section 1221 of the Code.
Gains from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a REMIC Regular Security had income
accrued at a rate equal to 110% of the "applicable federal rate" (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a REMIC Regular Security who
purchased such a Security at a market discount would also be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such Security was held by such Holder, reduced by any market
discount includible in income under the rules described below under "--Discount
and Premium."
If a Holder of a REMIC Residual Security sells such Security at a loss,
the loss will not be recognized if, within six months before or after the sale
of the REMIC Residual Security, such Holder purchases another residual interest
in any REMIC or any interest in a taxable mortgage pool (as defined in Section
7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss would be allowed upon the sale of the other residual interest
(or comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While this rule may be modified by Treasury regulations,
to date such regulations have not been published.
Transfer of REMIC Residual Securities. Section 860E(c) of the Code
imposes a substantial tax, payable by the transferor (or, if a transfer is
through a broker, nominee or other middleman as the transferee's agent, payable
by that agent) upon any transfer of a REMIC Residual Security to a "disqualified
organization" and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
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The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than certain taxable instrumentalities), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization (other than a farmers' cooperative) that is exempt
from federal income tax, unless such organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (i) residual
interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of a REMIC Residual Security and
certain other provisions that are intended to meet this requirement are
described in the related Pooling and Servicing Agreement, and will be discussed
more fully in the related Prospectus Supplement relating to the offering of any
REMIC Residual Security. In addition, a pass-through entity (including a
nominee) that holds a REMIC Residual Security may be subject to additional taxes
if a disqualified organization is a record-holder therein. A transferor of a
REMIC Residual Security (or an agent of a transferee of a REMIC Residual
Security, as the case may be) will be relieved of such tax liability with
respect to a transfer if (i) the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization, and (ii) the
transferor (or the transferee's agent) does not have actual knowledge that the
affidavit is false at the time of the transfer. Similarly, no such tax will be
imposed on a pass-through entity for a period with respect to an interest
therein owned by a disqualified organization if (i) the record-holder of such
interest furnishes to the pass-through entity an affidavit that it is not a
disqualified organization, and (ii) during such period, the pass-through entity
has no actual knowledge that the affidavit is false.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below under "-- Foreign
Investors--Grantor Trust Securities and REMIC Regular Securities") will be
disregarded for all federal tax purposes unless no significant purpose of the
transfer is to impede the assessment or collection of tax. A REMIC Residual
Security would be treated as constituting a "noneconomic residual interest"
unless, at the time of the transfer, (i) the present value of the expected
future distributions on the REMIC Residual Securities is no less than the
product of the present value of the "anticipated excess inclusions" with respect
to such Security and the highest corporate rate of tax for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the transferee
will receive distributions from the applicable REMIC Trust in an amount
sufficient to satisfy the liability for income tax on any excess inclusions at
or after the time when such liability accrues. "Anticipated excess inclusions"
are the excess inclusions that are anticipated to be allocated to each calendar
quarter (or portion thereof) following the transfer of a REMIC Residual
Security, determined as of the date such Security is transferred and based on
events that have occurred as of that date and on the Prepayment Assumption. See
"-- Discount and Premium" and "--Taxation of Holders of REMIC Residual
Securities--Excess Inclusions".
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, and (ii) the
transferee makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consult with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters.
For purposes of the administrative provisions of the Code, each REMIC
Trust will be treated as a partnership and the Holders of REMIC Residual
Securities will be treated as partners. The Trustee will prepare, sign and file
federal income tax returns for each REMIC Trust, which returns are subject to
audit by the IRS. Moreover, within a reasonable time after the end of each
calendar year, the Trustee will furnish to each Holder that received a
distribution during such year a statement setting forth the portions of any such
distributions that constitute interest distributions, original issue discount,
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and such other information as is required by Treasury regulations and, with
respect to Holders of REMIC Residual Securities in a REMIC Trust, information
necessary to compute the daily portions of the taxable income (or net loss) of
such REMIC Trust for each day during such year. The Trustee will also act as the
tax matters partner for each REMIC Trust, either in its capacity as a Holder of
a REMIC Residual Security or in a fiduciary capacity. Each Holder of a REMIC
Residual Security, by the acceptance of its REMIC Residual Security, agrees that
the Trustee will act as its fiduciary in the performance of any duties required
of it in the event that it is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on
its return consistently with the treatment on the return of the REMIC Trust,
unless the Holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Trust. The IRS may assert a deficiency resulting from a failure
to comply with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. The Trustee does not intend to register any
REMIC Trust as a tax shelter pursuant to Section 6111 of the Code.
Termination
In general, no special tax consequences will apply to a Holder of a
REMIC Regular Security upon the termination of a REMIC Trust by virtue of the
final payment or liquidation of the last of the Loans remaining in the Trust. If
a Holder's adjusted basis in its REMIC Residual Security at the time such
termination occurs exceeds the amount of cash distributed to such Holder in
liquidation of its interest, although the matter is not entirely free from
doubt, it would appear that the Holder of the REMIC Residual Security is
entitled to a loss equal to the amount of such excess.
Debt Securities
General
With respect to each series of Debt Securities, Dewey Ballantine,
special tax counsel to the Company, will deliver its opinion to the Company that
the Securities will be classified as debt of the Company secured by the related
Loans. Consequently, the Debt Securities will not be treated as ownership
interests in the Loans or the Trust. Holders will be required to report income
received with respect to the Debt Securities in accordance with their normal
method of accounting. For additional tax consequences relating to Debt
Securities purchased at a discount or with premium, see "-- Discount and
Premium," below.
Special Tax Attributes
As described above, Grantor Trust Securities will possess certain
special tax attributes by virtue of their being ownership interests in the
underlying Loans. Similarly, REMIC Securities will possess similar attributes by
virtue of the REMIC provisions of the Code. In general, Debt Securities will not
possess such special tax attributes. Investors to whom such attributes are
important should consult their own tax advisors regarding investment in Debt
Securities.
Sale or Exchange
If a Holder of a Debt Security sells or exchanges such Security, the
Holder will recognize gain or loss equal to the difference, if any, between the
amount received and the Holder's adjusted basis in the Security. The adjusted
basis in the Security generally will equal its initial cost, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described under "-Discount and Premium--Market
Discount," below), except for certain financial institutions subject to Section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
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recognized by a Holder who holds the Security as a capital asset (within the
meaning of Section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
Discount and Premium
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in Section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
Original Issue Discount
In general, a Security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The "issue price" of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
remittance period and the Closing Date. The stated redemption price at maturity
of a Security that has a notional principal amount or receives principal only,
or that is or may be a Security with respect to which certain accrued interest
is not distributed but added to the principal amount, is equal to the sum of all
distributions to be made under such Security. The "stated redemption price at
maturity" of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Distribution
Date for the Security over the interest that accrues for the period from the
Closing Date to the first Distribution Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25 % of the stated redemption
price at maturity multiplied by the weighted average life of the Security. The
weighted average life of a Security is apparently computed for this purpose as
the sum, for all distributions included in the stated redemption price at
maturity of the amounts determined by multiplying (i) the number of complete
years (rounding down for partial years) from the Closing Date until the date on
which each such distribution is expected to be made under the assumption that
the Loans prepay at the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption"), by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust Securities
should be aware that there can be no assurance that the rules described below
will be applied to such Securities. In particular with respect to Grantor Trust
Strip Securities, on June 12, 1996 the Treasury issued regulations concerning
the tax treatment of debt instruments that provide for one or more contingent
payments (the "Contingent Payment Regulations"). Investors should be aware that
while the Contingent Payment Regulations do not specifically address the
taxation of Grantor Trust Strip Securities, the IRS may take the position that
Grantor Trust Strip Securities should be taxed under the methods described in
those regulations. In the absence of specific guidance, however, the Trustee
will apply the rules of Section 1272(a)(6) to calculate accruals of original
issue discount on the Grantor Trust Securities. Under these rules (described in
greater detail below), (i) the amount and rate of accrual of original issue
discount on each series of Securities will be based on (x) the Prepayment
Assumption, and (y) in the case of a Security calling for a variable rate of
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interest, an assumption that the value of the index upon which such variable
rate is based remains equal to the value of that rate on the Closing Date, and
(ii) adjustments will be made in the amount of discount accruing in each taxable
year in which the actual prepayment rate differs from the Prepayment Assumption.
Section 1272(a)(6)(b)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Company anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The Company
makes no representation, however, that the Loans for a given series will prepay
at the rate reflected in the Prepayment Assumption for that series or at any
other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the Securities.
Each Holder of a Security must include in gross income the sum of the
"daily portions" of original issue discount on its Security for each day during
its taxable year on which it held such Security. For this purpose, in the case
of an original Holder, the "daily portions" of original issue discount will be
determined as described as follows. A calculation will first be made of the
portion of the original issue discount that accrued during each "accrual
period." The Trustee will supply, at the time and in the manner required by the
IRS, to Holders of Securities, brokers and middlemen information with respect to
the original issue discount accruing on the Securities. The Trustee will report
original issue discount based on accrual periods of one month, each beginning on
a payment date (or, in the case of the first such period, the Closing Date) and
ending on the day before the next payment date.
Under Section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity over (ii) the "adjusted
issue price" of such Security at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated based on (i) the yield to maturity of the Security,
calculated as of the Settlement Date, giving effect to the Prepayment
Assumption, (ii) events (including actual prepayments) that have occurred prior
to the end of the accrual period, (iii) the Prepayment Assumption, and (iv) in
the case of a Security calling for a variable rate of interest, and assumption
that the value of the index upon which such variable rate is based remains the
same as its value on the Closing Date over the entire life of such Security. The
"adjusted issued price" of a Security at any time will equal the issue price of
such Security, increased by the aggregate amount of previously accrued original
issue discount with respect to such Security, and reduced by the amount of any
distributions made on such Security as of that time of amounts included in the
stated redemption price at maturity. The original issue discount accruing during
any accrual period will then be allocated ratably to each day during the period
to determine the daily portion of original issue discount.
In the case of Grantor Trust Strip Securities and certain REMIC
Securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history of Section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals, but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. Holders of such
Securities should consult their own tax advisors concerning the treatment of
such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which its holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
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portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent that such distribution does not exceed the aggregate amount of
accrued market discount on such Security not previously included in income. With
respect to Securities that have unaccrued original issue discount, such market
discount must be included in income in addition to any original issue discount.
A Holder that incurs or continues indebtedness to acquire a Security at a market
discount may also be required to defer the deduction of all or a portion of the
interest on such indebtedness until the corresponding amount of market discount
is included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining accruals of original issue discount, if any, or if none,
in proportion to remaining distributions of interest on the Security, in any
case taking into account the Prepayment Assumption. The Trustee will make
available, as required by the IRS, to Holders of Securities information
necessary to compute the accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such Security (a "Premium Security") at a premium.
Such a purchaser need not include in income any remaining original issue
discount and may elect, under Section 171(c)(2) of the Code, to treat such
premium as "amortizable bond premium." If a Holder makes such an election, the
amount of any interest payment that must be included in such Holder's income of
each period ending on a Distribution Date will be reduced by the portion of the
premium allocable to such period based on the Premium Security's yield to
maturity. The legislative history of the Tax Reform Act of 1986 states that such
premium amortization should be made under principles analogous to those
governing the accrual of market discount (as discussed above under "--Discount
and Premium--Market Discount"). If such election is made by the Holder, the
election will also apply to all bonds the interest on which is not excludible
from gross income ("fully taxable bonds") held by the Holder at the beginning of
the first taxable year to which the election applies and to all such fully
taxable bonds thereafter acquired by it, and is irrevocable without the consent
of the IRS. If such an election is not made, (i) such a Holder must include the
full amount of each interest payment in income as it accrues, and (ii) the
premium must be allocated to the principal distributions on the Premium Security
and, when each such distribution is received, a loss equal to the premium
allocated to such distribution will be recognized. Any tax benefit from the
premium not previously recognized will be taken into account in computing gain
or loss upon the sale or disposition of the Premium Security.
Some Securities may provide for only nominal distributions of principal
in comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding such Securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, Section 1272(a)(6) of the Code
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would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under Section 171(e)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
Special Election
For any Security acquired on or after April 4, 1994, a Holder may elect
to include in gross income all "interest" that accrues on the Security by using
a constant yield method. For purposes of the election, the term "interest"
includes stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimis market discount and
unstated interest as adjusted by any amortizable bond premium or acquisition
premium. A Holder should consult it own tax advisor regarding the time and
manner of making and the scope of the election and the implementation of the
constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under Section 3406 of the Code at rate of 31% if recipients of such
distributions 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
distributions that is required to supply information but that does not do so in
the proper manner.
Foreign Investors
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security or a REMIC Regular
Security to, or on behalf of, a Holder that is not a "U.S. Person" generally
will be exempt from United States federal income and withholding taxes. The term
"U.S. Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate trust that is
subject to United States federal income tax regardless of the source of its
income. This exemption is applicable provided (a) the Holder is not subject to
United States tax as a result of a connection to the United States other than
ownership of the Security, (b) the Holder signs a statement under penalties of
perjury that certifies that such Holder is not a U.S. Person, and provides the
name and address of such Holder, and (c) the last U.S. Person in the chain of
payment to the Holder receives such statement from such Holder or a financial
institution holding on its behalf and does not have actual knowledge that such
statement is false. Holders should be aware that the IRS might take the position
that this exemption does not apply to a Holder that also owns 10% or more of the
REMIC Residual Securities of any REMIC Trust, or to a Holder that is a
"controlled foreign corporation" described in Section 881(c)(3)(C) of the Code.
REMIC Residual Securities
Amounts distributed to a Holder of a REMIC Residual Security that is
not a U.S. Person generally will be treated as interest for purposes of applying
the 30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a United States trade or business. Temporary Treasury Regulations
clarify that amounts not constituting excess inclusions that are distributed on
a REMIC Residual Security to a Holder that is not a U.S. Person generally will
be exempt from United States federal income and withholding tax, subject to the
same conditions applicable to distributions on Grantor Trust Securities and
REMIC Regular Securities, as described above, but only to the extent that the
obligations directly underlying the REMIC Trust that issued the REMIC Residual
Security (e.g., Loans or regular interests in another REMIC) were issued after
July 18, 1984. In no case will any portion of REMIC income that constitutes an
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excess inclusion be entitled to any exemption from the withholding tax or a
reduced treaty rate for withholding. See "--Taxation of Holders of REMIC
Residual Securities--Excess Inclusions."
Taxation of the Securities Classified as Partnership Interests
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trust may issue Debt Securities in the form of
Notes, as described above, and may also issue Securities characterized as
partnership interests ("Partnership Interests") as discussed in the related
Prospectus Supplement.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Federal Income Tax Considerations," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in Section 401(a) of
the Code ("Qualified Retirement Plans") and on Individual Retirement Accounts
("IRAs") described in Section 408 of the Code (collectively, "Tax-Favored
Plans").
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may generally be invested in
Securities without regard to the ERISA considerations described below, subject
to the provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan 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.
Section 404 of ERISA imposes general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
Plan's investment 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 ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
A Plan's investment in Securities may cause the Loans included in a
Loan Pool to be deemed Plan assets. The United States Department of Labor
("DOL") has issued a final regulation (29 C.F.R. Section 2510.3-101) containing
rules for determining what constitutes the assets of a Plan. This regulation
provides that, as a general rule, the underlying assets and properties of
corporations, partnerships, trusts and certain other entities in which a Plan
makes an investment in an "equity interest" will be deemed for purposes of ERISA
to be assets of the Plan unless certain exceptions apply.
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Under the terms of the regulation, the Trust Estate may be deemed to
hold plan assets by reason of a Plan's investment in a Security; such plan
assets would include an undivided interest in the Loans and any other assets
held by the Trust Estate. In such an event, persons providing services with
respect to the assets of the Trust Estate may be parties in interest, subject to
the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA (and of Section 4975
of the Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
An exception applies if the class of equity interests in question is:
(i) "widely held" (held by 100 or more investors who are independent of the
Trust Estate and each other); (ii) freely transferable; and (iii) sold as part
of an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition, the regulation provides that if at all times more
than 75% of the value of each class of equity interest in the Trust Estate is
held by investors other than benefit plan investors (which is defined as
including, among others, plans subject to ERISA, government plans and individual
retirement accounts), the investing Plan's assets will not include any of the
underlying assets of the Trust Estate.
Under the regulation, a Plan will not be considered to have invested in
an "equity interest" if the interest described is treated as indebtedness under
applicable local law and has no substantial equity features. Generally, a
profits interest in a partnership, an undivided ownership interest in property
and a beneficial ownership interest in a trust are deemed to be "equity
interests" under the final regulation. If Notes of a particular series were
deemed to be indebtedness under applicable local law without any substantial
equity features, an investing Plan's assets would include such Notes, but not,
by reason of such purchase, the underlying assets of the Trust Estate.
If an investing Plan's assets are considered to include the underlying
assets of the Trust Estate, an exemption may be available. Various underwriters
and placement agents have been granted individual exemptions by the DOL from
certain of the prohibited transaction rules of ERISA with respect to the initial
purchase, the holding and the subsequent resale by Plans of securities
representing interests in, and the operation of, asset-backed pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of such exemptions (each such exemption is
referred to hereafter as the "Exemption"). These securities may include the
Certificates. The obligations that may be held in trusts covered by the
Exemption include obligations such as the Loans.
Among the conditions which must be satisfied for the Exemption to apply
are the following:
(i) The acquisition of the Certificates by a Plan is on terms
(including the price for the Certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(ii) The rights and interests evidenced by the Certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by
other securities of the trust;
(iii) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Group ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Inc.
("D&P") or Fitch Investors Service, Inc. ("Fitch");
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Certificates represents not more than
reasonable compensation for underwriting the Certificates. The sum of all
payments made to and retained by the seller pursuant to the sale of the
obligations to the trust represents not more than the fair market value of
such obligations. The sum of all payments made to and retained by the
servicer represents not more than reasonable compensation for the
servicer's services under the related servicing agreement and reimbursement
of the servicer's reasonable expenses in connection therewith;
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(v) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's, Moody's,
D&P or Fitch for at least one year prior to the Plan's acquisition of
securities; and
(iii) securities evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Securities.
Moreover, the Exemption provides relief from certain self-dealing/
conflict of interest prohibited transactions that may occur when the Plan
fiduciary causes a Plan to acquire securities in a trust in which the fiduciary
(or its affiliate) is an obligor on the receivables held in the trust provided
that, among other requirements: (i) in the case of an acquisition in connection
with the initial issuance of Certificates, at least fifty (50) percent of each
class of Certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty (50) percent of the
aggregate interest in the trust is acquired by persons independent of the
Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor with
respect to five (5) percent or less of the fair market value of the obligations
contained in the trust; (iii) the Plan's investment in Certificates does not
exceed twenty-five (25) percent of all of the Certificates outstanding after the
acquisition; and (iv) no more than twenty-five (25) percent of the assets of the
Plan are invested in securities representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemption does not
apply to Plans sponsored by the Company, the underwriters of the Certificates,
the Trustee, the Servicer, any obligor with respect to obligations included in a
Trust Estate constituting more than five (5) percent of the aggregate
unamortized principal balance of the assets in a Trust Estate, or any affiliate
of such parties (the "Restricted Group").
There are other class (e.g., Prohibited Transaction Class Exemption
83-1) and individual prohibited transaction exemptions issued by the DOL that
could apply to a Plan's acquisition or holding of Securities. The applicable
Prospectus Supplement under "ERISA Considerations" may contain additional
information regarding the application of the Exemption, or other prohibited
transaction exemptions that may be available, with respect to the series offered
thereby.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
regulation described above, the Exemption or other class and individual
exemptions issued by the DOL to the purchase and holding of the Securities and
the potential consequences to their specific circumstances, prior to making an
investment in the Securities. Moreover, each Plan fiduciary should determine
whether under the general fiduciary standards of investment procedure and
diversification an investment in the Securities is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. In this regard, purchasers that
are insurance companies should consult with their counsel with respect to the
United States Supreme Court case interpreting the fiduciary responsibility rules
of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings
Bank, 114 S. Ct. 517 (1993). In John Hancock, the Supreme Court ruled that
assets held in an insurance company's general account may be deemed to be "plan
assets" for purposes of ERISA under certain circumstances. Prospective
purchasers should determine whether the decision affects their ability to
purchase the Securities.
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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 UBTI within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Security held by a Tax Exempt Investor will be considered UBTI and thus
will be subject to federal income tax. See "Federal Income Tax
Considerations--REMICS--Taxation of Owners of REMIC Residual Securities--Excess
Inclusions."
LEGAL INVESTMENT MATTERS
Certain classes of Offered Securities will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are rated in at least the second highest rating
category by any Rating Agency, and as such may 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 adopted 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 Office of Thrift Supervision 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 analysis by the institution would be unacceptable. There
can be no assurance as to which classes of Securities will be treated as
high-risk under the Policy Statement. 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 Securities. Similar policy statements have been
issued by regulators having jurisdiction over other types of depository
institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Securities or to purchase any class of
Securities 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 Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Securities. Accordingly, all
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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 Securities of any class constitute legal investments under SMMEA or
are subject to investment, capital or other restrictions, and whether SMMEA has
been overridden in any jurisdiction applicable to such investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
Securities will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Loans underlying
the Securities or will be deposited by the Company in its general funds and used
by the Company for general corporate purposes, such as payment of salaries,
rent, utilities and related business expenses. The Company expects that it will
make additional sales of securities similar to the Securities 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 loans originated or purchased
by the Company, prevailing interest rates, availability of funds and general
market conditions.
METHODS OF DISTRIBUTION
The Offered Securities will be offered in series through one or more of
the methods described below. The Prospectus Supplement prepared for each series
will describe the method of offering being utilized for that series and will
state the public offering or purchase price of such series and the net proceeds
to the Company from such sale.
The Company intends that Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Securities may be made through a combination of two or more of these
methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the 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 Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. The managing underwriter or
underwriters with respect to the offer and sale of a particular series of
Securities will be set forth on the cover of the Prospectus Supplement relating
to such series and the members of the underwriting syndicate, if any, will be
named in such Prospectus Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Company or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Company and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended. The Prospectus Supplement will describe any such compensation
paid by the Company.
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It is anticipated that the underwriting agreement pertaining to the
sale of any series of Securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, 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 Securities of such series.
The Company anticipates that the Offered Securities will be sold
primarily to institutional investors. Purchasers of Securities, including
dealers, may, depending on the facts and circumstances of such purchases, be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended, in connection with reoffers and sales by them of Securities. Holders of
Securities should consult with their legal advisors in this regard prior to any
such reoffer or sale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Dewey
Ballantine, New York, New York and by the office of the general counsel of the
Company.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each
series of Securities, contains a discussion of the material terms of the
applicable exhibits to the Registration Statement and the documents referred to
herein and therein. Copies of such exhibits are on file at the offices of the
Securities and Exchange Commission in Washington, D.C., and may be obtained at
rates prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
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INDEX OF PRINCIPAL DEFINITIONS
Page
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Accounts ................................................................. 43
Accrual Securities ....................................................... 8
AFH ...................................................................... 59
AFL ...................................................................... 1, 59
APR ...................................................................... 24
ARM Loans ................................................................ 19
Balloon Amount ........................................................... 29
Balloon Loans ............................................................ 17
Bankruptcy Bond .......................................................... 55
Bankruptcy Loss .......................................................... 53
Bankruptcy Loss Amount ................................................... 53
Base Servicing Fee ....................................................... 60
Book-Entry Securities .................................................... 38
Bulk Acquisitions ........................................................ 10
Buydown Account .......................................................... 23
Buydown Funds ............................................................ 23
Buydown Mortgage Loans ................................................... 23
Buydown Period ........................................................... 23
Cede ..................................................................... 14
Certificates ............................................................. 6
Closing Date ............................................................. 40
CLTV (Combined Loan-to-Value Ratio) ...................................... 25
Code ..................................................................... 82
Collateral ............................................................... 1,6
Collateral Pool .......................................................... 22
Collateral Schedule ...................................................... 22
Company .................................................................. 1, 59
Company's Seller's Guide ................................................. 31
Compensating Interest .................................................... 47
Contracts ................................................................ 1, 22
Conventional Loans ....................................................... 22
Convertible Loan ......................................................... 29
Cooperative .............................................................. 26
Cooperative Loans ........................................................ 22
Cooperative Notes ........................................................ 28
Credit Enhancement ....................................................... 2
Credit Enhancer ..........................................................21, 44
Cut-Off Date ............................................................. 24
Debt Securities ..........................................................14, 82
Debt Service Reduction ................................................... 55
Defaulted Mortgage Loss .................................................. 53
Deferred Interest ........................................................ 17
Deficient Valuation ...................................................... 55
Deleted Loan ............................................................. 31
Delinquency Advances ..................................................... 46
Designated Depository Institution ........................................ 42
Detailed Description ..................................................... 22
Determination Date ....................................................... 46
Direct or Indirect Participants .......................................... 21
Disqualified Persons ..................................................... 95
101
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Page
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Distribution Account ..................................................... 42
DTC ...................................................................... 14
Due Date ................................................................. 42
Eligible Investments ..................................................... 43
Equity Securities ........................................................ 1, 7
ERISA .................................................................... 13
ERISA Plan(s) ............................................................ 95
Exchange Act ............................................................. 14
Extraordinary Losses ..................................................... 53
FHA ...................................................................... 27
Financial Guaranty Insurance Policy ...................................... 56
Financial Guaranty Insurer ............................................... 56
Fixed-Income Securities .................................................. 1, 7
Forward Purchase Agreement ............................................... 11
Fraud Loss ............................................................... 53
Fraud Loss Amount ........................................................ 53
Funding Period ...........................................................11, 41
Garn-St. Germain Act ..................................................... 74
Graduated Payments ....................................................... 23
Grantor Trust ............................................................ 82
Grantor Trust Fractional Interest Security ............................... 82
Grantor Trust Securities .................................................13, 82
Grantor Trust Strip Security ............................................. 82
Guidelines ............................................................... 30
Holder ................................................................... 82
Home Improvement Loans ................................................... 22
Indenture ................................................................ 7
Indenture Trustee ........................................................ 7
Index .................................................................... 28
Indirect Participant(s) .................................................. 38
Insurance Paying Agent ................................................... 56
Insurance Proceeds ....................................................... 42
Insured Payment .......................................................... 56
Interest Payment Date .................................................... 66
Interest Rate ............................................................ 7
Investment Company Act ................................................... 10
IRAs ..................................................................... 95
IRS ...................................................................... 84
Junior Lien Loans ........................................................ 25
Land Secured Contracts ................................................... 18
Letter of Credit ......................................................... 54
Letter of Credit Bank .................................................... 54
Liquidated Mortgage Loan ................................................. 17
Liquidation Proceeds ..................................................... 17
Loan Pool ................................................................ 1
Loan Purchase Price ...................................................... 30
Loan Rate ................................................................ 23
Loans .................................................................... 22
LTV ...................................................................... 25
Manufactured Homes ....................................................... 27
Manufacturer's Invoice Price ............................................. 25
Master Commitments ....................................................... 33
102
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Page
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Master Servicer .......................................................... 6
Master Servicing Fee ..................................................... 60
Mixed Use Loans .......................................................... 1, 22
Modified Loans ........................................................... 29
Mortgage Loans ........................................................... 1, 22
Mortgage Pool Insurance Policy ........................................... 54
Mortgages ................................................................ 10
Multi-family Loans ....................................................... 22
Negotiated Transactions .................................................. 10
Net Liquidation Proceeds ................................................. 42
Net Loan Rate ............................................................ 66
Note Margin .............................................................. 28
Notes .................................................................... 6, 28
Obligor .................................................................. 16
Originator's Retained Yield .............................................. 60
Originators .............................................................. 1
Participants ............................................................. 38
Parties in Interest ...................................................... 95
Partnership Interests .................................................... 14
Pass-Through Rate ........................................................ 45
Paying Agent ............................................................. 45
Payment Date ............................................................. 9
Percentage Interest ...................................................... 45
Physical Certificates .................................................... 38
Plan(s) .................................................................. 13
Policy Statement ......................................................... 98
Pool Factor .............................................................. 48
Pooling and Servicing Agreement .......................................... 7
Pre-Funding Account ...................................................... 11
Premium Security ......................................................... 93
Prepayment Assumption .................................................... 85
Principal Prepayments .................................................... 42
Properties ............................................................... 22
Property ................................................................. 10
Purchase Obligation ...................................................... 15
Qualified Replacement Loan ............................................... 31
Qualified Retirement Plans ............................................... 95
Rating Agencies .......................................................... 14
Realized Loss ............................................................ 52
Record Date .............................................................. 9
Relief Act ...............................................................21, 81
REMIC .................................................................... 82
REMIC Regular Securities ................................................. 13
REMIC Regular Security ................................................... 84
REMIC Regulations ........................................................ 84
REMIC Residual Securities ................................................ 13
REMIC Residual Security .................................................. 84
REMIC Securities ......................................................... 82
REMIC Trust .............................................................. 84
REMIC(s) ................................................................. 2
Remittance Date .......................................................... 43
Remittance Period ........................................................ 9
103
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Page
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REO Property ............................................................. 50
Reserve Fund ............................................................. 55
Rule of 78's ............................................................. 24
Securities ............................................................... 1, 6
Security Registrar ....................................................... 38
Securityholder ........................................................... 82
Securityholders .......................................................... 1
Senior Lien .............................................................. 25
Senior Securities ........................................................ 8
Servicer ................................................................. 6
Servicer(s) .............................................................. 2
Servicing Advance(s) ..................................................... 47
Servicing Agreement ...................................................... 7
Servicing Fee ............................................................ 60
Single Family Loans ...................................................... 22
SMMEA .................................................................... 13
Special Hazard Amount .................................................... 53
Special Hazard Insurance Policy .......................................... 55
Special Hazard Insurer ................................................... 55
Special Hazard Loss ...................................................... 53
Statistic Calculation Date ............................................... 24
Strip Securities ......................................................... 8
Sub-Servicers ............................................................ 2
Sub-Servicing Account .................................................... 41
Sub-Servicing Agreement .................................................. 51
Subordinate Securities ................................................... 8
Subordinate(d) Amount .................................................... 53
Subsequent Collateral .................................................... 11
Subsequent Loans ......................................................... 40
Tax Exempt Investor ...................................................... 98
Tax-Favored Plans ........................................................ 95
Title V ..................................................................75, 81
Title VIII ............................................................... 76
Trust .................................................................... 1
Trust Agreement .......................................................... 6
Trust Estate ............................................................. 1
Trustee .................................................................. 6
UCC ...................................................................... 38
104
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No dealer, salesperson or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement and the Prospectus, if given or made, such information or
representations may not be relied upon as having been authorized by the Company,
the Transferor, or by the Underwriters. This Prospectus Supplement and the
Prospectus do not constitute an offer to sell, or a solicitation of an offer to
buy, the securities offered hereby in any jurisdiction to any person to whom it
is unlawful to make such offer in such jurisdiction. Neither the delivery of
this Prospectus Supplement or Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that information herein is
correct as of any time subsequent to the date hereof or that there has been no
change in the affairs of the Company, the Master Servicer, the Transferor, or
the Certificate Insurer since such date.
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TABLE OF CONTENTS
Page
----
PROSPECTUS SUPPLEMENT
Available Information................................................... S-3
Reports to the Holders.................................................. S-3
Incorporation of Certain Documents by Reference......................... S-4
Summary................................................................. S-5
Risk Factors............................................................ S-17
Use of Proceeds......................................................... S-18
The Company............................................................. S-19
Servicing............................................................... S-19
The Mortgage Loan Pool.................................................. S-21
Maturity, Prepayment and Yield Considerations........................... S-36
Description of the Certificates......................................... S-41
The Trustee............................................................. S-61
The Certificate Insurance Policy and the Certificate Insurer............ S-64
Federal Income Tax Consequences......................................... S-68
ERISA Considerations.................................................... S-69
Ratings................................................................. S-72
Legal Investment Considerations......................................... S-72
Underwriting............................................................ S-72
Experts................................................................. S-73
Certain Legal Matters................................................... S-73
Annex I................................................................. I-1
Index of Principal Definitions.......................................... i
PROSPECTUS
Incorporation of Certain Documents by Reference......................... 5
Summary of Prospectus................................................... 6
Risk Factors............................................................ 15
The Trusts.............................................................. 22
The Loan Pools.......................................................... 28
Underwriting Program.................................................... 30
Description of the Securities........................................... 35
Subordination........................................................... 52
Description of Credit Enhancement....................................... 53
Hazard Insurance; Claims Thereunder..................................... 58
The Company............................................................. 59
The Servicer............................................................ 59
The Pooling and Servicing Agreement..................................... 59
The Trustee............................................................. 63
Yield Considerations.................................................... 65
Maturity and Prepayment Considerations.................................. 67
Certain Legal Aspects of Mortgage Loans
and Related Matters................................................... 69
Federal Income Tax Considerations....................................... 82
State Tax Considerations................................................ 95
ERISA Considerations.................................................... 95
Legal Investment Matters................................................ 98
Use of Proceeds......................................................... 99
Methods of Distribution................................................. 99
Legal Matters........................................................... 100
Additional Information.................................................. 100
Index of Principal Definitions.......................................... 101
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Class A Certificates, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement or a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
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Access Financial(TM)
Mortgage Loan Trust
1997-2
$185,188,000
Mortgage Loan Pass-Through
Certificates,
Series 1997-2
$39,812,000 Class A-1 Group I
Certificates, Variable Pass-Through Rate
$21,165,000 Class A-2 Group I
Certificates, 7.000% Pass-Through Rate
$10,000,000 Class A-3 Group I
Certificates, 7.300% Pass-Through Rate
$8,175,000 Class A-4 Group I
Certificates, 7.675% Pass-Through Rate
$10,000,000 Class A-5 Group I
Certificates, 7.275% Pass-Through Rate
$96,036,000 Class A-6 Group II
Certificates, Variable Pass-Through Rate
Access Financial Lending Corp.
Company and Master Servicer
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PROSPECTUS SUPPLEMENT
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Prudential Securities Incorporated
J.P. Morgan & Co.
May 22, 1997
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