PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 24, 1997)
$317,639,574
[INSERT LOGO]
MASTER SERVICER AND SELLER
ICIFC SECURED ASSETS CORP.
COMPANY
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-3
The Series 1997-3 Mortgage Pass-Through Certificates will include the
following eleven classes (the "Senior Certificates"): (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates and Class A-6 Certificates; (ii) Class A-7
Certificates (the "Super Senior Lockout Certificates"); (iii) the Class A-8
Certificates (the "Senior Support Lockout Certificates"; and collectively with
the Class A-6 Certificates and Super Senior Lockout Certificates, the "Lockout
Certificates"); (iv) Class A-9 Certificates (the "Principal Only Certificates");
(v) Class A-10 Certificates (the "Variable Strip Certificates") and (vi) Class R
(CONTINUED ON FOLLOWING PAGE)
---------------
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING AN INVESTMENT IN
THE OFFERED CERTIFICATES, SEE "RISK FACTORS" BEGINNING ON PAGE S-17 HEREIN AND
ON PAGE 14 OF THE PROSPECTUS.
---------------
THE CERTIFICATES DO NOT REPRESENT OBLIGATIONS OF OR INTERESTS IN THE COMPANY,
THE SELLER, THE TRUSTEE, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE
LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, THE
COMPANY, THE SELLER, THE MASTER SERVICER OR ANY OF THEIR
AFFILIATES, OR ANY OTHER PERSON. DISTRIBUTIONS ON THE
CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS
TRANSFERRED OR PLEDGED TO THE TRUST FOR THE
BENEFIT OF CERTIFICATEHOLDERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
Initial Initial
Certificate Certificate
Principal Principal
Class Balance Pass-Through Rate Class Balance Pass-Through Rate
<S> <C> <C> <C> <C> <C>
Class A-1 Certificates $152,291,000 7.25% Class A-8 Certificates $4,186,000 7.25%
Class A-2 Certificates $45,634,000 7.25% Class A-9 Certificates $11,474 0.00%
Class A-3 Certificates $27,873,000 7.25% Class A-10 Certificates $0 Variable Rate
Class A-4 Certificates $ 4,114,000 7.25% Class R Certificates $100 7.25%
Class A-5 Certificates $12,841,000 7.25% Class M-1 Certificates $7,292,000 7.25%
Class A-6 Certificates $20,052,000 7.25% Class M-2 Certificates $3,241,000 7.25%
Class A-7 Certificates $37,673,000 7.25% Class M-3 Certificates $2,431,000 7.25%
</TABLE>
(1) The Class A-9 Certificates will be Principal Only Certificates and will not
be entitled to receive distributions of interest.
(2) Based on the related Notional Amount as described herein.
----------
There is currently no secondary market for the Offered Certificates.
Lehman Brothers Inc. (the "Underwriter") intends to make a secondary market in
the Offered Certificates other than the Variable Strip Certificates and the
Principal Only Certificates (the "Underwritten Certificates"), but is not
obligated to do so. There can be no assurance that a secondary market for the
Offered Certificates will develop or, if it does develop, that it will continue.
The Offered Certificates will not be listed on any securities exchange.
The Underwritten Certificates will be purchased from the Company by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions at varying prices to be determined at the time
of sale. Proceeds to the Company are expected to be approximately 99.59% of the
aggregate principal balance of the Underwritten Certificates plus accrued
interest thereon from September 1, 1997 (the "Cut-off Date"), but before
deducting expenses payable by the Company in connection with the sale of the
Offered Certificates, estimated to be $325,000.
The Underwritten Certificates are offered by the Underwriter when, as
and if issued, delivered to and accepted by the Underwriter and subject to
certain other conditions. It is expected that delivery of the Underwritten
Certificates (other than the Residual Certificates) will be made in book-entry
form only, through the Same Day Funds Settlement System of The Depository Trust
Company as further discussed herein, and that delivery of the Residual
Certificates offered hereby in definitive, fully-registered form will be made at
the offices of the Underwriter, New York, New York on or about September 29,
1997, against payment therefor in immediately available funds.
----------
LEHMAN BROTHERS
SEPTEMBER 24, 1997
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Certificates (the "Residual Certificates"). In addition to the Senior
Certificates, the Series 1997-3 Mortgage Pass-Through Certificates will also
include six classes of subordinate certificates which are designated as the
Class M-1 Certificates, Class M-2 Certificates and Class M-3 Certificates
(collectively, the "Class M Certificates") and the Class B-1 Certificates, Class
B-2 Certificates and Class B-3 Certificates (collectively, the "Class B
Certificates" and, together with the Class M Certificates and Senior
Certificates, the "Certificates"). Only the Senior Certificates and Class M
Certificates (together, the "Offered Certificates") are offered hereby. See
"Index of Principal Definitions" in the Prospectus for the meanings of
capitalized terms and acronyms not otherwise defined herein.
It is a condition of the issuance of the Senior Certificates offered
hereby (other than the Principal Only Certificates and Variable Strip
Certificates) that they be rated "AAA" by each of Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's")
and Duff & Phelps Credit Rating Co. ("DCR"). It is a condition of the issuance
of the Principal Only Certificates and Variable Strip Certificates that they be
rated "AAAr" by Standard & Poor's and "AAA" by DCR. It is a condition of the
issuance of the Class M-1, Class M-2 and Class M-3 Certificates that they be
rated not lower than "AA," "A" and "BBB," respectively, by each of Standard &
Poor's and DCR.
The Senior Certificates in the aggregate and the Class M-1
Certificates, Class M-2 Certificates and Class M-3 Certificates will evidence
initial undivided interests of approximately 94.00%, 2.25%, 1.00% and 0.75%,
respectively, in the Trust Fund consisting primarily of a pool of certain
conventional, fixed-rate, one- to four-family first mortgage loans, with terms
to maturity of not more than 30 years (the "Mortgage Loans"), to be deposited by
the Company into the Trust Fund for the benefit of the Certificateholders.
Certain characteristics of the Mortgage Loans are described herein under
"Description of the Mortgage Pool." The rights of the holders of the Class M
Certificates and Class B Certificates to receive distributions with respect to
the Mortgage Loans will be subordinate to the rights of the holders of the
Senior Certificates; the rights of holders of the Class M-2 Certificates to
receive distributions with respect to the Mortgage Loans will also be
subordinate to the rights of the holders of the Class M-1 Certificates; the
rights of holders of the Class M-3 Certificates to receive distributions with
respect to the Mortgage Loans will also be subordinate to the rights of the
holders of the other classes of Class M Certificates; and the rights of the
holders of the Class B Certificates to receive distributions with respect to the
Mortgage Loans will also be subordinate to the rights of the holders of the
Class M Certificates, in each case to the extent described herein and in the
Prospectus. In addition, certain losses otherwise allocable to the Super Senior
Certificates will be allocated first to the Senior Support Certificates as
described herein.
The DTC Registered Certificates (as defined herein) will be represented
by certificates registered in the name of Cede & Co., as nominee of DTC, as
further described herein. The interests of beneficial owners of the DTC
Registered Certificates will be represented by book entries on the records of
participating members of DTC. Definitive certificates will be available for the
DTC Registered Certificates only under the limited circumstances described
herein. See "Description of the Certificates--Book-Entry Registration of Certain
of the Senior Certificates" herein.
As described herein, a REMIC election will be made in connection with
the Trust Fund for federal income tax purposes. Each class of the Offered
Certificates (other than the Residual Certificates) and the Class B Certificates
will represent ownership of "regular interests" in the REMIC and the Residual
Certificates will constitute the sole class of "residual interests" in the
REMIC. See "Federal Income Tax Consequences" herein and in the Prospectus.
Transfer of the Residual Certificates will be prohibited to any non-United
States person, and will be subject to certain additional transfer restrictions
described under "Federal Income Tax Consequences--Special Tax Considerations
Applicable to Residual Certificates" herein and in the Prospectus under "Federal
Income Tax Consequences--REMICs--Tax on Transfers of REMIC Residual Certificates
to Certain Organizations" and "--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates."
Distributions on the Offered Certificates will be made on the 25th day
of each month or, if such day is not a business day, then on the next business
day, commencing in October 1997 (each, a "Distribution Date"). As described
herein, interest distributions on the Offered Certificates entitled to interest
distributions will be based on the Certificate Principal Balance thereof (or the
Notional Amount (as defined herein) in the case of the Variable Strip
Certificates) and the Pass-Through Rate thereof, which will be variable for the
Variable Strip Certificates and fixed for all other classes of Certificates, and
may be reduced by certain interest shortfalls. Distributions in respect of
principal on the Offered Certificates will be allocated among the various
classes of the Offered Certificates as described herein under "Description of
the Certificates--Principal Distributions on the Senior Certificates" and
"--Principal Distributions on the Class M Certificates."
S-2
<PAGE>
This Prospectus Supplement contains an "Index of Principal Definitions"
at the end hereof, and the Prospectus contains an "Index of Principal
Definitions" at the end of the Prospectus.
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON THE MORTGAGE LOANS. THE YIELD TO MATURITY ON EACH CLASS OF
CLASS M CERTIFICATES WILL BE EXTREMELY SENSITIVE TO LOSSES DUE TO DEFAULTS ON
THE MORTGAGE LOANS (AND THE TIMING THEREOF), TO THE EXTENT THAT SUCH LOSSES ARE
NOT COVERED BY THE CLASS B CERTIFICATES OR BY ANY CLASS OF CLASS M CERTIFICATES
HAVING A LOWER PAYMENT PRIORITY, AS DESCRIBED HEREIN. AFTER THE CREDIT SUPPORT
DEPLETION DATE (AS DEFINED HEREIN), THE YIELD TO MATURITY ON THE SENIOR SUPPORT
LOCKOUT CERTIFICATES WILL ALSO BE EXTREMELY SENSITIVE TO LOSSES DUE TO DEFAULTS
ON THE MORTGAGE LOANS (AND THE TIMING THEREOF). THE MORTGAGE LOANS GENERALLY MAY
BE PREPAID IN FULL OR IN PART AT ANY TIME WITHOUT PENALTY. THE YIELD TO
INVESTORS ON THE OFFERED CERTIFICATES WILL BE ADVERSELY AFFECTED BY ANY
SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS,
LIQUIDATIONS OR OTHERWISE. SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE
LOANS DUE TO PREPAYMENTS WILL BE OFFSET BY THE MASTER SERVICER TO THE EXTENT
DISCUSSED HEREIN. BECAUSE THE PRINCIPAL ONLY CERTIFICATES WILL BE PURCHASED AT A
DISCOUNT, AND BECAUSE AMOUNTS PAYABLE WITH RESPECT TO THE PRINCIPAL ONLY
CERTIFICATES DERIVE ONLY FROM PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS WITH NET
MORTGAGE RATES THAT ARE LOWER THAN 7.250% PER ANNUM ("DISCOUNT MORTGAGE LOANS"),
THE YIELD ON THE PRINCIPAL ONLY CERTIFICATES WILL BE ADVERSELY AFFECTED BY
SLOWER THAN EXPECTED PAYMENTS OF PRINCIPAL ON THE DISCOUNT MORTGAGE LOANS.
FURTHERMORE, THE YIELD TO INVESTORS ON THE VARIABLE STRIP CERTIFICATES WILL BE
EXTREMELY SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING
PREPAYMENTS, DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS OTHER THAN THE
DISCOUNT MORTGAGE LOANS (THE "NON-DISCOUNT MORTGAGE LOANS"), WHICH RATE MAY
FLUCTUATE SIGNIFICANTLY OVER TIME. A RAPID RATE OF PRINCIPAL PAYMENTS ON THE
MORTGAGE LOANS COULD RESULT IN THE FAILURE OF INVESTORS IN THE VARIABLE STRIP
CERTIFICATES TO RECOVER THEIR INITIAL INVESTMENTS. SEE "SUMMARY--SPECIAL
PREPAYMENT CONSIDERATIONS," "--SPECIAL YIELD CONSIDERATIONS" AND "CERTAIN YIELD
AND PREPAYMENT CONSIDERATIONS" HEREIN AND "YIELD CONSIDERATIONS" IN THE
PROSPECTUS.
The purchase or holding of Senior Support Lockout Certificates, Class M
Certificates or Residual Certificates by or on behalf of or with "plan assets"
of an ERISA-covered plan is prohibited and transfers thereof are subject to
the restrictions described herein. See "ERISA Considerations" herein.
The Variable Strip Certificates and Principal Only Certificates may be
offered by the Company from time to time to the public, directly or through an
underwriter or agent, in negotiated transactions or otherwise at varying prices
to be determined at the time of sale. Proceeds to the Company from any sale of
the Variable Strip Certificates and Principal Only Certificates will be equal to
the purchase price paid by the purchaser thereof, net of any expenses payable by
the Company and any compensation payable to any such underwriter or agent.
THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT
CONSTITUTE PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE COMPANY AND
ARE BEING OFFERED PURSUANT TO ITS PROSPECTUS DATED SEPTEMBER 24, 1997, OF WHICH
THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Title of Securities................. Mortgage Pass-Through Certificates, Series
1997-3.
Company............................. ICIFC Secured Assets Corp. (the
"Company"), a wholly owned subsidiary of
ICI Funding Corporation. See "The Company"
and "ICI Funding" in the Prospectus.
Master Servicer..................... ICI Funding Corporation ("ICI Funding,"
and in its capacity as master servicer,
the "Master Servicer"), a
non-consolidating subsidiary of Imperial
Credit Mortgage Holdings, Inc. ("ICMH").
See "Pooling and Servicing Agreement--The
Master Servicer" herein and "ICI Funding
Corporation" and "Imperial Credit Mortgage
Holdings, Inc." in the Prospectus.
Subservicer......................... The Mortgage Loans will be subserviced by
Wendover Funding, Inc. ("Wendover"). See
"Pooling and Servicing Agreement--The
Subservicer" herein.
Seller.............................. ICI Funding (in its capacity as seller,
the "Seller").
Trustee............................. Bankers Trust Company of California, N.A.
(the "Trustee"), a national banking
association.
Cut-off Date........................ September 1, 1997.
Delivery Date....................... On or about September 29, 1997.
The Mortgage Pool................... The Mortgage Pool will consist of a pool
of conventional, fixed-rate, first lien
Mortgage Loans with an aggregate principal
balance as of the Cut-off Date of
approximately $324,123,629. The Mortgage
Loans are secured by first liens on fee
simple interests in one- to four-family
residential real properties (each, a
"Mortgaged Property"). At origination, the
Mortgage Loans had individual principal
balances of at least $22,750 but not more
than $650,000, with an average principal
balance of approximately $149,255. The
Mortgage Loans have terms to maturity from
the date of origination or modification of
not more than 30 years, and a weighted
average remaining term to maturity of
approximately 348 months as of the Cut-off
Date. The Mortgage Loans will bear
interest at Mortgage Rates of at least
7.000% per annum but not more than 13.625%
per annum, with a weighted average
Mortgage Rate of 8.991% per annum as of
the Cut-off Date. For a further
description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein.
S-4
<PAGE>
The Offered Certificates............ The Offered Certificates will be issued
pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing
Agreement"), to be dated as of the Cut-off
Date, among the Company, the Master
Servicer and the Trustee. The Offered
Certificates will have the following
Pass-Through Rates, Certificate Principal
Balances and other features as of the
Cut-off Date:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Class A-1 Certificates 7.25% $152,191,000 Senior
Class A-2 Certificates 7.25% $ 45,634,000 Senior
Class A-3 Certificates 7.25% $ 27,873,000 Senior
Class A-4 Certificates 7.25% $ 4,114,000 Senior
Class A-5 Certificates 7.25% $ 12,841,000 Senior
Class A-6 Certificates 7.25% $ 20,052,000 Senior/Lockout
Class A-7 Certificates 7.25% $ 37,673,000 Senior/Lockout/
Super Senior
Class A-8 Certificates 7.25% $ 4,186,000 Senior/Lockout/
Senior Support
Class A-9 Certificates 0.00% $ 11,474 Senior/Principal
Only
Class A-10 Certificates Variable $ 0 Senior/Variable
Rate Strip
Class R Certificates 7.25% $ 100 Senior/Residual
Class M-1 Certificates 7.25% $ 7,292,000 Mezzanine
Class M-2 Certificates 7.25% $ 3,241,000 Mezzanine
Class M-3 Certificates 7.25% $ 2,431,000 Mezzanine
</TABLE>
The Offered Certificates are subject to
various priorities for payment of interest
and principal as described herein. For a
description of the allocation of interest
and principal distributions among the
Senior Certificates and on the Class M
Certificates, see "Description of the
Certificates--Interest Distributions,"
"--Principal Distributions on the Senior
Certificates" and "--Principal
Distributions on the Class M Certificates"
herein. For a description of the
Pass-Through Rate on the Variable Strip
Certificates, see the cover and
"Description of the Certificates--Interest
Distributions" herein. Investors in the
Offered Certificates should carefully
consider the information set forth under
"Summary--Special Prepayment
Considerations," "--Special Yield
Considerations" and "Certain Yield and
Prepayment Considerations" herein and
"Yield Considerations" in the Prospectus.
Certificate Registration............ The Offered Certificates (other than the
Variable Strip, Principal Only and
Residual Certificates) (the "DTC
Registered Certificates") will be
represented by one or more certificates
registered in the name of Cede & Co., as
nominee of DTC. No Beneficial Owner will
be entitled to receive a Certificate of
such class in fully registered,
certificated form (a "Definitive
Certificate"), except under the limited
circumstances described herein. The
Variable Strip, Principal Only and
Residual Certificates will be offered in
fully registered, certificated form. For
further registration
S-5
<PAGE>
information and denomination amounts, see
"Description of the Certificates" herein.
Pass-Through Rates on the
Offered Certificates.............. The Pass-Through Rates on all classes of
the Offered Certificates (other than the
Variable Strip Certificates) are fixed and
are set forth on the cover hereof. The
Pass-Through Rate on the Variable Strip
Certificates on each Distribution Date
will equal the weighted average of the
Pool Strip Rates (as defined herein) on
each of the Mortgage Loans as of the Due
Date (as defined herein) in the month
preceding the month in which such
Distribution Date occurs. The Pool Strip
Rate on each Mortgage Loan is equal to the
Net Mortgage Rate thereon minus 7.250%
(but not less than 0.000%). The "Net
Mortgage Rate" on each Mortgage Loan is
equal to the Mortgage Rate thereon minus
0.265% per annum, which is the sum of the
rate per annum at which the related master
servicing and subservicing fees accrue
(the "Servicing Fee Rate") and the rate
per annum at which the Trustee's fee
accrues (the "Trustee Fee Rate"). As of
the Cut-off Date, the Pool Strip Rates on
the Mortgage Loans range between 0.000%
and 6.110% per annum. The initial
Pass-Through Rate on the Variable Strip
Certificates is 1.477% per annum. The
Variable Strip Certificates have no
Certificate Principal Balance and will
accrue interest at the then applicable
Pass-Through Rate on the Notional Amount
(as defined herein).
Interest Distributions.............. Holders of each class of Senior
Certificates (other than the Principal
Only Certificates) and the Class M
Certificates will be entitled to receive
interest distributions in an amount equal
to the Accrued Certificate Interest (as
defined herein) on such class on each
Distribution Date, in the manner and
priority set forth herein and to the
extent of the Available Distribution
Amount (as defined herein) for such
Distribution Date, subject to the
priorities described herein.
With respect to any Distribution Date,
Accrued Certificate Interest will be equal
to (a) in respect of each class of Offered
Certificates (other than the Variable
Strip Certificates and Principal Only
Certificates), interest accrued for the
prior calendar month on the Certificate
Principal Balance of the Certificates of
such class at the related Pass-Through
Rate and (b) in respect of the Variable
Strip Certificates, interest accrued for
the prior calendar month on the Notional
Amount thereof at the then-applicable
Pass-Through Rate on such class for such
Distribution Date, in each case less any
interest shortfalls not covered with
respect to such class by Subordination, or
by the Master Servicer, in each case as
described herein, including any Prepayment
Interest Shortfall (as defined herein)
allocated thereto for such Distribution
Date. The Notional Amount of the Variable
Strip Certificates as of any Distribution
Date is equal to the aggregate Stated
Principal Balance of the
S-6
<PAGE>
Mortgage Loans immediately prior to such
date. The Principal Only Certificates are
not entitled to distributions of interest.
The Pass-Through Rates on all classes of
Offered Certificates (other than the
Variable Strip Certificates and Principal
Only Certificates) are fixed and are set
forth on the cover hereof. See
"Description of the Certificates--Interest
Distributions" herein.
Principal Distributions............. Holders of the Senior Certificates (other
than the Variable Strip Certificates and
the Principal Only Certificates) will be
entitled to receive a distribution of
principal on each Distribution Date, in
the manner and priority set forth herein,
to the extent of the portion of the
Available Distribution Amount remaining
after the Senior Interest Distribution
Amount and Principal Only Distribution
Amount (each as defined herein) are
distributed. Holders of the Principal Only
Certificates will be entitled to receive a
distribution of principal on each
Distribution Date, in the manner and
priority set forth herein, to the extent
of the portion of the Available
Distribution Amount remaining after the
Senior Interest Distribution Amount is
distributed. Holders of the Principal Only
Certificates are generally entitled to
receive principal payments only with
respect to the Discount Mortgage Loans (as
defined herein).
Holders of each class of the Class M
Certificates will be entitled to receive a
distribution of principal on each
Distribution Date, in the manner and
priority set forth herein, to the extent
of the portion of the Available
Distribution Amount remaining after (i)
distributions in respect of interest and
principal to the holders of the Senior
Certificates and any class of Class M
Certificates having a higher payment
priority and (ii) distributions in respect
of interest to the holders of such class
of Class M Certificates.
See "Description of the
Certificates--Principal Distributions on
the Senior Certificates" and "--Principal
Distributions on the Class M Certificates"
herein.
Advances............................ The Master Servicer is required to make
Advances in respect of delinquent payments
of principal and interest on the Mortgage
Loans, subject to the limitations
described herein. See "Description of the
Certificates--Advances" herein and in the
Prospectus.
Allocation of Losses; Subordination. Subject to the limitations set forth
below, Realized Losses on the Mortgage
Loans will be allocated as follows: first,
to the Class B Certificates; second, to
the Class M-3 Certificates; third, to the
Class M-2 Certificates; fourth, to the
Class M-1 Certificates until, in each
case, the Certificate Principal Balance of
each such class of Certificates is reduced
to zero; and thereafter, if any such
Realized Loss is on a Discount Mortgage
Loan, to the Principal Only Certificates
in an amount equal to the related Discount
Fraction of the principal portion of such
Realized Loss, and the
S-7
<PAGE>
remainder of such Realized Losses and the
entire amount of such Realized Losses on
Non-Discount Mortgage Loans to the
remaining classes of Senior Certificates
on a pro rata basis, as described herein,
except that Defaulted Mortgage Losses
otherwise allocable to the Super Senior
Lockout Certificates will be allocated to
the Senior Support Lockout Certificates
until the Certificate Principal Balance of
the Senior Support Lockout Certificates is
reduced to zero. The Subordination
provided to the Senior Certificates by the
Class B Certificates and Class M
Certificates and the Subordination
provided to each class of Class M
Certificates by the Class B Certificates
and by any class of Class M Certificates
subordinate thereto will cover Realized
Losses on the Mortgage Loans that are
Defaulted Mortgage Losses and, to the
extent described below, Fraud Losses,
Bankruptcy Losses and Special Hazard
Losses (each as defined herein). The
aggregate amounts of Realized Losses which
may be allocated by means of Subordination
to cover Special Hazard Losses, Fraud
Losses and Bankruptcy Losses are initially
limited to $2,314,000, $6,482,473 and
$148,332, respectively. All of the
foregoing amounts are subject to periodic
reduction as described herein and may be
further reduced as described in the
Prospectus under "Subordination."
In addition, any Special Hazard Losses,
Fraud Losses and Bankruptcy Losses in
excess of the respective amounts of
coverage therefor and any Extraordinary
Losses (as defined herein) on Non-Discount
Mortgage Loans will be allocated on a pro
rata basis among the Senior Certificates
(other than the Principal Only
Certificates), the Class M Certificates
and the Class B Certificates (any such
Realized Losses so allocated to the Senior
Certificates (other than the Principal
Only Certificates) or Class M Certificates
will be allocated without priority among
the various classes thereof). The
principal portion of such losses on
Discount Mortgage Loans will be allocated
to the Principal Only Certificates in an
amount equal to the related Discount
Fraction of such losses, and the remainder
of such losses on Discount Mortgage Loans
will be allocated to the remaining
Certificates on a pro rata basis as
described above. See "Description of the
Certificates--Allocation of Losses;
Subordination" herein.
Neither the Offered Certificates nor the
Mortgage Loans are insured or guaranteed
by any governmental agency or
instrumentality or by the Company, the
Master Servicer, the Seller, the Trustee
or any affiliate thereof.
Class B Certificates................ The Class B-1 Certificates, Class B-2
Certificates and Class B-3 Certificates
will each have a Pass-Through Rate of
7.25% per annum and initial Certificate
Principal Balances of $3,241,000,
$1,620,000 and $1,623,054, respectively,
and will evidence initial undivided
interests of approximately 1.00%, 0.50%
and 0.50%,
S-8
<PAGE>
respectively, in the Trust Fund. The Class
B Certificates are not being offered
hereby.
Optional Termination................ At its option, on any Distribution Date
when the aggregate Stated Principal
Balance of the Mortgage Loans is less than
10% of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date,
the Master Servicer may (i) purchase from
the Trust Fund all remaining Mortgage
Loans and other assets thereof, and
thereby effect early retirement of the
Certificates or (ii) purchase in whole,
but not in part, the Certificates. See
"Pooling and Servicing
Agreement--Termination" herein and "The
Pooling and Servicing
Agreement--Termination; Retirement of
Certificates" in the Prospectus.
Special Prepayment Considerations... The rate and timing of principal payments
on the Offered Certificates will depend
on, among other things, the rate and
timing of principal payments (including
prepayments, defaults, liquidations and
purchases of Mortgage Loans due to a
breach of a representation and warranty)
on the Mortgage Loans. As is the case with
mortgage-backed securities generally, the
Offered Certificates are subject to
substantial inherent cash-flow
uncertainties because the Mortgage Loans
may be prepaid at any time. Generally,
when prevailing interest rates increase,
prepayment rates on mortgage loans tend to
decrease, resulting in a slower return of
principal to investors at a time when
reinvestment at such higher prevailing
rates would be desirable. Conversely, when
prevailing interest rates decline,
prepayment rates on mortgage loans tend to
increase, resulting in a faster return of
principal to investors at a time when
reinvestment at comparable yields may not
be possible.
The multiple class structure of the
Offered Certificates results in the
allocation of prepayments among certain
classes as follows:
SEQUENTIALLY PAYING CLASSES: The Class
A-1, Class A-2, Class A-3, Class A-4 and
Class A-5 Certificates are also subject to
various priorities for payment of
principal as described herein.
Distributions of principal on classes
having an earlier priority of payment will
be affected by the rates of prepayment of
the Mortgage Loans early in the life of
the Mortgage Pool. The timing of
commencement of principal distributions
and the weighted average lives of classes
of Certificates with a later priority of
payment will be affected by the rates of
prepayment experienced both before and
after the commencement of principal
distributions on such classes.
LOCKOUT CERTIFICATES AND CERTIFICATES WITH
SUBORDINATION FEATURES: As described
herein, during certain periods all or a
disproportionately large percentage of
principal payments on the Mortgage Loans
will be allocated to the Senior
Certificates (other
S-9
<PAGE>
than the Lockout Certificates and the
Principal Only Certificates), and, during
certain periods, no principal payments
will be distributed on the Lockout
Certificates. Unless the Certificate
Principal Balances of the Class A-1, Class
A-2, Class A-3, Class A-4 and Class A-5
Certificates have been reduced to zero,
the Lockout Certificates will be entitled
to receive no distributions of principal
payments prior to the Distribution Date in
October 2002.
As described herein, during certain
periods all or a disproportionately large
percentage of Mortgagor prepayments on the
Mortgage Loans will be allocated among the
Senior Certificates, and, during certain
periods, no Mortgagor prepayments or,
relative to the Class M Percentage, a
disproportionately small percentage of
such prepayments will be distributed on
the Class M Certificates. To the extent
that no prepayments or a
disproportionately small percentage of
such prepayments are distributed on the
Class M Certificates, the percentage level
of subordination afforded the Senior
Certificates by the Class M Certificates
(together with the Class B Certificates),
in the absence of offsetting Realized
Losses allocated thereto, will be
increased , and the weighted average lives
of the Class M Certificates will be
extended. Unless the Certificate Principal
Balances of the Senior Certificates (other
than the Principal Only Certificates) have
been reduced to zero, the Class M
Certificates will be entitled to receive
no distributions of Mortgagor prepayments
prior to the Distribution Date in October
2002.
See "Description of the
Certificates--Principal Distributions on
the Senior Certificates," "--Principal
Distributions on the Class M Certificates"
and "Certain Yield and Prepayment
Considerations" herein, and "Maturity and
Prepayment Considerations" in the
Prospectus. For further information
regarding the effect of Mortgagor
prepayments on the weighted average lives
of the Offered Certificates (other than
the Variable Strip Certificates and
Residual Certificates), see the table
entitled "Percent of Initial Certificate
Principal Balance Outstanding at the
Following Percentages of the Prepayment
Assumption" herein.
Special Yield Considerations........ The yield to maturity on each class of the
Offered Certificates will depend on, among
other things, the rate and timing of
principal payments (including prepayments,
defaults, liquidations and purchases of
Mortgage Loans due to a breach of a
representation and warranty) on the
Mortgage Loans and the allocation thereof
to reduce the Certificate Principal
Balance or Notional Amount, as the case
may be, of such class. The yield to
maturity on each class of the Offered
Certificates will also depend on the
Pass-Through Rate (as applicable) and the
purchase price for such Certificates. The
yield to investors on any class of Offered
Certificates (other than the Principal
Only Certificates) will be adversely
affected by
S-10
<PAGE>
any allocation thereto of Prepayment
Interest Shortfalls on the Mortgage Loans,
which are expected to result from the
distribution of interest only to the date
of prepayment (rather than a full month's
interest) in connection with prepayments
in full and the lack of any distribution
of interest on the amount of any partial
prepayments. Prepayment Interest
Shortfalls resulting from Mortgagor
prepayments in any calendar month will not
adversely affect the yield to investors in
the Offered Certificates to the extent
such Prepayment Interest Shortfalls are
offset by the Master Servicer. See
"Description of the Certificates--Interest
Distributions" herein.
In general, if a class of Offered
Certificates is purchased at a premium and
principal distributions thereon occur at a
rate faster than assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than anticipated at
the time of purchase. Conversely, if a
class of Offered Certificates is purchased
at a discount and principal distributions
thereon occur at a rate slower than
assumed at the time of purchase, the
investor's actual yield to maturity will
be lower than anticipated at the time of
purchase.
The Offered Certificates were structured
assuming, among other things, a Prepayment
Assumption (as defined herein) of 100% and
corresponding weighted average lives as
described herein. The prepayment, yield
and other assumptions to be used for
pricing purposes for the respective
classes that are to be offered hereunder
may vary as determined at the time of
sale.
The multiple class structure of the
Offered Certificates causes the yield of
certain classes to be particularly
sensitive to changes in the rates of
prepayment of the Mortgage Loans and other
factors, as follows:
LOCKOUT CERTIFICATES: Investors in the
Lockout Certificates should be aware that
because the Lockout Certificates do not
receive any portion of principal payments
prior to the Distribution Date occurring
in October 2002 and will receive a
disproportionately small portion of
principal prepayments prior to the
Distribution Date occurring in October
2006 (unless the Certificate Principal
Balances of the Class A-1, Class A-2,
Class A-3, Class A-4 and Class A-5 have
been reduced to zero), the weighted
average life of the Lockout Certificates
will be longer than would otherwise be the
case, and the effect on the market value
of the Lockout Certificates of changes in
market interest rates or market yields for
similar securities may be greater than for
other classes of Senior Certificates
entitled to such distributions.
VARIABLE STRIP CERTIFICATES: The yield to
investors on the Variable Strip
Certificates will be extremely sensitive
to the rate and timing of principal
payments on the Non-Discount Mortgage
Loans
S-11
<PAGE>
(including prepayments, defaults and
liquidations), which rate may fluctuate
significantly over time. A faster than
expected rate of principal payments on
such Mortgage Loans will have a negative
effect on the yield to such investors and
could result in the failure of investors
in the Variable Strip Certificates to
recover their initial investments. In
addition, because holders of the Variable
Strip Certificates generally have rights
to relatively larger portions of interest
payments on Non-Discount Mortgage Loans
with higher Mortgage Rates than on
Mortgage Loans with lower Mortgage Rates,
and because such Mortgage Loans having
higher Mortgage Rates are generally likely
to prepay at a faster rate than Mortgage
Loans with lower Mortgage Rates, the yield
on the Variable Strip Certificates will be
adversely affected to a greater extent
than the yields on the other Offered
Certificates if the Mortgage Loans with
higher Mortgage Rates prepay faster than
the Mortgage Loans with lower Mortgage
Rates. Because the Pool Strip Rates on the
Discount Mortgage Loans equal 0.000%, the
yield to investors on the Variable Strip
Certificates will not be affected by
prepayments on the Discount Mortgage
Loans. See "Certain Yield and Prepayment
Considerations," especially "Variable
Strip Certificate and Principal Only
Certificate Yield Considerations" herein.
PRINCIPAL ONLY CERTIFICATES: The amounts
payable with respect to the Principal Only
Certificates derive only from principal
payments on the Discount Mortgage Loans.
As a result, the yield on the Principal
Only Certificates will be adversely
affected by slower than expected payments
of principal on the Discount Mortgage
Loans. Because the Discount Mortgage Loans
have lower Net Mortgage Rates than the
Non-Discount Mortgage Loans, and because
the Mortgage Loans with lower Net Mortgage
Rates are likely to have lower Mortgage
Rates, the Discount Mortgage Loans are
generally likely to prepay at a slower
rate than the Non-Discount Mortgage Loans.
See "Certain Yield and Prepayment
Considerations," especially "--Principal
Only Certificate Yield Considerations"
herein.
CERTIFICATES WITH SUBORDINATION FEATURES:
The yield to investors on each class of
Class M Certificates, and particularly on
those classes of Class M Certificates with
lower payment priorities, will be
extremely sensitive to losses due to
defaults on the Mortgage Loans (and the
timing thereof), to the extent such losses
are not covered by the Class B
Certificates or by any other class of
Class M Certificates having a lower
payment priority, because the entire
amount of such losses that are covered by
Subordination will be allocable to such
class or classes of Class M Certificates,
as described herein.
In the event that, on any Distribution
Date, due to Realized Losses, the
Certificate Principal Balances of the
Class M Certificates and Class B
Certificates have been reduced to zero and
the Senior
S-12
<PAGE>
Percentage is 100% (such date, the "Credit
Support Depletion Date"), the yield to
maturity on the Senior Support Lockout
Certificates will be extremely sensitive
to losses due to defaults on the Mortgage
Loans (and the timing thereof) because
such losses otherwise allocable to the
Super Senior Lockout Certificates will be
allocated first to the Senior Support
Lockout Certificates, as described herein.
Furthermore, as described herein, the
timing of receipt of principal and
interest by the Senior Support Lockout
Certificates (after the Credit Support
Depletion Date) and any class of Class M
Certificates may be adversely affected by
losses even if such class does not
ultimately bear such loss. See "Certain
Yield and Prepayment Considerations"
herein and "Yield Considerations" in the
Prospectus.
RESIDUAL CERTIFICATES: Holders of the
Residual Certificates are entitled to
receive distributions of principal and
interest as described herein; however,
holders of such Certificates may have tax
liabilities with respect to their
Certificates during the early years of the
term of the Trust Fund that substantially
exceed the principal and interest payable
thereon during such periods. See "Certain
Yield and Prepayment Considerations,"
especially "--Additional Yield
Considerations Applicable Solely to the
Residual Certificates" herein, "Federal
Income Tax Consequences" herein and in the
Prospectus and "Yield Considerations" in
the Prospectus.
Federal Income Tax
Consequences........................ A REMIC election will be made with respect
to the Trust Fund for federal income tax
purposes. Upon the issuance of the Offered
Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its
opinion generally to the effect that,
assuming compliance with all provisions of
the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust
Fund will qualify as a REMIC under
Sections 860A through 860G of the Code.
For federal income tax purposes, (a) the
Class R Certificates will be the sole
class of "residual interests" in the REMIC
and (b) each class of the Senior
Certificates (other than the Residual
Certificates), the Class M Certificates
and the Class B Certificates will
represent ownership of "regular interests"
in the REMIC and will generally be treated
as representing ownership of debt
instruments of the REMIC.
For federal income tax reporting purposes,
the Class A-1, Class A-2, Class A-4, Class
A-5, Class A-6, Class A-7, Class A-8 and
Class M-1 Certificates will not be treated
as having been issued with original issue
discount. The Class A-3 and Class M-2
Certificates may, and the Principal Only,
Variable Strip and Class M-3 Certificates
will, be treated as having been issued
with
S-13
<PAGE>
original issue discount for federal income
tax reporting purposes. The prepayment
assumption that will be used in
determining the rate of accrual of
original issue discount, market discount
and premium, if any, for federal income
tax purposes will be based on the
assumption that, subsequent to the date of
any determination the Mortgage Loans will
prepay at a rate equal to 100% of the
Prepayment Assumption. No representation
is made that the Mortgage Loans will
prepay at that rate or at any other rate.
See "Federal Income Tax Consequences"
herein and "Federal Income Tax
Consequences--General" and
"--REMICs--Taxation of Owners of REMIC
Regular Certificates--Issue Discount" in
the Prospectus.
The Offered Certificates will be treated
as assets described in Section
7701(a)(19)(C) of the Code and "real
estate assets" under Section 856(c)(4)(A)
of the Code generally in the same
proportion that the assets of the Trust
Fund would be so treated. In addition,
interest on the Offered Certificates will
be treated as "interest on obligations
secured by mortgages on real property"
under Section 856(c)(3)(B) of the Code
generally to the extent that such Offered
Certificates are treated as "real estate
assets" under Section 856(c)(4)(A) of the
Code. Moreover, the Offered Certificates
(other than the Residual Certificates)
will be "qualified mortgages" within the
meaning of Section 860G(a)(3) of the Code
if transferred to another REMIC on its
startup day in exchange for a regular or
residual interest therein. However,
prospective investors in Offered
Certificates that will be generally
treated as assets described in Section
860G(a)(3) of the Code should note that,
notwithstanding such treatment, any
repurchase of such a Certificate pursuant
to the right of the Master Servicer or the
Company to repurchase such Offered
Certificates may adversely affect any
REMIC that holds such Offered Certificates
if such repurchase is made under
circumstances giving rise to a Prohibited
Transaction Tax. See "The Pooling and
Servicing Agreement--Termination" and
"Federal Income Tax Consequences" herein
and "Federal Income Tax Consequences--
REMICs--Characterization of Investments in
REMIC Certificates" in the Prospectus.
Under the REMIC Regulations, the Residual
Certificates may constitute "noneconomic"
residual interests. Transfers of the
Residual Certificates will be restricted
in a manner designed to prevent a transfer
of a noneconomic residual interest from
being disregarded under the REMIC
Regulations. See "Federal Income Tax
Consequences--Special Tax Considerations
Applicable to Residual Certificates"
herein and "Federal Income Tax
Consequences--REMICs--Taxation of Owners
of REMIC Residual Certificates--Excess
Inclusions" and "--Noneconomic REMIC
Residual Certificates" in the Prospectus.
S-14
<PAGE>
The Residual Certificateholders may be
required to report an amount of taxable
income with respect to the early years of
the REMIC's term that significantly
exceeds distributions on the Residual
Certificates during such years, with
corresponding tax deductions or losses
deferred until the later years of the
REMIC's term. Accordingly, on a present
value basis, the tax detriments occurring
in the earlier years may substantially
exceed the sum of any tax benefits in the
later years. As a result, the Residual
Certificateholders' after-tax rate of
return may be zero or negative, even if
their pre-tax rate of return is positive.
See "Certain Yield and Prepayment
Considerations," especially "--Additional
Yield Considerations Applicable Solely to
the Residual Certificates" and "Federal
Income Tax Consequences--Special Tax
Considerations Applicable to Residual
Certificates" herein.
For further information regarding the
federal income tax consequences of
investing in the Offered Certificates, see
"Federal Income Tax Consequences" herein
and in the Prospectus.
ERISA Considerations................ Fiduciaries of employee benefit plans
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or plans subject to Section
4975 of the Internal Revenue Code of 1986
(the "Code"), should carefully review with
their legal advisors whether the purchase
or holding of the Offered Certificates
could give rise to a transaction
prohibited or not otherwise permissible
under ERISA or the Code. The Senior
Support Lockout Certificates, the Class M
Certificates and the Residual Certificates
may not be acquired by a Plan (as defined
herein) and transfers thereof are subject
to the restrictions described herein. See
"ERISA Considerations" herein.
Legal Investment.................... The Senior Certificates and Class M-1
Certificates will constitute "mortgage
related securities" for purposes of SMMEA
for so long as they are rated in at least
the second highest rating category by one
or more nationally recognized statistical
rating agencies. The Class M-2
Certificates and Class M-3 Certificates
will not constitute "mortgage related
securities" for purposes of SMMEA.
Institutions whose investment activities
are subject to legal investment laws and
regulations, regulatory capital
requirements or review by regulatory
authorities may be subject to restrictions
on investment in the Offered Certificates
and should consult with their legal
advisors. See "Legal Investment" herein
and "Legal Investment Matters" in the
Prospectus.
Ratings............................. It is a condition to the issuance of the
Senior Certificates offered hereby (other
than the Variable Strip Certificates and
Principal Only Certificates) that they be
rated "AAA" by each of Standard & Poor's
and DCR. It is a condition to the issuance
of the Variable
S-15
<PAGE>
Strip Certificates and Principal Only
Certificates that they be rated "AAAr" by
Standard & Poor's and "AAA" by DCR. It is
a condition of the issuance of the Class
M-1, Class M-2 and Class M-3 Certificates
that they be rated not lower than "AA,"
"A" and "BBB," respectively, by each of
Standard & Poor's and DCR. A security
rating is not a recommendation to buy,
sell or hold securities and may be subject
to revision or withdrawal at any time by
the assigning rating organization. A
security rating does not address the
frequency of prepayments of Mortgage
Loans, or the corresponding effect on
yield to investors. The ratings of the
Variable Strip Certificates do not address
the possibility that the holders of such
Certificates may fail to fully recover
their initial investments. See "Certain
Yield and Prepayment Considerations" and
"Ratings" herein and "Yield
Considerations" in the Prospectus.
Risk Factors........................ There are material risks associated with
an investment in the Offered Certificates.
See "Risk Factors" beginning on page S-17
herein and on page 14 of the Prospectus
for a discussion of significant matters
affecting investments in the Certificates.
S-16
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, among other things, the
items discussed under "Risk Factors" in the Prospectus and the following factors
in connection with the purchase of the Certificates:
GENERAL. The yields to maturity and the aggregate amount of
distributions on the Offered Certificates will be affected by the rate and
timing of principal payments on the Mortgage Loans and the amount and timing of
Mortgagor defaults resulting in Realized Losses. Such yields may be adversely
affected by a higher or lower than anticipated rate of principal payments on the
Mortgage Loans in the Trust Fund. The rate of principal payments on such
Mortgage Loans will in turn be affected by the amortization schedules of the
Mortgage Loans, the rate and timing of Mortgagor prepayments thereon by the
Mortgagors, liquidations of defaulted Mortgage Loans and purchases of Mortgage
Loans due to certain breaches of representations and warranties. The timing of
changes in the rate of prepayments, liquidations and purchases of the Mortgage
Loans may, and the timing of Realized Losses will, significantly affect the
yield to an investor, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. Since the rate and
timing of principal payments on the Mortgage Loans will depend on future events
and on a variety of factors, no assurance can be given as to such rate or the
timing of principal payments on the Offered Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any
time without payment of any prepayment fee or penalty. The Mortgage Loans
generally contain due-on-sale clauses. As described under "Description of the
Certificates--Principal Distributions on the Senior Certificates" and
"--Principal Distributions on the Class M Certificates" herein, during certain
periods all or a disproportionately large percentage of Mortgagor prepayments on
the Mortgage Loans will be allocated to the Senior Certificates (other than the
Principal Only Certificates and the Lockout Certificates), and during certain
periods no Mortgagor prepayments or, relative to their respective percentage
interests in the Trust Fund, a disproportionately small portion of Mortgagor
prepayments on the Mortgage Loans will be distributed on the Lockout
Certificates and each class of Class M Certificates. In addition to the
foregoing, if on any Distribution Date, the loss level established for the Class
M-2 Certificates or Class M-3 Certificates is exceeded and a class of Class M
Certificates having a higher payment priority is then outstanding, the Class M-2
Certificates or Class M-3 Certificates, as the case may be, will not receive
distributions in respect of Mortgagor prepayments on such Distribution Date.
Prepayments, liquidations and purchases of the Mortgage Loans will result in
distributions to holders of the Offered Certificates of principal amounts which
would otherwise be distributed over the remaining terms of the Mortgage Loans.
Factors affecting prepayment (including defaults and liquidations) of mortgage
loans include changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties, changes in the value of the
mortgaged properties, mortgage market interest rates, solicitations and
servicing decisions. In addition, if prevailing mortgage rates fell
significantly below the Mortgage Rates on the Mortgage Loans, the rate of
prepayments (including refinancings) would be expected to increase. Conversely,
if prevailing mortgage rates rose significantly above the Mortgage Rates on the
Mortgage Loans, the rate of prepayments on the Mortgage Loans would be expected
to decrease.
BOOK-ENTRY SYSTEM. Transactions in the Book-Entry Certificates
generally can be effected only through DTC Participants and Indirect
Participants. The ability of Beneficial Owners to pledge Book-Entry Certificates
and the liquidity of the Book-Entry Certificates in general may be limited due
to the lack of a physical certificate for such Book-Entry Certificates. In
addition, Certificateholders may experience delays in their receipt of payments.
See "Risk Factors--Book-Entry Registration May Affect Liquidity" in the
Prospectus.
LEGAL PROCEEDINGS. On March 5, 1997, Fortune Mortgage filed a complaint
against various parties, including the Master Servicer, ICMH, ICII and certain
individuals who are officers and/or directors of such entities. The claims arise
out of a sale of a group of loan production offices by ICII to Imperial First
Mortgage. The complaint alleges that the sale was induced by fraudulent
misrepresentations and omissions, including but not limited to an allegation
that the loan production offices were engaged in illegal kickback practices
which were not disclosed to the buyer, as well as misrepresentations concerning
the volume and profitability of the loan production offices. The
S-17
<PAGE>
complaint seeks general damages, special and/or consequential damages,
reasonable attorney's fees and costs of suit on all of the causes of action. In
addition, the complaint also seeks exemplary and punitive damages. The complaint
alleges specifically that plaintiffs have been damaged in a sum in excess of
$2.5 million by virtue of the defendants' conduct, and that the defendants have
been unjustly enriched in a sum in excess of $10 million. The matter will be
arbitrated before the American Arbitration Association. The Master Servicer
intends to vigorously defend the lawsuit; however, there can be no assurance
that an adverse decision in such lawsuit would not have a material adverse
affect on the ability of the Master Servicer to perform its obligations under
the Pooling and Servicing Agreement.
A financial institution has contended that the institution has a claim
against ICMH in connection with certain communications between ICMH and the
institution regarding a certain mortgage broker and transactions involving that
mortgage broker. No lawsuit has been filed and no damages have been alleged.
ICMH believes that these contentions are without merit, and if a lawsuit is ever
filed, it will be vigorously defended; however, there can be no assurance that
an adverse decision in such lawsuit would not have a material adverse affect on
the ability of ICMH to perform its obligations as guarantor under the Mortgage
Loan Purchase Agreement.
See "Risk Factors" in the Prospectus for a description of certain other
risks and special considerations applicable to the Offered Certificates.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of approximately $324,123,629. The Mortgage Pool
will consist of conventional, fixed-rate, first lien Mortgage Loans with terms
to maturity of not more than 30 years from the date of origination or
modification. With respect to Mortgage Loans which have been modified,
references herein to the date of origination shall be deemed to be the date of
the most recent modification. All percentages of the Mortgage Loans described
herein are approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Cut-off Date.
On the Delivery Date, the Mortgage Loans will be sold to the Company
from ICI Funding pursuant to a Mortgage Loan Purchase Agreement, dated September
29, 1997, among the Company, ICI Funding and ICMH, as guarantor. All of the
Mortgage Loans were acquired by ICI Funding from Unaffiliated Sellers (as
defined in the Prospectus) in accordance with the underwriting criteria
described herein.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Company will assign the representations and warranties made with respect to the
Mortgage Loans by ICI Funding to the Trustee for the benefit of the
Certificateholders and will also make certain limited representations and
warranties regarding the Mortgage Loans as of the date of issuance of the
Certificates. To the extent that any Unaffiliated Seller of the Mortgage Loans
does not repurchase a Mortgage Loan in the event of a breach of its
representations and warranties with respect to such Mortgage Loan, neither the
Company nor ICI Funding will be required to repurchase such Mortgage Loan unless
such breach also constitutes a breach of one of the Company's or ICI Funding's
representations and warranties with respect to such Mortgage Loan and such
breach materially and adversely affects the interests of the Certificateholders
in any such Mortgage Loan. In addition, neither the Company nor ICI Funding will
be required to repurchase any Mortgage Loan in the event of a breach of its
representations and warranties with respect to such Mortgage Loan if the
substance of any such breach also constitutes fraud in the origination of such
affected Mortgage Loan. A limited amount of losses on Mortgage Loans as to which
there was fraud in the origination of such Mortgage Loans will be covered by the
Subordination (as defined herein) provided by the Class M Certificates and Class
B Certificates as described herein under "Description of the
Certificates--Allocation of Losses; Subordination."
S-18
<PAGE>
None of the Mortgage Loans will have been originated prior to November,
1993, or will have a maturity date later than September, 2027. No Mortgage Loan
will have a remaining term to maturity as of the Cut-off Date of less than 20
months. The weighted average remaining term to maturity of the Mortgage Loans as
of the Cut-off Date will be approximately 348 months. The weighted average
original term to maturity of the Mortgage Loans as of the Cut-off Date will be
approximately 350 months.
One Mortgage Loan, representing 0.05% of the Mortgage Pool, is a
Balloon Loan (as defined in the Prospectus). Such Mortgage Loan amortizes over
360 months, but the final payment (the "Balloon Payment") of such Mortgage Loan
is due and payable on the 60th month. The amount of the Balloon Payment on such
Mortgage Loan is substantially in excess of the amount of the scheduled monthly
payment on such Mortgage Loan for the period prior to the Due Date of such
Balloon Payment. This Mortgage Loan has a remaining term to maturity of 20
months.
Each Mortgage Loan is required to be covered by a standard hazard
insurance policy (a "Primary Hazard Insurance Policy"). See "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder--Hazard Insurance Policies" in
the Prospectus. In addition, except with respect to 0.13% of the Mortgage Loans,
each Mortgage Loan with a Loan-to-Value Ratio at origination in excess of 80.00%
will be insured by a primary mortgage insurance policy (a "Primary Insurance
Policy") issued by a private mortgage insurer insuring against default under the
Mortgage Note in an amount at least equal to (i) with respect to each Mortgage
Loan not originated under the Seller's "Progressive Express Program" (as
described herein under "-- Underwriting Standards), the excess of such
outstanding principal amount over 75.00% of the value of the related Mortgaged
Property used in determining such Loan-to-Value Ratio (the "Appraised Value") of
such Mortgage Loan until the outstanding principal balance of such Mortgage Loan
is reduced below 80.00% of the Appraised Value or, based upon a new appraisal,
the principal balance of such Mortgage Loan represents less than 80.00% of the
new appraised value or (ii) with respect to each Mortgage Loan originated under
the Seller's "Progressive Express" program, (A) for which the outstanding
principal balance at origination of the such Mortgage Loan is between 80.00% and
up to and including 85.00% of the Appraised Value is covered by a Primary
Insurance Policy in an amount equal to 22.00% of the Appraised Value and (B) for
which the outstanding principal balance at origination of such Mortgage Loan
exceeded 85.00% of the Appraised Value is covered by Primary Insurance Policy in
an amount equal to 30.00% of the Appraised Value.
As of the Cut-off Date, no Mortgage Loan will be one month or more
delinquent in payment of principal and interest.
None of the Mortgage Loans will be Buydown Mortgage Loans.
No Mortgage Loan provides for deferred interest or negative
amortization.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date (except as otherwise indicated).
All percentages of the Mortgage Loans are approximate percentages by aggregate
principal balance as of the Cut-off Date (except as otherwise indicated). Unless
otherwise specified, all principal balances of the Mortgage Loans are as of the
Cut-off Date and are rounded to the nearest dollar.
S-19
<PAGE>
<TABLE>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
<CAPTION>
ORIGINAL PERCENTAGE OF CUT-OFF
MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID DATE AGGREGATE
PRINCIPAL BALANCE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$0.01- $50,000.00.................... 92 $ 4,002,840 1.23%
$50,000.01 - $100,000.00.................... 594 46,076,734 14.22
$100,000.01 - $150,000.00.................... 671 83,419,447 25.74
$150,000.01 - $200,000.00.................... 357 61,780,467 19.06
$200,000.01 - $250,000.00.................... 213 47,350,741 14.61
$250,000.01 - $300,000.00.................... 119 32,716,868 10.09
$300,000.01 - $350,000.00.................... 63 20,347,330 6.28
$350,000.01 - $400,000.00.................... 35 13,260,664 4.09
$400,000.01 - $450,000.00.................... 9 3,922,490 1.21
$450,000.01 - $500,000.00.................... 13 6,216,813 1.92
$500,000.01 - $550,000.00.................... 4 2,042,584 0.63
$550,000.01 - $600,000.00.................... 3 1,699,150 0.52
$600,000.01 - $650,000.00.................... 2 1,287,500 0.40
-------- ----------- -----
Total................................... 2,175 $324,123,629 100.00%
======= ============ =======
</TABLE>
The average original principal balance of the Mortgage Loans will be
approximately $149,255.
S-20
<PAGE>
<TABLE>
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT THE CUT-OFF DATE
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$0.01 - $50,000.00.................. 92 $ 4,002,840 1.23%
$50,000.01 - $100,000.00................. 595 46,176,560 14.25
$100,000.01 - $150,000.00................. 671 83,469,605 25.75
$150,000.01 - $200,000.00................. 356 61,630,483 19.01
$200,000.01 - $250,000.00................. 214 47,597,337 14.68
$250,000.01 - $300,000.00................. 118 32,470,273 10.02
$300,000.01 - $350,000.00................. 63 20,347,330 6.28
$350,000.01 - $400,000.00................. 35 13,260,664 4.09
$400,000.01 - $450,000.00................. 9 3,922,490 1.21
$450,000.01 - $500,000.00................. 13 6,216,813 1.92
$500,000.01 - $550,000.00................. 4 2,042,584 0.63
$550,000.01 - $600,000.00................. 3 1,699,150 0.52
$600,000.01 - $650,000.00................. 2 1,287,500 0.40
-------- ------------- ------
Total................................. 2,175 $324,123,629 100.00%
======== ============ =======
</TABLE>
The average current principal balance of the Mortgage Loans will be
approximately $149,022.
S-21
<PAGE>
<TABLE>
MORTGAGE RATES
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<C> <C> <C> <C>
7.000% - 7.499%...................... 3 288,559 0.09%
7.500% - 7.999%...................... 22 4,158,005 1.28
8.000% - 8.499%...................... 147 29,246,803 9.02
8.500% - 8.999%...................... 794 123,530,824 38.11
9.000% - 9.499%...................... 866 121,371,567 37.45
9.500% - 9.999%...................... 265 35,707,427 11.02
10.000% - 10.499%..................... 48 6,808,226 2.10
10.500% - 10.999%..................... 21 2,060,371 0.64
11.000% - 11.499%..................... 4 436,335 0.13
11.500% - 11.999%..................... 4 319,990 0.10
13.500% - 13.999%..................... 1 195,522 0.06
----- --------------- ----
Total............................ 2,175 $324,123,629 100.00%
========= ============ ======
</TABLE>
The weighted average Mortgage Rate of the Mortgage Loans will be
approximately 8.991% per annum.
S-22
<PAGE>
<TABLE>
ORIGINAL LOAN-TO-VALUE RATIOS
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Less than or equal to 25.00................ 6 $ 386,944 0.12%
25.01% - 30.00%............................ 10 841,412 0.26
30.01% - 35.00%............................ 8 651,998 0.20
35.01% - 40.00%............................ 9 547,481 0.17
40.01% - 45.00%............................ 19 1,993,955 0.62
45.01% - 50.00%............................ 37 4,465,423 1.38
50.01% - 55.00%............................ 36 3,598,583 1.11
55.01% - 60.00%............................ 43 5,749,332 1.77
60.01% - 65.00%............................ 67 9,870,291 3.05
65.01% - 70.00%............................ 93 12,427,226 3.83
70.01% - 75.00%............................ 218 36,370,378 11.22
75.01% - 80.00%............................ 557 80,748,332 24.91
80.01% - 85.00%............................ 73 9,542,253 2.94
85.01% - 90.00%............................ 935 145,496,924 44.89
90.01% - 95.00%............................ 64 11,433,095 3.53
------- ------------ ----
Total.................................. 2,175 $324,123,629 100.00%
======= ============ ======
</TABLE>
The minimum and maximum Loan-to-Value Ratios at origination of the
Mortgage Loans were approximately 18.34% and 95.00%, respectively, and the
weighted average Loan-to-Value Ratio at origination of the Mortgage Loans was
approximately 81.74%.
<TABLE>
MORTGAGE LOAN PROGRAM
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------------- --------------------
<S> <C> <C> <C>
Full Documentation......................... 198 $31,301,269 9.66%
Limited Documentation...................... 420 60,886,983 18.79
No Ratio................................... 210 31,164,668 9.62
Alternative Documentation.................. 9 1,392,084 0.43
No Income/No Asset......................... 208 26,092,050 8.05
Lite (Self-Employed B/C)................... 1 187,425 0.06
Express (Non-Verified Assets).............. 1,074 163,279,696 50.38
Express (Verified Assets).................. 55 9,819,454 3.03
------ ------------- -------
Total................................ 2,175 $324,123,629 100.00%
===== ============ =======
</TABLE>
See "--Underwriting" below for a description of ICI Funding's
documentation programs.
S-23
<PAGE>
<TABLE>
RISK CATEGORIES OF MORTGAGE LOANS
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------------- --------------------
<S> <C> <C> <C>
A+(1)...................................... 15 $ 3,883,540 1.20%
A(1)....................................... 963 138,141,428 42.62
A-(1)...................................... 64 8,683,057 2.68
B (1)...................................... 3 226,454 0.07
C (1)...................................... 1 90,000 0.03
Progressive Express 1(2)................... 530 80,763,516 24.92
Progressive Express 2(2)................... 478 73,562,459 22.70
Progressive Express 3(2)................... 62 9,421,144 2.91
Progressive Express 4(2)................... 52 8,684,771 2.68
Progressive Express 5(2)................... 7 667,260 0.21
------ ----------- --------
Total.................................. 2,175 $324,123,629 100.00%
===== ============ =========
</TABLE>
- ------------------
(1) All of the Mortgage Loans were reviewed and placed into risk categories
generally based on the credit standards of the Progressive Program. See "--
Underwriting" herein.
(2) These Mortgage Loans were originated under ICI Funding's Progressive Express
Program. The underwriting for such Mortgage Loans is generally based on the
borrower's "FICO" score and therefore such Mortgage Loans do not correspond to
the alphabetical risk categories listed above. See "Description of the Mortgage
Pool-- Underwriting Standards."
S-24
<PAGE>
<TABLE>
OCCUPANCY TYPE
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
OCCUPANCY TYPE (AS INDICATED BY BORROWER) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner-Occupied Primary Residence........... 1,997 $307,165,205 94.77%
Second Homes............................... 88 9,411,492 2.90
Non-Owner Occupied......................... 90 7,546,932 2.33
----- ------------- -------
Total................................... 2,175 $324,123,629 100.00%
====== ============ =======
</TABLE>
<TABLE>
PROPERTY TYPES
<CAPTION>
PERCENTAGE OF CUT-OFF
NUMBER OF AGGREGATE UNPAID DATE AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-family............................... 1,798 $276,741,234 85.38%
PUD......................................... 133 19,298,082 5.95
Condominium................................. 169 18,460,988 5.70
Two- to Four-Family......................... 70 8,893,905 2.74
CondoHotel.................................. 3 425,985 0.13
Deminimus PUD............................... 2 303,434 0.09
----- ------------ -----
Total.................................... 2,175 $324,123,629 100.00%
======== ============ ======
</TABLE>
S-25
<PAGE>
<TABLE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
California................................. 528 $104,148,340 32.13%
Florida.................................... 447 49,694,872 15.33
New Jersey................................. 217 32,632,914 10.07
New York................................... 176 26,491,769 8.17
Texas...................................... 115 14,099,260 4.35
Washington................................. 63 10,294,066 3.18
Other(1)................................... 629 86,762,407 26.77
----- ------------ -------
Total................................... 2,175 $324,123,629 100.00%
======= ============ ======
</TABLE>
- ------------------
(1) No more than 3% in any one state.
No more than approximately 0.71% of the Mortgage Loans will be secured
by Mortgaged Properties located in any one zip code.
<TABLE>
PURPOSES OF MORTGAGE LOANS
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Purchase................................... 1,673 $247,551,336 76.38%
Refinance/Equity Take-Out.................. 293 41,172,988 12.70
Refinance/No Equity Take-Out............... 199 34,254,051 10.57
Construction............................... 10 1,145,255 0.35
------ ------------- ----
Total................................... 2,175 $324,123,629 100.00%
======== ============ ======
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term"
refinance purposes, substantially all of the proceeds are used to pay in full
the principal balance of a previous mortgage loan of the mortgagor with respect
to a Mortgaged Property and to pay origination and closing costs associated with
such refinancing. Mortgage Loans made for "equity take out" refinance purposes
may involve the use of the proceeds to pay in full the principal balance of a
previous mortgage loan and related costs except that a portion of the proceeds
are generally retained by the mortgagor for uses unrelated to the Mortgaged
Property. The amount of such proceeds retained by the mortgagor may be
substantial.
UNDERWRITING STANDARDS
All of the Mortgage Loans were acquired by ICI Funding and
substantially all were underwritten pursuant to, or in accordance with, the
standards of either ICI Funding's Progressive Series Program or its Progressive
Express(TM) Program, each of which is described below.
S-26
<PAGE>
THE PROGRESSIVE SERIES PROGRAM
GENERAL. The underwriting guidelines utilized in the Progressive Series
Program, as developed by ICI Funding, are intended to assess the borrower's
ability and willingness to repay the mortgage loan obligation and to assess the
adequacy of the mortgaged property as collateral for the mortgage loan. The
Progressive Series Program is designed to meet the needs of borrowers with
excellent credit, as well as those whose credit has been adversely affected. The
Progressive Series Program consists of six mortgage loan programs. Each program
has different credit criteria, reserve requirements, qualifying ratios and
Loan-to-Value Ratio restrictions. Series I is designed for credit history and
income requirements typical of "A" credit borrowers. In the event a borrower
does not fit the Series I criteria, the borrower's mortgage loan is placed into
either Series II, III, III+, IV or V, depending on which series' mortgage loan
parameters meets the borrower's unique credit profile. Series II, III, III+, IV
and V allow for less restrictive standards because of certain compensating or
offsetting factors such as a lower Loan-to-Value Ratio, verified liquid assets,
job stability, pride of ownership and, in the case of refinance mortgage loans,
length of time owning the mortgaged property. The philosophy of the Progressive
Series Program is that no single borrower characteristic should automatically
determine whether an application for a mortgage loan should be approved or
disapproved. Lending decisions are based on a risk analysis assessment after the
review of the entire mortgage loan file. Each mortgage loan is individually
underwritten with emphasis placed on the overall quality of the mortgage loan.
The Progressive Series I Program utilizes an average annual salary to calculate
the debt service-to-income ratio. Salaried borrowers are evaluated based on a 12
month salary history, and self-employed and commission borrowers are evaluated
on a 24 month basis. The debt service-to-income ratio for Series I borrowers is
required to be within the range of 36% to 50%. The Progressive Series II, III,
III+, IV and V Program borrowers are required to have debt service-to-income
ratios within the range of 45% to 60% calculated on the basis of monthly income
and depending on the Loan-to-Value Ratio of the Mortgage Loan.
Under the Progressive Series Program, ICI Funding underwrites one- to
four-family mortgage loans with Loan-to-Value Ratios at origination of up to
95%, depending on, among other things, a borrower's credit history, repayment
ability and debt service-to-income ratio, as well as the type and use of the
mortgaged property. Second lien financing of the mortgaged properties may be
provided by lenders other than ICI Funding at origination; however, the combined
Loan-to-Value Ratio ("CLTV") generally may not exceed 95% for mortgage loan
amounts up to $400,000 and 90% for mortgage loan amounts above $400,000. In
certain circumstances, ICI Funding may allow second lien financing with CLTVs of
up to 100%. The mortgage loans in the Progressive Series Program generally bear
rates of interest that are greater than those which are originated in accordance
with FHLMC and FNMA standards. In general, the maximum amount for mortgage loans
originated under the Progressive Series Program is $750,000; however, ICI
Funding may approve mortgage loans in excess of such amount on a case-by-case
basis.
All of the mortgage loans originated under the Progressive Series I, II
and III Programs are underwritten either by employees of ICI Funding or by
contracted mortgage insurance companies or delegated conduit sellers.
Substantially all of the mortgage loans originated under the Series III+, IV and
V Programs are underwritten by employees of ICI Funding or contracted due
diligence firms. Substantially all of the Series I Program mortgage loans and
all of the Series II and III Program mortgage loans with Loan-to-Value Ratios at
origination in excess of 80% are insured by a Primary Insurance Policy. None of
the Series III+ Program Mortgage Loans with Loan-to-Value Ratios at origination
in excess of 80% will be insured by a Primary Insurance Policy. In general, all
Series IV and Series V Program Mortgage Loans have Loan-to-Value Ratios at
origination which are less than or equal to 80% and do not require a Primary
Insurance Policy. ICI Funding receives verbal verification from ICI Funding's
conduit seller of employment prior to funding or acquiring each Progressive
Series Program mortgage loan.
FULL/ALTERNATIVE DOCUMENTATION AND REDUCED DOCUMENTATION PROGRESSIVE
SERIES PROGRAMS. Each prospective borrower completes a mortgage loan application
which includes information with respect to the applicant's liabilities, income,
credit history, employment history and personal information. ICI Funding
requires a credit report on each applicant from a credit reporting company. The
report typically contains information relating to credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments.
S-27
<PAGE>
The Progressive Series Program allows for approval of an application
pursuant to the (a) Full/Alternative Documentation Program, or (b) the Limited
Documentation Program, the Lite Documentation Program, the "No Ratio" Program or
the "No Income, No Assets" Program (any of the foregoing, a "Reduced
Documentation Program"). The Full/Alternative Documentation Program requires the
following documents: (i) Uniform Residential Loan Application (FNMA Form 1003 or
FHLMC Form 65), (ii) Statement of Assets and Liabilities (FNMA Form 1003A or
FHLMC 65A), (iii) Residential Mortgage Credit Report with records obtained from
at least two separate repositories, (iv) Verification of Employment Form
providing a complete two year employment history, (v) Verification of Deposit
Form for all liquid assets, verifying minimum cash reserves as required based
upon the Loan-to-Value Ratio and borrower's income, and (vi) a Uniform
Residential Appraisal Report (FNMA Form 1004 or FHLMC Form 70). The
Full/Alternative Documentation Program allows for the use of certain alternative
documents in lieu of the Verification of Deposit Form and Verification of
Employment Form. These include W-2 Statements, tax returns and one pay check
from the most recent full month for verification of income and the most recent
three months personal bank statements for verification of liquid assets. In
addition, self-employed borrowers must provide federal tax returns for the
previous two to three years, including K-l's, federal business tax returns for
two years, year-to-date financial statements, a business credit report (for
corporations) and a signed IRS Form 4506 (Request for Copy of Tax Returns).
Under the Limited Documentation Program, which is available to
borrowers in every Progressive Series Program, ICI Funding obtains from
prospective borrowers either a verification of deposits or bank statements for
the most recent two-month period preceding the mortgage loan application. In
addition, the Lite Documentation Program is available to Series III+, Series IV
and Series V self-employed borrowers where the previous 12 months bank
statements are utilized in lieu of tax returns. Under these programs the
borrower provides income information on the mortgage loan application, and the
debt service-to-income ratio is calculated. However, income is not verified.
Permitted maximum Loan-to-Value Ratios (including secondary financing) under the
Limited Documentation and Lite Documentation Programs generally are limited.
The Progressive Series Program also allows for approval of applications
pursuant to the "No Ratio" Program and "No Income, No Assets" Program. The "No
Ratio" Program, available to borrowers in the Series I and Series II Programs,
is designed for a mortgage loan which requires a minimum 20% down payment from
the borrower with employment information, but no income information, stated on
the application (and, therefore, the debt service-to-income ratio is not
calculated). The verification of assets is confirmed by written verification of
deposits and supported by bank statements. With respect to the "No Ratio"
Program, a mortgage loan with a Loan-to-Value Ratio at origination in excess of
80% is not eligible.
The "No Income, No Assets" Program, available to borrowers in the
Series I Program, requires a much larger down payment than under the "No Ratio"
Program. Under this program, the borrower provides no income information, but
provides employment and unverified asset information on the mortgage loan
application. With respect to the "No Income, No Assets" Program, a mortgage loan
with a Loan-to-Value Ratio at origination in excess of 80% is generally not
eligible.
Under all Progressive Series Programs, ICI Funding's conduit seller
verbally verifies the borrower's employment prior to closing. Credit history,
collateral quality and the amount of the down payment are important factors in
evaluating a mortgage loan submitted under one of the Reduced Documentation
Programs. In addition, in order to qualify for a Reduced Documentation Program,
a mortgage loan must conform to certain criteria regarding maximum loan amount,
property type and occupancy status. Mortgage loans having a Loan-to-Value Ratio
at origination in excess of 80% for Series I, II and III and mortgage loans on
mortgaged property used as a second or vacation home by the prospective
borrowers are not eligible for a Reduced Documentation Program. In general, the
maximum loan amount for mortgage loans underwritten in accordance with Series I,
II and III Reduced Documentation Program is $750,000 for purchase transactions
and rate-term transactions and a maximum loan amount of $650,000 for cash out
refinance transactions. The maximum loan amount for mortgage loans underwritten
in accordance with Series III+, IV and V Reduced Documentation Program is
$450,000, however, exceptions are granted on a case-by-case basis. Secondary
financing is allowed in the origination of the Limited Documentation
S-28
<PAGE>
Program but must meet the CLTV requirements described above and certain other
requirements for subordinate financing. Secondary financing may also be allowed
in the case of the "No Ratio" or the "No Income, No Assets" Programs. In all
cases, liquid assets must support the level of income of the borrower as stated
in proportion to the type of employment of the borrower. Full Documentation is
requested by the underwriter if it is the judgment of the underwriter that the
compensating factors are insufficient for loan approval.
CREDIT HISTORY. The Progressive Series Program defines an acceptable
credit history in each of the Series I, II and III Programs. The Series I
Program defines an acceptable credit history as a borrower who has "A" credit,
meaning a minimum of five trade accounts, with 24 months credit history, no
30-day delinquent mortgage payments in the last 24 months, and a maximum of two
30-day delinquent payments on any installment credit account within the past 24
months. No bankruptcies or foreclosures are allowed in the past 24 months. No
judgments, suits, liens, collections or charge-offs are allowed within the past
24 months.
With respect to the Series II Program, a borrower must have a minimum
of five trade accounts with no late mortgage payments for the past 12 months and
may have one 30-day delinquent mortgage payment within the past 13th through
24th months. A borrower may not have more than three 30-day delinquent payments
on any revolving credit account and a maximum of three 30-day delinquent
payments within the past 24 months on any installment credit account. All
bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established a satisfactory credit history. Foreclosures are not
allowed in the past 24 months.
With respect to the Series III Program, a borrower may not have more
than two 30-day delinquent mortgage payments within the past 24 months. The
borrower may not have more than three 30-day delinquent payments and one 60-day
delinquent payment on revolving debt in the last 24 months and may not have more
than three 30-day delinquent and one 60-day delinquent payment on any
installment credit account in the past 24 months. Any open judgment, suit, lien,
collection or charge-off must be paid prior to closing. Bankruptcies must be at
least 24 months old, fully discharged and the borrower must have re-established
a satisfactory credit history. No late mortgage payments are permitted on equity
take-out refinances under the Limited Documentation Program offered under the
Progressive Series Program.
With respect to the Series III+ Program, a borrower may not have more
than two 30-day delinquent mortgage payments within the past 12 months. The
borrower may not have more than two 30-day delinquent payments and one 60-day
delinquent payment on revolving debt in the last 12 months and may not have more
than two 30-day delinquent payments and one 60-day delinquent payment on any
installment credit account in the past 12 months. Any open judgments, suits,
liens collections, charge-offs not to exceed $500 must be paid in full at
closing. Bankruptcies must be at least 24 months old, fully discharged and the
borrower must have reestablished a satisfactory credit history. Foreclosures are
not allowed in the past 24 months.
With respect to the Series IV Program, a borrower may not have more
than four 30-day delinquent mortgage payments or three 30-day delinquent
mortgage payments and one 60-day delinquent mortgage payment within the past 12
months. The borrower may not have more than four 30-day delinquent payments or
two 60-day delinquent payments or one 90-day delinquent payment on revolving
debt in the last 12 months and may not have more than four 30-day delinquent
payments or two 60-day delinquent payments or one 90-day delinquent payment on
any installment credit account in the past 12 months. Any open judgments, suits,
liens, collections, charge-offs not to exceed $1,000 must be paid in full at
closing. Bankruptcies must be at least 18 months old, fully discharged and the
borrower must have re-established a satisfactory credit history. Foreclosures
are not allowed in the past 18 months.
With respect to the Series V Program, a borrower may not have more than
five 30-day delinquent mortgage payments or two 60-day delinquent mortgage
payments and one 90-day delinquent mortgage payment within the past 12 months.
The borrower may not have more than six 30-day delinquent payments or three
60-day delinquent payments or two 90-day delinquent payments on revolving debt
in the last 12 months and may not have more than six 30-day delinquent payments
or three 60-day delinquent payments or two 90-day delinquent payments on any
installment credit account in the past 12 months. Any open judgments, suits,
liens, collections or charge-offs not to
S-29
<PAGE>
exceed $4,000 must be paid in full at closing. Bankruptcies must be at least 12
months old, fully discharged and the borrower must have re-established a
satisfactory credit history. Foreclosures are not allowed in the past 12 months.
QUALITY CONTROL. ICI Funding generally performs a pre-funding audit on
each Progressive Series Program mortgage loan. This audit includes a review for
compliance with Progressive Series Program parameters and accuracy of the legal
documents. ICI Funding performs a quality control review on a minimum of 25% of
the mortgage loans originated or acquired under the Progressive Series Program
for complete re-verification of employment, income and liquid assets used to
qualify for such mortgage loan. Such review also includes procedures intended to
detect evidence of fraudulent documentation and/or imprudent activity during the
processing, funding, servicing or selling of the mortgage loan. Verification of
occupancy and applicable information is made by regular mail.
APPRAISALS. One- to four-family residential properties that are to
secure Progressive Series Program mortgage loans are appraised by qualified
independent appraisers who are approved by ICI Funding's correspondents. Such
appraisers inspect and appraise the subject property and verify that such
property is in acceptable condition. Following each appraisal, the appraiser
prepares a report which includes a market value analysis based on recent sales
of comparable homes in the area and, when deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home. All
appraisals are required to conform to the Uniform Standards of Professional
Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal
Foundation and must be on forms acceptable to FNMA and FHLMC. As part of ICI
Funding's quality control procedures, either field or desk appraisal reviews are
obtained on 10% of all mortgage loans originated under the Progressive Series
Program. Selected mortgage loans will also be reviewed for compliance and
document accuracy. Historically, desk and/or field appraisal reviews have been
required on all mortgage loans originated under the Progressive Series Program
with Loan-to-Value Ratios in excess of 65% on mortgaged properties located in
the State of California, Loan-to-Value Ratios in excess of 70% on any properties
in all other states, loan amounts in excess of $350,000, non-owner occupied
properties, second home properties, cash-out refinance mortgage loans and
whenever in the underwriter's judgment it is necessary to reverify the appraised
value of the property. Effective February 3, 1997, each loan includes one full
appraisal and an enhanced review appraisal by a national appraisal company
designated by ICI Funding. The enhanced appraisal review is not required when
the full appraisal is ordered by the Conduit Seller from one of ICI Funding's
approved national appraisal companies. ICI Funding has approved acceptable
appraisal and review policies in lieu of the above from other nationally
recognized mortgage lenders.
VARIATIONS. ICI Funding uses the foregoing parameters as guidelines
only. On a case-by-case basis, ICI Funding may determine that the prospective
mortgagor warrants an exception outside the standard Progressive Series Program
guidelines. An exception may be allowed if the loan application reflects certain
compensating factors, including (i) the prospective mortgagor has demonstrated
an ability to save and devote a greater portion of income to basic housing
needs; (ii) the prospective mortgagor may have a potential for increased
earnings and advancement because of education or special job training, even if
the prospective mortgagor has just entered the job market; (iii) the prospective
mortgagor has demonstrated an ability to maintain a debt free position; (iv) the
prospective mortgagor may have short term income that is verifiable but could
not be counted as stable income because it does not meet the remaining term
requirements; and (v) the prospective mortgagor's net worth is substantial
enough to suggest that repayment of the loan is within the prospective
mortgagor's ability.
THE PROGRESSIVE EXPRESS(TM) PROGRAM
GENERAL. In July 1996, ICI Funding developed an additional Series to
the Progressive Program, the "Progressive Express(TM) Program". The concept of
the Progressive Express(TM) Program is to underwrite the loan focusing on the
borrowers Fair Issac ("FICO") credit score, ability and willingness to repay the
mortgage loan obligation, and assess the adequacy of the mortgage property as
collateral for the loan. The FICO Score was developed by Fair, Issac Co., Inc.
of San Rafael, California. It is an electronic evaluation of past and present
credit accounts on the borrower's credit bureau report. This includes all
reported accounts as well as public records and inquiries. The Progressive
Express(TM) Program offers six levels of mortgage loan programs. The Progressive
Express(TM) Program has a minimum FICO score that must be met by each of the
borrowers and does not allow for any
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<PAGE>
exceptions to the FICO score requirement. The FICO Score requirement is as
follows: Progressive Express(TM) I 681 & above, Progressive Express(TM) II
680-621, Progressive Express(TM) III 620-601, Progressive Express(TM) IV
600-581, Progressive Express(TM) V 580-551, and Progressive Express(TM) VI
550-500. Each Progressive Express(TM) program has different FICO score
requirements, credit criteria, reserve requirements, and Loan-to-Value Ratio
restrictions. Progressive Express(TM) I is designed for credit history and
income requirements typical of "A+" credit borrowers. In the event a borrower
does not fit the Progressive Express(TM) I criteria, the borrower's mortgage
loan is placed into either Progressive Express(TM) II, III, IV, V, or VI,
depending on which series' mortgage loan parameters meets the borrower unique
credit profile.
Under the Progressive Express(TM) Program, ICI Funding underwrites
single family dwellings with Loan-to- Value Ratios at origination of up to 95%.
In order for the property to be eligible for the Progressive Express(TM)
Program, it must be a single family residence (1 unit only), condominium, and/or
planned unit development (PUD). Each mortgage loan is either (i) individually
underwritten by an ICI Funding employee or by contracted Commonwealth Mortgage
Assurance Company staff on-site at ICI Funding or (ii) underwritten by certain
specially approved Conduit Sellers under the Delegated Underwriting program.
Progressive Express(TM) Programs I through IV with Loan-to-Value Ratios at
origination in excess of 80% are insured by Commonwealth Mortgage Assurance
Company. Loan-to-Value Ratios of 80.01% to 85% require 22% mortgage insurance
coverage and 85.01% to 90% require 30% mortgage insurance coverage.
Each respective buyer completes a Progressive Express(TM) Doc loan
application and certifies the following when signing the application; property
is intended to be owner-occupied, funds are not from a gift, borrower is
presently employed, and the transaction is not a non-arms length transaction. At
the time of signing loan documents, Progressive Express(TM) I - IV borrowers
execute a "Borrower's Certification" certifying the above and that the borrower
has 4 months principal, interest, taxes, and insurance reserves available,
exclusive of cash-out proceeds. The borrower must disclose employment and assets
on the application, however, there is no verification of the information. The
Conduit Seller obtains a Verbal Verification of Employment on each borrower. ICI
Funding uses the foregoing parameters as guidelines only. Sellers may include
certain criteria that ICI Funding may not enforce, particularly, when a fixed
rate loan includes an Addendum to the Note for a prepayment penalty. Full
documentation is requested by the underwriter if it is the judgment of the
underwriter that the compensating factors are insufficient for loan approval
under the Progressive Product Line.
CREDIT HISTORY. The Progressive Express(TM) Program defines an
acceptable credit history in each of the programs I through VI. Progressive
Express(TM) I defines an acceptable credit history as a borrower who has "A+"
credit, meaning a minimum of 5 trade accounts, no 30-day delinquent mortgage
payments in the past 24 months, and a maximum of two 30-day delinquent payments
on any revolving credit accounts within the past 24 months and one 30-day
delinquent payment on any installment credit accounts within the past 24 months.
All bankruptcies must be at least 24 months old, fully discharged and the
borrower must have re-established a satisfactory credit history. Foreclosures
are not allowed in the past 3 years. No judgments, suits, liens, collections or
charge-offs are allowed within the past 24 months. Tax liens are not allowed.
With respect to Progressive Express(TM) II, a borrower must have a
minimum of 5 trade accounts, no late mortgage payments for the past 12 months,
and a maximum of two 30-day or no 60-day delinquent payments on any revolving
credit accounts and a maximum of one 30-day or no 60-day delinquent payments on
any installment credit accounts in the past 12 months. All bankruptcies must be
at least 24 months old, fully discharged and the borrower must have
re-established a satisfactory credit history. Foreclosures are not allowed in
the past 3 years. Judgments, suits, liens, collections or charge-offs must be
paid prior to closing. Tax liens are not allowed.
With respect to Progressive Express(TM) III, a borrower must have a
minimum of 5 trade accounts, no late mortgage payments for the past 12 months
and may have one 30-day late mortgage payment within the past 13 and 24 months.
A borrower may not have more than a maximum of three 30-day delinquent payments
on any revolving credit accounts or installment credit accounts in the past 24
months. All bankruptcies must be at least 24 months old, fully discharged and
the borrower must have re-established a satisfactory credit history.
Foreclosures are not allowed
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<PAGE>
in the past 3 years. Judgments, suits, liens, collections or charge-offs must be
paid prior to closing. Tax liens are not allowed.
With respect to Progressive Express(TM) IV, a borrower must have a
minimum of 5 trade accounts, no more than two 30-day late mortgage payments in
the past 12 months or three 30-day late mortgage payments in the past 24 months.
A borrower may not have more than a maximum of three 30-day or one 60-day
delinquent payments on any revolving credit accounts or installment credit
accounts in the past 24 months. All bankruptcies must be at least 24 months old,
fully discharged and the borrower must have re-established a satisfactory credit
history. Foreclosures are not allowed in the past 3 years. Judgments, suits,
liens, collections or charge-offs, not to exceed $500, must be paid prior to
closing. Tax liens are not allowed.
With respect to Progressive Express(TM) V, a borrower must have a
minimum of 3 trade accounts, no more than two 30-day late mortgage payments in
the past 12 months. A borrower may not have more than a maximum of two 30-day or
one 60-day delinquent payments on any revolving credit accounts or installment
credit accounts in the past 12 months. All bankruptcies must be at least 24
months old, fully discharged and the borrower must have re-established a
satisfactory credit history. Foreclosures are not allowed in the past 24 months.
Judgments, suits, liens, collections or charge-offs, not to exceed $500, must be
paid at closing. Tax liens are not allowed.
With respect to Progressive Express(TM) VI, a borrower must have a
minimum of 3 trade accounts, no more than four 30-day or three 30-day and one
60-day late mortgage payments in the past 12 months. A borrower may not have
more than a maximum of four 30-day or two 60-day or one 90-day delinquent
payments on any revolving credit accounts or installment credit accounts in the
past 12 months. All bankruptcies must be at least 18 months old and fully
discharged. Foreclosures are not allowed in the past 18 months. Judgments,
suits, liens, collections or charge-offs, not to exceed $1,000, must be paid at
closing. Tax liens are not allowed.
QUALITY CONTROL. ICI Funding generally performs a pre-funding audit on
each Progressive Express(TM) Program mortgage loan. This audit includes a review
for compliance with Progressive Express(TM) Program parameters and accuracy of
the legal documents. ICI Funding performs a quality control review on a minimum
of 25% of the mortgage loans originated or acquired under the Progressive
Express(TM) Program for complete re-verification of employment, income and
liquid assets used to qualify for such mortgage loan. Such review also includes
procedures intended to detect evidence of fraudulent documentation and/or
imprudent activity during the processing, funding, servicing or selling of the
mortgage loan. Verification of occupancy and applicable information is made by
regular mail.
APPRAISALS. Each Progressive Express(TM) loan includes one full
appraisal and an enhanced review appraisal by a national appraisal company
designated by ICI Funding. The enhanced appraisal review is not required when
the full appraisal is ordered by the Conduit Seller from one of ICI Funding's
approved national appraisal companies. In full appraisals, appraisers inspect
and appraise the subject property and verify that such property is in acceptable
condition. Following each appraisal, the appraiser prepares a report which
includes a market value analysis based on recent sales of comparable homes in
the area and, when deemed appropriate, replacement cost analysis based on the
current cost of constructing a similar home. All full appraisals are required to
conform to the Uniform Standards of Professional Appraisal Practice adopted by
the Appraisal Standards Board of the Appraisal Foundation and must be on forms
acceptable to FNMA and FHLMC. Selected mortgage loans will also be reviewed for
compliance and document accuracy.
ICI Funding commenced acquiring mortgage loans underwritten pursuant to
the Progressive Series Program in November 1995 and pursuant to the Progressive
Express(TM) Program in late 1996. Accordingly, ICI Funding does not have
sufficient historical delinquency or default experience that may be referred to
for purposes of estimating the future delinquency and loss experience of the
Mortgage Loans underwritten pursuant to the Progressive Series Program and the
Progressive Express(TM) Program. There can be no assurance that the delinquency
experience of the servicing portfolio of ICI Funding or of Wendover as described
herein will correspond to the delinquency experience of the Mortgage Loans
underwritten pursuant to the Progressive Series Program or the Progressive
Express(TM)
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<PAGE>
Program. It is contemplated that all of the Progressive Series Program and
Progressive Express(TM) Program mortgage loans originated or acquired by ICI
Funding will also be underwritten with a view toward the resale thereof in the
secondary mortgage market.
VARIATIONS. ICI Funding uses the foregoing parameters as guidelines
only. On a case-by-case basis, ICI Funding may determine that the prospective
mortgagor warrants an exception outside the standard Progressive Series Program
guidelines. An exception may be allowed if the loan application reflects certain
compensating factors, including instances where the prospective mortgagor (i)
has demonstrated an ability to save and devote a greater portion of income to
basic housing needs; (ii) may have a potential for increased earnings and
advancement because of education or special job training, even if the
prospective mortgagor has just entered the job market; (iii) has demonstrated an
ability to maintain a debt free position; (iv) may have short term income that
is verifiable but could not be counted as stable income because it does not meet
the remaining term requirements; and (v) has net worth substantial enough to
suggest that repayment of the loan is within the prospective mortgagor's
ability. ICI Funding may also underwrite loans from time to time pursuant to the
Federal National Mortgage Association guidelines for five and seven year balloon
loans.
See "The Mortgage Pools--Underwriting Standards" in the Prospectus.
DELINQUENCY AND FORECLOSURE EXPERIENCE
Based solely upon information provided by the Master Servicer, the
following tables summarize, for the respective dates indicated, the delinquency,
foreclosure, bankruptcy and REO property status with respect to all mortgage
loans originated or acquired by the Seller. The indicated periods of delinquency
are based on the number of days past due on a contractual basis. The monthly
payments under all of such mortgage loans are due on the first day of each
calendar month.
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<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT JUNE 30, 1997
---------------------------------- ---------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Loans Outstanding............................ 11,996 $1,550,121 16,092 $2,186,958
DELINQUENCY(1)
Period of Delinquency:
30-59 Days............................... 587 $ 66,272 810 $96,196
60-89 Days............................... 118 15,089 165 17,955
90 Days or More.......................... 3 95 36 4,756
----- --------- ------- ------
Total Delinquencies............................ 708 $ 81,456 1,011 $118,907
=== ======= ===== ========
Delinquencies as a Percentage of
Total Loans Outstanding............................ 5.90% 5.25% 6.28% 5.44%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT JUNE 30, 1997
--------------------------------- ----------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FORECLOSURES PENDING(2)............................ 180 $ 25,697 318 $39,668
Foreclosures Pending as a Percentage of Total Loans
Outstanding........................................ 1.50% 1.66% 1.98% 1.81%
BANKRUPTCIES PENDING(3)............................ 55 $ 6,315 86 $9,771
Bankruptcies Pending as a Percentage of Total Loans
Outstanding........................................ 0.46% 0.41% 0.53% 0.45%
Total Delinquencies plus Foreclosures Pending and
Bankruptcies Pending............................... 943 113,468 1,415 $168,346
Total Delinquencies plus Foreclosures Pending and
Bankruptcies Pending as a Percentage of Total Loans
Outstanding........................................ 7.86% 7.32% 8.79% 7.70%
REO PROPERTIES(4).................................. 2 $ 429 42 $6,483
REO Properties as a Percentage of Total Loans
Outstanding........................................ 0.02% 0.03% 0.26% 0.30%
</TABLE>
- --------------
(1) The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were in foreclosure
at the respective dates indicated ("Foreclosure Loans"), (b) delinquent
mortgage loans as to which the related mortgagor was in bankruptcy
proceedings at the respective dates indicated ("Bankruptcy Loans") and
(c) REO properties that have been purchased upon foreclosure of the
related mortgage loans. All Foreclosure Loans, Bankruptcy Loans and REO
properties have been segregated into the sections of the table entitled
"Foreclosures Pending," "Bankruptcies Pending" and "REO Properties,"
respectively, and are not included in the "30-59 Days," "60-89 Days,"
"90 Days or More" and "Total Delinquencies" sections of the table. See
the section of the table entitled "Total Delinquencies plus
Foreclosures Pending and Bankruptcies Pending" for total delinquency
balances, percentages and numbers which include Foreclosure Loans and
Bankruptcy Loans, and see the section of the table entitled "REO
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<PAGE>
Properties" for delinquency balances, percentages and numbers related
to REO properties that have been purchased upon foreclosure of the
related mortgage loans.
(2) Includes mortgage loans that are in foreclosure but as to which the
mortgaged property has not been liquidated at the respective dates
indicated. It is generally the Master Servicer's policy, with respect
to mortgage loans originated by the Seller, to commence foreclosure
proceedings when a mortgage loan is between 31 and 60 days delinquent.
(3) Includes mortgage loans as to which the related mortgagor is in
bankruptcy proceedings at the respective dates indicated.
(4) Includes REO properties that have been purchased upon foreclosure of
the related mortgage loans, including mortgaged properties that were
purchased by the Seller after the respective dates indicated.
The above data on delinquency, foreclosure, bankruptcy and REO property
status are calculated on the basis of the total mortgage loans originated or
acquired by the Seller. However, the total amount of mortgage loans on which the
above data are based includes many mortgage loans which were not, as of the
respective dates indicated, outstanding long enough to give rise to some of the
indicated periods of delinquency or to foreclosure or bankruptcy proceedings or
REO property status. In the absence of such mortgage loans, the delinquency,
foreclosure, bankruptcy and REO property percentages indicated above would be
higher and could be substantially higher. Because the Mortgage Pool will consist
of a fixed group of Mortgage Loans, the actual delinquency, foreclosure,
bankruptcy and REO property percentages with respect to the Mortgage Pool may
therefore be expected to be higher, and may be substantially higher, than the
percentages indicated above.
Based solely on information provided by the Seller, the following table
presents the changes in the Seller's charge-off and recoveries for the period
indicated.
SIX MONTHS ENDED
JUNE 30, 1997
-------------
(DOLLARS IN THOUSANDS)
Charge-offs:
Mortgage Loan Properties ...................... 252
REO Properties ................................ 1,578
Recoveries:
Mortgage Loan Properties ...................... 62
REO Properties ................................ 18
Net charge-offs ............................... 1,750
Ratio of net charge-offs to average loans
outstanding during the six months ended June
30, 1997 .......................................... 0.19%*
* The ratio of net charge-offs was based upon annualized charge-offs
for the six months ended June 30, 1997. The average loans outstanding during the
six months ended June 30, 1997 was computed using monthly averages.
From November 1995 through December 1996, ICI Funding experienced no
charge-offs and no recoveries.
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<PAGE>
The above data on charge-offs and recoveries are calculated on the
basis of the total mortgage loans originated or acquired by the Seller. However,
the total amount of mortgage loans on which the above data are based includes
many mortgage loans which were not, as of the respective data indicated,
outstanding long enough to give rise to some of the indicated charge-offs. In
the absence of such mortgage loans, the charge-off percentages indicated above
would be higher and could be substantially higher. Because the Mortgage Pool
will consist of a fixed group of Mortgage Loans, the actual charge-off
percentages with respect to the Mortgage Pool may therefore be expected to be
higher, and may be substantially higher, than the percentage indicated above.
The information set forth in the preceding paragraphs concerning ICI
Funding has been provided by ICI Funding.
THE MASTER SERVICER; THE SUB-SERVICER
ICI Funding (in its capacity as master servicer, the "Master Servicer")
will act as master servicer for the Mortgage Loans pursuant to the Pooling and
Servicing Agreement. As set forth above, Wendover will sub-service the Mortgage
Loans in exchange for a sub-servicing fee. See "Description of the Mortgage
Pool--The Seller" and "Risk Factors" herein.
WENDOVER. Wendover is a sub-servicer of residential, consumer and
commercial mortgage loans in 50 states. At June 30, 1997, Wendover serviced
approximately $10.03 billion outstanding amount of mortgage loans. Additionally,
Wendover provides contract master servicing for residential mortgage loans,
origination and servicing for Federal Housing Authority home equity conversion
mortgages, specialized asset management and default servicing for non-performing
loans, and special servicing activities for government entities. As of June 30,
1997, Wendover employed 447 employees. Wendover is located in Greensboro, North
Carolina. Wendover is an approved servicer in good standing with FNMA and FHLMC.
Established in 1986, Wendover was originally owned by Sunbelt Savings
FSB, which was formed to receive the assets and certain liabilities of
Independent American Mortgage Services Inc. ("IAMSI") and other insolvent Texas
savings and loan associations. Wendover was a subsidiary of IAMSI until it was
purchased by Wendover Financial Services Corp. in June 1990. In October 1992,
Wendover was acquired by State Street Bank and Trust Company ("State Street").
In June 1997, Wendover was acquired by Electronic Data Systems Corporation.
The following table sets forth certain information concerning
delinquency experience including bankruptcies and foreclosures in progress on
one- to four-family residential mortgage, consumer, and commercial loans
included in Wendover's servicing portfolio at the dates indicated. Consumer and
commercial loans represented less than 3% of the overall portfolio volume at
June 30, 1997. As of December 31, 1993, 1994, 1995, 1996 and June 30, 1997, the
total principal balance of loans being serviced by Wendover was (in millions)
$4,785.6, $7,160.8 , $7,637.4, $9,819.8 and $10,028.2, respectively. The
indicated periods of delinquency are based on the number of days past due on a
contractual basis. No mortgage, consumer, or commercial loan is considered
delinquent for these purposes until it is one month past due on a contractual
basis.
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<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------------------------
1993 1994 1995
------ ------ ------
Percent of Percent of Percent of
Number Servicing Number Servicing Number Servicing
Of Loans Portfolio Of Loans Portfolio Of Loans Portfolio
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio (1) 78,372 100% 96,270 100% 94,662 100%
====== ==== ====== ==== ====== ====
Period of Delinquency:
30-59 days.............. 2,778 2.85% 4,093 4.73% 5,364 6.10%
60-89 days.............. 679 0.66% 1,162 1.39% 1,291 1.46%
90 days or more......... 8,694 5.67% 10,082 5.98% 8,409 7.31%
----- ----- ------ ----- ----- -----
Total Delinquencies
(excluding Foreclosures) 12,151 9.18% 15,337 12.10% 15,064 14.87%
====== ===== ====== ====== ====== ======
Foreclosures Pending 1,962 3.70% 1,632 2.28% 4,041 4.86%
<CAPTION>
AT DECEMBER 31, At June 30,
------------------------
1996 1997
------ -----
Percent of Percent of
Number Servicing Number Servicing
Of Loans Portfolio Of Loans Portfolio
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Total Portfolio (1) 112,980 100% 111,631 100%
======= ==== ======= ====
Period of Delinquency:
30-59 days.............. 5,273 4.67% 5,004 4.48%
60-89 days.............. 1,311 1.16% 1,349 1.21%
90 days or more......... 6,097 5.40% 5,600 5.02%
----- ----- ----- ----
Total Delinquencies
(excluding Foreclosures) 12,681 11.22% 11,953 10.71%
====== ====== ====== ======
Foreclosures Pending 4,240 3.75% 3,628 3.25%
</TABLE>
- ---------------------
(1) Includes purchased mortgage servicing rights owned by Wendover totaling
6,332 loans for $614.9 million unpaid principal balance, 9,004 loans
for $890.4 million unpaid principal balance and 10,899 loans for $944.2
million unpaid principal balance as of December 31, 1995, 1996, and
June 30, 1997, respectively.
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<PAGE>
Wendover sub-services for a variety of clients with portfolios that
include sub-performing and non-performing loans. In 1995 Wendover added several
new clients with an inordinate amount of loans that were severely delinquent, in
foreclosure, bankruptcy or the post-foreclosure claim process. Clients with
special needs or those with "B" or "C" quality portfolios are assigned to
Wendover's Asset Management Division. Such division handles approximately 400
delinquent loans per employee and is responsible for the collection, workout,
foreclosure, bankruptcy or REO management of each account in their respective
portfolios. Standards for these portfolios typically require intensive
collection activity which include collection contacts early and often,
innovative workout programs and fast track foreclosure processing where
appropriate.
GENERAL. There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans will correspond to the delinquency and
foreclosure experience of the servicing portfolio of Wendover set forth in the
foregoing tables. The statistics shown above represent the respective
delinquency and foreclosure experiences only at the dates presented, whereas the
aggregate delinquency and foreclosure experience on the Mortgage Loans will
depend on the results obtained over the life of the Trust. Each servicing
portfolio includes mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans.
In addition, Wendover's servicing portfolio includes consumer and commercial
loans. Each servicing portfolio includes mortgage loans underwritten pursuant to
guidelines not necessarily representative of those applicable to the Mortgage
Loans. It should be noted that if the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously experienced
by Wendover. In addition, adverse economic conditions may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Loans.
The information set forth in this section concerning the Master
Servicer and the Sub-Servicer has been provided by the Master Servicer and the
Sub-Servicer, respectively.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Offered
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. A limited number of other mortgage loans may be added
to the Mortgage Pool prior to the issuance of the Offered Certificates. The
Company believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as it will be
constituted at the time the Offered Certificates are issued although the range
of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Offered Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K.
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<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1997-3 Mortgage Pass-Through Certificates will include the
following eleven classes (the "Senior Certificates"): (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates and Class A-6 Certificates; (ii) Class A-7
Certificates (the "Super Senior Lockout Certificates"); (iii) the Class A-8
Certificates (the "Senior Support Lockout Certificates"; and collectively with
the Class A-6 Certificates and Super Senior Lockout Certificates, the "Lockout
Certificates"); (iv) Class A-9 Certificates (the "Principal Only Certificates");
(v) Class A-10 Certificates (the "Variable Strip Certificates") and (vi) Class R
Certificates (the "Residual Certificates"). In addition to the Senior
Certificates, the Series 1997-3 Mortgage Pass-Through Certificates will also
include six classes of subordinate certificates which are designated as the
Class M-1 Certificates, Class M-2 Certificates and Class M-3 Certificates
(collectively, the "Class M Certificates") and the Class B-1 Certificates, Class
B-2 Certificates and Class B-3 Certificates (collectively, the "Class B
Certificates" and, together with the Class M Certificates and Senior
Certificates, the "Certificates"). Only the Senior Certificates and Class M
Certificates (together, the "Offered Certificates") are offered hereby.
The Certificates will evidence the entire beneficial ownership interest
in the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Custodial Account and in the Certificate Account and
belonging to the Trust Fund; (iii) property acquired by foreclosure of such
Mortgage Loans or deed in lieu of foreclosure; and (iv) any applicable Primary
Insurance Policies and Primary Hazard Insurance Policies and all proceeds
thereof.
The Principal Only Certificates will be entitled to payments based on
the Discount Fraction of the Discount Mortgage Loans. A "Discount Mortgage Loan"
is any Mortgage Loan with a Net Mortgage Rate less than 7.250% per annum. With
respect to each Discount Mortgage Loan, the "Discount Fraction" is equal to a
fraction, expressed as a percentage, the numerator of which is 7.250% minus the
Net Mortgage Rate for such Discount Mortgage Loan and the denominator of which
is 7.250%. The Mortgage Loans other than the Discount Mortgage Loans are
referred to herein as the "Non-Discount Mortgage Loans."
The DTC Registered Certificates will be issued, maintained and
transferred on the book-entry records of DTC and its Participants. The DTC
Registered Certificates will be issued in minimum denominations of $25,000 and
integral multiples of $1 in excess thereof. The Principal Only Certificates will
be issued in registered, certificated form in minimum denominations of $25,000
and integral multiples of $1,000 in excess thereof, except for one Principal
Only Certificate, evidencing the sum of an authorized denomination thereof and
the remainder of the aggregate initial Certificate Principal Balance of such
class of Certificates. The Variable Strip Certificates and Residual Certificates
will be issued in registered, certificated form in minimum denominations of a
20% Percentage Interest and integral multiples of 0.01% in excess thereof.
The DTC Registered Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The Company has been
informed by DTC that DTC's nominee will be Cede & Co. ("Cede"). No Beneficial
Owner will be entitled to receive a Definitive Certificate, except as set forth
below under "--Book-Entry Registration of Certain of the Senior
Certificates--Definitive Certificates." Unless and until Definitive Certificates
are issued for the DTC Registered Certificates under the limited circumstances
described herein, all references to actions by Certificateholders with respect
to the DTC Registered Certificates shall refer to actions taken by DTC upon
instructions from its Participants, and all references herein to distributions,
notices, reports and statements to Certificateholders with respect to the DTC
Registered Certificates shall refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the DTC Registered
Certificates, for distribution to Beneficial Owners by DTC in accordance with
DTC procedures.
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BOOK-ENTRY REGISTRATION OF CERTAIN OF THE OFFERED CERTIFICATES
GENERAL. Beneficial Owners that are not Participants or Intermediaries
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, the related DTC Registered Certificates may do so only through
Participants and Intermediaries. In addition, Beneficial Owners will receive all
distributions of principal of and interest on the related DTC Registered
Certificates from the Trustee through DTC and Participants. Accordingly,
Beneficial Owners may experience delays in their receipt of payments. Unless and
until Definitive Certificates are issued for the related DTC Registered
Certificates, it is anticipated that the only registered Certificateholder of
such DTC Registered Certificates will be Cede, as nominee of DTC. Beneficial
Owners will not be recognized by the Trustee or the Master Servicer as
Certificateholders, as such term is used in the Pooling and Servicing Agreement,
and Beneficial Owners will be permitted to receive information furnished to
Certificateholders and to exercise the rights of Certificateholders only
indirectly through DTC, its Participants and Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of DTC Registered Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, such DTC Registered
Certificates. Participants and Intermediaries with which Beneficial Owners have
accounts with respect to such DTC Registered Certificates similarly are required
to make book-entry transfers and receive and transmit such distributions on
behalf of their respective Beneficial Owners. Accordingly, although Beneficial
Owners will not possess physical certificates evidencing their interests in the
DTC Registered Certificates, the Rules provide a mechanism by which Beneficial
Owners, through their Participants and Intermediaries, will receive
distributions and will be able to transfer their interests in the DTC Registered
Certificates.
None of the Company, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC Registered Certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Certificates--Form of Certificates."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Certificates--Form of Certificates,"
the Trustee is required to notify, through DTC, Participants who have ownership
of DTC Registered Certificates as indicated on the records of DTC of the
availability of Definitive Certificates for their DTC Registered Certificates.
Upon surrender by DTC of the definitive certificates representing the DTC
Registered Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will reissue the DTC Registered Certificates as
Definitive Certificates issued in the respective principal amounts owned by
individual Beneficial Owners, and thereafter the Trustee and the Master Servicer
will recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling and Servicing Agreement.
For additional information regarding DTC and the DTC Registered
Certificates, see "Description of the Certificates--Form of Certificates" in the
Prospectus.
AVAILABLE DISTRIBUTION AMOUNT
The "Available Distribution Amount" for any Distribution Date is equal
to (i) the aggregate amount of scheduled payments on the Mortgage Loans due on
the related Due Date and received on or prior to the related Determination Date,
after deduction of the related Servicing Fees (as defined herein), (ii) certain
unscheduled payments, including Mortgagor prepayments on the Mortgage Loans,
Insurance Proceeds, Liquidation Proceeds and proceeds from repurchases of and
substitutions for the Mortgage Loans occurring during the preceding calendar
month
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and (iii) all Advances made for such Distribution Date, in each case net of
amounts reimbursable therefrom to the Master Servicer and any Subservicer. With
respect to any Distribution Date, (i) the "Due Date" is the first day of the
month in which such Distribution Date occurs and (ii) the "Determination Date"
is the 15th day of the month in which such Distribution Date occurs or, if such
day is not a business day, the immediately preceding business day.
INTEREST DISTRIBUTIONS
Holders of each class of Senior Certificates (other than the Principal
Only Certificates) will be entitled to receive interest distributions in an
amount equal to the Accrued Certificate Interest on such class on each
Distribution Date, to the extent of the Available Distribution Amount for such
Distribution Date. Holders of each class of Class M Certificates will be
entitled to receive interest distributions in an amount equal to the Accrued
Certificate Interest on such class on each Distribution Date, to the extent of
the Available Distribution Amount for such Distribution Date after distributions
of interest and principal to the Senior Certificates and distributions of
interest and principal to any class of Class M Certificates having a higher
payment priority.
With respect to any Distribution Date, "Accrued Certificate Interest"
will be equal to (a) in the case of each class of Offered Certificates (other
than the Variable Strip Certificates and Principal Only Certificates), interest
accrued for the prior calendar month on the Certificate Principal Balance of the
Certificates of such class immediately prior to such Distribution Date at the
related Pass-Through Rate and (b) in the case of the Variable Strip Certificates
interest accrued for the prior calendar month on the Notional Amount at the
then-applicable Pass-Through Rate; in each case less interest shortfalls, if
any, allocated thereto for such Distribution Date to the extent not covered with
respect to the Senior Certificates by the Subordination provided by the Class B
Certificates and Class M Certificates and by the Senior Support Lockout
Certificates (in the case of the Super Senior Lockout Certificates only) and,
with respect to the Class M Certificates to the extent not covered by the
Subordination provided by the Class B Certificates and any class or classes of
Class M Certificates having a lower payment priority, including in each case:
(i) any Prepayment Interest Shortfall (as defined below) to
the extent not covered by the Master Servicer as described below;
(ii) the interest portions of Realized Losses (including
Special Hazard Losses in excess of the Special Hazard Amount ("Excess
Special Hazard Losses"), Fraud Losses in excess of the Fraud Loss
Amount ("Excess Fraud Losses"), Bankruptcy Losses in excess of the
Bankruptcy Loss Amount ("Excess Bankruptcy Losses") and losses
occasioned by war, civil insurrection, certain governmental actions,
nuclear reaction and certain other risks ("Extraordinary Losses")) not
allocated through Subordination; and
(iii) any other interest shortfalls not covered by
Subordination, including interest shortfalls relating to the Relief Act
(as defined in the Prospectus) or similar legislation or regulations,
all allocated as described below.
Such reductions resulting from clauses (i), (ii) and (iii) above will be
allocated among the holders of all classes of Certificates in proportion to the
respective amounts of Accrued Certificate Interest which would have been payable
on such Distribution Date absent such reductions. In the case of each class of
Class M Certificates, Accrued Certificate Interest on such class will be further
reduced by the allocation of the interest portion of certain losses thereto, if
any, as described below under "--Allocation of Losses; Subordination." Accrued
Certificate Interest on each class of Senior Certificates will be distributed on
a pro rata basis. Accrued Certificate Interest is calculated on the basis of a
360-day year consisting of twelve 30-day months. The Principal Only Certificates
are not entitled to distributions of interest.
The "Prepayment Interest Shortfall" for any Distribution Date is equal
to the aggregate shortfall, if any, in collections of interest (adjusted to the
related Net Mortgage Rates) resulting from Mortgagor prepayments on the Mortgage
Loans during the preceding calendar month. Such shortfalls will result because
interest on prepayments in full is distributed only to the date of prepayment,
and because no interest is distributed on prepayments in part, as such
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prepayments in part are applied to reduce the outstanding principal balance of
the related Mortgage Loans as of the Due Date in the month of prepayment.
However, with respect to any Distribution Date, any Prepayment Interest
Shortfalls resulting from partial prepayments or prepayments in full during the
preceding calendar month will be offset by the Master Servicer, but only to the
extent such Prepayment Interest Shortfalls do not exceed an amount equal to the
lesser of (a) one-twelfth of 0.125% of the Stated Principal Balance (as defined
herein) of the Mortgage Loans immediately preceding such Distribution Date and
(b) the sum of the Servicing Fees payable to the Master Servicer and
reinvestment income received by the Master Servicer on amounts payable with
respect to such Distribution Date. No assurance can be given that the servicing
compensation available to cover Prepayment Interest Shortfalls will be
sufficient therefor. See "Pooling and Servicing Agreement--Servicing and Other
Compensation and Payment of Expenses" herein.
If on any Distribution Date the Available Distribution Amount is less
than Accrued Certificate Interest on the Senior Certificates, the shortfall will
be allocated among the holders of all classes of Senior Certificates in
proportion to the respective amounts of Accrued Certificate Interest, subject to
the priorities described herein with respect to the Senior Support Lockout
Certificates on or after the Credit Support Depletion Date. In addition, the
amount of any such interest shortfalls that are covered by Subordination
(specifically, interest shortfalls not described in clauses (i) through (iii) in
the second preceding paragraph) will be unpaid Accrued Certificate Interest and
will be distributable to holders of the Certificates of such classes entitled to
such amounts on subsequent Distribution Dates, to the extent of available funds
after interest distributions as required herein. Such shortfalls could occur,
for example, if delinquencies on the Mortgage Loans were exceptionally high and
were concentrated in a particular month and Advances by the Master Servicer did
not cover the shortfall. Any such amounts so carried forward will not bear
interest. Any interest shortfalls will not be offset by a reduction in the
servicing compensation of the Master Servicer or otherwise, except to the
limited extent described in the preceding paragraph with respect to Prepayment
Interest Shortfalls resulting from prepayments.
The Pass-Through Rates on all classes of Offered Certificates (other
than the Principal Only Certificates, which are not entitled to distributions of
interest, and the Variable Strip Certificates) are fixed and are set forth on
the cover hereof. The Pass-Through Rate on the Variable Strip Certificates on
each Distribution Date will equal the weighted average, as of the Due Date in
the month preceding the month in which such Distribution Date occurs, of the
Pool Strip Rates on each of the Mortgage Loans in the Mortgage Pool. The "Pool
Strip Rate" on any Mortgage Loan is equal to the Net Mortgage Rate thereon minus
7.250% (but not less than 0.000%). The "Net Mortgage Rate" on each Mortgage Loan
is equal to the Mortgage Rate thereon minus 0.265%, which is the sum of the rate
per annum at which the related master servicing and subservicing fees accrue
(the "Servicing Fee Rate") and the rate per annum at which the Trustee's fee
accrues (the "Trustee Fee Rate"). The initial Pass-Through Rate on the Variable
Strip Certificates is 1.477% per annum.
As described herein, the Accrued Certificate Interest allocable to each
class of Certificates (other than the Principal Only Certificates, which are not
entitled to any distributions in respect of interest) is based on the
Certificate Principal Balance thereof or, in the case of the Variable Strip
Certificates, on the Notional Amount thereof. The "Certificate Principal
Balance" of any Certificate as of any date of determination is equal to the
initial Certificate Principal Balance thereof, reduced by the aggregate of (a)
all amounts allocable to principal previously distributed with respect to such
Certificate and (b) any reductions in the Certificate Principal Balance thereof
deemed to have occurred in connection with allocations of Realized Losses in the
manner described herein, provided that, after the Certificate Principal Balances
of the Class B Certificates have been reduced to zero, the Certificate Principal
Balance of any Certificate of the class of Class M Certificates outstanding with
the lowest payment priority shall equal the percentage interest evidenced
thereby times the excess, if any, of (a) the then aggregate Stated Principal
Balance of all of the Mortgage Loans over (b) the then aggregate Certificate
Principal Balance of all other classes of Certificates then outstanding. The
Notional Amount of the Variable Strip Certificates as of any Distribution Date
is equal to the aggregate Stated Principal Balance of the Mortgage Loans
immediately prior to such date. At the option of the initial holder of the
Variable Strip Certificates, any Variable Strip Certificate can be exchanged by
such holder for one or more Variable Strip Certificates that represent, in the
aggregate, the same Notional Amount. Reference to the Notional
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Amount of the Variable Strip Certificates is solely for convenience in certain
calculations and does not represent the right to receive any distributions
allocable to principal.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Except as provided below, holders of the Senior Certificates (other
than the Variable Strip Certificates, which are not entitled to receive any
principal distributions, and the Principal Only Certificates) will be entitled
to receive on each Distribution Date, in the priority set forth herein and to
the extent of the portion of the Available Distribution Amount remaining after
the aggregate amount of Accrued Certificate Interest to be distributed to the
holders of the Senior Certificates for such Distribution Date (the "Senior
Interest Distribution Amount") and the Principal Only Distribution Amount (as
defined below) are distributed, a distribution allocable to principal equal to
the sum of the following:
(i) the product of (A) the then-applicable Senior Percentage and (B)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on
the Mortgage Loans (other than the related Discount Fraction of the
principal portion of such payments, with respect to each Discount
Mortgage Loan) due on the related Due Date, whether or not received on
or prior to the related Determination Date, less the principal portion
of Debt Service Reductions, as defined below (other than the related
Discount Fraction of the principal portion of such Debt Service
Reductions with respect to each Discount Mortgage Loan), which together
with other Bankruptcy Losses are in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the repurchase of
a Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) (other than the related Discount
Fraction of the principal portion of such proceeds with respect to each
Discount Mortgage Loan) as required by the Pooling and Servicing
Agreement during the preceding calendar month; and
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month (other than full and
partial Mortgagor prepayments made by the respective Mortgagors and any
amounts received in connection with a Final Disposition (as defined
below) of a Mortgage Loan described in clause (ii) below), to the
extent applied as recoveries of principal (other than the related
Discount Fraction of the principal portion of such unscheduled
collections with respect to each Discount Mortgage Loan);
(ii) in connection with the Final Disposition of a Mortgage Loan (x)
that occurred in the preceding calendar month and (y) that did not result in any
Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses, an amount equal to the lesser of (a) the then-applicable
Senior Percentage of the Stated Principal Balance of such Mortgage Loan (other
than the related Discount Fraction of such Stated Principal Balance with respect
to a Discount Mortgage Loan) and (b) the then-applicable Senior Accelerated
Distribution Percentage (as defined below) of the related unscheduled
collections, including Insurance Proceeds and Liquidation Proceeds, to the
extent applied as recoveries of principal (in each case other than the portion
of such collection, with respect to a Discount Mortgage Loan included in clause
(iii) of the definition of "Principal Only Distribution Amount" below);
(iii) the then-applicable Senior Accelerated Distribution Percentage of
the aggregate of all full and partial Mortgagor prepayments made by the
respective Mortgagors of the Mortgage Loans (other than the related Discount
Fraction of such Mortgagor prepayments, with respect to each Discount Mortgage
Loan) during the preceding calendar month; and
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to clauses (i) through (iii) above) that remain
undistributed to the extent that any such amounts are not attributable to
Realized Losses which were allocated to the Class M Certificates or Class B
Certificates.
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With respect to any Distribution Date, the lesser of (a) the balance of
the Available Distribution Amount remaining after the Senior Interest
Distribution Amount and the Principal Only Distribution Amount have been
distributed and (b) the sum of the amounts described in clauses (i) through (iv)
of the immediately preceding paragraph is hereinafter referred to as the "Senior
Principal Distribution Amount."
Holders of the Principal Only Certificates will be entitled to receive
on each Distribution Date, to the extent of the excess, if any, of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount is
distributed, a distribution allocable to principal equal to the Principal Only
Distribution Amount. The "Principal Only Distribution Amount" is equal to the
aggregate of:
(i) the related Discount Fraction of the principal portion of
the scheduled monthly payment on each Discount Mortgage Loan due on the
related Due Date, whether or not received on or prior to the related
Determination Date, less the Discount Fraction of the principal portion
of any related Debt Service Reductions which together with other
Bankruptcy Losses are in excess of the Bankruptcy Amount;
(ii) the related Discount Fraction of the principal portion of
all unscheduled collections on each Discount Mortgage Loan received
during the preceding calendar month (other than amounts received in
connection with a Final Disposition of a Discount Mortgage Loan
described in clause (iii) below), including full and partial Mortgagor
prepayments, repurchases of Discount Mortgage Loans (or, in the case of
a substitution, certain amounts representing a principal adjustment) as
required by the Pooling and Servicing Agreement, Liquidation Proceeds
and Insurance Proceeds, to the extent applied as recoveries of
principal;
(iii) in connection with the Final Disposition of a Discount
Mortgage Loan that did not result in any Excess Special Hazard Losses,
Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses,
an amount equal to the lesser of (a) the applicable Discount Fraction
of the Stated Principal Balance of such Discount Mortgage Loan
immediately prior to such Distribution Date and (b) the aggregate
amount of collections on such Discount Mortgage Loan to the extent
applied as recoveries of principal;
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii)
above) that remain undistributed; and
(v) with respect to each Final Disposition of a Discount
Mortgage Loan in connection with such Distribution Date or any prior
Distribution Date, to the extent that the amount included under clause
(iii) above for such Distribution Date was less than the amount
described in (a) under clause (iii) above (each such shortfall, a
"Principal Only Collection Shortfall"), an amount equal to the
aggregate of the Principal Only Collection Shortfalls, less any amounts
paid pursuant to this clause on a prior Distribution Date, until paid
in full; provided, that distributions pursuant to this clause (v) shall
only be made to the extent of Eligible Funds (as described below) on
any Distribution Date.
A "Final Disposition" of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Master Servicer that it has received all
Insurance Proceeds, Liquidation Proceeds and other payments or cash recoveries
which the Master Servicer reasonably and in good faith expects to be finally
recoverable with respect to such Mortgage Loan.
"Eligible Funds" on any Distribution Date means the portion, if any, of
the Available Distribution Amount remaining after reduction by the sum of the
Senior Interest Distribution Amount, the Senior Principal Distribution Amount,
the Principal Only Distribution Amount (determined without regard to clause (v)
thereof) and the aggregate amount of Accrued Certificate Interest on the Class
M, Class B-1 and Class B-2 Certificates. Notwithstanding any other provision
hereof, any distribution in respect of any Principal Only Collection Shortfall,
to the extent not covered by any amounts otherwise distributable to the Class
B-3 Certificates, shall result in a reduction of the amount of principal
distributions on such Distribution Date on (i) first, the Class B-1 Certificates
and Class B-2 Certificates and (ii) second, the Class M Certificates, in each
case in reverse order of their payment priority.
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The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
any Realized Loss thereon has been allocated to one or more classes of
Certificates on or before the date of determination.
The "Senior Percentage," which initially will equal approximately
94.00% and will in no event exceed 100%, will be recalculated for each
Distribution Date to be the percentage equal to the aggregate Certificate
Principal Balance of the Senior Certificates (other than the Principal Only
Certificates) immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans (other than the
Discount Fraction of the Discount Mortgage Loans) immediately prior to such
Distribution Date. The "Subordinate Percentage" as of any date of determination
is equal to 100% minus the Senior Percentage as of such date. The initial Senior
Percentage is less than the initial percentage interest in the Trust Fund
evidenced by the classes of Senior Certificates (including the Principal Only
Certificates) in the aggregate, because such percentage is calculated without
regard to either the Certificate Principal Balance of the Principal Only
Certificates or the Discount Fraction of the Stated Principal Balance of each
Discount Mortgage Loan.
The "Senior Accelerated Distribution Percentage" for any Distribution
Date occurring prior to the Distribution Date in October 2002 will equal 100%.
The Senior Accelerated Distribution Percentage for any Distribution Date
occurring after the first five years following the Delivery Date will be as
follows:
(i) for any Distribution Date during the sixth year after the
Delivery Date, the Senior Percentage for such Distribution Date plus
70% of the Subordinate Percentage for such Distribution Date;
(ii) for any Distribution Date during the seventh year after
the Delivery Date, the Senior Percentage for such Distribution Date
plus 60% of the Subordinate Percentage for such Distribution Date;
(iii) for any Distribution Date during the eighth year after
the Delivery Date, the Senior Percentage for such Distribution Date
plus 40% of the Subordinate Percentage for such Distribution Date;
(iv) for any Distribution Date during the ninth year after the
Delivery Date, the Senior Percentage for such Distribution Date plus
20% of the Subordinate Percentage for such Distribution Date; and
(v) for any Distribution Date thereafter, the Senior
Percentage for such Distribution Date (unless on any such Distribution
Date the Senior Percentage exceeds the initial Senior Percentage, in
which case the Senior Accelerated Distribution Percentage for such
Distribution Date will once again equal 100%).
Any scheduled reduction to the Senior Accelerated Distribution Percentage
described above shall not be made as of any Distribution Date unless either:
(a)(i)(X) the outstanding principal balance of Mortgage Loans
delinquent 60 days or more averaged over the last six months, as a
percentage of the aggregate outstanding Certificate Principal Balance
of the Class M Certificates and Class B Certificates, is less than 50%
or (Y) the outstanding principal balance of Mortgage Loans delinquent
60 days or more averaged over the last six months, as a percentage of
the aggregate outstanding principal balance of all Mortgage Loans
averaged over the last six months, does not exceed 2%, and
(ii) Realized Losses on the Mortgage Loans to date for such
Distribution Date, if occurring during the sixth, seventh, eighth,
ninth or tenth year (or any year thereafter) after the Delivery Date,
are less than
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30%, 35%, 40%, 45% or 50%, respectively, of the sum of the initial
Certificate Principal Balances of the Class M Certificates and Class B
Certificates;
or
(b)(i) the outstanding principal balance of Mortgage Loans
delinquent 60 days or more averaged over the last six months, as a
percentage of the aggregate outstanding principal balance of all
Mortgage Loans averaged over the last six months, does not exceed 4%,
and
(ii) Realized Losses on the Mortgage Loans to date for such
Distribution Date are less than 10% of the sum of the initial
Certificate Principal Balances of the Class M Certificates and Class B
Certificates.
Notwithstanding the foregoing, upon reduction of the Certificate Principal
Balances of the Senior Certificates (other than the Principal Only Certificates)
to zero, the Senior Accelerated Distribution Percentage will equal 0%. See
"Subordination" in the Prospectus.
The "Unscheduled Payment Lockout Distribution Percentage" for any
Distribution Date occurring prior to the Distribution Date in October 2002 will
be equal to 0%. The Unscheduled Payment Lockout Distribution Percentage for any
Distribution Date occurring after the first five years following the Delivery
Date will be as follows: for any Distribution Date during the sixth year after
the Delivery Date, 30%; for any Distribution Date during the seventh year after
the Delivery Date, 40%; for any Distribution Date during the eighth year after
the Delivery Date, 60%; for any Distribution Date during the ninth year after
the Delivery Date, 80%; and for any Distribution Date thereafter, 100%. The
"Scheduled Payment Lockout Distribution Percentage" for any Distribution Date
occurring prior to the Distribution Date in October 2002 will be equal to 0% and
for any Distribution Date thereafter will be equal to 100%. Notwithstanding the
foregoing, if the Certificate Principal Balances of the Class A-1, Class A-2,
Class A-3, Class A-4 and Class A-5 Certificates have been reduced to zero, the
Unscheduled Payment Lockout Distribution Percentage and the Scheduled Payment
Lockout Distribution Percentage will be equal to 100%.
Distributions of principal on the Senior Certificates on each
Distribution Date will be made (after distribution of the Senior Interest
Distribution Amount as described under "Interest Distributions"), as follows, in
each case to the extent of the amount remaining in the Certificate Account:
(a) Prior to the occurrence of the Credit Support Depletion Date (as
defined below):
(i) the Principal Only Distribution Amount shall be
distributed to the Principal Only Certificates, in reduction of the
Certificate Principal Balance thereof, until such Certificate Principal
Balance is reduced to zero;
(ii) second, concurrently to the Lockout Certificates in
reduction of the Certificate Principal Balances thereof, until such
Certificate Principal Balances have been reduced to zero, an amount
equal to the Unscheduled Payment Lockout Distribution Percentage (or,
with respect to the amount described in subsection (i)(B)(1) of the
clause referred to below, the Scheduled Payment Lockout Distribution
Percentage) of such Certificates' pro rata share (based on the
aggregate Certificate Principal Balances thereof relative to the
aggregate Certificate Principal Balance of all classes of Certificates
(other than the Principal Only Certificates)) of the aggregate of the
amounts described in clauses (i), (ii) and (iii) of the first paragraph
under "Principal Distributions on the Senior Certificates" (but without
application of either the Senior Percentage or the Senior Accelerated
Distribution Percentage described therein) shall be distributed to such
Certificates; provided that if the aggregate of the amounts set forth
in clauses (i), (ii) and (iii) of the first paragraph under "Principal
Distributions on the Senior Certificates" is more than the balance of
the Available Distribution Amount remaining after the Senior Interest
Distribution Amount and Principal Only Distribution Amount have been
distributed, the amount paid to such Certificates pursuant to this
clause (ii) shall be reduced by an amount equal to such Certificates'
pro rata share, based on the aggregate Certificate Principal
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Balance thereof relative to the aggregate Certificate Principal Balance
of the Senior Certificates (other than the Principal Only Certificates)
of such difference;
(iii) third, to the Class R Certificates, in reduction of the
Certificate Principal Balance thereof, until the Certificate Principal
Balance thereof has been reduced to zero;
(iv) fourth, concurrently, 91.0000000034%, 8.5229999968% and
0.4769999998% of the amount remaining after the distribution in clause
(iii) above shall be distributed to the Class A-1, Class A-3 and Class
A-4 Certificates, respectively, in reduction of the Certificate
Principal Balances thereof, until the Certificate Principal Balance of
the Class A-1 Certificates has been reduced to approximately
$93,364,532.32;
(v) fifth, concurrently, 47.4999963375%, 44.9824965317%,
4.7350069367% and 2.7825001941% of the amount remaining after the
distribution in clause (iv) above shall be distributed to the Class
A-1, Class A-2, Class A-3 and Class A-4 Certificates, respectively, in
reduction of the Certificate Principal Balances thereof, until the
Certificate Principal Balance of the Class A-2 Certificates has been
reduced to zero;
(vi) sixth, concurrently, 90.9999296212%, 8.5230666488% and
0.4770037301% of the amount remaining after the distribution in clause
(v) above shall be distributed to the Class A-1, Class A-3 and Class
A-4 Certificates, respectively, in reduction of the Certificate
Principal Balances thereof, until the Certificate Principal Balance of
the Class A-1 Certificates has been reduced to zero;
(vii) seventh, concurrently, 94.6993814584% and 5.3006185416%
of the amount remaining after the distribution in clause (vi) above
shall be distributed to the Class A-3 and Class A-4 Certificates,
respectively, in reduction of the Certificate Principal Balances
thereof, until the Certificate Principal Balances of the Class A-3
Certificates and Class A-4 Certificates have been reduced to zero;
(viii) eighth, to the Class A-5 Certificates in reduction of
the Certificate Principal Balance thereof, until the Certificate
Principal Balance thereof has been reduced to zero; and
(ix) ninth, concurrently, to the Lockout Certificates, on a
pro rata basis, based on the Certificate Principal Balances thereof, in
reduction of the Certificate Principal Balances thereof, until the
Certificate Principal Balances thereof have been reduced to zero.
The percentages and amounts set forth in the foregoing clauses (iv),
(v), (vi) and (vii) are calculated on the basis of the Certificate Principal
Balances of the related Certificates set forth on the cover hereof. If such
Certificate Principal Balances are changed prior to the Delivery Date, the
approximate percentages and amounts will be increased or decreased accordingly.
(b) On or after the occurrence of the Credit Support Depletion Date but
prior to the reduction of the Certificate Principal Balance of the Senior
Support Lockout Certificates to zero, all priorities relating to distributions
as described above in respect of principal among the Senior Certificates (other
than the Principal Only Certificates) will be disregarded and an amount equal to
the Discount Fraction of the principal portion of scheduled or unscheduled
payments received or advanced in respect of Discount Mortgage Loans will be
distributed to the Principal Only Certificates, and the Senior Principal
Distribution Amount will be distributed to the Senior Certificates (other than
the Principal Only Certificates) pro rata in accordance with their respective
outstanding Certificate Principal Balances and the Senior Interest Distribution
Amount will be distributed as described under "Interest Distributions"; provided
that the aggregate amount distributable to the Super Senior Lockout Certificates
and Senior Support Lockout Certificates in respect of the aggregate Accrued
Certificate Interest thereon and in respect of their collective pro rata portion
of the Senior Principal Distribution Amount will be distributed among such
Certificates in the following priority: first, to the Super Senior Lockout
Certificates, up to an amount equal to the Accrued Certificate Interest thereon;
second, to the Super Senior Lockout Certificates, up to an amount equal to the
Super Senior Optimal Principal Distribution Amount thereof (as defined below),
in reduction of the Certificate Principal Balance thereof;
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third, to the Senior Support Lockout Certificates, up to an amount equal to the
Accrued Certificate Interest thereon; and fourth, to the Senior Support Lockout
Certificates, until the Certificate Principal Balance thereof is reduced to
zero.
(c) On or after the occurrence of the Credit Support Depletion Date and
upon reduction of the Certificate Principal Balance of the Senior Support
Lockout Certificates to zero, all priorities relating to distributions as
described above in respect of principal among the various classes of Senior
Certificates (other than the Principal Only Certificates) will be disregarded,
an amount equal to the Discount Fraction of the principal portion of scheduled
payments and unscheduled collections received or advanced in respect of Discount
Mortgage Loans will be distributed to the Principal Only Certificates, and the
Senior Principal Distribution Amount will be distributed to all classes of
Senior Certificates (other than the Principal Only Certificates) pro rata in
accordance with their respective outstanding Certificate Principal Balances and
the Senior Interest Distribution Amount will be distributed as described under
"Interest Distributions."
The "Credit Support Depletion Date" is the first Distribution Date on
which the Senior Percentage equals 100%.
With respect to any Distribution Date on and after the Credit Support
Depletion Date, the "Super Senior Optimal Principal Distribution Amount" is
equal to the product of (a) the then-applicable Super Senior Optimal Percentage
for such class and (b) the Senior Principal Distribution Amount. The "Super
Senior Optimal Percentage" is equal to a fraction, expressed as a percentage,
the numerator of which is the aggregate Certificate Principal Balance of the
Super Senior Lockout Certificates immediately prior to such Distribution Date
and the denominator of which is the aggregate Certificate Principal Balance of
each class of Certificates (other than the Principal Only Certificates)
immediately prior to such Distribution Date.
PRINCIPAL DISTRIBUTIONS ON THE CLASS M CERTIFICATES
Holders of each class of the Class M Certificates will be entitled to
receive on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after (a) the sum of the Senior Interest
Distribution Amount, the Principal Only Distribution Amount and the Senior
Principal Distribution Amount is distributed to holders of the Senior
Certificates, (b) the aggregate amount of Accrued Certificate Interest and
principal required to be distributed on any class of Class M Certificates having
a higher payment priority on such Distribution Date is distributed to holders of
such class of Class M Certificates and (c) the aggregate amount of Accrued
Certificate Interest required to be distributed on such class of Class M
Certificates on such Distribution Date is distributed to such Class M
Certificates, a distribution allocable to principal in the sum of the following:
(i) the product of (A) the then-applicable related Class M Percentage
and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly
payments on the Mortgage Loans (other than the related
Discount Fraction of the principal portion of such payments
with respect to a Discount Mortgage Loan) due on the related
Due Date, whether or not received on or prior to the related
Determination Date, less the principal portion of Debt Service
Reductions (other than the related Discount Fraction of the
principal portion of such Debt Service Reductions with respect
to a Discount Mortgage Loan) which together with other
Bankruptcy Losses are in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the
repurchase of a Mortgage Loan (or, in the case of a
substitution, certain amounts representing a principal
adjustment) (other than the related Discount Fraction of the
principal portion of such proceeds with respect to a Discount
Mortgage Loan) as required by the Pooling and Servicing
Agreement during the preceding calendar month; and
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(3) the principal portion of all other unscheduled
collections received during the preceding calendar month
(other than full and partial Mortgagor prepayments made by the
respective Mortgagors and any amounts received in connection
with a Final Disposition of a Mortgage Loan described in
clause (ii) below), to the extent applied as recoveries of
principal (other than the related Discount Fraction of the
principal amount of such unscheduled collections, with respect
to a Discount Mortgage Loan);
(ii) such class's pro rata share, based on the Certificate
Principal Balance of each class of Class M Certificates and Class B
Certificates then outstanding, of all amounts received in connection
with the Final Disposition of a Mortgage Loan (other than the related
Discount Fraction of such amounts with respect to a Discount Mortgage
Loan) (x) that occurred during the preceding calendar month and (y)
that did not result in any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses, to the extent
applied as recoveries of principal and to the extent not otherwise
payable to the Senior Certificates;
(iii) the portion of full and partial Mortgagor prepayments
(other than the Discount Fraction of such Mortgagor prepayments with
respect to a Discount Mortgage Loan) made by the respective Mortgagors
during the preceding calendar month allocable to such class of Class M
Certificates as described below; and
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated pursuant to clauses (i) through (iii)
above) that remain undistributed to the extent that any such amounts
are not attributable to Realized Losses which were allocated to any
class of Class M Certificates with a lower payment priority or the
Class B Certificates.
References herein to "payment priority" of the Class M Certificates
refer to a payment priority among such classes as follows: first, to the Class
M-1 Certificates; second, to the Class M-2 Certificates; and third, to the Class
M-3 Certificates.
As to each class of Class M Certificates, on any Distribution Date, any
Accrued Certificate Interest thereon remaining unpaid from any previous
Distribution Date will be distributable to the extent of available funds.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class B Certificates have been reduced to zero, on any Distribution Date, with
respect to the class of Class M Certificates outstanding on such Distribution
Date with the lowest payment priority, Accrued Certificate Interest thereon
remaining unpaid from any previous Distribution Date (except in the limited
circumstances provided in the Pooling and Servicing Agreement) will not be
distributable.
All Mortgagor prepayments not otherwise distributable to the Senior
Certificates will be allocated on a pro rata basis among the class of Class M
Certificates with the highest payment priority then outstanding and each other
class of Class M Certificates and Class B Certificates for which certain loss
levels established for such class in the Pooling and Servicing Agreement have
not been exceeded. The related loss level on any Distribution Date would be
satisfied as to any Class M-2, Class M-3 or Class B Certificates, respectively,
only if the sum of the current percentage interests in the Mortgage Pool
evidenced by such class and each class, if any, subordinate thereto were at
least equal to the sum of the initial percentage interests in the Mortgage Pool
evidenced by such class and each class, if any, subordinate thereto.
The Class M-1, Class M-2 and Class M-3 Percentages, which initially
will equal approximately 2.25%, 1.00% and 0.75%, respectively, and will in no
event exceed 100%, will each be adjusted for each Distribution Date to be the
percentage equal to the Certificate Principal Balance of the related class of
Class M Certificates immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans (other than the
related Discount Fraction of each Discount Mortgage Loan) immediately prior to
such Distribution Date. The initial Class M-1, Class M-2 and Class M-3
Percentages are greater than the initial percentage interests in the Trust Fund
evidenced by the Class M-1, Class M-2 and Class M-3 Certificates, respectively,
because the Class M-1, Class
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M-2 and Class M-3 Percentages are calculated without regard to the Discount
Fraction of the Stated Principal Balance of each Discount Mortgage Loan.
As stated above under "--Principal Distributions on the Senior
Certificates," the Senior Accelerated Distribution Percentage will be 100%
during the first five years after the Delivery Date (unless the Certificate
Principal Balances of the Senior Certificates (other than the Principal Only
Certificates) are reduced to zero before the end of such period), and will
thereafter equal 100% whenever the Senior Percentage exceeds the initial Senior
Percentage. Furthermore, as set forth herein, the Senior Accelerated
Distribution Percentage will exceed the Senior Percentage during the sixth
through ninth years following the Delivery Date, and scheduled reductions to the
Senior Accelerated Distribution Percentage are subject to postponement based on
the loss and delinquency experience of the Mortgage Loans. Accordingly, each
class of the Class M Certificates will not be entitled to any prepayments for at
least the first five years after the Delivery Date (unless the Certificate
Principal Balances of the Senior Certificates (other than the Principal Only
Certificates) have been reduced to zero before the end of such period), and may
receive no prepayments or a disproportionately small portion of prepayments
relative to the related Class M Percentage during certain periods thereafter.
See "--Principal Distributions on the Senior Certificates" herein.
ALLOCATION OF LOSSES; SUBORDINATION
The Subordination provided to the Senior Certificates by the Class B
Certificates and Class M Certificates and the Subordination provided to each
class of Class M Certificates by the Class B Certificates and by any class of
Class M Certificates subordinate thereto will cover Realized Losses on the
Mortgage Loans that are Defaulted Mortgage Losses, Fraud Losses, Bankruptcy
Losses (each as defined in the Prospectus) and Special Hazard Losses (as defined
herein). Any such Realized Losses which are not Excess Special Hazard Losses,
Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses will be
allocated as follows: first, to the Class B Certificates; second, to the Class
M-3 Certificates; third, to the Class M-2 Certificates; and fourth, to the Class
M-1 Certificates, in each case until the Certificate Principal Balance of such
class of Certificates has been reduced to zero; and thereafter, if any such
Realized Loss is on a Discount Mortgage Loan, to the Principal Only Certificates
in an amount equal to the related Discount Fraction of the principal portion of
such Realized Loss, and the remainder of such Realized Losses and the entire
amount of such Realized Losses on Non-Discount Mortgage Loans among all the
remaining classes of Senior Certificates on a pro rata basis, except that
Defaulted Mortgage Losses otherwise allocable to the Super Senior Lockout
Certificates will be allocated first, to the Senior Support Lockout
Certificates, until the Certificate Principal Balance of the Senior Support
Lockout Certificates is reduced to zero. Any allocation of a Realized Loss
(other than a Debt Service Reduction) to a Certificate will be made by reducing
the Certificate Principal Balance thereof, in the case of the principal portion
of such Realized Loss, in each case until the Certificate Principal Balance of
such class has been reduced to zero, and the Accrued Certificate Interest
thereon, in the case of the interest portion of such Realized Loss, by the
amount so allocated as of the Distribution Date occurring in the month following
the calendar month in which such Realized Loss was incurred. In addition, any
such allocation of a Realized Loss to a Class M Certificate may also be made by
operation of the payment priority to the Senior Certificates set forth under
"--Principal Distributions on the Senior Certificates" and any class of Class M
Certificates with a higher payment priority. As used herein, "Debt Service
Reduction" means a reduction in the amount of the monthly payment due to certain
bankruptcy proceedings, but does not include any permanent forgiveness of
principal. As used herein, "Subordination" refers to the provisions discussed
above for the sequential allocation of Realized Losses among the various
classes, as well as all provisions effecting such allocations including the
priorities for distribution of cash flows in the amounts described herein.
Allocations of the principal portion of Debt Service Reductions to each
class of Class M Certificates and Class B Certificates will result from the
priority of distributions of the Available Distribution Amount as described
herein, which distributions shall be made first to the Senior Certificates,
second to the Class M Certificates in the order of their payment priority and
third to the Class B Certificates. An allocation of the interest portion of a
Realized Loss as well as the principal portion of Debt Service Reductions will
not reduce the level of Subordination, as such term is defined herein, until an
amount in respect thereof has been actually disbursed to the Senior
Certificateholders or the Class M Certificateholders, as applicable. The holders
of the Offered Certificates will not be entitled to any
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additional payments with respect to Realized Losses from amounts otherwise
distributable on any classes of Certificates subordinate thereto (except in
limited circumstances in the case of Principal Only Collection Shortfalls, to
the extent of Eligible Funds). Accordingly, the Subordination provided to the
Senior Certificates (other than the Principal Only Certificates) and to each
class of Class M Certificates by the respective classes of Certificates
subordinate thereto with respect to Realized Losses allocated on any
Distribution Date will be effected primarily by increasing the Senior
Percentage, or the respective Class M Percentage, of future distributions of
principal of the remaining Mortgage Loans. Because the Discount Fraction of each
Discount Mortgage Loan will not change over time, the protection from losses
provided to the Principal Only Certificates by the Class M Certificates and
Class B Certificates is limited to the prior right of the Principal Only
Certificates to receive distributions in respect of principal as described
herein. Furthermore, principal losses on the Mortgage Loans that are not covered
by Subordination will be allocated to the Principal Only Certificates only to
the extent they occur on a Discount Mortgage Loan and only to the extent of the
related Discount Fraction of such losses. Such allocation of principal losses on
the Discount Mortgage Loans may result in such losses being allocated in an
amount that is greater or less than would have been the case had such losses
been allocated in proportion to the Certificate Principal Balance of the
Principal Only Certificates. Thus, the Senior Certificates (other than the
Principal Only Certificates) will bear the entire amount of losses that are not
allocated to the Class M Certificates and Class B Certificates (other than the
amount allocable to the Principal Only Certificates), which losses will be
allocated among all classes of Senior Certificates (other than the Principal
Only Certificates) as described herein.
Because the Principal Only Certificates are entitled to receive in
connection with the Final Disposition of a Discount Mortgage Loan, on any
Distribution Date, an amount equal to all unpaid Principal Only Collection
Shortfalls to the extent of Eligible Funds on such Distribution Date, shortfalls
in distributions of principal on any class of Class M Certificates could occur
under certain circumstances, even if such class is not the most subordinate
class of Certificates then outstanding.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses, Extraordinary Losses or other losses of a type not covered by
Subordination on Non-Discount Mortgage Loans will be allocated on a pro rata
basis among the Senior Certificates (other than the Principal Only
Certificates), Class M Certificates and Class B Certificates (any such Realized
Losses so allocated to the Senior Certificates or Class M Certificates will be
allocated without priority among the various classes of Senior Certificates
(other than the Principal Only Certificates) or Class M Certificates). The
principal portion of such losses on Discount Mortgage Loans will be allocated to
the Principal Only Certificates in an amount equal to the related Discount
Fraction thereof, and the remainder of such losses on Discount Mortgage Loans
will be allocated among the remaining Certificates on a pro rata basis. An
allocation of a Realized Loss on a "pro rata basis" among two or more classes of
Certificates means an allocation to each such class of Certificates on the basis
of its then outstanding Certificate Principal Balance prior to giving effect to
distributions to be made on such Distribution Date in the case of an allocation
of the principal portion of a Realized Loss, or based on the Accrued Certificate
Interest thereon in respect of such Distribution Date in the case of an
allocation of the interest portion of a Realized Loss.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer or the Subservicer for Advances and expenses, including attorneys'
fees) towards interest and principal owing on the Mortgage Loan. Such amount of
loss realized and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses
are referred to herein as "Realized Losses."
In order to maximize the likelihood of distribution in full of the
Senior Interest Distribution Amount, Principal Only Distribution Amount and
Senior Principal Distribution Amount, on each Distribution Date, holders of
Senior Certificates have a right to distributions of the Available Distribution
Amount that is prior to the rights of the holders of the Class M Certificates
and Class B Certificates, to the extent necessary to satisfy the Senior Interest
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Distribution Amount, Principal Only Distribution Amount and Senior Principal
Distribution Amount. Similarly, holders of the Class M Certificates have a right
to distributions of the Available Distribution Amount prior to the rights of
holders of the Class B Certificates, and holders of any class of Class M
Certificates with a higher payment priority have a right to distributions of the
Available Distribution Amount prior to the rights of holders of any class of
Class M Certificates with a lower payment priority. In addition, holders of the
Super Senior Lockout Certificates will have a right, on each Distribution Date
occurring on or after the Credit Support Depletion Date, to that portion of the
Available Distribution Amount otherwise allocable to the Senior Support Lockout
Certificates to the extent necessary to satisfy the Accrued Certificate Interest
on the Super Senior Lockout Certificates and the Super Senior Optimal Principal
Distribution Amount.
The application of the Senior Accelerated Distribution Percentage (when
it exceeds the Senior Percentage) to determine the Senior Principal Distribution
Amount will accelerate the amortization of the Senior Certificates (other than
the Principal Only Certificates) relative to the actual amortization of the
Mortgage Loans. The Principal Only Certificates will not receive more than the
Discount Fraction of any unscheduled payment relating to a Discount Mortgage
Loan. To the extent that the Senior Certificates (other than the Principal Only
Certificates) are amortized faster than the Mortgage Loans, in the absence of
offsetting Realized Losses allocated to the Class M Certificates and Class B
Certificates, the percentage interest evidenced by such Senior Certificates in
the Trust Fund will be decreased (with a corresponding increase in the interest
in the Trust Fund evidenced by the Class M Certificates and Class B
Certificates), thereby increasing, relative to their respective Certificate
Principal Balances, the Subordination afforded the Senior Certificates (other
than the Principal Only Certificates) by the Class M Certificates and Class B
Certificates collectively. In addition, if losses on the Mortgage Loans exceed
the amounts described above under "--Principal Distributions on the Senior
Certificates," a greater percentage of full and partial Mortgagor prepayments
will be allocated to the Senior Certificates (other than the Principal Only
Certificates) than would otherwise be the case, thereby accelerating the
amortization of the Senior Certificates (other than the Principal Only
Certificates) relative to the Class M Certificates and Class B Certificates.
The priority of payments (including Mortgagor prepayments) among the
Class M Certificates, as described herein, also has the effect during certain
periods, in the absence of losses, of decreasing the percentage interest
evidenced by any class of Class M Certificates with a higher payment priority,
thereby increasing, relative to its Certificate Principal Balance, the
Subordination afforded to such class of the Class M Certificates by the Class B
Certificates and any class of Class M Certificates with a lower payment
priority.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Amount") through
Subordination shall initially be equal to $2,314,000. As of any date of
determination following the Cut-off Date, the Special Hazard Amount shall equal
$2,314,000 less the sum of (A) any amounts allocated through Subordination in
respect of Special Hazard Losses and (B) the Adjustment Amount. The Adjustment
Amount will be equal to an amount calculated pursuant to the terms of the
Pooling and Servicing Agreement. As used in this Prospectus Supplement, "Special
Hazard Losses" has the same meaning set forth in the Prospectus, except that
Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the "Fraud Loss Amount") through Subordination
shall initially be equal to $6,482,473. As of any date of determination after
the Cut-off Date, the Fraud Loss Amount shall equal (X) prior to the first
anniversary of the Cut-off Date an amount equal to 2.00% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus the
aggregate amounts allocated through Subordination with respect to Fraud Losses
up to such date of determination and (Y) from the first to the fifth anniversary
of the Cut-off Date, an amount equal to (1) the lesser of (a) the Fraud Loss
Amount as of the most recent anniversary of the Cut-off Date and (b) 1.00% of
the aggregate principal balance of all of the Mortgage Loans as of the most
recent anniversary of the Cut-off Date minus (2) the aggregate amounts allocated
through Subordination with respect to Fraud Losses since the most recent
anniversary of the Cut-off Date
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up to such date of determination. On and after the fifth anniversary of the
Cut-off Date, the Fraud Loss Amount shall be zero and Fraud Losses shall not be
allocated through Subordination.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the "Bankruptcy Amount") through
Subordination will initially be equal to $148,332. As of any date of
determination, the Bankruptcy Amount will equal $148,332 less the sum of any
amounts allocated through subordination for such losses up to such date of
determination.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Master Servicer has notified the Trustee in writing that the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer or a
Subservicer.
The Special Hazard Amount, Fraud Amount and Bankruptcy Amount are
subject to further reduction as described in the Prospectus under
"Subordination."
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to
make Advances of principal and interest (net of interest at the Servicing Fee
Rate) which were due on the Mortgage Loans on the immediately preceding Due Date
and delinquent on the business day next preceding the related Determination
Date. With respect to a delinquent Balloon Payment, the Master Servicer is not
required to make an Advance of such delinquent Balloon Payment. The Master
Servicer will, however, make monthly Advances with respect to balloon Mortgage
Loans with delinquent Balloon Payments, in each case in an amount equal to the
assumed monthly principal and interest payment (net of the related servicing
fees) that would have been due on the related Due Date based on the original
principal amortization schedule for such balloon Mortgage Loan.
Such Advances are required to be made only to the extent they are
deemed by the Master Servicer to be recoverable from related late collections,
Insurance Proceeds or Liquidation Proceeds. The purpose of making such Advances
is to maintain a regular cash flow to the Certificateholders, rather than to
guarantee or insure against losses. The Master Servicer will not be required to
make any Advances with respect to reductions in the amount of the monthly
payments on the Mortgage Loans due to Debt Service Reductions or the application
of the Relief Act or similar legislation or regulations. Any failure by the
Master Servicer to make an Advance as required under the Pooling and Servicing
Agreement will constitute an Event of Default thereunder, in which case the
Trustee, as successor Master Servicer, will be obligated to make any such
Advance, in accordance with the terms of the Pooling and Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from late collections, Insurance Proceeds and Liquidation
Proceeds from the Mortgage Loan as to which such unreimbursed Advance was made,
and after a Realized Loss has been allocated with respect to such Mortgage Loan,
if such collections and proceeds are insufficient, from other amounts in the
Custodial Account.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of Mortgagor defaults
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resulting in Realized Losses. Such yields may be adversely affected by a higher
or lower than anticipated rate of principal payments on the Mortgage Loans in
the Trust Fund. The rate of principal payments on such Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, the rate
and timing of Mortgagor prepayments thereon by the Mortgagors, liquidations of
defaulted Mortgage Loans and purchases of Mortgage Loans due to certain breaches
of representations and warranties. The timing of changes in the rate of
prepayments, liquidations and purchases of the Mortgage Loans may, and the
timing of Realized Losses will, significantly affect the yield to an investor,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described herein and in the Prospectus under "Yield
Considerations" and "Maturity and Prepayment Considerations"), no assurance can
be given as to such rate or the timing of principal payments on the Offered
Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any
time without payment of any prepayment fee or penalty. The Mortgage Loans
generally contain due-on-sale clauses. As described under "Description of the
Certificates--Principal Distributions on the Senior Certificates" and
"--Principal Distributions on the Class M Certificates" herein, during certain
periods all or a disproportionately large percentage of Mortgagor prepayments on
the Mortgage Loans will be allocated among the Senior Certificates (other than
the Principal Only Certificates), and during certain periods no Mortgagor
prepayments or, relative to their respective percentage interests in the Trust
Fund, a disproportionately small portion of Mortgagor prepayments on the
Mortgage Loans will be distributed on the Lockout Certificates or on each class
of Class M Certificates. In addition to the foregoing, if on any Distribution
Date, the loss level established for the Class M-2 Certificates or Class M-3
Certificates is exceeded and a class of Class M Certificates having a higher
payment priority is then outstanding, the Class M-2 Certificates or Class M-3
Certificates, as the case may be, will not receive distributions in respect of
Mortgagor prepayments on such Distribution Date. Prepayments, liquidations and
purchases of the Mortgage Loans will result in distributions to holders of the
Offered Certificates of principal amounts which would otherwise be distributed
over the remaining terms of the Mortgage Loans. Factors affecting prepayment
(including defaults and liquidations) of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates, solicitations and servicing decisions. In
addition, if prevailing mortgage rates fell significantly below the Mortgage
Rates on the Mortgage Loans, the rate of prepayments (including refinancings)
would be expected to increase. Conversely, if prevailing mortgage rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayments on the Mortgage Loans would be expected to decrease.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the country
in which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
See "Maturity and Prepayment Considerations" in the Prospectus.
After the Certificate Principal Balances of the Class B Certificates
have been reduced to zero, the yield to maturity on the class of Class M
Certificates then outstanding with the lowest payment priority will be extremely
sensitive to losses on the Mortgage Loans (and the timing thereof) because the
entire amount of losses that are covered by Subordination will be allocated to
such class of Class M Certificates. In addition, if the Certificate Principal
Balances of the Class M Certificates and Class B Certificates are reduced to
zero, the yield to maturity on the Senior Support Lockout Certificates will be
extremely sensitive to the rate of default and liquidations on the Mortgage
Loans and the Senior Support Lockout Certificates will bear a greater risk of
losses than the Senior Certificates (other than the Senior Support Lockout
Certificates and Principal Only Certificates) because of the allocation thereto
of the portion of Defaulted Mortgage Losses otherwise allocable to the Super
Senior Lockout Certificates. Furthermore, because
S-54
<PAGE>
principal distributions are paid to certain classes of Senior Certificates and
Class M Certificates before other classes, holders of classes having a later
priority of payment bear a greater risk of losses than holders of classes having
earlier priorities for distribution of principal.
All classes of Senior Certificates entitled to payments of principal
are subject to various priorities for payment of principal as described herein.
Distributions of principal on classes having an earlier priority of payment will
be affected by the rates of prepayment of the Mortgage Loans early in the life
of the Mortgage Pool. The timing of commencement of principal distributions and
the weighted average lives of classes of Certificates with a later priority of
payment will be affected by the rates of prepayment experienced both before and
after the commencement of principal distributions on such classes.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through
Rates on the Offered Certificates (other than the Variable Strip Certificates)
are fixed, such rates will not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the Offered Certificates were to rise, the market value of the
Offered Certificates may decline.
Investors in the Lockout Certificates should be aware that because the
Lockout Certificates do not receive any portion of principal payments prior to
the Distribution Date occurring in October 2002 and prior to the Distribution
Date occurring in October 2006 will receive a disproportionately small portion
of principal prepayments (unless the Certificate Principal Balance of the Class
A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates have been
reduced to zero), the weighted average life of the Lockout Certificates will be
longer than would otherwise be the case, and the effect on the market value of
the Lockout Certificates of changes in market interest rates or market yields
for similar securities may be greater than for other classes of Senior
Certificates entitled to such distributions.
As described under "Description of the Certificates--Allocation of
Losses; Subordination" and "--Advances," amounts otherwise distributable to
holders of one or more classes of the Class M Certificates may be made available
to protect the holders of the Senior Certificates and holders of any Class M
Certificates with a higher payment priority against interruptions in
distributions due to certain Mortgagor delinquencies, to the extent not covered
by Advances. Such delinquencies may affect the yields to investors on such
classes of the Class M Certificates, and, even if subsequently cured, may affect
the timing of the receipt of distributions by the holders of such classes of
Class M Certificates. Similarly, if the Certificate Principal Balances of the
Class M Certificates and Class B Certificates are reduced to zero, delinquencies
on the Mortgage Loans to the extent not covered by Advances will affect the
yield to investors on the Senior Support Lockout Certificates because the amount
of any shortfall resulting from such delinquencies and otherwise allocable to
the Super Senior Lockout Certificates would be borne by the Senior Support
Lockout Certificates to the extent such Certificates are then outstanding as
described herein. Furthermore, the Principal Only Certificates will share in the
principal portion of Realized Losses on the Mortgage Loans only to the extent
that they are incurred with respect to Discount Mortgage Loans and only to the
extent of the related Discount Fraction; thus, after the Class B Certificates
and the Class M Certificates are retired or in the case of Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses and Extraordinary Losses,
the Senior Certificates (other than the Principal Only Certificates) may be
affected to a greater extent by losses on Non-Discount Mortgage Loans than
losses on Discount Mortgage Loans. In addition, a higher than expected rate of
delinquencies or losses will also affect the rate of principal payments on one
or more classes of the Class M Certificates if it delays the scheduled reduction
of the Senior Accelerated Distribution Percentage or affects the allocation of
prepayments among the Class M Certificates and Class B Certificates.
The periodic increase in interest paid by the Mortgagor of a Buydown
Mortgage Loan may increase the risk of default with respect to the related
Mortgage Loan. See "Mortgage Loan Program--Underwriting Standards" and "Yield
Considerations" in the Prospectus.
The amount of interest otherwise payable to holders of the Offered
Certificates will be reduced by any interest shortfalls to the extent not
covered by Subordination or by the Master Servicer as described herein,
including
S-55
<PAGE>
Prepayment Interest Shortfalls and, in the case of each class of the Class M
Certificates, the interest portions of Realized Losses allocated solely to such
class of Certificates. Such shortfalls will not be offset by a reduction in the
Servicing Fees payable to the Master Servicer or otherwise, except as described
herein with respect to certain Prepayment Interest Shortfalls. See "Yield
Considerations" in the Prospectus and "Description of the Certificates--Interest
Distributions" herein for a discussion of the effect of Mortgagor prepayments on
the Mortgage Loans on the yield to maturity of the Offered Certificates and
certain possible shortfalls in the collection of interest.
The yield to investors in the Offered Certificates will be affected by
Prepayment Interest Shortfalls allocable thereto in the month preceding any
Distribution Date to the extent that such shortfalls exceed the amount offset by
the Master Servicer. See "Description of the Certificates--Interest
Distributions" herein.
In addition, the yield to maturity on each class of the Offered
Certificates will depend on, among other things, the price paid by the holders
of the Offered Certificates and the related Pass-Through Rate. The extent to
which the yield to maturity of an Offered Certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of Offered Certificates is purchased
at a premium and principal distributions thereon occur at a rate faster than
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than that anticipated at the time of purchase. Conversely, if a class of
Offered Certificates is purchased at a discount and principal distributions
thereon occur at a rate slower than that anticipated at the time of purchase,
the investor's actual yield to maturity will be lower than that assumed at the
time of purchase. For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
ASSUMED FINAL DISTRIBUTION DATE: The assumed final Distribution Date
with respect to each class of the Offered Certificates is September 25, 2027,
which is the Distribution Date immediately following the latest scheduled
maturity date for any Mortgage Loan.
No event of default, change in the priorities for distribution among
the various classes or other provisions under the Pooling and Servicing
Agreement will arise or become applicable solely by reason of the failure to
retire the entire Certificate Principal Balance of any class of Certificates on
or before its assumed final Distribution Date.
WEIGHTED AVERAGE LIFE: Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in reduction of
principal of such security (assuming no losses). The weighted average life of
the Offered Certificates will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement with
respect to the Offered Certificates is a prepayment assumption (the "Prepayment
Assumption"), which represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of the pool of mortgage loans for the
life of such mortgage loans. A 100% Prepayment Assumption assumes a constant
prepayment rate of 4.0% per annum of the outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional approximate 1.0909% (precisely 12/11) (expressed as a percentage per
annum) in each month thereafter until the twelfth month; beginning in the
twelfth month and in each month thereafter during the life of the mortgage
loans, a constant prepayment rate of 16% per annum each month is assumed. As
used in the table below, a 0% Prepayment Assumption assumes a prepayment rate
equal to 0% of the Prepayment Assumption, i.e., no prepayments. Correspondingly,
80% Prepayment Assumption assumes prepayment rates equal to 80% of the
Prepayment Assumption, and so forth. The Prepayment Assumption does not purport
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust Fund as
S-56
<PAGE>
described under "Description of the Mortgage Pool" herein and the performance
thereof. The table assumes, among other things, that: (i) the Mortgage Loans
have been divided into four pools: (a) one pool of Non-Discount Mortgage Loans
with an aggregate principal balance as of the date of issuance of the Offered
Certificates of $17,020,578.20, a Mortgage Rate of 8.5754%, a Net Mortgage Rate
of 8.3104%, an original term of maturity of 180 months and a remaining term to
maturity of 178 months, (b) one pool of Discount Mortgage Loans with an
aggregate principal balance as of the date of issuance of the Offered
Certificates of $938,559.27, a Mortgage Rate of 7.4319235121%, a Net Mortgage
Rate of 7.1669235121%, an original term of maturity of 180 months and a
remaining term to maturity of 178 months, (c) one pool of Non-Discount Mortgage
Loans with an aggregate principal balance as of the date of issuance of the
Offered Certificates of $305,816,749.34, a Mortgage Rate of 9.0210%, a Net
Mortgage Rate of 8.7560%, an original term of maturity of 360 months and a
remaining term to maturity of 358 months and (d) one pool of Discount Mortgage
Loans with an aggregate principal balance as of the date of issuance of the
Offered Certificates of $347,741.73, a Mortgage Rate of 7.500%, a Net Mortgage
Rate of 7.235% an original term of maturity of 360 months and a remaining term
to maturity of 358 months; (ii) the scheduled monthly payment for each Mortgage
Loan has been based on its outstanding balance, interest rate and remaining term
to maturity, such that the Mortgage Loan will amortize in amounts sufficient for
repayment thereof over its remaining term to maturity; (iii) none of the
Unaffiliated Sellers, the Master Servicer or the Company will repurchase any
Mortgage Loan, as described under "Mortgage Loan Program--Representations by
Sellers" and "Description of the Certificates--Assignment of the Mortgage Loans"
in the Prospectus, and neither the Master Servicer nor the Company exercises any
option to purchase the Mortgage Loans and thereby cause a termination of the
Trust Fund; (iv) there are no delinquencies or Realized Losses on the Mortgage
Loans, and principal payments on the Mortgage Loans will be timely received
together with prepayments, if any, at the respective constant percentages of the
Prepayment Assumption set forth in the table; (v) there is no Prepayment
Interest Shortfall or any other interest shortfall in any month; (vi) payments
on the Certificates will be received on the 25th day of each month, commencing
October 25, 1997; (vii) payments on the Mortgage Loans earn no reinvestment
return; (viii) there are no additional ongoing Trust Fund expenses payable out
of the Trust Fund; and (ix) the Certificates will be purchased on September 29,
1997; ((i) through (ix) collectively, the "Structuring Assumptions").
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at a
constant level of the Prepayment Assumption until maturity or that all of the
Mortgage Loans will prepay at the same level of the Prepayment Assumption.
Moreover, the diverse remaining terms to maturity of the Mortgage Loans could
produce slower or faster principal distributions than indicated in the table at
the various constant percentages of the Prepayment Assumption specified, even if
the weighted average remaining term to maturity of the Mortgage Loans is as
assumed. Any difference between such assumptions and the actual characteristics
and performance of the Mortgage Loans, or actual prepayment or loss experience,
will affect the percentages of initial Certificate Principal Balances
outstanding over time and the weighted average lives of the classes of Offered
Certificates.
Subject to the foregoing discussion and assumptions, the following
table indicates the weighted average life of each class of Offered Certificates
(other than the Variable Strip Certificates and Residual Certificates), and sets
forth the percentages of the initial Certificate Principal Balance of each such
class of Offered Certificates that would be outstanding after each of the dates
shown at various percentages of the Prepayment Assumption.
S-57
<PAGE>
<TABLE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<CAPTION>
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
----------------------------------------------------- ---------------------------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
----------------------------------------------------- ---------------------------------------------------
DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
---- -- --- ---- ---- ---- -- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent..... 100 100 100 100 100 100 100 100 100 100
September 1998...... 98 87 75 64 57 100 100 100 100 85
September 1999...... 97 71 54 42 32 100 100 77 40 7
September 2000...... 95 59 42 25 2 100 92 38 0 0
September 2001...... 93 52 31 3 0 100 70 5 0 0
September 2002...... 91 45 16 0 0 100 50 0 0 0
September 2003...... 89 40 6 0 0 100 34 0 0 0
September 2004...... 87 36 0 0 0 100 20 0 0 0
September 2005...... 84 32 0 0 0 100 8 0 0 0
September 2006...... 82 29 0 0 0 100 0 0 0 0
September 2007...... 79 25 0 0 0 100 0 0 0 0
September 2008...... 76 21 0 0 0 100 0 0 0 0
September 2009...... 73 17 0 0 0 100 0 0 0 0
September 2010...... 70 13 0 0 0 100 0 0 0 0
September 2011...... 66 10 0 0 0 100 0 0 0 0
September 2012...... 62 7 0 0 0 100 0 0 0 0
September 2013...... 60 4 0 0 0 95 0 0 0 0
September 2014...... 58 2 0 0 0 88 0 0 0 0
September 2015...... 55 0 0 0 0 81 0 0 0 0
September 2016...... 53 0 0 0 0 73 0 0 0 0
September 2017...... 50 0 0 0 0 65 0 0 0 0
September 2018...... 47 0 0 0 0 56 0 0 0 0
September 2019...... 44 0 0 0 0 45 0 0 0 0
September 2020...... 41 0 0 0 0 34 0 0 0 0
September 2021...... 37 0 0 0 0 22 0 0 0 0
September 2022...... 32 0 0 0 0 9 0 0 0 0
September 2023...... 26 0 0 0 0 0 0 0 0 0
September 2024 17 0 0 0 0 0 0 0 0 0
September 2025 6 0 0 0 0 0 0 0 0 0
September 2026...... 0 0 0 0 0 0 0 0 0 0
September 2027 0 0 0 0 0 0 0 0 0 0
and thereafter
WEIGHTED
AVERAGE LIFE TO
MATURITY
(YEARS)**........... 18.2 6.0 2.8 1.9 1.4 21.2 5.3 2.8 1.9 1.5
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the principal
balance of such Certificate from one Distribution Date to the next
Distribution Date by the number of years from the date of issuance to
the second such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Certificate.
S-58
<PAGE>
<TABLE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<CAPTION>
CLASS A-3 CERTIFICATES CLASS A-4 CERTIFICATES
----------------------------------------------------- ----------------------------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
----------------------------------------------------- ----------------------------------------------------
DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
---- -- --- ---- ---- ---- -- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent..... 100 100 100 100 100 100 100 100 100 100
September 1998...... 99 93 87 82 78 100 97 95 93 82
September 1999...... 98 85 76 70 64 99 94 77 51 28
September 2000...... 97 79 69 60 49 99 87 50 23 18
September 2001...... 96 75 64 49 0 99 72 28 19 0
September 2002...... 95 72 56 0 0 98 58 21 0 0
September 2003...... 94 69 51 0 0 98 47 19 0 0
September 2004...... 93 66 35 0 0 97 37 13 0 0
September 2005...... 92 64 8 0 0 97 30 3 0 0
September 2006...... 91 63 0 0 0 97 24 0 0 0
September 2007...... 89 60 0 0 0 96 23 0 0 0
September 2008...... 88 58 0 0 0 95 22 0 0 0
September 2009...... 86 56 0 0 0 95 21 0 0 0
September 2010...... 84 55 0 0 0 94 21 0 0 0
September 2011...... 83 53 0 0 0 93 20 0 0 0
September 2012...... 80 51 0 0 0 93 19 0 0 0
September 2013...... 79 50 0 0 0 89 19 0 0 0
September 2014...... 78 49 0 0 0 84 19 0 0 0
September 2015...... 77 47 0 0 0 80 18 0 0 0
September 2016...... 76 36 0 0 0 74 14 0 0 0
September 2017...... 74 25 0 0 0 68 10 0 0 0
September 2018...... 73 16 0 0 0 62 6 0 0 0
September 2019...... 71 7 0 0 0 55 3 0 0 0
September 2020...... 69 0 0 0 0 47 0 0 0 0
September 2021...... 67 0 0 0 0 39 0 0 0 0
September 2022...... 64 0 0 0 0 30 0 0 0 0
September 2023 61 0 0 0 0 23 0 0 0 0
September 2024 56 0 0 0 0 21 0 0 0 0
September 2025 51 0 0 0 0 19 0 0 0 0
September 2026...... 16 0 0 0 0 6 0 0 0 0
September 2027 0 0 0 0 0 0 0 0 0 0
and thereafter
WEIGHTED
AVERAGE LIFE
TO MATURITY
(YEARS)**........... 23.4 12.8 5.0 3.1 2.3 22.0 8.1 3.6 2.3 1.8
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the principal
balance of such Certificate from one Distribution Date to the next
Distribution Date by the number of years from the date of issuance to
the second such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Certificate.
S-59
<PAGE>
<TABLE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<CAPTION>
CLASS A-5 CERTIFICATES CLASS A-6, A-7 AND A-8 CERTIFICATES
------------------------------------------------------- --------------------------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
------------------------------------------------------- --------------------------------------------------
DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
---- -- --- ---- ---- ---- -- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent..... 100 100 100 100 100 100 100 100 100 100
September 1998...... 100 100 100 100 100 100 100 100 100 100
September 1999...... 100 100 100 100 100 100 100 100 100 100
September 2000...... 100 100 100 100 100 100 100 100 100 100
September 2001...... 100 100 100 100 0 100 100 100 100 90
September 2002...... 100 100 100 29 0 100 100 100 100 51
September 2003...... 100 100 100 0 0 99 96 94 75 28
September 2004...... 100 100 100 0 0 97 92 86 52 14
September 2005...... 100 100 100 0 0 95 86 76 37 7
September 2006...... 100 100 83 0 0 94 79 65 27 4
September 2007...... 100 100 68 0 0 92 71 53 20 2
September 2008...... 100 100 56 0 0 89 64 44 15 2
September 2009...... 100 100 46 0 0 87 57 36 11 1
September 2010...... 100 100 37 0 0 84 51 29 8 1
September 2011...... 100 100 30 0 0 82 45 24 6 *
September 2012...... 100 100 24 0 0 79 40 19 4 *
September 2013...... 100 100 20 0 0 76 36 16 3 *
September 2014...... 100 100 16 0 0 73 32 13 2 *
September 2015...... 100 100 13 0 0 70 28 10 2 *
September 2016...... 100 100 10 0 0 66 24 8 1 *
September 2017...... 100 100 8 0 0 63 21 6 1 *
September 2018...... 100 100 6 0 0 59 18 5 1 *
September 2019...... 100 100 5 0 0 54 15 4 * *
September 2020...... 100 96 4 0 0 49 13 3 * *
September 2021...... 100 79 3 0 0 44 10 2 * *
September 2022...... 100 63 2 0 0 38 8 2 * *
September 2023...... 100 48 1 0 0 31 6 1 * *
September 2024...... 100 34 1 0 0 24 4 1 * *
September 2025...... 100 21 1 0 0 16 3 * * *
September 2026...... 100 9 * 0 0 8 1 * * *
September 2027 0 0 0 0 0 0 0 0 0 0
and thereafter
WEIGHTED
AVERAGE LIFE TO
MATURITY
(YEARS)**........... 29.6 26.0 12.9 4.9 3.6 21.2 14.5 11.5 8.2 5.5
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the principal
balance of such Certificate from one Distribution Date to the next
Distribution Date by the number of years from the date of issuance to
the second such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Certificate.
S-60
<PAGE>
<TABLE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<CAPTION>
CLASS M-1, CLASS M-2 AND CLASS M-3
CLASS A-9 CERTIFICATES CERTIFICATES
------------------------------------------------------- -------------------------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
------------------------------------------------------- -------------------------------------------------
DATE 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
---- -- --- ---- ---- ---- -- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100 100 100 100
September 1998 96 91 85 79 73 99 99 99 99 99
September 1999 92 80 68 58 48 98 98 98 98 98
September 2000 88 70 55 42 31 97 97 97 97 97
September 2001 84 61 44 30 20 96 96 96 96 96
September 2002 79 53 34 22 13 95 95 95 95 95
September 2003 73 45 27 15 8 94 91 89 86 83
September 2004 68 39 16 11 5 92 87 82 76 71
September 2005 61 32 12 7 3 91 81 72 64 55
September 2006 55 26 9 5 2 89 75 62 50 40
September 2007 48 21 6 3 1 87 67 51 37 26
September 2008 40 16 4 2 1 85 60 42 28 18
September 2009 32 12 2 1 * 83 54 34 20 12
September 2010 23 8 1 1 * 80 48 28 15 8
September 2011 13 4 * * * 77 43 22 11 5
September 2012 5 1 * * * 75 38 18 8 3
September 2013 5 1 * * * 72 34 15 6 2
September 2014 4 1 * * 0 69 30 12 4 1
September 2015 4 1 * * 0 66 26 10 3 1
September 2016 4 1 * * 0 63 23 8 2 1
September 2017 4 1 * * 0 59 20 6 2 *
September 2018 3 1 * * 0 56 17 5 1 *
September 2019 3 1 * 0 0 51 15 4 1 *
September 2020 3 * * 0 0 47 12 3 1 *
September 2021 2 * * 0 0 41 10 2 * *
September 2022 2 * * 0 0 36 8 2 * *
September 2023 2 * * 0 0 30 6 1 * *
September 2024 1 * * 0 0 23 4 1 * *
September 2025 1 * 0 0 0 15 3 * * *
September 2026 * * 0 0 0 7 1 * * *
September 2027 0 0 0 0 0 0 0 0 0 0
and thereafter
WEIGHTED
AVERAGE LIFE TO
MATURITY
(YEAR)**............ 9.5 6.2 4.4 3.3 2.6 20.3 13.9 11.0 9.5 8.6
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the principal
balance of such Certificate from one Distribution Date to the next
Distribution Date by the number of years from the date of issuance to
the second such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Certificate.
S-61
<PAGE>
VARIABLE STRIP CERTIFICATES AND PRINCIPAL ONLY CERTIFICATE YIELD CONSIDERATIONS
Because the Principal Only Certificates will be purchased at a
discount, the yield on the Principal Only Certificates will be adversely
affected by slower than expected payments of principal (including prepayments,
defaults, liquidations and purchases of Mortgage Loans due to a breach of a
representation and warranty) on the Discount Mortgage Loans.
The yield to maturity on the Variable Strip Certificates will be
extremely sensitive to both the timing of receipt of prepayments and the overall
rate of principal prepayments and defaults on the Non-Discount Mortgage Loans,
which rate may fluctuate significantly over time. Investors in the Variable
Strip Certificates should fully consider the risk that a rapid rate of
prepayments on the Mortgage Loans could result in the failure of such investors
to fully recover their investments. Because the Pool Strip Rates on the Discount
Mortgage Loans equal 0.000%, the yield to investors on the Variable Strip
Certificates will not be affected by prepayments on the Discount Mortgage Loans.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Variable Strip Certificates and Principal Only Certificates to
various constant rates of prepayment on the Mortgage Loans by projecting the
monthly aggregate payments on the Variable Strip Certificates and Principal Only
Certificates and computing the corresponding pre-tax yields to maturity on a
corporate bond equivalent basis, based on the Structuring Assumptions including
the assumptions regarding the characteristics and performance of the Mortgage
Loans which differ from the actual characteristics and performance thereof and
assuming the aggregate purchase price set forth below. Any differences between
such assumptions and the actual characteristics and performance of the Mortgage
Loans and of the Certificates may result in yields being different from those
shown in such tables. Discrepancies between assumed and actual characteristics
and performance underscore the hypothetical nature of the tables, which are
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
<TABLE>
PRE-TAX YIELD TO MATURITY OF THE PRINCIPAL ONLY
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<CAPTION>
ASSUMED PURCHASE PRICE 0% 50% 100% 150% 200%
---------------------- -- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
65.00% ....................... 4.92% 7.97% 11.74% 16.05% 20.75
</TABLE>
<TABLE>
PRE-TAX YIELD TO MATURITY OF THE VARIABLE STRIP
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<CAPTION>
ASSUMED PURCHASE PRICE 0% 50% 100% 150% 200%
---------------------- -- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
5.15625% .................... 28.47% 19.96% 11.09% 1.80% (7.96%)
</TABLE>
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Variable Strip Certificates and
Principal Only Certificates, as applicable, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed purchase price
listed in the tables. With respect to the Variable Strip Certificates, accrued
interest is included in the assumed purchase price and is used in computing the
yields shown. These yields do not take into account the different interest rates
at which investors may be able to reinvest funds received by them as
distributions on the Variable Strip Certificates or Principal Only Certificates
and thus do not reflect the return on any investment in the Variable Strip
Certificates or Principal Only Certificates when any reinvestment rates other
than the discount rates set forth in the preceding tables are considered.
S-62
<PAGE>
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Variable
Strip Certificates and Principal Only Certificates is likely to differ from
those shown in the tables above, even if the average prepayment rate on all of
the Mortgage Loans equals the constant percentages of the Prepayment Assumption
indicated in the tables above over any given time period or over the entire life
of the Certificates. A lower than anticipated rate of principal prepayments on
the Discount Mortgage Loans will have a material adverse effect on the yield to
maturity of the Principal Only Certificates. The rate and timing of principal
prepayments on the Discount Mortgage Loans may differ from the rate and timing
of principal prepayments on the Mortgage Pool. In addition, because the Discount
Mortgage Loans have Mortgage Rates that are lower than the Mortgage Rates of the
Non-Discount Mortgage Loans, the Discount Mortgage Loans are generally likely to
prepay under most circumstances at a lower rate than the Non- Discount Mortgage
Loans. In addition, holders of the Variable Strip Certificates generally have
rights to relatively larger portions of interest payments on Non-Discount
Mortgage Loans with higher Mortgage Rates; thus, the yield on the Variable Strip
Certificates will be adversely affected to a greater extent than on the other
Offered Certificates if the Non-Discount Mortgage Loans with higher Mortgage
Rates prepay faster than the Non-Discount Mortgage Loans with lower Mortgage
Rates. Because Mortgage Loans having higher Pool Strip Rates have higher
Mortgage Rates, such Mortgage Loans are generally more likely to be prepaid
under most circumstances than are Mortgage Loans having lower Pool Strip Rates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Variable Strip Certificates and
Principal Only Certificates will conform to the yields described herein.
Moreover, the various remaining terms to maturity of the Mortgage Loans could
produce slower or faster principal distributions than indicated in the preceding
table at the various constant percentages of the Prepayment Assumption
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Investors are urged to make their investment
decisions based on their determinations as to anticipated rates of prepayment
under a variety of scenarios.
For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
The Residual Certificateholders' after-tax rate of return on their
Residual Certificates will reflect their pre-tax rate of return, reduced by the
taxes required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the Trust Fund's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the Mortgage Pool.
The Residual Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Federal Income Tax Consequences"
herein and in the Prospectus.
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POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement dated as of September 1, 1997, among the Company, the Master Servicer,
and Bankers Trust Company of California, N.A., as Trustee. Reference is made to
the Prospectus for important information in addition to that set forth herein
regarding the terms and conditions of the Pooling and Servicing Agreement and
the Offered Certificates. The Offered Certificates will be transferable and
exchangeable at the corporate trust office of the Trustee. The Company will
provide a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Pooling and Servicing Agreement.
Requests should be addressed to ICIFC Secured Assets Corp., 20371 Irvine Avenue,
Santa Ana Heights, California 92707. Pursuant to the Pooling and Servicing
Agreement, transfers of Residual Certificates are prohibited to any non-United
States person. Transfers of certain of the Certificates, including the Residual
Certificates, are also subject to additional transfer restrictions as set forth
in the Pooling and Servicing Agreement. See "Federal Income Tax Consequences"
herein and "Federal Income Tax Consequences--REMICs--Tax on Transfers of REMIC
Residual Certificates to Certain Organizations" and "--Taxation of Owners of
REMIC Residual Certificates--Noneconomic REMIC Residual Certificates" in the
Prospectus. In addition to the circumstances described in the Prospectus, the
Company may terminate the Trustee for cause under certain circumstances. See
"The Pooling and Servicing Agreement--The Trustee" in the Prospectus.
THE MASTER SERVICER
ICI Funding, an indirect wholly-owned subsidiary of ICMH, and the
parent of the Company, will act as master servicer for the Mortgage Loans
pursuant to the Pooling and Servicing Agreement. For a general description of
ICI Funding and its activities, see "ICI Funding Corporation" in the Prospectus.
ICI Funding, a California corporation, is a mortgage banking conduit
that acquires conventional one- to four-family residential mortgage loans
nationwide. ICI Funding is a non-consolidating subsidiary of Imperial Credit
Mortgage Holdings, Inc., a publicly traded real estate investment trust. ICI
Funding primarily acquires mortgage loans from approved correspondents.
Prior to November 1995, ICI Funding was a division of Imperial Credit
Industries, Inc. ("ICII"). In November 1995, ICII restructured its operations
pursuant to which ICI Funding became a separate corporation and ICII
contributed, among other things, all of the outstanding nonvoting preferred
stock of ICI Funding, which represents 99% of the economic interest in ICI
Funding, to Imperial Credit Mortgage Holdings, Inc. ("ICMH"), in exchange for
approximately 10% of ICMH's common stock. The common stock of ICI Funding was
retained by ICII until March 1997 when it was distributed to certain officers
and/or directors of ICI Funding who are also officers and/or directors of ICMH.
ICI Funding had sub-contracted with ICII to perform its mortgage loan
servicing, which included the processing and administration of mortgage loan
payments, in return for a sub-servicing fee through June 30, 1996. Commencing on
July 1, 1996, Wendover Funding, Inc., a wholly-owned subsidiary of Electronic
Data Systems Corporation ("Wendover"), undertook to perform ICI Funding's
mortgage loan servicing for a sub-servicing fee. At June 30, 1997, Wendover
serviced approximately $10 billion outstanding principal amount of mortgage
loans. Wendover is hereinafter at times referred to herein as the
"Sub-Servicer." See "--The Master Servicer; the Sub- Servicer" herein.
At June 30, 1997, ICI Funding had approximately 137 employees. ICI
Funding's executive offices are located at 20371 Irvine Avenue, Santa Ana
Heights, California 92707, and its telephone number is (714) 556-0122.
For information concerning the loss and delinquency of the Master
Servicer, see "Description of the Mortgage Pool--Delinquency and Foreclosure
Experience" herein.
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Servicing Fees in respect of each
Mortgage Loan will be 0.25% per annum (such rate, the "Servicing Fee Rate") of
the outstanding principal balance of such Mortgage Loan. The Servicing Fees
consist of (a) servicing compensation payable to the Master Servicer in respect
of its master servicing activities and (b) subservicing and other related
compensation payable to the Subservicer (including such compensation paid to the
Master Servicer as the direct servicer of a Mortgage Loan for which there is no
Subservicer). The Master Servicer is obligated to pay certain ongoing expenses
associated with the Trust Fund and incurred by the Master Servicer in connection
with its responsibilities under the Pooling and Servicing Agreement.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by
holders of Certificates evidencing a specified percentage of all undivided
interests in the Trust Fund may be taken by holders of Certificates entitled in
the aggregate to such percentage of the Voting Rights. 98% of all Voting Rights
will be allocated among all holders of the Certificates (other than the Variable
Strip Certificates and Residual Certificates) in proportion to their then
outstanding Certificate Principal Balances, and 1% and 1% of all Voting Rights
will be allocated to the holders of the Variable Strip Certificates and Class R
Certificates, respectively, in proportion to the Percentage Interests (as
defined in the Prospectus) evidenced by their Certificates.
TERMINATION
The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the Offered Certificates
are described in "The Pooling Agreement--Termination; Retirement of
Certificates" in the Prospectus. The Master Servicer will have the option, on
any Distribution Date on which the aggregate Stated Principal Balance of the
Mortgage Loans is less than 10% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, either (i) to purchase all remaining
Mortgage Loans and other assets in the Trust Fund, thereby effecting early
retirement of the Offered Certificates or (ii) to purchase, in whole but not in
part, the Certificates. Any such purchase of Mortgage Loans and other assets of
the Trust Fund shall be made at a price equal to the sum of (a) 100% of the
unpaid principal balance of each Mortgage Loan (or the fair market value of the
related underlying Mortgaged Properties with respect to defaulted Mortgage Loans
as to which title to such Mortgaged Properties has been acquired if such fair
market value is less than such unpaid principal balance) (net of any
unreimbursed Advance attributable to principal) as of the date of repurchase
plus (b) accrued interest thereon at the Net Mortgage Rate to, but not
including, the first day of the month in which such repurchase price is
distributed. Distributions on the Certificates in respect of any such optional
termination will be paid, first, to the Senior Certificates, second, to the
Class M Certificates in the order of their payment priority and, third, to the
Class B Certificates. The proceeds of any such distribution may not be
sufficient to distribute the full amount to each class of Certificates if the
purchase price is based in part on the fair market value of the underlying
Mortgaged Property and such fair market value is less than 100% of the unpaid
principal balance of the related Mortgage Loan. Any such purchase of the
Certificates will be made at a price equal to 100% of the Certificate Principal
Balance thereof plus (except with respect to the Principal Only Certificates)
the sum of interest thereon for the prior calendar month (or with respect to the
Variable Strip Certificates, on the Notional Amount) at the applicable
Pass-Through Rate and any previously unpaid Accrued Certificate Interest. Upon
the purchase of such Certificates or at any time thereafter, at the option of
the Master Servicer, the Mortgage Loans may be sold, thereby effecting a
retirement of the Certificates and the termination of the Trust Fund, or the
Certificates so purchased may be held or resold by the Master Servicer.
Upon presentation and surrender of the Offered Certificates in
connection with the termination of the Trust Fund or a purchase of Certificates
under the circumstances described above, the holders of the Offered Certificates
will receive an amount equal to the Certificate Principal Balance of such class
plus interest for the prior calendar month (or, with respect to the Variable
Strip Certificates, interest accrued for the prior calendar month on the
Notional
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Amount thereof) thereon at the applicable Pass-Through Rate, plus any previously
unpaid Accrued Certificate Interest (reduced, as described above, in the case of
the termination of the Trust Fund resulting from a purchase of all the assets of
the Trust Fund).
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund will qualify as a REMIC under
the Code.
For federal income tax purposes, (a) the Class R Certificates will
constitute the sole class of "residual interests" in the REMIC and (b) each
class of Senior Certificates (other than the Residual Certificates), the Class M
Certificates and the Class B Certificates will represent ownership of "regular
interests" in the REMIC and will generally be treated as debt instruments of the
REMIC. See "Federal Income Tax Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class A-1, Class A-2,
Class A-4, Class A-5, Class A-6, Class A-7, Class A-8 and Class M-1 Certificates
will not be treated as having been issued with original issue discount. The
Class A-3 and Class M-2 Certificates may, and the Principal Only, Variable Strip
and Class M-3 Certificates will, be treated as having been issued with original
issue discount for federal income tax reporting purposes. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, if any, for federal income tax
purposes will be based on the assumption that, subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to 100% of the
Prepayment Assumption. No representation is made that the Mortgage Loans will
prepay at that rate or at any other rate. See "Federal Income Tax
Consequences--General" and "--REMICs--Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" in the Prospectus.
Purchasers of the Variable Strip Certificates should be aware that
Section 1272(a)(6) of the Code and the OID Regulations do not adequately address
certain issues relevant to, or applicable to, prepayable securities bearing a
variable rate of interest such as the Variable Strip Certificates. In the
absence of other authority, the Master Servicer intends to be guided by certain
principles of the OID Regulations applicable to variable rate debt instruments
in determining whether such Certificates should be treated as issued with
original issue discount and in adapting the provisions of Section 1272(a)(6) of
the Code to such Certificates for the purpose of preparing reports furnished to
Certificateholders and the IRS. Because of the uncertainties concerning the
application of Section 1272(a)(6) of the Code to such Certificates and because
the rules relating to debt instruments having a variable rate of interest are
limited in their application in ways that could preclude their application to
such Certificates even in the absence of Section 1272(a)(6) of the Code, the IRS
could assert that the Variable Strip Certificates should be governed by some
other method not yet set forth in regulations. Prospective purchasers of the
Variable Strip Certificates are advised to consult their tax advisors concerning
the tax treatment of such Certificates.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder, the amount of original issue discount allocable to such
period would be zero and such Certificateholder will be permitted to offset such
negative amount only against future original issue discount (if any)
attributable to such Certificates.
In certain circumstances OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Master Servicer in preparing reports
to the Certificateholders and the IRS.
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Certain classes of the Offered Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
such a class of Certificates will be treated as holding a certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of such classes of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that such Offered
Certificates are treated as "real estate assets" under Section 856(c)(4)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. However, prospective
investors in Offered Certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Code should note that, notwithstanding
such treatment, any repurchase of such a Certificate pursuant to the right of
the Master Servicer or the Company to repurchase such Offered Certificates may
adversely affect any REMIC that holds such Offered Certificates if such
repurchase is made under circumstances giving rise to a Prohibited Transaction
Tax. See "The Pooling and Servicing Agreement--Termination" herein and "Federal
Income Tax Consequences--REMICs--Characterization of Investments in REMIC
Certificates" in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see "Federal Income Tax
Consequences--REMICs" in the Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The IRS has issued REMIC Regulations under the provisions of the Code
that significantly affect holders of Residual Certificates. The REMIC
Regulations impose restrictions on the transfer or acquisition of certain
residual interests, including the Residual Certificates. The Pooling and
Servicing Agreement includes certain other provisions regarding the transfer of
Residual Certificates, including (i) the requirement that any transferee of a
Residual Certificate provide an affidavit representing that such transferee (a)
is not a "disqualified organization," (b) is not acquiring the Residual
Certificate on behalf of a "disqualified organization" and (c) will maintain
such status and will obtain a similar affidavit from any person to whom such
transferee shall subsequently transfer a Residual Certificate, (ii) a provision
that any transfer of a Residual Certificate to a "disqualified person" shall be
null and void and (iii) a grant to the Master Servicer of the right, without
notice to the holder or any prior holder, to sell to a purchaser of its choice
any Residual Certificate that shall become owned by a "disqualified
organization" despite (i) and (ii) above. In addition, pursuant to the Pooling
and Servicing Agreement, the Residual Certificates may not be transferred to
nonUnited States persons.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, unless "no significant purpose of the
transfer was to impede the assessment or collection of tax." Based on the REMIC
Regulations, the Residual Certificates may constitute noneconomic residual
interests during some or all of their terms for purposes of the REMIC
Regulations and, accordingly, unless no significant purpose of a transfer is to
impede the assessment or collection of tax, transfers of the Residual
Certificates may be disregarded and purported transferors may remain liable for
any taxes due with respect to the income on the Residual Certificates. All
transfers of the Residual Certificates will be subject to certain restrictions
under the terms of the Pooling and Servicing Agreement that are intended to
reduce the possibility of any such transfer being disregarded to the extent that
the Residual
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Certificates constitute noneconomic residual interests. See "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
REMIC that significantly exceeds the amount of cash distributions received by
such Class R Certificateholders from the REMIC with respect to such periods.
Furthermore, the tax on such income may exceed the cash distributions with
respect to such periods. Consequently, Class R Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due in the
earlier years of the REMIC's term as a result of their ownership of the Class R
Certificates. In addition, the required inclusion of this amount of taxable
income during the REMIC's earlier accrual periods and the deferral of
corresponding tax losses or deductions until later accrual periods or until the
ultimate sale or disposition of a Class R Certificate (or possibly later under
the "wash sale" rules of Section 1091 of the Code) may cause the Class R
Certificateholders' after-tax rate of return to be zero or negative even if the
Class R Certificateholders' pre-tax rate of return is positive. That is, on a
present value basis, the Class R Certificateholders' resulting tax liabilities
could substantially exceed the sum of any tax benefits and the amount of any
cash distributions on such Class R Certificates over their life.
An individual, trust or estate that holds (whether directly or
indirectly through certain pass-through entities) a Residual Certificate may
have significant additional gross income with respect to, but may be subject to
limitations on the deductibility of, servicing and trustee's fees and other
administrative expenses properly allocable to the related REMIC in computing
such Certificateholder's regular tax liability and will not be able to deduct
such fees or expenses to any extent in computing such Certificateholder's
alternative minimum tax liability. Such expenses will be allocated for federal
income tax information reporting purposes entirely to the Class R Certificates.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Residual Certificates--Possible Pass-Through of Miscellaneous Itemized
Deductions" in the Prospectus.
The Trustee will irrevocably appointed by the holders of the largest
percentage interest in the Residual Certificates as agent for the "tax matters
person" with respect to the REMIC as defined in the REMIC Provisions (as defined
in the Prospectus).
Purchasers of the Residual Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Residual Certificates.
For further information regarding the federal income tax consequences
of investing in the Residual Certificates, see "Certain Yield and Prepayment
Considerations--Additional Yield Considerations Applicable Solely to the
Residual Certificates" herein and "Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated September 24, 1997 (the "Underwriting Agreement"), the
Underwriter has agreed to purchase and the Company has agreed to sell to the
Underwriter the Underwritten Certificates. It is expected that delivery of the
Underwritten Certificates (other than the Residual Certificates) will be made
only in book-entry form through the Same Day Funds Settlement System of DTC, and
the delivery of the Residual Certificates offered hereby in definitive,
fully-registered form will be made at the offices of the Underwriter, New York,
New York 10172 on or about September 29, 1997, against payment therefor in
immediately available funds.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Underwritten Certificates is
subject to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement
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shall be in effect, and that no proceedings for such purpose shall be pending
before or threatened by the Securities and Exchange Commission.
The distribution of the Underwritten Certificates by the Underwriter
may be effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Underwritten Certificates, before deducting
expenses payable by the Company, will be approximately 99.59% of the aggregate
Certificate Principal Balance of the Underwritten Certificates plus accrued
interest thereon from the Cut-off Date. The Underwriter may effect such
transactions by selling their respective Certificates to or through dealers, and
such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the related Underwriter for whom they act as
agent. In connection with the sale of its Underwritten Certificates, the related
Underwriter may be deemed to have received compensation from the Company in the
form of underwriting compensation. The related Underwriter and any dealers that
participate with the related Underwriter in the distribution of its Underwritten
Certificates may be deemed to be Underwriter and any profit on the resale of the
Underwritten Certificates positioned by them may be deemed to be underwriting
discounts and commissions under the Securities Act of 1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Company, against certain civil liabilities under the Securities Act of 1933,
or contribute to payments required to be made in respect thereof.
The Variable Strip Certificates and Principal Only Certificates may be
offered by the Company from time to time directly or through an underwriter or
agent in one or more negotiated transactions, or otherwise, at varying prices to
be determined at the time of sale. Proceeds to the Company from any sale of the
Variable Strip Certificates and Principal Only Certificates will equal the
purchase price paid by the purchaser thereof, net of any expenses payable by the
Company and any compensation payable to any such underwriter or agent.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates-- Reports to Certificateholders," which will
include information as to the outstanding principal balance of the Offered
Certificates. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other source.
In addition, the Company is not aware of any source through which price
information about the Offered Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Offered
Certificates may adversely affect the liquidity of the Offered Certificates,
even if a secondary market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon
for the Company by Thacher Proffitt & Wood, New York, New York and for the
Underwriter by Brown & Wood LLP, Washington, District of Columbia.
RATINGS
It is a condition of the issuance of the Senior Certificates (other
than the Variable Strip Certificates and Principal Only Certificates), that they
be rated not lower than "AAA" by each of Standard & Poor's and DCR. It is a
condition of the issuance of the Principal Only Certificates and Variable Strip
Certificates that they be rated "AAAr" by Standard & Poor's and "AAA" by DCR. It
is a condition of the issuance of the Class M-1, Class M-2 and Class M-3
Certificates that they be rated not lower than "AA," "A" and "BBB,"
respectively, by each of Standard & Poor's and DCR.
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Standard & Poor's ratings on mortgage pass-through certificates address
the likelihood of the receipt by Certificateholders of payments required under
the Pooling and Servicing Agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. Standard & Poor's rating on the Certificates does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
"Certain Yield and Prepayment Considerations" herein. The "r" of the "AAAr"
rating of the Variable Strip Certificates and Principal Only Certificates by
Standard & Poor's is attached to highlight derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The ratings assigned by DCR to mortgage pass-through certificates also
address the likelihood of the receipt by Certificateholders of all distributions
to which such Certificateholders are entitled. The rating process addresses the
structural and legal aspects associated with the Certificates, including the
nature of the underlying mortgage loans. The ratings assigned to mortgage
pass-through certificates do not represent any assessment of the likelihood or
rate of Mortgagor prepayments. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield. The ratings do
not address the possibility that Certificateholders might suffer a lower than
anticipated yield or that the holders of the Variable Strip Certificates may
fail to recoup their initial investments.
The Company has not requested a rating on the Offered Certificates by
any rating agency other than Standard & Poor's and DCR. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Offered
Certificates by Standard & Poor's and DCR.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. The ratings of the Variable Strip
Certificates do not address the possibility that the holders of such
Certificates may fail to fully receive their initial investments. In the event
that the ratings initially assigned to the Offered Certificates are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the Offered
Certificates.
LEGAL INVESTMENT
The Senior Certificates and Class M-1 Certificates will constitute
"mortgage related securities" for purposes of SMMEA so long as they are rated in
at least the second highest rating category by one of the Rating Agencies, and,
as such, are legal investments for certain entities to the extent provided in
SMMEA. SMMEA provides, however, that states could override its provisions on
legal investment and restrict or condition investment in mortgage related
securities by taking statutory action on or prior to October 3, 1991. Certain
states have enacted legislation which overrides the preemption provisions of
SMMEA. The Class M-2 Certificates and Class M-3 Certificates will not constitute
"mortgage related securities" for purposes of SMMEA.
The Company makes no representation as to the proper characterization
of any class of the Offered Certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the
Offered Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of the Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions.
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See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), any insurance company
(whether through its general or separate accounts) or any other person investing
"Plan Assets" of any Plan, as described under "ERISA Considerations--Plan Asset
Regulations" in the Prospectus, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code.
The DOL issued an individual exemption, Prohibited Transaction
Exemption 91-14 (56 Fed. Reg. 7413, February 22, 1991) (the "Exemption"), as
described under "ERISA Considerations" in the Prospectus, to Lehman Brothers
Inc. The Exemption generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools and the initial purchase, holding and subsequent resale of
mortgage pass-through certificates underwritten by the Underwriter, provided
that the conditions set forth in the Exemption are satisfied. The purchase of
the Senior Certificates (other than the Senior Support Lockout Certificates) by,
on behalf of or with the Plan Assets of any Plan may qualify for relief under
the Exemption. However, the Exemption contains a number of conditions which must
be met for the Exemption to apply, including the requirement that any such Plan
must be 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, as
amended. A fiduciary of a Plan contemplating purchasing a Senior Certificate
(other than a Senior Support Lockout Certificate) must make its own
determination that the condition set forth in the Exemption will be satisfied
with respect to such Senior Certificates.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not likely apply to the purchase, sale
or holding of the Senior Support Lockout Certificates or the Class M
Certificates (due to the subordinate nature thereof) or the Residual
Certificates, transfers of such certificates to a Plan, to a trustee or other
person acting on behalf of any Plan, or to any other person using "Plan Assets"
to effect such acquisition will not be registered by the Trustee unless the
transferee provides the Company, the Trustee and the Master Servicer with an
opinion of counsel satisfactory to the Company, the Trustee and the Master
Servicer, which opinion will not be at the expense of the Company, the Trustee
or the Master Servicer, that the purchase of such certificates by or on behalf
of such Plan is permissible under applicable law, will not constitute or result
in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the Company, the Trustee or the Master Servicer to any
obligation in addition to those undertaken in the Pooling and Servicing
Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Offered
Certificates by or on behalf of such Plan is permissible under applicable law,
will not constitute or result in a non-exempt prohibited transaction under ERISA
or Section 4975 of the Code, will not subject the Company, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Pooling
and Servicing Agreement and the following conditions are satisfied: (i) the
transferee is an insurance company and the source of funds used to purchase such
Offered Certificates is an "insurance company general account" (as such term is
defined in Prohibited Transaction Class Exemption ("PTCE") 95-60), (ii) the
conditions set forth in PTCE 95-60 have been satisfied and (c) there is no Plan
with respect to which the amount of such general account's reserves and
liabilities for contracts held by or on behalf of such Plan and all other Plans
maintained by the same employer (or any "affiliate" thereof), as defined in PTCE
95-60) or by the same employee organization exceed 10% of the total of all
reserves and liabilities of such general account (as determined under PTCE
95-60) as of the date of the acquisition of such Offered Certificates.
S-71
<PAGE>
Any fiduciary or other investor of "Plan Assets" that proposes to
acquire or hold the Offered Certificates on behalf of or with "Plan Assets" of
any Plan should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of the ERISA and the Code to the proposed
investment. See "ERISA Considerations" in the Prospectus.
S-72
<PAGE>
INDEX OF DEFINITIONS
Accrued Certificate Interest...........................................S-41
Appraised Value .....................................................S-19
Available Distribution Amount..........................................S-40
Balloon Payment .....................................................S-19
Bankruptcy Amount .....................................................S-53
Bankruptcy Loans .....................................................S-34
Cede .....................................................S-39
Certificate Principal Balance..........................................S-42
Certificates ................................................S-2, S-39
Class B Certificates..............................................S-2, S-39
Class M Certificates..............................................S-2, S-39
CLTV .....................................................S-27
Code .....................................................S-15
Company ......................................................S-4
Credit Support Depletion Date....................................S-13, S-48
Cut-off Date ......................................................S-1
DCR ......................................................S-2
Debt Service Reduction.................................................S-50
Definitive Certificate..................................................S-5
Determination Date.....................................................S-41
Discount Fraction .....................................................S-39
Discount Mortgage Loan.................................................S-39
Discount Mortgage Loans.................................................S-3
Distribution Date ......................................................S-2
DTC Registered Certificates.............................................S-5
Due Date .....................................................S-40
Eligible Funds .....................................................S-44
ERISA .....................................................S-15
Excess Bankruptcy Losses...............................................S-41
Excess Fraud Losses....................................................S-41
Excess Special Hazard Losses...........................................S-41
Exemption .....................................................S-71
Extraordinary Losses...................................................S-41
FICO .....................................................S-30
Final Disposition .....................................................S-44
Foreclosure Loans .....................................................S-34
Fraud Loss Amount .....................................................S-52
IAMSI .....................................................S-36
ICI Funding ......................................................S-4
ICII .....................................................S-64
ICMH ................................................S-4, S-64
Index of Principal Definitions..........................................S-2
Lockout Certificates..............................................S-1, S-39
Master Servicer ................................................S-4, S-36
Mortgage Loans ......................................................S-2
Mortgaged Property......................................................S-4
Net Mortgage Rate ................................................S-6, S-42
Non-Discount Mortgage Loan..............................................S-3
S-73
<PAGE>
INDEX OF DEFINITIONS
Non-Discount Mortgage Loans.................................................S-39
Offered Certificates...................................................S-2, S-39
Plan ..........................................................S-71
Pool Strip Rate ..........................................................S-42
Pooling and Servicing Agreement..............................................S-5
Prepayment Assumption.......................................................S-56
Prepayment Interest Shortfall...............................................S-41
Primary Hazard Insurance Policy.............................................S-19
Primary Insurance Policy....................................................S-19
Principal Only Certificates............................................S-1, S-39
Principal Only Collection Shortfall.........................................S-44
Principal Only Distribution Amount..........................................S-44
pro rata basis ..........................................................S-51
Progressive Express(TM) Program.............................................S-30
PTCE ..........................................................S-71
Realized Losses ..........................................................S-51
Reduced Documentation Program...............................................S-28
Residual Certificates..................................................S-2, S-39
Rules ..........................................................S-40
Scheduled Payment Lockout Distribution Percentage...........................S-46
Seller ...........................................................S-4
Senior Accelerated Distribution Percentage..................................S-45
Senior Certificates....................................................S-1, S-39
Senior Interest Distribution Amount.........................................S-43
Senior Percentage ..........................................................S-45
Senior Principal Distribution Amount........................................S-44
Senior Support Lockout Certificates....................................S-1, S-39
Servicing Fee Rate...............................................S-6, S-42, S-65
Special Hazard Amount.......................................................S-52
Special Hazard Losses.......................................................S-52
Standard & Poor's ...........................................................S-2
State Street ..........................................................S-36
Stated Principal Balance....................................................S-45
Structuring Assumptions.....................................................S-57
Sub-Servicer ..........................................................S-64
Subordinate Percentage......................................................S-45
Subordination ..........................................................S-50
Super Senior Certificates....................................................S-1
Super Senior Lockout Certificates......................................S-1, S-39
Super Senior Optimal Percentage.............................................S-48
Super Senior Optimal Principal Distribution Amount..........................S-48
Trustee ...........................................................S-4
Trustee Fee Rate ...........................................................S-6
Underwriter ...........................................................S-1
Underwriting Agreement......................................................S-68
Underwritten Certificates....................................................S-1
Unscheduled Payment Lockout Distribution Percentage.........................S-46
Variable Strip Certificates............................................S-1, S-39
Wendover .....................................................S-4, S-64
S-74
<PAGE>
PROSPECTUS
Mortgage Pass-Through Certificates
ICIFC SECURED ASSETS CORP.
The mortgage pass-through certificates (the "Offered Certificates") offered
hereby and by the supplements hereto (each, a "Prospectus Supplement") will be
offered from time to time in series. The Offered Certificates of each series,
together with any other mortgage pass-through certificates of such series, are
collectively referred to herein as the "Certificates."
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") to be established by ICIFC Secured Assets Corp. (the "Company").
Each Trust Fund will consist primarily of a segregated pool (a "Mortgage Pool")
of one- to four-family and/or multifamily residential first and/or junior
mortgage loans or manufactured housing conditional sales contracts and
installment loan agreements (collectively, the "Mortgage Loans") or interests
therein (which may include Mortgage Securities as defined herein), acquired by
the Company from one or more affiliated or unaffiliated institutions (the
"Sellers"). See "The Company" and "The Mortgage Pools." The Mortgage Loans and
other assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates (the "Certificateholders")
pursuant to a pooling and servicing or other agreement (in either case, a
"Pooling Agreement") as more fully described herein under "Description of the
Certificates" and in the related Prospectus Supplemental Information regarding
the Offered Certificates of a series, and the general characteristics of the
Mortgage Loans and other assets in the related Trust Fund, will be set forth in
the related Prospectus Supplement.
Each series of Certificates will include one or more classes. Each class of
Certificates of any series will represent the right, which right may be senior
or subordinate to the rights of one or more of the other classes of the
Certificates, to receive a specified portion of payments of principal or
interest (or both) on the Mortgage Loans and other assets in the related Trust
Fund in the manner described herein under "Description of the Certificates" and
in the related Prospectus Supplement. A series may include one or more classes
of Certificates entitled to principal distributions, with disproportionate,
nominal or no interest distributions, or to interest distributions, with
disproportionate, nominal or no principal distributions. A series may include
two or more classes of Certificates which differ as to the timing, sequential
order, priority of payment pass-through rate or amount of distributions of
principal or interest or both. See "Description of the Certificates."
THE COMPANY'S ONLY OBLIGATIONS WITH RESPECT TO A SERIES OF CERTIFICATES WILL BE
PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY, EXCEPT
AS PROVIDED IN THE RELATED PROSPECTUS SUPPLEMENT. THE MASTER SERVICER (THE
"MASTER SERVICER") FOR ANY SERIES OF CERTIFICATES WILL BE NAMED IN THE RELATED
PROSPECTUS SUPPLEMENT. THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE
PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH INCLUDE ITS LIMITED
OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON
THE RELATED MORTGAGE LOANS). SEE "DESCRIPTION OF THE CERTIFICATES."
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include any one or any combination of a mortgage pool
insurance policy, letter of credit, bankruptcy bond, special hazard insurance
policy, reserve fund or other form of credit support. In addition to or in lieu
of the foregoing, credit enhancement may be provided by means of subordination
of one or more classes of Certificates. See "Description of Credit Enhancement."
The rate of payment of principal of each class of Certificates entitled to a
portion of principal payments on the Mortgage Loans and other assets in the
related Mortgage Pool will depend on the priority of payment of such class and
the rate and timing of principal payments (including by reason of prepayments,
defaults, liquidations and repurchases of Mortgage Loans) on such Mortgage Loans
and other assets. A rate of principal payment slower or faster than that
anticipated may affect the yield on a class of Certificates in the manner
described herein under "Yield Considerations" and in the related Prospectus
Supplement.
One or more separate elections may be made to treat a Trust Fund or a designated
portion thereof as a real estate mortgage investment conduit ("REMIC") for
federal income tax purposes. If applicable, the Prospectus Supplement for a
series of Certificates will specify which class or classes of the related series
of Certificates will be considered to be regular interests in the related REMIC
and which class of Certificates or other interests will be designated as the
residual interest in the related REMIC. See "Federal Income Tax Consequences"
herein.
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE
CERTIFICATES, SEE "RISK FACTORS" BEGINNING ON PAGE 14 HEREIN AND ON PAGE S-17 OF
THE RELATED PROSPECTUS SUPPLEMENT.
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES OF ANY SERIES NOR THE UNDERLYING MORTGAGE
LOANS OR MORTGAGE SECURITIES WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR
RESPECTIVE AFFILIATES, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Offered Certificates may be offered through one or more different methods,
including offerings through underwriters, as more fully described herein under
"Methods of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Certificates of any series
prior to the offering thereof. There can be no assurance that a secondary market
for any of the Offered Certificates will develop or, if it does develop, that it
will continue. The Offered Certificates will not be listed on any securities
exchange.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of securities offered hereby unless accompanied by a Prospectus
Supplement. This Prospectus contains in "Index of Principal Definitions"
beginning on page 110 herein.
Prospectus dated September 24, 1997
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND ANY PROSPECTUS
SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CERTIFICATES
OFFERED HEREBY AND THEREBY OR AN OFFER OF SUCH CERTIFICATES TO ANY PERSON IN ANY
STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY
OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS
WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL
BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
TABLE OF CONTENTS
Caption Page
- ------- ----
SUMMARY OF PROSPECTUS..........................................................5
RISK FACTORS..................................................................14
THE MORTGAGE POOLS............................................................20
General..................................................................20
The Mortgage Loans.......................................................22
Underwriting Standards...................................................25
Qualifications of Originators and Sellers................................27
Representations by Sellers...............................................28
SERVICING OF MORTGAGE LOANS...................................................30
General..................................................................30
The Master Servicer......................................................30
Collection and Other Servicing Procedures;
Mortgage Loan Modifications........................................30
Subservicers.............................................................32
Special Servicers........................................................33
Realization Upon or Sale of Defaulted Mortgage Loans.....................33
Servicing and Other Compensation and
Payment of Expenses; Spread........................................35
Evidence as to Compliance................................................36
DESCRIPTION OF THE CERTIFICATES...............................................36
General..................................................................36
Form of Certificates.....................................................38
Assignment of Trust Fund Assets..........................................39
Certificate Account......................................................41
Distributions............................................................44
Distributions of Interest and Principal on the Certificates..............45
Distributions on the Certificates in Respect of Prepayment
Premiums or in Respect of Equity Participations......................46
Allocation of Losses and Shortfalls......................................46
Advances.................................................................46
Reports to Certificateholders............................................47
DESCRIPTION OF CREDIT ENHANCEMENT.............................................48
General..................................................................48
Subordinate Certificates.................................................49
Letter of Credit.........................................................49
Mortgage Pool Insurance Policies.........................................50
Special Hazard Insurance Policies........................................51
Bankruptcy Bonds.........................................................52
Reserve Funds............................................................52
Maintenance of Credit Enhancement........................................53
Reduction or Substitution of Credit Enhancement..........................55
PURCHASE OBLIGATIONS..........................................................55
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER........................................................56
Primary Mortgage Insurance Policies......................................56
Hazard Insurance Policies................................................57
FHA Insurance............................................................58
THE COMPANY...................................................................59
ICI FUNDING CORPORATION.......................................................59
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC........................................59
THE POOLING AGREEMENT.........................................................59
General..................................................................59
Certain Matters Regarding the Master Servicer
and the Company......................................................60
Events of Default........................................................61
Rights Upon Event of Default.............................................61
Amendment................................................................62
Termination; Retirement of Certificates..................................62
The Trustee..............................................................63
Limitations on the Duties of the Trustee.................................63
Certain Matters Regarding the Trustee....................................64
Resignation and Removal of the Trustee...................................64
YIELD CONSIDERATIONS..........................................................64
MATURITY AND PREPAYMENT CONSIDERATIONS........................................66
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......................................67
Single Family Loans and Multifamily Loans................................67
Contracts................................................................68
Foreclosure on Mortgages and Certain Contracts...........................69
Repossession with respect to Contracts...................................71
Rights of Redemption.....................................................72
AntiDeficiency Legislation and Other
Limitations on Lenders...............................................72
Environmental Legislation................................................74
Consumer Protection Laws with respect to Contracts.......................75
Enforceability of Certain Provisions.....................................75
Subordinate Financing....................................................76
Applicability of Usury Laws..............................................77
Alternative Mortgage Instruments.........................................77
Formaldehyde Litigation with respect to Contracts........................78
Soldiers' and Sailors' Civil Relief Act of 1940..........................78
Junior Mortgages.........................................................79
FEDERAL INCOME TAX CONSEQUENCES...............................................80
General..................................................................80
REMICS...................................................................81
Grantor Trust Funds......................................................94
STATE AND OTHER TAX CONSEQUENCES.............................................102
ERISA CONSIDERATIONS.........................................................102
LEGAL INVESTMENT MATTERS.....................................................106
USE OF PROCEEDS..............................................................108
METHODS OF DISTRIBUTION......................................................108
LEGAL MATTERS................................................................109
FINANCIAL INFORMATION........................................................109
RATING.......................................................................109
-2-
<PAGE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located as follows: Chicago Regional
Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661; New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates
and electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval System at the Commission's Web Site (http://www.sec.gov.). The
Company does not intend to send any financial reports to Certificateholders.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Company has filed with the Commission under the Securities Act
of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or other designated person will be required to provide
periodic unaudited reports concerning each Trust Fund to all registered holders
of Offered Certificates. Such information will be provided in accordance with
the requirements of recent SEC No-Action Letters. Such information will include,
among other things, the following: (i) with respect to each series of Offered
Certificates, a form 8-K will be filed within fifteen days after the issuance of
such series and will include the relevant Pooling Agreement for such series;
(ii) pursuant to the Pooling Agreement for the related series, concurrently with
each distribution on each distribution date, the holders of each class of
Registered Certificates will receive a monthly statement setting forth material
information pertaining to each distribution, as required by the Pooling
Agreement; (iii) for so long as the Pool Insurer, if any, is eligible to use
Form S-3 and is making reports pursuant to the Exchange Act, incorporated by
reference into the appropriate Monthly Statements, on a quarterly and annual
basis, the current financial statements of the Pool Insurer, if any, for such
series; (iv) for so long as the Company has a duty to file periodic reports with
respect to any Trust Fund and series pursuant to the Exchange Act, a form 8-K
will be filed with the Commission within fifteen days after the related
distribution to Certificateholders of any series is made containing the Monthly
Statement; (v) if any monthly (or other periodic) distribution to
Certificateholders of a series is not made as required by the related Pooling
Agreement, or in the event of any material change in the procedures or forms
described above for the reports to the Certificateholders or Trustee, the
Company will file within fifteen days of the due date for such distribution, a
Form 8-K responding to Item 5 thereof, to the extent applicable to the related
Trust Fund the Registered Certificates of such series, describing such failure
to make payment or such change in reporting; (vi) within fifteen days under Item
5 of Form 8-K, any matters that have occurred during any month that would be
reportable under Item 1, 2, 4 or 5 of Part II of Form 10-Q, to the extent
applicable; (vii) on or prior to 90 days following the Company's fiscal year
end, an annual report on Form 10-K containing information required under Items
2, 3, 4, 5, 9, 12, 13 and 14 thereof, to the extent
-3-
<PAGE>
material to the operations of the Trust Fund and required by recent SEC
No-Action Letters. The Company will not provide Quarterly Reports on Form 10-Q
since pertinent information will be covered in the Form 8-Ks to be filed with
the Commission as described above. See "Description of the Certificates-Reports
to Certificateholders."
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein and in the related Prospectus Supplement by
reference all documents and reports filed or caused to be filed by the Company
with respect to a Trust Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act, prior to the termination of the offering of the Offered
Certificates of the related series. The Company will provide or cause to be
provided without charge to each person to whom this Prospectus is delivered in
connection with the offering of one or more classes of Offered Certificates,
upon written or oral request of such person, a copy of any or all such reports
incorporated herein by reference, in each case to the extent such reports relate
to one or more of such classes of such Offered Certificates, other than the
exhibits to such documents, unless such exhibits are specifically incorporated
by reference in such documents. Requests should be directed in writing to ICIFC
Secured Assets Corp., 20371 Irvine Avenue, Suite 200, Santa Ana Heights,
California 92707, or by telephone at (714) 556-0122. The Company has determined
that its financial statements will not be material to the offering of any
Offered Certificates.
-4-
<PAGE>
SUMMARY OF PROSPECTUS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND BY REFERENCE TO
THE INFORMATION WITH RESPECT TO EACH SERIES OF CERTIFICATES CONTAINED IN THE
PROSPECTUS SUPPLEMENT TO BE PREPARED AND DELIVERED IN CONNECTION WITH THE
OFFERING OF OFFERED CERTIFICATES OF SUCH SERIES. CAPITALIZED TERMS USED IN THIS
SUMMARY THAT ARE NOT OTHERWISE DEFINED SHALL HAVE THE MEANINGS ASCRIBED THERETO
ELSEWHERE IN THIS PROSPECTUS. AN "INDEX OF PRINCIPAL DEFINITIONS" INDICATING
WHERE CERTAIN CAPITALIZED TERMS USED HEREIN ARE DEFINED APPEARS IN THIS
PROSPECTUS BEGINNING ON PAGE 110.
Securities Offered.................. Mortgage pass-through certificates. The
mortgage pass-through certificates (the
"Offered Certificates") offered hereby and
by the various Prospectus Supplements with
respect hereto will be offered from time
to time in series. The Offered
Certificates of each series, together with
any other mortgage pass- through
certificates of such series, are
collectively referred to herein as the
"Certificates."
Company............................. ICIFC Secured Assets Corp. (the
"Company"), a wholly-owned subsidiary of
ICI Funding Corporation ("ICI Funding").
See "The Company" and "ICI Funding
Corporation."
Master Servicer..................... The master servicer (the "Master
Servicer"), if any, for a series of
Certificates will be specified in the
related Prospectus Supplement and may
either be an entity not affiliated with
the Company or an affiliate of the
Company, including ICI Funding, the
Company's parent and a non-consolidating
subsidiary of Imperial Credit Mortgage
Holdings, Inc. ("ICMH"). See "ICI Funding
Corporation," "Imperial Credit Mortgage
Holdings, Inc." and "Servicing of Mortgage
Loans--The Master Servicer."
Special Servicer.................... The special servicer (the "Special
Servicer"), if any, for a series of
Certificates will be specified, or the
circumstances under which a Special
Servicer will be appointed will be
described, in the related Prospectus
Supplement. Any Special Servicer may
either be an entity unaffiliated with the
Company or an affiliate of the Company.
See "Servicing of Mortgage Loans--Special
Servicers."
Trustee............................. The trustee (the "Trustee") for each
series of Certificates will be specified
in the related Prospectus Supplement. See
"The Pooling Agreement--The Trustee."
-5-
<PAGE>
The Certificates.................... Each series of Certificates will include
one or more classes of Certificates which
will represent in the aggregate the entire
beneficial ownership interest in a
segregated pool of Mortgage Loans
(exclusive of any portion of interest
payments (the "Spread") relating to each
Mortgage Loan retained by the Company or
any of its affiliates) or interests
therein (which may include Mortgage
Securities as defined herein), and certain
other assets as described below
(collectively, a "Trust Fund"), and will
be issued pursuant to a pooling and
servicing agreement or other agreement
specified in the related Prospectus
Supplement (in either case, a "Pooling
Agreement"). Except for certain Strip
Certificates and REMIC Residual
Certificates (each as hereinafter
described), each series of Certificates,
or class of Certificates in the case of a
series consisting of two or more classes,
will have a stated principal balance and
will be entitled to distributions of
interest based on a specified interest
rate or rates (each, a "Pass- Through
Rate"). Each series or class of
Certificates may have a different
Pass-Through Rate, which may be a fixed,
variable or adjustable Pass-Through Rate,
or any combination of two or more such
Pass-Through Rates. The related Prospectus
Supplement will specify the Pass-Through
Rate or Rates for each series or class of
Certificates, or the initial Pass-Through
Rate or Rates and the method for
determining subsequent changes to the
Pass-Through Rate or Rates. A series may
include one or more classes of
Certificates ("Strip Certificates")
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
Certificates which differ as to timing,
sequential order, priority of payment,
pass-through rate or amount of
distributions of principal or interest or
both, or as to which distributions of
principal or interest or both on any class
may be made upon the occurrence of
specified events, in accordance with a
schedule or formula, or on the basis of
collections from designated portions of
the Mortgage Pool, which series may
include one or more classes of
Certificates ("Accrual Certificates"), as
to which certain accrued interest will not
be
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distributed but rather will be added to
the principal balance thereof on each
Distribution Date, as hereinafter defined,
in the manner described in the related
Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of Certificates may
include one or more classes of
Certificates (collectively, the "Senior
Certificates") which are senior to one or
more classes of Certificates
(collectively, the "Subordinate
Certificates") in respect of certain
distributions of principal and interest
and allocations of losses on Mortgage
Loans. In addition, certain classes of
Senior (or Subordinate) Certificates may
be senior to other classes of Senior (or
Subordinate) Certificates in respect of
such distributions or losses. As to each
series, one or more elections may be made
to treat the related Trust Fund or a
designated portion thereof as a "real
estate mortgage investment conduit" or
"REMIC" as defined in the Internal Revenue
Code of 1986, as amended (the "Code"). See
"Description of the Certificates."
The Certificates will not be guaranteed or
insured by any governmental agency or
instrumentality, by the Company, the
Master Servicer or any of their respective
affiliates or by any other person, unless
otherwise specified in the related
Prospectus Supplement.
The Mortgage Pools.................. Each Trust Fund will consist primarily of
a segregated pool (a "Mortgage Pool") of
mortgage loans and/or manufactured housing
conditional sales and installment loan
agreements (collectively, the "Mortgage
Loans"). Each Mortgage Loan will be
secured by a first or junior lien on or
security interest in (i) a one- to
four-family residential property, (ii) a
residential property consisting of five or
more rental or cooperatively owned
dwelling units or (iii) a new or used
manufactured home (each, a "Mortgaged
Property"). The Mortgaged Properties may
be located in any one of the 50 states,
the District of Columbia or the
Commonwealth of Puerto Rico. For a
description of the types of Mortgage Loans
that may be included in the Mortgage
Pools, see "The Mortgage Pools--The
Mortgage Loans." The Mortgage Loans will
not be guaranteed or insured by the
Company, any of its affiliates
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<PAGE>
or, unless otherwise specified in the
related Prospectus Supplement, by any
governmental agency or instrumentality or
any other person.
If specified in the related Prospectus
Supplement, Mortgage Loans which are
converting or converted from an
adjustable-rate to a fixed-rate or certain
Mortgage Loans for which the Mortgage Rate
has been reset may be repurchased by the
Company or purchased by the related Master
Servicer, the applicable Seller or another
party, or a designated remarketing agent
will use its best efforts to arrange the
sale thereof as further described herein
under "The Mortgage Pools--The Mortgage
Loans."
If so specified in the related Prospectus
Supplement, some Mortgage Loans may be
delinquent or non-performing as of the
date of their deposit in the related Trust
Fund.
If specified in the related Prospectus
Supplement, a Trust Fund may include or
consist solely of mortgage participations
or pass-through certificates evidencing
interests in Mortgage Loans ("Mortgage
Securities"), as described herein. See
"The Mortgage Pools--General" herein.
Each Mortgage Loan and Mortgage Security
included in a Trust Fund will have been
selected by the Company from among those
purchased, either directly or indirectly,
from a prior holder thereof (a "Seller"),
which prior holder may or may not be the
originator of such Mortgage Loan or the
issuer of such Mortgage Security and may
be an affiliate of the Company. A Mortgage
Security included in a Trust Fund,
however, may also have been issued
previously by the Company or an affiliate
thereof.
A Current Report on Form 8-K will be
available upon request to purchasers of
the Offered Certificates of the related
series and will be filed, together with
the related Pooling Agreement, with the
Securities and Exchange Commission within
fifteen days after such initial issuance.
Interest Distributions.............. Except as otherwise specified in the
related Prospectus Supplement, interest on
each class
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<PAGE>
of Offered Certificates of each series,
other than Strip Certificates or Accrual
Certificates (prior to the time when
accrued interest becomes payable thereon),
will accrue at the applicable Pass-Through
Rate (which may be a fixed, variable or
adjustable rate or any combination
thereof) on such class's principal balance
outstanding from time to time and will be
remitted on the 25th day (or, if such day
is not a business day, on the next
succeeding business day) of each month,
commencing with the month following the
month in which the Cut-off Date (as
defined in the applicable Prospectus
Supplement) occurs (each, a "Distribution
Date"). Distributions, if any, with
respect to interest on Strip Certificates
will be calculated and made on each
Distribution Date as described herein
under "Description of the
Certificates--Distribution of Interest and
Principal on the Certificates" and in the
related Prospectus Supplement. Interest
that has accrued but is not yet payable on
any Accrual Certificates will be added to
the principal balance of such class on
each Distribution Date, and will
thereafter bear interest. Distributions of
interest with respect to one or more
classes of Offered Certificates (or, in
the case of a class of Accrual
Certificates, accrued interest to be added
to the principal balance thereof) may be
reduced as a result of the occurrence of
certain delinquencies not covered by
advances, losses, prepayments and other
contingencies described herein and in the
related Prospectus Supplement. See "Yield
Considerations" and "Description of the
Certificates--Distributions of Interest
and Principal on the Certificates."
Principal Distributions.......... Except as otherwise specified in the
related Prospectus Supplement, principal
distributions on the Certificates of each
series will be payable on each
Distribution Date, commencing with the
Distribution Date in the month following
the month in which the Cut- off Date
occurs, to the holders of the Certificates
of such series, or of the class or classes
of Certificates then entitled thereto, on
a pro rata basis among all such
Certificates or among the Certificates of
any such class, in proportion to their
respective outstanding principal balances,
or in the priority and manner otherwise
specified in the related Prospectus
Supplement. Strip Certificates with
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<PAGE>
no principal balance will not receive
distributions in respect of principal.
Distributions of principal with respect to
any series of Certificates, or with
respect to one or more classes included
therein, may be reduced to the extent of
certain delinquencies not covered by
advances or losses not covered by the
applicable form of credit enhancement. See
"The Mortgage Pools," "Maturity and
Prepayment Considerations" and
"Description of the Certificates."
Credit Enhancement.................. If so specified in the Prospectus
Supplement, the Trust Fund with respect to
any series of Certificates may include any
one or any combination of a letter of
credit, mortgage pool insurance policy,
special hazard insurance policy,
bankruptcy bond or reserve fund to provide
partial coverage for certain defaults and
losses relating to the Mortgage Loans.
Credit support also may be provided in the
form of subordination of one or more
classes of Certificates in a series under
which losses are first allocated to any
Subordinate Certificates up to a specified
limit. Any form of credit enhancement will
have certain limitations and exclusions
from coverage thereunder, which will be
described in the related Prospectus
Supplement. Losses not covered by any form
of credit enhancement will be borne by the
holders of the related Certificates (or
certain classes thereof). 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 Certificates. See "Description of
Credit Enhancement."
Advances............................ If and to the extent described in the
related Prospectus Supplement, and subject
to any limitations specified therein, the
Master Servicer for any Trust Fund will be
obligated to make, or have the option of
making, certain advances with respect to
delinquent scheduled payments on the
Mortgage Loans in such Trust Fund. Any
such advance made by the Master Servicer
with respect to a Mortgage Loan is
recoverable by it as described herein
under "Description of the
Certificates--Advances" either from
recoveries on or in respect of the
specific Mortgage Loan or, with respect to
any
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<PAGE>
advance subsequently determined to be
nonrecoverable from recoveries on or in
respect of the specific Mortgage Loan, out
of funds otherwise distributable to the
holders of the related series of
Certificates, which may include the
holders of any Senior Certificates of such
series. If and to the extent provided in
the Prospectus Supplement for a series of
Certificates, the Master Servicer will be
entitled to receive interest on its
advances for the period that they are
outstanding payable from amounts in the
related Trust Fund. As specified in the
Prospectus Supplement with respect to any
series of Certificates as to which the
Trust Fund includes Mortgage Securities,
the advancing obligations in respect of
the underlying Mortgage Loans will be
pursuant to the terms of such Mortgage
Securities, as may be supplemented by the
terms of the applicable Pooling Agreement,
and may differ from the provisions
described herein.
Optional Termination................ The Master Servicer, the Company or, if
specified in the related Prospectus
Supplement, the holder of the residual
interest in a REMIC may at its option
either (i) effect early retirement of a
series of Certificates through the
purchase of the assets in the related
Trust Fund or (ii) purchase, in whole but
not in part, the Certificates specified in
the related Prospectus Supplement; in each
case under the circumstances and in the
manner set forth herein under "The Pooling
Agreement-- Termination; Retirement of
Certificates" and in the related
Prospectus Supplement.
Legal Investment.................... At the date of issuance, as to each
series, each class of Offered Certificates
will be rated at the request of the
Company in one of the four highest rating
categories by one or more nationally
recognized statistical rating agencies
(each, a "Rating Agency"). Unless
otherwise specified in the related
Prospectus Supplement, each class of
Offered Certificates that is rated in one
of the two highest rating categories by at
least one Rating Agency will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA").
Investors whose investment authority is
subject to legal restrictions should
consult their own legal advisors to
determine whether and to what extent the
Offered Certificates of any series
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<PAGE>
constitute legal investments for them. See
"Legal Investment Matters."
ERISA Considerations................ A fiduciary of an employee benefit plan
and certain other retirement plans and
arrangements, including individual
retirement accounts and annuities, Keogh
plans, and collective investment funds and
separate accounts in which such plans,
accounts, annuities or arrangements are
invested, that is subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the
Code (each, a "Plan") should carefully
review with its legal advisors whether the
purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA
or Section 4975 of the Code. Investors are
advised to consult their counsel and to
review "ERISA Considerations" herein and
in the related Prospectus Supplement.
Federal Income Tax Consequences Offered Certificates of each series will
constitute either (i) interests ("Grantor
Trust Certificates") in a Trust Fund
treated as a grantor trust under
applicable provisions of the Code, or (ii)
"regular interests" ("REMIC Regular
Certificates") or "residual interests"
("REMIC Residual Certificates") in a Trust
Fund, or a portion thereof, treated as a
REMIC under Sections 860A through 86OG of
the Code.
Investors are advised to consult their tax
advisors as to the tax consequences of an
investment in the Certificates in light of
each investor's individual circumstances
and to review "Federal Income Tax
Consequences" herein and in the related
Prospectus Supplement for a general
discussion of material tax matters related
to the Certificates. Such discussion, to
the extent it relates to matters of law or
legal conclusions with respect thereto,
represents the opinion of counsel to the
Company, subject to any qualifications set
forth therein. See "Federal Income Tax
Consequences."
Ratings............................. It is a condition to the issuance of any
class of Offered Certificates that they
shall have been rated not lower than
investment grade, that is, in one of the
four highest rating categories, by
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<PAGE>
at least one Rating Agency. Ratings on
mortgage pass-through certificates address
the likelihood of receipt by the holders
thereof of all collections on the
underlying mortgage assets to which such
holders are entitled. These ratings
address the structural, legal and issuer-
related aspects associated with such
certificates, the nature of the underlying
mortgage assets and the credit quality of
the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent
any assessment of the likelihood of
principal prepayments by borrowers or of
the degree by which such prepayments might
differ from those originally anticipated.
As a result, Certificateholders might
suffer a lower than anticipated yield,
and, in addition, holders of stripped
interest certificates in extreme cases
might fail to recoup their initial
investments.
Listing Application................. The Company does not currently intend to
make an application to list the Offered
Certificates on a national securities
exchange or to quote the Offered
Securities in the automated quotation
system of a registered securities
association.
Risk Factors........................ There are material risks associated with
an investment in the Certificates. See
"Risk Factors" beginning on page 14 herein
and on page S-17 of the Prospectus
Supplement for a discussion of significant
matters affecting investments in the
Certificates.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates:
LIMITED LIQUIDITY. There can be no assurance that a secondary market for
the Offered Certificates of any series will develop or, if it does develop, that
it will provide Certificateholders with liquidity of investment or that it will
continue for the life of the Offered Certificates of any series. The Prospectus
Supplement for any series of Offered Certificates may indicate that an
underwriter specified therein intends to establish a secondary market in such
Certificates, however no underwriter will be obligated to do so. The Offered
Certificates will not be listed on any securities exchange.
LIMITED OBLIGATIONS. The Offered Certificates will not represent an
interest in or obligation of the Company, the Master Servicer or any of their
respective affiliates. The only obligations of the foregoing entities with
respect to the Certificates, the Mortgage Loans or any Mortgage Securities will
be the obligations (if any) of the Company pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans or
Mortgage Securities, the Master Servicer's servicing obligations under the
related Pooling Agreement (including, if and to the extent described in the
related Prospectus Supplement, its limited obligation to make certain advances
in the event of delinquencies on the Mortgage Loans) and pursuant to the terms
of any Mortgage Securities, and, if and to the extent expressly described in the
related Prospectus Supplement, certain limited obligations of the Master
Servicer in connection with a Purchase Obligation or an agreement to purchase or
act as remarketing agent with respect to a Convertible Mortgage Loan upon
conversion to a fixed rate. Unless otherwise specified in the related Prospectus
Supplement, neither the Certificates nor the underlying Mortgage Loans or
Mortgage Securities will be guaranteed or insured by any governmental agency or
instrumentality, by the Company, the Master Servicer or any of their respective
affiliates or by any other person. Proceeds of the assets included in the
related Trust Fund for each series of Certificates (including the Mortgage Loans
or Mortgage Securities and any form of credit enhancement) will be the sole
source of payments on the Certificates, and there will be no recourse to the
Company, the Master Servicer or any other entity in the event that such proceeds
are insufficient or otherwise unavailable to make all payments provided for
under the Certificates.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. With respect
to each series of Certificates, credit enhancement will be provided in limited
amounts to cover certain types of losses on the underlying Mortgage Loans.
Credit enhancement will be provided in one or more of the forms referred to
herein, including, but not limited to: subordination of other classes of
Certificates of the same series; a Letter of Credit; a Purchase Obligation; a
Mortgage Pool Insurance Policy; a Special Hazard Insurance Policy; a Bankruptcy
Bond; a Reserve Fund; or any combination thereof. See "Description of Credit
Enhancement" herein. Regardless of the form of credit enhancement provided, the
amount of coverage will be limited in amount and in most cases will be subject
to periodic reduction in accordance with a schedule or formula. Furthermore,
such credit enhancements may provide only very limited coverage as to certain
types of losses or risks, and may provide no coverage as to certain other types
of losses or risks. In the event losses exceed the amount of coverage provided
by any credit enhancement or losses of a type not covered by any credit
enhancement occur, such losses will be borne by the holders of the related
Certificates (or certain classes thereof). The Company, the Master Servicer or
other specified person will generally be permitted to reduce, terminate or
substitute all or a portion of the credit enhancement for any series of
Certificates, if each applicable Rating Agency indicates that the then-current
rating(s) thereof will not be adversely affected. The rating(s) of any series of
Certificates by any applicable Rating Agency may be lowered following the
initial issuance thereof as a result of the downgrading of the obligations of
any applicable credit support provider, or as a result of losses on the related
Mortgage Loans in excess of the levels contemplated by such Rating Agency at the
time of its initial rating analysis. Neither the Company, the Master Servicer
nor any of their respective affiliates will have any obligation to replace or
supplement any credit enhancement, or to take any other action to maintain any
rating(s) of any series of Certificates. See "Description of Credit
Enhancement--Reduction of Substitution of Credit Enhancement" herein.
RISKS OF DECLINING PROPERTY VALUES AND HIGH LOAN-TO-VALUE RATIOS. An
investment in securities such as the Certificates which generally represent
interests in mortgage loans and/or manufactured housing conditional sales
contracts and installment loan agreements may be affected by, among other
things, a decline in real estate values and changes in the borrowers' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding balances of the
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<PAGE>
Mortgage Loans, and any secondary financing on the Mortgaged Properties, in a
particular Mortgage Pool become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. Mortgaged Properties subject to high Loan-to-Value Ratios are at
greater risk since such properties initially have less equity than Mortgaged
Properties with low Loan-to-Value ratios and therefore a decline in property
values could dissipate equity more quickly. Delinquencies, foreclosures and
losses due to declining values of Mortgaged Properties, especially those with
high Loan-to-Value Ratios, would cause losses to the Trust and, to the extent
not covered by credit enhancement, would adversely affect the yield to maturity
on the Certificates.
RISKS OF NEGATIVELY AMORTIZING LOANS. In the case of Mortgage Loans that
are subject to negative amortization, due to the addition to principal balance
of Deferred Interest, the principal balances of such Mortgage Loans could be
increased to an amount equal to or in excess of the value of the underlying
Mortgaged Properties, thereby increasing the likelihood of default. To the
extent that such losses are not covered by any reserve fund or instrument of
credit enhancement in the related Trust Fund, holders of Certificates of the
series evidencing interests in the related Mortgage Pool will bear all risk of
loss resulting from default by Mortgagors and will have to look primarily to the
value of the Mortgaged Properties for recovery of the outstanding principal and
unpaid interest on the defaulted Mortgage Loans. Certain of the types of loans
which may be included in the Mortgage Pools may involve additional uncertainties
not present in traditional types of loans.
RISKS OF BUYDOWN MORTGAGE LOANS. Certain of the Mortgage Loans contained in
a Mortgage Pool may be subject to temporary buydown plans ("Buydown Mortgage
Loans") pursuant to which the monthly payments made by the Mortgagor during the
early years of the Mortgage Loan (the "Buydown Period") will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) an amount (such amount, exclusive of investment earnings
thereon, being hereinafter referred to as "Buydown Funds") contributed by the
seller of the Mortgaged Property or another source and placed in a custodial
account (the "Buydown Account"), (ii) if the Buydown Funds are contributed on a
present value basis, investment earnings on such Buydown Funds or (iii)
additional buydown funds to be contributed over time by the Mortgagor's employer
or another source. See "Description of the Certificates--Certificate Account."
Generally, the Mortgagor under each Buydown Mortgage Loan will be qualified at
the applicable lower monthly payment. Accordingly, the repayment of a Buydown
Mortgage Loan is dependent on the ability of the Mortgagor to make larger level
monthly payments after the Buydown Funds have been depleted and, for certain
Buydown Mortgage Loans, during the Buydown Period. The inability of a Mortgagor
to make such larger monthly payments could lead to losses on the Mortgage Loans,
and to the extent not covered by credit enhancement, may adversely affect the
yield to maturity on the Certificates.
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES. Certain geographic
regions of the United States from time to time will experience weaker regional
economic conditions and housing markets, and, consequently, will experience
higher rates of loss and delinquency than will be experienced on mortgage loans
generally. For example, a region's economic condition and housing market may be
directly, or indirectly, adversely affected by natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, eruptions or riots. The
economic impact of any of these types of events may also be felt in areas beyond
the region immediately affected by the disaster or disturbance. The Mortgage
Loans underlying certain series of Certificates may be concentrated in these
regions, and such concentration may present risk considerations in addition to
those generally present for similar mortgage-backed securities without such
concentration. Moreover, as described below, any Mortgage Loan for which a
breach of a representation or warranty exists will remain in the related Trust
Fund in the event that a Seller is unable, or disputes its obligation, to
repurchase such Mortgage Loan and such a breach does not also constitute a
breach of any representation made by any other person. In such event, any
resulting losses will be borne by the related form of credit enhancement, to the
extent available.
RISKS OF LOANS WITH BALLOON PAYMENTS. Certain of the Mortgage Loans
included in a Trust Fund, particularly those secured by Multifamily Properties,
may not be fully amortizing (or may not amortize at all) over their terms to
maturity and, thus, will require substantial payments of principal and interest
(that is, balloon payments) at their stated maturity. Mortgage Loans of this
type involve a greater degree of risk than self-amortizing loans because the
ability of a Mortgagor to make a balloon payment typically will depend upon its
ability either to fully refinance the loan or to sell the related Mortgaged
Property at a price sufficient to permit the Mortgagor to make the balloon
payment. The ability of a Mortgagor to accomplish either of these goals will be
affected by a number of factors, including the value of the related Mortgaged
Property, the level of available mortgage rates at the time of sale or
refinancing, the Mortgagor's equity in the related Mortgaged Property,
prevailing general economic conditions, the
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<PAGE>
availability of credit for loans secured by comparable real properties and, in
the case of Multifamily Properties, the financial condition and operating
history of the Mortgagor and the related Mortgaged Property, tax laws and rent
control laws.
RISKS OF LENDING ON NON-OWNER OCCUPIED PROPERTIES. It is anticipated that
some or all of the Mortgage Loans included in any Trust Fund, particularly
Mortgage Loans secured by Multifamily Properties, will be nonrecourse loans or
loans for which recourse may be restricted or unenforceable. As to those
Mortgage Loans, recourse in the event of Mortgagor default will be limited to
the specific real property and other assets, if any, that were pledged to secure
the Mortgage Loan. However, even with respect to those Mortgage Loans that
provide for recourse against the Mortgagor and its assets generally, there can
be no assurance that enforcement of such recourse provisions will be
practicable, or that the other assets of the Mortgagor will be sufficient to
permit a recovery in respect of a defaulted Mortgage Loan in excess of the
liquidation value of the related Mortgaged Property.
Mortgage Loans made on the security of Multifamily Properties may entail
risks of delinquency and foreclosure, and risks of loss in the event thereof,
that are greater than similar risks associated with loans made on the security
of Single Family Properties. The ability of a borrower to repay a loan secured
by an income-producing property typically is dependent primarily upon the
successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay the
loan may be impaired. In addition, the concentration of default, foreclosure and
loss risk for a pool of Mortgage Loans secured by Multifamily Properties may be
greater than for a pool of Mortgage Loans secured by Single Family Properties of
comparable aggregate unpaid principal balance because the pool of Mortgage Loans
secured by Multifamily Properties is likely to consist of a smaller number of
higher balance loans.
RISKS OF NON-CONFORMING LOANS. Mortgage Loans to be included in a Mortgage
Pool may be non-conforming Mortgage Loans. Non-conforming Mortgage Loans are
Mortgage Loans that do not qualify for purchase by government sponsored agencies
such as Fannie Mae and Freddie Mac due to credit characteristics that to not
satisfy such Fannie Mae and Freddie Mac guidelines, including mortgagors whose
creditworthiness and repayment ability do not satisfy such Fannie Mae and
Freddie Mac underwriting guidelines and mortgagors who may have a record of
credit write-offs, outstanding judgments, prior bankruptcies and other
derogatory credit items. Accordingly, non-conforming Mortgage Loans are likely
to experience rates of delinquency, foreclosure and loss that are higher, and
that may be substantially higher, than mortgage loans originated in accordance
with Fannie Mae or Freddie Mac underwriting guidelines. The principal
differences between conforming Mortgage Loans and non-conforming Mortgage Loans
include the applicable Loan-to-Value Ratios, the credit and income histories of
the related Mortgagors, the documentation required for approval of the related
Mortgage Loans, the types of properties securing the Mortgage Loans, the loan
sizes and the Mortgagors' occupancy status with respect to the Mortgaged
Properties. As a result of these and other factors, the interest rates charged
on non-conforming Mortgage Loans are often higher than those charged for
conforming Mortgage Loans. The combination of different underwriting criteria
and higher rates of interest may also lead to higher delinquency, foreclosure
and losses on non-conforming Mortgage Loans as compared to conforming Mortgage
Loans.
RISKS OF UNDERWRITING STANDARDS OF UNAFFILIATED SELLERS. Mortgage Loans to
be included in a Mortgage Pool will have been purchased by the Company, either
directly or indirectly from Sellers. Such Mortgage Loans will generally have
been originated in accordance with underwriting standards acceptable to the
Company and generally described herein under "The Mortgage Pools--Underwriting
Standards" as more particularly described in the underwriting criteria included
in the related Prospectus Supplement. Nevertheless, in some cases, particularly
those involving Unaffiliated Sellers, the Company may not be able to establish
the underwriting standards used in the origination of the related Mortgage
Loans. In those cases, the related Prospectus Supplement will include a
statement to such effect and will reflect what, if any, re-underwriting of the
related Mortgage Loans was completed by the Company or any of its affiliates. To
the extent the Mortgage Loans cannot be re-underwritten or the underwriting
criteria cannot be verified, the Mortgage Loans might suffer losses greater than
they would had they been directly underwritten by the Company or an affiliate
thereof. Any such losses, to the extent not covered by credit enhancement, may
adversely affect the yield to maturity of the Certificates.
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<PAGE>
RISKS ASSOCIATED WITH LIMITED OR NO DOCUMENTATION LOANS. Mortgage Loans to
be included in a Mortgage Pool may have been originated in accordance with
underwriting standards that require documentation from Mortgagors that is more
limited than that required under standard loan underwriting programs or that
require no documentation from Mortgagors. Such programs rely on a combination of
independent credit ratings, asset evaluations, collateral value, work history,
and lower Loan-to Value Ratios. Such Mortgage Loans could experience rates of
delinquency, foreclosure and loss that are higher, and may be substantially
higher, than Mortgage Loans originated in accordance with underwriting standards
that require full documentation.
RISKS ASSOCIATED WITH JUNIOR LIEN MORTGAGE LOANS. Certain of the Mortgage
Pools may contain Mortgage Loans secured by junior liens and the related senior
liens may not be included in the Mortgage Pool. An overall decline in the
residential real estate market could adversely affect the values of the
Mortgaged Properties securing the Mortgage Loans with junior liens such that the
outstanding principal balances, together with any senior financing thereon,
exceeds the value of the Mortgaged Properties. Since Mortgage Loans secured by
junior (i.e., second, third, etc.) lines are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, such
a decline would adversely affect the position of the related junior beneficiary
or junior mortgagee before having such an effect on the position of the related
senior beneficiaries or senior mortgagees. A rise in interest rates over a
period of time, the general condition of the Mortgaged Property and other
factors may also have the effect of reducing the value of the Mortgaged Property
from the value oat the time the junior lien Mortgage Loan was originated. As a
result, the Loan-to-Value Ratio may exceed the ratio in effect at the time the
Mortgage Loan was originated. Such an increase may reduce the likelihood that,
in the event of a default by the related Mortgagor, liquidation or other
proceeds will be sufficient to satisfy the junior lien Mortgage Loan after
satisfaction of any senior liens and the payment of any liquidation expenses.
Other factors may affect the prepayment rate of junior lien Mortgage Loans,
such as the amounts of, and interest on, the related senior mortgage loans and
the use of senior lien mortgage loans as long-term financing for home purchases
and junior lien mortgage loans as shorter-term financing for a variety of
purposes, such as home improvement, educational expenses and purchases of
consumer durable such as automobiles. Accordingly, junior lien Mortgage Loans
may experience a higher rate of prepayments that traditional senior lien
mortgage loans. In addition, any future limitations on the rights of borrowers
to deduct interest payments on junior lien Mortgage Loans for federal income tax
purposes may further increase the rate of prepayments on such junior lien
Mortgage Loans.
RISKS OF NONPERFECTION OF SECURITY INTERESTS. Any Contract included in a
Mortgage Pool will be secured by a security interest in a Manufactured Home.
Perfection of security interests in 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 UCC
as adopted in each state and each state's certificate of title statutes. The
steps necessary to perfect the security interest in a Manufactured Home will
vary from state to state. In the event the Master Servicer fails, due to
clerical errors or otherwise, to take the appropriate steps to perfect such a
security interest, the Trustee may not have a first priority security interest
in the Manufactured Home securing a Contract. Additionally, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. The failure to properly perfect a valid, first priority security
interest in a Manufactured Home securing a Contract could lead to losses that
may adversely affect the yield to maturity of the Certificates.
RISKS RELATING TO LIQUIDATION OF MORTGAGED PROPERTIES. Substantial delays
can be encountered in connection with the liquidation of defaulted Mortgage
Loans and corresponding delays in the receipt of related proceeds by the
Certificateholders could occur. An action to foreclose on a Mortgaged 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 Mortgaged Property. In the
event of a default by a Mortgagor, these restrictions, among other things, may
impede the ability of the Master Servicer to foreclose on or sell the Mortgaged
Property or to obtain Liquidation Proceeds sufficient to repay all amounts due
on the related Mortgage Loan. The Master 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 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 Mortgaged Properties fail to
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provide adequate security for the related Mortgage Loans and insufficient funds
are available from any applicable credit enhancement, Certificateholders 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 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 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 loan.
ENVIRONMENTAL RISKS. The Mortgaged Properties are subject to certain
environmental risks. Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous owner of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operation knew of, or was responsible for, the presence of such
hazardous or toxic substances. A lender also risks such liability on foreclosure
of the mortgage on such property. In addition, the presence of hazardous or
toxic substances, or the failure to properly remediate such property, may
adversely affect the owner's or operator's ability to sell such property.
Although the incidence of environmental contamination of residential properties
is less common than that for commercial properties, Mortgage Loans contained in
a Mortgage Pool may be secured by Mortgaged Properties in violation of
environmental laws, ordinances or regulations. The Master Servicer is generally
prohibited from foreclosing on a Mortgaged Property unless it has taken adequate
steps to ensure environmental compliance with respect to such Mortgaged
Property. However, to the extent the Master Servicer errs and forecloses on
Mortgaged Property that is subject to environmental law violations, and to the
extent a Seller does not provide adequate representations and warranties against
such violations, or is unable to honor such obligations, including the
obligation to repurchase a Mortgage Loan upon the breach of a representation or
warranty, a Mortgage Pool could experience losses.
LIMITED NATURE OF RATINGS. It is a condition to the issuance of the
Certificates that each series of Certificates be rated in one of the four
highest rating categories by a nationally recognized statistical rating agency.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time. No person is obligated to
maintain the rating on any Certificate, and accordingly, there can be no
assurance that the ratings assigned to any Certificate on the date on which such
Certificate is originally issued will not be lowered or withdrawn by a Rating
Agency at any time thereafter. in the event any rating is revised or withdrawn,
the liquidity or the market value of the related Certificate may be adversely
affected. See "Rating" herein.
LIMITED REPRESENTATIONS BY AND AGAINST THE SELLER. Each Seller will have
made representations and warranties in respect of the Mortgage Loans and/or
Mortgage Securities sold by such Seller and evidenced by a series of
Certificates. In the event of a breach of a Seller's representation or warranty
that materially adversely affects the interests of the Certificateholders in a
Mortgage Loan or Mortgage Security, unless otherwise specified in the related
Prospectus Supplement, the related Seller will be obligated to cure the breach
or repurchase or, if permitted, replace such Mortgage Loan or Mortgage Security
as described below. However, there can be no assurance that a Seller will honor
its obligation to cure, repurchase or, if permitted, replace any Mortgage Loan
or Mortgage Security as to which such a breach of a representation or warranty
arises. A Seller's failure or refusal to honor its repurchase obligation could
lead to losses that, to the extent not covered by credit enhancement, may
adversely affect the yield to maturity of the Certificates.
In instances where a Seller is unable, or disputes its obligation, to
purchase affected Mortgage Loans and/or Mortgage Securities, the Master Servicer
may negotiate and enter into one or more settlement agreements with such Seller
that could provide for, among other things, the purchase of only a portion of
the affected Mortgage Loans and/or Mortgage Securities. Any such settlement
could lead to losses on the Mortgage Loans and/or Mortgage Securities which
would be borne by the related Certificates. Neither the Company nor the Master
Servicer will be obligated to purchase a Mortgage Loan or Mortgage Security if a
Seller defaults on its obligation to do so, and no assurance can be given that
the Sellers will carry out such purchase obligations. Such a default by a Seller
is not a default by the Company or by the Master Servicer. Any Mortgage Loan or
Mortgage Security not so purchased or substituted for shall remain in the
related Trust Fund and any losses related thereto shall be allocated to the
related credit enhancement, to the extent available, and otherwise to one or
more classes of the related series of Certificates.
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All of the representations and warranties of a Seller in respect of a
Mortgage Loan or Mortgage Security will have been made as of the date on which
such Mortgage Loan or Mortgage Security was purchased from the Seller by or on
behalf of the Company; the date as of which such representations and warranties
were made will be a date prior to the date of initial issuance of the related
series of Certificates or, in the case of a Designated Seller Transaction, will
be the date of closing of the related sale by the applicable Seller. A
substantial period of time may have elapsed between the date as of which the
representations and warranties were made and the later date of initial issuance
of the related series of Certificates. Accordingly, the Seller's purchase
obligation (or, if specified in the related Prospectus Supplement, limited
replacement option) will not arise if, during the period commencing on the date
of sale of a Mortgage Loan or Mortgage Security by the Seller, an event occurs
that would have given rise to such an obligation had the event occurred prior to
sale of the affected Mortgage Loan or Mortgage Security, as the case may be. The
occurrence of events during this period that are not covered by a Seller's
purchase obligation could lead to losses that, to the extent not covered by
credit enhancement, may adversely affect the yield to maturity of the
Certificates.
SUBORDINATION OF CERTAIN CLASSES OF CERTIFICATES. Credit support for a
particular series of Certificates may be provided in the form of subordination
of one or more classes of Certificates in a series under which losses are first
allocated to any Subordinate Certificates up to a specified limit. Losses not
covered by any form of credit enhancement will be borne by the holders of the
related Certificates (or certain classes thereof). Therefore, in the event of
substantial losses in any Mortgage Pool, such losses may be borne by such
holders.
BOOK ENTRY REGISTRATION MAY AFFECT LIQUIDITY. Because transfers and pledges
of DTC Registered Securities can be effected only through book entries at DTC
through Participants, the liquidity of the secondary market for DTC Registered
Securities may be reduced to the extent that some investors are unwilling to
hold Certificates in book entry form in the name of DTC and the ability to
pledge DTC Registered Securities may be limited due to the lack of a physical
certificate. Beneficial Owners of DTC Registered Securities may, in certain
cases experience delay in the receipt of payments of principal and interest such
payments will be forwarded by the related Trustee to DTC who will then forward
payment to the Participants who will thereafter forward payment to Beneficial
Owners. In the event of the insolvency of DTC or a Participant in whose name DTC
Registered Securities are recorded, the ability of Beneficial Owners to obtain
timely payment and (if the limits of applicable insurance coverage is otherwise
unavailable) ultimate payment of principal and interest on DTC Registered
Securities may be impaired.
YIELD TO MATURITY MAY VARY. The yield to maturity of the Offered
Certificates of each series will depend on, among other things, the rate and
timing of principal payments (including prepayments, liquidations due to
defaults, and repurchases due to conversion of ARM Loans to fixed interest rate
loans or breaches of representations and warranties) on the related Mortgage
Loans and the price paid by Certificateholders. Such yield may be adversely
affected by a higher or lower than anticipated rate of prepayments on the
related Mortgage Loans. The yield to maturity on Strip Certificates will be
extremely sensitive to the rate of prepayments on the related Mortgage Loans. In
addition, the yield to maturity on certain other types of classes of
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with an index or certain other classes in a
series including more than one class of Certificates, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Certificates. Prepayments are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. In addition, to the extent amounts in any
Pre-Funding Account have not been used to purchase additional Mortgage Loans,
holders of the Certificates may receive an additional prepayment. See "Yield
Considerations" and "Maturity and Prepayment Considerations" herein.
ERISA CONSIDERATIONS. Generally, ERISA applies to investments made by
employee benefit plans and transactions involving the assets of such plans. Due
to the complexity of regulations that govern such plans, prospective investors
that are subject to ERISA are urged to consult their own counsel regarding
consequences under ERISA of acquisition, ownership and disposition of the
Offered Certificates of any series. See "ERISA Considerations".
FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES. Holders
of REMIC Residual Certificates will be required to report on their federal
income tax returns as ordinary income their pro rata share of the taxable income
of the REMIC, regardless of the amount or timing of their receipt of cash
payments, as described under "Federal Income Tax Consequences--REMICs".
Accordingly, under certain circumstances, holders of Offered Certificates that
constitute REMIC Residual Certificates may have taxable income and tax
liabilities arising from such investment during a taxable year in excess of the
cash received during such period. The requirement that holders of
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REMIC Residual Certificates report their pro rata share of the taxable income
and net loss of the REMIC will continue until the principal balances of all
classes of Certificates of the related series have been reduced to zero, even
though holders of REMIC Residual Certificates have received full payment of
their stated interest and principal. A portion (or, in certain circumstances,
all) of such Certificateholder's share of the REMIC taxable income may be
treated as "excess inclusion" income to such holder, which (i) generally will
not be subject to offset by losses from other activities, (ii) for a tax-exempt
holder, will be treated as unrelated business taxable income and (iii) for a
foreign holder, will not qualify for exemption from withholding tax. Individual
holders of REMIC Residual Certificates may be limited in their ability to deduct
servicing fees and other expenses of the REMIC. In addition, REMIC Residual
Certificates are subject to certain restrictions on transfer. Because of the
special tax treatment of REMIC Residual Certificates, the taxable income arising
in a given year on a REMIC Residual Certificate will not be equal to the taxable
income associated with investment in a corporate bond or stripped instrument
having similar cash flow characteristics and pre-tax yield. Therefore, the
after-tax yield on a REMIC Residual Certificate may be significantly less than
that of a corporate bond or stripped instrument having similar cash flow
characteristics.
RISKS OF OPTIONAL TERMINATION. The Master Servicer or the Company will have
the option to purchase, in whole but not in part, the Certificates specified in
the related Prospectus Supplement in the manner set forth in the related
Prospectus Supplement. Upon the purchase of such Certificates or at any time
thereafter, at the option of the Master Servicer or the Company, the assets of
the Trust Fund may be sold, thereby effecting a retirement of the Certificates
and the termination of the Trust Fund, or the Certificates so purchased may be
held or resold by the Master Servicer or the Company.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Certificates shall be made at the option
of the Master Servicer or the Company at the price specified in the related
Prospectus Supplement. The exercise of such right will effect early retirement
of the Certificates of that series, and will be subject to the aggregate
principal balance of the Mortgage Loans and/or Mortgage Securities in the Trust
Fund for that series as of the Distribution Date on which the purchase proceeds
are to be distributed to Certificateholders being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of such Mortgage Loans and/or Mortgage Securities at the Cut-off Date
for that series. The Prospectus Supplement for each series of Certificates will
set forth the amounts that the holders of such Certificates will be entitled to
receive upon such early retirement. A Trust Fund may also be terminated and the
Certificates retired upon the Master Servicer's determination, based upon an
opinion of counsel, that the REMIC status of the Trust Fund has been lost or
that a substantial risk exists that such status will be lost for the then
current taxable year. The termination of a Trust Fund and the early retirement
of Certificates by the Master Servicer or the Company may adversely affect the
yield to holders of certain classes of such Certificates.
THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist primarily of Mortgage Loans, minus the
Spread, if any, or any other interest retained by the Company or any affiliate
of the Company. The Mortgage Loans may consist of Single Family Loans,
Multifamily Loans and Contracts, each as described below.
The Mortgage Loans (other than the Contracts) will be evidenced by
promissory notes ("Mortgage Notes") and secured by mortgages, deeds of trust or
other similar security instruments ("Mortgages") that, in each case, create a
first or junior lien on the related Mortgagor's fee or leasehold interest in the
related Mortgaged Property. The Mortgaged Properties for such loans may consist
of attached or detached one-family dwelling units, two- to four-family dwelling
units, condominiums, townhouses, row houses, individual units in planned-unit
developments and certain other individual dwelling units (a "Single Family
Property" and the related loans, "Single Family Loans"), which in each case may
be owner-occupied or may be a vacation, second or non-owner-occupied home. The
Mortgaged Properties for such loans may also consist of residential properties
consisting of five or more rental or cooperatively owned dwelling units in
high-rise, mid-rise or garden apartment buildings or projects ("Multifamily
Properties" and the related loans, "Multifamily Loans").
The "Contracts" will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
Unless otherwise specified in the related Prospectus Supplement, each
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Contract will be fully amortizing and will bear interest at its Mortgage Rate.
Unless specified otherwise in the related Prospectus Supplement, Contracts will
all have individual principal balances at origination of not less than $10,000
and not more than $1,000,000 and original terms to maturity of 5 to 40 years.
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 Fund, among other things, the date of origination of the
Contracts; the Mortgage Rate 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 Fund; and the original
maturities of the Contracts and the last maturity date of any Contract.
Mortgaged Properties may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The Mortgage Loans will not be guaranteed or insured by the Company, any of
its affiliates or, unless otherwise specified in the related Prospectus
Supplement, by any governmental agency or instrumentality or other person.
However, if so specified in the related Prospectus Supplement, the Mortgage
Loans may be insured by the Federal Housing Administration (the "FHA" and such
loans, "FHA Loans"). See "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder--FHA Insurance."
A Mortgage Pool may include Mortgage Loans that are delinquent or
non-performing as of the date the related series of Certificates is issued. In
that case, the related Prospectus Supplement will set forth, as to each such
Mortgage Loan, available information as to the period of such delinquency or
nonperformance and any other information relevant for a prospective purchaser to
make an investment decision.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among those purchased by the Company, either directly or
through its affiliates, from banks, savings and loan associations, mortgage
bankers, investment banking firms, the Resolution Trust Corporation (the "RTC"),
the Federal Deposit Insurance Corporation (the "FDIC") and other mortgage loan
originators or sellers not affiliated with the Company ("Unaffiliated Sellers")
or from affiliates of the Company, including ICI Funding and ICMH (collectively
"Affiliated Sellers"; Unaffiliated Sellers and Affiliated Sellers are
collectively referred to herein as "Sellers"). If a Mortgage Pool is composed of
Mortgage Loans acquired by the Company directly from Unaffiliated Sellers, the
related Prospectus Supplement will specify the extent of Mortgage Loans so
acquired. The characteristics of the Mortgage Loans are as described in the
related Prospectus Supplement. Other mortgage loans available for purchase by
the Company may have characteristics which would make them eligible for
inclusion in a Mortgage Pool but were not selected for inclusion in such
Mortgage Pool.
Under certain circumstances, the Mortgage Loans to be included in a
Mortgage Pool will be delivered either directly or indirectly to the Company by
one or more Sellers identified in the related Prospectus Supplement,
concurrently with the issuance of the related series of Certificates (a
"Designated Seller Transaction"). Such Certificates may be sold in whole or in
part to any such Seller in exchange for the related Mortgage Loans, or may be
offered under any of the other methods described herein under "Methods of
Distribution." The related Prospectus Supplement for a Mortgage Pool composed of
Mortgage Loans acquired by the Company pursuant to a Designated Seller
Transaction will generally include information, provided by the related Seller,
about the Seller, the Mortgage Loans and the underwriting standards applicable
to the Mortgage Loans. None of the Company or, unless it is the Seller, ICI
Funding or any of their affiliates will make any representation or warranty with
respect to such Mortgage Loans, or any representation as to the accuracy or
completeness of such information provided by the Seller.
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If specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include mortgage participations and pass-through
certificates evidencing interests in Mortgage Loans ("Mortgage Securities"), as
described herein. The Mortgage Securities may have been issued previously by the
Company or an affiliate thereof, a financial institution or other entity engaged
generally in the business of mortgage lending or a limited purpose corporation
organized for the purpose of, among other things, acquiring and depositing
mortgage loans into such trusts, and selling beneficial interests in such
trusts. Except as otherwise set forth in the related Prospectus Supplement, such
Mortgage Securities will be generally similar to Certificates offered hereunder.
As to any such series of Certificates, the related Prospectus Supplement will
include a description of such Mortgage Securities and any related credit
enhancement, and the Mortgage Loans underlying such Mortgage Securities will be
described together with any other Mortgage Loans included in the Mortgage Pool
relating to such series. To the extent the issuance of such Mortgage Securities
has been registered under the Exchange Act, the underlying securities will be
registered and the underlying issuer will be a reporting entity pursuant to
Sections 12 or 1 d) of the Exchange Act. Additionally, the material terms of
such underlying securities will be disclosed in the related Prospectus
Supplement. Furthermore, the Company will include only Mortgage Securities
acquired in the secondary market and not in a public offering of such
securities.
THE MORTGAGE LOANS
Each of the Mortgage Loans will be a type of mortgage loan described or
referred to in paragraphs numbered (1) through (8) below, with any variations
thereto described in the related Prospectus Supplement:
(1) Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans or otherwise
modified) providing for level monthly payments of principal and interest
and terms at origination or modification of not more than approximately 15
years;
(2) Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans or otherwise
modified) providing for level monthly payments of principal and interest
and terms at origination or modification of more than 15 years, but not
more than approximately 25 or 30 years;
(3) Fully-amortizing adjustable-rate mortgage loans ("ARM Loans")
having an original or modified term to maturity of not more than
approximately 25 or 30 years with a related interest rate (a "Mortgage
Rate") which generally adjusts initially either three months, six months or
one, three, five or seven years subsequent to the initial payment date, and
thereafter at either three-month, six-month, one-year or other intervals
(with corresponding adjustments in the amount of monthly payments) over the
term of the mortgage loan to equal the sum of a fixed percentage set forth
in the related Mortgage Note (the "Note Margin") and an index.(1) The
related Prospectus Supplement will set forth the relevant index and the
highest, lowest and weighted average Note Margin with respect to the ARM
Loans in the related Mortgage Pool. The related Prospectus Supplement will
also indicate any periodic or lifetime limitations on changes in any per
annum Mortgage Rate at the time of any adjustment. If specified in the
related Prospectus Supplement, an ARM Loan may include a provision that
allows the Mortgagor to convert the adjustable Mortgage Rate to a fixed
rate at some point during the term of such ARM Loan generally not later
than six to ten years subsequent to the initial payment date;
(4) Negatively-amortizing ARM Loans having original or modified
terms to maturity of not more than approximately 25 or 30 years with
Mortgage Rates which generally adjust initially on the payment date
referred to in the related Prospectus Supplement, and on each of certain
periodic payment dates thereafter, to equal the sum of the Note Margin and
the index. The scheduled monthly payment will be adjusted as and when
described in the related Prospectus Supplement to an amount that would
fully amortize the Mortgage Loan over its
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(1)The index (the "Index") for a particular Mortgage Pool will be
specified in the related Prospectus Supplement and may include one of the
following indexes: (i) the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of either six months or one year, (ii) the
weekly auction average investment yield of U.S. Treasury bills of six
months, (iii) the daily Bank Prime Loan rate made available by the Federal
Reserve Board, (iv) the cost of funds of member institutions for the
Federal Home Loan Bank of San Francisco, (v) the interbank offered rates
for U.S. dollar deposits in the London market, each calculated as of a date
prior to each scheduled interest rate adjustment date which will be
specified in the related Prospectus Supplement or (vi) another index
substantially similar to the indexes described in (i) through (v) above as
described in the related Prospectus Supplement.
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remaining term on a level debt service basis; provided that increases in
the scheduled monthly payment may be subject to certain limitations as
specified in the related Prospectus Supplement. If an adjustment to the
Mortgage Rate on a Mortgage Loan causes the amount of interest accrued
thereon in any month to exceed the scheduled monthly payment on such
mortgage loan, the resulting amount of interest that has accrued but is not
then payable ("Deferred Interest") will be added to the principal balance
of such Mortgage Loan;
(5) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of not more than approximately 15 years with
monthly payments during the first year calculated on the basis of an
assumed interest rate which is a specified percentage below the Mortgage
Rate on such mortgage loan. Such monthly payments increase at the beginning
of the second year by a specified percentage of the monthly payment during
the preceding year and each year thereafter to the extent necessary to
amortize the mortgage loan over the remainder of its approximately 15-year
term. Deferred Interest, if any, will be added to the principal balance of
such mortgage loans;
(6) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of not more than approximately 25 or 30 years
with monthly payments during the first year calculated on the basis of an
assumed interest rate which is a specified percentage below the Mortgage
Rate. Such monthly payments increase at the beginning of the second year by
a specified percentage of the monthly payment during the preceding year and
each year thereafter to the extent necessary to fully amortize the mortgage
loan within its approximately 25- or 30-year term. Deferred Interest, if
any, will be added to the principal balance of such mortgage loan;
(7) Mortgage loans ("Balloon Loans") having payment terms similar
to those described in one of the preceding paragraphs numbered (1) through
(6), calculated on the basis of an assumed amortization term, but providing
for a payment (a "Balloon Payment") of all outstanding principal and
interest to be made at the end of a specified term that is shorter than
such assumed amortization term; or
(8) Another type of mortgage loan having terms substantially
similar to those described in one or more of the preceding paragraphs
numbered (1) through (7) as described in the related Prospectus Supplement.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Single Family and Multifamily Loans secured by junior liens,
and the related senior liens ("Senior Liens") may not be included in the
Mortgage Pool. The primary risk to holders of such Mortgage Loans secured by
junior liens is the possibility that adequate funds will not be received in
connection with a foreclosure of the related Senior Liens to satisfy fully both
the Senior Liens and the Mortgage Loan. In the event that a holder of a Senior
Lien forecloses on a Mortgaged Property, the proceeds of the foreclosure or
similar sale will be applied first to the payment of court costs and fees in
connection with the foreclosure, second to real estate taxes, third in
satisfaction of all principal, interest, prepayment or acceleration penalties,
if any, and any other sums due and owing to the holder of the Senior Liens. The
claims of the holders of the Senior Liens will be satisfied in full out of
proceeds of the liquidation of the related Mortgaged Property, if such proceeds
are sufficient, before the Trust Fund as holder of the junior lien receives any
payments in respect of the Mortgage Loan. If the Master Servicer were to
foreclose on any such Mortgage Loan, it would do so subject to any related
Senior Liens. In order for the debt related to the Mortgage Loan to be paid in
full at such sale, a bidder at the foreclosure sale of such Mortgage Loan would
have to bid an amount sufficient to pay off all sums due under the Mortgage Loan
and the Senior Liens or purchase the Mortgaged Property subject to the Senior
Liens. In the event that such proceeds from a foreclosure or similar sale of the
related Mortgaged Property are insufficient to satisfy all Senior Liens and the
Mortgage Loan in the aggregate, the Trust Fund, as the holder of the junior
lien, and, accordingly, holders of one or more classes of the Certificates of
the related series bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of loss
if the deficiency judgment is not realized upon. Moreover, deficiency judgments
may not be available in certain jurisdictions or the Mortgage Loan may be
nonrecourse. In addition, a junior mortgagee may not foreclose on the property
securing a junior mortgage unless it forecloses subject to the senior mortgages.
If so specified in the related Prospectus Supplement, a Mortgage Loan may
contain a prohibition on prepayment (the period of such prohibition, a "Lock-out
Period" and its date of expiration, a "Lock-out Expiration Date") or require
payment of a premium or a yield maintenance penalty (a "Prepayment Penalty"). A
Multifamily Loan may also contain a provision that entitles the lender to a
share of profits realized from the operation or disposition of the related
Mortgaged Property (an "Equity Participation"). If the holders of any class or
classes of Offered Certificates of a series will be entitled to all or a portion
of an Equity Participation, the related Prospectus Supplement will
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describe the Equity Participation and the method or methods by which
distributions in respect thereof will be made to such holders.
Certain information, including information regarding loan-to-value ratios
(each, a "Loan-to-Value Ratio") at origination of the Mortgage Loans underlying
each series of Certificates, will be supplied in the related Prospectus
Supplement. In the case of most Mortgage Loans, the "Loan-to-Value Ratio" at
origination is defined generally as the ratio, expressed as a percentage, of the
principal amount of the Mortgage Loan at origination (or, if appropriate, at the
time of an appraisal subsequent to origination), plus, in the case of a Mortgage
Loan secured by a junior lien, the outstanding principal balance of the related
Senior Liens, to the Value of the related Mortgaged Property. Unless otherwise
specified in the related Prospectus Supplement, the "Value" of a Mortgaged
Property securing a Single Family or Multifamily Mortgage Loan will generally be
equal to the lesser of (x) the appraised value determined in an appraisal
obtained at origination of such Mortgage Loan, if any, or, if the related
Mortgaged Property has been appraised subsequent to origination, the value
determined in such subsequent appraisal and (y) the sales price for the related
Mortgaged Property (except in certain circumstances in which there has been a
subsequent appraisal). In the case of certain refinanced, modified or converted
Single Family or Multifamily Loans, unless otherwise specified in the related
Prospectus Supplement, the "Value" of the related Mortgaged Property will be
equal to the lesser of (x) the appraised value of the related Mortgaged Property
determined at origination or in an appraisal, if any, obtained at the time of
refinancing, modification or conversion and (y) the sales price of the related
Mortgage Property or, if the Mortgage Loan is not a rate and term refinance
Mortgage Loan and if the Mortgaged Property was owned for a relatively short
period of time prior to refinancing, modification or conversion, the sum of the
sales price of the related Mortgaged Property plus the added value of any
improvements. Certain Mortgage Loans which are subject to negative amortization
will have Loan-to-Value Ratios which will increase after origination as a result
of such negative amortization. Unless otherwise specified in the related
Prospectus Supplement, for purposes of calculating the Loan-to-Value Ratio of a
Contract relating to a new Manufactured Home, the "Value" is 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. Unless otherwise specified in the related Prospectus Supplement, with
respect to a used Manufactured Home, the "Value" is the least of the sale price,
the appraised value, and the National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable. Manufactured Homes are less likely to experience
appreciation in value and more likely to experience depreciation in value over
time than other types of housing.
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to which a
portion of the proceeds are used to refinance an existing mortgage loan, and the
remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net of related costs incurred by the Mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The Mortgage Loans
may be mortgage loans which have been consolidated and/or have had various terms
changed, mortgage loans which have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. In addition, a Mortgaged Property may be
subject to secondary financing at the time of origination of the Mortgage Loan
or thereafter.
If provided for in the related Prospectus Supplement, a Mortgage Pool may
contain ARM Loans which allow the Mortgagors to convert the adjustable rates on
such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally not later than six to ten years subsequent to the date of origination,
depending upon the length of the initial adjustment period. If specified in the
related Prospectus Supplement, upon any conversion, the Company, the related
Master Servicer, the applicable Seller or a third party will purchase the
converted Mortgage Loan as and to the extent set forth in the related Prospectus
Supplement. Alternatively, if specified in the related Prospectus Supplement,
the Company or the related Master Servicer (or another party specified therein)
may agree to act as remarketing agent with respect to such converted Mortgage
Loans and, in such capacity, to use its best efforts to arrange for the sale of
converted Mortgage Loans under specified conditions. Upon the failure of any
party so obligated to purchase any such converted Mortgage Loan, the inability
of any remarketing agent to arrange for the sale of the converted Mortgage Loan
and the
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unwillingness of such remarketing agent to exercise any election to purchase the
converted Mortgage Loan for its own account, the related Mortgage Pool will
thereafter include both fixed rate and adjustable rate Mortgage Loans.
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be subject to temporary buydown plans ("Buydown Mortgage
Loans") pursuant to which the monthly payments made by the Mortgagor during the
early years of the Mortgage Loan (the "Buydown Period") will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) an amount (such amount, exclusive of investment earnings
thereon, being hereinafter referred to as "Buydown Funds") contributed by the
seller of the Mortgaged Property or another source and placed in a custodial
account (the "Buydown Account"), (ii) if the Buydown Funds are contributed on a
present value basis, investment earnings on such Buydown Funds or (iii)
additional buydown funds to be contributed over time by the Mortgagor's employer
or another source. See "Description of the Certificates--Certificate Account."
Generally, the Mortgagor under each Buydown Mortgage Loan will be qualified at
the applicable lower monthly payment. Accordingly, the repayment of a Buydown
Mortgage Loan is dependent on the ability of the Mortgagor to make larger level
monthly payments after the Buydown Funds have been depleted and, for certain
Buydown Mortgage Loans, during the Buydown Period.
The Prospectus Supplement for each series of Certificates will contain
information as to the type of Mortgage Loans that will be included in the
related Mortgage Pool. Each Prospectus Supplement applicable to a series of
Certificates will include certain information, generally as of the Cut-off Date
and to the extent then available to the Company, on an approximate basis, as to
(i) the aggregate principal balance of the Mortgage Loans, (ii) the type of
property securing the Mortgage Loans, (iii) the original or modified terms to
maturity of the Mortgage Loans, (iv) the range of principal balances of the
Mortgage Loans at origination or modification, (v) the earliest origination or
modification date and latest maturity date of the Mortgage Loans, (vi) the
Loan-to-Value Ratios of the Mortgage Loans, (vii) the Mortgage Rate or range of
Mortgage Rates borne by the Mortgage Loans, (viii) if any of the Mortgage Loans
are ARM Loans, the applicable Index, the range of Note Margins and the weighted
average Note Margin, (ix) the geographical distribution of the Mortgage Loans,
(x) the number of Buydown Mortgage Loans, if applicable, and (xi) the percent of
ARM Loans which are convertible to fixed-rate mortgage loans, if applicable. A
Current Report on Form 8-K will be available upon request to holders of the
related series of Certificates and will be filed, together with the related
Pooling Agreement, with the Securities and Exchange Commission within fifteen
days after the initial issuance of such Certificates. In the event that Mortgage
Loans are added to or deleted from the Trust Fund after the date of the related
Prospectus Supplement, such addition or deletion will be noted in the Current
Report on Form 8-K.
The Company will cause the Mortgage Loans constituting each Mortgage Pool
(or Mortgage Securities evidencing interests therein) to be assigned, without
recourse, to the Trustee named in the related Prospectus Supplement, for the
benefit of the holders of all of the Certificates of a series. Except to the
extent that servicing of any Mortgage Loan is to be transferred to a Special
Servicer, the Master Servicer named in the related Prospectus Supplement will
service the Mortgage Loans, directly or through other mortgage servicing
institutions ("Subservicers"), pursuant to a Pooling Agreement and will receive
a fee for such services. See "Servicing of Mortgage Loans," "Description of the
Certificates" and "The Pooling Agreement." With respect to those Mortgage Loans
serviced by the Master Servicer through a Subservicer, the Master Servicer will
remain liable for its servicing obligations under the related Pooling Agreement
as if the Master Servicer alone were servicing such Mortgage Loans. The Master
Servicer's obligations with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Pooling
Agreement (including its obligation to enforce certain purchase and other
obligations of Subservicers and Sellers, as more fully described herein under
"--Representations by Sellers" below, "Servicing of Mortgage
Loans--Subservicers," and "Description of the Certificates--Assignment of Trust
Fund Assets," and, if and to the extent set forth in the related Prospectus
Supplement, its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans as described
herein under "Description of the Certificates--Advances") or pursuant to the
terms of any Mortgage Securities.
UNDERWRITING STANDARDS
Mortgage Loans to be included in a Mortgage Pool will have been purchased
by the Company, either directly or indirectly from Sellers. Such Mortgage Loans,
as well as Mortgage Loans underlying Mortgage Securities, will generally have
been originated or acquired in accordance with underwriting standards acceptable
to the Company or alternative underwriting criteria. The underwriting standards
for the Mortgage Loans included in each Mortgage Pool
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are described below and in the related Prospectus Supplement. However, in some
cases, particularly those involving Unaffiliated Sellers, the Company may not be
able to establish the underwriting standards used in the origination of the
related Mortgage Loans. In those cases, the related Prospectus Supplement will
include a statement to such effect and will reflect what, if any,
re-underwriting of the related Mortgage Loans was done by the Company or any of
its affiliates.
Unless otherwise specified in the related Prospectus Supplement, the
underwriting standards to be used in originating the Mortgage Loans are
primarily intended to assess the creditworthiness of the Mortgagor, the value of
the Mortgaged Property and the adequacy of such property as collateral for the
Mortgage Loan.
The primary considerations in underwriting a Single Family Loan or Contract
are the Mortgagor's employment stability and whether the Mortgagor has
sufficient monthly income available (i) to meet the Mortgagor's monthly
obligations on the proposed Mortgage Loan (generally determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the home (such as property taxes and hazard insurance) and (ii) to meet
monthly housing expenses and other financial obligations and monthly living
expenses. However, the Loan-to- Value Ratio of the Mortgage Loan is another
critical factor. In addition, a Mortgagor's credit history and repayment
ability, as well as the type and use of the Mortgaged Property, are also
considerations.
In the case of the Multifamily Loans, lenders typically look to the Debt
Service Coverage Ratio of a loan as an important measure of the risk of default
on such a loan. Unless otherwise defined in the related Prospectus Supplement,
the "Debt Service Coverage Ratio" of a Multifamily Loan at any given time is the
ratio of (i) the Net Operating Income of the related Mortgaged Property for a
twelve-month period to (ii) the annualized scheduled payments on the Mortgage
Loan and on any other loan that is secured by a lien on the Mortgaged Property
prior to the lien of the related Mortgage. Unless otherwise defined in the
related Prospectus Supplement, "Net Operating Income" means, for any given
period, the total operating revenues derived from a Multifamily Property during
such period, minus the total operating expenses incurred in respect of such
property during such period other than (i) non-cash items such as depreciation
and amortization, (ii) capital expenditures and (iii) debt service on loans
(including the related Mortgage Loan) secured by liens on such property. The Net
Operating Income of a Multifamily Property will fluctuate over time and may or
may not be sufficient to cover debt service on the related Mortgage Loan at any
given time. As the primary source of the operating revenues of a Multifamily
Property, rental income (and maintenance payments from tenant-stockholders of a
cooperatively owned Multifamily Property) may be affected by the condition of
the applicable real estate market and/or area economy. Increases in operating
expenses due to the general economic climate or economic conditions in a
locality or industry segment, such as increases in interest rates, real estate
tax rates, energy costs, labor costs and other operating expenses, and/or to
changes in governmental rules, regulations and fiscal policies, may also affect
the risk of default on a Multifamily Loan. Lenders also look to the
Loan-to-Value Ratio of a Multifamily Loan as a measure of risk of loss if a
property must be liquidated following a default.
It is expected that each prospective Mortgagor will complete a mortgage
loan application that includes information with respect to the applicant's
liabilities, income, credit history, employment history and personal
information. One or more credit reports on each applicant from national credit
reporting companies will generally be required. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions, or judgments. In the case of a Multifamily Loan,
the Mortgagor will also be required to provide certain information regarding the
related Multifamily Property, including a current rent roll and operating income
statements (which may be pro forma and unaudited). In addition, the originator
will generally also consider the location of the Multifamily Property, the
availability of competitive lease space and rental income of comparable
properties in the relevant market area, the overall economy and demographic
features of the geographic area and the Mortgagor's prior experience in owning
and operating properties similar to the Multifamily Properties.
Unless otherwise specified in the related Prospectus Supplement, Mortgaged
Properties will be appraised by licensed appraisers. The appraiser will
generally address neighborhood conditions, site and zoning status and condition
and valuation of improvements. In the case of Single Family Properties, the
appraisal report will generally include a reproduction cost analysis (when
appropriate) based on the current cost of constructing a similar home and a
market value analysis based on recent sales of comparable homes in the area.
With respect to Multifamily Properties, the appraisal must specify whether an
income analysis, a market analysis or a cost analysis was used. An appraisal
employing the income approach to value analyzes a property's projected net cash
flow, capitalization and other
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operational information in determining the property's value. The market approach
to value analyzes the prices paid for the purchase of similar properties in the
property's area, with adjustments made for variations between those other
properties and the property being appraised. The cost approach to value requires
the appraiser to make an estimate of land value and then determine the current
cost of reproducing the improvements less any accrued depreciation. In any case,
the value of the property being financed, as indicated by the appraisal, must be
such that it currently supports, and is anticipated to support in the future,
the outstanding loan balance. Unless otherwise specified in the related
Prospectus Supplement, all appraisals are required to conform to the Uniform
Standards of Professional Appraisal Practice and the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and must be on forms
acceptable to the Federal National Mortgage Association ("Fannie Mae") and/or
the Federal Home Loan Mortgage Corporation ("Freddie Mac").
Notwithstanding the foregoing, Loan-to-Value Ratios will not necessarily
constitute an accurate measure of the risk of liquidation loss in a pool of
Mortgage Loans. For example, the value of a Mortgaged Property as of the date of
initial issuance of the related series of Certificates may be less than the
Value determined at loan origination, and will likely continue to fluctuate from
time to time based upon changes in economic conditions and the real estate
market. Moreover, even when current, an appraisal is not necessarily a reliable
estimate of value for a Multifamily Property. As stated above, appraised values
of Multifamily Properties are generally based on the market analysis, the cost
analysis, the income analysis, or upon a selection from or interpolation of the
values d ived from such approaches. Each of these appraisal methods can present
analytical difficulties. It is often difficult to find truly comparable
properties that have recently been sold; the replacement cost of a property may
have little to do with its current market value; and income capitalization is
inherently based on inexact projections of income and expenses and the selection
of an appropriate capitalization rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of default and
loss risks, is even more difficult.
If so specified in the related Prospectus Supplement, the underwriting of a
Multifamily Loan may also include environmental testing. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an
"owner" or "operator", for costs of addressing releases or threatened releases
of hazardous substances at a property, if agents or employees of the lender have
become sufficiently involved in the operations of the borrower, regardless of
whether or not the environmental damage or threat was caused by the borrower or
a prior owner. A lender also risks such liability on foreclosure of the
mortgage. See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation".
With respect to any FHA Loan the Mortgage Loan Seller will be required to
represent that it has complied with the applicable underwriting policies of the
FHA. See "Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder--FHA
Insurance".
To the extent available, the related Prospectus Supplement will include
delinquency and foreclosure experience for the applicable Seller(s) and/or
Master Servicer.
QUALIFICATIONS OF ORIGINATORS AND SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be originated, directly or through mortgage brokers and
correspondents, by a savings and loan association, savings bank, commercial
bank, credit union, insurance company, or similar institution which is
supervised and examined by a federal or state authority, or by a mortgagee
approved by the Secretary of Housing and Urban Development pursuant to sections
203 and 211 of the National Housing Act of 1934, as amended (the "Housing Act").
Except with respect to Designated Seller Transactions or unless otherwise
specified in the related Prospectus Supplement, each Seller must satisfy certain
criteria as to financial stability evaluated on a case-by-case basis by the
Company. These criteria include, but are not limited to requirements that each
Seller must (i) be properly licensed to originate and sell loans; (ii) have been
conducting business for a pre-determined time period; (iii) meet minimum net
worth standards; (iv) maintain insurance at pre-determined levels of coverage;
and (v) be in "good standing" with governmental licensing and revenue collection
agencies.
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REPRESENTATIONS BY SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Seller will have made representations and warranties in respect of the Mortgage
Loans and/or Mortgage Securities sold by such Seller and evidenced by a series
of Certificates. In the case of Mortgage Loans, such representations and
warranties will generally include, among other things, that as to each such
Mortgage Loan: (i) any required hazard and primary mortgage insurance policies
were effective at the origination of such Mortgage Loan, and each such policy
remained in effect on the date of purchase of such Mortgage Loan from the Seller
by or on behalf of the Company; (ii) with respect to each Mortgage Loan other
than a Contract, either (A) a title insurance policy insuring (subject only to
permissible title insurance exceptions) the lien status of the Mortgage was
effective at the origination of such Mortgage Loan and such policy remained in
effect on the date of purchase of the Mortgage Loan from the Seller by or on
behalf of the Company or (B) if the Mortgaged Property securing such Mortgage
Loan is located in an area where such policies are generally not available,
there is in the related mortgage file an attorney's certificate of title
indicating (subject to such permissible exceptions set forth therein) the first
lien status of the mortgage; (iii) the Seller has good title to such Mortgage
Loan and such Mortgage Loan was subject to no offsets, defenses or counterclaims
except as may be provided under the Relief Act and except to the extent that any
buydown agreement exists for a Buydown Mortgage Loan; (iv) there are no
mechanics' liens or claims for work, labor or material affecting the related
Mortgaged Property which are, or may be a lien prior to, or equal with, the lien
of the related Mortgage (subject only to permissible title insurance
exceptions); (v) the related Mortgaged Property is free from damage and in good
repair; (vi) there are no delinquent tax or assessment liens against the related
Mortgaged Property; (vii) such Mortgage Loan is not more than 30 days'
delinquent as to any scheduled payment of principal and/or interest; (viii) if a
Primary Insurance Policy is required with respect to such Mortgage Loan, such
Mortgage Loan is the subject of such a policy; and (ix) such Mortgage Loan was
made in compliance with, and is enforceable under, all applicable local, state
and federal laws in all material respects. In the case of Mortgage Securities,
such representations and warranties will generally include, among other things,
that as to each such Mortgage Security: (i) such Mortgage Security is validly
issued and outstanding and entitled to the benefits of the agreement pursuant to
which it was issued; and (ii) the Seller has good title to such Mortgage
Security. In the event of a breach of a Seller's representation or warranty that
materially adversely affects the interests of the Certificateholders in a
Mortgage Loan or Mortgage Security, unless otherwise specified in the related
Prospectus Supplement, the related Seller will be obligated to cure the breach
or repurchase or, if permitted, replace such Mortgage Loan or Mortgage Security
as described below. However, there can be no assurance that a Seller will honor
its obligation to repurchase or, if permitted, replace any Mortgage Loan or
Mortgage Security as to which such a breach of a representation or warranty
arises.
All of the representations and warranties of a Seller in respect of a
Mortgage Loan or Mortgage Security will have been made as of the date on which
such Mortgage Loan or Mortgage Security was purchased from the Seller by or on
behalf of the Company; the date as of which such representations and warranties
were made will be a date prior to the date of initial issuance of the related
series of Certificates or, in the case of a Designated Seller Transaction, will
be the date of closing of the related sale by the applicable Seller. A
substantial period of time may have elapsed between the date as of which the
representations and warranties were made and the later date of initial issuance
of the related series of Certificates. Accordingly, the Seller's purchase
obligation (or, if specified in the related Prospectus Supplement, limited
replacement option) described below will not arise if, during the period
commencing on the date of sale of a Mortgage Loan or Mortgage Security by the
Seller, an event occurs that would have given rise to such an obligation had the
event occurred prior to sale of the affected Mortgage Loan or Mortgage Security,
as the case may be. Unless otherwise specified in the related Prospectus
Supplement, the only representations and warranties to be made for the benefit
of holders of Certificates in respect of any related Mortgage Loan or Mortgage
Security relating to the period commencing on the date of sale of such Mortgage
Loan or Mortgage Security by the Seller to or on behalf of the Company will be
certain limited representations of the Company and the Master Servicer described
under "Description of the Certificates--Assignment of Trust Fund Assets" below.
The Company will assign to the Trustee for the benefit of the holders of
the related series of Certificates all of its right, title and interest in each
agreement by which it purchased a Mortgage Loan or Mortgage Security from a
Seller insofar as such agreement relates to the representations and warranties
made by such Seller in respect of such Mortgage Loan or Mortgage Security and
any remedies provided for with respect to any breach of such representations and
warranties. If a Seller cannot cure a breach of any representation or warranty
made by it in respect of a Mortgage Loan or Mortgage Security which materially
and adversely affects the interests of the Certificateholders therein within a
specified period after having discovered or received notice of such breach,
then, unless otherwise specified in the related Prospectus Supplement, such
Seller will be obligated to purchase such Mortgage Loan or
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Mortgage Security at a price (the "Purchase Price") set forth in the related
Pooling Agreement which Purchase Price will generally be equal to the principal
balance thereof as of the date of purchase plus accrued and unpaid interest
through or about the date of purchase at the related Mortgage Rate or
pass-through rate, as applicable (net of any portion of such interest payable to
such Seller in respect of master servicing compensation, special servicing
compensation or subservicing compensation, as applicable, and the Spread, if
any).
Unless otherwise specified in the related Prospectus Supplement, as to any
Mortgage Loan required to be purchased by an Affiliated Seller as provided
above, rather than repurchase the Mortgage Loan, the Seller will be entitled, at
its sole option, to remove such Mortgage Loan (a "Deleted Mortgage Loan") from
the Trust Fund and substitute in its place another Mortgage Loan of like kind (a
"Qualified Substitute Mortgage Loan"); however, such substitution must be
effected within 120 days of the date of the initial issuance of the related
series of Certificates with respect to a Trust Fund for which no REMIC election
is to be made. With respect to a Trust Fund for which a REMIC election is to be
made, except as otherwise provided in the related Prospectus Supplement, such
substitution of a defective Mortgage Loan must be effected within two years of
the date of the initial issuance of the related series of Certificates, and may
not be made if such substitution would cause the Trust Fund, or any portion
thereof, to fail to qualify as a REMIC or result in a prohibited transaction tax
under the Code. Except as otherwise provided in the related Prospectus
Supplement, any Qualified Substitute Mortgage Loan generally will, on the date
of substitution, (i) have an outstanding principal balance, after deduction of
the principal portion of the monthly payment due in the month of substitution,
not in excess of the outstanding principal balance of the Deleted Mortgage Loan
(the amount of any shortfall to be deposited in the Certificate Account by the
Master Servicer in the month of substitution for distribution to the
Certificateholders), (ii) have a Mortgage Rate and a Net Mortgage Rate not less
than (and not more than one percentage point greater than) the Mortgage Rate and
Net Mortgage Rate, respectively, of the Deleted Mortgage Loan as of the date of
substitution, (iii) have a Loan-to-Value Ratio at the time of substitution no
higher than that of the Deleted Mortgage Loan at the time of substitution, (iv)
have a remaining term to maturity not greater than (and not more than one year
less than) that of the Deleted Mortgage Loan, (v) comply with all of the
representations and warranties made by such Affiliated Seller as of the date of
substitution, and (vi) be covered under a primary insurance policy if such
Mortgage Loan has a Loan-to-Value Ratio greater than 80%. The related purchase
agreement may include additional requirements relating to ARM Loans or other
specific types of Mortgage Loans, or additional provisions relating to meeting
the foregoing requirements on an aggregate basis where a number of substitutions
occur contemporaneously. Unless otherwise specified in the related Prospectus
Supplement, an Unaffiliated Seller will have no option to substitute for a
Mortgage Loan that it is obligated to repurchase in connection with a breach of
a representation and warranty, and neither an Affiliated Seller nor an
Unaffiliated Seller will have any option to substitute for a Mortgage Security
that it is obligated to repurchase in connection with a breach of a
representation and warranty.
The Master Servicer will be required under the applicable Pooling Agreement
to use reasonable efforts to enforce this purchase or substitution obligation
for the benefit of the Trustee and the Certificateholders, following such
practices it would employ in its good faith business judgment and which are
normal and usual in its general mortgage servicing activities; provided,
however, that this purchase or substitution obligation will not become an
obligation of the Master Servicer in the event the applicable Seller fails to
honor such obligation. In instances where a Seller is unable, or disputes its
obligation, to purchase affected Mortgage Loans and/or Mortgage Securities, the
Master Servicer, employing the standards set forth in the preceding sentence,
may negotiate and enter into one or more settlement agreements with such Seller
that could provide for, among other things, the purchase of only a portion of
the affected Mortgage Loans and/or Mortgage Securities. Any such settlement
could lead to losses on the Mortgage Loans and/or Mortgage Securities which
would be borne by the related Certificates. In accordance with the above
described practices, the Master Servicer will not be required to enforce any
purchase obligation of a Seller arising from any misrepresentation by the
Seller, if the Master Servicer determines in the reasonable exercise of its
business judgment that the matters related to such misrepresentation did not
directly cause or are not likely to directly cause a loss on the related
Mortgage Loan or Mortgage Security. If the Seller fails to repurchase and no
breach of any other party's representations has occurred, the Seller's purchase
obligation will not become an obligation of the Company or any other party. In
the case of a Designated Seller Transaction where the Seller fails to repurchase
a Mortgage Loan or Mortgage Security and neither the Company nor any other
entity has assumed the representations and warranties, such repurchase
obligation of the Seller will not become an obligation of the Company or any
other party. Unless otherwise specified in the related Prospectus Supplement,
the foregoing obligations will constitute the sole remedies available to
Certificateholders or the Trustee for a breach of any representation by a Seller
or for any other event giving rise to such obligations as described above.
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Neither the Company nor the Master Servicer will be obligated to purchase a
Mortgage Loan or Mortgage Security if a Seller defaults on its obligation to do
so, and no assurance can be given that the Sellers will carry out such purchase
obligations. Such a default by a Seller is not a default by the Company or by
the Master Servicer. However, to the extent that a breach of the representations
and warranties of a Seller also constitutes a breach of a representation made by
the Company or the Master Servicer, as described below under "Description of the
Certificates--Assignment of Trust Fund Assets," the Company or the Master
Servicer may have a purchase or substitution obligation. Any Mortgage Loan or
Mortgage Security not so purchased or substituted for shall remain in the
related Trust Fund and any losses related thereto shall be allocated to the
related credit enhancement, to the extent available, and otherwise to one or
more classes of the related series of Certificates.
If a person other than a Seller makes the representations and warranties
referred to in the first paragraph of this "--Representations by Sellers"
section, or a person other than a Seller is responsible for repurchasing or
replacing any Mortgage Loan or Mortgage Security in connection with a breach of
such representations and warranties, the identity of such person will be
specified in the related Prospectus Supplement.
SERVICING OF MORTGAGE LOANS
GENERAL
The Mortgage Loans and Mortgage Securities included in each Mortgage Pool
will be serviced and administered pursuant to a Pooling Agreement. Forms of
Pooling Agreements have been filed as an exhibit to the Registration Statement
of which this Prospectus is a part. However, the provisions of each Pooling
Agreement will vary depending upon the nature of the related Mortgage Pool. The
following summaries describe the material servicing-related provisions that may
appear in a Pooling Agreement for a Mortgage Pool that includes Mortgage Loans.
The related Prospectus Supplement will describe any servicing-related provision
of such a Pooling Agreement that materially differs from the description thereof
contained in this Prospectus and, if the related Mortgage Pool includes Mortgage
Securities, will summarize all of the material provisions of the related Pooling
Agreement that govern the administration of such Mortgage Securities and
identify the party responsible for such administration. The summaries herein do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the related Pooling Agreement
and the description of such provisions in the related Prospectus Supplement.
With respect to any series of Certificates as to which the related Mortgage
Pool includes Mortgage Securities, the servicing and administration of the
Mortgage Loans underlying such Mortgage Securities will be pursuant to the terms
of such Mortgage Securities. It is expected that Mortgage Loans underlying any
Mortgage Securities in a Mortgage Pool would be serviced and administered
generally in the same manner as Mortgage Loans included in a Mortgage Pool,
however, there can be no assurance that such will be the case, particularly if
such Mortgage Securities are issued by an entity other than the Company or any
of its affiliates. The related Prospectus Supplement will describe any material
differences between the servicing described below and the servicing of Mortgage
Loans underlying the Mortgage Securities in any Mortgage Pool.
THE MASTER SERVICER
The master servicer (the "Master Servicer"), if any, for a series of
Certificates will be named in the related Prospectus Supplement and may be ICI
Funding or another affiliate of the Company. The Master Servicer is generally
required to maintain a fidelity bond and errors and omissions policy with
respect to its officers and employees and other persons acting on behalf of the
Master Servicer in connection with its activities under a Pooling Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer for any Mortgage Pool, directly or through Subservicers, will be
obligated under the Pooling Agreement to service and administer the Mortgage
Loans in such Mortgage Pool for the benefit of the related Certificateholders,
in accordance with applicable law and the terms of such Pooling Agreement, such
Mortgage Loans and any instrument of credit enhancement
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included in the related Trust Fund, and, to the extent consistent with the
foregoing, in the same manner as would prudent institutional mortgage lenders
servicing comparable mortgage loans for their own account in the jurisdictions
where the related Mortgaged Properties are located. Subject to the foregoing,
the Master Servicer will have full power and authority to do any and all things
in connection with such servicing and administration that it may deem necessary
and desirable.
As part of its servicing duties, a Master Servicer will be required to make
reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans that it services and will be obligated to
follow such collection procedures as it would follow with respect to mortgage
loans that are comparable to such Mortgage Loans and held for its own account,
provided such procedures are consistent with the terms of the related Pooling
Agreement, including the servicing standard specified therein and generally
described in the preceding paragraph (as such may be more particularly described
in the related Prospectus Supplement, the "Servicing Standard"), and do not
impair recovery under any instrument of credit enhancement included in the
related Trust Fund. Consistent with the foregoing, the Master Servicer will be
permitted, in its discretion, to waive any Prepayment Premium, late payment
charge or other charge in connection with any Mortgage Loan.
Under a Pooling Agreement, a Master Servicer will be granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. In
the case of Single Family Loans and Contracts, a Master Servicer may, among
other things, grant a period of temporary indulgence (generally up to four
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by such Mortgagor of delinquent amounts within a specified period
(generally up to one year) from the date of execution of the plan. However,
unless otherwise specified in the related Prospectus Supplement, the Master
Servicer must first determine that any such waiver or extension will not impair
the coverage of any related insurance policy or materially adversely affect the
security for such Mortgage Loan. In addition, unless otherwise specified in the
related Prospectus Supplement, if a material default occurs or a payment default
is reasonably foreseeable with respect to a Multifamily Loan, the Master
Servicer will be permitted, subject to any specific limitations set forth in the
related Pooling Agreement and described in the related Prospectus Supplement, to
modify, waive or amend any term of such Mortgage Loan, including deferring
payments, extending the stated maturity date or otherwise adjusting the payment
schedule, provided that such modification, waiver or amendment (i) is reasonably
likely to produce a greater recovery with respect to such Mortgage Loan on a
present value basis than would liquidation and (ii) will not adversely affect
the coverage under any applicable instrument of credit enhancement.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the related Master Servicer will be required to
monitor any Multifamily Loan that is in default, evaluate whether the causes of
the default can be corrected over a reasonable period without significant
impairment of the value of the related Mortgaged Property, initiate corrective
action in cooperation with the Mortgagor if cure is likely, inspect the related
Mortgaged Property and take such other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the Master
Servicer is able to assess the success of any such corrective action or the need
for additional initiatives. The time within which the Master Servicer can make
the initial determination of appropriate action, evaluate the success of
corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose (or accept a deed to a Mortgaged Property in
lieu of foreclosure) on behalf of the Certificateholders of the related series
may vary considerably depending on the particular Multifamily Loan, the
Mortgaged Property, the Mortgagor, the presence of an acceptable party to assume
the Multifamily Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a Mortgagor files a bankruptcy petition, the Master
Servicer may not be permitted to accelerate the maturity of the related
Multifamily Loan or to foreclose on the Mortgaged Property for a considerable
period of time. See "Certain Legal Aspects of Mortgage Loans."
Certain of the Mortgage Loans in a Mortgage Pool may contain a due-on-sale
clause that entitles the lender to accelerate payment of the Mortgage Loan upon
any sale or other transfer of the related Mortgaged Property made without the
lender's consent. Certain of the Multifamily Loans in a Mortgage Pool may also
contain a due-on-encumbrance clause that entitles the lender to accelerate the
maturity of the Mortgage Loan upon the creation of any other lien or encumbrance
upon the Mortgaged Property. In any case in which property subject to a Single
Family Loan or Contract is being conveyed by the Mortgagor, unless the related
Prospectus Supplement provides otherwise,
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the Master Servicer will in general be obligated, to the extent it has knowledge
of such conveyance, to exercise its rights to accelerate the maturity of such
Mortgage Loan under any due-on-sale clause applicable thereto, but only if the
exercise of such rights is permitted by applicable law and only to the extent it
would not adversely affect or jeopardize coverage under any Primary Insurance
Policy or applicable credit enhancement arrangements. If the Master Servicer is
prevented from enforcing such due-on-sale clause under applicable law or if the
Master Servicer determines that it is reasonably likely that a legal action
would be instituted by the related Mortgagor to avoid enforcement of such
due-on-sale clause, the Master Servicer will enter into an assumption and
modification agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Mortgage Loan subject to certain specified conditions. The original Mortgagor
may be released from liability on a Single Family Loan or Contract if the Master
Servicer shall have determined in good faith that such release will not
adversely affect the collectability of the Mortgage Loan. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
determine whether to exercise any right the Trustee may have under any
due-on-sale or due-on-encumbrance provision in a Multifamily Loan in a manner
consistent with the Servicing Standard. Unless otherwise specified in the
related Prospectus Supplement, the Master Servicer will be entitled to retain as
additional servicing compensation any fee collected in connection with the
permitted transfer of a Mortgaged Property. See "Certain Legal Aspects of
Mortgage Loans--Enforceability of Certain Provisions." FHA Loans contain no such
clause and may be assumed by the purchaser of the mortgaged property.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer may approve such a request if it has
determined, exercising its good faith business judgment in the same manner as it
would if it were the owner of the related Mortgage Loan, that such approval will
not adversely affect the security for, or the timely and full collectability of,
the related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Single Family and Multifamily Loans secured by junior liens
on the related Mortgaged Properties, unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will be required to file (or cause to
be filed) of record a request for notice of any action by a superior lienholder
under the Senior Lien for the protection of the related Trustee's interest,
where permitted by local law and whenever applicable state law does not require
that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose such junior lienholder's equity of redemption.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer also will be required to notify any superior lienholder in writing of
the existence of the Mortgage Loan and request notification of any action (as
described below) to be taken against the Mortgagor or the Mortgaged Property by
the superior lienholder. If the Master Servicer is notified that any superior
lienholder has accelerated or intends to accelerate the obligations secured by
the related Senior Lien, or has declared or intends to declare a default under
the mortgage or the promissory note secured thereby, or has filed or intends to
file an election to have the related Mortgaged Property sold or foreclosed,
then, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will be required to take, on behalf of the related Trust Fund,
whatever actions are necessary to protect the interests of the related
Certificateholders, and/or to preserve the security of the related Mortgage
Loan, subject to the application of the REMIC Provisions. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
required to advance the necessary funds to cure the default or reinstate the
superior lien, if such advance is in the best interests of the related
Certificateholders and the Master Servicer determines such advances are
recoverable out of payments on or proceeds of the related Mortgage Loan.
The Master Servicer for any Mortgage Pool will also be required to perform
other customary functions of a servicer of comparable loans, including
maintaining escrow or impound accounts for payment of taxes, insurance premiums
and similar items, or otherwise monitoring the timely payment of those items;
adjusting Mortgage Rates on ARM Loans; maintaining Buydown Accounts; supervising
foreclosures and similar proceedings; managing Mortgage Properties acquired
through or in lieu of foreclosure (each, an "REO Property"); and maintaining
servicing records relating to the Mortgage Loans in such Mortgage Pool. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be responsible for filing and settling claims in respect of particular
Mortgage Loans under any applicable instrument of credit enhancement. See
"Description of Credit Enhancement."
SUBSERVICERS
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A Master Servicer may delegate its servicing obligations in respect of the
Mortgage Loans serviced by it to one or more third-party servicers (each, a
"Subservicer"), but the Master Servicer will remain liable for such obligations
under the related Pooling Agreement unless otherwise provided in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be solely liable for all fees owed by it to
any Subservicer, irrespective of whether the Master Servicer's compensation
pursuant to the related Pooling Agreement is sufficient to pay such fees. Each
Subservicer will be entitled to reimbursement for certain expenditures which it
makes, generally to the same extent as would the Master Servicer for making the
same expenditures. See "--Servicing and Other Compensation and Payment of
Expenses; Spread" below and "Description of the Certificates--Certificate
Account."
SPECIAL SERVICERS
If and to the extent specified in the related Prospectus Supplement, a
special servicer (a "Special Servicer") may be a party to the related Pooling
Agreement or may be appointed by the Master Servicer or another specified party
to perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Master Servicer (for example, the
workout and/or foreclosure of defaulted Mortgage Loans). The rights and
obligations of any Special Servicer will be specified in the related Prospectus
Supplement, and the Master Servicer will be liable for the performance of a
Special Servicer only if, and to the extent, set forth in such Prospectus
Supplement.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below or in the related Prospectus Supplement, the
Master Servicer will be required, in a manner consistent with the Servicing
Standard, to foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Mortgage Loans in the related Mortgage Pool as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection therewith, the
Master Servicer will be authorized to institute foreclosure proceedings,
exercise any power of sale contained in the related Mortgage, obtain a deed in
lieu of foreclosure, or otherwise acquire title to the related Mortgaged
Property, by operation of law or otherwise, if such action is consistent with
the Servicing Standard. The Master Servicer's actions in this regard must be
conducted, however, in a manner that will permit recovery under any instrument
of credit enhancement included in the related Trust Fund. In addition, the
Master Servicer will not be required to expend its own funds in connection with
any foreclosure or to restore any damaged property unless it shall determine
that (i) such foreclosure and/or restoration will increase the proceeds of
liquidation of the Mortgage Loan to the related Certificateholders after
reimbursement to itself for such expenses and (ii) such expenses will be
recoverable to it from related Insurance Proceeds, Liquidation Proceeds or
amounts drawn out of any fund or under any instrument constituting credit
enhancement (respecting which it shall have priority for purposes of withdrawal
from the Certificate Account in accordance with the Pooling Agreement).
Notwithstanding the foregoing, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer may not acquire title to any
Multifamily Property securing a Mortgage Loan or take any other action that
would cause the related Trustee, for the benefit of Certificateholders of the
related series, or any other specified person to be considered to hold title to,
to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator" of
such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Master Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions as
are necessary to bring the Mortgaged Property into compliance therewith is
reasonably likely to produce a greater recovery on a present value basis
than not taking such actions; and
(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or remediation
could be required under any applicable environmental laws and regulations
or, if such circumstances or conditions are present for which any such
action could be required, taking such actions with respect to the Mortgaged
Property is reasonably likely to produce a greater recovery on a present
value basis than not taking such actions. See "Certain Legal Aspects of
Mortgage Loans--Environmental Legislation."
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In addition, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will not be obligated to foreclose upon or
otherwise convert the ownership of any Single Family Property securing a
Mortgage Loan if it has received notice or has actual knowledge that such
property may be contaminated with or affected by hazardous wastes or hazardous
substances; however, no environmental testing will generally be required. The
Master Servicer will not be liable to the Certificateholders of the related
series if, based on its belief that no such contamination or effect exists, the
Master Servicer forecloses on a Mortgaged Property and takes title to such
Mortgaged Property, and thereafter such Mortgaged Property is determined to be
so contaminated or affected.
With respect to a Mortgage Loan in default, the Master Servicer may pursue
foreclosure (or similar remedies) concurrently with pursuing any remedy for a
breach of a representation and warranty. However, the Master Servicer is not
required to continue to pursue both such remedies if it determines that one such
remedy is more likely to result in a greater recovery. Upon the first to occur
of final liquidation (by foreclosure or otherwise) and a repurchase or
substitution pursuant to a breach of a representation and warranty, such
Mortgage Loan will be removed from the related Trust Fund if it has not been
removed previously. The Master Servicer may elect to treat a defaulted Mortgage
Loan as having been finally liquidated if substantially all amounts expected to
be received in connection therewith have been received. Any additional
liquidation expenses relating to such Mortgage Loan thereafter incurred will be
reimbursable to the Master Servicer (or any Subservicer) from any amounts
otherwise distributable to holders of Certificates of the related series, or may
be offset by any subsequent recovery related to such Mortgage Loan.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be distributed to Certificateholders, the amount of any Realized
Loss or the amount required to be drawn under any applicable form of credit
support, the Master Servicer may take into account minimal amounts of additional
receipts expected to be received, as well as estimated additional liquidation
expenses expected to be incurred in connection with such defaulted Mortgage
Loan. With respect to certain series of Certificates, if so provided in the
related Prospectus Supplement, the applicable form of credit enhancement may
provide, to the extent of coverage thereunder, that a defaulted Mortgage Loan
will be removed from the Trust Fund prior to the final liquidation thereof. In
addition, a Pooling Agreement may grant to the Master Servicer, a Special
Servicer, a provider of credit enhancement and/or the holder or holders of
certain classes of Certificates of the related series a right of first refusal
to purchase from the Trust Fund, at a predetermined purchase price (which, if
insufficient to fully fund the entitlements of Certificateholders to principal
and interest thereon, will be specified in the related Prospectus Supplement),
any Mortgage Loan as to which a specified number of scheduled payments are
delinquent. Furthermore, a Pooling Agreement may authorize the Master Servicer
to sell any defaulted Mortgage Loan if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a greater
recovery to Certificateholders on a present value basis than would liquidation
of the related Mortgaged Property.
In the event that title to any Mortgaged Property is acquired in
foreclosure, deed in lieu of foreclosure or otherwise, the deed or certificate
of sale will be issued to the Trustee or to its nominee on behalf of
Certificateholders of the related series. Notwithstanding any such acquisition
of title and cancellation of the related Mortgage Loan, such Mortgage Loan (an
"REO Mortgage Loan") will be considered for most purposes to be an outstanding
Mortgage Loan held in the Trust Fund until such time as the Mortgaged Property
is sold and all recoverable Liquidation Proceeds and Insurance Proceeds have
been received with respect to such defaulted Mortgage Loan (a "Liquidated
Mortgage Loan"). For purposes of calculations of amounts distributable to
Certificateholders in respect of an REO Mortgage Loan, unless otherwise
specified in the related Prospectus Supplement, the amortization schedule in
effect at the time of any such acquisition of title (before any adjustment
thereto by reason of any bankruptcy or any similar proceeding or any moratorium
or similar waiver or grace period) will be deemed to have continued in effect
(and, in the case of an ARM Loan, such amortization schedule will be deemed to
have adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor) so long as such REO Mortgage Loan is considered to
remain in the Trust Fund.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Master Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within two years of acquisition, unless
(i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund for more than two
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the Code
at any time that any Certificate is outstanding. Subject to the foregoing and
any other tax-related constraints, the Master Servicer will generally be
required to solicit bids for any Mortgaged Property so acquired in such a manner
as will be reasonably likely to realize a fair price for such property. Unless
otherwise provided in the related
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Prospectus Supplement, if title to any Mortgaged Property is acquired by a Trust
Fund as to which a REMIC election has been made, the Master Servicer will also
be required to ensure that the Mortgaged Property is administered so that it
constitutes "foreclosure property" within the meaning of Code Section 86OG(a)(8)
at all times, that the sale of such property does not result in the receipt by
the Trust Fund of any income from non-permitted assets as described in Code
Section 86OF(a)(2)(B), and that the Trust Fund does not derive any "net income
from foreclosure property" within the meaning of Code Section 86OG(c)(2), with
respect to such property.
If Liquidation Proceeds collected with respect to a defaulted Mortgage Loan
are less than the outstanding principal balance of the defaulted Mortgage Loan
plus interest accrued thereon plus the aggregate amount of reimbursable expenses
incurred by the Master Servicer with respect to such Mortgage Loan, and the
shortfall is not covered under any applicable instrument or fund constituting
credit enhancement, the Trust Fund will realize a loss in the amount of such
difference. The Master Servicer will be entitled to reimburse itself from the
Liquidation Proceeds recovered on any defaulted Mortgage Loan, prior to the
distribution of such Liquidation Proceeds to Certificateholders, amounts that
represent unpaid servicing compensation in respect of the Mortgage Loan,
unreimbursed servicing expenses incurred with respect to the Mortgage Loan and
any unreimbursed advances of delinquent payments made with respect to the
Mortgage Loan. If so provided in the related Prospectus Supplement, the
applicable form of credit enhancement may provide for reinstatement subject to
certain conditions in the event that, following the final liquidation of a
Mortgage Loan and a draw under such credit enhancement, subsequent recoveries
are received. In addition, if a gain results from the final liquidation of a
defaulted Mortgage Loan or an REO Mortgage Loan which is not required by law to
be remitted to the related Mortgagor, the Master Servicer will not be entitled
to retain such gain as additional servicing compensation unless the related
Prospectus Supplement provides otherwise. For a description of the Master
Servicer's (or other specified person's) obligations to maintain and make claims
under applicable forms of credit enhancement and insurance relating to the
Mortgage Loans, see "Description of Credit Enhancement" and "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; SPREAD
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for a series of Certificates will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each Mortgage Loan, and such compensation will be retained by it on a
monthly or other periodic basis from collections of interest on such Mortgage
Loan in the related Trust Fund at the time such collections are deposited into
the applicable Certificate Account. If so specified in the related Prospectus
Supplement, the Master Servicer will retain all Prepayment Premiums, assumption
fees and late payment charges, to the extent collected from Mortgagors, and any
benefit which may accrue as a result of the investment of funds in the
applicable Certificate Account. Any additional servicing compensation will be
described in the related Prospectus Supplement. Any Subservicer will receive a
portion of the Master Servicer's compensation as its sub-servicing compensation.
In addition to amounts payable to any Subservicer, the Master Servicer will
pay or cause to be paid certain ongoing expenses associated with each Trust Fund
and incurred by it in connection with its responsibilities under the Pooling
Agreement, including, if so specified in the related Prospectus Supplement,
payment of any fee or other amount payable in respect of any alternative credit
enhancement arrangements, payment of the fees and disbursements of the Trustee,
any custodian appointed by the Trustee and the Certificate Registrar, and
payment of expenses incurred in enforcing the obligations of Subservicers and
Sellers. The Master Servicer will be entitled to reimbursement of expenses
incurred in enforcing the obligations of Subservicers and Sellers under certain
limited circumstances. In addition, the Master Servicer will be entitled to
reimbursements for certain expenses incurred by it in connection with Liquidated
Mortgage Loans and in connection with the restoration of Mortgaged Properties,
such right of reimbursement being prior to the rights of Certificateholders to
receive any related Liquidation Proceeds or Insurance Proceeds. If and to the
extent so provided in the related Prospectus Supplement, the Master Servicer
will be entitled to receive interest on amounts advanced to cover such
reimbursable expenses for the period that such advances are outstanding at the
rate specified in such Prospectus Supplement, and the Master Servicer will be
entitled to payment of such interest periodically from general collections on
the Mortgage Loans in the related Trust Fund prior to any payment to
Certificateholders or as otherwise provided in the related Pooling Agreement and
described in such Prospectus Supplement.
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The Prospectus Supplement for a series of Certificates will specify whether
there will be any Spread retained. Any such Spread will be a specified portion
of the interest payable on each Mortgage Loan in a Mortgage Pool and will not be
part of the related Trust Fund. Any such Spread will be established on a
loan-by-loan basis and the amount thereof with respect to each Mortgage Loan in
a Mortgage Pool will be specified on an exhibit to the related Pooling
Agreement. Any partial recovery of interest in respect of a Mortgage Loan will
be allocated between the owners of any Spread and the holders of classes of
Certificates entitled to payments of interest as provided in the related
Prospectus Supplement and the applicable Pooling Agreement.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to any Prepayment Interest
Shortfalls resulting from Mortgagor prepayments during such period. See "Yield
Considerations."
EVIDENCE AS TO COMPLIANCE
Each Pooling Agreement will provide that on or before a specified date in
each year, beginning the first such date that is at least a specified number of
months after the Cut-off Date, a firm of independent public accountants will
furnish a statement to the Company and the Trustee to the effect that, on the
basis of an examination by such firm conducted substantially in compliance with
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for Freddie Mac, the servicing of mortgage loans under
agreements (including the related Pooling Agreement) substantially similar to
each other was conducted in compliance with such agreements except for such
significant exceptions or errors in records that, in the opinion of the firm,
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for Freddie Mac requires it to report. In rendering its
statement such firm may rely, as to the matters relating to the direct servicing
of mortgage loans by Subservicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
Freddie Mac (rendered within one year of such statement) of firms of independent
public accountants with respect to those Subservicers which also have been the
subject of such an examination.
Each Pooling Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by one or
more officers of the Master Servicer to the effect that, to the best knowledge
of each such officer, the Master Servicer has fulfilled in all material respects
its obligations under the Pooling Agreement throughout the preceding year or, if
there has been a material default in the fulfillment of any such obligation,
such statement shall specify each such known default and the nature and status
thereof. Such statement may be provided as a single form making the required
statements as to more than one Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, copies of
the annual accountants' statement and the annual statement of officers of a
Master Servicer may be obtained by Certificateholders without charge upon
written request to the Master Servicer at the address of the Master Servicer set
forth under "The Master Servicer; the Sub-Servicer" in the Prospectus
Supplement. Such requests should be sent to the attention of the President of
the Master Servicer.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in series. Each series of Certificates (or,
in certain instances, two or more series of Certificates) will be issued
pursuant to a Pooling Agreement, similar to one of the forms filed as an exhibit
to the Registration Statement of which this Prospectus is a part. Each Pooling
Agreement will be filed with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K. The following summaries (together with
additional summaries under "The Pooling Agreement" below) describe the material
provisions relating to the Certificates common to each Pooling Agreement. The
summaries do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all of the provisions of the Pooling Agreement
for each Trust Fund and the related Prospectus Supplement. Wherever particular
sections or defined terms of the Pooling Agreement are referred to herein, such
sections or defined terms are thereby incorporated herein by reference.
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Unless otherwise specified in the related Prospectus Supplement,
Certificates of each series covered by a particular Pooling Agreement will
evidence specified beneficial ownership interests in a separate Trust Fund
created pursuant to such Pooling Agreement. A Trust Fund will consist of, to the
extent provided in the Pooling Agreement: (i) such Mortgage Loans (and the
related mortgage documents) or interests therein (including any Mortgage
Securities) underlying a particular series of Certificates as from time to time
are subject to the Pooling Agreement, exclusive of, if specified in the related
Prospectus Supplement, any Spread or other interest retained by the Company or
any of its affiliates with respect to each such Mortgage Loan; (ii) such assets
including, without limitation, all payments and collections in respect of the
Mortgage Loans or Mortgage Securities due after the related Cut-off Date, as
from time to time are identified as deposited in respect thereof in the related
Certificate Account as described below; (iii) any property acquired in respect
of Mortgage Loans in the Trust Fund, whether through foreclosure of such
Mortgage Loans or by deed in lieu of foreclosure or otherwise; (iv) hazard
insurance policies, Primary Insurance Policies and FHA insurance policies, if
any, maintained in respect of Mortgage Loans in the Trust Fund and certain
proceeds of such policies; (v) certain rights of the Company under any Mortgage
Loan Purchase Agreement, including in respect of any representations and
warranties therein; and (vi) any combination, as and to the extent specified in
the related Prospectus Supplement, of a Letter of Credit, Purchase Obligation,
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy or Bankruptcy
Bond as described under "Description of Credit Enhancement." To the extent that
any Trust Fund includes certificates of interest or participations in Mortgage
Loans, the related Prospectus Supplement will describe the material terms and
conditions of such certificates or participations.
If provided in the related Prospectus Supplement, the original principal
amount of a series of Certificates may exceed the principal balance of the
Mortgage Loans or Mortgage Securities initially being delivered to the Trustee.
Cash in an amount equal to such difference will be deposited into a separate
trust account (the "Pre-Funding Account") maintained with the Trustee. During
the period set forth in the related Prospectus Supplement, amounts on deposit in
the Pre-Funding Account may be used to purchase additional Mortgage Loans or
Mortgage Securities for the related Trust Fund, which Mortgage Loans will
generally be underwritten to the same standards as the Mortgage Loans initially
included in the Trust Fund. Any amounts remaining in the Pre-Funding Account at
the end of such period will be distributed as a principal prepayment to the
holders of the related series of Certificates at the time and in the manner set
forth in the related Prospectus Supplement. A Pre-Funding Account will be
required to be maintained as an Eligible Account, all amounts therein will be
required to be invested in Permitted Investments and the amount held therein
shall at no time exceed 25% of the aggregate outstanding principal of the
Certificates. The related agreement providing for the transfer of additional
Mortgage Loans will provide that all such transfers must be made within 9 months
(as to amounts representing proceeds from the sale of the Certificates) or 12
months (as to amounts representing principal collections on the Mortgage Loans)
after the Closing Date, and that amounts to be set aside to fund such transfers
(whether in a Pre-Funding Account or otherwise) and not so applied within the
required period of time will be deemed to be principal prepayments and applied
in the manner set forth in such Prospectus Supplement.
The Company will be required to provide data regarding any additional
Mortgage Loans or Mortgage Securities to the Rating Agencies and the credit
support provider, if any, sufficiently in advance of the scheduled transfer to
permit review by such parties. Transfer of any additional Mortgage Loans or
Mortgage Securities will be further conditioned upon confirmation by the Rating
Agencies that the addition of such Mortgage Loans to the Trust Fund will not
result in the downgrading of the Certificates or, in the case of a series
guaranteed or supported by a credit support provider, will not adversely affect
the capital requirements of such credit support provider. Additionally, a legal
opinion to the effect that the conditions to the transfer of the additional
Mortgage Loans or Mortgage Securities have been satisfied will be required. If a
Trust Fund includes a Pre-Funding Account and the principal balance of
additional Mortgage Loans delivered to the Trust Fund during the Pre-Funding
Period is less than the Pre-Funded Amount, the Certificateholders will receive a
prepayment of principal as and to the extent described in the related Prospectus
Supplement. Any such principal prepayment may adversely affect the yield to
maturity of the applicable Certificates.
Each series of Certificates may consist of any one or a combination of the
following: (i) a single class of Certificates; (ii) two or more classes of
Certificates, one or more classes of which will be senior ("Senior
Certificates") in right of payment to one or more of the other classes
("Subordinate Certificates"), and as to which certain classes of Senior (or
Subordinate) Certificates may be senior to other classes of Senior (or
Subordinate) Certificates, as described in the respective Prospectus Supplement
(any such series, a "Senior/Subordinate Series"); (iii) two or more classes of
Certificates, one or more classes ("Strip Certificates") of which will be
entitled to (a) principal distributions, with disproportionate, nominal or no
interest distributions or (b) interest distributions, with
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disproportionate, nominal or no principal distributions; (iv) two or more
classes of Certificates which differ as to the timing, sequential order, rate,
pass-through rate or amount of distributions of principal or interest or both,
or as to which distributions of principal or interest or both on any such class
may be made upon the occurrence of specified events, in accordance with a
schedule or formula (including "planned amortization classes" and "targeted
amortization classes"), or on the basis of collections from designated portions
of the Mortgage Pool, and which classes may include one or more classes of
Certificates ("Accrual Certificates") with respect to which certain accrued
interest will not be distributed but rather will be added to the principal
balance thereof on each Distribution Date for the period described in the
related Prospectus Supplement; or (v) other types of classes of Certificates, as
described in the related Prospectus Supplement. As to each series, all
Certificates offered hereby (the "Offered Certificates") will be rated in one of
the four highest rating categories by one or more Rating Agencies. Credit
support for the Offered Certificates of each series may be provided by a
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy, Bankruptcy
Bond, Letter of Credit, Purchase Obligation or Reserve Fund as described under
"Description of Credit Enhancement," by the subordination of one or more other
classes of Certificates as described under "Description of Credit
Enhancement--Subordinate Certificates" or by any combination of the foregoing.
If so specified in the Prospectus Supplement relating to a series of
Certificates, one or more elections may be made to treat the related Trust Fund,
or a designated portion thereof, as a REMIC. If such an election is made with
respect to a series of Certificates, one of the classes of Certificates in such
series will be designated as evidencing the sole class of "residual interests"
in each related REMIC, as defined in the Code; alternatively, a separate class
of ownership interests will evidence such residual interests. All other classes
of Certificates in such series will constitute "regular interests" in the
related REMIC, as defined in the Code and will be designated as such. As to each
series of Certificates as to which a REMIC election is to be made, the Master
Servicer, Trustee or other specified person will be obligated to take certain
specified actions required in order to comply with applicable laws and
regulations.
FORM OF CERTIFICATES
Unless otherwise specified in the related Prospectus Supplement, the
Offered Certificates of each series will be issued as physical certificates in
fully registered form only in the denominations specified in the related
Prospectus Supplement, and will be transferrable and exchangeable at the
corporate trust office of the registrar (the "Certificate Registrar") named in
the related Prospectus Supplement. No service charge will be made for any
registration of exchange or transfer of Offered Certificates, but the Trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge. The term "Certificateholder" or "Holder" as used herein refers to the
entity whose name appears on the records of the Certificate Registrar
(consisting of or including the "Certificate Register") as the registered holder
of a Certificate, except as otherwise indicated in the related Prospectus
Supplement.
If so specified in the related Prospectus Supplement, specified classes of
a series of Certificates will be initially issued through the book-entry
facilities of The Depository Trust Company ("DTC"). As to any such class of
Certificates ("DTC Registered Certificates"), the record Holder of such
Certificates will be DTC's nominee.
DTC
is a limited-purpose trust company organized under the laws of the State of New
York, which holds securities for its participating organizations
("Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in the
accounts of Participants. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. Other institutions that are not Participants but clear through or
maintain a custodial relationship with Participants (such institutions,
"Intermediaries") have indirect access to DTC's clearance system.
Unless otherwise specified in the related Prospectus Supplement, no person
acquiring an interest in any DTC Registered Certificates (each such person, a
"Beneficial Owner") will be entitled to receive a Certificate representing such
interest in registered, certificated form, unless either (i) DTC ceases to act
as depository in respect thereof and a successor depository is not obtained, or
(ii) the Company elects in its sole discretion to discontinue the registration
of such Certificates through DTC. Prior to any such event, Beneficial Owners
will not be recognized by the Trustee or the Master Servicer as Holders of the
related Certificates for purposes of the related Pooling Agreement, and
Beneficial Owners will be able to exercise their rights as owners of such
Certificates only indirectly through DTC, Participants and Intermediaries. Any
Beneficial Owner that desires to purchase, sell or otherwise transfer any
interest in DTC Registered Certificates may do so only through DTC, either
directly if such Beneficial Owner is a Participant or indirectly through
Participants and, if applicable, Intermediaries. Pursuant to the procedures of
DTC, transfers of the beneficial ownership of any DTC Registered Certificates
will be required to be made in minimum denominations
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specified in the related Prospectus Supplement. The ability of a Beneficial
Owner to pledge DTC Registered Certificates to persons or entities that are not
Participants in the DTC system, or to otherwise act with respect to such
Certificates, may be limited because of the lack of physical certificates
evidencing such Certificates and because DTC may act only on behalf of
Participants.
Distributions in respect of the DTC Registered Certificates will be
forwarded by the Trustee or other specified person to DTC, and DTC will be
responsible for forwarding such payments to Participants, each of which will be
responsible for disbursing such payments to the Beneficial Owners it represents
or, if applicable, to Intermediaries. Accordingly, Beneficial Owners may
experience delays in the receipt of payments in respect of their Certificates.
Under DTC's procedures, DTC will take actions permitted to be taken by Holders
of any class of DTC Registered Certificates under the Pooling Agreement only at
the direction of one or more Participants to whose account the DTC Registered
Certificates are credited and whose aggregate holdings represent no less than
any minimum amount of Percentage Interests or voting rights required therefor.
DTC may take conflicting actions with respect to any action of Holders of
Certificates of any Class to the extent that Participants authorize such
actions. None of the Master Servicer, the Company, the Trustee or any of their
respective affiliates will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
DTC Registered Certificates, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
ASSIGNMENT OF TRUST FUND ASSETS
At the time of issuance of a series of Certificates, the Company will
assign, or cause to be assigned, to the related Trustee (or its nominee),
without recourse, the Mortgage Loans or Mortgage Securities being included in
the related Trust Fund, together with, unless otherwise specified in the related
Prospectus Supplement, all principal and interest received on or with respect to
such Mortgage Loans or Mortgage Securities after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date. If specified in the
related Prospectus Supplement, the Company or any of its affiliates may retain
the Spread, if any, for itself or transfer the same to others. The Trustee will,
concurrently with such assignment, deliver the Certificates of such series to or
at the direction of the Company in exchange for the Mortgage Loans and/or
Mortgage Securities in the related Trust Fund. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Pooling
Agreement. Such schedule will include, among other things, information as to the
principal balance of each Mortgage Loan in the related Trust Fund as of the
Cut-off Date, as well as information respecting the Mortgage Rate, the currently
scheduled monthly payment of principal and interest, the maturity of the
Mortgage Note and the Loan-to-Value Ratio at origination or modification
(without regard to any secondary financing).
In addition, unless otherwise specified in the related Prospectus
Supplement, the Company will, as to each Mortgage Loan (other than Mortgage
Loans underlying any Mortgage Securities and other than Contracts), deliver, or
cause to be delivered, to the related Trustee (or to the custodian described
below) the Mortgage Note endorsed, without recourse, either in blank or to the
order of such Trustee (or its nominee), the Mortgage with evidence of recording
indicated thereon (except for any Mortgage not returned from the public
recording office), an assignment of the Mortgage in blank or to the Trustee (or
its nominee) in recordable form, together with any intervening assignments of
the Mortgage with evidence of recording thereon (except for any such assignment
not returned from the public recording office), and, if applicable, any riders
or modifications to such Mortgage Note and Mortgage, together with certain other
documents at such times as set forth in the related Pooling Agreement. Such
assignments may be blanket assignments covering Mortgages on Mortgaged
Properties located in the same county, if permitted by law. Notwithstanding the
foregoing, a Trust Fund may include Mortgage Loans where the original Mortgage
Note is not delivered to the Trustee if the Company delivers, or causes to be
delivered, to the related Trustee (or the custodian) a copy or a duplicate
original of the Mortgage Note, together with an affidavit certifying that the
original thereof has been lost or destroyed. In addition, if the Company cannot
deliver, with respect to any Mortgage Loan, the Mortgage or any intervening
assignment with evidence of recording thereon concurrently with the execution
and delivery of the related Pooling Agreement because of a delay caused by the
public recording office, the Company will deliver, or cause to be delivered, to
the related Trustee (or the custodian) a true and correct photocopy of such
Mortgage or assignment as submitted for recording. The Company will deliver, or
cause to be delivered, to the related Trustee (or the custodian) such Mortgage
or assignment with evidence of recording indicated thereon after receipt thereof
from the public recording office. If the Company cannot deliver, with respect to
any Mortgage Loan, the Mortgage or any intervening assignment with evidence of
recording thereon concurrently with the execution and delivery of the related
Pooling Agreement because such Mortgage or assignment has been lost, the Company
will
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deliver, or cause to be delivered, to the related Trustee (or the custodian) a
true and correct photocopy of such Mortgage or assignment with evidence of
recording thereon. Assignments of the Mortgage Loans to the Trustee (or its
nominee) will be recorded in the appropriate public recording office, except in
states where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interests in the Mortgage
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Company or the originator of such Mortgage Loan, or except as
otherwise specified in the related Prospectus Supplement as to any series of
Certificates. In addition, unless specified in the related Prospectus
Supplement, the Company will, as to each Contract, deliver, or cause to be
delivered, the original Contract endorsed, without recourse, to the order of the
Trustee and copies of documents and instruments related to the Contract and the
security interest in the Manufactured Home securing the Contract, together with
a blanket assignment to the Trustee of all Contracts in the related Trust Fund
and such documents and instruments. In order to give notice of the right, title
and interest of the Certificateholders to the Contracts, the Company will cause
to be executed and delivered to the Trustee a UCC-1 financing statement
identifying the Trustee as the secured party and identifying all Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Company will, as to each Mortgage Security included in a Mortgage Pool, deliver,
or cause to be delivered, to the related Trustee (or the custodian) a physical
certificate evidencing such Mortgage Security, registered in the name of the
related Trustee (or its nominee), or endorsed in blank or to the related Trustee
(or its nominee), or accompanied by transfer documents sufficient to effect a
transfer to the Trustee (or its nominee).
The Trustee (or the custodian hereinafter referred to) will hold such
documents in trust for the benefit of the related Certificateholders, and
generally will review such documents within 90 days after receipt thereof in the
case of documents delivered concurrently with the execution and delivery of the
related Pooling Agreement, and within the time period specified in the related
Pooling Agreement in the case of all other documents delivered. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will be required to promptly so notify the Master Servicer, the Company, and the
related Seller. If the related Seller does not cure the omission or defect
within a specified period after notice is given thereto by the Trustee, and such
omission or defect materially and adversely affects the interests of
Certificateholders in the affected Mortgage Loan or Mortgage Security, then,
unless otherwise specified in the related Prospectus Supplement, the related
Seller will be obligated to purchase such Mortgage Loan or Mortgage Security
from the Trustee at its Purchase Price (or, if and to the extent it would
otherwise be permitted to do so for a breach of representation and warranty as
described under "The Mortgage Pools--Representations of Sellers," to substitute
for such Mortgage Loan or Mortgage Security). The Trustee will be obligated to
enforce this obligation of the Seller to the extent described above under "The
Mortgage Pools--Representations by Sellers," but there can be no assurance that
the applicable Seller will fulfill its obligation to purchase (or substitute
for) the affected Mortgage Loan or Mortgage Security as described above. Unless
otherwise specified in the related Prospectus Supplement, neither the Master
Servicer nor the Company will be obligated to purchase or substitute for such
Mortgage Loan or Mortgage Security if the Seller defaults on its obligation to
do so. Unless otherwise specified in the related Prospectus Supplement, this
purchase or substitution obligation constitutes the sole remedy available to the
related Certificateholders and the related Trustee for omission of, or a
material defect in, a constituent document. Any affected Mortgage Loan or
Mortgage Security not so purchased or substituted for shall remain in the
related Trust Fund.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage Loans
and/or Mortgage Securities in any Mortgage Pool, and to maintain possession of
and, if applicable, to review, the documents relating to such Mortgage Loans
and/or Mortgage Securities, in any case as the agent of the Trustee. The
identity of any such custodian to be appointed on the date of initial issuance
of the Certificates will be set forth in the related Prospectus Supplement. Any
such custodian may be an affiliate of the Company or the Master Servicer.
With respect to the Mortgage Loans in a Mortgage Pool, except in the case
of a Designated Seller Transaction or as to Mortgage Loans underlying any
Mortgage Securities or unless otherwise specified in the related Prospectus
Supplement, the Company will make certain representations and warranties as to
the types and geographical concentrations of such Mortgage Loans and as to the
accuracy, in all material respects, of certain identifying information furnished
to the related Trustee in respect of each such Mortgage Loan (e.g., original
Loan-to-Value Ratio, principal balance as of the Cut-off Date, Mortgage Rate and
maturity). Upon a breach of any such representation which materially and
adversely affects the interests of the Certificateholders in a Mortgage Loan,
the Company will be obligated to cure the breach in all material respects, to
purchase the Mortgage Loan at its Purchase
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Price or, unless otherwise specified in the related Prospectus Supplement, to
substitute for such Mortgage Loan a Qualified Substitute Mortgage Loan in
accordance with the provisions for such substitution by Affiliated Sellers as
described above under "The Mortgage Pools--Representations by Sellers." However,
the Company will not be required to repurchase or substitute for any Mortgage
Loan in connection with a breach of a representation and warranty if the
substance of any such breach also constitutes fraud in the origination of the
related Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, this purchase or substitution obligation constitutes the sole remedy
available to Certificateholders or the Trustee for such a breach of
representation by the Company. Any Mortgage Loan not so purchased or substituted
for shall remain in the related Trust Fund.
Pursuant to the related Pooling Agreement, the Master Servicer for any
Mortgage Pool, either directly or through Subservicers, will service and
administer the Mortgage Loans included in such Mortgage Pool and assigned to the
related Trustee as more fully set forth under "Servicing of Mortgage Loans." The
Master Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
Pooling Agreement.
CERTIFICATE ACCOUNT
GENERAL. The Master Servicer and/or the Trustee will, as to each Trust
Fund, establish and maintain or cause to be established and maintained one or
more separate accounts for the collection of payments on the related Mortgage
Loans and/or Mortgage Securities constituting such Trust Fund (collectively, the
"Certificate Account"), which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of
Certificates of the related series. A Certificate Account may be maintained
either as an interest-bearing or a non-interest-bearing account, and the funds
held therein may be held as cash or invested in United States government
securities and other investment grade obligations specified in the related
Pooling Agreement ("Permitted Investments"). Such Permitted Investments will,
however, consist of investments only to the extent that such investments would
not require registration of a Trust Fund as an investment company under the
Investment Company Act of 1940, as amended. Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
the Certificate Account will be paid to the related Master Servicer or Trustee
as additional compensation. If permitted by such Rating Agency or Agencies and
so specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds representing payments on mortgage loans
owned by the related Master Servicer or serviced by it on behalf of others.
DEPOSITS. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the related Master Servicer,
Trustee or Special Servicer will be required to deposit or cause to be deposited
in the Certificate Account for each Trust Fund within a certain period following
receipt (in the case of collections and payments), the following payments and
collections received, or advances made, by the Master Servicer, the Trustee or
any Special Servicer subsequent to the Cut-off Date with respect to the Mortgage
Loans and/or Mortgage Securities in such Trust Fund (other than payments due on
or before the Cut-off Date):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans,
including any default interest collected, in each case net of any portion
thereof retained by the Master Servicer, any Special Servicer or
Sub-Servicer as its servicing compensation or as compensation to the
Trustee, and further net of any Spread;
(iii) all payments on the Mortgage Securities;
(iv) all proceeds received under any hazard, title, primary
mortgage, FHA or other insurance policy that provides coverage with respect
to a particular Mortgaged Property or the related Mortgage Loan other than
proceeds applied to the restoration of the property or released to the
related borrower in accordance with the customary servicing practices of
the Master Servicer (or, if applicable, a Special Servicer) and/or the
terms and conditions of the related Mortgage (collectively, "Insurance
Proceeds") and all other amounts received and retained in connection with
the liquidation of defaulted Mortgage Loans or property acquired in respect
thereof, by foreclosure or otherwise ("Liquidation Proceeds"), together
with the net operating income (less reasonable
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reserves for future expenses) derived from the operation of any Mortgaged
Properties acquired by the Trust Fund through foreclosure or otherwise;
(v) any amounts paid under any instrument or drawn from any fund
that constitutes credit enhancement for the related series of Certificates
as described under "Description of Credit Enhancement";
(vi) any advances made as described under "--Advances" below;
(vii) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be paid to Certificateholders, as described below;
(viii) all proceeds of any Mortgage Loan or Mortgage Security
purchased (or, in the case of a substitution, certain amounts representing
a principal adjustment) by the Master Servicer, the Company, a Seller or
any other person pursuant to the terms of the related Pooling Agreement as
described under "The Mortgage Pools--Representations by Sellers,"
"Servicing of Mortgage Loans--Realization Upon and Sale of Defaulted
Mortgage Loans," "--Assignment of Trust Fund Assets" above, "The Pooling
Agreement-- Termination; Retirement of Certificates" and "Purchase
Obligations" (all of the foregoing, also "Liquidation Proceeds");
(ix) any amounts paid by the Master Servicer to cover Prepayment
Interest Shortfalls arising out of the prepayment of Mortgage Loans as
described under "Servicing of Mortgage Loans--Servicing and Other
Compensation and Payment of Expenses; Spread";
(x) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or a Special Servicer, any
payments on account of modification or assumption fees, late payment
charges, Prepayment Premiums or Equity Participations on the Mortgage
Loans;
(xi) any amount required to be deposited by the Master Servicer or
the Trustee in connection with losses realized on investments for the
benefit of the Master Servicer or the Trustee, as the case may be, of funds
held in the Certificate Account; and
(xii) any other amounts required to be deposited in the Certificate
Account as provided in the related Pooling Agreement and described herein
or in the related Prospectus Supplement.
With respect to each Buydown Mortgage Loan, the Master Servicer will be
required to deposit the related Buydown Funds provided to it in a Buydown
Account which will comply with the requirements set forth herein with respect to
the Certificate Account. Unless otherwise specified in the related Prospectus
Supplement, the terms of all Buydown Mortgage Loans provide for the contribution
of Buydown Funds in an amount equal to or exceeding either (i) the total
payments to be made from such funds pursuant to the related buydown plan or (ii)
if such Buydown Funds are to be deposited on a discounted basis, that amount of
Buydown Funds which, together with investment earnings thereon at a rate as will
support the scheduled level of payments due under the Buydown Mortgage Loan.
Neither the Master Servicer nor the Company will be obligated to add to any such
discounted Buydown Funds any of its own funds should investment earnings prove
insufficient to maintain the scheduled level of payments. To the extent that any
such insufficiency is not recoverable from the Mortgagor or, in an appropriate
case, from the Seller, distributions to Certificateholders may be affected. With
respect to each Buydown Mortgage Loan, the Master Servicer will be required
monthly to withdraw from the Buydown Account and deposit in the Certificate
Account as described above the amount, if any, of the Buydown Funds (and, if
applicable, investment earnings thereon) for each Buydown Mortgage Loan that,
when added to the amount due from the Mortgagor on such Buydown Mortgage Loan,
equals the full monthly payment which would be due on the Buydown Mortgage Loan
if it were not subject to the buydown plan. The Buydown Funds will in no event
be a part of the related Trust Fund.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan in
its entirety during the Buydown Period, the Master Servicer will be required to
withdraw from the Buydown Account and remit to the Mortgagor or such other
designated party in accordance with the related buydown plan any Buydown Funds
remaining in the Buydown Account. If a prepayment by a Mortgagor during the
Buydown Period together with Buydown Funds will result in full prepayment of a
Buydown Mortgage Loan, the Master Servicer will generally be required to
withdraw from the Buydown Account and deposit in the Certificate 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
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Funds may not be available to cover a prepayment under certain Mortgage Loan
programs. Any Buydown Funds so remitted to the Master Servicer in connection
with a prepayment described in the preceding sentence will be deemed to reduce
the amount that would be required to be paid by the Mortgagor to repay fully the
related Mortgage Loan if the Mortgage Loan were not subject to the buydown plan.
Any investment earnings remaining in the Buydown Account after prepayment or
after termination of the Buydown Period will be remitted to the related
Mortgagor or such other designated party pursuant to the agreement relating to
each Buydown Mortgage Loan (the "Buydown Agreement"). If the Mortgagor defaults
during the Buydown Period with respect to a Buydown Mortgage Loan and the
property securing such Buydown Mortgage Loan is sold in liquidation (either by
the Master Servicer, the Primary Insurer, the insurer under the Mortgage Pool
Insurance Policy (the "Pool Insurer") or any other insurer), the Master Servicer
will be required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and either deposit the same in the
Certificate Account or, alternatively, pay the same to the Primary Insurer or
the Pool Insurer, as the case may be, if the Mortgaged Property is transferred
to such insurer and such insurer pays all of the loss incurred in respect of
such default.
WITHDRAWALS. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, a Master Servicer, Trustee or
Special Servicer may make withdrawals from the Certificate Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the related Certificateholders on each
Distribution Date;
(ii) to reimburse the Master Servicer or any other specified person
for unreimbursed amounts advanced by it as described under "--Advances"
below in respect of Mortgage Loans in the Trust Fund, such reimbursement to
be made out of amounts received which were identified and applied by the
Master Servicer as late collections of interest (net of related servicing
fees) on and principal of the particular Mortgage Loans with respect to
which the advances were made or out of amounts drawn under any form of
credit enhancement with respect to such Mortgage Loans;
(iii) to reimburse the Master Servicer or a Special Servicer for
unpaid servicing fees earned by it and certain unreimbursed servicing
expenses incurred by it with respect to Mortgage Loans in the Trust Fund
and properties acquired in respect thereof, such reimbursement to be made
out of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Mortgage Loans and properties, and net income
collected on the particular properties, with respect to which such fees
were earned or such expenses were incurred or out of amounts drawn under
any form of credit enhancement with respect to such Mortgage Loans and
properties;
(iv) to reimburse the Master Servicer or any other specified person
for any advances described in clause (ii) above made by it and any
servicing expenses referred to in clause (iii) above incurred by it which,
in the good faith judgment of the Master Servicer or such other person,
will not be recoverable from the amounts described in clauses (ii) and
(iii), respectively, such reimbursement to be made from amounts collected
on other Mortgage Loans in the Trust Fund or, if and to the extent so
provided by the related Pooling Agreement and described in the related
Prospectus Supplement, only from that portion of amounts collected on such
other Mortgage Loans that is otherwise distributable on one or more classes
of Subordinate Certificates of the related series;
(v) if and to the extent described in the related Prospectus
Supplement, to pay the Master Servicer, a Special Servicer or another
specified entity (including a provider of credit enhancement) interest
accrued on the advances described in clause (ii) above made by it and the
servicing expenses described in clause (iii) above incurred by it while
such remain outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Multifamily
Properties that constitute security for defaulted Mortgage Loans, and for
any containment, clean-up or remediation of hazardous wastes and materials
present on such Mortgaged Properties, as described under "Servicing of
Mortgage Loans--Realization Upon or Sale of Defaulted Mortgage Loans";
(vii) to reimburse the Master Servicer, the Company, or any of
their respective directors, officers, employees and agents, as the case may
be, for certain expenses, costs and liabilities incurred thereby, as and to
the extent described under "The Pooling Agreement--Certain Matters
Regarding the Master Servicer and the Company";
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(viii) if and to the extent described in the related Prospectus
Supplement, to pay the fees of the Trustee;
(ix) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "The
Pooling Agreement--Certain Matters Regarding the Trustee";
(x) to pay the Master Servicer or the Trustee, as additional
compensation, interest and investment income earned in respect of amounts
held in the Certificate Account;
(xi) to pay (generally from related income) for costs incurred in
connection with the operation, management and maintenance of any Mortgaged
Property acquired by the Trust Fund by foreclosure or otherwise;
(xii) if one or more elections have been made to treat the Trust
Fund or designated portions thereof as a REMIC, to pay any federal, state
or local taxes imposed on the Trust Fund or its assets or transactions, as
and to the extent described under "Federal Income Tax
Consequences--REMICS--Prohibited Transactions and Other Possible REMIC
Taxes";
(xiii) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price for a
defaulted Mortgage Loan or a property acquired in respect thereof in
connection with the liquidation of such Mortgage Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Pooling Agreement for the benefit of the related
Certificateholders;
(xv) to pay to itself, the Company, a Seller or any other
appropriate person all amounts received with respect to each Mortgage Loan
purchased, repurchased or removed from the Trust Fund pursuant to the terms
of the related Pooling Agreement and not required to be distributed as of
the date on which the related Purchase Price is determined;
(xvi) to make any other withdrawals permitted by the related
Pooling Agreement and described in the related Prospectus Supplement; and
(xvii) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the related Trustee or Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date. Unless otherwise provided in
the related Prospectus Supplement, the "Available Distribution Amount" for any
series of Certificates and any Distribution Date will refer to the total of all
payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Loans and/or Mortgage Securities and any other assets
included in the related Trust Fund that are available for distribution to the
Certificateholders of such series on such date. The particular components of the
Available Distribution Amount for any series on each Distribution Date will be
more specifically described in the related Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month in which the applicable
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date (the
"Determination Date") specified in the related Prospectus Supplement. All
distributions with respect to each class of Certificates on each Distribution
Date will be allocated pro rata among the outstanding Certificates in such
class. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has provided the
Trustee or other person required to make such payments with wiring instructions
no later than five business days prior to the related Record Date or such other
date specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, such Certificateholder holds Certificates in the
requisite amount or denomination specified therein), or by check mailed to the
address of such
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Certificateholder as it appears on the Certificate Register; provided, however,
that the final distribution in retirement of any class of Certificates will be
made only upon presentation and surrender of such Certificates at the location
specified in the notice to Certificateholders of such final distribution.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Strip Certificates and certain REMIC Residual Certificates that have no
Pass-Through Rate) may have a different Pass-Through Rate, which may be fixed,
variable or adjustable, or any combination of two or more such rates. The
related Prospectus Supplement will specify the Pass-Through Rate or, in the case
of a variable or adjustable Pass-Through Rate, the method for determining the
Pass-Through Rate, for each class. Unless otherwise specified in the related
Prospectus Supplement, interest on the Certificates of each series will be
calculated on the basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class
(other than any class of Certificates that will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement ("Accrual
Certificates"), and other than any class of Strip Certificates or REMIC Residual
Certificates that is not entitled to any distributions of interest) will be made
on each Distribution Date based on the Accrued Certificate Interest for such
class and such Distribution Date, subject to the sufficiency of the portion of
the Available Distribution Amount allocable to such class on such Distribution
Date. Prior to the time interest is distributable on any class of Accrual
Certificates, the amount of Accrued Certificate Interest otherwise distributable
on such class will be added to the principal balance thereof on each
Distribution Date. With respect to each class of Certificates (other than
certain classes of Strip Certificates and REMIC Residual Certificates), "Accrued
Certificate Interest" for each Distribution Date will be equal to interest at
the applicable Pass-Through Rate accrued for a specified period (generally one
month) on the outstanding principal balance thereof immediately prior to such
Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, Accrued Certificate Interest for each Distribution Date on Strip
Certificates entitled to distributions of interest will be similarly calculated
except that it will accrue on a notional amount that is either (i) based on the
principal balances of some or all of the Mortgage Loans and/or Mortgage
Securities in the related Trust Fund or (ii) equal to the principal balances of
one or more other classes of Certificates of the same series. Reference to such
a notional amount with respect to a class of Strip Certificates is solely for
convenience in making certain calculations and does not represent the right to
receive any distribution of principal. If so specified in the related Prospectus
Supplement, the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Certificates, that may otherwise be
added to the principal balance of) one or more classes of the Certificates of a
series will be reduced to the extent that any Prepayment Interest Shortfalls, as
described under "Yield Considerations", exceed the amount of any sums
(including, if and to the extent specified in the related Prospectus Supplement,
the Master Servicer's servicing compensation) that are applied to offset such
shortfalls. The particular manner in which such shortfalls will be allocated
among some or all of the classes of Certificates of that series will be
specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the extent to which the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Certificates, that may otherwise be added to the principal balance of) a
class of Offered Certificates may be reduced as a result of any other
contingencies, including delinquencies, losses and Deferred Interest on or in
respect of the related Mortgage Loans or application of the Relief Act with
respect to such Mortgage Loans. Unless otherwise provided in the related
Prospectus Supplement, any reduction in the amount of Accrued Certificate
Interest otherwise distributable on a class of Certificates by reason of the
allocation to such class of a portion of any Deferred Interest on or in respect
of the related Mortgage Loans will result in a corresponding increase in the
principal balance of such class.
As and to the extent described in the related Prospectus Supplement,
distributions of principal with respect to a series of Certificates will be made
on each Distribution Date to the holders of the class or classes of Certificates
of such series entitled thereto until the principal balance(s) of such
Certificates have been reduced to zero. In the case of a series of Certificates
which includes two or more classes of Certificates, 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 Certificates
or Subordinate Certificates), shall be as set forth in the related Prospectus
Supplement. Distributions of principal with respect to one or more classes of
Certificates may be made at a rate that is faster (and, in some cases,
substantially faster) than the rate at which payments or other collections of
principal are received on the Mortgage Loans and/or Mortgage Securities in the
related Trust Fund, may not commence until the occurrence of certain events,
such as the retirement of one or more other classes of Certificates of the same
series, or may be made at a rate that is slower
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(and, in some cases, substantially slower) than the rate at which payments or
other collections of principal are received on such Mortgage Loans and/or
Mortgage Securities. In addition, distributions of principal with respect to one
or more classes of Certificates may be made, subject to available funds, based
on a specified principal payment schedule and, with respect to one or more
classes of Certificates, may be contingent on the specified principal payment
schedule for another class of the same series and the rate at which payments and
other collections of principal on the Mortgage Loans and/or Mortgage Securities
in the related Trust Fund are received.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS
OR IN RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment Premiums or
payments in respect of Equity Participations received on or in connection with
the Mortgage Assets in any Trust Fund will be distributed on each Distribution
Date to the holders of the class of Certificates of the related series entitled
thereto in accordance with the provisions described in such Prospectus
Supplement. "Equity Participations" are financial participations in the equity
portions of mortgage pools.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage Loans
and/or Mortgage Securities in any Trust Fund (to the extent not covered or
offset by draws on any reserve fund or under any instrument of credit
enhancement) will be allocated among the respective classes of Certificates of
the related series in the priority and manner, and subject to the limitations,
specified in the related Prospectus Supplement. As described in the related
Prospectus Supplement, such allocations may result in reductions in the
entitlements to interest and/or principal balances of one or more such classes
of Certificates, or may be effected simply by a prioritization of payments among
such classes of Certificates.
ADVANCES
If and to the extent provided in the related Prospectus Supplement, and
subject to any limitations specified therein, the related Master Servicer may be
obligated to advance, or have the option of advancing, on or before each
Distribution Date, from its or their own funds or from excess funds held in the
related Certificate Account that are not part of the Available Distribution
Amount for the related series of Certificates for such Distribution Date, an
amount up to the aggregate of any payments of principal (other than the
principal portion of any Balloon Payments) and interest that were due on or in
respect of such Mortgage Loans during the related Due Period and were delinquent
on the related Determination Date. Unless otherwise provided in the related
Prospectus Supplement, a "Due Period" is the period between Distribution Dates,
and scheduled payments on the Mortgage Loans in any Trust Fund that became due
during a given Due Period will, to the extent received by the related
Determination Date or advanced by the related Master Servicer or other specified
person, be distributed on the Distribution Date next succeeding such
Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made from the Master Servicer's own funds will be reimbursable out of
related recoveries on the Mortgage Loans (including amounts received under any
fund or instrument constituting credit enhancement) respecting which such
advances were made (as to any Mortgage Loan, "Related Proceeds") and such other
specific sources as may be identified in the related Prospectus Supplement,
including in the case of a series that includes one or more classes of
Subordinate Certificates, collections on other Mortgage Loans in the related
Trust Fund that would otherwise be distributable to the holders of one or more
classes of such Subordinate Certificates. No advance will be required to be made
by the Master Servicer if, in the good faith judgment of the Master Servicer,
such advance would not be recoverable from Related Proceeds or another
specifically identified source (any such advance, a "Nonrecoverable Advance");
and, if previously made by a Master Servicer, a Nonrecoverable Advance will be
reimbursable from any amounts in the related Certificate Account prior to any
distributions being made to the related series of Certificateholders.
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If advances have been made from excess funds in a Certificate Account, the
Master Servicer that advanced such funds will be required to replace such funds
in the Certificate Account on any future Distribution Date to the extent that
funds then in the Certificate Account are insufficient to permit full
distributions to Certificateholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer to make advances may
be secured by a cash advance reserve fund or a surety bond. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If any person other than the Master Servicer has any obligation to make
advances as described above, the related Prospectus Supplement will identify
such person.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest thereon for the
period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to Certificateholders or as otherwise
provided in the related Pooling Agreement and described in such Prospectus
Supplement.
As specified in the related Prospectus Supplement with respect to any
series of Certificates as to which the Trust Fund includes Mortgage Securities,
the advancing obligations with respect to the underlying Mortgage Loans will be
pursuant to the terms of such Mortgage Securities, as may be supplemented by the
terms of the applicable Pooling Agreement, and may differ from the provisions
described above.
REPORTS TO CERTIFICATEHOLDERS
With each distribution to Certificateholders of a particular class of
Offered Certificates, the related Master Servicer or Trustee will forward or
cause to be forwarded to each holder of record of such class of Certificates a
statement or statements with respect to the related Trust Fund setting forth the
information specifically described in the related Pooling Agreement, which
generally will include the following as applicable except as otherwise provided
therein:
(i) the amount, if any, of such distribution allocable to
principal;
(ii) the amount, if any, of such distribution allocable to
interest;
(iii) the amount, if any, of such distribution allocable to (A)
Prepayment Premiums and (B) payments on account of Equity Participations;
(iv) with respect to a series consisting of two or more classes,
the outstanding principal balance or notional amount of each class after
giving effect to the distribution of principal on such Distribution Date;
(v) the amount of servicing compensation received by the related
Master Servicer (and, if payable directly out of the related Trust Fund, by
any Special Servicer and any Sub-Servicer);
(vi) the aggregate amount of advances included in the distributions
on such Distribution Date, and the aggregate amount of unreimbursed
advances at the close of business on such Distribution Date;
(vii) the aggregate principal balance of the Mortgage Loans in the
related Mortgage Pool on, or as of a specified date shortly prior to, such
Distribution Date;
(viii) the number and aggregate principal balance of any Mortgage
Loans in the related Mortgage Pool in respect of which (A) one scheduled
payment is delinquent, (B) two scheduled payments are delinquent, (C) three
or more scheduled payments are delinquent and (D) foreclosure proceedings
have been commenced;
(ix) the book value of any real estate acquired by such Trust Fund
through foreclosure or grant of a deed in lieu of foreclosure;
(x) the balance of the Reserve Fund, if any, at the close of
business on such Distribution Date;
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(xi) the amount of coverage under any Letter of Credit or Mortgage
Pool Insurance Policy covering default risk as of the close of business on
the applicable Determination Date and a description of any credit
enhancement substituted therefor;
(xii) the Special Hazard Amount, Fraud Loss Amount and Bankruptcy
Amount as of the close of business on the applicable Distribution Date and
a description of any change in the calculation of such amounts;
(xiii) in the case of Certificates benefitting from alternative
credit enhancement arrangements described in a Prospectus Supplement, the
amount of coverage under such alternative arrangements as of the close of
business on the applicable Determination Date; and
(xiv) with respect to any series of Certificates as to which the
Trust Fund includes Mortgage Securities, certain additional information as
required under the related Pooling Agreement and specified in the related
Prospectus Supplement.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per minimum denomination
of the relevant class of Offered Certificates or per a specified portion of such
minimum denomination. In addition to the information described above, reports to
Certificateholders will contain such other information as is set forth in the
applicable Pooling Agreement, which may include, without limitation,
prepayments, reimbursements to Subservicers and the Master Servicer and losses
borne by the related Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or Trustee will furnish a report to each
holder of record of a class of Offered Certificates at any time during such
calendar year which, among other things, will include information as to the
aggregate of amounts reported pursuant to subclauses (i)-(iii) above for such
calendar year or, in the event such person was a holder of record of a class of
Certificates during a portion of such calendar year, for the applicable portion
of such a year.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Unless otherwise provided in the applicable Prospectus Supplement, credit
support with respect to the Offered Certificates of each series may be comprised
of one or more of the following components. Each component will have a dollar
limit and, unless otherwise specified in the related Prospectus Supplement, will
provide coverage with respect to certain losses on the related Mortgage Loans
(as more particularly described in the related Prospectus Supplement, "Realized
Losses") that are (i) attributable to the Mortgagor's failure to make any
payment of principal or interest as required under the Mortgage Note, but not
including Special Hazard Losses, Extraordinary Losses or other losses resulting
from damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such
loss, a "Defaulted Mortgage Loss"); (ii) of a type generally covered by a
Special Hazard Insurance Policy (as defined below) (any such loss, a "Special
Hazard Loss"); (iii) attributable to certain actions which may be taken by a
bankruptcy court in connection with a Mortgage Loan, including a reduction by a
bankruptcy court of the principal balance of or the Mortgage Rate on a Mortgage
Loan or an extension of its maturity (any such loss, a "Bankruptcy Loss"); and
(iv) incurred on defaulted Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans (any such loss, a "Fraud Loss"). Unless
otherwise specified in the related Prospectus Supplement, Defaulted Mortgage
Losses, Special Hazard Losses, Bankruptcy Losses and Fraud Losses in excess of
the amount of coverage provided therefor and losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks ("Extraordinary Losses") will not be covered. To the extent that the
credit support for the Offered Certificates of any series is exhausted, the
holders thereof will bear all further risks of loss not otherwise insured
against.
As set forth below and in the applicable Prospectus Supplement, (i)
coverage with respect to Defaulted Mortgage Losses may be provided by one or
more of a Letter of Credit or a Mortgage Pool Insurance Policy, (ii) coverage
with respect to Special Hazard Losses may be provided by one or more of a Letter
of Credit or a Special Hazard Insurance Policy (any instrument, to the extent
providing such coverage, a "Special Hazard Instrument"), (iii) coverage with
respect to Bankruptcy Losses may be provided by one or more of a Letter of
Credit or a Bankruptcy Bond and (iv) coverage with respect to Fraud Losses may
be provided by one or more of a Letter of Credit, Mortgage Pool Insurance Policy
or mortgage repurchase bond. In addition, if provided in the applicable
Prospectus Supplement, in
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lieu of or in addition to any or all of the foregoing arrangements, credit
enhancement may be in the form of a Reserve Fund to cover such losses, in the
form of subordination of one or more classes of Subordinate Certificates to
provide credit support to one or more classes of Senior Certificates, or in the
form of a specified entity's agreement to repurchase certain Mortgage Loans or
fund certain losses pursuant to a Purchase Obligation, which obligations may be
supported by a Letter of Credit, surety bonds or other types of insurance
policies, certain other secured or unsecured corporate guarantees or in such
other form as may be described in the related Prospectus Supplement, or in the
form of a combination of two or more of the foregoing. The credit support may be
provided by an assignment of the right to receive certain cash amounts, a
deposit of cash into a Reserve Fund or other pledged assets, or by banks,
insurance companies, guarantees or any combination thereof identified in the
applicable Prospectus Supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to the Offered Certificates of
each series will be set forth in the related Prospectus Supplement. To the
extent provided in the applicable Prospectus Supplement and the Pooling
Agreement, the credit enhancement arrangements may be periodically modified,
reduced and substituted for based on the aggregate outstanding principal balance
of the Mortgage Loans covered thereby. See "Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement." If specified in
the applicable Prospectus Supplement, credit support for the Offered
Certificates of one series may cover the Offered Certificates of one or more
other series.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder, while
setting forth the material terms thereof, 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.
In general, references to "Mortgage Loans" under this "Description of
Credit Enhancement" section are to Mortgage Loans in a Trust Fund. However, if
so provided in the Prospectus Supplement for a series of Certificates, any
Mortgage Securities included in the related Trust Fund and/or the related
underlying Mortgage Loans may be covered by one or more of the types of credit
support described herein. The related Prospectus Supplement will specify, as to
each such form of credit support, the information indicated below with respect
thereto.
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate Account
on any Distribution Date will be subordinated to the corresponding rights of the
holders of Senior Certificates. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the manner and amount of
subordination provided by a class or classes of Subordinate Certificates in a
series and the circumstances under which such subordination will be available.
The Offered Certificates of any series may include one or more classes of
Subordinate Certificates.
If the Mortgage Loans and/or Mortgage Securities in any Trust Fund are
divided into separate groups, each supporting a separate class or classes of
Certificates of the related series, credit enhancement may be provided by
cross-support provisions requiring that distributions be made on Senior
Certificates evidencing interests in one group of Mortgage Loans and/or Mortgage
Securities prior to distributions on Subordinate Certificates evidencing
interests in a different group of Mortgage Loans and/or Mortgage Securities
within the Trust Fund. The Prospectus Supplement for a series that includes a
cross-support provision will describe the manner and conditions for applying
such provisions.
LETTER OF CREDIT
If any component of credit enhancement as to the Offered Certificates of
any series is to be provided by a letter of credit (the "Letter of Credit"), a
bank (the "Letter of Credit Bank") will deliver to the related Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the Mortgage Loans or, if specified in the related Prospectus
Supplement, support an entity's obligation pursuant to a Purchase Obligation to
make certain
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payments to the related Trustee with respect to one or more components of credit
enhancement. The Letter of Credit Bank, as well as the amount available under
the Letter of Credit with respect to each component of credit enhancement, will
be specified in the applicable Prospectus Supplement. If so specified in the
related Prospectus Supplement, the Letter of Credit may permit draws only in the
event of certain types of losses and shortfalls. The Letter of Credit may also
provide for the payment of advances which the Master Servicer would be obligated
to make with respect to delinquent monthly mortgage payments. The amount
available under the Letter of Credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced as
described in the related Prospectus Supplement. The Letter of Credit will expire
on the expiration date set forth in the related Prospectus Supplement, unless
earlier terminated or extended in accordance with its terms.
MORTGAGE POOL INSURANCE POLICIES
Any mortgage pool insurance policy (a "Mortgage Pool Insurance Policy")
obtained by the Company for each Trust Fund will be issued by the Pool Insurer
named in the applicable Prospectus Supplement. Each Mortgage Pool Insurance
Policy will, subject to the limitations described below, cover Defaulted
Mortgage Losses in an amount equal to a percentage specified in the applicable
Prospectus Supplement of the aggregate principal balance of the Mortgage Loans
on the Cut-off Date. As set forth under "--Maintenance of Credit Enhancement,"
the Master Servicer will use reasonable efforts to maintain the Mortgage Pool
Insurance Policy and to present claims thereunder to the Pool Insurer on behalf
of itself, the related Trustee and the related Certificateholders. The Mortgage
Pool Insurance Policies, however, are not blanket policies against loss, since
claims thereunder may only be made respecting particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent described
below. Unless specified in the related Prospectus Supplement, the Mortgage Pool
Insurance Policies may not cover losses due to a failure to pay or denial of a
claim under a Primary Insurance Policy, irrespective of the reason therefor.
Each Mortgage Pool Insurance Policy will generally provide that no claims
may be validly presented thereunder unless, among other things, (i) any required
Primary Insurance Policy is in effect for the defaulted Mortgage Loan and a
claim thereunder has been submitted and settled, (ii) hazard insurance on the
property securing such Mortgage Loan has been kept in force and real estate
taxes and other protection and preservation expenses have been paid by the
Master Servicer, (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its condition (reasonable wear and
tear excepted) at the Cut-off Date and (iv) the insured has acquired good and
merchantable title to the Mortgaged Property free and clear of liens except
certain permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Mortgage Loan at a price equal to the principal balance thereof plus
accrued and unpaid interest at the applicable Mortgage Rate to the date of
purchase and certain expenses incurred by the Master Servicer, Special Servicer
or Subservicer on behalf of the related Trustee and Certificateholders, or (b)
to pay the amount by which the sum of the principal balance of the defaulted
Mortgage Loan plus accrued and unpaid interest at the Mortgage Rate to the date
of payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under any related Primary
Insurance Policy. Certificateholders will experience a shortfall in the amount
of interest payable on the related Certificates in connection with the payment
of claims under a Mortgage Pool Insurance Policy because the Pool Insurer is
only required to remit unpaid interest through the date a claim is paid rather
than through the end of the month in which such claim is paid. In addition, the
Certificateholders will also experience losses with respect to the related
Certificates in connection with payments made under a Mortgage Pool Insurance
Policy to the extent that the Master Servicer expends funds to cover unpaid real
estate taxes or to repair the related Mortgaged Property in order to make a
claim under a Mortgage Pool Insurance Policy, as those amounts will not be
covered by payments under such policy and will be reimbursable to the Master
Servicer from funds otherwise payable to the Certificateholders. If any
Mortgaged Property securing a defaulted Mortgage Loan is damaged and proceeds,
if any (see "--Special Hazard Insurance Policies" below for risks which are not
covered by such policies), from the related hazard insurance policy or
applicable Special Hazard Instrument are insufficient to restore the damaged
property to a condition sufficient to permit recovery under the Mortgage Pool
Insurance Policy, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines (x) that such restoration will
increase the proceeds to one or more classes of Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer for
its expenses and (y) that such expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds.
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Unless otherwise specified in the related Prospectus Supplement, a Mortgage
Pool Insurance Policy (and certain Primary Insurance Policies) will likely not
insure against loss sustained by reason of a default arising from, among other
things, (i) fraud or negligence in the origination or servicing of a Mortgage
Loan, including misrepresentation by the Mortgagor, the Seller or other persons
involved in the origination thereof, or (ii) failure to construct a Mortgaged
Property in accordance with plans and specifications. Depending upon the nature
of the event, a breach of representation made by a Seller may also have
occurred. Such a breach, if it materially and adversely affects the interests of
Certificateholders and cannot be cured, would give rise to a purchase obligation
on the part of the Seller, as more fully described under "The Mortgage
Pools--Representations by Sellers." However, such an event would not give rise
to a breach of a representation and warranty or a purchase obligation on the
part of the Company or Master Servicer.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related series of Certificates by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties. The
amount of claims paid includes certain expenses incurred by the Master Servicer,
Special Servicer or Subservicer as well as accrued interest on delinquent
Mortgage Loans to the date of payment of the claim. Accordingly, if aggregate
net claims paid under any Mortgage Pool Insurance Policy reach the original
policy limit, coverage under that Mortgage Pool Insurance Policy will be
exhausted and any further losses will be borne by holders of the related series
of Certificates. In addition, unless the Master Servicer could determine that an
advance in respect of a delinquent Mortgage Loan would be recoverable to it from
the proceeds of the liquidation of such Mortgage Loan or otherwise, the Master
Servicer would not be obligated to make an advance respecting any such
delinquency since the advance would not be ultimately recoverable to it from
either the Mortgage Pool Insurance Policy or from any other related source. See
"Description of the Certificates--Advances."
Since each Mortgage Pool Insurance Policy will require that the property
subject to a defaulted Mortgage Loan be restored to its original condition prior
to claiming against the Pool Insurer, such policy will not provide coverage
against hazard losses. As set forth under "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder," the hazard policies covering the Mortgage Loans
typically exclude from coverage physical damage resulting from a number of
causes and, even when the damage is covered, may afford recoveries which are
significantly less than full replacement cost of such losses. Further, no
coverage in respect of Special Hazard Losses, Fraud Losses or Bankruptcy Losses
will cover all risks, and the amount of any such coverage will be limited. See
"--Special Hazard Insurance Policies" below. As a result, certain hazard risks
will not be insured against and will therefore be borne by the related
Certificateholders.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust Fund will be issued by
the insurer named in the applicable Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described below, protect holders
of the related series of Certificates from (i) losses due to direct physical
damage to a Mortgaged Property other than any loss of a type covered by a hazard
insurance policy or a flood insurance policy, if applicable, and (ii) losses
from partial damage caused by reason of the application of the co-insurance
clauses contained in hazard insurance policies ("Special Hazard Losses"). See
"Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder." However, a
Special Hazard Insurance Policy will not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, chemical
contamination, waste by the Mortgagor and certain other risks. Aggregate claims
under a Special Hazard Insurance Policy will be limited to the amount set forth
in the related Prospectus Supplement and will be subject to reduction as
described in such related Prospectus Supplement. A Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy
will provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
Special Servicer or the Subservicer, the insurer will pay the lesser of (i) the
cost of repair or replacement of such property or (ii) upon transfer of the
property to the insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
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foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer, Special
Servicer or Subservicer with respect to such property. If the property is
transferred to a third party in a sale approved by the issuer of the Special
Hazard Insurance Policy (the "Special Hazard Insurer"), the amount that the
Special Hazard Insurer will pay will be the amount under (ii) above reduced by
the net proceeds of the sale of the property. No claim may be validly presented
under the Special Hazard Insurance Policy unless hazard insurance on the
property securing a defaulted Mortgage Loan has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid
(all of which must be approved in advance by the Special Hazard Insurer). If the
unpaid principal balance plus accrued interest and certain expenses is paid by
the insurer, the amount of further coverage under the related Special Hazard
Insurance Policy will be reduced by such amount less any net proceeds from the
sale of the property. Any amount paid as the cost of repair of the property will
further reduce coverage by such amount. Restoration of the property with the
proceeds described under (i) above will satisfy the condition under each
Mortgage Pool Insurance Policy that the property be restored before a claim
under such Mortgage Pool Insurance Policy may be validly presented with respect
to the defaulted Mortgage Loan secured by such property. The payment described
under (ii) above will render presentation of a claim in respect of such Mortgage
Loan under the related Mortgage Pool Insurance Policy unnecessary. Therefore, so
long as a Mortgage Pool Insurance Policy remains in effect, the payment by the
insurer under a Special Hazard Insurance Policy of the cost of repair or of the
unpaid principal balance of the related Mortgage Loan plus accrued interest and
certain expenses will not affect the total Insurance Proceeds paid to
Certificateholders, but will affect the relative amounts of coverage remaining
under the related Special Hazard Insurance Policy and Mortgage Pool Insurance
Policy.
As and to the extent set forth in the applicable Prospectus Supplement,
coverage in respect of Special Hazard Losses for a series of Certificates may be
provided, in whole or in part, by a type of Special Hazard Instrument other than
a Special Hazard Insurance Policy or by means of the special hazard
representation of the Company.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a Mortgagor, it is possible that
the bankruptcy court may establish the value of the Mortgaged Property of such
Mortgagor at an amount less than the then outstanding principal balance of the
Mortgage Loan secured by such Mortgaged Property (a "Deficient Valuation"). The
amount of the secured debt could then be reduced to such value, and, thus, the
holder of such Mortgage Loan would become an unsecured creditor to the extent
the outstanding principal balance of such Mortgage Loan exceeds the value
assigned to the Mortgaged Property by the bankruptcy court. In addition, certain
other modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including a reduction in the amount of the Monthly Payment on the
related Mortgage Loan (a "Debt Service Reduction"; Debt Service Reductions and
Deficient Valuations, collectively referred to herein as Bankruptcy Losses). See
"Certain Legal Aspects of Mortgage Loans and Related Matters--Anti-Deficiency
Legislation and Other Limitations on Lenders." Any Bankruptcy Bond to provide
coverage for Bankruptcy Losses for proceedings under the Federal Bankruptcy Code
obtained by the Company for a Trust Fund will be issued by an insurer named in
the applicable Prospectus Supplement. The level of coverage under each
Bankruptcy Bond will be set forth in the applicable Prospectus Supplement.
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, or any other instrument satisfactory
to the relevant Rating Agency or Agencies, which will be applied and maintained
in the manner and under the conditions specified in such Prospectus Supplement.
In the alternative or in addition to such deposit, to the extent described in
the related Prospectus Supplement, a Reserve Fund may be funded through
application of all or a portion of amounts otherwise payable on any related
Subordinate Certificates, from the Spread or otherwise. To the extent that the
funding of the Reserve Fund is dependent on amounts otherwise payable on related
Subordinate Certificates, Spread or other cash flows attributable to the related
Mortgage Loans or on reinvestment income, the Reserve Fund may provide less
coverage than initially expected if the cash flows or reinvestment income on
which such funding is dependent are lower than anticipated. In addition, with
respect to any series of Certificates 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
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to Certificateholders, or applied to reimburse the Master Servicer for
outstanding advances, or may be used for other purposes, in the manner and to
the extent specified in the related Prospectus Supplement. Unless otherwise
provided in the related Prospectus Supplement, any such Reserve Fund will not be
deemed to be part of the related Trust Fund. If set forth in the related
Prospectus Supplement, a Reserve Fund may provide coverage to more than one
series of Certificates.
In connection with the establishment of any Reserve Fund, unless otherwise
specified in the related Prospectus Supplement, the Reserve Fund will be
structured so that the Trustee will have a perfected security interest for the
benefit of the Certificateholders in the assets in the Reserve Fund. However, to
the extent that the Company, any affiliate thereof or any other entity has an
interest in any Reserve Fund, in the event of the bankruptcy, receivership or
insolvency of such entity, there could be delays in withdrawals from the Reserve
Fund and corresponding payments to the Certificateholders which could adversely
affect the yield to investors on the related Certificates.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the applicable Prospectus Supplement does not expressly
provide for alternative credit enhancement arrangements in lieu of some or all
of the arrangements mentioned below, the following paragraphs shall apply.
If a Letter of Credit or alternate form of credit enhancement has been
obtained for a series of Certificates, the Master Servicer will be obligated to
exercise reasonable efforts to keep or cause to be kept such Letter of Credit
(or an alternate form of credit support) in full force and effect throughout the
term of the applicable Pooling 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." Unless otherwise specified in the applicable Prospectus
Supplement, if a Letter of Credit obtained for a series of Certificates is
scheduled to expire prior to the date the final distribution on such
Certificates is made and coverage under such Letter of Credit has not been
exhausted and no substitution has occurred, the Trustee will draw the amount
available under the Letter of Credit and maintain such amount in trust for such
Certificateholders.
If a Mortgage Pool Insurance Policy has been obtained for a series of
Certificates, the Master Servicer will be obligated to exercise reasonable
efforts to keep such Mortgage Pool Insurance Policy (or an alternate form of
credit support) in full force and effect throughout the term of the applicable
Pooling Agreement, unless coverage thereunder has been exhausted through payment
of claims or until such Mortgage Pool Insurance Policy is replaced in accordance
with the terms of the applicable Pooling Agreement. Unless otherwise provided in
the related Prospectus Supplement, the Master Servicer will agree to pay the
premiums for each Mortgage Pool Insurance Policy on a timely basis. In the event
the Pool Insurer ceases to be a Qualified Insurer (such term being defined to
mean a private mortgage guaranty insurance company duly qualified as such under
the laws of the state of its incorporation and each state having jurisdiction
over the insurer in connection with the Mortgage Pool Insurance Policy and
approved as an insurer by Freddie Mac, Fannie Mae or any successor entity)
because it ceases to be qualified under any such law to transact such insurance
business or coverage is terminated for any reason other than exhaustion of such
coverage, the Master Servicer will use reasonable efforts to obtain from another
Qualified Insurer a replacement insurance policy comparable to the Mortgage Pool
Insurance Policy with a total coverage equal to the then outstanding coverage of
such Mortgage Pool Insurance Policy, provided that, if the cost of the
replacement policy is greater than the cost of such Mortgage Pool Insurance
Policy, the coverage of the replacement policy will, unless otherwise agreed to
by the Company, be reduced to a level such that its premium rate does not exceed
the premium rate on such Mortgage Pool Insurance Policy. In the event that the
Pool Insurer ceases to be a Qualified Insurer because it ceases to be approved
as an insurer by Freddie Mac, Fannie Mae or any successor entity, the Master
Servicer will be obligated to review, not less often than monthly, the financial
condition of the Pool Insurer with a view toward determining whether recoveries
under the Mortgage Pool Insurance Policy are jeopardized for reasons related to
the financial condition of the Pool Insurer. If the Master Servicer determines
that recoveries are so jeopardized, it will be obligated to exercise its best
reasonable efforts to obtain from another Qualified Insurer a replacement
insurance policy as described above,
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subject to the same cost limit. Any losses associated with any reduction or
withdrawal in rating by an applicable Rating Agency shall be borne by the
related Certificateholders.
In lieu of the Master Servicer's obligation to maintain a Letter of Credit
or Mortgage Pool Insurance Policy as provided above, the Master Servicer may
obtain a substitute Letter of Credit, Mortgage Pool Insurance Policy or an
alternate form of credit enhancement. If the Master Servicer obtains such a
substitute Letter of Credit or Mortgage Pool Insurance Policy, it will maintain
and keep such Letter of Credit, Mortgage Pool Insurance Policy or alternate form
of credit enhancement in full force and effect as provided herein. Prior to its
obtaining any substitute Letter of Credit, Mortgage Pool Insurance Policy or
alternate form of credit enhancement, the Master Servicer will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
Certificates that the substitution of such Mortgage Pool Insurance Policy,
Letter of Credit, or alternate form of credit enhancement for the existing
credit enhancement will not adversely affect the then-current ratings assigned
to such Certificates by such Rating Agency or Agencies.
If a Special Hazard Instrument has been obtained for a series of
Certificates, the Master Servicer will also be obligated to exercise reasonable
efforts to maintain and keep such Special Hazard Instrument in full force and
effect throughout the term of the applicable Pooling 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." If the Special Hazard Instrument takes the
form of a Special Hazard Insurance Policy, such policy will provide coverage
against risks of the type described herein under "Description of Credit
Enhancement--Special Hazard Insurance Policies." The Master Servicer may obtain
a substitute Special Hazard Instrument for the existing Special Hazard
Instrument if prior to such substitution the Master Servicer obtains written
confirmation from the Rating Agency or Agencies that rated the related
Certificates that such substitution shall not adversely affect the then-current
ratings assigned to such Certificates by such Rating Agency or Agencies.
If a Bankruptcy Bond has been obtained for a series of Certificates, the
Master Servicer will be obligated to exercise reasonable efforts to maintain and
keep such Bankruptcy Bond in full force and effect throughout the term of the
Pooling Agreement, unless coverage thereunder has been exhausted through payment
of claims or substitution therefor is made as described below under "--Reduction
or Substitution of Credit Enhancement." The Master Servicer may obtain a
substitute Bankruptcy Bond or other credit enhancement for the existing
Bankruptcy Bond if prior to such substitution the Master Servicer obtains
written confirmation from the Rating Agency or Agencies that rated the related
Certificates that such substitution shall not adversely affect the then-current
ratings assigned to such Certificates by such Rating Agency or Agencies. See
"--Bankruptcy Bonds" above.
The Master Servicer, on behalf of itself, the Trustee and
Certificateholders, will provide the Trustee information required for the
Trustee to draw under the Letter of Credit and will present claims to the
provider of any Purchase Obligation, to each Pool Insurer, to the issuer of each
Special Hazard Insurance Policy or other Special Hazard Instrument, to the
issuer of each Bankruptcy Bond and, in respect of defaulted Mortgage Loans for
which there is no Subservicer, to each Primary Insurer and take such reasonable
steps as are necessary to permit recovery under such Letter of Credit, Purchase
Obligation, insurance policies or comparable coverage respecting defaulted
Mortgage Loans or Mortgage Loans which are the subject of a bankruptcy
proceeding. Additionally, the Master Servicer will present such claims and take
such steps as are reasonably necessary to provide for the performance by the
provider of the Purchase Obligation of its Purchase Obligation. As set forth
above, all collections by the Master Servicer under any Purchase Obligation, any
Mortgage Pool Insurance Policy, any Primary Insurance Policy or any Bankruptcy
Bond and, where the related property has not been restored, any Special Hazard
Instrument, are to be deposited in the related Certificate Account, subject to
withdrawal as described above. All draws under any Letter of Credit are also to
be deposited in the related Certificate Account. In those cases in which a
Mortgage Loan is serviced by a Subservicer, the Subservicer, on behalf of
itself, the Trustee and the Certificateholders will present claims to the
Primary Insurer, and all collections thereunder shall initially be deposited in
a subservicing account that generally meets the requirements for the Certificate
Account prior to being delivered to the Master Servicer for deposit in the
related Certificate Account.
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related hazard insurance policy or any applicable Special
Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any Letter of Credit, Mortgage
Pool Insurance Policy or any related Primary Insurance Policy, the Master
Servicer is not required to expend its own funds to restore the damaged property
unless it determines (i) that such restoration will increase the proceeds to one
or more classes of Certificateholders
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on liquidation of the Mortgage Loan after reimbursement of the Master Servicer
for its expenses and (ii) that such expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds. If recovery under any Letter of
Credit, Mortgage Pool Insurance Policy, other credit enhancement or any related
Primary Insurance Policy is not available because the Master Servicer has been
unable to make the above determinations, has made such determinations
incorrectly or recovery is not available for any other reason, the Master
Servicer is nevertheless obligated to follow such normal practices and
procedures (subject to the preceding sentence) as it deems necessary or
advisable to realize upon the defaulted Mortgage Loan and in the event such
determination has been incorrectly made, is entitled to reimbursement of its
expenses in connection with such restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
Unless otherwise specified in the Prospectus Supplement, the amount of
credit support provided pursuant to any form of credit enhancements (including,
without limitation, a Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy, Bankruptcy Bond, Letter of Credit, Reserve Fund, Purchase Obligation, or
any alternative form of credit enhancement) may be reduced under certain
specified circumstances. In most cases, the amount available pursuant to any
form of credit enhancement will be subject to periodic reduction in accordance
with a schedule or formula on a nondiscretionary basis pursuant to the terms of
the related Pooling Agreement. Additionally, in most cases, such form of credit
support (and any replacements therefor) may be replaced, reduced or terminated,
and the formula used in calculating the amount of coverage with respect to
Bankruptcy Losses, Special Hazard Losses or Fraud Losses may be changed, without
the consent of the Certificateholders, upon the written assurance from each
applicable Rating Agency that the then-current rating of the related series of
Certificates will not be adversely affected. Furthermore, in the event that the
credit rating of any obligor under any applicable credit enhancement is
downgraded, the credit rating(s) of the related series of Certificates may be
downgraded to a corresponding level, and, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer will not be obligated to
obtain replacement credit support in order to restore the rating(s) of the
related series of Certificates. The Master Servicer will also be permitted to
replace such credit support with other credit enhancement instruments issued by
obligors whose credit ratings are equivalent to such downgraded level and in
lower amounts which would satisfy such downgraded level, provided that the
then-current rating(s) of the related series of Certificates are maintained.
Where the credit support is in the form of a Reserve Fund, a permitted reduction
in the amount of credit enhancement will result in a release of all or a portion
of the assets in the Reserve Fund to the Company, the Master Servicer or such
other person that is entitled thereto. Any assets so released will not be
available for distributions in future periods.
PURCHASE OBLIGATIONS
With respect to certain types of Mortgage Loans to be included in any
Mortgage Pool, if specified in the related Prospectus Supplement, the Mortgage
Loans may be sold subject to a Purchase Obligation as described below that would
become applicable on a specified date or upon the occurrence of a specified
event. For example, with respect to certain types of ARM Loans as to which the
Mortgage Rate is fixed for the first five years, a Purchase Obligation may apply
on the first date that the Mortgage Rate of such Mortgage Loan is adjusted, and
such obligation may apply to the Mortgage Loans or to the related Certificates
themselves, or to a corresponding Purchase Obligation of the Company or another
person as specified in the related Prospectus Supplement. With respect to any
Purchase Obligation, such obligation will be an obligation of an entity (which
may include a bank or other financial institution or an insurance company)
specified in the related Prospectus Supplement, and an instrument evidencing
such obligation (a "Purchase Obligation") shall be delivered to the related
Trustee for the benefit of the Certificateholders to the related series.
The specific terms and conditions applicable to any Purchase Obligation
will be described in the related Prospectus Supplement, including the purchase
price, the timing of and any limitations and conditions to any such purchase.
Any Purchase Obligation will be payable solely to the Trustee for the benefit of
the Certificateholders of the related series and will be nontransferable. Unless
otherwise provided in the related Prospectus Supplement, each Purchase
Obligation will be a general unsecured obligation of the provider thereof, and
prospective purchasers of Offered Certificates must look solely to the credit of
such entity for payment under the Purchase Obligation.
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PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER
GENERAL
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below) and, if required as described below, a Primary
Insurance Policy. The following is only a brief description of certain insurance
policies and does not purport to summarize or describe all of the provisions of
these policies. Such insurance is subject to underwriting and approval of
individual Mortgage Loans by the respective insurers. The descriptions of any
insurance policies described in this Prospectus or any Prospectus Supplement and
the coverage thereunder, while setting forth the material terms thereof, do not
purport to be complete and are qualified in their entirety by reference to such
forms of policies, sample copies of which are available upon request.
PRIMARY MORTGAGE INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, (i) each
Single Family Loan having a Loan-to- Value Ratio at origination of over 80% is
required by the Company to be covered by a primary mortgage guaranty insurance
policy (a "Primary Insurance Policy") insuring against default on such Mortgage
Loan as to at least the principal amount thereof exceeding 75% of the Value of
the related Mortgaged Property at origination of the Mortgage Loan, unless and
until the principal balance of the Mortgage Loan is reduced to a level that
would produce a Loan-to- Value Ratio equal to or less than at least 80%, and
(ii) the Company will represent and warrant that, to the best of the Company's
knowledge, such Mortgage Loans are so covered. However, the foregoing standard
may vary significantly depending on the characteristics of the Mortgage Loans
and the applicable underwriting standards. A Mortgage Loan will not be
considered to be an exception to the foregoing standard if no Primary Insurance
Policy was obtained at origination but the Mortgage Loan has amortized to below
an 80% Loan-to-Value Ratio level as of the applicable Cut-off Date. Mortgage
Loans which are subject to negative amortization will only be covered by a
Primary Insurance Policy if such coverage was so required upon their
origination, notwithstanding that subsequent negative amortization may cause
such Mortgage Loan's Loan-to-Value Ratio (based on the then-current balance) to
subsequently exceed the limits which would have required such coverage upon
their origination. Multifamily Loans will not be covered by a Primary Insurance
Policy, regardless of the related Loan-to-Value Ratio.
While the terms and conditions of the Primary Insurance Policies issued by
one primary mortgage guaranty insurer (a "Primary Insurer") will differ from
those in Primary Insurance Policies issued by other Primary Insurers, each
Primary Insurance Policy will in general provide substantially the following
coverage. The amount of the loss as calculated under a Primary Insurance Policy
covering a Mortgage Loan (herein referred to as the "Loss") will generally
consist of the unpaid principal amount of such Mortgage Loan and accrued and
unpaid interest thereon and reimbursement of certain expenses, less (i) rents or
other payments collected or received by the insured (other than the proceeds of
hazard insurance) that are derived from the related Mortgaged Property, (ii)
hazard insurance proceeds in excess of the amount required to restore such
Mortgaged Property and which have not been applied to the payment of the
Mortgage Loan, (iii) amounts expended but not approved by the Primary Insurer,
(iv) claim payments previously made on such Mortgage Loan and (v) unpaid
premiums and certain other amounts.
The Primary Insurer will generally be required to pay either: (i) the
insured percentage of the Loss; (ii) the entire amount of the Loss, after
receipt by the Primary Insurer of good and merchantable title to, and possession
of, the Mortgaged Property; or (iii) at the option of the Primary Insurer under
certain Primary Insurance Policies, the sum of the delinquent monthly payments
plus any advances made by the insured, both to the date of the claim payment
and, thereafter, monthly payments in the amount that would have become due under
the Mortgage Loan if it had not been discharged plus any advances made by the
insured until the earlier of (a) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (b) an approved sale.
As conditions precedent to the filing or payment of a claim under a Primary
Insurance Policy, in the event of default by the Mortgagor, the insured will
typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes,
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protection and preservation expenses and foreclosure and related costs; (ii) in
the event of any physical loss or damage to the Mortgaged Property, have the
Mortgaged Property restored to at least its condition at the effective date of
the Primary Insurance Policy (ordinary wear and tear excepted); and (iii) tender
to the Primary Insurer good and merchantable title to, and possession of, the
Mortgaged Property.
For any Certificates offered hereunder, the Master Servicer will maintain
or cause each Subservicer to maintain, as the case may be, in full force and
effect and to the extent coverage is available a Primary Insurance Policy with
regard to each Single Family Loan for which such coverage is required under the
standard described above, provided that such Primary Insurance Policy was in
place as of the Cut-off Date and the Company had knowledge of such Primary
Insurance Policy. In the event that the Company gains knowledge that as of the
Closing Date, a Mortgage Loan had a Loan-to-Value Ratio at origination in excess
of 80% and was not the subject of a Primary Insurance Policy (and was not
included in any exception to such standard disclosed in the related Prospectus
Supplement) and that such Mortgage Loan has a then current Loan-to-Value Ratio
in excess of 80%, then the Master Servicer is required to use reasonable efforts
to obtain and maintain a Primary Insurance Policy to the extent that such a
policy is obtainable at a reasonable price. The Master Servicer or, in the case
of a Designated Seller Transaction, the Seller will not cancel or refuse to
renew any such Primary Insurance Policy in effect at the time of the initial
issuance of a series of Certificates that is required to be kept in force under
the applicable Pooling Agreement unless the replacement Primary Insurance Policy
for such cancelled or non-renewed policy is maintained with an insurer whose
claims-paying ability is acceptable to the Rating Agency or Agencies that rated
such series of Certificates for mortgage pass-through certificates having a
rating equal to or better than the highest then-current rating of any class of
such series of Certificates. For further information regarding the extent of
coverage under any Mortgage Pool Insurance Policy or Primary Insurance Policy,
see "Description of Credit Enhancement--Mortgage Pool Insurance Policies."
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a hazard
insurance policy for their Mortgage Loan. Additionally, the Pooling Agreement
will require the Master Servicer to cause to be maintained for each Mortgage
Loan a hazard insurance policy providing for no less than the coverage of the
standard form of fire insurance policy with extended coverage customary in the
state in which the property is located. Unless otherwise specified in the
related Prospectus Supplement, such coverage generally will be in an amount
equal to the lesser of the principal balance owing on such Mortgage Loan or 100%
of the insurable value of the improvements securing the Mortgage Loan except
that, if generally available, such coverage must not be less than the minimum
amount required under the terms thereof to fully compensate for any damage or
loss on a replacement cost basis. The ability of the Master Servicer to ensure
that hazard insurance proceeds are appropriately applied may be dependent on its
being named as an additional insured under any hazard insurance policy and under
any flood insurance policy referred to below, or upon the extent to which
information in this regard is furnished to the Master Servicer by Mortgagors or
Subservicers.
As set forth above, all amounts collected by the Master Servicer under any
hazard policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited in the related
Certificate Account. The Pooling Agreement will provide that the Master Servicer
may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on the Mortgage Loans. If
such blanket policy contains a deductible clause, the Master Servicer will
deposit in the applicable Certificate Account all sums which would have been
deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although the
policies relating to the Mortgage Loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. Where
the improvements securing a Mortgage Loan are located in a
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federally designated flood area at the time of origination of such Mortgage
Loan, the Pooling Agreement requires the Master Servicer to cause to be
maintained for each such Mortgage Loan serviced, flood insurance (to the extent
available) in an amount equal in general to the lesser of the amount required to
compensate for any loss or damage on a replacement cost basis or the maximum
insurance available under the federal flood insurance program.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause which in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements damaged or destroyed less physical
depreciation or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement--Special Hazard Insurance Policies"
for a description of the limited protection afforded by any Special Hazard
Insurance Policy against losses occasioned by hazards which are otherwise
uninsured against (including losses caused by the application of the
co-insurance clause described in the preceding paragraph).
Under the terms of the Mortgage Loans, Mortgagors are generally required to
present claims to insurers under hazard insurance policies maintained on the
Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present claims under any Special Hazard
Insurance Policy or other Special Hazard Instrument and any blanket insurance
policy insuring against hazard losses on the Mortgaged Properties. However, the
ability of the Master Servicer to present such claims is dependent upon the
extent to which information in this regard is furnished to the Master Servicer
or the Subservicers by Mortgagors.
FHA INSURANCE
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under The Housing Act and the United
States Housing Act of 1937, as amended.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow the Department of Housing and Urban Development ("HUD") to insure mortgage
loans that are secured by newly constructed and substantially rehabilitated
multifamily rental projects. Section 244 of the Housing Act provides for
co-insurance of such mortgage loans made under Sections 221 (d)(3) and (d)(4) by
HUD/FHA and a HUD-approved co-insurer. Generally the term of such a mortgage
loan may be up to 40 years and the ratio of the loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project or a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan to value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated to purchase any such debenture
issued in satisfaction of a defaulted FHA insured Mortgage Loan serviced by it
for an amount equal to the principal amount of any such debenture.
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The Master Servicer will be required to take such steps as are reasonably
necessary to keep FHA insurance in full force and effect.
THE COMPANY
The Company is a wholly-owned subsidiary of ICI Funding. The Company was
incorporated in the State of California on May 6, 1996. The Company was
organized for the purpose of serving as a private secondary mortgage market
conduit. The Company does not have, nor is it expected in the future to have,
any significant assets.
The Company maintains its principal office at 20371 Irvine Avenue, Suite
200, Santa Ana Heights, California 92707. Its telephone number is (714)
556-0122.
ICI FUNDING CORPORATION
ICI Funding, the Company's parent, will be a Seller and may act as Master
Servicer with respect to a Mortgage Pool. ICI Funding is a mortgage banking
conduit that acquires conventional one- to four-family residential mortgage
loans nationwide and has, from time to time, acquired condominium conversion
loans. ICI Funding is a non- consolidating subsidiary of ICMH. ICI Funding
primarily acquires mortgage loans from approved correspondents.
Prior to November 1995, ICI Funding was a division of ICII. In November
1995, ICII restructured its operations pursuant to which ICI Funding became a
separate corporation and ICII contributed, among other things, all of the
outstanding nonvoting preferred stock of ICI Funding, which represents 99% of
the economic interest in ICI Funding, to ICMH, in exchange for approximately 10%
of the common stock of ICMH. The common stock of ICI Funding was retained by
ICII until March 1997 when it was distributed to certain officers and/or
directors of ICI Funding who are also officers and/or directors of ICMH.
At March 31, 1997, ICI Funding had approximately 115 employees. ICI
Funding's executive offices are located at 20371 Irvine Avenue, Santa Ana
Heights, California 92707, and its telephone number is (714) 556-0122.
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
ICMH is a publicly traded, recently formed specialty finance company which
operates three businesses: (1) long-term investment operations, (2) conduit
operations, and (3) warehouse lending operations. The long-term investment
operations is a recently-created business that invests primarily in
nonconforming residential mortgage loans and securities backed by such loans.
The conduit operations, conducted by ICI Funding, primarily purchases and sells
or securitizes non-conforming mortgage loans, and the warehouse lending
operations provides short-term lines of credit to originators of mortgage loans.
These two businesses include certain ongoing operations contributed to the
Company by Imperial Credit Industries, Inc. ("ICII"), a leading specialty
finance company, in November 1995. ICMH is organized as a real estate investment
trust for tax purposes, which allows it generally to pass through earnings to
stockholders without federal income tax at the corporate level.
ICMH's day-to-day operations are overseen by Imperial Credit Advisors,
Inc., a wholly-owned subsidiary of ICII ("ICAI") pursuant to a management
agreement between ICMH and ICAI. ICMH's executive offices are located at 20371
Irvine Avenue, Santa Ana Heights, California 92707, and its telephone number is
(714) 556-0122.
THE POOLING AGREEMENT
GENERAL
The Certificates of each series will be issued pursuant to a pooling and
servicing agreement or other agreement specified in the related Prospectus
Supplement (in either case, a "Pooling Agreement"). In general, the parties to a
Pooling Agreement will include the Company, the Trustee, the Master Servicer
and, in some cases, a Special
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Servicer. However, a Pooling Agreement that relates to a Trust Fund that
includes Mortgage Securities may include a party solely responsible for the
administration of such Mortgage Securities, and a Pooling Agreement that relates
to a Trust Fund that consists solely of Mortgage Securities may not include a
Master Servicer, Special Servicer or other servicer as a party. All parties to
each Pooling Agreement under which Certificates of a series are issued will be
identified in the related Prospectus Supplement.
Forms of Pooling Agreements have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. However, the provisions of each
Pooling Agreement will vary depending upon the nature of the Certificates to be
issued thereunder and the nature of the related Trust Fund. The following
summaries describe certain provisions that may appear in a Pooling Agreement.
The Prospectus Supplement for a series of Certificates will describe any
provision of the related Pooling Agreement that materially differs from the
description thereof set forth below. The summaries herein, while setting forth
the material provisions that may be included in a Pooling Agreement, do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Pooling Agreement for each series
of Certificates and the description of such provisions in the related Prospectus
Supplement. As used herein with respect to any series, the term "Certificate"
refers to all of the Certificates of that series, whether or not offered hereby
and by the related Prospectus Supplement, unless the context otherwise requires.
The Company will provide a copy of the Pooling Agreement (without exhibits) that
relates to any series of Certificates without charge upon written request of a
holder of a Certificate of such series addressed to it at its principal
executive offices specified herein under "The Company."
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Pooling Agreement for each series of Certificates will provide that the
Master Servicer may not resign from its obligations and duties thereunder except
upon a determination that performance of such duties is no longer permissible
under applicable law or except (a) in connection with a permitted transfer of
servicing or (b) upon appointment of a successor servicer reasonably acceptable
to the Trustee and upon receipt by the Trustee of a letter from each Rating
Agency generally to the effect that such resignation and appointment will not,
in and of itself, result in a downgrading of the Certificates. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Pooling
Agreement.
Each Pooling Agreement will also provide that, except as set forth below,
neither the Master Servicer, the Company, nor any director, officer, employee or
agent of the Master Servicer or the Company will be under any liability to the
Trust Fund or the Certificateholders for any action taken or for refraining from
the taking of any action in good faith pursuant to the Pooling Agreement, or for
errors in judgment; provided, however, that neither the Master Servicer, the
Company, nor any such person will be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties thereunder. Each Pooling Agreement will further provide
that the Master Servicer, the Company, and any director, officer, employee or
agent of the Master Servicer or the Company is entitled to indemnification by
the Trust Fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Pooling Agreement
or the related series of Certificates, other than any loss, liability or expense
related to any specific Mortgage Loan or Mortgage Loans (except any such loss,
liability or expense otherwise reimbursable pursuant to the Pooling Agreement)
and any loss, liability or expense incurred by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In addition,
each Pooling Agreement will provide that neither the Master Servicer nor the
Company will be under any obligation to appear in, prosecute or defend any legal
or administrative action that is not incidental to its respective duties under
the Pooling Agreement and which in its opinion may involve it in any expense or
liability. The Master Servicer or the Company may, however, in its discretion
undertake any such action which it may deem necessary or desirable with respect
to the Pooling Agreement and the rights and duties of the parties thereto and
the interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust Fund, and the Master Servicer or
the Company, as the case may be, will be entitled to be reimbursed therefor out
of funds otherwise distributable to Certificateholders.
Any person into which the Master Servicer may be merged or consolidated,
any person resulting from any merger or consolidation to which the Master
Servicer is a party or any person succeeding to the business of the Master
Servicer will be the successor of the Master Servicer under the Pooling
Agreement, provided that (i) such person is
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qualified to service mortgage loans on behalf of Fannie Mae or Freddie Mac and
(ii) such merger, consolidation or succession does not adversely affect the
then-current ratings of the classes of Certificates of the related series that
have been rated. In addition, notwithstanding the prohibition on its
resignation, the Master Servicer may assign its rights under a Pooling Agreement
to any person to whom the Master Servicer is transferring a substantial portion
of its mortgage servicing portfolio, provided clauses (i) and (ii) above are
satisfied and such person is reasonably satisfactory to the Company and the
Trustee. In the case of any such assignment, the Master Servicer will be
released from its obligations under such Pooling Agreement, exclusive of
liabilities and obligations incurred by it prior to the time of such assignment.
EVENTS OF DEFAULT
Events of Default under the Pooling Agreement in respect of a series of
Certificates, unless otherwise specified in the Prospectus Supplement, will
include, without limitation, (i) any failure by the Master Servicer to make a
required deposit to the Certificate Account or, if the Master Servicer is so
required, to distribute to the holders of any class of Certificates of such
series any required payment which continues unremedied for five days after the
giving of written notice of such failure to the Master Servicer by the Trustee
or the Company, or to the Master Servicer, the Company and the Trustee by the
holders of Certificates evidencing not less than 25% of the aggregate undivided
interests (or, if applicable, voting rights) in the related Trust Fund; (ii) any
failure by the Master Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Pooling Agreement with
respect to such series of Certificates which continues unremedied for 30 days
(15 days in the case of a failure to pay the premium for any insurance policy
which is required to be maintained under the Pooling Agreement) after the giving
of written notice of such failure to the Master Servicer by the Trustee or the
Company, or to the Master Servicer, the Company and the Trustee by the holders
of Certificates evidencing not less than 25% of the aggregate undivided
interests (or, if applicable, voting rights) in the related Trust Fund; (iii)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Master Servicer and certain
actions by the Master Servicer indicating its insolvency or inability to pay its
obligations and (iv) any failure of the Master Servicer to make certain advances
as described herein under "Description of the Certificates--Advances." A default
pursuant to the terms of any Mortgage Securities included in any Trust Fund will
not constitute an Event of Default under the related Pooling Agreement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Company or
the Trustee may, and at the direction of the holders of Certificates evidencing
not less than 51% of the aggregate undivided interests (or, if applicable,
voting rights) in the related Trust Fund the Trustee shall, by written
notification to the Master Servicer and to the Company or the Trustee, as
applicable, terminate all of the rights and obligations of the Master Servicer
under the Pooling Agreement (other than any rights of the Master Servicer as
Certificateholder) covering such Trust Fund and in and to the Mortgage Loans and
the proceeds thereof, whereupon the Trustee or, upon notice to the Company and
with the Company's consent, its designee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Pooling Agreement
(other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of, a
Fannie Mae- or Freddie Mac-approved mortgage servicing institution with a net
worth of at least $10,000,000 to act as successor to the Master Servicer under
the Pooling Agreement (unless otherwise set forth in the Pooling Agreement).
Pending such appointment, the Trustee is obligated to act in such capacity. The
Trustee and such successor may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation to the initial Master
Servicer under the Pooling Agreement.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates evidencing not less
than 25% of the aggregate undivided interests (or, if applicable, voting rights)
in the related Trust Fund have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity and the Trustee for 60 days after receipt of
such request and indemnity has neglected or refused to institute any such
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proceeding. However, the Trustee will be under no obligation to exercise any of
the trusts or powers vested in it by the Pooling Agreement or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the holders of Certificates covered by
such Pooling Agreement, unless such Certificateholders have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby.
The holders of Certificates representing at least 66% of the aggregate
undivided interests (or, if applicable, voting rights) evidenced by those
Certificates affected by a default or Event of Default may waive such default or
Event of Default (other than a failure by the Master Servicer to make an
advance); provided, however, that (a) a default or Event of Default under clause
(i) or (iv) under "--Events of Default" above may be waived only by all of the
holders of Certificates affected by such default or Event of Default and (b) no
waiver shall reduce in any manner the amount of, or delay the timing of,
payments received on Mortgage Loans which are required to be distributed to, or
otherwise materially adversely affect, any non-consenting Certificateholder.
AMENDMENT
Each Pooling Agreement may be amended by the parties thereto, without the
consent of any of the holders of Certificates covered by such Pooling Agreement,
(i) to cure any ambiguity, (ii) to correct or supplement any provision therein
which may be inconsistent with any other provision therein or to correct any
error, (iii) to change the timing and/or nature of deposits in the Certificate
Account, provided that (A) such change would not adversely affect in any
material respect the interests of any Certificateholder, as evidenced by an
opinion of counsel, and (B) such change would not adversely affect the
then-current rating of any rated classes of Certificates, as evidenced by a
letter from each applicable Rating Agency, (iv) if a REMIC election has been
made with respect to the related Trust Fund, to modify, eliminate or add to any
of its provisions (A) to such extent as shall be necessary to maintain the
qualification of the Trust Fund as a REMIC or to avoid or minimize the risk of
imposition of any tax on the related Trust Fund, provided that the Trustee has
received an opinion of counsel to the effect that (1) such action is necessary
or desirable to maintain such qualification or to avoid or minimize such risk,
and (2) such action will not adversely affect in any material respect the
interests of any holder of Certificates covered by the Pooling Agreement, or (B)
to restrict the transfer of the REMIC Residual Certificates, provided that the
Company has determined that the then-current ratings of the classes of the
Certificates that have been rated will not be adversely affected, as evidenced
by a letter from each applicable Rating Agency, and that any such amendment will
not give rise to any tax with respect to the transfer of the REMIC Residual
Certificates to a non-Permitted Transferee, (v) to make any other provisions
with respect to matters or questions arising under such Pooling Agreement which
are not materially inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
Certificateholder, or (vi) to amend specified provisions that are not material
to holders of any class of Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with the
consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66 2/3% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Pooling
Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on a Certificate
of any class without the consent of the holder of such Certificate or (ii)
reduce the aforesaid percentage of Certificates of any class the holders of
which are required to consent to any such amendment without the consent of the
holders of all Certificates of such class covered by such Pooling Agreement then
outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be entitled to consent
to any amendment to a Pooling Agreement without having first received an opinion
of counsel to the effect that such amendment or the exercise of any power
granted to the Master Servicer, the Company, the Trustee or any other specified
person in accordance with such amendment will not result in the imposition of a
tax on the related Trust Fund or cause such Trust Fund to fail to qualify as a
REMIC.
TERMINATION; RETIREMENT OF CERTIFICATES
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The obligations created by the Pooling Agreement for each series of
Certificates (other than certain limited payment and notice obligations of the
Trustee and the Company, respectively) will terminate upon the payment to
Certificateholders of that series of all amounts held in the Certificate Account
or by the Master Servicer and required to be paid to them pursuant to such
Pooling Agreement following the earlier of (i) the final payment or other
liquidation or disposition (or any advance with respect thereto) of the last
Mortgage Loan, REO Property and/or Mortgage Security subject thereto and (ii)
the purchase by the Master Servicer or the Company or, if specified in the
related Prospectus Supplement, by the holder of the REMIC Residual Certificates
(see "Federal Income Tax Consequences" below) from the Trust Fund for such
series of all remaining Mortgage Loans, REO Properties and/or Mortgage
Securities. In addition to the foregoing, the Master Servicer or the Company
will have the option to purchase, in whole but not in part, the Certificates
specified in the related Prospectus Supplement in the manner set forth in the
related Prospectus Supplement. Upon the purchase of such Certificates or at any
time thereafter, at the option of the Master Servicer or the Company, the assets
of the Trust Fund may be sold, thereby effecting a retirement of the
Certificates and the termination of the Trust Fund, or the Certificates so
purchased may be held or resold by the Master Servicer or the Company. In no
event, however, will the trust created by the Pooling Agreement continue beyond
the expiration of 21 years from the death of the survivor of certain persons
named in such Pooling Agreement. Written notice of termination of the Pooling
Agreement will be given to each Certificateholder, and the final distribution
will be made only upon surrender and cancellation of the Certificates at an
office or agency appointed by the Trustee which will be specified in the notice
of termination. If the Certificateholders are permitted to terminate the trust
under the applicable Pooling Agreement, a penalty may be imposed upon the
Certificateholders based upon the fee that would be foregone by the Master
Servicer because of such termination.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Certificates shall be made at the option
of the Master Servicer, the Company or, if applicable, the holder of the REMIC
Residual Certificates at the price specified in the related Prospectus
Supplement. The exercise of such right will effect early retirement of the
Certificates of that series, but the right of the Master Servicer, the Company
or, if applicable, such holder to so purchase is subject to the aggregate
principal balance of the Mortgage Loans and/or Mortgage Securities in the Trust
Fund for that series as of the Distribution Date on which the purchase proceeds
are to be distributed to Certificateholders being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of such Mortgage Loans and/or Mortgage Securities at the Cut-off Date
for that series. The Prospectus Supplement for each series of Certificates will
set forth the amounts that the holders of such Certificates will be entitled to
receive upon such early retirement. Such early termination may adversely affect
the yield to holders of certain classes of such Certificates. The foregoing is
subject to the provision that if a REMIC election has been made, the termination
of the related Trust Fund will be effected only in connection with a "qualified
liquidation" within the meaning of Section 860F(a)(4) of the Code.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Company and its affiliates.
LIMITATIONS ON THE DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, the
Certificates or any underlying Mortgage Loan, Mortgage Security or related
document and will not be accountable for the use or application by or on behalf
of any Master Servicer or Special Servicer of any funds paid to the Master
Servicer or Special Servicer in respect of the Certificates or the underlying
Mortgage Loans or Mortgage Securities, or any funds deposited into or withdrawn
from the Certificate Account for such series or any other account by or on
behalf of the Master Servicer or Special Servicer. If no Event of Default has
occurred and is continuing, the Trustee for each series of Certificates will be
required to perform only those duties specifically required under the related
Pooling Agreement. However, upon receipt of any of the various certificates,
reports or other instruments required to be furnished to it pursuant to the
related Pooling Agreement, a Trustee will be required to examine such documents
and to determine whether they conform to the requirements of such agreement.
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CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the related
Master Servicer or other specified person or may be required to be borne by the
related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling Agreement;
provided, however, that such indemnification will not extend to any loss
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of its
trusts or powers under the related Pooling Agreement or perform any of this
duties thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for any willful misconduct or gross negligence
on the part of any such agent or attorney appointed by it with due care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Company will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing not less than 51% of the aggregate undivided interests
(or, if applicable, voting rights) in the related Trust Fund. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
YIELD CONSIDERATIONS
The yield to maturity of an Offered Certificate will depend on the price
paid by the holder for such Certificate, the Pass-Through Rate on any such
Certificate entitled to payments of interest (which Pass-Through Rate may vary
if so specified in the related Prospectus Supplement) and the rate and timing of
principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Loans and the allocation thereof to reduce the
principal balance of such Certificate (or notional amount thereof if applicable)
and other factors.
A class of Certificates may be entitled to payments of interest at a fixed
Pass-Through Rate, a variable Pass- Through Rate or adjustable Pass-Through
Rate, or any combination of such Pass-Through Rates, each as specified in the
related Prospectus Supplement. A variable Pass-Through Rate may be calculated
based on the weighted average of the Mortgage Rates (in each case, net of the
per annum rate or rates applicable to the calculation of servicing and
administrative fees and any Spread (each, a "Net Mortgage Rate")) of the related
Mortgage Loans for the month preceding the Distribution Date if so specified in
the related Prospectus Supplement. As will be described in the related
Prospectus Supplement, the aggregate payments of interest on a class of
Certificates, and the yield to maturity thereon, will be affected by the rate of
payment of principal on the Certificates (or the rate of reduction in the
notional balance of Certificates entitled only to payments of interest) and, in
the case of Certificates evidencing interests in ARM Loans, by changes in the
Net Mortgage Rates on the ARM Loans. See "Maturity and Prepayment
Considerations" below. The yield on the Certificates will also be affected by
liquidations of Mortgage Loans following Mortgagor defaults and by purchases of
Mortgage Loans in the event of breaches of representations made in respect of
such Mortgage Loans by the Company, the Master Servicer and others, or
conversions of ARM Loans to a fixed interest rate. See "The Mortgage
Pools--Representations by Sellers" and "Descriptions of the
Certificates--Assignment of Trust Fund Assets" above. Holders of certain Strip
Certificates or a class of Certificates having a Pass-Through Rate that varies
based on the weighted average Mortgage Rate of the underlying Mortgage Loans
will be affected by disproportionate prepayments and repurchases of Mortgage
Loans having higher Net Mortgage Rates or rates applicable to the Strip
Certificates, as applicable.
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With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the related Mortgage Loans are due and
the Distribution Date on which such payments are passed through to
Certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Certificateholders on or near the date they were due.
In general, if a class of Certificates is purchased at initial issuance at
a premium and payments of principal on the related Mortgage Loans occur at a
rate faster than anticipated at the time of purchase, the purchaser's actual
yield to maturity will be lower than that assumed at the time of purchase.
Conversely, if a class of Certificates is purchased at initial issuance at a
discount and payments of principal on the related Mortgage Loans occur at a rate
slower than that assumed at the time of purchase, the purchaser's actual yield
to maturity will be lower than that originally anticipated. The effect of
principal prepayments, liquidations and purchases on yield will be particularly
significant in the case of a series of Certificates having a class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which such class is entitled. Such a
class will likely be sold at a substantial premium to its principal balance and
any faster than anticipated rate of prepayments will adversely affect the yield
to holders thereof. In certain circumstances extremely rapid prepayments may
result in the failure of such holders to recoup their original investment. In
addition, the yield to maturity on certain other types of classes of
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with or at a multiple of an index or certain
other classes in a series including more than one class of Certificates, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other classes of Certificates.
The timing of changes in the rate of principal payments on or repurchases
of the Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. In general, the earlier a
prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of Certificates
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is generally charged interest only for the period from the due date of
the preceding scheduled payment up to the date of such prepayment, instead of
for the full accrual period, that is, the period from the due date of the
preceding scheduled payment up to the due date for the next scheduled payment.
In addition, a partial principal prepayment may likewise be applied as of a date
prior to the next scheduled due date (and, accordingly, be accompanied by
interest thereon for less than the full accrual period). However, interest
accrued on any series of Certificates and distributable thereon on any
Distribution Date will generally correspond to interest accrued on the principal
balance of Mortgage Loans for their respective full accrual periods.
Consequently, if a prepayment on any Mortgage Loan is distributable to
Certificateholders on a particular Distribution Date, but such prepayment is not
accompanied by interest thereon for the full accrual period, the interest
charged to the borrower (net of servicing and administrative fees and any
Spread) may be less (such shortfall, a "Prepayment Interest Shortfall") than the
corresponding amount of interest accrued and otherwise payable on the
Certificates of the related series. If and to the extent that any such shortfall
is allocated to a class of Offered Certificates, the yield thereon will be
adversely affected. The Prospectus Supplement for a series of Certificates will
describe the manner in which any such shortfalls will be allocated among the
classes of such Certificates. If so specified in the related Prospectus
Supplement, the Master Servicer will be required to apply some or all of its
servicing compensation for the corresponding period to offset the amount of any
such shortfalls. The related Prospectus Supplement will also describe any other
amounts available to offset such shortfalls. See "Servicing of Mortgage
Loans--Servicing and Other Compensation and Payment of Expenses; Spread."
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans and thus the yield on the
Certificates. In general, defaults on Single Family Loans are expected to occur
with greater frequency in their early years. However, there is a risk that
Mortgage Loans, including Multifamily Loans, that require Balloon Payments may
default at maturity, or that the maturity of such a Mortgage Loan may be
extended in connection with a workout. The rate of default on Single Family
Loans which are refinance or limited documentation mortgage loans, and on
Mortgage Loans, including Multifamily Loans, with high Loan-to-Value Ratios, may
be higher than for other types of Mortgage Loans. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Mortgage Loans will be
affected by the general economic condition of the region of the country in which
the related Mortgaged Properties are located. The risk of delinquencies and loss
is greater and
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prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See "Risk Factors."
With respect to certain Mortgage Loans including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. Under the applicable
underwriting standards, the Mortgagor under each Mortgage Loan generally will be
qualified, or the Mortgage Loan otherwise approved, on the basis of the Mortgage
Rate in effect at origination. The repayment of any such Mortgage Loan may thus
be dependent on the ability of the mortgagor to make larger level monthly
payments following the adjustment of the Mortgage Rate. In addition, the
periodic increase in the amount paid by the Mortgagor of a Buydown Mortgage Loan
during or at the end of the applicable Buydown Period may create a greater
financial burden for the Mortgagor, who might not have otherwise qualified for a
mortgage under applicable underwriting guidelines, and may accordingly increase
the risk of default with respect to the related Mortgage Loan. The Mortgage
Rates on certain ARM Loans subject to negative amortization generally adjust
monthly and their amortization schedules adjust less frequently. During a period
of rising interest rates as well as immediately after origination (initial
Mortgage Rates are generally lower than the sum of the Indices applicable at
origination and the related Note Margins), the amount of interest accruing on
the principal balance of such Mortgage Loans may exceed the amount of the
minimum scheduled monthly payment thereon. As a result, a portion of the accrued
interest on negatively amortizing Mortgage Loans may become Deferred Interest
which will be added to the principal balance thereof and will bear interest at
the applicable Mortgage Rate. The addition of any such Deferred Interest to the
principal balance of any related class or classes of Certificates will lengthen
the weighted average life thereof and may adversely affect yield to holders
thereof, depending upon the price at which such Certificates were purchased. In
addition, with respect to certain ARM Loans subject to negative amortization,
during a period of declining interest rates, it might be expected that each
minimum scheduled monthly payment on such a Mortgage Loan would exceed the
amount of scheduled principal and accrued interest on the principal balance
thereof, and since such excess will be applied to reduce the principal balance
of the related class or classes of Certificates, the weighted average life of
such Certificates will be reduced and may adversely affect yield to holders
thereof, depending upon the price at which such Certificates were purchased.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Certificates will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans may be prepaid without penalty in full or in part at any time.
The prepayment experience with respect to the Mortgage Loans in a Mortgage Pool
will affect the life and yield of the related series of Certificates.
With respect to Balloon Loans, payment of the Balloon Payment (which, based
on the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such Mortgage Loans or to sell the Mortgaged Property prior to
the maturity of the Balloon Loan. The ability to obtain refinancing will depend
on a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the Mortgagor's financial
situation, prevailing mortgage loan interest rates, the Mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. Unless otherwise specified in the related Prospectus Supplement,
none of the Company, the Master Servicer, or any of their affiliates will be
obligated to refinance or repurchase any Mortgage Loan or to sell the Mortgaged
Property.
The extent of prepayments of principal of the Mortgage Loans may be
affected by a number of factors, including, without limitation, solicitations
and the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located and, in the case of
Multifamily Loans, the quality of management of the Mortgage Properties, the
servicing of the Mortgage Loans, possible changes in tax laws and other
opportunities for investment. In addition, the rate of principal payments on the
Mortgage Loans may be affected by the existence of Lock-out Periods and
requirements that principal prepayments be accompanied by Prepayment Premiums,
as well as due-on-sale and due-on-encumbrance provisions, and by the extent to
which such provisions may be practicably enforced. See "Servicing of Mortgage
Loans--Collection and Other Servicing Procedures; Mortgage Loan Modifications"
and "Certain Legal Aspects of Mortgage Loans--Enforceability of Certain
Provisions" for a description
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of certain provisions of the Pooling Agreement and certain legal developments
that may affect the prepayment experience on the Mortgage Loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (i) converting
to a fixed rate loan and thereby "locking in" such rate or (ii) taking advantage
of the initial "teaser rate" (a mortgage interest rate below what it would
otherwise be if the applicable index and gross margin were applied) on another
adjustable rate mortgage loan. Moreover, although the Mortgage Rates on ARM
Loans will be subject to periodic adjustments, such adjustments generally will,
unless otherwise specified in the related Prospectus Supplement, (i) not
increase or decrease such Mortgage Rates by more than a fixed percentage amount
on each adjustment date, (ii) not increase such Mortgage Rates over a fixed
percentage amount during the life of any ARM Loan and (iii) be based on an index
(which may not rise and fall consistently with mortgage interest rates) plus the
related Note Margin (which may be different from margins being used at the time
for newly originated adjustable rate mortgage loans). As a result, the Mortgage
Rates on the ARM Loans at any time may not equal the prevailing rates for
similar, newly originated adjustable rate mortgage loans. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current Mortgage Rates on ARM Loans
that the rate of prepayment may increase as a result of refinancings. There can
be no certainty as to the rate of prepayments on the Mortgage Loans during any
period or over the life of any series of Certificates.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Company is not aware of any publicly available statistics relating to
the principal prepayment experience of diverse portfolios of mortgage loans such
as the Mortgage Loans over an extended period of time. All statistics known to
the Company that have been compiled with respect to prepayment experience on
mortgage loans indicate that while some mortgage loans may remain outstanding
until their stated maturities, a substantial number will be paid prior to their
respective stated maturities. No representation is made as to the particular
factors that will affect the prepayment of the Mortgage Loans or as to the
relative importance of such factors.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates may have the option to purchase the assets in a Trust Fund
and effect early retirement of the related series of Certificates. See "The
Pooling Agreement-- Termination; Retirement of Certificates."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans
and Contracts.
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS
GENERAL. Each Single Family and Multifamily Loan will, and if applicable,
Contracts, be evidenced by a note or bond and secured by an instrument granting
a security interest in real property, which may be a mortgage, deed of trust or
a deed to secure debt, depending upon the prevailing practice and law in the
state in which the related Mortgaged Property is located, and may have first,
second or third priority. Mortgages and deeds to secure debt are herein referred
to as "mortgages." Contracts evidence both the obligation of the obligor to
repay the loan evidenced thereby and grant a security interest in the related
Manufactured Homes to secure repayment of such loan. However, as Manufactured
Homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that Manufactured Homes may, under certain circumstances become subject to
real estate title and recording laws. See "-- Contracts" below. In some states,
a mortgage or deed of trust creates a lien upon the real property encumbered by
the mortgage or deed of trust. However, in other states, the mortgage or deed of
trust conveys legal title to the property respectively, to the mortgagee or to a
trustee for the benefit of the mortgagee subject to a condition subsequent
(i.e., the payment of the
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indebtedness secured thereby). The lien created by the mortgage or deed of trust
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 or on the terms of separate subordination or inter-creditor
agreements, the knowledge of the parties in some cases 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 borrower 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 borrower is the
beneficiary; at origination of a mortgage loan, the borrower 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 trustor who is the
borrower-homeowner; the beneficiary who is the lender; and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The trustee's authority under a
deed of trust, the grantee's authority under a deed to secure debt and the
mortgagee's authority under a mortgage are governed by the law of the state in
which the real property is located, the express provisions of the deed of trust
or mortgage, and, in certain deed of trust transactions, the directions of the
beneficiary.
LEASES AND RENTS. Mortgages that encumber income-producing multifamily
properties often contain an assignment of rents and leases, pursuant to which
the borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived therefrom, while (unless rents
are to be paid directly to the lender) retaining a revocable license to collect
the rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
CONTRACTS
Except as set forth below, under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In a few states, where certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department (or a similar entity) of such state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law.
The Master Servicer will be required under the related Pooling Agreement or
Servicing Agreement to effect such notation or delivery of the required
documents and fees, and to obtain possession of the certificate of title, as
appropriate under the laws of the state in which any Manufactured Home is
registered. In the event the Master Servicer fails, due to clerical errors or
otherwise, to effect such notation or delivery, or files the security interest
under the wrong law (for example, under a motor vehicle title statute rather
than under the UCC, in a few states), the Trustee may not have a first priority
security interest in the Manufactured Home securing a Contract. As manufactured
homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that manufactured homes may, under certain circumstances, become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located. Generally,
Contracts will contain provisions prohibiting the obligor from permanently
attaching the Manufactured Home to its site. So long as the obligor does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is
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permanently attached to its site, other parties could obtain an interest in the
Manufactured Home that is prior to the security interest originally retained by
the Seller and transferred to the Company.
The Company will assign or cause to be assigned a security interest in the
Manufactured Homes to the Trustee, on behalf of the Securityholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Company,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Securityholders, as the new secured party
and, accordingly, the Company or the Seller will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In most states, such assignment is an effective conveyance of such security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the Company's rights as the secured party.
However, in some states there exists a risk that, in the absence of an amendment
to the certificate of title, such assignment of the security interest might not
be held effective against creditors of the Company or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Company on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the Company
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the Trustee, on
behalf of the Securityholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and re- register
the Manufactured Home in such state, and if the Company did not take steps to
re-perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Company must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the Company would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Company would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Pooling Agreement or Servicing Agreement, the Master
Servicer will be obligated to take such steps, at the Master Servicer's expense,
as are necessary to maintain perfection of security interests in the
Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Company will obtain the representation of the related Seller that it has no
knowledge of any such liens with respect to any Manufactured Home securing a
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee or Securityholders in the event
such a lien arises.
FORECLOSURE ON MORTGAGES AND CERTAIN CONTRACTS
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, the trustee must record a notice
of default and send a copy to the borrower trustor and to any person who has
recorded a request for a copy of notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed
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of trust is not reinstated within a specified period, a notice of sale must be
posted in a public place and, in most states, published for a specific period of
time in one or more newspapers in a specified manner prior to the date of
trustee's sale. 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.
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.
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 the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee for a credit bid less than or equal to the unpaid principal amount of
note plus the accrued and unpaid interest and the expense of foreclosure, in
which case the mortgagor's debt will be extinguished unless the lender purchases
the property for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment and such remedy is available under state
law and the related loan documents. In the same states, there is a statutory
minimum purchase price which the lender may offer for the property and
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, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale.
Generally, the lender will 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 or other forms of credit enhancement
for a series of Certificates. See "Description of Credit Enhancement".
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Single Family and
Multifamily Loans which are junior mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens. The proceeds received by the referee or trustee from
the sale are applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. Any remaining proceeds are generally payable to
the holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial
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disability. In other cases, courts have limited the right of a lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of a second mortgage or deed of trust affecting the property. Finally,
some courts have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust or mortgages receive notices in
addition to the statutorily-prescribed minimums. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
REPOSSESSION WITH RESPECT TO CONTRACTS
GENERAL. Repossession of manufactured housing is governed by state law. A
few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice
of the right to cure a default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either through
self-help (peaceable retaking without court order), voluntary repossession
or through judicial process (repossession pursuant to court-issued writ of
replevin). The self-help and/or voluntary repossession methods are more
commonly employed, and are accomplished simply by retaking possession of
the manufactured home. In cases in which the debtor objects or raises a
defense to repossession, a court order must be obtained from the
appropriate state court, and the manufactured home must then be repossessed
in accordance with that order. Whether the method employed is self-help,
voluntary repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured home
to a secure location for refurbishment and resale or by removing the
occupants and their belongings from the manufactured home and maintaining
possession of the manufactured home on the location where the occupants
were residing. Various factors may affect whether the manufactured home is
physically removed or left on location, such as the nature and term of the
lease of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method, manner,
time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession
expenses (expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the full
amount of the indebtedness, the remainder may be sought from the debtor in
the form of a deficiency judgement in those states that do not prohibit or
limit such judgments. The deficiency judgment is a personal judgment
against the debtor for the shortfall. Occasionally, after resale of a
manufactured home and payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home generally has very little capital
or income available following repossession, a deficiency judgment may not
be sought in many cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial condition.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
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Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
RIGHTS OF REDEMPTION
SINGLE FAMILY PROPERTIES AND MULTIFAMILY PROPERTIES. The purposes of a
foreclosure action in respect of a Single Family Property or Multifamily
Property are to enable the lender to realize upon its security and to bar the
borrower, and all persons who have interests in the property that are
subordinate to that of the foreclosing lender, from exercise of their "equity of
redemption". The doctrine of equity of redemption provides that, until the
property encumbered by a mortgage has been sold in accordance with a properly
conducted foreclosure and foreclosure sale, those having interests that are
subordinate to that of the foreclosing lender have an equity of redemption and
may redeem the property by paying the entire debt with interest. Those having an
equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which should
be distinguished from post-sale statutory rights of redemption. In some states,
after sale pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory period in which to
redeem the property. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
permitted if the former borrower pays only a portion of the sums due. The effect
of a statutory right of redemption is to diminish the ability of the lender to
sell the foreclosed property because the exercise of a right of redemption would
defeat the title of any purchase through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired. In some states, a post-sale statutory right of redemption may exist
following a judicial foreclosure, but not following a trustee's sale under a
deed of trust.
MANUFACTURED HOMES. While state laws do not usually require notice to be
given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of the
UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. Certain states have imposed
statutory prohibitions which limit the remedies of a beneficiary under a deed of
trust or a mortgagee under a mortgage. In some states (including California),
statutes limit the right of the beneficiary or mortgagee to obtain a deficiency
judgment against the borrower following foreclosure. A deficiency judgment is a
personal judgment against the former borrower equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. In the case of a Mortgage Loan
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust, even if obtainable under applicable
law, may be of little value to the mortgagee or beneficiary if there are no
trust assets against which such deficiency judgment may be executed. Some state
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
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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, under the federal Bankruptcy Code, as
amended from time to time (Title 11 of the United States Code) (the "Bankruptcy
Code"), virtually all actions (including foreclosure actions and deficiency
judgment proceedings) to collect a debt are automatically stayed upon the filing
of the bankruptcy petition and, often, no interest or principal payments are
made during the course of the bankruptcy case. The delay and the consequences
thereof caused by such automatic stay can be significant. Also, under the
Bankruptcy Code, the filing of a petition in a bankruptcy by or on behalf of a
junior lienor may stay the senior lender from taking action to foreclose out of
such junior lien. Moreover, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearage within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the residence
had yet occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearage over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period.
In the case of income-producing multifamily properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue could be time-consuming, with resulting delays in
the lender's receipt of the rents.
Certain tax liens arising under the Code may, in certain circumstances,
have priority over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
CONTRACTS. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the home at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of
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the indebtedness. A bankruptcy court may also reduce the monthly payments due
under a contract or change the rate of interest and time of repayment of the
indebtedness.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Conservation Act") amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws in certain circumstances may impose liability
on a secured party which takes a deed- in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. Such cleanup costs may be substantial. It is possible that
such cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise distributable to the holders of the related series of
Certificates. Moreover, certain federal statutes and certain states by statute
impose a lien for any cleanup costs incurred by such state on the property that
is the subject of such cleanup costs (an "Environmental Lien"). All subsequent
liens on such property generally are subordinated to such an Environmental Lien
and, in some states, even prior recorded liens are subordinated to Environmental
Liens. In the latter states, the security interest of the Trustee in a related
parcel of real property that is subject to such an Environmental Lien could be
adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to foreclosure or
accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not made
and will not make such evaluations prior to the origination of the Secured
Contracts. Neither the Company nor any replacement Servicer will be required by
any Agreement to undertake any such evaluations prior to foreclosure or
accepting a deed-in-lieu of foreclosure. The Company does not make any
representations or warranties or assume any liability with respect to the
absence or effect of contaminants on any related real property or any casualty
resulting from the presence or effect of contaminants. However, the Company will
not be obligated to foreclose on related real property or accept a deed- in-lieu
of foreclosure if it knows or reasonably believes that there are material
contaminated conditions on such property. A failure so to foreclose may reduce
the amounts otherwise available to Certificateholders of the related series.
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CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions. In some cases, this liability may affect an assignee's ability
to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that may
be collected. Unless otherwise provided in the related Prospectus Supplement,
under the related Pooling Agreement or Servicing Agreement, late charges will be
retained by the Master Servicer as additional servicing compensation, and any
inability to collect these amounts will not affect payments to Securityholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder. Most of the
Contracts in a Trust Fund will be subject to the requirements of the FTC Rule.
Accordingly, the Trust Fund, as holder of the Contracts, will be subject to any
claims or defenses that the purchaser of the related manufactured home may
assert against the seller of the manufactured home, subject to a maximum
liability equal to the amounts paid by the obligor on the Contract. If an
obligor is successful in asserting any such claim or defense, and if the Seller
had or should have had knowledge of such claim or defense, the Master Servicer
will have the right to require the Seller to repurchase the Contract because of
a breach of its Seller's representation and warranty that no claims or defenses
exist that would affect the obligor's obligation to make the required payments
under the Contract. The Seller would then have the right to require the
originating dealer to repurchase the Contract from it and might also have the
right to recover from the dealer any losses suffered by the Seller with respect
to which the dealer would have been primarily liable to the obligor.
ENFORCEABILITY OF CERTAIN PROVISIONS
TRANSFER OF SINGLE FAMILY PROPERTIES AND MULTIFAMILY PROPERTIES. Unless the
related Prospectus Supplement indicates otherwise, the Single Family Loans and
Multifamily Loans generally contain due-on-sale clauses. These clauses permit
the lender to accelerate the maturity of the loan if the borrower sells,
transfers or conveys the property without the prior consent of the lender. 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.
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The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by the
buyer rather than being paid off, which may have an impact upon the average life
of the Mortgage Loans and the number of Mortgage Loans which may be outstanding
until maturity.
TRANSFER OF MANUFACTURED HOMES. Generally, manufactured housing contracts
contain provisions prohibiting the sale or transfer of the related manufactured
homes without the consent of the obligee on the contract and permitting the
acceleration of the maturity of such contracts by the obligee on the contract
upon any such sale or transfer that is not consented to. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will, to the
extent it has knowledge of such conveyance or proposed conveyance, exercise or
cause to be exercised its rights to accelerate the maturity of the related
Contracts through enforcement of due-on-sale clauses, subject to applicable
state law. In certain cases, the transfer may be made by a delinquent obligor in
order to avoid a repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clause. The Garn-St Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of due-on-sale
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a due-on-sale clause in respect
of certain Manufactured Homes.
LATE PAYMENT CHARGES AND PREPAYMENT RESTRICTIONS. Notes and mortgages, as
well as manufactured housing conditional sales contracts and installment loan
agreements, may contain provisions that obligate the borrower to pay a late
charge or additional interest if payments are not timely made, and in some
circumstances, may prohibit prepayments for a specified period and/or condition
prepayments upon the borrower's payment of prepayment fees or yield maintenance
penalties. In certain states, there are or may be specific limitations upon the
late charges which a lender may collect from a borrower for delinquent payments.
Certain states also limit the amounts that a lender may collect from a borrower
as an additional charge if the loan is prepaid. In addition, the enforceability
of provisions that provide for prepayment fees or penalties upon an involuntary
prepayment is unclear under the laws of many states.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
INSTALLMENT CONTRACTS
The Trust Fund Assets may also consist of installment sales contracts.
Under an installment contract ("Installment Contract") the seller (hereinafter
referred to in this section as the "lender") retains legal title to the property
and enters into an agreement with the purchaser (hereinafter referred to in this
section as the "borrower") for the payment of the purchase price, plus interest,
over the term of such contract. Only after full performance by the borrower of
the Installment Contract is the lender obligated to convey title to the property
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Installment Contract, the borrower is generally
responsible for the maintaining the property in good condition and for paying
real estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract
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strictly according to its terms. The terms of Installment Contracts generally
provide that upon a default by the borrower, the borrower loses his or her right
to occupy the property, the entire indebtedness is accelerated and the buyer's
equitable interest in the property is forfeited. The lender in such a situation
is not required to foreclose in order to obtain title to the property, although
in some cases a quiet title action is in order if the borrower has filed the
Installment Contract in local land records and an ejectment action may be
necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the defaulted
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, the lender's procedures for obtaining possession and clear title
under an Installment Contract in a given state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining clear
title to a property subject to one or more liens.
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.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
Usury limits apply to junior mortgage loans in many states. Any applicable
usury limits in effect at origination will be reflected in the maximum Mortgage
Rates for ARM Loans, as set forth in the related Prospectus Supplement.
As indicated above under "The Mortgage Pools--Representations by Sellers,"
each Seller of a Mortgage Loan and a Contract will have represented that such
Mortgage Loan or Contract was originated in compliance with then applicable
state laws, including usury laws, in all material respects. However, the
Mortgage Rates on the Mortgage Loans will be subject to applicable usury laws as
in effect from time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subjected to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
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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,
(i) 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,
(ii) 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 (iii) all other non-federally
chartered housing creditors, including state-chartered savings and loan
associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The Company is aware of a limited number of
cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. In the event an obligor
is successful in asserting such a claim, the related Securityholders could
suffer a loss if (i) the related Seller fails or cannot be required to
repurchase the affected Contract for a breach of representation and warranty and
(ii) the Master Servicer or the Trustee were unsuccessful in asserting any claim
of contribution or subrogation on behalf of the Securityholders against the
manufacturer or other persons who were directly liable to the plaintiff for the
damages. Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan and certain Contracts (including a
Mortgagor who was in reserve status and is called to active duty after
origination of the Mortgage Loan and certain Contracts), may not be charged
interest (including fees and charges) above an annual rate of 6% during the
period of such Mortgagor's active duty status, unless a court orders otherwise
upon application of the lender. The Relief Act applies to Mortgagors who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard, and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to Mortgagors who enter military
service (including reservists who are called to active duty) after origination
of the related Mortgage Loan and related Contract, no information can be
provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the Master Servicer to collect full amounts of
interest on certain of the Mortgage Loans and Contracts. 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 and Contracts, would result in a reduction of the amounts
distributable to the holders of the related Securities, and would not be covered
by advances or, unless otherwise specified in the related Prospectus Supplement,
by 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 Master Servicer to
foreclose on an affected Mortgage Loan or enforce rights under a Contract during
the Mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation or regulations applies to any Mortgage Loan
and Contract which goes into default, there may be delays in payment and losses
on the related Securities in connection therewith. Any other interest
shortfalls, deferrals
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or forgiveness of payments on the Mortgage Loans and Contracts resulting from
similar legislation or regulations may result in delays in payments or losses to
Securityholders of the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property", including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
JUNIOR MORTGAGES
Some of the Mortgage Loans or Contracts may be secured by mortgages or
deeds of trust which are junior to senior mortgages or deeds of trust which are
not part of the Trust Fund. The rights of the Securityholders, as mortgagee
under a junior mortgage, are subordinate to those of the mortgagee under the
senior mortgage, including the prior rights of the senior mortgagee to receive
hazard insurance and condemnation proceeds and to cause the property securing
the Mortgage Loan or Contract to be sold upon default of the mortgagor, which
may extinguish the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and, in
certain cases, either reinitiates or satisfies the defaulted senior loan or
loans. A junior mortgagee may satisfy a defaulted senior loan in full or, in
some states, may cure such default and bring the senior loan current thereby
reinstating the senior loan, in either event usually adding the amounts expended
to the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee. Where applicable law or the terms of the senior mortgage or
deed of trust do not require notice of default to the junior mortgagee, the lack
of any such notice may prevent the junior mortgagee from exercising any right to
reinstate the loan which applicable law may provide.
The standard form of the mortgage or deed of trust used by most
institutional lenders confers on the mortgagee the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in such order as
the mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under certain mortgages or deeds of trust to perform the
obligation itself, at its election, with the mortgagor agreeing to reimburse the
mortgagee for any sums expended by the mortgagee on behalf of the mortgagor. All
sums so expended by a senior mortgagee become part of the indebtedness secured
by the senior mortgage.
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NEGATIVE AMORTIZATION LOANS
A recent case decided by the United States Court of Appeals, First Circuit,
held that state restrictions on the compounding of interest are not preempted by
the provisions of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("DIDMC") and as a result, a mortgage loan that provided for
negative amortization violated New Hampshire's requirement that first mortgage
loans provide for computation of interest on a simple interest basis. The
holding was limited to the effect of DIDMC on state laws regarding the
compounding of interest and the court did not address the applicability of the
Alternative Mortgage Transaction Parity Act of 1982, which authorizes lender to
make residential mortgage loans that provide for negative amortization. The
First Circuit's decision is binding authority only on Federal District Courts in
Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following general discussion of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of the Certificates
offered hereunder, to the extent it relates to matters of law or legal
conclusions with respect thereto, represents the opinion of counsel to the
Company with respect to that series on the material matters associated with such
consequences, subject to any qualifications set forth herein. This discussion
has been prepared with the advice of Thacher Proffitt & Wood, counsel to the
Company. This discussion is directed solely to Certificateholders that hold the
Certificates as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986 (the "Code") and does not purport to discuss all
federal income tax consequences that may be applicable to particular categories
of investors, some of which (such as banks, insurance companies and foreign
investors) may be subject to special rules. Further, the authorities on which
this discussion, and the opinion referred to below, are based are subject to
change or differing interpretations, which could apply retroactively. Taxpayers
and preparers of tax returns (including those filed by any REMIC or other
issuer) should be aware that under applicable Treasury regulations a provider of
advice on specific issues of law is not considered an income tax return preparer
unless the advice (i) is given with respect to events that have occurred at the
time the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (ii) is directly relevant to the determination of an
entry on a tax return. Prospective investors should note that no rulings have
been or will be sought from the Internal Revenue Service (the "IRS") with
respect to any of the federal income tax consequences discussed below, and no
assurance can be given the IRS will not take a contrary position. Accordingly,
taxpayers should consult their own tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "State and Other Tax Consequences."
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, that the Trustee, the Master Servicer or another specified
party (the "REMIC Administrator") will elect to have treated as a real estate
mortgage investment conduit ("REMIC") under Sections 860A through 86OG (the
"REMIC Provisions") of the Code and (ii) certificates ("Grantor Trust
Certificates") representing interests in a Trust Fund ("Grantor Trust Fund") as
to which no such election will be made. The Prospectus Supplement for each
series of Certificates will indicate whether a REMIC election (or elections)
will be made for the related Trust Fund and, if such an election is to be made,
will identify all "regular interests" and "residual interests" in the REMIC. For
purposes of this tax discussion, references to a "Certificateholder" or a
"holder" are to the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Certificates.
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REMICS
CLASSIFICATION OF REMICS. Prior to the sale of each series of REMIC
Certificates, Thacher Proffitt & Wood, counsel to the Company, will have
delivered its opinion generally to the effect that, assuming the making of
appropriate elections and compliance with all provisions of the related Pooling
and Servicing Agreement, the related Trust Fund (or each applicable portion
thereof) will qualify as a REMIC and the REMIC Certificates offered with respect
thereto will be considered to evidence ownership of "regular interests" ("REMIC
Regular Certificates") or "residual interests" ("REMIC Residual Certificates")
in that REMIC within the meaning of the REMIC Provisions. Such opinion will be
filed with the Commission either as an exhibit to the Registration Statement of
which the Prospectus Supplement is a part or in a Current Report on Form 8-K.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust Fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any Trust Fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES. In general, the
REMIC Certificates will be "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code and assets described in Section 7701(a)(19)(C) of the
Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. Moreover, if 95% or more of the assets of the
REMIC qualify for any of the foregoing treatments at all times during a calendar
year, the REMIC Certificates will qualify for the corresponding status in their
entirety for that calendar year. Interest (including original issue discount) on
the REMIC Regular Certificates and income allocated to the class of REMIC
Residual Certificates will be interest described in Section 856(c)(3)(B) of the
Code to the extent that such Certificates are treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code. In addition, the REMIC
Regular Certificates will be "qualified mortgages" within the meaning of Section
86OG(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for regular or residual interests therein. The determination as to the
percentage of the REMIC's assets that constitute assets described in the
foregoing sections of the Code will be made with respect to each calendar
quarter based on the average adjusted basis of each category of the assets held
by the REMIC during such calendar quarter. The REMIC will report those
determinations to Certificateholders in the manner and at the times required by
applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. If so, the related Prospectus Supplement
will describe the Mortgage Loans that may not be so treated. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
Trust Fund as REMICs ("Tiered REMICS") for federal income tax purposes. Upon the
issuance of any such series of REMIC Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the related Pooling and Servicing
Agreement, the Tiered REMICs will each qualify as a REMIC and the REMIC
Certificates issued by the Tiered REMICS, respectively, will be considered to
evidence ownership of REMIC Regular Certificates or REMIC Residual Certificates
in the related REMIC within the meaning of the REMIC Provisions.
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Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES.
GENERAL. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to such income. In addition, Section 1272(a)(6)
of the Code provides special rules applicable to REMIC Regular Certificates and
certain other debt instruments issued with original issue discount. Regulations
have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report accompanying the Tax Reform Act of 1986 (the
"Committee Report") indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Company, the Master Servicer nor the
Trustee will make any representation that the Mortgage Loans will in fact prepay
at a rate conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest."
"Qualified stated interest" includes interest that is unconditionally payable at
least annually at a single fixed rate, or at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that does not operate in a manner that
accelerates or defers interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on a
Distribution Date, in some cases, as a consequence of this "long first accrual
period," some or all interest payments may be required to be included in the
stated redemption price of the
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REMIC Regular Certificate and accounted for as original issue discount. Because
interest on REMIC Regular Certificates must in any event be accounted for under
an accrual method, applying this analysis would result in only a slight
difference in the timing of the inclusion in income of the yield on the REMIC
Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that portion of the
interest paid on the first Distribution Date in excess of interest accrued for a
number of days corresponding to the number of days from the Closing Date to the
first Distribution Date should be included in the stated redemption price of
such REMIC Regular Certificate. However, the OID Regulations state that all or
some portion of such accrued interest may be treated as a separate asset the
cost of which is recovered entirely out of interest paid on the first
Distribution Date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates-Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(i) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the Mortgage Loans being prepaid at a rate
equal to the Prepayment Assumption and (ii) using a discount rate equal to the
original yield to maturity of the Certificate. For these purposes, the original
yield to maturity of the Certificate will be calculated based on its issue price
and assuming that distributions on the Certificate will be made in all accrual
periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such
Certificate, increased by the aggregate amount of original issue discount that
accrued with respect to such Certificate in prior accrual periods, and reduced
by the amount of any distributions made
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on such REMIC Regular Certificate in prior accrual periods of amounts included
in the stated redemption price. The original issue discount accruing during any
accrual period, computed as described above, will be allocated ratably to each
day during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals (i)
the adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Certificate at the beginning of the accrual period which includes
such day plus (ii) the daily portions of original issue discount for all days
during such accrual period prior to such day minus (iii) any principal payments
made during such accrual period prior to such day with respect to such
Certificate.
MARKET DISCOUNT. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price, will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a Certificateholder generally will be required to allocate the portion
of each such distribution representing stated redemption price first to accrued
market discount not previously included in income, and to recognize ordinary
income to that extent. A Certificateholder may elect to include market discount
in income currently as it accrues rather than including it on a deferred basis
in accordance with the foregoing. If made, such election will apply to all
market discount bonds acquired by such Certificateholder on or after the first
day of the first taxable year to which such election applies. In addition, the
OID Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
made with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "Taxation of Owners of REMIC
Regular Certificates--Premium" below. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant yield
method or as interest may not be revoked without the consent of the IRS.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment may result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total
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remaining market discount as the original issue discount accrued in the accrual
period bears to the total original issue discount remaining on the REMIC Regular
Certificate at the beginning of the accrual period. Moreover, the Prepayment
Assumption used in calculating the accrual of original issue discount is also
used in calculating the accrual of market discount. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a REMIC
Regular Certificate purchased at a discount in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest) greater
than its remaining stated redemption price will be considered to be purchased at
a premium. The holder of such a REMIC Regular Certificate may elect under
Section 171 of the Code to amortize such premium under the constant yield method
over the life of the Certificate. If made, such an election will apply to all
debt instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related debt instrument, rather than as a separate
interest deduction. The OID Regulations also permit Certificateholders to elect
to include all interest, discount and premium in income based on a constant
yield method, further treating the Certificateholder as having made the election
to amortize premium generally. See "Taxation of Owners of REMIC Regular
Certificates--Market Discount" above. The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use of
a Prepayment Assumption in accruing market discount with respect to REMIC
Regular Certificates without regard to whether such Certificates have original
issue discount) will also apply in amortizing bond premium under Section 171 of
the Code.
REALIZED LOSSES. Under Section 166 of the Code, holders of REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be entitled
to deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has been
reduced to zero) and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that as the result of a realized loss
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
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GENERAL. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the Mortgage Loans or as debt instruments issued
by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions" and
"noneconomic" residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC Residual
Certificateholders may exceed the cash distributions received by such REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return.
TAXABLE INCOME OF THE REMIC. The taxable income of the REMIC will equal the
income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby),
amortization of any premium on the Mortgage Loans, bad debt losses with respect
to the Mortgage Loans and, except as described below, for servicing,
administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the
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REMIC in proportion to their respective fair market values. The issue price of
any REMIC Certificates offered hereby will be determined in the manner described
above under "--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." The issue price of a REMIC Certificate received in exchange for an
interest in the Mortgage Loans or other property will equal the fair market
value of such interests in the Mortgage Loans or other property. Accordingly, if
one or more classes of REMIC Certificates are retained initially rather than
sold, the REMIC Administrator may be required to estimate the fair market value
of such interests in order to determine the basis of the REMIC in the Mortgage
Loans and other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Mortgage Loans
with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described above for accruing original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the Mortgage
Loans. Premium on any Mortgage Loan to which such election applies may be
amortized under a constant yield method, presumably taking into account a
Prepayment Assumption. Further, such an election would not apply to any Mortgage
Loan originated on or before September 27, 1985. Instead, premium on such a
Mortgage Loan should be allocated among the principal payments thereon and be
deductible by the REMIC as those payments become due or upon the prepayment of
such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to the
extent they exceed in the aggregate two percent of the taxpayer's adjusted gross
income) will not be applied at the REMIC level so that the REMIC will be allowed
deductions for servicing, administrative and other non-interest expenses in
determining its taxable income. All such expenses will be allocated as a
separate item to the holders of REMIC Certificates, subject to the limitation of
Section 67 of the Code. See "--Possible Pass-Through of Miscellaneous Itemized
Deductions" below. If the deductions allowed to the REMIC exceed its gross
income for a calendar quarter, such excess will be the net loss for the REMIC
for that calendar quarter.
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BASIS RULES, NET LOSSES AND DISTRIBUTIONS. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible 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
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
EXCESS INCLUSIONS. Any "excess inclusions" with respect to a REMIC Residual
Certificate will be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be 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 Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
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otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates," below.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, 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 Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was to
enable the transferor to impede the assessment or collection of tax." If such
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on such "noneconomic" REMIC
Residual Certificate. The REMIC Regulations provide that a REMIC Residual
Certificate is noneconomic unless, based on the Prepayment Assumption and on any
required or permitted clean up calls, or required liquidation provided for in
the REMIC's organizational documents, (1) the present value of the expected
future distributions (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) on the
REMIC Residual Certificate equals at least the present value of the expected tax
on the anticipated excess inclusions, and (2) the transferor reasonably expects
that the transferee will receive distributions with respect to the REMIC
Residual Certificate at or after the time the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may constitute
noneconomic residual interests will be subject to certain restrictions under the
terms of the related Pooling and Servicing Agreement that are intended to reduce
the possibility of any such transfer being disregarded. Such restrictions will
require each party to a transfer to provide an affidavit that no purpose of such
transfer is to impede the assessment or collection of tax, including certain
representations as to the financial condition of the prospective transferee, as
to which the transferor is also required to make a reasonable investigation to
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a
REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Company will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES. Certain recently promulgated regulations (the
"Mark-to-Market Regulations"), relating to the requirement that a securities
dealer mark to market securities held for sale to customers, may have particular
relevance for prospective purchasers of a REMIC Residual Certificate. This
mark-to-market requirement applies generally to all securities owned by a
dealer, except to the extent that the dealer has specifically identified a
security
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as held for investment. The Mark-to-Market Regulations provide that for purposes
of this mark-to-market requirement, a REMIC Residual Certificate is not treated
as a security and thus may not be marked to market.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should carefully
consult with their own tax advisors prior to making an investment in such
Certificates.
SALES OF REMIC CERTIFICATES. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC Certificate.
The adjusted basis of a REMIC Regular Certificate generally will equal the cost
of such REMIC Regular Certificate to such Certificateholder, increased by income
reported by such Certificateholder with respect to such REMIC Regular
Certificate (including original issue discount and market discount income) and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such Certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described under
"--Taxation of Owners of REMIC Residual Certificates--Basis Rules, Net Losses
and Distributions." Except as provided in the following two paragraphs, any such
gain or loss will be capital gain or loss, provided such REMIC Certificate is
held as a capital asset (generally, property held for investment) within the
meaning of Section 1221 of the Code.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate, which rate is
computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually includible in the seller's income prior to such sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium."
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REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires such REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but instead will
be added to such REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. The Code imposes a
tax on REMICs equal to 100% of the net income derived from "prohibited
transactions" (a "Prohibited Transactions Tax"). In general, subject to certain
specified exceptions a prohibited transaction means the disposition of a
Mortgage Loan, the receipt of income from a source other than a Mortgage Loan or
certain other permitted investments, the receipt of compensation for services,
or gain from the disposition of an asset purchased with the payments on the
Mortgage Loans for temporary investment pending distribution on the REMIC
Certificates. It is not anticipated that any REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts." Net income from foreclosure
property" generally means gain from the sale of a 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.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with
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applicable laws and regulations. Any such tax not borne by the Master Servicer
or the Trustee will be charged against the related Trust Fund resulting in a
reduction in amounts payable to holders of the related REMIC Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS. If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally would
be imposed on the transferor of the REMIC Residual Certificate, except that
where such transfer is through an agent for a disqualified organization, the tax
would instead be imposed on such agent. However, a transferor of a REMIC
Residual Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. 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 REMIC Residual Certificates and certain other
provisions that are intended to meet this requirement will be included in the
Pooling and Servicing Agreement, and will be discussed more fully in any
Prospectus Supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization. For taxable years beginning after
December 31, 1997, notwithstanding the preceding two sentences, in the case of a
REMIC Residual Certificate held by an "electing large partnership," all
interests in such partnership shall be treated as held by disqualified
organizations (without regard to whether the record holders of the partnership
furnish statements described in the preceding sentence) and the amount that is
subject to tax under the second preceding sentence is excluded from the gross
income of the partnership allocated to the partners (in lieu of allocating to
the partners a deduction for such tax paid by the partners).
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION. A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the Mortgage
Loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument. In
the case of a REMIC Residual Certificate, if the last distribution on such REMIC
Residual Certificate is less than the REMIC Residual Certificateholder's
adjusted basis in such Certificate, such REMIC Residual Certificateholder should
(but may not) be treated as realizing a loss equal to the amount of such
difference, and such loss may be treated as a capital loss.
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REPORTING AND OTHER ADMINISTRATIVE MATTERS. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, the REMIC
Administrator will file REMIC federal income tax returns on behalf of the
related REMIC, and under the terms of the related Agreement, will either (i) be
irrevocably appointed by the holders of the largest percentage interest in the
related REMIC Residual Certificates as their agent to perform all of the duties
of the "tax matters person" with respect to the REMIC in all respects or (ii)
will be designated as and will act as the "tax matters person" with respect to
the related REMIC in all respects and will hold at least a nominal amount of
REMIC Residual Certificates.
As the tax matters person or as agent for the tax matters person, the REMIC
Administrator, subject to certain notice requirements and various restrictions
and limitations, generally will have the authority to act on behalf of the REMIC
and the REMIC Residual Certificateholders in connection with the administrative
and judicial review of items of income, deduction, gain or loss of the REMIC, as
well as the REMIC's classification. REMIC Residual Certificateholders generally
will be required to report such REMIC items consistently with their treatment on
the REMIC's tax return and may in some circumstances be bound by a settlement
agreement between the REMIC Administrator, as either tax matters person or as
agent for the tax matters person, and the Service concerning any such REMIC
item. Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from such an audit,
could result in an audit of a REMIC Residual Certificateholder's return. No
REMIC will be registered as a tax shelter pursuant to Section 6111 of the Code
because it is not anticipated that any REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
the REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
Service; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the Service. Reporting with
respect to the REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the REMIC may not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
Except as set forth in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the REMIC Administrator.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES. Payments of interest
and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section 3406
of the Code at a rate of 31% if recipients of such payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from such tax. Any amounts deducted
and withheld from a distribution to a recipient would be allowed as a credit
against such recipient's federal income tax. Furthermore, certain penalties may
be imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
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FOREIGN INVESTORS IN REMIC CERTIFICATES. Interest, including original issue
discount, distributable to REMIC Regular Certificateholders who are nonresident
aliens, foreign corporations, or other persons who are not "U.S. Persons", as
defined below, will be considered "portfolio interest" and, therefore, generally
will not be subject to 30% United States withholding, provided that such person
(i) is not a "10 percent shareholder" within the meaning of Code Section
871(h)(3)(B), or a controlled foreign corporation described in Code Section
881(c)(3)(C) and (ii) provides the Trustee, or the person who would otherwise be
required to withhold tax from such distributions under Code Section 1441 or
1442, with an appropriate statement, signed under penalties of perjury,
identifying the beneficial owner and stating, among other things, that the
beneficial owner of the REMIC Regular Certificate is not a U.S. Person. If such
statement, or any other required statement, is not provided, 30% withholding
will apply unless reduced or eliminated pursuant to an applicable tax treaty or
unless the interest on the REMIC Regular Certificate is effectively connected
with the conduct of a trade or business within the United States by such person.
In the latter case, such person will be subject to United States federal income
tax at regular rates. For these purposes, "U.S. Person" means (i) 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 (except, in the case of a partnership, to the extent
provided in regulations); (ii) an estate or trust whose income from sources
without the United States is includible in gross income for United States
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States or (iii) a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. Investors who are not U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a REMIC Regular Certificate.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related Pooling and Servicing Agreement. GRANTOR TRUST
FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS. With respect to each series of
Grantor Trust Certificates, Thacher Proffitt & Wood, counsel to the Company,
will deliver its opinion generally to the effect that assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related
Grantor Trust Fund will be classified as a grantor trust under subpart E, part I
of subchapter J of Chapter 1 of the Code and not as a partnership or an
association taxable as a corporation. Accordingly, each holder of a Grantor
Trust Certificate generally will be treated as the owner of an interest in the
Mortgage Loans included in the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate." A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, unless otherwise disclosed in the
related Prospectus Supplement and subject to the discussion below with respect
to Buydown Mortgage Loans, counsel to the Company will deliver an opinion that,
in general, Grantor Trust Fractional Interest Certificates 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; (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 86OG(a)(3) of the Code; and (iii) "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code. In addition, special tax
counsel to the Company will deliver an opinion that interest on Grantor Trust
Fractional Interest Certificates will to the same extent 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.
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The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. No directly applicable precedents exist
with respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Grantor Trust
Certificates should consult their own tax advisors with respect to the
characterization of investments in Grantor Trust Certificates representing an
interest in a Grantor Trust Fund that includes Buydown Mortgage Loans.
GRANTOR TRUST STRIP CERTIFICATES. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of Mortgage Loans that
are "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code and "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code, and the interest on which is
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code, it is unclear whether the Grantor
Trust Strip Certificates, and the income therefrom, will be so characterized.
However, the policies underlying such sections (namely, to encourage or require
investments in mortgage loans by thrift institutions and real estate investment
trusts) may suggest that such characterization is appropriate. Counsel to the
Company will not deliver any opinion on these questions. Prospective purchasers
to which such characterization of an investment in Grantor Trust Strip
Certificates is material should consult their tax advisors regarding whether the
Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized.
The Grantor Trust Strip Certificates will be "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 86OG(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the Mortgage Loans (including amounts used to
pay reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the Mortgage Loans. Under Section 67 of the Code, an
individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through certain pass-through entities will be allowed a
deduction for such reasonable servicing fees and expenses only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, Section 68 of
the Code provides that the amount of itemized deductions otherwise allowable for
an individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (i) 3% of the excess of the individual's adjusted gross
income over such amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income reportable by holders of Grantor Trust Fractional Interest Certificates
who are subject to the limitations of either Section 67 or Section 68 of the
Code may be substantial. Further, Certificateholders (other than corporations)
subject to the alternative minimum tax may not deduct miscellaneous itemized
deductions in determining such holder's alternative minimum taxable income.
Although it is not entirely clear, it appears that in transactions in which
multiple classes of Grantor Trust Certificates (including Grantor Trust Strip
Certificates) are issued, such fees and expenses should be allocated among the
classes of Grantor Trust Certificates using a method that recognizes that each
such class benefits from the related services. In the absence of statutory or
administrative clarification as to the method to be used, it currently is
intended to base information returns or reports to the IRS and
Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Company or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees
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for various types of mortgages the IRS has established certain "safe harbors."
The servicing fees paid with respect to the Mortgage Loans for certain series of
Grantor Trust Certificates may be higher than the "safe harbors" and,
accordingly, may not constitute reasonable servicing compensation. The related
Prospectus Supplement will include information regarding servicing fees paid to
the Master Servicer, any subservicer or their respective affiliates necessary to
determine whether the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY. If the stripped bond rules apply, each
Grantor Trust Fractional Interest Certificate will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding de
minimis market discount. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--Market Discount" below. Under the stripped bond rules,
the holder of a Grantor Trust Fractional Interest Certificate (whether a cash or
accrual method taxpayer) will be required to report interest income from its
Grantor Trust Fractional Interest Certificate for each month in an amount equal
to the income that accrues on such Certificate in that month calculated under a
constant yield method, in accordance with the rules of the Code relating to
original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest," if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest." In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional Interest Certificate at the beginning of such month
(see "Sales of Grantor Trust Certificates") and the yield of such Grantor Trust
Fractional Interest Certificate to such holder. Such yield would be computed at
the rate (compounded based on the regular interval between payment dates) that,
if used to discount the holder's share of future payments on the Mortgage Loans,
would cause the present value of those future payments to equal the price at
which the holder purchased such Certificate. In computing yield under the
stripped bond rules, a Certificateholder's share of future payments on the
Mortgage Loans will not include any payments made in respect of any ownership
interest in the Mortgage Loans retained by the Company, the Master Servicer, any
subservicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates represent
an interest in any pool of debt instruments the yield on which may be affected
by reason of prepayments, for taxable years beginning after August 5, 1997,
Section 1272(a)(6) of the Code requires (i) the use of a reasonable prepayment
assumption in accruing original issue discount and (ii) adjustments in the
accrual of original issue discount when prepayments do not conform to the
prepayment assumption. It is unclear whether those provisions would be
applicable to the Grantor Trust Fractional Interest Certificates that do not
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, or for taxable years beginning prior to
August 5, 1997, or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates and, in particular, whether a prepayment
assumption should be used in reporting original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or
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loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to such Certificate and the portion of
the adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Mortgage Loan. If a prepayment assumption is
used, it appears that no separate item of income or loss should be recognized
upon a prepayment. Instead, a prepayment should be treated as a partial payment
of the stated redemption price of the Grantor Trust Fractional Interest
Certificate and accounted for under a method similar to that described for
taking account of original issue discount on REMIC Regular Certificates. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." It is unclear whether any other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
It is currently intended to base information reports or returns to the IRS
and Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Company, the Master Servicer nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to such Prepayment Assumption or any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price.
Under Treasury regulation Section 1.1286-I, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in
"--Taxation of Owners of Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Do Not Apply" and
"--Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required to
report its share of the interest income on the Mortgage Loans in accordance with
such Certificateholder's normal method of accounting. The original issue
discount rules will apply to a Grantor Trust Fractional Interest Certificate to
the extent it evidences an interest in Mortgage Loans issued with original issue
discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Mortgage Loan other than "qualified
stated interest." "Qualified stated interest" includes interest that is
unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial below-market rate of interest or the acceleration or the deferral
of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Trustee in
preparing information returns to the Certificateholders and the IRS.
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Notwithstanding the general definition of original issue discount, original
issue discount will be considered to be de minimis if such original issue
discount is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loan. For this purpose, the weighted
average maturity of the Mortgage Loan will be computed as the sum of the amounts
determined, as to each payment included in the stated redemption price of such
Mortgage Loan, by multiplying (i) the number of complete years (rounding down
for partial years) from the issue date until such payment is expected to be made
by (ii) a fraction, the numerator of which is the amount of the payment and the
denominator of which is the stated redemption price of the Mortgage Loan. Under
the OID Regulations, original issue discount of only a de minimis amount (other
than de minimis original issue discount attributable to a so-called "teaser"
rate or initial interest holiday) will be included in income as each payment of
stated principal is made, based on the product of the total amount of such de
minimis original issue discount and a fraction, the numerator of which is the
amount of each such payment and the denominator of which is the outstanding
stated principal amount of the Mortgage Loan. The OID Regulations also permit a
Certificateholder to elect to accrue de minimis original issue discount into
income currently based on a constant yield method. See "--Taxation of Owners of
Grantor Trust Fractional Interest Certificates--Market Discount" below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. Section
1272(a)(6) of the Code requires that a prepayment assumption be made in
computing yield with respect to any pool of debt instruments the yield on which
may be affected by reason of prepayments. Accordingly, for certificates backed
by such pools, it is intended to base information reports and returns to the IRS
and Certificateholders for taxable years beginning after August 5, 1997, on the
use of a prepayment assumption. However, in the case of certificates not backed
by such pools or with respect to taxable years beginning prior to August 5,
1997, it currently is not intended to base such reports and returns on the use
of a prepayment assumption. Certificateholders are advised to consult their own
tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such Mortgage Loan, increased by the aggregate amount of original issue
discount with respect to such Mortgage Loan that accrued in prior accrual
periods, and reduced by the amount of any payments made on such Mortgage Loan in
prior accrual periods of amounts included in its stated redemption price.
In addition to its regular reports, the Trustee, unless otherwise provided
in the related Prospectus Supplement, will provide to any holder of a Grantor
Trust Fractional Interest Certificate such information as such holder may
reasonably request from time to time with respect to original issue discount
accruing on Grantor Trust Fractional Interest Certificates. See "Grantor Trust
Reporting" below.
MARKET DISCOUNT. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to the
market discount rules of Sections 1276 through 1278 of the Code to the extent an
interest in a Mortgage Loan is considered to have been purchased at a "market
discount," that is, in the case of a Mortgage Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above, or in the case of a Mortgage Loan issued with original issue
discount, at a purchase price less than its adjusted issue price (as defined
above). If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through such month that has not previously been included
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in income, but limited, in the case of the portion of such discount that is
allocable to any Mortgage Loan, to the payment of stated redemption price on
such Mortgage Loan that is received by (or, in the case of accrual basis
Certificateholders, due to) the Trust Fund in that month. A Certificateholder
may elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing.
If made, such election will apply to all market discount bonds acquired by such
Certificateholder during or after the first taxable year to which such election
applies. In addition, the OID Regulations would permit a Certificateholder to
elect to accrue all interest, discount (including de minimis market or original
issue discount) and premium in income as interest, based on a constant yield
method. If such an election were made with respect to a Mortgage Loan with
market discount, the Certificateholder would be deemed to have made an election
to include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election and thereafter, and possibly previously
acquired instruments. Similarly, a Certificateholder that made this election for
a Certificate acquired at a premium would be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See
"--REMICs--Taxation of Owners of REMIC Regular Certificates--Premium" below.
Each of these elections to accrue interest, discount and premium with respect to
a Certificate on a constant yield method or as interest may not be revoked
without the consent of the IRS.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report will apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount
would be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be considered
to be de minimis if it is less than 0.25% of the stated redemption price of the
Mortgage Loans multiplied by the number of complete years to maturity remaining
after the date of its purchase. In interpreting a similar rule with respect to
original issue discount on obligations payable in installments, the OID
Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied with respect to market discount,
presumably taking into account the prepayment assumption used, if any. The
effect of using a prepayment assumption could be to accelerate the reporting of
such discount income. If market discount is treated as de minimis under the
foregoing rule, it appears that actual discount would be treated in a manner
similar to original issue discount of a de minimis amount. See "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Do Not Apply."
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates-- Market Discount," below, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the Mortgage Loans.
PREMIUM. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans
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originated after September 27, 1985. Amortizable premium is treated as an offset
to interest income on the related debt instrument, rather than as a separate
interest deduction. However, premium allocable to Mortgage Loans originated
before September 28, 1985 or to Mortgage Loans for which an amortization
election is not made, should be allocated among the payments of stated
redemption price on the Mortgage Loan and be allowed as a deduction as such
payments are made (or, for a Certificateholder using the accrual method of
accounting, when such payments of stated redemption price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular Certificates--
Original Issue Discount." It is unclear whether any other adjustments would be
required to reflect differences between the prepayment assumption used, and the
actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust Strip
Certificates. Except as described above in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates-If Stripped Bond Rules Apply," no
regulations or published rulings under Section 1286 of the Code have been issued
and some uncertainty exists as to how it will be applied to securities such as
the Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust
Strip Certificates should consult their own tax advisors concerning the method
to be used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "Possible Application of Proposed Contingent Payment Rules" and
assumes that the holder of a Grantor Trust Strip Certificate will not own any
Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption.
To the extent the Grantor Trust Strip Certificates represent an interest in any
pool of debt instruments the yield on which may be affected by reason of
prepayments, those provisions will apply to the Grantor Trust Strip Certificates
for taxable years beginning after August 5, 1997. It is unclear whether those
provisions would be applicable to the Grantor Trust Strip Certificates that do
not represent an interest in any such pool or for taxable years beginning prior
to August 5, 1997, or whether use of a prepayment assumption may be required or
permitted in the absence of such provisions. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Strip Certificate or, with respect to any subsequent holder, at the time
of purchase of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and Certificateholders on the
Prepayment Assumption disclosed in the related Prospectus Supplement and on a
constant yield computed using a representative initial offering price for each
class
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of Certificates. However, neither the Company, the Master Servicer nor the
Trustee will make any representation that the Mortgage Loans will in fact prepay
at a rate conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
POSSIBLE APPLICATION OF CONTINGENT PAYMENT RULES. The coupon stripping
rules' general treatment of stripped coupons is to regard them as newly issued
debt instruments in the hands of each purchaser. To the extent that payments on
the Grantor Trust Strip Certificates would cease if the Mortgage Loans were
prepaid in full, the Grantor Trust Strip Certificates could be considered to be
debt instruments providing for contingent payments. Under the OID Regulations,
debt instruments providing for contingent payments are not subject to the same
rules as debt instruments providing for noncontingent payments. Regulations were
promulgated on June 14, 1996, regarding contingent payment debt instruments (the
"Contingent Payment Regulations"), but it appears that Grantor Trust Strip
Certificates, to the extent subject to 1272(a)(6) of the Code, as described
above, or due to their similarity to other mortgage-backed securities (such as
REMIC regular interests and debt instruments subject to Section 1272(a)(6) of
the Code) that are expressly excepted from the application of the Contingent
Payment Regulations, are or may be excepted from such regulations. Like the OID
Regulations, the Contingent Payment Regulations do not specifically address
securities, such as the Grantor Trust Strip Certificates, that are subject to
the stripped bond rules of Section 1286 of the Code.
If the Contingent Payment Regulations were to apply, the holder of a
Grantor Trust Strip Certificate would be required to apply a " noncontingent
bond method." Under that method, the issuer of a Grantor Trust Strip Certificate
would determine a projected payment schedule with respect to such Grantor Trust
Strip Certificate. Holders of Grantor Trust Strip Certificates would be bound by
the issuer's projected payment schedule, which would consist of all
noncontingent payments and a projected amount for each contingent payment based
on the projected yield (as described below) of the Grantor Trust Strip
Certificate. The projected amount of each payment would be determined so that
the projected payment schedule reflected the projected yield reasonably expected
to be received by the holder of a Grantor Trust Strip Certificate. The projected
yield referred to above would be a reasonable rate, not less than the
"applicable Federal rate" that, as of the issue date, reflected general market
conditions, the credit quality of the issuer, and the terms and conditions of
the Mortgage Loans. The holder of a Grantor Trust Strip Certificate would be
required to include as interest income in each month the adjusted issue price of
the Grantor Trust Strip Certificate at the beginning of the period multiplied by
the projected yield.
Assuming that a prepayment assumption were used, if the proposed
regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the Contingent Payment Regulations to the
Grantor Trust Strip Certificates.
SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss equal to the
difference between the amount realized on the sale of a Grantor Trust
Certificate, recognized on the sale or exchange of a Grantor Trust Certificate
by an investor who holds such Grantor Trust Certificate as a capital asset, 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 Certificate generally will 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 with
respect to such Grantor Trust Certificate.
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Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction. Finally, a
taxpayer may elect to have net capital gain taxed at ordinary income rates
rather than capital gains rates in order to include such net capital gain in
total net investment income for that taxable year, for purposes of the rule that
limits the deduction of interest on indebtedness incurred to purchase or carry
property held for investment to a taxpayer's net investment income.
GRANTOR TRUST REPORTING. Unless otherwise provided in the related
Prospectus Supplement, the Trustee will furnish to each holder of a Grantor
Trust Fractional Interest Certificate with each distribution a statement setting
forth the amount of such distribution allocable to principal on the underlying
Mortgage Loans and to interest thereon at the related Pass-Through Rate. In
addition, the Trustee will furnish, within a reasonable time after the end of
each calendar year, to each holder of a Grantor Trust Certificate who was such a
holder at any time during such year, information regarding the amount of
servicing compensation received by the Master Servicer and sub-servicer (if any)
and such other customary factual information as the Trustee deems necessary or
desirable to enable holders of Grantor Trust Certificates to prepare their tax
returns and will furnish comparable information to the Service as and when
required by law to do so. Because the rules for accruing discount and amortizing
premium with respect to the Grantor Trust Certificates are uncertain in various
respects, there is no assurance the Service will agree with the Trustee's
information reports of such items of income and expense. Moreover, such
information reports, even if otherwise accepted as accurate by the Service, will
in any event be accurate only as to the initial Certificateholders that bought
their Certificates at the representative initial offering price used in
preparing such reports.
BACKUP WITHHOLDING. In general, the rules described in "--REMICS--Backup
Withholding with Respect to REMIC Certificates" will also apply to Grantor Trust
Certificates.
FOREIGN INVESTORS. In general, the discussion with respect to REMIC Regular
Certificates in "REMICS-- Foreign Investors in REMIC Certificates--REMIC Regular
Certificates" applies to Grantor Trust Certificates except that Grantor Trust
Certificates will, unless otherwise disclosed in the related Prospectus
Supplement, be eligible for exemption from U.S. withholding tax, subject to the
conditions described in such discussion, only to the extent the related Mortgage
Loans were originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non-resident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences", potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Certificates offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the certificates
offered hereunder.
ERISA CONSIDERATIONS
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Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA
("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans and bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. 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 and on Individual
Retirement Accounts described in Section 408 of the Code (collectively, "Tax
Favored Plans"). ERISA and the Code prohibit a broad range of transactions
involving assets of ERISA Plans and Tax Favored Plans (collectively, "Plans")
and persons who have certain specified relationships to such Plans ("Parties in
Interest" within the meaning of ERISA or "Disqualified Persons" within the
meaning of the Code, collectively "Parties in Interest"), unless a statutory or
administrative exemption is available with respect to any such transaction.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not subject
to ERISA requirements. Accordingly, assets of such plans may be invested in the
Certificates without regard to the ERISA considerations described below, subject
to the provisions of other applicable federal, state and local law. Any such
plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchases a Certificate, if the Mortgage Loans and other assets included in a
Trust Fund are deemed to be assets of the Plan. The U.S. Department of Labor
(the "DOL") has promulgated regulations at 29 C.F.R. ss.2510.3-101 (the "DOL
Regulations") defining the term "Plan Assets" for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code. Under the DOL Regulations,
generally, when a Plan acquires an "equity interest" in another entity (such as
a Trust Fund), the underlying assets of that entity may be considered to be Plan
Assets unless certain exceptions apply. Exceptions contained in the DOL
Regulations provide that a Plan's assets will not include an undivided interest
in each asset of an entity in which such Plan makes an equity investment if: (1)
the entity is an operating company; (2) the equity investment made by the Plan
is either a "publicly-offered security" that is "widely held," both as defined
in the DOL Regulations, or a security issued by an investment company registered
under the Investment Company Act of 1940, as amended; or (3) Benefit Plan
Investors do not own 25% or more in value of any class of equity securities
issued by the entity. For this purpose, "Benefit Plan Investors" include Plans,
as well as any "employee benefit plan" (as defined in Section 3(3) or ERISA)
which is not subject to Title I of ERISA, such as governmental plans (as defined
in Section 3(32) of ERISA) and church plans (as defined in Section 3(33) of
ERISA) which have not made an election under Section 410(d) of the Code, and any
entity whose underlying assets include Plan Assets by reason of a Plan's
investment in the entity. Because of the factual nature of certain of the rules
set forth in the DOL Regulations, Plan Assets either may be deemed to include an
interest in the assets of an entity (such as a Trust Fund) or may be deemed
merely to include an interest in the instrument evidencing such equity interest
(such as a Certificate). Neither Plans nor such entities should acquire or hold
Certificates in reliance upon the availability of any exception under the DOL
Regulations.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. Any person who has discretionary authority or control with
respect to the management or disposition of Plan Assets and any person who
provides investment advice with respect to such Plan Assets for a fee is a
fiduciary of the investing Plan. If the Mortgage Loans and other assets included
in a Trust Fund were to constitute Plan Assets, then any party exercising
management or discretionary control with respect to those Plan Assets may be
deemed to be a Plan "fiduciary," and thus subject to the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, the acquisition or holding of Certificates by or on behalf of a Plan
or with Plan Assets, as well as the operation of the Trust Fund, may constitute
or involve a prohibited transaction under ERISA and the Code unless a statutory
or administrative exemption is available.
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The DOL has issued a number of individual exemptions to certain
underwriters (each an "Exemption"), which generally exempts from the application
of the prohibited transaction provisions of Section 406 of ERISA, and the excise
taxes imposed on such prohibited transactions pursuant to Section 4975(a) and
(b) of the Code, certain transactions, among others, relating to the servicing
and operation of mortgage pools and the initial purchase, holding and subsequent
resale of mortgage pass-through certificates underwritten by an Underwriter (as
hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this Section "ERISA Considerations",
the term "Underwriter" shall include (a) the underwriters who have obtained such
an Exemption, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with the
underwriters who have obtained such an Exemption, and (c) any member of the
underwriting syndicate or selling group of which a person described in (a) or
(b) is a manager or co-manager with respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied for
the Exemption to apply. First, the acquisition of Certificates by a Plan or with
Plan Assets must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Certificates evidencing rights and interests that are
not subordinated to the rights and interests evidenced by other Certificates of
the same trust. Third, the Certificates at the time of acquisition by a Plan or
with Plan Assets must be rated in one of the three highest generic rating
categories by Standard & Poor's Structured Ratings Group, Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service, L.P.
(collectively, the "Exemption Rating Agencies"). Fourth, the Trustee cannot be
an affiliate of any member of the "Restricted Group" which consists of any
Underwriter, the Company, the Trustee, the Master Servicer, the Special
Servicer, any subservicer and any obligor with respect to assets included in the
Trust Fund constituting more than 5% of the aggregate unamortized principal
balance of the assets in the Trust Fund as of the date of initial issuance of
the Certificates. Fifth, the sum of all payments made to and retained by the
Underwriter(s) must represent not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and retained by
the Company pursuant to the assignment of the assets to the related Trust Fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer and any
Sub-Servicer must represent not more than reasonable compensation for such
person's services under the related Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Sixth, the Exemption states that
the investing Plan or Plan Asset investor must be an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest generic categories of one of the Exemption Rating Agencies for at
least one year prior to the acquisition of Certificates by or on behalf of a
Plan or with Plan Assets; 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 acquisition of Certificates by or on behalf
of a Plan or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
Certificate must make its own determination that the conditions set forth above
will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of the Code
by reason of Sections 4975(c)(1)(A) through (D) of the Code, in connection with
the direct or indirect sale, exchange or transfer of Certificates in the initial
issuance of such Certificates or the direct or indirect acquisition or
disposition in the secondary market of Certificates by a Plan or with Plan
Assets or the continued holdings of Certificates acquired by a Plan or with Plan
Assets pursuant to either of the foregoing. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
the acquisition or holding of a Certificate on behalf of an "Excluded Plan" by
any person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes of the Certificates,
an Excluded Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions 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 excise 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,
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exchange or transfer of Certificates in the initial issuance of Certificates
between the Company or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan Assets in the Certificates is (a) a mortgagor with respect to
5% or less of the fair market value of the Trust Fund Assets or (b) an affiliate
of such a person, (2) the direct or indirect acquisition or disposition in the
secondary market of Certificates by a Plan or with Plan Assets and (3) the
continued holding of Certificates acquired by a Plan or with Plan Assets
pursuant to either of the foregoing.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the excise 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 Fund. The Company expects that the specific conditions of the Exemption
required for this purpose will be satisfied with respect to the Certificates so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA (as well as the excise 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 Fund, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by Section
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 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 the Plan's
ownership of Certificates.
In addition to the Exemption, a fiduciary or other Plan Asset investor
should consider the availability of certain class exemptions granted by the DOL
("Class Exemptions"), which may provide relief from certain of the prohibited
transaction provisions of ERISA and the related excise tax provisions of the
Code, including Prohibited Transaction Class Exemption ("PTCE") 83-1, regarding
transactions involving mortgage pool investment trusts; PTCE 84-14, regarding
transactions effected by a "qualified professional asset manager"; PTCE 90-1,
regarding transactions by insurance company pooled separate accounts; PTCE
91-38, regarding investments by bank collective investment funds; PTCE 95-60,
regarding transactions by insurance company general accounts; and PTCE 96-23,
regarding transactions effected by an "in-house asset manager."
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL is required to
issue final regulations ("401(c) Regulations") no later than December 31, 1997
which are to provide guidance for the purpose of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan Assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan Assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Certificates should consult with their legal
counsel with respect to the applicability of Section 401(c) of ERISA, including
the general account's ability to continue to hold the Certificates after the
date which is 18 months after the date the 401(c) Regulations become final.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Certificates, such as Subordinate Certificates, REMIC
Residual Certificates or any Certificates which are not rated in one of the
three highest generic rating categories by one of the
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Exemption Rating Agencies, transfers of such Certificates to a Plan, to a
trustee or other person acting on behalf of any Plan or to any other person
investing Plan Assets to effect such acquisition will not be registered by the
Trustee unless the transferee provides the Company, the Trustee and the Master
Servicer with an opinion of counsel satisfactory to the Company, the Trustee and
the Master Servicer, which opinion will not be at the expense of the Company,
the Trustee or the Master Servicer, that the purchase of such Certificates by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code and will not subject the Company, the Trustee or the Master Servicer
to any obligation in addition to those undertaken in the related Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Certificates by
or on behalf of such Plan, trustee or other person acting on behalf of any Plan
or other person investing Plan Assets to effect such acquisition is permissible
under applicable law, will not constitute or result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
Company, the Trustee or the Master Servicer to any obligation in addition to
those undertaken in the Agreement, and the following conditions have been
satisfied: (i) the transferee is an insurance company and the source of funds
used to purchase such Certificates is an "insurance company general account" (as
such term is defined in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60
have been satisfied; and (iii) there is no Plan with respect to which the amount
of such general account's reserves and liabilities for contracts held by or on
behalf of such Plan and all other Plans maintained by the same employer (or any
"affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Certificates.
An opinion of counsel or certification will not be required with respect to
the purchase of DTC registered Certificates. Any purchaser of a DTC registered
Certificate will be deemed to have represented by such purchase that either (a)
such purchaser is not a Plan and is not purchasing such Certificates on behalf
of, or with Plan Assets of, any Plan or (b) the purchase of any such Certificate
by or on behalf of, or with Plan Assets of, any Plan is permissible under
applicable law, will not result in any non-exempt prohibited transaction under
ERISA or Section 4975 of the Code and will not subject the Company, the Trustee
or the Master Servicer to any obligation in addition to those undertaken in the
related Agreement and the following conditions have been satisfied: (i) the
transferee is an insurance company and the source of funds used to purchase such
Certificates is an "insurance company general account" (as such term is defined
in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60 have been satisfied;
and (iii) there is not a Plan with respect to which the amount of such general
account's reserves and liabilities for contracts held by or on behalf of such
Plan and all other Plans maintained by the same employer (or any "affiliate"
thereof, as defined in PTCE 95-60) or by the same employee organization exceed
10% of the total of all reserves and liabilities of such general account (as
determined under PTCE 95-60) as of the date of the acquisition of such
Certificates.
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the Certificates or, even if all the
conditions specified therein were satisfied, that any such exemption would apply
to transactions involving the related Trust Fund. Prospective Plan investors
should consult with their legal counsel concerning the impact of ERISA and the
Code and the potential consequences to their specific circumstances prior to
making an investment in the Certificates. Neither the Company, the Trustee, the
Master Servicer nor any of their respective affiliates will make any
representation to the effect that the Certificates satisfy all legal
requirements with respect to the investment therein by Plans generally or any
particular Plan or to the effect that the Certificates are an appropriate
investment for Plans generally or any particular Plan.
BEFORE PURCHASING A CERTIFICATE, A FIDUCIARY OF A PLAN OR OTHER PLAN ASSET
INVESTOR SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL CONDITIONS
SET FORTH IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR SECTION 401(C) OF
ERISA WILL BE SATISFIED AND (B) IN THE CASE OF A CERTIFICATE PURCHASED UNDER THE
EXEMPTION, THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR PURPOSES OF THE
EXEMPTION. IN ADDITION TO MAKING ITS OWN DETERMINATION AS TO THE AVAILABILITY OF
THE EXEMPTIVE RELIEF PROVIDED IN THE EXEMPTION, ONE OF THE CLASS EXEMPTIONS OR
SECTION 401(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE A
CERTIFICATE ON BEHALF OF A PLAN.
LEGAL INVESTMENT MATTERS
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Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each such class that is rated in one of the
two highest rating categories by at least one Rating Agency will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), and, as such, will be legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including depository institutions, life insurance companies
and pension funds) created pursuant to or existing under the laws of the United
States or of any State whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States have enacted legislation which overrides the preemption
provisions of SMMEA. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS with an effective date of
February 10, 1992. The Policy Statement generally indicates that a mortgage
derivative product will be deemed to be high risk if it exhibits greater price
volatility than a standard fixed rate thirty-year mortgage security. According
to the Policy Statement, prior to purchase, a depository institution will be
required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the proposed acquisition
would reduce the institution's overall interest rate risk. Reliance on analysis
and documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There can be
no assurance as to which classes of Offered Certificates will be treated as
high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision ("OTS") issued a
bulletin, entitled, "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin established
guidelines for the investment by savings institutions in certain "high-risk"
mortgage derivative securities and limitations on the use of such securities by
insolvent, undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Offered Certificates. 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 Offered Certificates. Similar policy statements have been issued by
regulators having jurisdiction over other types of depository institutions.
Certain classes of Certificates offered hereby, including any class that is
not rated in one of the two highest rating categories by at least one Rating
Agency, will not constitute "mortgage related securities" for purposes of SMMEA.
Any such class of Certificates will be identified in the related Prospectus
Supplement. Prospective investors in such classes of Certificates, in
particular, should consider the matters discussed in the following paragraph.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Offered Certificates or to purchase any class of
Offered Certificates 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 Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity
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of any class of Certificates. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the Offered
Certificates of any class thereof constitute legal investments or are subject to
investment, capital or other restrictions, and, if applicable, whether SMMEA has
been overridden in any jurisdiction relevant to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
and/or Mortgage Securities in the respective Mortgage Pools. The Company expects
that it will make additional sales of securities similar to the Offered
Certificates from time to time, but the timing and amount of any such additional
offerings will be dependent upon a number of factors, including the volume of
mortgage loans purchased by the Company, prevailing interest rates, availability
of funds and general market conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Company from such sale.
The Company intends that Offered Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the Offered
Certificates of a particular series may be made through a combination of two or
more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the Company with institutional investors
through dealers; and
3. By direct placements by the Company with institutional
investors.
If underwriters are used in a sale of any Offered Certificates (other than
in connection with an underwriting on a best efforts basis), such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Such
underwriters may be broker-dealers affiliated with the Company whose identities
and relationships to the Company will be as set forth in the related Prospectus
Supplement. The managing underwriter or underwriters with respect to the offer
and sale of the Offered Certificates of a particular series will be set forth on
the cover of the Prospectus Supplement relating to such series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Offered Certificates, underwriters may
receive compensation from the Company or from purchasers of such Certificates in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Offered Certificates may be deemed to
be underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Company and any profit on the resale of
Offered Certificates by them may be deemed to be underwriting discounts and
commissions under the Securities Act.
It is anticipated that the underwriting agreement pertaining to the sale of
Offered Certificates of any series will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities Act or
will contribute to payments required to be made in respect thereof.
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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
Offered Certificates of such series.
The Company anticipates that the Certificates offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Offered Certificates, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be "underwriters"
within the meaning of the Securities Act in connection with reoffers and sales
by them of such Certificates. Holders of Offered Certificates should consult
with their legal advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series will be passed
upon for the Company by Thacher Proffitt & Wood, New York, New York.
FINANCIAL INFORMATION
A new Trust fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the structural,
legal and issuer-related aspects associated with such certificates, the nature
of the underlying mortgage assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates do not represent any
assessment of the likelihood of principal prepayments by borrowers or of the
degree by which such prepayments might differ from those originally anticipated.
As a result, Certificateholders might suffer a lower than anticipated yield,
and, in addition, holders of stripped interest certificates in extreme cases
might fail to recoup their initial investments.
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INDEX OF PRINCIPAL DEFINITIONS
401(c) Regulations...........................................................105
Accrual Certificates...................................................6, 38, 45
Accrued Certificate Interest..................................................45
Affiliated Sellers............................................................21
ARM Loans ............................................................22
Available Distribution Amount.................................................44
Balloon Loans ............................................................23
Balloon Payment ............................................................23
Bankruptcy Code ............................................................73
Bankruptcy Loss ............................................................48
Beneficial Owner ............................................................38
Buydown Account ........................................................15, 25
Buydown Agreement ............................................................43
Buydown Funds ........................................................15, 25
Buydown Mortgage Loans....................................................15, 25
Buydown Period ........................................................15, 25
CERCLA ........................................................27, 74
Certificate ............................................................60
Certificate Account...........................................................41
Certificate Register..........................................................38
Certificate Registrar.........................................................38
Certificateholder ........................................................38, 80
Certificateholders.............................................................1
Certificates ..........................................................1, 5
Class Exemptions ...........................................................105
Closing Date ............................................................82
Code .........................................................7, 80
Commission .............................................................3
Committee Report ............................................................82
Company ..........................................................1, 5
Conservation Act ............................................................74
Contingent Payment Regulations...............................................101
Contracts ............................................................20
Contributions Tax ............................................................91
Convertible Mortgage Loan.....................................................24
Crime Control Act ............................................................79
Debt Service Coverage Ratio...................................................26
Debt Service Reduction........................................................52
Defaulted Mortgage Loss.......................................................48
Deferred Interest ............................................................23
Deficient Valuation...........................................................52
Deleted Mortgage Loan.........................................................29
Designated Seller Transaction.................................................21
Determination Date............................................................44
DIDMC ............................................................80
Distribution Date .............................................................9
DOL ...........................................................103
DOL Regulations ...........................................................103
DTC ............................................................38
DTC Registered Certificates...................................................38
Due Period ............................................................46
Environmental Lien............................................................74
Equity Participation..........................................................23
ERISA .......................................................12, 103
ERISA Plans ...........................................................103
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Exchange Act .............................................................3
Excluded Plan ...........................................................104
Exemption ...........................................................104
Exemption Rating Agencies....................................................104
Extraordinary Losses..........................................................48
Fannie Mae ............................................................27
FDIC ............................................................21
FHA ............................................................21
FHA Loans ............................................................21
FIRREA ............................................................27
Fraud Loss ............................................................48
Freddie Mac ............................................................27
FTC Rule ............................................................75
Garn-St Germain Act...........................................................75
Grantor Trust Certificates................................................12, 80
Grantor Trust Fractional Interest Certificate.................................94
Grantor Trust Fund............................................................80
Grantor Trust Strip Certificate...............................................94
Holder ........................................................38, 80
Housing Act ............................................................27
HUD ............................................................58
ICAI ............................................................59
ICI Funding .............................................................5
ICII ............................................................59
ICMH .............................................................5
Index ............................................................22
Installment Contract..........................................................76
Insurance Proceeds............................................................41
Intermediaries ............................................................38
IRS ........................................................80, 82
Issue Premium ............................................................87
Letter of Credit ............................................................49
Letter of Credit Bank.........................................................49
Liquidated Mortgage Loan......................................................34
Liquidation Proceeds......................................................41, 42
Loan-to-Value Ratio...........................................................24
Lock-out Expiration Date......................................................23
Lock-out Period ............................................................23
Loss ............................................................56
Manufactured Homes............................................................21
Manufacturer's Invoice Price..................................................24
Mark-to-Market Regulations....................................................89
Master Servicer ......................................................1, 5, 30
Mortgage Loans ......................................................1, 7, 49
Mortgage Notes ............................................................20
Mortgage Pool ..........................................................1, 7
Mortgage Pool Insurance Policy................................................50
Mortgage Rate ............................................................22
Mortgage Securities........................................................8, 22
Mortgaged Property.............................................................7
Mortgages ............................................................20
Multifamily Loans ............................................................20
Multifamily Properties........................................................20
Net Mortgage Rate ............................................................64
Net Operating Income..........................................................26
Nonrecoverable Advance........................................................46
Note Margin ............................................................22
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<PAGE>
Offered Certificates....................................................1, 5, 38
OID Regulations ............................................................80
OTS ...........................................................107
Participants ............................................................38
Parties in Interest..........................................................103
Pass-Through Rate .............................................................6
Permitted Investments.........................................................41
Plan ............................................................12
Plan Assets ...........................................................103
Plans ...........................................................103
Policy Statement ...........................................................107
Pool Insurer ............................................................43
Pooling Agreement ......................................................1, 6, 59
Pre-Funding Account...........................................................37
Prepayment Assumption.....................................................82, 97
Prepayment Interest Shortfall.................................................65
Prepayment Penalty............................................................23
Primary Insurance Policy......................................................56
Primary Insurer ............................................................56
Prohibited Transactions Tax...................................................91
Prospectus Supplement..........................................................1
PTCE ...........................................................105
PTCE 83-1 ...........................................................105
Purchase Obligation...........................................................55
Purchase Price ............................................................29
Qualified Substitute Mortgage Loan............................................29
Rating Agency ............................................................11
Realized Losses ............................................................48
Record Date ............................................................44
Related Proceeds ............................................................46
Relief Act ............................................................78
REMIC ......................................................1, 7, 80
REMIC Administrator...........................................................80
REMIC Certificates............................................................80
REMIC Provisions ............................................................80
REMIC Regular Certificates................................................12, 81
REMIC Regulations ............................................................80
REMIC Residual Certificates...................................................81
REO Mortgage Loan ............................................................34
REO Property ............................................................32
Reserve Fund ............................................................52
RICO ............................................................79
RTC ............................................................21
Securities Act .............................................................3
Seller .............................................................8
Sellers .........................................................1, 21
Senior Certificates........................................................7, 37
Senior Liens ............................................................23
Senior/Subordinate Series.....................................................37
Servicing Standard............................................................31
Single Family Loans...........................................................20
Single Family Property........................................................20
SMMEA ............................................................11
Special Hazard Instrument.....................................................48
Special Hazard Insurance Policy...............................................51
Special Hazard Insurer........................................................52
Special Hazard Loss...........................................................48
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<PAGE>
Special Hazard Losses.........................................................51
Special Servicer .............................................................5
Spread .............................................................6
Strip Certificates.........................................................6, 37
Subordinate Certificates...................................................7, 37
Subservicer ............................................................33
Subservicers ............................................................25
Tax Favored Plans ...........................................................103
Tiered REMICS ............................................................81
Title V ............................................................77
Title VIII ............................................................78
Trust Fund ..........................................................1, 6
Trustee .............................................................5
Unaffiliated Sellers..........................................................21
Underwriter ...........................................................104
Value ............................................................24
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<PAGE>
INDEX OF DEFINITIONS
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary..................................................................S-4
Risk Factors............................................................S-17
Description of the Mortgage Pool........................................S-18
Description of the Certificates.........................................S-39
Certain Yield and Prepayment Consideration..............................S-53
Pooling and Servicing Agreement.........................................S-64
Federal Income Tax Consequences.........................................S-66
Method of Distribution..................................................S-68
Legal Opinions..........................................................S-69
Ratings.................................................................S-69
Legal Investment........................................................S-70
ERISA Considerations....................................................S-71
Index of Principal Definitions..........................................S-73
PROSPECTUS
Available Information......................................................3
Reports to Certificateholders..............................................3
Incorporation of Certain Information by Reference..........................4
Summary of Prospectus......................................................5
Risk Factors..............................................................14
The Mortgage Pools........................................................20
Servicing of Mortgage Loans...............................................30
Description of the Certificates...........................................36
Description of Credit Enhancement.........................................48
Purchase Obligations......................................................55
Primary Mortgage Insurance, Hazard Insurance;
Claims Thereunder........................................................56
The Company...............................................................59
ICI Funding Corporation...................................................59
Imperial Credit Mortgage Holdings, Inc....................................59
The Pooling Agreement.....................................................59
Yield Considerations......................................................64
Maturity and Prepayment Considerations....................................66
Certain Legal Aspects of Mortgage Loans...................................67
Federal Income Tax Consequences...........................................80
State and Other Tax Consequences.........................................102
ERISA Considerations.....................................................102
Legal Investment Matters................................................106
Use of Proceeds..........................................................108
Methods of Distribution..................................................108
Legal Matters............................................................109
Financial Information....................................................109
Rating...................................................................109
Index of Principal Definitions...........................................110
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS 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.
================================================================================
================================================================================
ICIFC
SECURED ASSETS CORP.
$317,639,574
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 1997-3
----------
PROSPECTUS SUPPLEMENT
SEPTEMBER 24, 1997
----------
LEHMAN BROTHERS
================================================================================
