PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 27, 1998)
$292,395,000
[LOGO FOR IMPAC]
MASTER SERVICER
IMPAC SECURED ASSETS CORP.
COMPANY
IMPAC SECURED ASSETS CMN TRUST SERIES 1998-1
COLLATERALIZED ASSET-BACKED NOTES, SERIES 1998-1
$88,116,000 6.71% Class A-1 Notes $33,803,000 7.40% Class A-5 Notes
$22,817,000 6.49% Class A-2 Notes $26,513,000 7.58% Class M-1 Notes
$53,189,000 6.52% Class A-3 Notes $24,240,000 7.77% Class M-2 Notes
$22,507,000 6.84% Class A-4 Notes $21,210,000 8.95% Class B-1 Notes
------------------------
The Series 1998-1 Collateralized Asset-Backed Notes will include the
following eight classes (the "Notes"): Class A-1 Notes, Class A-2 Notes, Class
A-3 Notes, Class A-4 Notes and Class A-5 Notes (collectively, the "Senior
Notes"); (ii) Class M-1 Notes and Class M-2 Notes (together, the "Class M
Notes"); and (iii) Class B-1 Notes (together with the Class M Notes, the
"Subordinate Notes"). The Series 1998-1 Collateralized Asset- Backed
Certificates will include the Class B-2 Certificates (together with the
Subordinate Notes, the "Subordinate Securities") and the Class X Certificates.
Only the Notes are offered hereby.
(CONTINUED ON FOLLOWING PAGE)
--------------------------
THE ASSETS PLEDGED TO SECURE THE NOTES ARE THE SOLE SOURCE OF PAYMENTS ON THE
NOTES. THE NOTES WILL REPRESENT OBLIGATIONS SOLELY OF THE ISSUER AND WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER,
ANY SUBSERVICER, THE OWNER TRUSTEE, THE INDENTURE TRUSTEE OR ANY OF THEIR
AFFILIATES, OTHER THAN THE ISSUER. NEITHER THE NOTES NOR THE
UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE NOTES 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.
--------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE S-14 OF THIS PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE 15 OF THE PROSPECTUS BEFORE PURCHASING ANY OF
THE NOTES.
There is currently no secondary market for the Notes. Lehman Brothers, Inc.
(the "Underwriter") intends to make a secondary market in the Notes, but is not
obligated to do so. There can be no assurance that a secondary market for the
Notes will develop or, if it does develop, that it will continue or provide
Noteholders with sufficient liquidity of investment. The Notes will not be
listed on any securities exchange.
The Notes will be purchased from the Company by the Underwriter and will be
offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The net proceeds to the Company from the sale of the Notes are expected to
be approximately $292,694,671, before the deduction of expenses payable by the
Company estimated to be approximately $1,080,000.
The Notes are offered by the Underwriter subject to prior sale, when, as and
if delivered to and accepted by the Underwriter and subject to cer tain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject any order in whole or in part. It is expected that
delivery of the Notes will be made in book-entry form through the Same Day Funds
Settlement System of The Depository Trust Company as discussed herein, against
payment therefor in immediately available funds.
LEHMAN BROTHERS
The date of this Prospectus Supplement is March 27, 1998
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Notes will represent obligations of the Impac Secured Assets CMN Trust
Series 1998-1 (the "Issuer") which will be formed pursuant to a Trust Agreement
to be dated as of March 25, 1998 (as amended and restated by the Amended and
Restated Trust Agreement dated March 31, 1998, the "Trust Agreement"), between
Impac Secured Assets Corp. (the "Company") and Wilmington Trust Company (the
"Owner Trustee"). The Notes will be issued pursuant to an Indenture to be dated
as of March 31, 1998 (the "Indenture") between the Issuer and Bankers Trust
Company of California, N.A. (the "Indenture Trustee").
The Notes will represent indebtedness of the trust fund (the "Trust Fund")
created by the Trust Agreement. The Trust Fund will be secured by certain
closed-end, fixed-rate mortgage loans (the "Initial Mortgage Loans"), which in
turn will be secured primarily by second mortgages or deeds of trust on one- to
four-family residential properties and any funds on deposit in the Interest
Coverage Account and Pre-Funding Account (each as defined herein). Additional
Mortgage Loans (the "Subsequent Mortgage Loans" and, together with the Initial
Mortgage Loans, the "Mortgage Loans") having an aggregate unpaid principal
balance of up to $33,184,962.50 meeting the criteria set forth herein are
intended to be purchased by the Issuer on or before June 30, 1998, with funds on
deposit in the Pre- Funding Account, which will become part of the Trust Fund.
The proceeds of the Mortgage Loans generally were used by the related borrowers
for debt consolidation. In addition, substantially all of the Mortgage Loans
will be secured by second liens on Mortgaged Properties in which the borrowers
have little or no equity.
The Mortgage Loans were generally underwritten in accordance with the
related underwriting standards described in "Description of the Mortgage
Pool--Underwriting" and Appendix A to this Prospectus Supplement. See also "Risk
Factors--Underwriting Standards" in this Prospectus Supplement. Approximately
28.03% of the Initial Mortgage Loans (by aggregate principal balance as of the
Cut-off Date) are secured by Mortgaged Properties in California. See "Risk
Factors--Potential Delinquencies Due to Geographical Concentration" in this
Prospectus Supplement.
Payments on the Notes 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 April
1998 (each, a "Payment Date"). Interest will accrue on each class of Notes at an
interest rate (the related "Note Interest Rate") which is set forth on the cover
hereof. See "Description of the Notes--Interest Distributions". As described
herein, interest payable on the Notes will accrue on the basis of a 30-day month
and a 360-day year. Payments in respect of principal of the Notes will be made
as described under "Description of the Notes--Principal Distributions".
The Notes may be redeemed in whole, but not in part, by the Issuer on any
Payment Date on or after the Payment Date on which the aggregate Principal
Balance of the Mortgage Loans is less than or equal to 10% of an amount (the
"Cut-off Date Balance") equal to the sum of the aggregate Principal Balance of
such Mortgage Loans as of the Cut-off Date and the amount in the Pre-Funding
Account on the Delivery Date. See "Description of the Notes--Maturity and
Optional Redemption" herein.
The Notes initially will be registered in the name of Cede & Co., as nominee
of The Depository Trust Company ("DTC"), as further described herein. The
interests of beneficial owners of the Notes will be represented by book entries
on the records of DTC and the participating members of DTC. Definitive Notes
will be available for the Notes only under the limited circumstances described
herein.
See "Description of the Notes--Book-Entry Notes" herein.
It is a condition of the issuance of the Senior Notes that they be rated
"Aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA" by Fitch IBCA,
Inc. ("Fitch"). It is a condition to the issuance of the Class M-1 Notes that
they be rated not lower than "Aa2" and "AA" by Moody's and Fitch, respectively.
It is a condition to the issuance of the Class M-2 Notes that they be rated not
lower than "A2" and "A" by Moody's and Fitch, respectively. It is a condition to
the issuance of the Class B-1 Notes that they be rated not lower than "Baa2" and
"BBB" by Moody's and Fitch, respectively.
THE YIELD TO MATURITY ON THE NOTES WILL DEPEND ON, AMONG OTHER THINGS, THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, REPURCHASES,
DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS. IN GENERAL, DEFAULTS ON
MORTGAGE LOANS SECURED BY SECOND LIENS ARE EXPECTED TO OCCUR WITH GREATER
FREQUENCY IN THEIR EARLY YEARS. THE RATE OF DEFAULTS AND THE SEVERITY OF LOSSES
ON SUCH MORTGAGE LOANS SECURED BY SECOND LIENS MAY BE SUBSTANTIALLY HIGHER THAN
MORTGAGE LOANS SECURED BY FIRST LIENS. SEE "RISK FACTORS" HEREIN AND IN THE
PROSPECTUS. IN ADDITION, THE YIELD TO MATURITY OF EACH CLASS OF SUBORDINATE
NOTES 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 OVERCOLLATERALIZATION AMOUNT (AS DEFINED HEREIN) OR BY ANY CLASS OF
SUBORDINATE SECURITIES HAVING A LOWER PAYMENT PRIORITY, AS DESCRIBED HEREIN. THE
MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME. SEE
"CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND "YIELD AND PREPAYMENT
CONSIDERATIONS" IN THE PROSPECTUS.
THE NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF NOTES BEING OFFERED PURSUANT TO THE COMPANY'S PROSPECTUS
DATED MARCH 27, 1998, 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 NOTES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, 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.
S-2
<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.
The Notes............................... $292,395,000 Collateralized
Asset-Backed Notes, Series 1998-1. The
Notes will be issued pursuant to an
Indenture dated as of March 31, 1998
between the Issuer and the Indenture
Trustee.
Issuer.................................. The Notes will be issued by Impac
Secured Assets CMN Trust Series 1998-1
(the "Issuer") a Delaware business
trust established pursuant to a Trust
Agreement, dated as of March 25, 1998
(as amended and restated by the
Amended and Restated Trust Agreement
dated March 31, 1998, the "Trust
Agreement"), between the Company and
the Owner Trustee. The Notes will
represent obligations solely of the
Issuer, and the proceeds of the assets
of the Issuer (such assets, the "Trust
Fund") will be the sole source of
payments on the Notes.
Company................................. Impac Secured Assets Corp. (the
"Company") formerly known as ICIFC
Secured Assets Corp. See "The Company"
in the Prospectus.
Master Servicer and Seller.............. Impac Funding Corporation ("Impac
Funding," the "Master Servicer" or the
"Seller"), formerly known as ICI
Funding Corporation, an affiliate of
the Company. See "Impac Funding" in
the Prospectus and "The Master
Servicer and Subservicers" herein.
Subservicers............................ The Mortgage Loans will be subserviced
by Advanta Mortgage Corp. USA
("Advanta") and by Wendover Funding,
Inc. ("Wendover"). See "The Master
Servicer and Subservicers" herein.
Owner Trustee........................... Wilmington Trust Company, a Delaware
trust company.
Indenture Trustee....................... Bankers Trust Company of California,
N.A., a national banking association.
Cut-off Date............................ With respect to each Initial Mortgage
Loan (as defined herein), the close of
business on February 28, 1998. With
respect to each Subsequent Mortgage
Loan (as defined herein), the date set
forth in the relevant Subsequent
Transfer Instrument (as defined
herein).
S-3
<PAGE>
Delivery Date........................... On or about March 31, 1998.
Payment Date............................ The 25th day of each month (or, if
such day is not a business day, the
next business day), commencing in
April 1998 (each, a "Payment Date").
Note Registration....................... The Notes will be issued, maintained
and transferred on the book-entry
records of DTC and its Participants
(as defined in the Prospectus). The
Notes will be offered in registered
form in the name of Cede & Co., as
nominee of DTC. No Beneficial Owner
will be entitled to receive a Note in
fully registered, certificated form (a
"Definitive Note"), except under the
limited circumstances described
herein. For further registration
information and information regarding
denominations. See "Description of the
Notes" herein.
The Mortgage Pool....................... The Mortgage Loans are closed-end,
fixed-rate mortgage loans. The
proceeds of the Mortgage Loans
generally were used by the related
borrowers for debt consolidation. In
addition, substantially all of the
Mortgage Loans will be secured by
second liens on Mortgaged Properties
in which the borrowers have little or
no equity. The Mortgage Loans are
primarily secured by second liens on
fee simple interests in one- to
four-family residential real
properties (each, a "Mortgaged
Property"). The Initial Mortgage Loans
have an initial aggregate principal
balance as of the Cut-off Date of
approximately $266,815,037.50. At
origination, the Initial Mortgage
Loans had individual principal
balances of at least $10,000 but not
more than $150,000, with an average
original principal balance of
approximately $41,413. The Initial
Mortgage Loans have terms to maturity
from the date of origination or
modification of not more than 25
years, and a weighted average
remaining term to maturity of
approximately 202 months as of the
Cut-off Date. The Initial Mortgage
Loans will bear interest at Mortgage
Rates of at least 9.960% per annum but
not more than 18.750% per annum, with
a weighted average Mortgage Rate of
13.930% per annum as of the Cut-off
Date.
None of the Initial Mortgage Loans
were 30 days or more delinquent as of
the Cut-off Date. Approximately 86.02%
of the Initial Mortgage Loans were
originated by Preferred Credit
Corporation ("Preferred") and
approximately 13.98% of the Initial
Mortgage Loans were originated or
acquired by the Seller. For a further
description of the Mortgage Loans, see
"Description of the Mortgage Pool"
herein.
S-4
<PAGE>
Interest Payments ...................... With respect to any Payment Date,
"Accrued Note Interest" will be equal
to, in respect of each class of Notes,
interest on the Note Principal Balance
thereof at the related Note Interest
Rate. With respect to each Note, the
Note Interest Rate will be the rate
set forth on the cover hereof.
Interest on the Notes will accrue
during the prior calendar month on the
basis of a 30-day month and a 360-day
year.
Principal Distributions................. Holders of the Senior Notes will be
entitled to receive a distribution of
principal on each Payment Date, in the
manner and priority set forth herein,
to the extent of the Senior Principal
Distribution Amount (as defined
herein).
Following the earlier to occur of (i)
the Stepdown Date (as defined herein)
or (ii) the retirement of the Senior
Notes and any Class M Notes senior
thereto, holders of the Class M Notes
will be entitled to receive a
distribution of principal on each
Payment Date, in the manner and
priority set forth herein, to the
extent of the portion of the Principal
Distribution Amount (as defined
herein) remaining after distributions
in respect of principal to the holders
of the Senior Notes and any class of
Class M Notes having a higher payment
priority.
Following the earlier to occur of (i)
the Stepdown Date or (ii) the
retirement of the Senior Notes and the
Class M Notes, holders of the Class
B-1 Notes will be entitled to receive
a distribution of principal on each
Payment Date, in the manner and
priority set forth herein, to the
extent of the portion of the Principal
Distribution Amount remaining after
distributions in respect of principal
to the holders of the Senior Notes and
the Class M Notes.
See "Description of the
Notes--Principal Distributions"
herein.
Net Monthly Excess Cash Flow............ Holders of the Notes then entitled to
payments in respect of principal may
be entitled to receive additional
distributions in respect of principal
(included in the Principal
Distribution Amount) on each Payment
Date to the extent of Net Monthly
Excess Cash Flow. "Net Monthly Excess
Cash Flow" will consist primarily of
(i) the portion, if any, of the
Interest Remittance Amount (as defined
herein) not required to pay Accrued
Note Interest on the Notes, any Unpaid
Interest Shortfall (as defined herein)
on the Notes and Accrued Certificate
Interest on the Class B-2 Certificates
and (ii) the Net Monthly Excess
Principal Amount (as defined herein).
The Net Monthly Excess Cash Flow
generally will be used
S-5
<PAGE>
as follows: (i) first, to pay any
remaining Unpaid Interest Shortfall on
the Senior Notes; (ii) second, as
payments in respect of principal on
the Notes to reduce the
Undercollateralization Amount (as
defined herein) to zero and then to
create overcollateralization until the
Overcollateralization Amount (as
defined herein) has reached the
Required Overcollateralization Amount
(as defined herein); (iii) third, to
pay any remaining Unpaid Interest
Shortfall on the Subordinate
Securities and to reimburse the
Subordinate Securities for any
Realized Losses previously allocated
thereto, in the order of priority
described herein; and (iv) fourth, to
be distributed to the Class X
Certificates (as defined herein).
See "Description of the Notes-Net
Monthly Excess Cash Flow
Distributions" herein.
The Certificates........................ The Certificates will consist of the
Class X Certificates and the Class B-2
Certificates (together, the
"Certificates"). The Certificates will
be issued pursuant to the Trust
Agreement and will represent the
beneficial ownership interests in the
Issuer. The Certificates are not
offered hereby.
Credit Enhancement..................... The credit enhancement provided for
the benefit of the Noteholders
consists solely of (a) the
subordination provisions provided
herein and (b) the
overcollateralization provisions which
utilize the internal cash flows of the
Mortgage Loans.
SUBORDINATION. The rights of the
holders of the Class M-1 Notes to
receive distributions with respect to
the Mortgage Loans will be subordinate
to the rights of the holders of the
Senior Notes, the rights of the
holders of the Class M-2 Notes to
receive distributions with respect to
the Mortgage Loans will be subordinate
to the rights of the holders of the
Senior Notes and the Class M-1 Notes,
and the rights of the holders of the
Class B-1 Notes to receive
distributions with respect to the
Mortgage Loans will be subordinate to
the rights of the holders of the
Senior Notes, the Class M-1 Notes and
the Class M-2 Notes, in each case to
the extent described herein and in the
Prospectus. In addition, following
each Payment Date, Realized Losses on
the Mortgage Loans, to the extent not
covered by the Overcollateralization
Amount (including the Net Monthly
Excess Cash Flow distributed on such
Payment Date) or the Class B-2
Certificates, will be allocated to the
Notes in reverse order of priority as
described herein under "Allocation of
Losses; Subordination."
S-6
<PAGE>
OVERCOLLATERALIZATION. After the
Undercollateralization Amount
(described below) has been reduced to
zero, the Overcollateralization Amount
will be created by distributions of
the Extra Principal Distribution
Amount (as defined herein), if any, to
the Notes and the Class B-2
Certificates. This
Overcollateralization Amount will
increase until it reaches the required
level of overcollateralization (the
"Required Overcollateralization
Amount"), which may increase or
decrease, subject to certain trigger
tests, in accordance with the
provisions of the Indenture. An
increase would result in a temporary
period of accelerated amortization of
the Notes and the Class B-2
Certificates to increase the actual
level of overcollateralization to its
required level; a decrease would
result in a temporary period of
decelerated amortization to reduce the
actual level of overcollateralization
to its required level. As of the
Delivery Date, the Required
Overcollateralization Amount is equal
to 3.50% of an amount (the "Cut-off
Date Balance") equal to the sum of the
aggregate Principal Balance of the
Initial Mortgage Loans as of the
Cut-off Date and the Pre-Funded Amount
as of the Delivery Date. See
"Description of the
Notes--Overcollateralization
Provisions" herein.
As of the Delivery Date, the sum of
the aggregate Note Principal Balance
of the Notes and the Certificate
Principal Balance of the Class B-2
Certificates will exceed the Cut-off
Date Balance by $3,000,000
(approximately 1.00% of the Cut-off
Date Balance) (such excess at any
time, the "Undercollateralization
Amount"), representing an initial
undercollateralization of the Notes
and the Class B-2 Certificates in
relationship to the Initial Mortgage
Loans and the Original Pre-Funded
Amount. On each Payment Date, the
Extra Principal Distribution Amount
will be used first, to eliminate this
initial undercollateralization by
reducing the aggregate Note Principal
Balance of the Notes and the
Certificate Principal Balance of the
Class B-2 Certificates to the sum of
the aggregate Principal Balance of the
Mortgage Loans as of the end of the
related Collection Period and the
Pre-Funded Amount, and then to
increase the Overcollateralization
Amount, until such amount is equal to
the Required Overcollateralization
Amount.
Pre-Funding Account..................... On the Delivery Date, approximately
$33,184,962.50 (the "Original
Pre-Funded Amount") will be deposited
in an account (the "Pre-Funding
Account"), which account is in the
name of the Indenture Trustee and is
part of the Trust Fund and will be
used to acquire Subsequent Mortgage
Loans. During the Funding Period (as
defined below), the Original
S-7
<PAGE>
Pre-Funded Amount will be reduced by
the amount thereof used by the Issuer
to purchase Subsequent Mortgage Loans
from the Seller. The "Funding Period"
is the period commencing on the
Delivery Date and ending on the
earlier to occur of (i) the date on
which the amount on deposit in the
Pre-Funding Account is less than
$10,000 and (ii) June 30, 1998. See
"Description of the Mortgage Pool --
Conveyance of Subsequent Mortgage
Loans and the Pre-Funding Account"
herein.
Interest Coverage Account............... On the Delivery Date, a portion of the
sales proceeds of the Notes will be
deposited in an account (the "Interest
Coverage Account") for application by
the Indenture Trustee to cover
shortfalls in Accrued Note Interest on
the Notes attributable to the
Pre-Funding feature during the Funding
Period. Any amounts remaining in the
Interest Coverage Account at the end
of the Pre-Funding Period will be paid
to the Seller. See "Description of the
Notes-- Interest Coverage Account"
herein.
Mandatory Prepayments on
the Notes............................. The Notes will be prepaid in part on
the Payment Date immediately following
the end of the Funding Period in the
event that any amount remains on
deposit in the Pre-Funding Account on
such Payment Date after the purchase
by the Issuer of the Subsequent
Mortgage Loans, if any. Although no
assurance can be given, it is
anticipated that the principal amount
of the Subsequent Mortgage Loans
purchased by the Issuer will require
the application of substantially all
of the Original Pre-Funded Amount and
that there should be no material
amount of principal prepaid to the
Notes from the Pre-Funding Account.
However, it is unlikely that the
Seller will be able to sell Subsequent
Mortgage Loans to the Issuer with an
aggregate Principal Balance identical
to the Original Pre-Funded Amount and,
therefore, a prepayment will likely
occur. See "Description of the
Notes--Mandatory Prepayments on the
Notes" herein.
Advances................................ The Master Servicer is required to
make advances ("Advances") in respect
of delinquent payments of interest on
the Mortgage Loans, subject to the
limitations described herein. See
"Description of the Notes--Advances"
herein and in the Prospectus.
Allocation of Losses;
Subordination.......................... On each Payment Date following the
application of all amounts
distributable on such date, to the
extent the sum of the aggregate
Principal Balance of the Mortgage
Loans and
S-8
<PAGE>
the Pre-Funded Amount is less than the
sum of the aggregate Note Principal
Balance of the Notes and the
Certificate Principal Balance of the
Class B-2 Certificates due to Realized
Losses, the Note Principal Balances of
the Subordinate Notes and the
Certificate Principal Balance of the
Class B-2 Certificates shall be
reduced as follows, until such
deficiency is fully allocated: first,
the Certificate Principal Balance of
the Class B-2 Certificates shall be
reduced, until the Certificate
Principal Balance thereof has been
reduced to zero; second, the Note
Principal Balance of the Class B-1
Notes shall be reduced, until the Note
Principal Balance thereof has been
reduced to zero; third, the Note
Principal Balance of the Class M-2
Notes shall be reduced, until the
related Note Principal Balance has
been reduced to zero; and fourth, the
Note Principal Balance of the Class
M-1 Notes shall be reduced, until the
related Note Principal Balance has
been reduced to zero. The Note
Principal Balances of the Senior Notes
will not be so reduced and such Notes
will continue to receive Accrued Note
Interest on their balance subject to
available funds. Any loss allocated to
a Subordinate Security may be repaid,
to the extent funds are available
therefor, through the application of
the Net Monthly Excess Cash Flow as
described above.
Maturity and Optional
Redemption of the Notes............... The Notes will be payable in full on
the related Final Scheduled Payment
Date (as defined herein), to the
extent of the related outstanding Note
Principal Balance on such date. In
addition, the Notes may be redeemed in
whole, but not in part, by the Issuer
on any Payment Date on or after the
Payment Date on which the aggregate
Principal Balance (as defined herein)
of the Mortgage Loans is less than or
equal to 10% of the Cut-off Date
Balance.
See "Description of the
Notes--Maturity and Optional
Redemption" herein and "The
Agreements--Termination; Redemption of
Notes" in the Prospectus.
Special Prepayment
Considerations........................ The rate and timing of principal
payments on the Notes will depend,
among other things, on the rate and
timing of principal payments
(including prepayments, defaults,
liquidations and purchases of the
Mortgage Loans due to a breach of a
representation or warranty) on the
Mortgage Loans. As is the case with
mortgage-backed securities generally,
the Notes are subject to substantial
inherent cash- flow uncertainties
because the Mortgage Loans may be
prepaid at any time. Generally, when
prevailing interest rates
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<PAGE>
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.
In addition, since mortgage loans
secured by second liens are not
generally viewed by borrowers as
permanent financing and generally
carry a higher rate of interest than
mortgage loans secured by first liens,
the Mortgage Loans may experience a
higher rate of prepayments than
traditional mortgage loans. In
addition, the rate of default on
second mortgage loans may be greater
than that of mortgage loans secured by
first liens. See "Certain Yield and
Prepayment Considerations--General"
herein.
The multiple class structure of Notes
results in the allocation of
prepayments among certain classes as
follows:
SENIOR NOTES: The Senior Notes are
subject to various priorities for
payment of principal as described
herein. Distributions of principal on
classes of Senior Notes 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 the classes of Senior Notes
with a later priority of payment will
be affected by the rates of prepayment
of the Mortgage Loans experienced both
before and after the commencement of
principal distributions on such
classes. In addition, distributions of
the Extra Principal Distribution
Amount to the Senior Notes will result
in an accelerated reduction of the
Note Principal Balance thereof until
the Overcollateralization Amount is
equal to the Required
Overcollateralization Amount. Realized
Losses, to the extent resulting in a
reduction of the Overcollateralization
Amount, will also result in an
accelerated payment with respect to
principal on the Senior Notes.
NOTES 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 Notes in the
aggregate and, during certain periods,
no principal payments will be
distributed to the Subordinate
Securities. Unless the Note Principal
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Balances of the Senior Notes have been
reduced to zero, the Subordinate
Securities will not be entitled to
receive distributions of principal
until the Stepdown Date. To the extent
that no principal payments are
distributed on the Subordinate
Securities, the Subordination afforded
the Senior Notes by the Subordinate
Securities (together with the
Overcollateralization Amount), in the
absence of offsetting Realized Losses
allocated thereto, will be increased,
and the weighted average lives of the
Subordinate Securities will be
extended.
In addition, investors in each class
of Subordinate Notes should be aware
that on and after the Payment Date on
which the Overcollateralization Amount
has been reduced to approximately
$1,500,000, the most subordinate class
of Subordinate Securities then
outstanding may receive more than such
class' pro rata share of the Principal
Distribution Amount for such Payment
Date.
See "Description of the Notes--
Principal Distributions" and "Certain
Yield and Prepayment Considerations"
herein and "Yield and Prepayment
Considerations" in the Prospectus. For
further information regarding the
effect of principal prepayments on the
weighted average lives of the Notes,
see the tables entitled "Percent of
Initial Note Principal Balance
Outstanding at the Following
Percentages of the Prepayment
Assumption" herein.
See "Certain Yield and Prepayment
Considerations" herein, and "Maturity
and Prepayment Considerations" in the
Prospectus.
Special Yield
Considerations....................... The multiple class structure of the
Notes 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:
NOTES WITH SUBORDINATION FEATURES: The
yield to investors on each class of
Subordinate Notes and particularly on
those classes of such Subordinate
Notes 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 Overcollateralization Amount
(including overcollateralization
created by the Net Monthly Excess Cash
Flow) or by any other class of
Subordinate Securities having a lower
payment priority, because the entire
amount of such losses that are covered
by
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<PAGE>
Subordination will be allocable to
such class or classes of Subordinate
Notes or as described herein.
Investors in each class of Subordinate
Notes should also be aware that on any
Payment Date prior to the Stepdown
Date, such class of Subordinate Notes
will not be entitled to distributions
of principal until the Note Principal
Balances of the Senior Notes and each
class of Subordinate Notes senior
thereto have been reduced to zero.
See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
The yield to maturity on the Notes
will depend on, among other things,
the rate and timing of principal
payments (including prepayments,
defaults, liquidations and purchases
of the Mortgage Loans due to a breach
of a representation or warranty) on
the Mortgage Loans and the allocation
thereof to reduce the Note Principal
Balance thereof. The yield to maturity
on the Notes will also depend on the
related Note Interest Rate and the
purchase price for such Notes.
If a class of Notes is purchased at a
premium and principal payments thereon
occur at a rate faster than
anticipated at the time of purchase,
the investor's actual yield to
maturity will be lower than that
assumed at the time of purchase.
Similarly, if a class of Notes is
purchased at a discount and principal
payments thereon occur at a rate
slower than that assumed at the time
of purchase, the investor's actual
yield to maturity will be lower than
that assumed at the time of purchase.
The Notes 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 Notes may vary as
determined at the time of sale.
See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
Federal Income Tax
Consequences........................... In the opinion of Tax Counsel (as
defined in the Prospectus), for
federal income tax purposes, each
class of Notes will be characterized
as indebtedness and not as
representing an ownership interest in
the Trust Fund or an equity interest
in the Issuer or the Company. In
addition, for federal income
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<PAGE>
tax purposes, the Issuer will not be
(i) classified as an association
taxable as a corporation for federal
income tax purposes, (ii) a taxable
mortgage pool as defined in Section
7701(i) of the Code, or (iii) a
"publicly traded partnership" as
defined in Treasury Regulation Section
1.7704-1.
For further information regarding
certain federal income tax
consequences of an investment in the
Notes see "Federal Income Tax
Consequences" herein and "Federal
Income Tax Consequences" and "State
and Other Tax Consequences" 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 Notes could give rise
to a transaction prohibited or not
otherwise permissible under ERISA or
the Code. See "ERISA Considerations"
herein.
Legal Investment........................ The Notes will not constitute
"mortgage related securities" for
purposes of SMMEA. See "Legal
Investment" herein and in the
Prospectus.
Rating.................................. It is a condition of the issuance of
the Senior Notes that they be rated
"Aaa" by Moody's Investors Service,
Inc. ("Moody's") and "AAA" by Fitch
IBCA, Inc. ("Fitch"). It is a
condition to the issuance of the Class
M-1 Notes that they be rated not lower
than "Aa2" and "AA" by Moody's and
Fitch, respectively. It is a condition
to the issuance of the Class M-2 Notes
that they be rated not lower than "A2"
and "A" by Moody's and Fitch,
respectively. It is a condition to the
issuance of the Class B-1 Notes that
they be rated not lower than "Baa2"
and "BBB" by Moody's and Fitch,
respectively. A security rating is not
a recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time by
the assigning rating organization. A
security rating does not address the
frequency of prepayments of Mortgage
Loans, or the corresponding effect on
yield to investors.
See "Certain Yield and Prepayment
Considerations" and "Ratings" herein.
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<PAGE>
RISK FACTORS
Prospective Noteholders 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 Notes:
SUBORDINATION
The yield to investors on each class of Subordinate Notes and
particularly on such classes of Subordinate Notes 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
Overcollateralization Amount (including overcollateralization created by the Net
Monthly Excess Cash Flow), or by any class of Subordinate Securities 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
Subordinate Notes as described herein. Furthermore, as described herein, the
timing of receipt of principal and interest by any class of Subordinate Notes
may be adversely affected by losses even if such class does not ultimately bear
such loss.
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 Notes and, during certain periods, no principal
payments will be distributed to the Subordinate Notes. Unless the Note Principal
Balances of the Senior Notes have been reduced to zero, the Subordinate Notes
will not be entitled to receive distributions of principal until the Stepdown
Date. To the extent that no principal payments are distributed on the
Subordinate Notes, the Subordination afforded the Senior Notes by the
Subordinate Notes (together with the Overcollateralization Amount (including
overcollateralization created by the Net Monthly Excess Cash Flow)), in the
absence of offsetting Realized Losses allocated thereto, will be increased, and
the weighted average lives of the Subordinate Notes will be extended.
In addition, investors in each class of Subordinate Notes should be
aware that on and after the Payment Date on which the Overcollateralization
Amount has been reduced to approximately $1,500,000, the most subordinate class
of Subordinate Notes then outstanding may receive more than such class' pro rata
share of the Principal Distribution Amount for such Payment Date.
RISKS ASSOCIATED WITH THE MORTGAGE LOANS
Since substantially all of the Mortgage Loans are subordinate to the
rights of the mortgagee under the related senior mortgage, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of such Mortgage Loans secured by subordinate mortgages
only to the extent that the claims of such senior mortgages have been satisfied
in full, including any related foreclosure costs. In circumstances when it is
determined to be uneconomical to foreclose on the Mortgaged Property, the Master
Servicer may write off the entire outstanding balance of such Mortgage Loan as a
bad debt. The foregoing considerations will be particularly applicable to
Mortgage Loans secured by junior liens that have high Combined Loan-to-Value
Ratios (as defined herein) because it is comparatively more likely that the
Master Servicer would determine foreclosure to be uneconomical in the case of
such Mortgage Loans. 92.02% of the Initial Mortgage Loans (by principal balance
as of the Cut-off Date) will have Combined Loan-to-Value Ratios in excess of
100%. Such Mortgage Loans were originated with a limited expectation of
recovering any amounts from the foreclosure of the related Mortgaged Property
and are underwritten with an emphasis on the creditworthiness of the related
borrower. If such Mortgage Loans go into foreclosure and are liquidated, there
may be no amounts recovered from the related Mortgaged Property unless the value
of the property increases or the principal amount of the related senior liens
have been reduced such as to reduce the current Combined Loan-to- Value Ratio of
the Mortgage Loan to below 100%. To the extent that any losses are incurred on
any of the
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<PAGE>
Mortgage Loans that are not covered by a reduction in the Overcollateralization
Amount or by any Subordinate Securities subordinate thereto, the holders of the
Senior Notes will bear all risk of such losses resulting from default by
Mortgagors.
Defaults on mortgage loans are generally expected to occur with greater
frequency in their early years. The rate of default and the severity of losses
of second lien mortgage loans may be greater than that of mortgage loans secured
by first liens on comparable properties.
UNDERWRITING STANDARDS
Approximately 86.02% of the Initial Mortgage Loans were originated by
Preferred Credit Corporation ("Preferred") and approximately 13.98% of the
Initial Mortgage Loans were originated or acquired by the Seller (together with
Preferred, the "Originators"), in accordance with the standards described in
"Description of the Mortgage Pool--Underwriting--Mortgage Loans" below and
Appendix A attached hereto. The underwriting standards of the Originators are
generally less stringent than those of FNMA or FHLMC for first lien, single
family mortgage loans with respect to a borrower's capacity to repay, collateral
and in certain other respects. The Mortgage Loans originated by the Originators
will have been made to borrowers that typically have limited access to
traditional mortgage financing for a variety of reasons, such as insufficient
home equity value, high level of debt-to-income ratios, past credit experience
or a limited credit history. The Originators consider the underwriting policy
under which the Mortgage Loans are underwritten to be analogous to credit
lending, rather than equity lending, since its underwriting decisions are based
primarily on the borrower's credit history and capacity to repay rather than on
the potential value of the collateral upon foreclosure. Accordingly, the
Originator's underwriting standards allow loans to be approved with Combined
Loan-to-Value Ratios of up to approximately 125%. Because of the relatively high
Combined Loan-to-Value Ratios of the Mortgage Loans and the fact that the
Mortgage Loans are secured by subordinate liens, losses on the Mortgage Loans
may be higher than loans written in conformity with FNMA or FHLMC standards for
first lien, single family mortgage loans.
RECENT DEVELOPMENTS IN THE BANKRUPTCY LAW AND THE MORTGAGE LOANS
The Bankruptcy Reform Act of 1994 established the National Bankruptcy
Review Commission ("NBRC") for purposes of analyzing the nation's bankruptcy
laws and making recommendations to Congress for legislative changes to the
bankruptcy laws. A similar commission was involved in developing the Bankruptcy
Code. The NBRC delivered its report to Congress, the President of the United
States and the Chief Justice of the Supreme Court on October 20, 1997. Among
other topics, high leverage loans were addressed in the NBRC's report. Despite
certain ambiguities, the NBRC's report appears to recommend that Congress amend
Bankruptcy Code section 1322(b)(2) by treating a claim secured only by a junior
security interest in a borrower's principal residence as protected ONLY to the
extent that the claim was secured when the security interest was made if the
value of the property securing the junior security interest is less than such
amount. However, the express language of the report implies that a claim secured
only by a junior security interest in a borrower's principal residence may not
be modified to reduce such claim below the appraised value of the property at
the time the security interest was made. A strong dissent by certain members of
the NBRC recommends that the protections of Bankruptcy Code section 1322(b)(2)
be extended to creditors principally secured by the borrower's principal
residence. Additionally, the NBRC's report recommends that a creditor's secured
claim in real property should be determined by the property's fair market value,
less hypothetical costs of sale. The standard advocated by this recommendation
would not apply to mortgages on the primary residence of a Chapter 11 or 13
borrower who retains the residence if such mortgages are protected from
modification such as those senior mortgages not subject to modification pursuant
to Bankruptcy Code Sections 1322(b)(2) and 1123(b)(5). The final NBRC report may
ultimately lead to substantive changes to the existing Bankruptcy Code, such as
reducing outstanding loan balances to the appraised value of a borrower's
principal residence at the time the security
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<PAGE>
interest in the property was taken, which could affect the Mortgage Loans and
the enforcement of rights therein.
SPECIAL LEGAL CONSIDERATIONS
The Mortgage Loans are subject to Federal laws, including:
(i) the Federal Truth in Lending Act, as amended by the Homeownership Act
(as defined below) and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Mortgage Loans;
(ii) the Real Estate Settlement Procedures Act, and Regulation X
promulgated thereunder, which requires disclosures related to settlement
services associated with any federally Mortgage Loan and establishes criminal
penalties for improper referrals and fee-splitting arrangements involving
settlement service business;
(iii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; and
(iv) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience.
Violations of certain provisions of these Federal laws may limit the
ability of the Master Servicer or any Subservicer to collect all or part of the
principal of or interest on the Mortgage Loans and in addition could subject the
Trust Fund to damages and administrative enforcement. In particular, the
originators' failure to comply with certain requirements of the Federal
Truth-in-Lending Act, as implemented by Regulation Z, could subject the Trust
Fund (and other assignees of the Mortgage Loans) to monetary penalties, and
result in the obligors' rescinding the Mortgage Loans against either the Trust
Fund or subsequent holders of the Mortgage Loans. In addition, the Mortgage
Loans are also subject to the Home Ownership and Equity Protection Act of 1994
(the "Homeownership Act") (such mortgage loans, "High Cost Loans"), if such
Mortgage Loans were originated on or after October 1, 1995, are not mortgage
loans made to finance the purchase of the mortgaged property and have interest
rates or origination costs in excess of certain prescribed levels. The
Homeownership Act requires certain additional disclosures, specifies the timing
of such disclosures and limits or prohibits inclusion of certain provisions in
mortgages subject to the Homeownership Act. Remedies available to the mortgagor
include monetary penalties, as well as recission rights if the appropriate
disclosures were not given as required or if the particular mortgage includes
provisions prohibited by the law. The Homeownership Act also provides that any
purchaser or assignee of a mortgage covered by the Homeownership Act is subject
to all of the claims and defenses to loan payment, whether under the Federal
Truth-in-Lending Act, as amended by the Homeownership Act or other law, which
the borrower could assert against the original lender unless the purchaser or
assignee did not know and could not with reasonable diligence have determined
that the Mortgage Loan was subject to the provisions of the Homeownership Act.
The maximum damages that may be recovered under the Homeownership Act from an
assignee is the remaining amount of indebtedness plus the total amount paid by
the borrower in connection with the Mortgage Loan. If the Trust Fund owns
Mortgage Loans subject to the Homeownership Act, it will be subject to all of
the claims and defenses which the borrower could assert against the Seller (as
defined herein). Any violation of the Homeownership Act which would result in
such liability would be a breach of the Seller's representations and warranties,
and the Seller would be obligated to cure, repurchase or, if permitted by the
Mortgage
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<PAGE>
Loan Purchase Agreement, substitute for the Mortgage Loan in question. See
"Certain Legal Aspects of the Mortgage Loans" in the Prospectus.
RECENT DEVELOPMENTS REGARDING PREFERRED CREDIT CORPORATION RELATING
TO THE PREFERRED MORTGAGE LOANS
The originator of approximately 86.02% of the Initial Mortgage Loans,
Preferred Credit Corporation ("Preferred"; and such Mortgage Loans, the
"Preferred Mortgage Loans"), was recently subject to examination by the
California Department of Corporations (the "CDC") and the California Department
of Real Estate (the "CDRE"). On or about March 1997, the CDC received complaints
from California borrowers that Preferred was not remitting loan proceeds to such
borrowers in a timely fashion. The CDC commenced a regulatory examination on
April 1, 1997 in response to these complaints. The examination confirmed the
validity of the complaints and that Preferred had also improperly charged
borrowers interest on their mortgage loans prior to the actual disbursement of
funds. Such practices were characterized by the CDC as "widespread" and in
violation of several provisions of the California Residential Mortgage Lender
Law (the "RML Law"). The examination also determined that Preferred had altered
and falsified its books and records in connection with such practices, and that
its principals had falsified and/or misrepresented information to the CDC.
On June 23, 1997, the CDC issued an Order to Refund Excess Interest to
Preferred pursuant to FC 50504, as well as commenced administrative proceedings
to revoke Preferred's license and to bar its principals from the industry.
Following the June 1997 Order, Preferred and its principals entered into a
Settlement with the CDC requiring the parties, among other things, to pay a $1
million civil money penalty for RML Law violations and, to the extent that any
interest accrual period on loans funded by Preferred since March 1, 1996
commenced prior to the actual disbursement of checks to customers, Preferred is
to refund such excess interest charged plus 10 percent interest.
A compliance review of all the Preferred Mortgage Loans was performed by
independent consultants to ensure that the types of violations discovered by the
CDC and the CDRE would not give rise to claims, defenses, or liabilities that
could be asserted against an assignee of the Preferred Mortgage Loans. Such
compliance review included procedures to determine whether such loans complied
with California state laws and Federal laws. Based on the results of such
compliance reviews, the Preferred Mortgage Loans include only those loans which
were either (i) not in violation of California state law and/or Federal law or
(ii) had been in violation of either California state law and/or Federal law,
but that such violation had been fully cured prior to the Delivery Date and
hence, would not subject the holder or subsequent assignee to monetary liability
or result in the loan being rescinded against either the holder or subsequent
assignee thereof.
The Seller has received an opinion of counsel from Wolf & Richards, A Law
Corporation (the "Wolf & Richards Opinion") that addresses the compliance
violations noted by the independent consultants and concludes that the manner in
which any of the violations of California state law and/or Federal law related
to the Preferred Mortgage Loans were cured leaves no residual risk of either (i)
liability to a holder or other assignee of such mortgage loans for (a) monetary
penalties, or (b) other possible claims and defenses that may be raised by the
obligor, or (ii) rescission by the obligor of the mortgage loans against either
the holder of such mortgage loans or a subsequent assignee thereof. The Wolf &
Richards Opinion relies on the factual matters set forth in the report of the
independent consultants, as well as certain documentation and certifications
from the Seller in reaching its conclusions. In addition, the Seller will make
representations and warranties in connection with the Mortgage Loans and
repurchase from the Trust Fund any such loan which had violations of any state
or Federal law which were not satisfactorily cured that materially and adversely
affect the Noteholders.
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<PAGE>
To the extent that the above procedures are inadequate to identify all
mortgage loans that could be subject to violations under Federal or state law
that may give rise to claims, defenses, or liabilities as specified above, and
any such mortgage loans are not repurchased by the Seller, such Mortgage Loans
may be subject to a recission right of the borrower, and expose the Trust Fund
holding the Mortgage Loans to significant monetary liability. Any resulting
losses may result in the allocation of losses to the Notes which are not covered
by overcollateralization or by Subordinate Notes subordinate thereto.
POTENTIAL DELINQUENCIES DUE TO GEOGRAPHICAL CONCENTRATION
Approximately 28.03% of the Initial Mortgage Loans (by aggregate
outstanding principal balance as of the Cut-off Date), are secured by Mortgaged
Properties located in the State of California. In the event California
experiences a decline in real estate values, losses on the Mortgage Loans may be
greater than otherwise would be the case.
RISKS OF PORTABLE LIENS
Certain of the Initial Mortgage Loans will include provisions allowing the
related borrower to transfer the Mortgage Loan to another Mortgaged Property
subject to certain requirements as described herein. Although the Combined
Loan-to-Value Ratio of the new lien will be less than or equal to that of the
prior lien, there can be no guarantee that the new Mortgage Property will
provide sufficient collateral for the related Mortgage Loan. See "Description of
the Mortgage Pool--General" herein.
LIMITED HISTORICAL DELINQUENCY AND FORECLOSURE EXPERIENCE
Impac Funding has limited historical delinquency and 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 underwriting
standards described herein, which include those of non-related bulk purchasers.
In particular, Impac Funding has only recently began acquiring mortgage loans
similar to the Mortgage Loans, and has no historical delinquency and default
experience with respect to the Mortgage Loans. See "The Mortgage
Pool--Delinquency and Foreclosure Experience of Impac Funding" and
"--Delinquency and Foreclosure Experience of Impac Funding" herein.
LEGAL PROCEEDINGS
On March 5, 1997, Fortune Mortgage filed a complaint against various
parties, including the Master Servicer and the Seller 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 Imperial Credit Industries, Inc.
("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 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 Servicing Agreement.
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<PAGE>
A financial institution has contended it has a claim against Impac
Mortgage Holdings, Inc. ("IMH"), formerly known as Imperial Mortgage Holdings,
Inc., in connection with certain communications between IMH 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. IMH 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 IMH to perform its obligations as guarantor under the Mortgage Loan Purchase
Agreement (as defined herein).
THE SUBSEQUENT MORTGAGE LOANS
Subsequent Mortgage Loans may have characteristics different from those
of the Initial Mortgage Loans. However, each Subsequent Mortgage Loan must
satisfy the eligibility criteria referred to herein under "Description of the
Mortgage Pool--Conveyance of Subsequent Mortgage Loans and the Pre-Funding
Account" at the time of its conveyance to the Trust Fund and must be
underwritten in accordance with the criteria set forth herein under "Description
of the Mortgage Pool--Underwriting."
MANDATORY PREPAYMENT
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the
Issuer by the end of the Funding Period, the holders of the Notes will receive,
as described herein, on the Payment Date immediately following the end of the
Funding Period, any amounts in the Pre-Funding Account after giving effect to
any purchase of Subsequent Mortgage Loans. Although no assurances can be given,
the Company intends that the principal amount of Subsequent Mortgage Loans sold
to the Trust Fund will require the application of substantially all amounts on
deposit in the Pre-Funding Account and that there will be no material principal
payment to the Notes on such Payment Date.
See "Risk Factors" in the Prospectus for a description of certain other
risks and special considerations applicable to the Notes.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement
describes only the mortgage loans included in the Trust Fund as of the Delivery
Date (the "Initial Mortgage Loans") and does not include mortgage loans
purchased by the Issuer and included in the Trust Fund after the Delivery Date
(the "Subsequent Mortgage Loans" and, together with the Initial Mortgage loans,
the "Mortgage Loans").
Subsequent Mortgage Loans are intended to be purchased by the Issuer
from the Seller from time to time on or before June 30, 1998, from funds on
deposit in the Pre-Funding Account. The Subsequent Mortgage Loans, if available,
will be sold by the Seller to the Issuer for inclusion in the Trust Fund. The
Purchase Agreement (as defined below) will provide that the Subsequent Mortgage
Loans must conform to certain specified characteristics described below under
"--Conveyance of Subsequent Mortgage Loans and the Pre-Funding Account."
The Initial Mortgage Loans had an aggregate outstanding principal balance
as of the Cut-off Date of approximately $266,815,037.50 (the "Cut-off Date
Balance"). The Mortgage Loans will consist of closed-end, fixed-rate mortgage
loans, which in turn will be secured primarily by second mortgages or deeds of
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trust on one- to four-family residential properties. The proceeds of the
Mortgage Loans generally were used by the related borrowers for debt
consolidation. In addition, substantially all of the Mortgage Loans will be
secured by second liens on Mortgaged Properties in which the borrowers have
little or no equity. Approximately 86.02% of the Initial Mortgage Loans were
originated by Preferred and will be subserviced by Advanta and approximately
13.98% of the Initial Mortgage Loans were originated or acquired by the Seller
and will be subserviced by Wendover. The Initial Mortgage Loans were originated
or acquired substantially in accordance with the underwriting criteria described
herein under "--Underwriting" below and in Appendix A. The Company will acquire
the Initial Mortgage Loans from Impac Funding (in such capacity, the "Seller"),
the parent of the Company, pursuant to a Mortgage Loan Purchase Agreement dated
the Delivery Date (the "Mortgage Loan Purchase Agreement"), between the Seller,
the Company, IMH, as guarantor, the Indenture Trustee and the Issuer. The
Company will convey the Initial Mortgage Loans to the Issuer on the Delivery
Date pursuant to the Trust Agreement. The Seller will make certain
representations and warranties with respect to the Mortgage Loans in the
Mortgage Loan Purchase Agreement and, as more particularly described in the
Prospectus, will have certain repurchase or substitution obligations in
connection with a breach of any such representation or warranty, as well as in
connection with an omission or defect in respect of certain constituent
documents required to be delivered with respect to the Mortgage Loans, in any
event if such breach, omission or defect cannot be cured and it materially and
adversely affects the interests of holders of the Notes and the Certificates. In
the event Impac Funding is unable to repurchase a Mortgage Loan in connection
with a breach of a representation or warranty, such Mortgage Loan will be
repurchased by IMH. In addition, with respect to the Preferred Mortgage Loans,
the Seller will assign to the Trust Fund its rights under the purchase agreement
whereby such loans were acquired from Preferred. See "Description of the
Mortgage Pool--Representations by Sellers" and "Description of the
Notes--Assignment of Trust Fund Assets" in the Prospectus.
None of the Mortgage Loans will be covered by a Primary Insurance Policy.
In addition, none of the Mortgage Loans will be covered by a hazard insurance
policy or flood insurance. See "Primary Mortgage Insurance, Hazard Insurance;
Claims Thereunder" the Prospectus.
PORTABLE LOANS AND REFINANCING OF SENIOR LIENS
Certain of the Initial Mortgage Loans will include provisions allowing the
related borrower to transfer the Mortgage Loan to another Mortgaged Property.
This transfer will only be permitted if the following requirements are met: (i)
the Combined Loan-to-Value Ratio of the Mortgage Loan after such transfer must
be less than or equal to the original Combined Loan-to-Value Ratio, (ii) the
Loan-to-Value Ratio of the first lien on the new Mortgaged Property must be less
than or equal to the Loan-to-Value Ratio of the first lien on the prior Mortgage
Property at the time the related Mortgage Loan was originated, and (iii) both
the original and the new Mortgaged Property must be a single-family owner
occupied property.
In addition, the Servicing Agreement will provide that with respect to any
Mortgage Loan the Master Servicer may allow the refinancing of a senior lien on
the related Mortgaged Property provided that certain requirements are met,
including, except under certain limited circumstances, that the resulting
Combined Loan-to-Value Ratio of such Mortgage Loan is no higher than the
Combined Loan-to-Value prior to such refinancing and the interest rate on the
refinanced senior loan is no higher than the interest rate on the prior senior
loan.
MORTGAGE LOAN CHARACTERISTICS
The earliest date of first payment of any Initial Mortgage Loan is February
12, 1996. None of the Initial Mortgage Loans will have a maturity date later
than April 1, 2023. No Initial Mortgage Loan will have a remaining term from
March 1, 1998, to the stated maturity thereof (a "Remaining Term") of less than
46 months. The weighted average Remaining Term of the Initial Mortgage Loans as
of the Cut-off
S-20
<PAGE>
Date will be approximately 202 months. The weighted average original term to
stated maturity of the Initial Mortgage Loans as of the Cut-off Date will be
approximately 208 months. All of the Mortgage Loans have principal and interest
payable monthly on various days of each month as specified in the Mortgage Note
(the "Due Date"). 92.02% of the Initial Mortgage Loans will be secured by
mortgages or deeds of trust on property in which the borrower has no equity
because the related Combined Loan-to-Value Ratio at the time of origination
exceeds 100%.
With respect to each Mortgage Loan, the "Combined Loan-to-Value Ratio" is
the ratio, expressed as a percentage, equal to the sum of any outstanding senior
lien's mortgage balance at the time such loan was originated plus the original
balance of the Mortgage Loan divided by the appraised value of the related
Mortgage Property. In the instance where more than one appraisal was performed
on the subject property, the lesser of the two values was used to determine the
Combined Loan-to-Value Ratio.
All of the Mortgage Loans were made with respect to owner-occupied
Mortgaged Properties.
99.55% and 0.45% of the Mortgage Loans are secured by second liens or first
liens, respectively, on the related Mortgaged Property.
No Mortgage Loan provides for deferred interest, negative amortization or
future advances.
S-21
<PAGE>
Set forth below is a description of certain additional characteristics of
the Initial Mortgage Loans as of the Cut-off Date (except as otherwise
indicated). All percentages of the Initial Mortgage Loans are approximate
percentages (except as otherwise indicated) by the Cut-off Date Balance. Unless
otherwise specified, all principal balances of the Initial Mortgage Loans are as
of the Cut-off Date.
<TABLE>
<CAPTION>
CURRENT BALANCES OF THE INITIAL MORTGAGE LOANS AS OF THE CUT-OFF DATE
PERCENTAGE OF
CURRENT NUMBER OF CUT-OFF DATE
MORTGAGE LOAN INITIAL AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 10,000.00 9 $ 74,255.54 0.03%
10,000.01 - 20,000.00................. 347 6,020,437.97 2.26
20,000.01 - 30,000.00................. 1,364 35,736,023.48 13.39
30,000.01 - 40,000.00................. 1,892 66,812,191.68 25.04
40,000.01 - 50,000.00................. 1,526 70,546,352.60 26.44
50,000.01 - 60,000.00................. 752 41,153,921.30 15.42
60,000.01 - 70,000.00................. 376 24,176,126.03 9.06
70,000.01 - 80,000.00................. 176 13,036,813.72 4.89
Greater than 80,000.00................ 91 9,258,915.18 3.47
------ --------------- ------
Total............................ 6,533 $266,815,037.50 100.00%
====== =============== ======
</TABLE>
As of the Cut-off Date, the average current principal balance of the
Initial Mortgage Loans will be approximately $40,841.
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF THE INITIAL MORTGAGE LOANS AT ORIGINATION
PERCENTAGE OF
ORIGINAL NUMBER OF CUT-OFF DATE
MORTGAGE LOAN INITIAL AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------- --------------- ------------------- -----------------
<S> <C> <C> <C>
0.01 - 10,000.00................. 7 $ 69,289.79 0.03%
10,000.01 - 20,000.00................. 338 5,837,938.67 2.19
20,000.01 - 30,000.00................. 1,344 35,101,979.06 13.16
30,000.01 - 40,000.00................. 1,887 66,334,382.36 24.86
40,000.01 - 50,000.00................. 1,544 71,029,425.07 26.62
50,000.01 - 60,000.00................. 761 41,508,301.39 15.56
60,000.01 - 70,000.00................. 380 24,340,729.53 9.12
70,000.01 - 80,000.00................. 181 13,334,076.45 5.00
Greater than 80,000.00................ 91 9,258,915.18 3.47
------ --------------- ------
Total............................ 6,533 $266,815,037.50 100.00%
====== =============== ======
</TABLE>
As of the Cut-off Date, the average original principal balance of the
Initial Mortgage Loans will be approximately $41,413.
S-22
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES OF THE INITIAL MORTGAGE LOANS
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
9.501 - 10.000........................... 1 $ 22,019.36 0.01%
10.001 - 10.500........................... 1 36,418.98 0.01
10.501 - 11.000........................... 22 1,028,866.09 0.39
11.001 - 11.500........................... 8 383,218.17 0.14
11.501 - 12.000........................... 366 16,940,903.49 6.35
12.001 - 12.500........................... 485 21,747,646.54 8.15
12.501 - 13.000........................... 852 36,743,579.36 13.77
13.001 - 13.500........................... 506 21,484,948.13 8.05
13.501 - 14.000........................... 1,731 70,625,357.08 26.47
14.001 - 14.500........................... 575 24,265,332.63 9.09
14.501 - 15.000........................... 946 36,550,328.16 13.70
15.001 - 15.500........................... 432 14,694,638.71 5.51
15.501 - 16.000........................... 383 14,649,508.78 5.49
16.001 - 16.500........................... 96 3,219,941.15 1.21
16.501 - 17.000........................... 95 3,432,964.71 1.29
17.001 - 17.500........................... 19 594,299.58 0.22
17.501 - 18.000........................... 12 297,484.13 0.11
18.001 - 18.500........................... 2 47,703.36 0.02
18.501 - 19.000........................... 1 49,879.09 0.02
----- ----------------- ------
Total................................ 6,533 $ 266,815,037.50 100.00%
===== ================= ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Initial
Mortgage Loans will be approximately 13.930% per annum.
S-23
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE INITIAL MORTGAGE LOANS
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
ORIGINAL COMBINED INITIAL AGGREGATE UNPAID AGGREGATE
LOAN-TO-VALUE RATIO(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
Less than 50.00.......................... 8 $ 299,360.68 0.11%
50.01 - 55.00........................... 2 49,720.34 0.02
55.01 - 60.00........................... 10 308,141.24 0.12
60.01 - 65.00........................... 6 172,905.55 0.06
65.01 - 70.00........................... 11 334,919.96 0.13
70.01 - 75.00........................... 12 468,695.14 0.18
75.01 - 80.00........................... 25 753,892.77 0.28
80.01 - 85.00........................... 38 1,119,137.03 0.42
85.01 - 90.00........................... 76 2,638,013.82 0.99
90.01 - 95.00........................... 140 4,955,304.45 1.86
95.01 - 100.00........................... 288 10,185,005.64 3.82
100.01 - 105.00........................... 357 12,817,232.33 4.80
105.01 - 110.00........................... 547 20,444,240.81 7.66
110.01 - 115.00........................... 738 29,738,389.96 11.15
115.01 - 120.00........................... 993 42,156,599.93 15.80
120.01 - 125.00........................... 3,235 138,656,032.05 51.97
125.01 - 130.00........................... 36 1,290,918.41 0.48
130.01 - 135.00........................... 11 426,527.39 0.16
----- --------------- ------
Total............................... 6,533 $266,815,037.50 100.00%
===== =============== ======
</TABLE>
The minimum and maximum Combined Loan-to-Value Ratios at origination of the
Initial Mortgage Loans were approximately 22.00% and 134.77%, respectively, and
the weighted average Combined Loan-to-Value Ratio at origination of the Initial
Mortgage Loans was approximately 116.66%.
S-24
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES RELATED TO THE INITIAL MORTGAGE LOANS
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ------------------- -----------------
<S> <C> <C> <C>
Alaska................................ 109 $ 4,727,608.70 1.77%
Arkansas.............................. 65 2,535,675.32 0.95
Arizona............................... 202 7,496,809.97 2.81
California............................ 1,663 74,783,689.66 28.03
Colorado.............................. 188 8,146,198.14 3.05
Connecticut........................... 133 5,745,244.35 2.15
District of Columbia.................. 8 353,960.57 0.13
Delaware.............................. 31 1,280,510.13 0.48
Florida............................... 498 18,825,549.72 7.06
Georgia............................... 237 9,513,687.69 3.57
Hawaii................................ 61 2,689,812.70 1.01
Iowa.................................. 139 5,240,238.48 1.96
Idaho................................. 97 3,891,266.03 1.46
Illinois.............................. 51 1,767,064.89 0.66
Indiana............................... 238 9,258,762.63 3.47
Kansas................................ 157 5,980,256.91 2.24
Kentucky.............................. 98 3,764,112.62 1.41
Louisiana............................. 46 1,889,345.23 0.71
Massachusetts......................... 3 91,252.12 0.03
Maryland.............................. 78 2,951,539.17 1.11
Maine................................. 21 700,598.69 0.26
Michigan.............................. 88 3,798,904.38 1.42
Minnesota............................. 198 7,776,938.31 2.91
Missouri.............................. 165 5,860,258.66 2.20
Mississippi........................... 50 1,995,325.64 0.75
Montana............................... 38 1,476,727.28 0.55
North Carolina........................ 146 5,799,620.23 2.17
North Dakota.......................... 33 1,226,461.56 0.46
Nebraska.............................. 118 4,546,028.41 1.70
New Hampshire......................... 1 34,839.05 0.01
New Jersey............................ 7 234,112.86 0.09
New Mexico............................ 61 2,569,400.39 0.96
Nevada................................ 133 5,542,937.33 2.08
New York.............................. 18 685,756.81 0.26
Ohio.................................. 236 9,214,956.28 3.45
Oklahoma.............................. 199 7,666,930.73 2.87
Oregon................................ 87 3,726,377.70 1.40
Pennsylvania.......................... 4 108,266.34 0.04
Rhode Island.......................... 14 503,432.43 0.19
South Carolina........................ 138 5,592,798.72 2.10
South Dakota.......................... 48 1,691,293.22 0.63
Tennessee............................. 103 3,720,507.10 1.39
Utah.................................. 44 1,786,298.47 0.67
Virginia.............................. 78 2,803,242.96 1.05
Washington............................ 259 10,854,256.76 4.07
Wisconsin............................. 86 3,520,338.24 1.32
West Virginia......................... 1 29,826.60 0.01
Wyoming............................... 57 2,416,017.32 0.91
------ --------------- ------
Total............................ 6,533 $266,815,037.50 100.00%
===== =============== ======
</TABLE>
No more than approximately 0.25% of the Initial Mortgage Loans will be
secured by Mortgaged Properties located in any one zip code.
S-25
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL TERM TO MATURITY OF THE INITIAL MORTGAGE LOANS
PERCENTAGE OF
NUMBER OF AGGREGATE
ORIGINAL TERM INITIAL AGGREGATE UNPAID CUT-OFF DATE
TO MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
60.......................................................... 5 $ 112,508.97 0.04%
72.......................................................... 1 19,709.70 0.01
84.......................................................... 5 133,708.84 0.05
120......................................................... 94 2,648,478.36 0.99
132......................................................... 1 29,826.91 0.01
144......................................................... 2 60,325.52 0.02
180......................................................... 4,159 162,793,950.54 61.01
240......................................................... 1,755 73,045,066.21 27.38
276......................................................... 1 26,979.06 0.01
300......................................................... 510 27,944,483.39 10.47
------ --------------- ------
Total.................................................. 6,533 $266,815,037.50 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average original term to maturity of
the Initial Mortgage Loans is approximately 208 months.
<TABLE>
<CAPTION>
REMAINING TERM TO MATURITY OF THE INITIAL MORTGAGE LOANS
PERCENTAGE OF
NUMBER OF AGGREGATE
REMAINING TERM INITIAL AGGREGATE UNPAID CUT-OFF DATE
TO MATURITY (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
31 - 60..................................................... 5 $112,508.97 0.04%
61 - 90..................................................... 6 153,418.54 0.06
91 - 120.................................................... 94 2,648,478.36 0.99
121 - 150................................................... 3 90,152.43 0.03
151 - 180................................................... 4,159 162,793,950.54 61.01
211 - 240................................................... 1,755 73,045,066.21 27.38
271 - 299................................................... 454 25,295,162.45 9.48
300......................................................... 57 2,676,300.00 1.00
------ --------------- -------
Total.................................................. 6,533 $266,815,037.50 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average remaining term to maturity of
the Initial Mortgage Loans is approximately 202 months.
S-26
<PAGE>
<TABLE>
<CAPTION>
SEASONING OF THE INITIAL MORTGAGE LOANS
PERCENTAGE OF
NUMBER OF AGGREGATE
INITIAL AGGREGATE UNPAID CUT-OFF DATE
SEASONING (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
0 - 2....................................................... 343 $ 16,744,701.47 6.28%
3 - 5....................................................... 2,139 89,959,469.54 33.72
6 - 8....................................................... 2,048 83,405,981.23 31.26
9 - 11...................................................... 1,814 70,235,882.87 26.32
12 - 14..................................................... 89 3,050,616.01 1.14
15 and greater.............................................. 100 3,418,386.38 1.28
----- ---------------- -------
Total.................................................. 6,533 $266,815,037.50 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average seasoning of the Initial
Mortgage Loans is approximately 7 months.
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES OF THE INITIAL MORTGAGE LOANS
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
INITIAL AGGREGATE UNPAID AGGREGATE
TYPE OF PROPERTY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
Single Family............................................... 6,293 $257,468,201.10 96.50%
Condominium................................................. 188 7,269,589.59 2.72
Other....................................................... 42 1,751,210.09 0.66
Two- to Four-Family......................................... 10 326,036.72 0.12
------- ----------------- -------
Total.................................................. 6,533 $266,815,037.50 100.00%
====== =============== ======
</TABLE>
<TABLE>
<CAPTION>
PURPOSE OF THE INITIAL MORTGAGE LOANS
PERCENTAGE OF
NUMBER OF AGGREGATE
INITIAL AGGREGATE UNPAID CUT-OFF DATE
PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------- -------------- ------------------- -----------------
<S> <C> <C> <C>
Cash Out Refinance.......................................... 283 $ 11,519,478.60 4.32%
Debt Consolidation - Cash Out............................... 31 1,599,427.02 0.60
Debt Consolidation - No Cash Out............................ 5,969 243,923,775.42 91.42
Home Improvement - No Cash Out.............................. 215 8,248,875.78 3.09
Purchase.................................................... 25 1,039,939.83 0.39
Refinance - No Cash Out..................................... 10 483,540.85 0.18
------ --------------- -------
Total.................................................. 6,533 $266,815,037.50 100.00%
===== =============== ======
</TABLE>
S-27
<PAGE>
<TABLE>
<CAPTION>
CREDIT BUREAU RISK SCORES OF THE INITIAL MORTGAGE LOANS
PERCENTAGE OF
NUMBER OF AGGREGATE
CREDIT BUREAU INITIAL AGGREGATE UNPAID CUT-OFF DATE
RISK SCORE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
620 - 639................................................... 871 $ 27,369,203.40 10.26%
640 - 659................................................... 1,468 58,093,491.06 21.77
660 - 679................................................... 1,388 57,730,572.34 21.64
680 - 699................................................... 1,210 52,157,685.16 19.55
700 - 719................................................... 881 39,873,012.47 14.94
720 - 739................................................... 430 19,005,446.54 7.12
740 - 759................................................... 196 8,656,954.06 3.24
760 - 779................................................... 62 2,651,954.15 0.99
780 - 799................................................... 25 1,140,760.69 0.43
800 or greater.............................................. 2 135,957.63 0.05
------- --------------- -------
Total.................................................. 6,533 $266,815,037.50 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Credit Bureau Risk Score of
the Initial Mortgage Loans is approximately 679.
<TABLE>
<CAPTION>
DEBT-TO-INCOME RATIOS OF THE INITIAL MORTGAGE LOANS
PERCENTAGE OF
NUMBER OF CUT-OFF DATE
DEBT-TO-INCOME INITIAL AGGREGATE UNPAID AGGREGATE
RATIO (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- -------------- ------------------- -----------------
<S> <C> <C> <C>
Up to 20.00................................................. 94 $ 3,438,248.15 1.29%
20.01 - 25.00............................................... 248 8,924,799.04 3.34
25.01 - 30.00............................................... 596 22,612,372.66 8.47
30.01 - 35.00............................................... 957 37,034,786.55 13.88
35.01 - 40.00............................................... 1,402 55,533,892.65 20.81
40.01 - 45.00............................................... 1,662 66,564,143.12 24.95
45.01 - 50.00............................................... 1,544 70,826,656.53 26.55
Greater than 50.00.......................................... 30 1,880,138.80 0.70
------- ------------- -------
Total.................................................. 6,533 $266,815,037.50 100.00%
===== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Debt-to-Income Ratio of the
Initial Mortgage Loans is approximately 39.58%.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT
Under the Purchase Agreement, following the initial issuance of the Notes,
the Issuer will be obligated to purchase from the Seller for inclusion in the
Trust Fund during the Funding Period, subject to the availability thereof, the
Subsequent Mortgage Loans secured by first and second liens on fee simple
interests in one- to four-family residential real properties. Each Subsequent
Mortgage Loan will have been underwritten in accordance with the criteria set
forth herein under "Description of the Mortgage Pool--Underwriting." Subsequent
Mortgage Loans will be transferred to the Issuer pursuant to Subsequent
S-28
<PAGE>
transfer instruments (the "Subsequent Transfer Instruments") between the Seller
and the Issuer. In connection with the purchase of Subsequent Mortgage Loans on
such dates of transfer (the "Subsequent Transfer Dates"), the Issuer will be
required to pay to the Seller from amounts on deposit in the Pre- Funding
Account (as defined below) a cash purchase price of 100% of the principal
balance thereof. In each instance in which Subsequent Mortgage Loans are
transferred pursuant to a Subsequent Transfer Instrument, the Issuer will
designate the cut-off date (such cut-off date the "Subsequent Cut-off Date")
with respect to the Subsequent Mortgage Loans acquired on such date. The amount
paid from the Pre-Funding Account on each Subsequent Transfer Date will not
include accrued interest on the Subsequent Mortgage Loans. Following each
Subsequent Transfer Date, the aggregate Principal Balance of the Mortgage Loans
will increase by an amount equal to the aggregate Principal Balance of the
Subsequent Mortgage Loans so acquired and the amount in the Pre-Funding Account
will decrease accordingly.
On the Delivery Date, approximately $33,184,962.50 (the "Original
Pre-Funded Amount") will be deposited in an account (the "Pre-Funding Account"),
which account will be in the name of the Indenture Trustee and shall be part of
the Trust Fund and which amount will be used to acquire Subsequent Mortgage
Loans. During the Funding Period (as defined below), the Original Pre-Funded
Amount will be reduced (on any date of determination, the related Original
Pre-Funded Amount as so reduced, the "Pre-Funded Amount") by the amount thereof
used to purchase Subsequent Mortgage Loans. The "Funding Period" is the period
commencing on the Delivery Date and ending on the earlier to occur of (i) the
date on which the amount on deposit in the Pre-Funding Account is less than
$10,000 and (ii) June 30, 1998.
Any conveyance of Subsequent Mortgage Loans on a Subsequent Transfer Date
is subject to certain conditions including, but not limited to: (a) each such
Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Instrument and the Purchase
Agreement and to the extent such loan is a Preferred Mortgage Loan, such
Mortgage Loan shall have had the appropriate compliance procedures applied as
indicated in the Wolf & Richards Opinion; (b) the Seller will select such
Subsequent Mortgage Loans in a manner that it reasonably believes is not adverse
to the interests of the Noteholders; (c) the Seller will deliver certain
opinions of counsel acceptable to the Indenture Trustee with respect to the
validity of the conveyance of such Subsequent Mortgage Loans; and (d) as of each
Subsequent Cut-off Date, each Subsequent Mortgage Loan will satisfy the
following criteria: (i) such Subsequent Mortgage Loan may not be 30 or more days
contractually delinquent as of the related Subsequent Cut-off Date; (ii) the
remaining stated term to maturity of such Subsequent Mortgage Loan will not
exceed 300 months; (iii) such Subsequent Mortgage Loan must have an outstanding
Principal Balance of at least $10,000 and no more than $150,000 as of the
Subsequent Cut-off Date; (iv) such Subsequent Mortgage Loan will be underwritten
in accordance with the criteria set forth under "Description of the Mortgage
Pool--Underwriting" herein; (v) such Subsequent Mortgage Loan must have a
Combined Loan-to-Value Ratio at origination of no more than 135%; (vi) the
stated maturity of such Subsequent Mortgage Loan will be no later than 300
months; (vii) such Subsequent Mortgage Loan shall not provide for negative
amortization; (viii) such Subsequent Mortgage Loan must have a fixed Mortgage
Rate of at least 10.00% (ix) such Subsequent Mortgage Loan must have a Credit
Score of 620 or greater and (x) following the purchase of such Subsequent
Mortgage Loans by the Issuer, the Mortgage Loans included in the Trust Fund must
have the following: (1) a weighted average interest rate, a weighted average
remaining term to maturity and a weighted average Combined Loan-to-Value Ratio
at origination, as of each respective Subsequent Cut-off Date, which does not
vary materially from the Initial Mortgage Loans included initially in the Trust
Fund (2) the percentage of Mortgage Loans included in the Trust Fund (by
aggregate principal balance) that are secured by second liens on the related
Mortgaged Properties shall be no greater than the percentage of Initial Mortgage
Loans which are secured by second liens and were included initially in the Trust
Fund, (3) no more than 15% of the Mortgage Loans included in the Trust Fund have
a Credit Score below 640 and (4) at least 92.5% of the Mortgage Loans shall have
been underwritten in accordance with a full documentation program.
S-29
<PAGE>
Furthermore, any conveyance of Subsequent Mortgage Loans on a Subsequent
Transfer Date is subject to the additional condition that following the transfer
of any Subsequent Mortgage Loans not more than 40% of the aggregate principal
balance of the Mortgage Loans will be: (i) obligations secured by real estate
the fair market value of which equaled at least eighty percent (80%) of the
adjusted issue price of such obligation at the time of origination; or (ii)
obligations substantially all of the proceeds of which were used to acquire,
improve or protect an interest in real property that, at the origination date,
was the only security for such obligation. For purposes of applying these
criteria: "substantially all of the proceeds" shall mean at least sixty-six and
two-thirds percent (66 2/3%) of such proceeds; and the fair market value of real
estate shall first be reduced by the amount of any lien senior to the lien
securing a Mortgage Loan (or reduced proportionately by the amount of any lien
in parity with such lien).
UNDERWRITING
Approximately 86.02% of the Initial Mortgage Loans were acquired by Impac
Funding from Preferred in accordance with the underwriting standards attached
hereto as Exhibit A. Due diligence and compliance review of such Mortgage Loans
were made by the Seller and independent consultants. Approximately 13.98% of the
Initial Mortgage Loans were acquired by the Seller in accordance with the
underwriting standards attached hereto as Exhibit A. See "The Mortgage
Pools-Underwriting Standards" in the Prospectus.
Preferred is a California corporation with its principal offices located in
Irvine, California. Preferred has 15 offices located in California along with
offices located in Aurora, Colorado, Phoenix, Arizona, Lake Oswego, Oregon, and
Boca Raton, Florida and employs in excess of 400 people. Preferred was
incorporated as a California corporation in January 1992 under the name T.A.R.
Preferred Mortgage Corporation, and has been originating subordinate lien
mortgage loans since August 1994. Preferred originates both first and
subordinate lien mortgage loans secured by one- to four-family residences.
Preferred is approved as a non-supervised lender by the U.S. Department of
Housing and Urban Development ("HUD"). Additionally, Preferred is licensed by
the State of California as a residential mortgage lender under the RML Law and
is licensed or otherwise permitted to lend in excess of 40 other states. In
addition, see "Risk Factors--Recent Developments Regarding Preferred Credit
Corporation.
For a description of the Seller, see "Impac Funding" in the Prospectus.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF IMPAC FUNDING
Impac Funding has no historical delinquency and 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 Preferred's or the
Seller's underwriting standards described herein. Preferred began originating
mortgage loans comparable to the Mortgage Loans during the late summer and early
fall of 1996. The Seller began originating and acquiring mortgage loans
comparable to the Mortgage Loans during the late fall of 1997. Accordingly,
there is insufficient historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of mortgage loans similar to the Mortgage Loans.
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. 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 Notes are issued
although the range of Mortgage
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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 Notes
and will be filed, together with the Servicing Agreement, the Trust Agreement
and the Indenture, with the Securities and Exchange Commission within fifteen
days after the initial issuance of the Notes. In the event Mortgage Loans are
removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K.
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage Loans" in
the Prospectus.
THE ISSUER
The Issuer is a business trust formed under the laws of the State of
Delaware pursuant to the Trust Agreement dated as of March 1, 1998 between the
Company and Wilmington Trust Company as the Owner Trustee for the transactions
described in this Prospectus Supplement. The Trust Agreement constitutes the
"governing instrument" under the laws of the State of Delaware relating to
business trusts. After its formation, the Issuer will not engage in any activity
other than (i) acquiring and holding the Mortgage Loans and the other assets of
the Trust and proceeds therefrom, (ii) issuing the Notes and Certificates, (iii)
making payments on the Notes and the Certificates and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
The assets of the Issuer will consist of the Mortgage Loans and certain
related assets.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee, at the address listed below.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement.
The Owner Trustee is a Delaware banking corporation and its principal offices
are located at 1100 North Market Street, Wilmington, Delaware 19890. The Owner
Trustee will receive a fee on each Payment Date at a rate equal to 0.0017% per
annum (the "Owner Trustee Fee Rate") on the aggregate Principal Balance of the
Mortgage Loans.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Noteholders under
the Trust Agreement under any circumstances, except for the Owner Trustee's own
misconduct, gross negligence, bad faith or grossly negligent failure to act or
in the case of the inaccuracy of certain representations made by the Owner
Trustee in the Trust Agreement. All persons into which the Owner Trustee may be
merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the Owner Trustee under the
Trust Agreement.
THE INDENTURE TRUSTEE
Bankers Trust Company of California, N.A., will act as Indenture Trustee
with respect to the Indenture. The Indenture Trustee will receive a fee on each
Payment Date at a rate equal to 0.0125% per
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annum (the "Indenture Trustee Fee Rate"; and together with the Owner Trustee Fee
Rate, the "Administrative Fee Rate") on the aggregate Principal Balance of the
Mortgage Loans. The Indenture Trustee will provide to a prospective or actual
Noteholder without charge, upon written request, a copy of the Indenture.
Requests should be addressed to the Indenture Trustee at 3 Park Plaza, 16th
Floor, Irvine, California 92614, Attention: Impac Secured Assets CMN Trust
Series 1998-1.
DESCRIPTION OF THE NOTES
GENERAL
The Series 1998-1 Collateralized Asset-Backed Notes will include the
following eight classes (the "Notes"): Class A-1 Notes, Class A-2 Notes, Class
A-3 Notes, Class A-4 Notes and Class A-5 Notes (collectively, the "Senior
Notes"); (ii) Class M-1 Notes and Class M-2 Notes (together, the "Class M
Notes"); and (iii) Class B-1 Notes (together with the Class M Notes, the
"Subordinate Notes"). The Series 1998-1 Collateralized Asset-Backed Certificates
will include the Class B-2 Certificates (together with the Subordinate Notes,
the "Subordinate Securities") and the Class X Certificates. Only the Notes are
offered hereby.
The Notes will represent obligations of the Impac Secured Assets CMN Trust
Series 1998-1 (the "Issuer") which will be formed pursuant to a Trust Agreement
to be dated as of March 25, 1998 (as amended and restated by the Amended and
Restated Trust Agreement dated March 31, 1998, the "Trust Agreement") between
Impac Secured Assets Corp. (the "Company") and Wilmington Trust Company, as
owner trustee (the "Owner Trustee"). The Notes will be issued pursuant to an
Indenture to be dated as of March 31, 1998 (the "Indenture"), between the Issuer
and Bankers Trust Company of California, N.A., as indenture trustee (the
"Indenture Trustee").
The Notes will be secured by the pledge by the Issuer of its assets to the
Indenture Trustee pursuant to the Indenture which will consist of the following
(such assets, collectively, the "Trust Fund"): (i) the Mortgage Loans; (ii)
collections in respect of principal and interest of the Mortgage Loans received
after the Cut-off Date or Subsequent Cut-off Date, as applicable (other than
interest payments due before but received after the Cut-off Date or Subsequent
Cut-off Date, as applicable); (iii) the amounts on deposit in any Collection
Account (as defined in the Prospectus), including the account in which amounts
are deposited prior to payment to the Noteholders (the "Payment Account"),
including net earnings thereon; (iv) certain insurance policies maintained by
the Mortgagors or by or on behalf of the Master Servicer or subservicer in
respect of the Mortgage Loans; (v) an assignment of the Company's rights under
the Mortgage Loan Purchase Agreement (as defined herein) and the Servicing
Agreement; (vi) the amounts on deposit in the Interest Coverage Account and the
Pre-Funding Account and (vii) proceeds of the foregoing.
The Class A Notes and Class M-1 Notes will be issued in denominations of
$25,000 and integral multiples of $1 in excess thereof. The Class M-2 and Class
B-1 Notes will issued in registered, certificated form, in minimum denominations
of $250,000 and integral multiples of $1 in excess thereof. See "--Book- Entry
Notes" below.
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BOOK-ENTRY NOTES
GENERAL. Beneficial Owners that are not Participants or Intermediaries (as
defined in the Prospectus) but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, the related Book-Entry Notes may do so only
through Participants and Intermediaries. In addition, Beneficial Owners will
receive all payments of principal of and interest on the related Book-Entry
Notes from the Paying Agent (as defined in the Prospectus) through DTC and
Participants. Accordingly, Beneficial Owners may experience delays in their
receipt of payments. Unless and until Definitive Notes are issued for the
related Book-Entry Notes, it is anticipated that the only registered Noteholder
of such Book-Entry Notes will be Cede & Co. ("Cede"), as nominee of DTC.
Beneficial Owners will not be recognized by the Indenture Trustee or the Master
Servicer as Noteholders, as such term is used in the Indenture, and Beneficial
Owners will be permitted to receive information furnished to Noteholders and to
exercise the rights of Noteholders only indirectly through DTC, its Participants
and Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Notes among Participants and to receive and transmit payments of
principal of, and interest on, such Book-Entry Notes. Participants and
Intermediaries with which Beneficial Owners have accounts with respect to such
Book-Entry Notes similarly are required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess physical Notes
evidencing their interests in the Book-Entry Notes, the Rules provide a
mechanism by which Beneficial Owners, through their Participants and
Intermediaries, will receive payments and will be able to transfer their
interests in the Book-Entry Notes.
None of the Company, the Master Servicer, the Subservicers, the Owner
Trustee or the Indenture Trustee will have any liability for any actions taken
by DTC or its nominee, including, without limitation, actions for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Book-Entry Notes held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
DEFINITIVE NOTES. Definitive Notes 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
Notes--Form of Notes."
Upon the occurrence of an event described in the Prospectus in the third
paragraph under "Description of the Notes--Form of Notes," the Indenture Trustee
is required to notify, through DTC, Participants who have ownership of
Book-Entry Notes as indicated on the records of DTC of the availability of
Definitive Notes for their Book-Entry Notes. Upon surrender by DTC of the
definitive Notes representing the Book- Entry Notes and upon receipt of
instructions from DTC for re-registration, the Indenture Trustee will reissue
the Book-Entry Notes as Definitive Notes issued in the respective principal
amounts owned by individual Beneficial Owners, and thereafter the Indenture
Trustee will recognize the holders of such Definitive Notes as Noteholders under
the Indenture.
For additional information regarding DTC and the Book-Entry Notes, see
"Description of the Notes--Form of Notes" in the Prospectus.
PAYMENTS
Payments on the Notes will be made by the Indenture Trustee or the Paying
Agent on the 25th day of each month or, if such day is not a Business Day, then
the next succeeding Business Day, commencing in
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April 1998. Payments on the Notes will be made to the persons in whose names
such Notes are registered at the close of business on the day prior to each
Payment Date or, if the Notes are no longer Book-Entry Notes, on the Record
Date. See "Description of the Notes--Payments" in the Prospectus. Payments will
be made by check or money order mailed (or upon the request, at least five
Business Days prior to the related Record Date, of a Holder owning Notes having
denominations aggregating at least $5,000,000, by wire transfer or otherwise) to
the address of the person entitled thereto (which, in the case of Book-Entry
Notes, will be DTC or its nominee) as it appears on the Security Register in
amounts calculated as described herein as of the Determination Date. However,
the final payment in respect of the Notes will be made only upon presentation
and surrender thereof at the office or the agency of the Indenture Trustee
specified in the notice to Holders of such final payment. A "Business Day" is
any day other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions in New York City, Delaware, California or in the city in which the
corporate trust offices of the Indenture Trustee are located, are required or
authorized by law to be closed.
INTEREST REMITTANCE AMOUNT AND PRINCIPAL REMITTANCE AMOUNT
The "Interest Remittance Amount" for any Payment Date is equal to (i) the
portion allocable to interest of all scheduled monthly payments on the Mortgage
Loans received or Advanced (as defined herein) during the related Collection
Period, after deduction of the related servicing fees and any subservicing fees
(collectively, the "Servicing Fees") and the related fees of the Indenture
Trustee and the Owner Trustee, (ii) any amounts withdrawn from the Interest
Coverage Account with respect to such Payment Date and (iii) certain unscheduled
collections, including Liquidation Proceeds and proceeds from repurchases of
(and certain amounts received in connection with any substitutions for) the
Mortgage Loans, received during the related Collection Period, to the extent
such amounts are allocable to interest.
The "Principal Remittance Amount" for any Payment Date is equal to the sum
of the following:
(i) the principal portion of all monthly payments on the Mortgage
Loans received on the Mortgage Loans during the preceding Collection
Period;
(ii) 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) pursuant to the Servicing
Agreement during the preceding Collection Period;
(iii) the principal portion of all other unscheduled collections
received with respect to the Mortgage Loans during the preceding Collection
Period (including, without limitation, full and partial Principal
Prepayments made by the respective Mortgagors and Liquidation Proceeds);
and
(iv) with respect to the Payment Date immediately following the
end of the Funding Period, any amounts in the Pre-Funding Account after
giving effect to any purchase of Subsequent Mortgage Loans.
With respect to any Payment Date and the Mortgage Loans, the "Collection
Period" is the calendar month preceding the month of such Payment Date.
INTEREST DISTRIBUTIONS
On each Payment Date, the Paying Agent shall make the following
distributions, to the extent of the Interest Remittance Amount:
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(i) first, to the Senior Noteholders, an amount equal to the
Accrued Note Interest (as defined below) thereon for such Payment Date,
plus any Unpaid Interest Shortfall (as defined below) thereon;
(ii) second, from the balance, if any, remaining of the Interest
Remittance Amount after the distribution described in clause (i) above, to
the Class M-1 Noteholders, an amount equal to the
Accrued Note Interest thereon for such Payment Date;
(iii) third, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) and (ii)
above, to the Class M-2 Noteholders an amount equal to
the Accrued Note Interest thereon for such Payment Date;
(iv) fourth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(iii) above, to the Class B-1 Noteholders an amount
equal to the Accrued Note Interest thereon for such Payment Date;
(v) fifth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(iv) above, to pay any Unpaid Interest Shortfall on the Class M-1 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(vi) sixth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(v) above, to pay any Unpaid Interest Shortfall on the Class M-2 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(vii) seventh, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(vi) above, to pay any Unpaid Interest Shortfall on the Class B-1 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(viii) eighth, from the balance, if any, remaining of the Interest
Remittance Amount after the distributions described in clauses (i) through
(vii) above, to the Class B-2 Certificateholders an amount equal to the
Accrued Certificate Interest thereon for such Payment Date; and
(ix) ninth, any amount remaining (the "Net Monthly Excess Interest
Amount") shall be included in the Net Monthly Excess Cash Flow as described
in "--Net Monthly Excess Cash Flow Distributions" below and applied as
described therein.
"Accrued Note Interest" on any Payment Date and with respect to any class
of Notes will be equal to one month's interest accrued on the Note Principal
Balance of such Notes at the related Note Interest Rate for such Payment Date.
The "Note Interest Rate" with respect to each class of Notes is equal to the
rate set forth on the cover hereof. "Accrued Certificate Interest" on any
Payment Date and with respect to the Class B-2 Certificates will be equal to one
month's interest accrued on the Certificate Principal Balance of such Class B-2
Certificates at the related Certificate Interest Rate for such Payment Date. The
"Certificate Interest Rate" with respect to the Class B-2 Certificates is equal
to 11.64% per annum. Interest on the Notes and the Class B-2 Certificates will
accrue during the prior calendar month on the basis of a 30-day month and a
360-day year.
If on any Payment Date the Interest Remittance Amount is insufficient to
pay Accrued Note Interest on any class of Notes or Accrued Certificate Interest
on the Class B-2 Certificates, the shortfall will be allocated through the
priority of payment set forth above; provided, however, that the aggregate
amount of such interest shortfalls allocable to the Senior Notes will be
allocated on a pro rata basis, based on the
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respective amount of Accrued Note Interest thereon. Such shortfalls could occur,
for example, if delinquencies on the Mortgage Loans were exceptionally high,
were not covered by Advances and were concentrated in a particular month. In
addition, such shortfalls could occur if Prepayment Interest Shortfalls or
shortfalls due to the Relief Act were particularly high in a particular month.
Any such shortfalls will be carried forward and will bear interest at the
related Note Interest Rate (such amount, including interest thereon, as of any
Payment Date, the "Unpaid Interest Shortfall") and be payable in the order
described herein on future Payment Dates from the Net Monthly Excess Cash Flow
to the extent of funds available therefor.
The "Prepayment Interest Shortfall" for any Payment Date is equal to the
aggregate shortfall, if any, in collections of interest (less the related
Servicing Fees) resulting from Mortgagor prepayments on the Mortgage Loans
during the related Collection Period. Such shortfalls will result because
interest on prepayments in full is paid only to the date of prepayment, and
because no interest is paid on prepayments in part, as such prepayments in part
are applied to reduce the outstanding principal balance of the Mortgage Loans as
of the Due Date in the month of prepayment. However, with respect to any Payment
Date, any Prepayment Interest Shortfalls resulting from 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 Servicing Fees for such Payment Date. Prepayment Interest
Shortfalls resulting from partial prepayments will not be offset by the Master
Servicer from the Servicing Fees or otherwise. No assurance can be given that
the Servicing Fees available to cover Prepayment Interest Shortfalls will be
sufficient therefor.
As described herein, Accrued Note Interest on each class of Notes is based
on the Note Principal Balances thereof immediately prior to the related Payment
Date. The "Note Principal Balance" of any class of Senior Notes means the
initial Note Principal Balance thereof as reduced by all amounts actually
distributed to the holders of such Notes on all prior Payment Dates on account
of principal. The Note Principal Balance of any class of Subordinate Notes means
the initial Note Principal Balance thereof as reduced by the sum of (x) all
amounts actually distributed to the holders of such Notes on all prior Payment
Dates on account of principal and (y) the aggregate, cumulative amount of
Realized Losses allocated thereto (upon which interest will no longer accrue) on
all prior Payment Dates. The "Certificate Principal Balance" of the Class B-2
Certificates means the initial Certificate Principal Balance thereof as reduced
by the sum of (x) all amounts actually distributed to the holders of such Class
B-2 Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of Realized Losses allocated thereto (upon which
interest will no longer accrue) on all prior Payment Dates.
The "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,
reduced by all amounts allocable to principal that have been received by the
Master Servicer or any Subservicer from the related mortgagor with respect to
such Mortgage Loan.
PRINCIPAL DISTRIBUTIONS
The "Principal Distribution Amount" means, as of any Payment Date, the sum
of (i) the Principal Remittance Amount, minus, on any Payment Date occurring on
or after the Stepdown Date (as defined herein), the Overcollateralization
Reduction Amount (as defined herein), if any, and (ii) the Extra Principal
Distribution Amount (funded as described below under "--Net Monthly Excess Cash
Flow Distributions"), if any, for such Payment Date. On each Payment Date prior
to the Stepdown Date, the Principal Distribution Amount will be distributed to
the Notes as follows:
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(i) first, to the Senior Notes, in the manner and priority
described in the seventh following paragraph, until the Note Principal
Balances of the Senior Notes have been reduced to zero;
(ii) second, the balance, if any, remaining of the Principal
Distribution Amount after the distribution described in clause (i) above
shall be distributed to the Class M-1 Notes, Class M-2 Notes, Class B-1
Notes and Class B-2 Certificates as described below, in that order, in each
case until the Note Principal Balance or Certificate Principal Balance
thereof, as applicable, has been reduced to zero; and
(iii) third, any amount remaining shall be included in the Net
Monthly Excess Cash Flow as described in "--Net Monthly Excess Cash Flow
Distributions" below and applied as described therein (without regard to
clause (b) thereof).
On each Payment Date on or after the Stepdown Date, the Principal
Distribution Amount will be distributed to the Notes as follows:
(i) first, to the Senior Notes, in the manner and priority as
described in the sixth following paragraph, until the Note Principal
Balances of the Senior Notes have been reduced to an amount equal to (x)
the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Collection Period minus (y) the greater of (a) 55.045% of the
aggregate Principal Balance of the Mortgage Loans as of the last day of the
related Collection Period plus the Required Overcollateralization Amount
for such Payment Date and (b) $1,500,000;
(ii) second, from the balance, if any, remaining of the Principal
Distribution Amount after the distribution described in clause (i) above,
to the Class M-1 Notes, until the sum of the Note Principal Balance of the
Senior Notes and the Class M-1 Notes has been reduced to an amount equal to
(x) the aggregate Principal Balance of the Mortgage Loans as of the last
day of the related Collection Period minus (y) the greater of (a) 37.37% of
the aggregate Principal Balance of the Mortgage Loans as of the last day of
the related Collection Period plus the Required Overcollateralization
Amount for such Payment Date and (b) $1,500,000;
(iii) third, from the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i) and
(ii) above, to the Class M-2 Notes, until the sum of the Note Principal
Balance of the Senior Notes and Class M Notes has been reduced to an amount
equal to (x) the aggregate Principal Balance of the Mortgage Loans as of
the last day of the related Collection Period minus (y) the greater of (a)
21.21% of the aggregate Principal Balance of the Mortgage Loans as of the
last day of the related Collection Period plus the Required
Overcollateralization Amount for such Payment Date and (b) $1,500,000;
(iv) fourth, from the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i)
through (iii) above, to the Class B-1 Notes, until the sum of the Note
Principal Balance of the Senior Notes and the Subordinate Notes has been
reduced to an amount equal to (x) the aggregate Principal Balance of the
Mortgage Loans as of the last day of the related Collection Period minus
(y) the greater of (a) 7.07% of the aggregate Principal Balance of the
Mortgage Loans as of the last day of the related Collection Period plus the
Required Overcollateralization Amount for such Payment Date and (b)
$1,500,000;
(v) fifth, from the balance, if any, remaining of the Principal
Distribution Amount after the distributions described in clauses (i)
through (iv) above, to the Class B-2 Certificates, until the sum of the
Note Principal Balance of the Senior Notes and Subordinate Notes and the
Certificate Principal
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Balance of the Class B-2 Certificates has been reduced to an amount equal
to (x) the aggregate Principal Balance of the Mortgage Loans as of the last
day of the related Collection Period minus the Required
Overcollateralization Amount for such Payment Date;
(vi) sixth, any amount remaining (the "Net Monthly Excess
Principal Amount") shall be included in the Net Monthly Excess Cash Flow as
described in "--Net Monthly Excess Cash Flow Distributions" below and
applied as described therein (without regard to clause (b) thereof).
The "Stepdown Date" means the first Payment Date occurring after March 2001
as to which all of the following conditions exist: (x) the aggregate Principal
Balance of the Mortgage Loans has been reduced to 50.00% of the Cut-off Date
Balance, (y) the Net Delinquency Amount is less than 3.50% of the Cut-off Date
Balance and (z) the aggregate Note Principal Balance of the Senior Notes (after
giving effect to distributions of principal on such Payment Date) will be able
to be reduced on such Payment Date (such determination to be made by the
Indenture Trustee prior to making actual distributions on such Payment Date) to
an amount equal to the excess, if any, of (i) the aggregate outstanding
Principal Balance of the Mortgage Loans as of the end of the preceding
Collection Period over (ii) the greater of (a) the sum of (1) 55.045% of the
aggregate Principal Balance of the Mortgage Loans as of the end of the preceding
Collection Period and (2) the greater of (A) 7.00% of the then current aggregate
Principal Balance of the Mortgage Loans as of the end of the preceding
Collection Period and (B) the Net Delinquency Amount and (b) $1,500,000.
The "Net Delinquency Amount" means with respect to any Payment Date, the
excess, if any, of (x) the product of 1.50 and the Six-Month Rolling Delinquency
Average over (y) the aggregate Net Monthly Excess Interest Amount for the three
preceding Payment Dates.
The "Six-Month Rolling Delinquency Average" means with respect to each
Payment Date, the average of the applicable Sixty-Day Delinquency Amounts for
each of the six immediately preceding Collection Periods, where the Sixty-Day
Delinquency Amount for any Collection Period is the aggregate Principal Balance
of the Mortgage Loans that are 60 or more days delinquent in payment of
principal and interest as of the end of the related Collection Period (including
Mortgage Loans in foreclosure and Mortgage Loans which are REO Mortgage Loans).
"Extra Principal Distribution Amount" means, as of any Payment Date, the
lesser of (x) the Net Monthly Excess Interest Amount for such Payment Date and
(y) the excess, if any, of (i) the Required Overcollateralization Amount for
such Payment Date over (ii) the Overcollateralization Amount (calculated for
this purpose after taking into account the reduction on such Payment Date of the
Note Principal Balances of all Classes of Notes and the Certificate Principal
Balance of the Class B-2 Certificates resulting from the distribution of the
Principal Remittance Amount) for such Payment Date.
In no event will any Principal Distribution Amount paid with respect to any
Payment Date and any class of Notes be less than zero or greater than the then
outstanding Note Principal Balance of such Note.
Distributions of the Principal Distribution Amount payable to the Senior
Notes on each Payment Date (such distribution, the "Senior Principal
Distribution Amount") will be made as follows:
(a) Prior to the occurrence of the Credit Support Depletion Date (as
defined below), the Senior Principal Distribution Amount shall be distributed to
the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Notes, in that
order, in each case in reduction of the Note Principal Balance thereof, until
such Note Principal Balance has been reduced to zero.
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(b) On or after the occurrence of the Credit Support Depletion Date, all
priorities relating to distributions as described above in respect of principal
among the various classes of Senior Notes will be disregarded, and the Senior
Principal Distribution Amount will be distributed to all classes of Senior Notes
pro rata in accordance with their respective outstanding Note Principal
Balances.
The "Credit Support Depletion Date" is the first Payment Date on which the
sum of the Overcollateralization Amount, the Note Principal Balances of the
Subordinate Notes and the Certificate Principal Balance of the Class B-2
Certificates has been reduced to zero.
NET MONTHLY EXCESS CASH FLOW DISTRIBUTIONS
On any Payment Date, the sum of the Net Monthly Excess Interest Amount, the
Net Monthly Excess Principal Amount and the Overcollateralization Reduction
Amount is the "Net Monthly Excess Cash Flow" for such Payment Date.
On any Payment Date, the Net Monthly Excess Cash Flow will be applied in
the following order of priority on such Payment Date:
(a) first, to pay any Unpaid Interest Shortfall on the Senior Notes on a
pro rata basis until such Unpaid Interest Shortfall has been reduced to
zero;
(b) second, to fund the Extra Principal Distribution Amount for such
Payment Date;
(c) third, to pay any Unpaid Interest Shortfall on the Class M-1 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(d) fourth, to reimburse the Class M-1 Notes for Realized Losses previously
allocated thereto as described below under "-Allocation of Losses;
Subordination," until fully reimbursed;
(e) fifth, to pay any Unpaid Interest Shortfall on the Class M-2 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(f) sixth, to reimburse the Class M-2 Notes for Realized Losses previously
allocated thereto as described below under "-Allocation of Losses;
Subordination," until fully reimbursed;
(g) seventh, to pay any Unpaid Interest Shortfall on the Class B-1 Notes
until such Unpaid Interest Shortfall has been reduced to zero;
(h) eighth, to reimburse the Class B-1 Notes for Realized Losses previously
allocated thereto as described below under "-Allocation of Losses;
Subordination," until fully reimbursed;
(i) ninth, to pay any Unpaid Interest Shortfall on the Class B-2
Certificates until such Unpaid Interest
Shortfall has been reduced to zero;
(j) tenth, to reimburse the Class B-2 Certificates for Realized Losses
previously allocated thereto as described below under "-Allocation of
Losses; Subordination," until fully reimbursed; and
(k) eleventh, any remaining amounts will be distributed to the Class X
Certificates.
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<PAGE>
OVERCOLLATERALIZATION PROVISIONS
As of the Delivery Date, the sum of the aggregate Note Principal Balance of
the Notes and the Certificate Principal Balance of the Class B-2 Certificates
will exceed the Cut-off Date Balance by $3,000,000 (approximately 1.00% of the
Cut-off Date Balance) (such excess at any time, the "Undercollateralization
Amount"), representing an initial undercollateralization of the Notes and the
Class B-2 Certificates in relationship to the Initial Mortgage Loans and the
Original Pre-Funded Amount. On each Payment Date, the Extra Principal
Distribution Amount will be used first, to eliminate this initial
undercollateralization by reducing the sum of the aggregate Note Principal
Balance of the Notes and the Certificate Principal Balance of the Class B-2
Certificates until it is equal to the aggregate Principal Balance of the
Mortgage Loans and the Pre-Funded Amount as of the end of the related Collection
Period, and then to increase the Overcollateralization Amount, until such amount
is equal to the Required Overcollateralization Amount. With respect to any
Payment Date, the excess, if any, of (a) the aggregate Principal Balances of the
Mortgage Loans and the amount of funds then on deposit in the Pre-Funding
Account immediately following such Payment Date over (b) the sum of the Note
Principal Balance of the Notes and the Certificate Principal Balance of the
Class B-2 Certificates as of such date (after taking into account the payment to
the Notes and the Class B-2 Certificates of the Principal Distribution Amount)
is the "Overcollateralization Amount" as of such Payment Date. The Indenture
requires that the Net Monthly Excess Cash Flow, to the extent available therefor
as described above, will be applied as an accelerated payment of principal on
the Notes and the Class B-2 Certificates to the extent that the Required
Overcollateralization Amount exceeds the Overcollateralization Amount as of such
Payment Date. The "Required Overcollateralization Amount" means as of any
Payment Date (i) prior to the Step-Down Date, the greater of (a) 3.50% of the
Cut-off Date Balance and (b) the Net Delinquency Amount for such Payment Date,
and (ii) on or after the Step-Down Date, the greater of (x) the greater of (a)
7.00% of the then current aggregate Principal Balance of the Mortgage Loans as
of the end of the related Collection Period and (b) the Net Delinquency Amount
for such Payment Date and (y) $1,500,000.
In the event that the Required Overcollateralization Amount is permitted to
decrease or "step down" on a Payment Date in the future, a portion of the
principal which would otherwise be distributed to the holders of the Notes and
Class B-2 Certificates on such Payment Date shall not be distributed to the
holders of the Notes and Class B-2 Certificates on such Payment Date. This has
the effect of decelerating the amortization of the Notes and Class B-2
Certificates relative to the amortization of the Mortgage Loans, and of reducing
the Overcollateralization Amount. With respect to any Payment Date, the excess,
if any, of (a) the Overcollateralization Amount on such Payment Date over (b)
the Required Overcollateralization Amount is the "Excess Overcollateralization
Amount" with respect to such Payment Date. If, on any Payment Date, the Excess
Overcollateralization Amount is, or, after taking into account all other
distributions to be made on such Payment Date would be, greater than zero (I.E.,
the Overcollateralization Amount is or would be greater than the Required
Overcollateralization Amount), then any amounts relating to principal which
would otherwise be distributed to the holders of the Notes and Class B-2
Certificates on such Payment Date shall instead be distributed to the Notes and
Class B-2 Certificates as described under "--Net Monthly Excess Cash Flow
Distributions" herein; such amount being the "Overcollateralization Reduction
Amount" for such Payment Date.
ALLOCATION OF LOSSES; SUBORDINATION
On each Payment Date following the application of all amounts
distributable on such date, to the extent the sum of the aggregate Principal
Balance of the Mortgage Loans and the Pre-Funded Amount is less than the sum of
the aggregate Note Principal Balances of the Notes and the Certificate Principal
Balance of the Class B-2 Certificates due to Realized Losses on the Mortgage
Loans, the Note Principal Balances of the Notes and the Certificate Principal
Balance of the Class B-2 Certificates shall be reduced
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<PAGE>
as follows, until such deficiency is fully allocated: first, the Certificate
Principal Balance of the Class B-2 Certificates shall be reduced, until the
Certificate Principal Balance thereof has been reduced to zero; second, the Note
Principal Balance of the Class B-1 Notes shall be reduced, until the Note
Principal Balance thereof has been reduced to zero; third, the Note Principal
Balance of the Class M-2 Notes shall be reduced, until the Note Principal
Balance thereof has been reduced to zero; and fourth, the Note Principal Balance
of the Class M-1 Notes shall be reduced, until the Note Principal Balance
thereof has been reduced to zero. The Note Principal Balances of the Senior
Notes will not be so reduced and such Notes will continue to receive Accrued
Note Interest on their balance subject to available funds.
As used herein, "Subordination" refers to the provisions discussed above
for the sequential allocation of Realized Losses among the various classes of
Notes and the Class B-2 Certificates and also the subordination provided by the
Overcollateralization Amount (including overcollateralization created by the Net
Monthly Excess Cash Flow) inasmuch as Realized Losses are only allocated to the
Notes and the Class B-2 Certificates after the Overcollateralization Amount has
been reduced to zero, as well as all provisions effecting such allocations
including the priorities for distribution of cash flows in the amounts described
herein.
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 Noteholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
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. The Master
Servicer will treat any Mortgage Loan that is 180 days or more delinquent as
having been finally liquidated; however, any amounts received following such
period shall be included in the Interest Remittance Amount and the Principal
Remittance Amount. The amount of any loss realized is referred to herein as a
"Realized Loss."
In order to maximize the likelihood of distribution in full of Accrued Note
Interest on the Senior Notes and of the Senior Principal Distribution Amount, on
each Payment Date, holders of the Senior Notes have a right to distributions of
the Interest Remittance Amount and the Principal Distribution Amount that is
prior to the rights of the holders of the Subordinate Securities, to the extent
necessary to satisfy the payment of Accrued Note Interest on, and the Senior
Principal Distribution Amount to, the Senior Notes. Similarly, holders of the
Class M Notes have a right to distributions that is prior to the rights of the
holders of the Class B-1 Notes and Class B-2 Certificates, and holders of the
Class M Notes with a higher payment priority have a right to distributions that
is prior to the rights of the holders of any Class M Notes with a lower payment
priority. In addition, the overcollateralization provisions of the Trust Fund
related to the Notes will also increase the likelihood of distribution of full
amounts of interest and principal to the Notes on each Payment Date.
The priority of payment provisions herein will accelerate the amortization
of the Senior Notes relative to the actual amortization of the Mortgage Loans.
To the extent that the Senior Notes are amortized faster than the Mortgage
Loans, in the absence of offsetting Realized Losses, the percentage interest
evidenced by such Senior Notes in the Mortgage Loans will be decreased, thereby
increasing, relative to the Note Principal Balances of the Subordinate
Securities and the Overcollateralization Amount, the subordination afforded the
Senior Notes by the Subordinate Securities and the Overcollateralization Amount.
The priority of payment provisions herein among the Subordinate Notes, as
described herein, also generally has the effect during certain periods, in the
absence of losses, of decreasing the percentage interest evidenced by any class
of related Subordinate Notes with a higher payment priority, thereby
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<PAGE>
increasing, relative to its Note Principal Balance, the Subordination afforded
to such class of Subordinate Notes by the Overcollateralization Amount
(including overcollateralization created by the Net Monthly Excess Cash Flow)
and any class of Subordinate Securities with a lower payment priority. However,
investors in the Subordinate Notes should be aware that on and after the Payment
Date on which the Overcollateralization Amount has been reduced to approximately
$1,500,000, the most subordinate class of Subordinate Notes then outstanding may
receive more than such class' pro rata share of the Principal Distribution
Amount for such Payment Date. In such case, the most subordinate class of
Subordinate Notes then outstanding may be retired prior to the most senior class
and will therefore not provide Subordination thereafter (although Subordination
will be provided by the Overcollateralization Amount).
ADVANCES
Prior to each Payment Date, the Master Servicer is required under the
Servicing Agreement to make Advances (out of its own funds, advances made by a
Subservicer, or funds held in the Collection Account (as described in the
Prospectus) for future payment or withdrawal) with respect to any payments of
interest (net of interest at the Servicing Fee Rate) which were due on such
Mortgage Loans on the immediately preceding Due Date and which are delinquent on
the business day next preceding the related Determination Date.
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 or
Liquidation Proceeds with respect to the Mortgage Loan. The purpose of making
such Advances is to maintain a regular cash flow to the Noteholders, rather than
to guarantee or insure against losses. Any failure by the Master Servicer to
make an Advance as required under the Servicing Agreement will constitute an
Event of Default thereunder, in which case the Indenture Trustee, as successor
Master Servicer, will be obligated to make any such Advance, in accordance with
the terms of the Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from late collections or Liquidation Proceeds from the Mortgage
Loan as to which such unreimbursed Advance was made. In addition, any Advances
previously made which are deemed by the Master Servicer to be nonrecoverable
from related late collections and Liquidation Proceeds may be reimbursed to the
Master Servicer out of any funds in the Collection Account prior to payments on
the Notes.
THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee. The Paying Agent
shall have the revocable power to withdraw funds from the Payment Account for
the purpose of making payments to the
Noteholders.
MATURITY AND OPTIONAL REDEMPTION
The Notes will be payable in full on the related Final Scheduled Payment
Date, to the extent of the related outstanding Note Principal Balance on such
date. The "Final Scheduled Payment Date" with respect to each class of Notes is
as follows: Class A-1 Notes, February 25, 2007; Class A-2 Notes, May 25, 2008;
Class A-3 Notes, August 25, 2010; Class A-4 Notes, March 25, 2012; and Class
A-5, Class M-1, Class M-2 and Class B-1 Notes, July 25, 2025.
In addition, the Notes may be redeemed in whole, but not in part, by the
Issuer on any Payment Date on or after the Payment Date on which the sum of the
aggregate Principal Balance of the Mortgage Loans is less than or equal to 10%
of the Cut-off Date Balance. The purchase price will be equal to 100% of the
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aggregate outstanding Note Principal Balance and accrued and unpaid interest
thereon at the Note Interest Rate through the date on which the Notes are
redeemed in full together with all amounts due and owing
to the Indenture Trustee.
MANDATORY PREPAYMENTS ON THE NOTES
The Notes will be partially prepaid on the Payment Date immediately
following the end of the Funding Period to the extent that any amount remains on
deposit in the Pre-Funding Account on such Payment Date. Although no assurance
can be given, it is anticipated that the principal amount of Subsequent Mortgage
Loans sold by the Seller to the Issuer and included in the Trust Fund will
require the application of substantially all of the Original Pre-Funded Amount
and that there should be no material amount of principal prepaid to the Notes
from the Pre-Funding Account. However, it is unlikely that the Seller will be
able to deliver Subsequent Mortgage Loans with an aggregate principal balance
identical to the Original Pre-Funded Amount.
INTEREST COVERAGE ACCOUNT
On the Delivery Date, a portion of the sales proceeds of the Notes will be
deposited in an account (the "Interest Coverage Account") for application by the
Indenture Trustee to cover shortfalls in Accrued Note Interest on the Notes
attributable to the Pre-Funding feature during the Funding Period. Such
shortfall Initially will exist during the Funding Period because the aggregate
Principal Balance of the Notes, and interest accrued thereon, during the Funding
Period will be greater than the aggregate principal balance of the Mortgage
Loans, and interest accrued thereon, during such period. On the first business
day following the first Payment Date following the termination of the Funding
Period, funds remaining on deposit in the Interest Coverage Account will be paid
to the Seller.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Notes will depend on the price paid by the
holder for such Note, the Note Interest Rate and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on the Mortgage Loans
and the allocation thereof. Such yield 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 principal prepayments thereon by the Mortgagors and 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 repurchases may, and the timing of 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
more fully 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 Notes.
Certain of the Mortgage Loans may be prepaid in full or in part at any time
without penalty. The Mortgage Loans generally are assumable under certain
circumstances if, in the sole judgment of the Master Servicer or Subservicer,
the prospective purchaser of a Mortgaged Property is creditworthy and the
security for such Mortgage Loan is not impaired by the assumption. The Master
Servicer shall enforce any due-on-sale clause contained in any Mortgage Note or
Mortgage, to the extent permitted under applicable law and governmental
regulations; provided, however, if the Master Servicer determines that it is
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reasonably likely that any Mortgagor will bring, or if any Mortgagor does bring,
legal action to declare invalid or otherwise avoid enforcement of a due-on-sale
clause contained in any Mortgage Note or Mortgage, the Master Servicer shall not
be required to enforce the due-on-sale clause or to contest such action. The
extent to which the Mortgage Loans are assumed by purchasers of the Mortgaged
Properties rather than prepaid by the related Mortgagors in connection with the
sales of the Mortgaged Properties will affect the weighted average life of the
Notes and may result in a prepayment experience on the Mortgage Loans that
differs from that on other conventional mortgage loans. See "Maturity and
Prepayment Considerations" in the Prospectus. Prepayments, liquidations and
purchases of the Mortgage Loans will result in payments to holders of the Notes
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 and servicing decisions.
Because the Mortgage Rates on the Mortgage Loans are fixed and the Note
Interest Rates on the Notes 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 Notes were to rise, the market value
of the Notes may decline.
The yield to investors on each class of Subordinate Notes, and particularly
on such classes of Subordinate Notes 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
Overcollateralization Amount (including overcollateralization created by the Net
Monthly Excess Cash Flow), or by any other class of Subordinate Securities
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
Subordinate Notes as described herein. Furthermore, as described herein, the
timing of receipt of principal and interest by any class of Subordinate Notes
may be adversely affected by losses even if such class does not ultimately bear
such loss.
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 Notes and, during certain periods, no principal payments will be
distributed to the Subordinate Notes. Unless the Note Principal Balances of the
Senior Notes have been reduced to zero, the Subordinate Notes will not be
entitled to receive distributions of principal until the Stepdown Date. To the
extent that no principal payments are distributed on the Subordinate Notes, the
Subordination afforded the Senior Notes by the Subordinate Notes (together with
the Overcollateralization Amount (including overcollateralization created by the
Net Monthly Excess Cash Flow)), in the absence of offsetting Realized Losses
allocated thereto, will be increased, and the weighted average lives of the
Subordinate Notes will be extended.
Investors in the Senior Notes should note that distributions of the Extra
Principal Distribution Amount to the Senior Notes will result in an accelerated
reduction of the Note Principal Balance thereof until the Overcollateralization
Amount is equal to the Required Overcollateralization Amount. Realized Losses,
to the extent resulting in a reduction of the Overcollateralization Amount, will
also result in an accelerated payment with respect to principal on the Senior
Notes.
In addition, investors in each class of Subordinate Notes should be aware
that on and after the Payment Date on which the Overcollateralization Amount has
been reduced to approximately $1,500,000, the most subordinate class of
Subordinate Securities then outstanding may receive more than such class' pro
rata share of the Principal Distribution Amount for such Payment Date.
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<PAGE>
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.
The amount of interest receipts on the Mortgage Loans available to pay
interest on the Notes will be reduced by any interest shortfalls to the extent
not covered by the Master Servicer as described herein. See "Yield
Considerations" in the Prospectus and "Description of the Notes--Interest
Payments on the Notes" herein for a discussion of the effect of principal
prepayments on the Mortgage Loans on the yield to maturity of the Notes and
certain possible shortfalls in the collection of interest.
To the extent that the Original Pre-Funded Amount has not been fully
applied to the purchase of Subsequent Mortgage Loans by the Issuer by the end of
the Funding Period, the holders of the Notes will receive on the first Payment
Date following the termination of the Funding Period a prepayment of principal
in an amount equal to the lesser of (i) the Pre-Funded Amount remaining in the
Pre-Funding Account and (ii) the outstanding Note Principal Balance of the
Notes. Although no assurance can be given, it is anticipated by the Depositor
that the principal amount of Subsequent Mortgage Loans sold to the Issuer for
inclusion in the Trust Fund will require the application of substantially all
amounts on deposit in the Pre-Funding Account and that there will be no material
amount of principal prepaid to such Noteholders. However, it is unlikely that
the Seller will be able to deliver Subsequent Mortgage Loans with an aggregate
principal balance identical to the Pre-Funded Amount and therefore, some
prepayment is expected on the Notes.
In addition, the yield to maturity of the Notes will depend on, among other
things, the price paid by the holders of the Notes and the then applicable Note
Interest Rate. The extent to which the yield to maturity of a Note 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 Note is purchased at a premium and
principal payments thereon occur at a rate faster than anticipated at the time
of purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a Note is purchased at a
discount and principal payments thereon occur at a rate slower than that assumed
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 Notes, see "Yield Considerations" and "Maturity and
Prepayment Considerations" in the Prospectus.
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 payment to the investor
of each dollar distributed in reduction of principal of such security (assuming
no losses). The weighted average life of the Notes 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 prepayment model used in this Prospectus
Supplement with respect to the Mortgage Loans (the "Prepayment Assumption")
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans. A 100% Prepayment
Assumption assumes a constant prepayment rate of 0% per annum of the then
outstanding principal balance of such mortgage loans in the first month of the
life of the mortgage loans and an additional approximate 1.14% (precisely
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16/14 multiplied by 1.00%) per annum in each month thereafter until the
fifteenth month. Beginning in the fifteenth month and in each month thereafter
during the life of the mortgage loans, a 100% Prepayment Assumption assumes a
constant prepayment rate of 16% per annum each month. As used in the table
below, a 50% Prepayment Assumption assumes prepayment rates equal to 50% of the
Prepayment Assumption. Correspondingly, a 150% Prepayment Assumption assumes
prepayment rates equal to 150% 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 tables 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 Funds as
described under "Description of the Mortgage Pool" herein and the performance
thereof. The tables assume, among other things, that: (i) the Mortgage Loans
consist of the following six hypothetical mortgage pools (each, a "Hypothetical
Pool"):
<TABLE>
<CAPTION>
ORIGINAL REMAINING TERM TO
CUT-OFF DATE AMORTIZING TERM MATURITY
POOL NUMBER PRINCIPAL BALANCE MORTGAGE RATE (IN MONTHS) (IN MONTHS)
- ----------- ----------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
1 $ 2,944,232.78 14.470% 116 109
2 162,854,276.06 13.800 180 172
3 73,045,066.21 13.889 240 234
4 27,971,462.45 14.735 300 297
5 16,592,481.25 13.930 208 208
6 16,592,481.25 13.930 208 208
</TABLE>
(ii) the Hypothetical Pool 5 and 6 represent Subsequent Mortgage Loans; (iii)
all scheduled principal payments on the Mortgage Loans are timely received on
the first day of the preceding Collection Period, with the first Collection
Period for the Initial Mortgage Loans commencing on March 1, 1998, the first
Collection Period for Hypothetical Pool 5 commencing on April 1, 1998, and the
first Collection Period for Hypothetical Pool 6 commencing on May 1, 1998; (iv)
no delinquencies or losses occur on the Mortgage Loans; (v) all scheduled
payments of interest and principal in respect of the Mortgage Loans have been
made through the respective Cut-off Date or Subsequent Cut-off Date; (vi) all
Mortgage Loans prepay monthly at the specified percentages of the Prepayment
Assumption, no optional or other early termination of the Notes occurs (except
with respect to the calculation of the "Weighted Average Life-to- Call (Years)"
figures in the following tables); (vii) all prepayments in respect of the
Mortgage Loans include 30 days' accrued interest thereon; (viii) the Notes are
purchased on March 31, 1998; (ix) each year will consist of twelve 30-day
months; (x) cash payments are received by the holders of the Notes on the 25th
day of each month, commencing in April 1998; (xi) the Required
Overcollateralization Amount will be as defined herein; (xii) the Note Interest
Rate for each class of Notes is as set forth on the cover page hereof; (xiii)
the Administrative Fee Rate is 0.0142% per annum and the Servicing Fee Rate is
0.70% per annum; (xiv) Hypothetical Pool 5 and 6 above are transferred to the
Trust Fund in April 1998 and May 1998, respectively, with principal payments on
such mortgage loans being received by the Master Servicer in April 1998 and May
1998, respectively, and passed through to the holders of the Notes on the
Payment Date in June 1998 and July 1998, respectively; (xv) the remaining term
to maturity is based on the Cut-off Date with respect to Hypothetical Pools 1,
2, 3 and 4 and the related Subsequent Cut-off Date with respect to Hypothetical
Pools 5 and 6; (xvi) all of the Original Pre-Funding Amount is used to purchase
Subsequent Mortgage Loans; and (xvii) funds in the Pre-Funding Account have been
assumed to accrue interest at a net rate of 13.23% per annum.
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<PAGE>
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 stated maturity of the Mortgage Loans
could produce slower or faster principal payments than indicated in the table at
the various constant percentages of the Prepayment Assumption specified, even if
the weighted average remaining term to stated 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
experience, will affect the percentages of initial Note Principal Balance
outstanding over time and the weighted average life of the Notes. Subject to the
foregoing discussion and assumptions, the following table indicates the weighted
average life of the Notes, and sets forth the percentages of the initial Note
Principal Balance of the Notes that would be outstanding after each of the dates
shown at various percentages of the Prepayment Assumption.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 NOTES
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200%
- ------------ -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100 100
March 25, 1999............................................. 79 58 48 38 27 17 0
March 25, 2000............................................. 71 27 6 0 0 0 0
March 25, 2001............................................. 63 0 0 0 0 0 0
March 25, 2002............................................. 54 0 0 0 0 0 0
March 25, 2003............................................. 43 0 0 0 0 0 0
March 25, 2004............................................. 31 0 0 0 0 0 0
March 25, 2005............................................. 17 0 0 0 0 0 0
March 25, 2006 and thereafter.............................. 0 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 4.10 1.36 1.04 0.85 0.73 0.65 0.53
Weighted Average Life-to-Call in Years(1)(2)............... 4.10 1.36 1.04 0.85 0.73 0.65 0.53
</TABLE>
(1) Assumes that an optional termination is exercised on the Payment Date
on which the aggregate Principal Balance of the Mortgage Loans is less
than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
S-48
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-2 NOTES
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200%
- ------------ -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100 100
March 25, 1999............................................. 100 100 100 100 100 100 85
March 25, 2000............................................. 100 100 100 45 0 0 0
March 25, 2001............................................. 100 92 0 0 0 0 0
March 25, 2002............................................. 100 0 0 0 0 0 0
March 25, 2003............................................. 100 0 0 0 0 0 0
March 25, 2004............................................. 100 0 0 0 0 0 0
March 25, 2005............................................. 100 0 0 0 0 0 0
March 25, 2006............................................. 100 0 0 0 0 0 0
March 25, 2007............................................. 30 0 0 0 0 0 0
March 25, 2008 and thereafter.............................. 0 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 8.75 3.42 2.52 2.00 1.67 1.43 1.12
Weighted Average Life-to-Call in Years(1)(2)............... 8.75 3.42 2.52 2.00 1.67 1.43 1.12
</TABLE>
(1) Assumes that an optional termination is exercised on the Payment Date
on which the aggregate Principal Balance of the Mortgage Loans is less
than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
S-49
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-3 NOTES
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200%
- ------------ -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100 100
March 25, 1999............................................. 100 100 100 100 100 100 100
March 25, 2000............................................. 100 100 100 100 87 56 0
March 25, 2001............................................. 100 100 91 47 6 0 0
March 25, 2002............................................. 100 95 37 0 0 0 0
March 25, 2003............................................. 100 53 0 0 0 0 0
March 25, 2004............................................. 100 13 0 0 0 0 0
March 25, 2005............................................. 100 0 0 0 0 0 0
March 25, 2006............................................. 100 0 0 0 0 0 0
March 25, 2007............................................. 100 0 0 0 0 0 0
March 25, 2008............................................. 78 0 0 0 0 0 0
March 25, 2009............................................. 39 0 0 0 0 0 0
March 25, 2010 and thereafter.............................. 0 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 10.73 5.11 3.80 3.00 2.47 2.10 1.62
Weighted Average Life-to-Call in Years(1)(2)............... 10.73 5.11 3.80 3.00 2.47 2.10 1.62
</TABLE>
- ------------
(1) Assumes that an optional termination is exercised on the Payment Date
on which the aggregate Principal Balance of the Mortgage Loans is less
than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
S-50
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-4 NOTES
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200%
- ------------ -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100 100
March 25, 1999............................................. 100 100 100 100 100 100 100
March 25, 2000............................................. 100 100 100 100 100 100 95
March 25, 2001............................................. 100 100 100 100 100 26 0
March 25, 2002............................................. 100 100 100 90 50 15 0
March 25, 2003............................................. 100 100 92 44 4 0 0
March 25, 2004............................................. 100 100 54 6 0 0 0
March 25, 2005............................................. 100 81 21 0 0 0 0
March 25, 2006............................................. 100 50 0 0 0 0 0
March 25, 2007............................................. 100 20 0 0 0 0 0
March 25, 2008............................................. 100 0 0 0 0 0 0
March 25, 2009............................................. 100 0 0 0 0 0 0
March 25, 2010............................................. 96 0 0 0 0 0 0
March 25, 2011............................................. 50 0 0 0 0 0 0
March 25, 2012 and thereafter.............................. 0 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 13.00 8.04 6.19 4.93 4.06 3.15 2.20
Weighted Average Life-to-Call in Years(1)(2)............... 13.00 8.04 6.19 4.93 4.06 3.15 2.20
</TABLE>
(1) Assumes that an optional termination is exercised on the Payment Date
on which the aggregate Principal Balance of the Mortgage Loans is less
than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
S-51
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-5 NOTES
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200%
- ------------ -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100 100
March 25, 1999............................................. 100 100 100 100 100 100 100
March 25, 2000............................................. 100 100 100 100 100 100 100
March 25, 2001............................................. 100 100 100 100 100 100 16
March 25, 2002............................................. 100 100 100 100 100 100 16
March 25, 2003............................................. 100 100 100 100 100 81 16
March 25, 2004............................................. 100 100 100 100 79 59 16*
March 25, 2005............................................. 100 100 100 83 60 43 16*
March 25, 2006............................................. 100 100 94 66 45 30* 13*
March 25, 2007............................................. 100 100 77 51 34* 21* 8*
March 25, 2008............................................. 100 95 62 39 25* 15* 5*
March 25, 2009............................................. 100 78 49 29* 18* 10* 3*
March 25, 2010............................................. 100 62 37 21* 12* 7* 0
March 25, 2011............................................. 100 46 26* 15* 8* 4* 0
March 25, 2012............................................. 97 31* 17* 9* 5* 2* 0
March 25, 2013............................................. 77 23* 12* 6* 3* 0 0
March 25, 2014............................................. 65 17* 9* 4* 1* 0 0
March 25, 2015............................................. 50 12* 6* 3* 0 0 0
March 25, 2016............................................. 37 8* 4* 0 0 0 0
March 25, 2017............................................. 24* 5* 1* 0 0 0 0
March 25, 2018............................................. 16* 3* 0 0 0 0 0
March 25, 2019............................................. 14* 2* 0 0 0 0 0
March 25, 2020............................................. 11* 0 0 0 0 0 0
March 25, 2021............................................. 7* 0 0 0 0 0 0
March 25, 2022............................................. 3* 0 0 0 0 0 0
August 25, 2023 and thereafter............................. 0 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 17.50 13.372 11.47 9.80 8.40 7.25 3.75
Weighted Average Life-to-Call in Years(1)(2)............... 16.68 12.44 10.64 8.94 7.52 6.42 3.19
</TABLE>
(1) Assumes that an optional termination is exercised on the Payment Date
on which the aggregate Principal Balance of the Mortgage Loans is less
than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
* Indicates that the cash flows are contingent on the optional
termination provision not being exercised.
S-52
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-1 NOTES
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200%
- ------------ -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100 100
March 25, 1999............................................. 100 100 100 100 100 100 100
March 25, 2000............................................. 100 100 100 100 100 100 100
March 25, 2001............................................. 100 100 100 100 100 100 100
March 25, 2002............................................. 100 100 100 95 79 65 100
March 25, 2003............................................. 100 100 96 77 61 48 70
March 25, 2004............................................. 100 100 81 62 47 35 39*
March 25, 2005............................................. 100 91 68 49 36 25 18*
March 25, 2006............................................. 100 79 56 39 27 18* 8*
March 25, 2007............................................. 100 67 46 30 20* 13* 5*
March 25, 2008............................................. 100 57 37 23 15* 9* 3*
March 25, 2009............................................. 100 46 29 18* 10* 6* 1*
March 25, 2010............................................. 97 37 22 13* 7* 4* 0
March 25, 2011............................................. 79 27 16* 9* 5* 2* 0
March 25, 2012............................................. 58 19* 10* 5* 3* 0 0
March 25, 2013............................................. 46 14* 7* 4* 0 0 0
March 25, 2014............................................. 38 10* 5* 3* 0 0 0
March 25, 2015............................................. 30 7* 4* 0 0 0 0
March 25, 2016............................................. 22 5* 2* 0 0 0 0
March 25, 2017............................................. 14* 3* 0 0 0 0 0
March 25, 2018............................................. 10* 1* 0 0 0 0 0
March 25, 2019............................................. 8* 0 0 0 0 0 0
March 25, 2020............................................. 6* 0 0 0 0 0 0
March 25, 2021............................................. 4* 0 0 0 0 0 0
March 25, 2022............................................. 1* 0 0 0 0 0 0
August 25, 2022 and thereafter............................. 0 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 15.65 11.16 9.30 7.80 6.61 5.80 5.96
Weighted Average Life-to-Call in Years(1)(2)............... 15.17 10.64 8.82 7.30 6.11 5.32 5.36
</TABLE>
(1) Assumes that an optional termination is exercised on the Payment Date
on which the aggregate Principal Balance of the Mortgage Loans is less
than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
* Indicates that the cash flows are contingent on the optional
termination provision not being exercised.
S-53
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-2 NOTES
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200%
- ------------ -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100 100
March 25, 1999............................................. 100 100 100 100 100 100 100
March 25, 2000............................................. 100 100 100 100 100 100 100
March 25, 2001............................................. 100 100 100 100 100 100 100
March 25, 2002............................................. 100 100 100 95 79 65 61
March 25, 2003............................................. 100 100 96 77 61 48 28
March 25, 2004............................................. 100 100 81 62 47 35 19*
March 25, 2005............................................. 100 91 68 49 36 25 12*
March 25, 2006............................................. 100 79 56 39 27 18* 8*
March 25, 2007............................................. 100 67 46 30 20* 13* 5*
March 25, 2008............................................. 100 57 37 23 15* 9* 2*
March 25, 2009............................................. 100 46 29 18* 10* 6* 0
March 25, 2010............................................. 97 37 22 13* 7* 4* 0
March 25, 2011............................................. 79 27 16* 9* 5* 1* 0
March 25, 2012............................................. 58 19* 10* 5* 1* 0 0
March 25, 2013............................................. 46 14* 7* 4* 0 0 0
March 25, 2014............................................. 38 10* 5* 1* 0 0 0
March 25, 2015............................................. 30 7* 4* 0 0 0 0
March 25, 2016............................................. 22 5* 0 0 0 0 0
March 25, 2017............................................. 14* 2* 0 0 0 0 0
March 25, 2018............................................. 10* 0 0 0 0 0 0
March 25, 2019............................................. 8* 0 0 0 0 0 0
March 25, 2020............................................. 6* 0 0 0 0 0 0
March 25, 2021............................................. 4* 0 0 0 0 0 0
March 25, 2022 and thereafter.............................. 0 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 15.65 11.14 9.28 7.77 6.59 5.72 4.90
Weighted Average Life-to-Call in Years(1)(2)............... 15.17 10.64 8.82 7.30 6.11 5.26 4.51
</TABLE>
(1) Assumes that an optional termination is exercised on the Payment Date
on which the aggregate Principal Balance of the Mortgage Loans is less
than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
* Indicates that the cash flows are contingent on the optional
termination provision not being exercised.
S-54
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL NOTE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS B-1 NOTES
PAYMENT DATE 0% 50% 75% 100% 125% 150% 200%
- ------------ -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage......................................... 100 100 100 100 100 100 100
March 25, 1999............................................. 100 100 100 100 100 100 100
March 25, 2000............................................. 100 100 100 100 100 100 100
March 25, 2001............................................. 100 100 100 100 100 100 100
March 25, 2002............................................. 100 100 100 95 79 65 43
March 25, 2003............................................. 100 100 96 77 61 48 28
March 25, 2004............................................. 100 100 81 62 47 35 19*
March 25, 2005............................................. 100 91 68 49 36 25 12*
March 25, 2006............................................. 100 79 56 39 27 18* 8*
March 25, 2007............................................. 100 67 46 30 20* 13* 3*
March 25, 2008............................................. 100 57 37 23 15* 9* 0
March 25, 2009............................................. 100 46 29 18* 10* 5* 0
March 25, 2010............................................. 97 37 22 13* 7* 1* 0
March 25, 2011............................................. 79 27 16* 9* 2* 0 0
March 25, 2012............................................. 58 19* 10* 4* 0 0 0
March 25, 2013............................................. 46 14* 7* 0 0 0 0
March 25, 2014............................................. 38 10* 3* 0 0 0 0
March 25, 2015............................................. 30 7* 0 0 0 0 0
March 25, 2016............................................. 22 3* 0 0 0 0 0
March 25, 2017............................................. 14* 0 0 0 0 0 0
March 25, 2018............................................. 10* 0 0 0 0 0 0
March 25, 2019............................................. 8* 0 0 0 0 0 0
March 25, 2020............................................. 6* 0 0 0 0 0 0
March 25, 2021............................................. 2* 0 0 0 0 0 0
March 25, 2022 and thereafter.............................. 0 0 0 0 0 0 0
Weighted Average Life-to-Maturity in Years(2).............. 15.61 11.10 9.22 7.72 6.55 5.65 4.61
Weighted Average Life-to-Call in Years(1)(2)............... 15.17 10.64 8.82 7.30 6.11 5.24 4.26
</TABLE>
(1) Assumes that an optional termination is exercised on the Payment Date
on which the aggregate Principal Balance of the Mortgage Loans is less
than or equal to 10% of the Cut-off Date Balance.
(2) The weighted average life of a Note is determined by (i) multiplying
the net reduction, if any, of Note Principal Balance by the number of
years from the date of issuance of the Note to the related Payment
Date, (ii) adding the results, and (iii) dividing the sum by the
aggregate of the net reductions of the Note Principal Balance described
in (i) above.
* Indicates that the cash flows are contingent on the optional
termination provision not being exercised.
S-55
<PAGE>
DESCRIPTION OF THE SERVICING AGREEMENT
GENERAL
For a description of the terms of the Servicing Agreement, dated as of
March 1, 1998 between the Issuer and the Master Servicer (the "Servicing
Agreement") see "The Agreements" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each Mortgage Loan is payable out of the interest
payments on such Mortgage Loan. The Servicing Fee Rate in respect of each
Mortgage Loan will be equal to 0.70% per annum of the outstanding principal
balance of such Mortgage Loan. The Servicing Fee consists of (a) servicing
compensation payable to the Master Servicer in respect of its master servicing
responsibilities 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). Wendover
will be entitled to retain in the form of additional servicing compensation half
of any late payment charges on the Mortgage Loans which it subservices. Advanta
will be entitled to retain in the form of additional servicing compensation all
late payment charges on the Mortgage Loans which it subservices. The Master
Servicer will be entitled to retain as additional servicing compensation any
prepayment penalties.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
Pursuant to the Servicing Agreement, the Master Servicer will have the
option to purchase from the Trust Fund any Mortgage Loan which is 90 days or
more delinquent at a purchase price equal to the Principal Balance thereof plus
accrued interest thereon.
THE MASTER SERVICER AND SUBSERVICERS
THE MASTER SERVICER
Impac Funding (in its capacity as master servicer, the "Master
Servicer") will act as master servicer for the Mortgage Loans pursuant to the
Servicing Agreement. See "Impac Funding" in the Prospectus. Impac Funding has
entered into subservicing arrangements with Advanta and Wendover.
Notwithstanding these agreements, Impac Funding will remain primarily liable for
servicing the Mortgage Loans. All of the Mortgage Loans will initially be
subserviced by Advanta or Wendover.
THE SUBSERVICERS
ADVANTA. Advanta Mortgage Corp. USA ("Advanta") will act as
Sub-Servicer for the Preferred Mortgage Loans pursuant to a Sub-Servicing
Agreement. Advanta is an indirect subsidiary of Advanta Corp., a Delaware
corporation (the "Advanta Parent"), a publicly-traded company based in Horsham,
Pennsylvania with assets as of December 31, 1997 in excess of $6.7 billion.
Advanta Parent, through its subsidiaries (including Advanta) had managed assets
(including mortgage loans) of approximately $21.1 billion as of December 31,
1997.
As of December 31, 1997, Advanta and its subsidiaries were servicing
approximately 75,000 mortgage loans in the Owned and Managed Servicing Portfolio
(as defined below) representing an aggregate outstanding principal balance of
approximately $4.9 billion, and approximately 132,000
S-56
<PAGE>
mortgage loans in the Third-Party Servicing Portfolio (as defined below)
representing an aggregate outstanding principal balance of approximately $9.2
billion.
On October 28, 1997, Advanta Parent announced that it had reached a
definitive agreement under which Fleet Financial Group, Inc. ("Fleet") would
acquire Advanta Parent's consumer credit card business and would combine it with
Fleet's consumer credit card business (the "Transaction"). On February 20, 1998,
a special meeting of stockholders of Advanta Parent was held whereby the
stockholders approved the Transaction with Fleet. The Transaction was completed
on the same day. In addition, Advanta Parent completed its cash tender offer
(the "Tender Offer") to purchase approximately $850 million of its Class A and
Class B common stock at $40 per share net, and its Stock Appreciation Income
Linked Securities Depositary shares at $32.80 per share net. The Tender Offer
commenced on January 20, 1998 and expired at 12:00 midnight, New York City time
on February 20, 1998. Advanta Parent will continue to operate its mortgage and
business services companies, including Advanta.
On January 22, 1998, Advanta Parent reported net income of $43.6
million for the fourth quarter of 1998, compared to net income of $45.2 million
for the fourth quarter of 1996.
The ability of Advanta Parent's subsidiaries to honor their financial
and other obligations is to some extent influenced by the financial conditions
of Advanta Parent. Such obligations of Advanta, insofar as they relate to the
Trust Fund with respect to the Preferred Mortgage Loans, primarily consist of
Advanta's limited advancing obligation and its obligation to service the
Preferred Mortgage Loans.
The Notes will not represent an interest in or obligation of, nor are
the Preferred Mortgage Loans guaranteed by, Advanta or the Advanta Parent.
WENDOVER. Wendover is a subservicer of residential, consumer and
commercial mortgage loans in 50 states. At December 31, 1997, Wendover serviced
approximately $7.81 billion outstanding principal amount of mortgage loans.
Additionally, Wendover provides origination and servicing for Federal Housing
Administration home equity conversion mortgages, specialized asset management
and default servicing for non-performing product, and special servicing
activities for government entities. As of December 31, 1997, Wendover employed
410 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
As at December 31, 1993, 1994, 1995, 1996 and 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 $7,811.4 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. Wendover
subservices 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
S-57
<PAGE>
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.
DELINQUENCY AND LOSS EXPERIENCE OF THE SUBSERVICERS
Advanta has been servicing mortgage loans of the type included in the
Trust Fund since 1995. Wendover has been servicing mortgage loans of the type
included in the Trust Fund since the summer of 1997. As a result, there is no
material loss and delinquency information available for Advanta or
Wendover.
THE INDENTURE
The following summary describes certain terms of the Indenture. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Trust Agreement and Indenture.
Whenever particular defined terms of the Indenture are referred to, such defined
terms are thereby incorporated herein by reference. See "The Agreements" in the
Prospectus.
EVENTS OF DEFAULT
An "Event of Default" with respect to the Notes is defined in the
Indenture as follows: (a) the failure to pay (i) Accrued Note Interest or Unpaid
Interest Shortfalls with respect to any class of Notes, (ii) the Principal
Distribution Amount with respect to any class of Notes, and (iii) the Extra
Principal Distribution Amount with respect to a Payment Date, but only to the
extent funds are available to make such payment as described under "Description
of the Notes"; (b) a default in the observance of certain negative covenants in
the Indenture; (c) a default in the observance of any other covenant of the
Indenture, and the continuation of any such default for a period of thirty days
after notice to the Issuer by the Indenture Trustee, or by the Holders of at
least 25% of the Note Principal Balance of the Notes; (d) any representation or
warranty made by the Issuer in the Indenture or in any Note or other writing
delivered pursuant thereto having been incorrect in a material respect as of the
time made, and the circumstance in respect of which such representation or
warranty is incorrect not having been cured within thirty days after notice
thereof is given to the Issuer by the Indenture Trustee, or by Noteholders
representing at least 25% of the Note Principal Balance of the Notes; (e)
certain events of bankruptcy, insolvency, receivership or reorganization of the
Issuer; or (f) the failure by the Issuer on the related Final Scheduled Payment
Date to reduce the Note Principal Balance of any class of the Notes to zero.
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect
to the Notes, the Indenture Trustee may, and on request of Noteholders
representing not less than 50% of the Note Principal Balance of the Notes then
outstanding shall, declare the principal of such Notes to be immediately due and
payable.
Such declaration may under certain circumstances be rescinded by Noteholders
representing more than 50% of the Note Principal Balance of the Notes.
If, following an Event of Default, the Notes have been declared to be
due and payable, the Indenture Trustee may, in its discretion (provided that
Noteholders representing more than 50% of the Note Principal Balance of the
Notes have not directed the Indenture Trustee to sell the assets included in the
Trust Fund), refrain from selling such assets and continue to apply all amounts
received on such assets to payments due on the Notes in accordance with their
terms, notwithstanding the acceleration of the
S-58
<PAGE>
maturity of such Notes. The Indenture Trustee, however, must sell the assets
included in the Trust Fund if collections in respect of such assets are
determined to be insufficient to pay certain expenses payable under the
Indenture and to make all scheduled payments on the Notes, in which case
payments will be made on the Notes in the same manner as described in the next
sentence with regard to instances in which such assets are sold. In addition,
upon an Event of Default the Indenture Trustee may sell the assets included in
the Trust Fund, in which event the collections on, or the proceeds from the sale
of, such assets will be applied as provided below: (i) to the payment of the
fees of the Indenture Trustee which have not been previously paid; (ii) to the
Noteholders, the amount of interest then due and unpaid on the Notes, first to
the Senior Notes without preference or priority of any kind, second to the Class
M-1 Notes, third to the Class M-2 Notes and fourth, to the Class B-1 Notes;
(iii) to the Noteholders, the amount of principal then due and unpaid on the
Notes, first to the Senior Notes without preference or priority of any kind,
second to the Class M-1 Notes, third to the Class M-2 Notes and fourth, to the
Class B-1 Notes; and (iv) to the Issuer.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an Event of Default shall occur and be
continuing, the Indenture Trustee shall be under no obligation to exercise any
of the rights and powers under the Indenture at the request or direction of any
of the Noteholders, unless such Noteholders shall have offered to the Indenture
Trustee reasonable security or indemnity satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, Noteholders representing more than 50%
of the Note Principal Balance of the Notes shall have the right to direct the
time, method, and place of conducting any proceeding or any remedy available to
the Indenture Trustee or exercising any trust or power conferred on the
Indenture Trustee with respect to such Notes; and Noteholders representing more
than 50% of the Note Principal Balance of the Notes may, in certain cases, waive
any default with respect thereto, except a default in the payment of principal
or interest or a default in respect of a covenant or provision of the Indenture
that cannot be modified without the waiver or consent of the holder of each
outstanding Note affected thereby.
LIMITATION ON SUITS
No Noteholder will have any right to institute any proceedings with
respect to the Indenture unless (1) such Noteholder has previously given written
notice to the Indenture Trustee of a continuing Event of Default; (2)
Noteholders representing not less than 25% of the Note Principal Balance of the
Notes have made written request to the Indenture Trustee to institute
proceedings in respect of such Event of Default in its own name as Indenture
Trustee; (3) such Noteholders have offered to the Indenture Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities to be
incurred in compliance with such request; (4) for 60 days after its receipt of
such notice, request and offer of indemnity the Indenture Trustee has failed to
institute any such proceedings; and (5) no direction inconsistent with such
written request has been given to the Indenture Trustee during such 60-day
period by the Noteholders representing a majority of the Note Principal Balance
of the Notes.
THE INDENTURE TRUSTEE
The Indenture Trustee may resign at any time, in which event the Issuer
will be obligated to appoint a successor Indenture Trustee. The Indenture
Trustee also may be removed at any time by Noteholders representing a majority
of the Note Principal Balance of the Notes, if the Indenture Trustee ceases to
be eligible to continue as such under the Indenture or if the Indenture Trustee
becomes incapable of acting, bankrupt, insolvent or if a receiver or public
officer takes charge of the Indenture Trustee or its
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<PAGE>
property. Any resignation or removal of the Indenture Trustee and appointment of
a successor Indenture Trustee will not become effective until acceptance of the
appointment by the successor Indenture Trustee.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Notes will be characterized as
indebtedness and not as representing an ownership interest in the Trust Fund or
an equity interest in the Issuer or the Company. In addition, for federal income
tax purposes, the Issuer will not be (i) classified as an association taxable as
a corporation for federal income tax purposes, (ii) a taxable mortgage pool as
defined in Section 7701(i) of the Code, or (iii) a "publicly traded partnership"
as defined in Treasury Regulation Section 1.7704-1. The Notes will not be
treated as having been issued with "original issue discount" (as defined in the
Prospectus). The prepayment assumption that will be used in determining the rate
of amortization of 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 those rates or at any other rate. See "Federal Income Tax
Consequences" in the Prospectus.
The Notes will NOT be treated as assets described in Section
7701(a)(19)(C) of the Code or "real estate assets" under Section 856(c)(4)(A) of
the Code. In addition, interest on the Notes will NOT be treated as "interest on
obligations secured by mortgages on real property" under Section 856(c)(3)(B) of
the Code. The Notes will also NOT be treated as "qualified mortgages" under
Section 860G(a)(3)(C) of the Code.
Prospective investors in the Notes should see "Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the Prospectus for a
discussion of the application of certain federal income and state and local tax
laws to the Issuer and purchasers of the Notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated March 27, 1998 (the "Underwriting Agreement"), among Lehman
Brothers, Inc. (the "Underwriter"), the Company and IMH, the Underwriter has
agreed to purchase and the Company has agreed to sell to the Underwriter the
Notes. It is expected that delivery of the Senior Notes will be made only in
book-entry form through the Same Day Funds Settlement System of DTC, and that
the delivery of the Subordinate Notes will be made at the offices of the
Underwriter, New York, New York, on or about March 31, 1998, against payment
therefor in immediately available funds.
The Notes will be purchased from the Company by the Underwriter and
will be offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Notes are expected to be
approximately $292,694,671, before the deduction of expenses payable by the
Company estimated to be approximately $1,080,000. The Underwriter may effect
such transactions by selling the Notes to or through dealers, and such dealers
may receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter. In connection with the sale of the Notes, the
Underwriter may be deemed to have received compensation from the Company in the
form of underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Notes may be deemed
to be underwriters and any profit on the resale of the Notes positioned by them
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933.
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<PAGE>
The Underwriting Agreement provides that the Company and IMH will
jointly and severally 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.
There can be no assurance that a secondary market for the Notes will
develop or, if it does develop, that it will continue or provide the Noteholders
with sufficient liquidity of investment. The primary source of information
available to investors concerning the Notes will be the monthly statements
discussed in the Prospectus under "Description of the Notes--Reports to
Noteholders," which will include information as to the outstanding principal
balance of the Notes. There can be no assurance that any additional information
regarding the Notes will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Notes will be generally available on an ongoing basis. The limited nature of
such information regarding the Notes may adversely affect the liquidity of the
Notes, even if a secondary market for the Notes becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Notes will be passed upon for the
Company, IMH and the Seller by Thacher Proffitt & Wood, New York, New York and
for the Underwriter by Brown & Wood LLP, New York, New York. Certain legal
matters relating to the Preferred Mortgage Loans will be passed upon for the
Company, IMH and the Seller by Wolf & Richards, A Law Corporation.
RATINGS
It is a condition of the issuance of the Senior Notes that they be
rated "Aaa" by Moody's Investors Service, Inc. ("Moody's") and "AAA" by Fitch
IBCA, Inc. ("Fitch"). It is a condition to the issuance of the Class M-1 Notes
that they be rated not lower than "Aa2" and "AA" by Moody's and Fitch,
respectively. It is a condition to the issuance of the Class M-2 Notes that they
be rated not lower than "A2" and "A" by Moody's and Fitch, respectively. It is a
condition to the issuance of the Class B-1 Notes that they be rated not lower
than "Baa2" and "BBB" by Moody's and Fitch, respectively.
The rating process of Moody's addresses the structural and legal
aspects associated with the Notes, including the nature of the underlying
mortgage loans. The ratings assigned to the Notes do not represent any
assessment of the likelihood or rate of principal prepayments. The ratings do
not address the possibility that Noteholders might suffer a lower than
anticipated yield. The ratings do not address the likelihood that Noteholders
will be paid any Prepayment Interest Shortfalls or Relief Act Shortfalls.
Fitch's ratings on mortgage pass-through Notes address the likelihood
of the receipt by Noteholders of payments required under the Indenture. Fitch's
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Notes, and the extent to which
the payment stream in the mortgage pool is adequate to make payments required
under the Notes. Fitch's rating on the Notes does not, however, constitute a
statement regarding frequency of prepayments on the mortgages.
See "Certain Yield and Prepayment Considerations" herein.
The Company has not requested a rating on the Notes by any rating
agency other than Moody's and Fitch. However, there can be no assurance as to
whether any other rating agency will rate the Notes, or, if it does, what rating
would be assigned by any such other rating agency. A rating on the Notes by
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<PAGE>
another rating agency, if assigned at all, may be lower than the ratings
assigned to the Notes by Moody's and Fitch.
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. In the event that the ratings
initially assigned to the Notes are subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to the Notes.
LEGAL INVESTMENT
The Notes will not constitute "mortgage related securities" for
purposes of SMMEA. See "Legal Investment" in the Prospectus.
The Company makes no representations as to the proper characterization
of the Notes for legal investment or other purposes, or as to the ability of
particular investors to purchase the Notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Notes. 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 the Notes constitute a legal investment
or are subject to investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Code impose certain requirements on employee benefit plans and
certain other retirement plans and arrangements (including, but not limited to,
individual retirement accounts and annuities), as well as on collective
investment funds and certain separate and general accounts of insurance
companies in which such plans or arrangements are invested (all of which are
hereinafter referred to as a "Plan") and on persons who are fiduciaries with
respect to such Plans. ERISA and the Code prohibit certain transactions
involving the assets of a Plan and "disqualified persons" (within the meaning of
the Code; "Disqualified Persons") and "parties in interest" (within the meaning
of ERISA; "Parties in Interest") who have certain specified relationships to the
Plan. Accordingly, prior to making an investment in the Notes, investing Plans
should determine whether the Issuer, the Company, the Seller, the Trust Fund,
the Owner Trustee, the Indenture Trustee, the Underwriter, any other
underwriter, the Master Servicer, the Subservicers, any other servicer, any
administrator, any provider of credit support, or any insurer or any of their
affiliates is a Party in Interest or Disqualified Person with respect to such
Plan and, if so, whether such transaction is subject to one or more statutory or
administrative exemptions. Additionally, an investment of the assets of a Plan
in securities may cause the assets included in the Trust Fund to be deemed "Plan
Assets" of such Plan, and any person with certain specified relationships to the
Trust Fund to be deemed a Party in Interest or Disqualified Person. The U.S.
Department of Labor (the "DOL") has promulgated regulations at 29 C.F.R. Section
2510.3-101 (the "Plan Asset 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 Section 4975 of the Code.
Under the Plan Asset Regulations, generally, when a Plan acquires an "equity
interest" in another entity (such as the Trust Fund), the underlying assets of
that entity may be considered to be Plan Assets. The Plan Asset Regulations
provide that the term "equity
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<PAGE>
interest" means any interest in an entity other than an instrument which is
treated as indebtedness under applicable local law and which has no "substantial
equity features." Although not entirely free from doubt, it is believed that, as
of the date hereof, the Notes will be treated as debt obligations without
significant equity features for the purposes of the Plan Asset Regulations.
Because of the factual nature of certain of the above-described provisions of
ERISA, the Code and the Plan Asset Regulations, Plans or persons investing Plan
Assets should carefully consider whether such an investment might constitute or
give rise to a prohibited transaction under ERISA or the Code. Any Plan
fiduciary which proposes to cause a Plan to acquire any of the Notes should
consult with its counsel with respect to the potential consequences under ERISA
and the Code of the Plan's acquisition and ownership of such Notes.
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================================================================================
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 Notes
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- 3
Risk Factors......................................... S-13
Description of the Mortgage Pool..................... S-14
The Issuer........................................... S-35
The Owner Trustee.................................... S-35
The Indenture Trustee................................ S-36
Description of the Notes............................. S-37
Certain Yield and Prepayment Considerations.......... S-46
Description of the Servicing Agreement............... S-53
Master Servicer and Subservicers..................... S-53
The Indenture........................................ S-55
Federal Income Tax Consequences...................... S-58
Method of Distribution............................... S-58
Legal Opinions....................................... S-59
Ratings.............................................. S-59
Legal Investment..................................... S-60
ERISA Considerations................................. S-60
Appendix A--Underwriting Guidelines Applicable
to the Mortgage Loans........................... A-1
Prospectus
Summary of Prospectus ............................... 4
Risk Factors......................................... 13
The Mortgage Pools................................... 18
Servicing of Mortgage Loans.......................... 29
Description of the Notes ............................ 36
Description of Credit Enhancement.................... 49
Purchase Obligations................................. 58
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder....................... 58
The Company.......................................... 62
Impac Funding Corporation............................ 62
The Agreements....................................... 62
Yield Considerations................................. 66
Maturity and Prepayment Considerations............... 69
Certain Legal Aspects of Mortgage Loans.............. 70
Federal Income Tax Consequences...................... 83
State and Other Tax Consequences..................... 90
ERISA Considerations................................. 90
Legal Investment Matters ............................ 91
Use of Proceeds...................................... 92
Methods of Distribution.............................. 93
Legal Matters........................................ 94
Financial Information................................ 94
Rating............................................... 94
Index of Principal Definitions....................... 95
================================================================================
IMPAC SECURED ASSETS CORP.
IMPAC SECURED ASSETS CMN TRUST
SERIES 1998-1
$292,395,000
COLLATERALIZED ASSET-BACKED NOTES,
SERIES 1998-1
------------------
PROSPECTUS SUPPLEMENT
-----------------
-----------------------
March 27, 1998
Lehman Brothers
================================================================================
<PAGE>
APPENDIX A -- UNDERWRITING GUIDELINES FOR THE MORTGAGE LOANS
UNDERWRITING PROGRAMS FOR PREFERRED CREDIT CORPORATION
UNDERWRITING STANDARDS
GENERAL. The Mortgage Loans originated by Preferred will have been made
to borrowers that typically have limited access to traditional home equity
mortgage financing for a variety of reasons, such as insufficient home equity
value, high levels of debt-to-income ratios, unfavorable past credit experience
or a limited credit history. Preferred considers the underwriting policy under
which the Mortgage Loans are underwritten to be analogous to credit lending,
rather than equity lending, since its underwriting decisions are based primarily
on the borrower's credit history and capacity to repay rather than on the
potential value upon foreclosure of the Mortgaged Property pledged as collateral
to secure the related Mortgage Loan. Loan decisions are based primarily on an
analysis of the prospective borrower's documented cash flow and credit history
and supplemented by a collateral evaluation. The proceeds of the Mortgage Loans
are generally used by the related borrowers to finance (i) debt consolidation,
(ii) property improvements, (iii) the acquisition of personal property such as
home appliances or furnishings, (iv) the purchase or refinancing of residential
one- to four-family properties, and (v) a combination of debt consolidation,
property improvements and other consumer purposes.
UNDERWRITING PROCESS OF PREFERRED. Each prospective mortgagor completes
a mortgage loan application that includes information with respect to the
applicant's liabilities, income, credit history, employment history and personal
information. The application is subject to a direct credit investigation by
Preferred or Preferred's approved correspondent prior to the extension of
credit. Preferred's underwriting investigation generally includes (i)
verification of employment, which normally includes, for salaried borrowers, two
of the most recent consecutive pay stubs showing year-to-date earnings and the
previous year's W-2 form and for self-employed borrowers, a minimum of two years
of tax returns or other written or telephone verification with employers, (ii)
verifying ownership of the property and any senior mortgage balance, (iii)
verifying payment history of the senior lien, which may be obtained form credit
bureau information or in writing or by telephone from the holder of any senior
lien, and (iv) obtaining and reviewing an independent credit bureau report from
one of three national credit repositories-- TRW, TransUnion and Equifax. 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 evaluating the credit quality of borrowers, Preferred utilizes
credit bureau risk scores (the "Credit Score"), a statistical ranking of likely
future credit performance developed by Fair, Isaac & Company ("Fair, Isaac") and
the three national credit repositories--Equifax, TransUnion and TRW. The Credit
Scores available from the three national credit repositories are calculated by
the assignment of weightings to the most predictive data collected by the credit
repositories and range from the 400s to the 800s. Such Credit Scores have been
calibrated to indicate the same level of credit risk regardless of which credit
repository is used. Such Credit Scores are based solely on the information at
the particular credit repository. The Credit Score is obtained from one of the
three national credit repositories stated above and is used by Preferred to
provide a means of analysis to assist the underwriter to estimate the
probability that the proposed mortgage loan will be paid in accordance with its
terms, however, the final decision whether to approve a Mortgage Loan rests with
Preferred. Credit Scores are not necessarily indicative
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<PAGE>
of ultimate performance of loans, but serve as a measure, based on historical
origination and statistical data, of the creditworthiness of borrowers.
The Maximum Loan Amount ("MLA") a borrower can obtain is generally
determined by a combination of considerations, including the Credit Score of the
primary wage earner and the combined debt-to-income ratio (the "DTI") of joint
borrowers. Provided a mortgage loan generally meets Preferred's other
underwriting guidelines, borrowers with applicable Credit Scores and DTIs may
generally be granted Maximum Loan Amounts of up to $65,000 and a DTI of up to
50%. Exceptions to these guidelines, including exceptions for Maximum Loan
Amounts greater than $65,000, Credit Scores below 620 and DTI's above 50%, may
be approved at Preferred's discretion.
Preferred generally requires one of the following to be obtained for
each Mortgage Loan: (i) a Uniform Residential Appraisal Report in compliance
with FNMA or FHLMC guidelines, (ii) a Second Mortgage Property Value Analysis
Report, typically referred to as a "Drive-By Appraisal Report" which consists
exclusively of an exterior inspection of the property without examination of
interior, or (iii) a comparable sale analysis report referred to as a "Desk-Top
Appraisal Report" which generally consists of an analysis of historical
comparable sale information on similar type properties through the use of public
record information or other on-line real estate sale information services and
does not consist of an exterior or interior inspection of the property. All
appraisals are analyzed on an "as is" valuation. Substantially all of the
appraisals on the Mortgage Loans are drive-by appraisals and such appraisals are
only considered to a limited extent by Preferred in its mortgage loan
underwriting decisions. There can be no assurance that the values determined by
appraisers at the time of loan origination will be achieved in the event of
foreclosure sale or that a different appraiser (or an appraisal which included
an interior review) would have arrived at the same opinion of value.
UNDERWRITING PROGRAMS FOR IMPAC FUNDING CORPORATION
Mortgage Loans included in the Mortgage Pool originated or acquired by
the Seller (other than the Preferred Mortgage Loans, the "Impac Funding Loans")
will have been purchased by the Seller, either directly or indirectly from
Unaffiliated Sellers (as defined in the Prospectus). Such Mortgage Loans will
generally have been originated in accordance with underwriting standards
acceptable to the Seller or alternative underwriting criteria. The underwriting
standard for the Impac Mortgage Loans are described below and in the Prospectus
Supplement.
Generally, the underwriting standards used in originating the Impac
Mortgage Loans are primarily intended to place a greater emphasis on the
creditworthiness of the borrower than on the underlying collateral in evaluating
the likelihood that a borrower will be able to repay such Mortgage Loan.
Generally, the Impac Mortgage Loans purchased by the Seller have been
made to borrowers that typically have demonstrated a commitment to maintain
their credit obligations regardless of collateral. The creditworthiness of the
borrower should be evidenced by a strong credit history as indicated by both
traditional credit methods and credit risk scoring models; a commitment to home
ownership based on a non-delinquent mortgage payment history; and a stable
employment background with a documented history of earnings sufficient to repay
obligations; and use the proceeds for home improvements and/or debt
consolidation. Under the "Closed-End Home Equity Loan" program, the originator
obtains credit information with respect to each applicant from several sources
and generally does not permit the ratio of total monthly debt obligations to
monthly gross income to exceed 54.16%. Generally, the applicant will
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<PAGE>
have a Credit Score of 620 or greater. A credit score (the "CREDIT SCORE") is
derived based on a methodology developed by Fair, Isaac and Company, a
consulting firm specializing in creating default predictive models through
scoring mechanisms. The Credit Scores, which are obtained from national credit
reporting organizations, are numerical representations of borrowers' estimated
default probabilities, and generally range from a low of 200 to a high of 800. A
borrower with a Credit Score of 720 or higher would be assigned the highest
classification for credit quality by the Seller. The principal amount of the
"Closed-End Home Equity Loan" originated or purchased by the Seller does not
exceed $150,000. Other than on an exception basis, the loans originated under
the "Closed-End Home Equity Loan" program will not have a Combined
Loans-to-Value Ratio in excess of 135%. In general, the loan is secured by a
first or second lien on the related property. In most instances the property is
improved with an owner-occupied one-to-four family residence.
The Seller's underwriting standards are designed to provide a program
for all qualified applicants in an amount and for a period of time consistent
with their ability to repay. The Seller's underwriting determinations are made
without regard to sex, martial status, race, color, religion, age or national
origin. Each application is evaluated on its individual merits, applying the
stated guidelines to ensure that each application is considered equitably.
The "Closed-End Home Equity Loan" program allows for "stated
value" (i.e., independent verification of property values are not required) on
loans of $35,000 and less. Generally, the Seller bases the loan decision on the
creditworthiness of the borrower, rather than the underlying collateral.
However, the Seller reserves the right to require an appraisal or other
documentation verifying values in each and every transaction.
A credit report by an independent, nationally recognized credit
reporting agency reflecting the applicant's complete credit history is required.
The credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, bankruptcies and similar instance of
adverse credit that can be discovered by a search of public records. An
applicants recent credit report, obtained by the originator opposed to the
correspondent, is used to evaluate the borrower's payment record and must be
current at the time of application. A lack of credit history payment will not
necessarily preclude a loan if the borrower has sufficient equity in the
property.
Generally, the Seller requires a Title Report or an Abstract of Title
with Liability Coverage that includes a bring down or date down endorsement or
certification on all property securing loans it originators or purchases. Title
reports indicate the lien position of any related senior mortgage loans.
Generally, the Seller has established classifications with respect to
the credit profiles of applicants based on Credit Scores. The criteria currently
used by the Seller to classify loan applicants are generally
as follows:
A-3
<PAGE>
<TABLE>
<CAPTION>
LOAN AMOUNT MINIMUM CREDIT SCORE EXISTING MORTGage BANKRUPTCY FILINGS
<S> <C> <C> <C>
$150,000 720 & above No 30-day late Discharged for at
payments in last least 3 years with
12 months and no re-established credit
60-day late payments prior to closing
$ 125,000 719-680 One time 30-days late Discharged for at
payment in last least 3 years with
12 months and no re-established credit
60-day late payments prior to closing
$100,000 679-660 Two times 30-days late Discharged for at
payment in last least 3 years with
12 months and no re-established credit
60-day late payments prior to closing
$100,000 659-640 Two times 30-days late Discharged for at
payment in last least 3 years with
12 months and no re-established credit
60-day late payments prior to closing
</TABLE>
Additionally, the Seller's underwriting criteria require loan
applicants to meet a minimum monthly disposable income requirement of $1,500 and
a debt-to-income ratio of 50% associated with all loan
amount and credit score classifications.
With respect to existing non-mortgage credit, minor derogatory items
are acceptable. Generally, collections and/or charge-offs must be brought
current. Installment and revolving histories can show one 30-day delinquency in
the past 12 months with a credit score of 680 and above. While installment and
revolving histories can show three 30-day delinquency in the past 12 months with
a credit score of 640 and above.
In response to changes and developments in the consumer finance area as
well as the refinement of the Seller's credit evaluation methodology, the
Seller's underwriting requirements for certain types of loans may change from
time to time resulting sometimes in more stringent and sometimes in less
stringent underwriting requirements. Depending upon the date on which the Impac
Funding Loans were originated or purchased by the Seller, such loans may have
been originated or purchased by the Seller under different underwriting
requirements, and accordingly, certain of the Impac Funding Loans may be of a
different credit quality and have different loan characteristics from those of
other loans. Furthermore, to the extent that certain loans were originated or
purchased by the Seller in accordance with less stringent underwriting
requirements, such Impac Funding Loans may be more likely to experience higher
rates of delinquencies, defaults and losses than those Impac Funding Loans
originated or purchased in accordance with more stringent underwriting
requirements.
A-4
<PAGE>
PROSPECTUS
Mortgage Pass-Through Certificates
Mortgage-Backed Notes
IMPAC SECURED ASSETS CORP.
The mortgage pass-through certificates (the "Certificates") or
mortgage-backed notes (the "Notes") offered hereby (the "Offered Securities")
and by the supplements hereto (each, a "Prospectus Supplement") will be offered
from time to time in series. The Offered Securities of each series, together
with any other mortgage pass-through certificates or mortgage-backed notes of
such series, are collectively referred to herein as the "Securities."
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in, and each series of Notes will represent
indebtedness of, a trust fund (with respect to any series, the "Trust Fund") to
be established by Impac Secured Assets Corp., formerly known as 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 Securities (the
"Securityholders") pursuant to (i) with respect to each series of Certificates,
a pooling and servicing agreement or other agreement (in either case, a "Pooling
Agreement") or (ii) with respect to each series of Notes, an indenture (an
"Indenture"), in each case as more fully described herein and in the related
Prospectus Supplement. Information regarding the Offered Securities 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 Securities will include one or more classes. Each class
of Securities 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
Securities, 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 and in the related Prospectus Supplement. A series
may include one or more classes of Securities entitled to principal
distributions, with disproportionate, nominal or no interest distributions, or
to interest distributions, with disproportionate, nominal or no principal
distributions. A series may include two or more classes of Securities which
differ as to the timing, sequential order, priority of payment, pass-through
rate or amount of distributions of principal or interest or both.
THE COMPANY'S ONLY OBLIGATIONS WITH RESPECT TO A SERIES OF SECURITIES
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 SECURITIES 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 SECURITIES"
If so specified in the related Prospectus Supplement, the Trust Fund
for a series of Securities 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 Securities. See "Description of Credit
Enhancement."
The rate of payment of principal of each class of Securities 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 Securities in the manner
described herein under "Yield Considerations" and in the related Prospectus
Supplement.
With respect to each series of Certificates, one or more separate
elections may be made to treat the related 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
SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE 15 HEREIN AND ON PAGE S-14 OF
THE RELATED PROSPECTUS SUPPLEMENT.
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND ARE THE SOLE
SOURCE OF PAYMENTS ON THE SECURITIES. THE SECURITIES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE SECURITIES 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 Securities 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 Securities of any
series prior to the offering thereof. There can be no assurance that a secondary
market for any of the Offered Securities will develop or, if it does develop,
that it will continue. The Offered Securities 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 an "Index of Principal
Definitions" beginning
on page 118 herein.
Prospectus dated March 27, 1998
<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 SECURITIES OFFERED
HEREBY AND THEREBY OR AN OFFER OF SUCH SECURITIES TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE; 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................................................................-15-
THE MORTGAGE POOLS..........................................................-22-
General ..........................................................-22-
The Mortgage Loans.................................................-23-
Underwriting Standards.............................................-27-
Qualifications of Originators and Sellers..........................-29-
Representations by Sellers.........................................-29-
SERVICING OF MORTGAGE LOANS.................................................-32-
General ..........................................................-32-
The Master Servicer................................................-32-
Collection and Other Servicing Procedures;
Mortgage Loan Modifications...............................-32-
Subservicers.......................................................-34-
Special Servicers..................................................-35-
Realization Upon or Sale of Defaulted
Mortgage Loans............................................-35-
Servicing and Other Compensation and
Payment of Expenses; Spread..............................-37-
Evidence as to Compliance..........................................-38-
DESCRIPTION OF THE SECURITIES...............................................-38-
General ..........................................................-38-
Form of Securities.................................................-40-
Assignment of Trust Fund Assets....................................-41-
Certificate Account................................................-43-
Distributions......................................................-47-
Distributions of Interest and Principal
on the Securities.........................................-47-
Distributions on the Securities in Respect of
Prepayment Premiums or in Respect of
Equity Participations.....................................-48-
Allocation of Losses and Shortfalls................................-48-
Advances ..........................................................-49-
Reports to Securityholders.........................................-49-
DESCRIPTION OF CREDIT ENHANCEMENT...........................................-51-
General ..........................................................-51-
Subordinate Securities.............................................-52-
Letter of Credit...................................................-52-
Mortgage Pool Insurance Policies...................................-52-
Special Hazard Insurance Policies..................................-54-
Bankruptcy Bonds...................................................-55-
Reserve Funds......................................................-55-
Maintenance of Credit Enhancement..................................-56-
Reduction or Substitution of Credit Enhancement....................-57-
PURCHASE OBLIGATIONS........................................................-58-
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER..................................................-58-
Primary Mortgage Insurance Policies................................-59-
Hazard Insurance Policies..........................................-60-
FHA Insurance......................................................-61-
THE COMPANY.................................................................-61-
IMPAC FUNDING CORPORATION...................................................-62-
IMPAC MORTGAGE HOLDINGS, INC................................................-62-
THE AGREEMENTS..............................................................-62-
General ..........................................................-62-
Certain Matters Regarding the Master Servicer
and the Company..........................................-63-
Events of Default and Rights Upon
Events of Default.........................................-64-
Amendment..........................................................-66-
Termination; Retirement of Securities..............................-68-
The Trustee........................................................-68-
Limitations on the Duties of the Trustee...........................-68-
Certain Matters Regarding the Trustee..............................-69-
Resignation and Removal of the Trustee.............................-69-
YIELD CONSIDERATIONS........................................................-69-
MATURITY AND PREPAYMENT CONSIDERATIONS......................................-71-
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.....................................-72-
Single Family Loans and Multifamily Loans..........................-73-
Contracts..........................................................-73-
Foreclosure on Mortgages and Certain Contracts.....................-75-
Repossession with respect to Contracts.............................-76-
Rights of Redemption...............................................-77-
Anti-Deficiency Legislation and Other
Limitations on Lenders....................................-78-
Environmental Legislation..........................................-79-
Consumer Protection Laws with respect to
Contracts................................................-80-
Enforceability of Certain Provisions...............................-81-
Subordinate Financing..............................................-82-
Applicability of Usury Laws........................................-83-
Alternative Mortgage Instruments...................................-83-
Formaldehyde Litigation with respect to Contracts..................-84-
Soldiers' and Sailors' Civil Relief Act of 1940....................-84-
Junior Mortgages...................................................-85-
FEDERAL INCOME TAX CONSEQUENCES.............................................-86-
REMICS ..........................................................-87-
Notes .........................................................-101-
Grantor Trust Funds...............................................-101-
STATE AND OTHER TAX CONSEQUENCES...........................................-109-
ERISA CONSIDERATIONS.......................................................-110-
Tax Exempt Investors..............................................-113-
Consultation with Counsel.........................................-114-
LEGAL INVESTMENT MATTERS...................................................-114-
USE OF PROCEEDS............................................................-115-
METHODS OF DISTRIBUTION....................................................-115-
LEGAL MATTERS..............................................................-116-
FINANCIAL INFORMATION......................................................-116-
RATING ..................................................................-117-
-2-
<PAGE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED OFFERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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 Securityholders.
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 SECURITYHOLDERS
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 Securities of the related series. 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 Securities, 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 Securities 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 Securityholders of any series is made
containing the Monthly Statement; (v) if any monthly (or other periodic)
distribution to Securityholders 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 Securityholders 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 Securities 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
-3-
<PAGE>
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 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
Securities-Reports to Securityholders."
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
Securities 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 Securities, 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 Securities, 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 Impac
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 Securities.
-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 SECURITIES CONTAINED IN THE
PROSPECTUS SUPPLEMENT TO BE PREPARED AND DELIVERED IN CONNECTION WITH THE
OFFERING OF OFFERED SECURITIES 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 118.
Securities Offered........................Mortgage pass-through certificates or
mortgage-backed notes. The mortgage
pass- through certificates (the
"Offered Certificates") or
mortgage-backed notes (the "Offered
Notes"; the Offered Notes or the
Offered Certificates, the "Offered
Securities") offered hereby and by the
various Prospectus Supplements with
respect hereto will be offered from
time to time in series. The Offered
Securities of each series, together
with any other mortgage pass-through
certificates or mortgage-backed notes
of such series, are collectively
referred to herein as the
"Securities."
Company...................................Impac Secured Assets Corp., formerly
known as ICIFC Secured Assets Corp.
(the "Company"), is a wholly-owned
subsidiary of Impac Funding
Corporation ("Impac Funding"),
formerly known as ICI Funding
Corporation. See "The Company" and
"Impac Funding Corporation."
Master Servicer...........................The master servicer (the "Master
Servicer"), if any, for a series of
Securities 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 Impac Funding,
the Company's parent and a
non-consolidating subsidiary of Impac
Mortgage Holdings, Inc. ("IMH"),
formerly known as Imperial Credit
Mortgage Holdings. See "Impac 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
Securities 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
-5-
<PAGE>
unaffiliated with the Company or an
affiliate of the Company. See
"Servicing of Mortgage Loans--Special
Servicers."
Issuer....................................With respect to each series of Notes,
the issuer (the "Issuer") will be the
Company or an owner trust established
by it for the purpose of issuing such
series of Notes. Each such owner trust
will be created pursuant to a trust
agreement (the "Owner Trust
Agreement") between the Company,
acting as depositor, and the Owner
Trustee. Each series of Notes will
represent indebtedness of the Issuer
and will be issued pursuant to an
indenture between the Issuer and the
Trustee (the "Indenture") whereby the
Issuer will pledge the Trust Fund to
secure the Notes under the lien of the
Indenture. As to each series of Notes
where the Issuer is an owner trust,
the ownership of the Trust Fund will
be evidenced by certificates (the
"Equity Certificates") issued under
the Owner Trust Agreement, which are
not offered hereby. The Notes will
represent nonrecourse obligations
solely of the Issuer, and the proceeds
of the Trust Fund will be the sole
source of payments on the Notes,
except as described herein under
"Description of Credit Enhancement"
and in the related Prospectus
Supplement.
Trustees..................................The trustee or indenture trustee
(each, the "Trustee") for each series
of Certificates and Notes,
respectively, will be named in the
related Prospectus Supplement. The
Owner Trustee (the "Owner Trustee")
for each series of Notes will be named
in the related Prospectus Supplement.
See "The Agreements--The Trustee."
The Securities............................Each series of Securities will include
one or more classes of Securities
which will represent either (i) with
respect to each series of
Certificates, in the aggregate the
entire beneficial ownership interest
in, or (ii) with respect to each
series of Notes, indebtedness of, 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
-6-
<PAGE>
(collectively, a "Trust Fund"), and
will be issued pursuant to either (i)
with respect to each series of
Certificates, a pooling and servicing
agreement or other agreement specified
in the related Prospectus Supplement
(in either case, a "Pooling
Agreement") or (ii) with respect to
each series of Notes, an indenture
specified in the related Prospectus
Supplement (the "Indenture"). Except
for certain Strip Securities and REMIC
Residual Certificates (each as
hereinafter described), each series of
Securities, or class of Securities 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 "Security Interest Rate").
The Security Interest Rate of each
Security offered hereby will be stated
in the related Prospectus Supplement
as the "Pass-Through Rate" with
respect to a Certificate and the "Note
Interest Rate" with respect to a Note.
Each series or class of Securities may
have a different Security Interest
Rate, which may be a fixed, variable
or adjustable Security Interest Rate,
or any combination of two or more such
Security Interest Rates. The related
Prospectus Supplement will specify the
Security Interest Rate or Rates for
each series or class of Securities, or
the initial Security Interest Rate or
Rates and the method for determining
subsequent changes to the Security
Interest Rate or Rates.
A series may include one or more
classes of Securities ("Strip
Securities") entitled (i) to principal
distributions, with disproportionate,
nominal or no interest distributions,
or (ii) to interest distributions,
with disproportionate, nominal or no
principal distributions. In addition,
a series may include two or more
classes of Securities 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 Securities ("Accrual
Securities"), as to which
-7-
<PAGE>
certain accrued interest will not be
distributed but rather will be added
to the principal balance thereof on
each Distribution Date, as hereinafter
defined, in the manner described in
the related Prospectus Supplement.
If so provided in the related
Prospectus Supplement, a series of
Securities may include one or more
classes of Securities (collectively,
the "Senior Securities") which are
senior to one or more classes of
Securities (collectively, the
"Subordinate Securities") in respect
of certain distributions of principal
and interest and allocations of losses
on Mortgage Loans. In addition,
certain classes of Senior (or
Subordinate) Securities may be senior
to other classes of Senior (or
Subordinate) Securities in respect of
such distributions or losses. As to
each series of Certificates, 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
Securities."
The Securities 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
-8-
<PAGE>
insured by the Company, any of its
affiliates 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
securities 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 Securities of the
related series and will be filed,
together with the related Pooling
Agreement, with respect to each series
of Certificates, and the related
Servicing Agreement, Owner Trust
Agreement and Indenture, with respect
to each series of Notes,
-9-
<PAGE>
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 of Offered
Securities of each series, other than
Strip Securities or Accrual Securities
(prior to the time when accrued
interest becomes payable thereon),
will accrue at the applicable Security
Interest Rate (which may be a fixed,
variable or adjustable rate or any
combination thereof) on such class's
principal balance outstanding from
time to time and will be remitted on
the 25th day (or, if such day is not a
business day, on the next succeeding
business day) of each month,
commencing with the month following
the month in which the Cut- off Date
(as defined in the applicable
Prospectus Supplement) occurs (each, a
"Distribution Date"). Distributions,
if any, with respect to interest on
Strip Securities will be calculated
and made on each Distribution Date as
described herein under "Description of
the Securities--Distribution of
Interest and Principal on the
Securities" and in the related
Prospectus Supplement. Interest that
has accrued but is not yet payable on
any Accrual Securities 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
Securities (or, in the case of a class
of Accrual Securities, 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
Securities--Distributions of Interest
and Principal on the Securities."
Principal Distributions................Except as otherwise specified in the
related Prospectus Supplement,
principal distributions on the
Securities 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 Securities of such
series, or of the class or classes of
Securities then entitled thereto, on a
pro rata basis among all such
-10-
<PAGE>
Securities or among the Securities 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
Securities with no principal balance
will not receive distributions in
respect of principal. Distributions of
principal with respect to any series
of Securities, 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 Securities."
Credit Enhancement........................If so specified in the Prospectus
Supplement, the Trust Fund with
respect to any series of Securities
may include any one or any combination
of a letter of credit, mortgage pool
insurance policy, special hazard
insurance policy, bankruptcy bond,
reserve fund or other type of credit
support 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 Securities in a series
under which losses are first allocated
to any Subordinate Securities up to a
specified limit. With respect to any
series of Notes, the related Equity
Certificates, insofar as they
represent the beneficial ownership
interest in the Issuer, will be
subordinate to the related Notes.
Unless otherwise specified in the
related Prospectus Supplement, any
form of credit enhancement will have
certain limitations and exclusions
from coverage thereunder, which will
be described in the related Prospectus
Supplement. Losses not covered by any
form of credit enhancement will be
borne by the holders of the related
Securities (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 Securities. See "Description
of Credit Enhancement."
Advances..................................If and to the extent described in the
related Prospectus Supplement, and
subject to any
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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 Securities--Advances" either from
recoveries on or in respect of the
specific Mortgage Loan or, with
respect to any advance subsequently
determined to be nonrecoverable from
recoveries on or in respect of the
specific Mortgage Loan, out of funds
otherwise distributable to the holders
of the related series of Securities,
which may include the holders of any
Senior Securities of such series. If
and to the extent provided in the
Prospectus Supplement for a series of
Securities, 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 Securities 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 with respect to a
series of Certificates or the holder
of the Equity Certificates with
respect to a series of Notes, may at
its option either (i) effect early
retirement of a series of Securities
through the purchase of the assets in
the related Trust Fund or (ii)
purchase, in whole but not in part,
the Securities 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 Securities" and in the
related Prospectus Supplement.
Legal Investment..........................At the date of issuance, as to each
series, each class of Offered
Securities will be rated at the
request of the Company in one of the
four
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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 Securities 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
Securities of any series 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
Securities could give rise to a
transaction that is prohibited or is
not otherwise permissible either under
ERISA or Section 4975 of the Code.
Investors are advised to consult their
counsel and to review "ERISA
Considerations" herein and in the
related Prospectus Supplement.
Federal Income Tax Consequences...........Offered Certificates of each series of
Certificates 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. Offered
Notes of each series of Notes will
represent indebtedness of the related
Trust Fund.
Investors are advised to consult their
tax advisors as to the tax
consequences of an
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<PAGE>
investment in the Securities 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 Securities.
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 Securities 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 Securities
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 Securities, the nature of
the underlying mortgage assets and the
credit quality of the guarantor, if
any. Ratings on mortgage pass-through
Securities 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,
Securityholders might suffer a lower
than anticipated yield, and, in
addition, holders of stripped interest
Securities 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 Securities 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 Securities.
See "Risk Factors" beginning on page
15 herein and on page S-14 of the
Prospectus Supplement for a discussion
of significant matters affecting
investments in the Securities.
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Securities:
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<PAGE>
LIMITED LIQUIDITY. There can be no assurance that a secondary market for
the Offered Securities of any series will develop or, if it does develop, that
it will provide Securityholders with liquidity of investment or that it will
continue for the life of the Offered Securities of any series. The Prospectus
Supplement for any series of Offered Securities may indicate that an underwriter
specified therein intends to establish a secondary market in such Securities,
however no underwriter will be obligated to do so. The Offered Securities will
not be listed on any securities exchange.
LIMITED OBLIGATIONS. The Offered Securities 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
Securities, 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
or Servicing Agreement, as applicable (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 Securities 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 Securities (including the Mortgage
Loans or Mortgage Securities and any form of credit enhancement) will be the
sole source of payments on the Securities, and there will be no recourse to the
Company, 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 Securities.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. With respect
to each series of Securities, 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
Securities 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 "Subordination" and
"Description of Credit Enhancement" herein. Regardless of the form of credit
enhancement provided, the amount of coverage will be limited in amount and in
most cases will be subject to periodic reduction in accordance with a schedule
or formula. Furthermore, such credit enhancements may provide only very limited
coverage as to certain types of losses or risks, and may provide no coverage as
to certain other types of losses or risks. In the event losses exceed the amount
of coverage provided by any credit enhancement or losses of a type not covered
by any credit enhancement occur, such losses will be borne by the holders of the
related Securities (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 Securities, 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 Securities 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 Securities. See "Description
of Credit Enhancement--Reduction or Substitution of Credit Enhancement" herein.
RISKS OF DECLINING PROPERTY VALUES AND HIGH LOAN-TO-VALUE RATIOS. An
investment in securities such as the Securities 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
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
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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 Securities.
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 Securities 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 Securities--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 Securities.
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 Securities 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 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.
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<PAGE>
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 HIGH LTV LOANS. Some or all of the Mortgage Loans included in any
Trust Fund may be High LTV Loans. High LTV Loans with Combined Loan-to-Value
Ratios in excess of 100% may have been originated with a limited expectation of
recovering any amounts from the foreclosure of the related Mortgaged Property
and are underwritten with an emphasis on the creditworthiness of the related
borrower. If such Mortgage Loans go into foreclosure and are liquidated, there
may be no amounts recovered from the related Mortgaged Property unless the value
of the property increases or the principal amount of the related senior liens
have been reduced such as to reduce the current Combined Loan-to-Value Ratio of
the related Mortgage Loan to below 100%. Any such losses, to the extent not
covered by credit enhancement, may affect the yield to maturity of the
Securities.
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
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<PAGE>
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 Securities.
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 Securities.
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
Securityholders 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
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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
provide adequate security for the related Mortgage Loans and insufficient funds
are available from any applicable credit enhancement, Securityholders could
experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the 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
Securities that each series of Securities 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 Securities.
In the event of a breach of a Seller's representation or warranty that
materially adversely affects the interests of the Securityholders in a Mortgage
Loan 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 Securities.
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 Securities. 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
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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 Securities.
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 Securities 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 Securities. 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 Securities.
SUBORDINATION OF CERTAIN CLASSES OF SECURITIES. Credit support for a
particular series of Securities may be provided in the form of subordination of
one or more classes of Securities in a series under which losses are first
allocated to any Subordinate Securities up to a specified limit. Losses not
covered by any form of credit enhancement will be borne by the holders of the
related Securities (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 Securities 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 Securities
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 Securityholders. 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 Securities 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 Securities, including Accrual
Securities, Securities with a Security Interest Rate which fluctuates inversely
with an index or certain other classes in a series including more than one class
of Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities. 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 Securities 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 Securities 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
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"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 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 Securities specified in
the related Prospectus Supplement in the manner set forth in the related
Prospectus Supplement. Upon the purchase of such Securities 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 Securities and
the termination of the Trust Fund, or the Securities 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 Securities 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 Securities 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 Securityholders 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 Securities will set forth the
amounts that the holders of such Securities will be entitled to receive upon
such early retirement. A Trust Fund may also be terminated and the Securities
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
Securities by the Master Servicer or the Company may adversely affect the yield
to holders of certain classes of such Securities.
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
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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 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 Securities 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 Impac Funding and IMH (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 Securities (a
"Designated Seller Transaction"). Such Securities 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
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and the underwriting standards applicable to the Mortgage Loans. None of the
Company or, unless it is the Seller, Impac 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.
If specified in the related Prospectus Supplement, the Trust Fund for a
series of Securities may include mortgage participations and pass-through
Securities 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 Securities offered hereunder.
As to any such series of Securities, 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 15d) 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;
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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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(4) Negatively-amortizing ARM Loans having original or modified
terms to maturity of not more than approximately 25 or 30 years with
Mortgage Rates which generally adjust initially on the payment date
referred to in the related Prospectus Supplement, and on each of certain
periodic payment dates thereafter, to equal the sum of the Note Margin and
the index. The scheduled monthly payment will be adjusted as and when
described in the related Prospectus Supplement to an amount that would
fully amortize the Mortgage Loan over its remaining term on a level debt
service basis; provided that increases in the scheduled monthly payment may
be subject to certain limitations as specified in the related Prospectus
Supplement. If an adjustment to the Mortgage Rate on a Mortgage Loan causes
the amount of interest accrued thereon in any month to exceed the scheduled
monthly payment on such mortgage loan, the resulting amount of interest
that has accrued but is not then payable ("Deferred Interest") will be
added to the principal balance of such Mortgage Loan;
(5) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of not more than approximately 15 years with
monthly payments during the first year calculated on the basis of an
assumed interest rate which is a specified percentage below the Mortgage
Rate on such mortgage loan. Such monthly payments increase at the beginning
of the second year by a specified percentage of the monthly payment during
the preceding year and each year thereafter to the extent necessary to
amortize the mortgage loan over the remainder of its approximately 15-year
term. Deferred Interest, if any, will be added to the principal balance of
such mortgage loans;
(6) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of not more than approximately 25 or 30 years
with monthly payments during the first year calculated on the basis of an
assumed interest rate which is a specified percentage below the Mortgage
Rate. Such monthly payments increase at the beginning of the second year by
a specified percentage of the monthly payment during the preceding year and
each year thereafter to the extent necessary to fully amortize the mortgage
loan within its approximately 25- or 30-year term. Deferred Interest, if
any, will be added to the principal balance of such mortgage loan;
(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 Securities 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.
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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 Securities of a series will be entitled to all or a portion
of an Equity Participation, the related Prospectus Supplement will 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 Securities, 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. In addition, certain or all of the Single Family Loans may have
Loan-to-Value Ratios in excess of 80% and as high as 125% and will not be
insured by a Primary Insurance Policy (such Mortgage Loans, "High LTV Loans").
If provided for in the related Prospectus Supplement, a Mortgage Pool may
contain ARM Loans which allow the Mortgagors to convert the adjustable rates on
such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally not later than six to
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ten years subsequent to the date of origination, depending upon the length of
the initial adjustment period. If specified in the related Prospectus
Supplement, upon any conversion, the Company, the related Master Servicer, the
applicable Seller or a third party will purchase the converted Mortgage Loan as
and to the extent set forth in the related Prospectus Supplement. Alternatively,
if specified in the related Prospectus Supplement, the Company or the related
Master Servicer (or another party specified therein) may agree to act as
remarketing agent with respect to such converted Mortgage Loans and, in such
capacity, to use its best efforts to arrange for the sale of converted Mortgage
Loans under specified conditions. Upon the failure of any party so obligated to
purchase any such converted Mortgage Loan, the inability of any remarketing
agent to arrange for the sale of the converted Mortgage Loan and the
unwillingness of such remarketing agent to exercise any election to purchase the
converted Mortgage Loan for its own account, the related Mortgage Pool will
thereafter include both fixed rate and adjustable rate Mortgage Loans.
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be subject to temporary buydown plans ("Buydown Mortgage
Loans") pursuant to which the monthly payments made by the Mortgagor during the
early years of the Mortgage Loan (the "Buydown Period") will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) an amount (such amount, exclusive of investment earnings
thereon, being hereinafter referred to as "Buydown Funds") contributed by the
seller of the Mortgaged Property or another source and placed in a custodial
account (the "Buydown Account"), (ii) if the Buydown Funds are contributed on a
present value basis, investment earnings on such Buydown Funds or (iii)
additional buydown funds to be contributed over time by the Mortgagor's employer
or another source. See "Description of the Securities--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 Securities 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
Securities 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 Securities and will be filed, together with the related
Pooling Agreement, with respect to each series of Certificates, or the related
Servicing Agreement, Trust Agreement and Indenture, with respect to each series
of Notes, with the Securities and Exchange Commission within fifteen days after
the initial issuance of such Securities. 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 Securities 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 or Servicing
Agreement and will receive a fee for such services. See "Servicing of Mortgage
Loans," "Description of the Securities" and "The Agreements." With respect to
those Mortgage Loans serviced by the Master Servicer through a Subservicer, the
Master Servicer will remain liable for its servicing obligations under the
related Pooling Agreement or Servicing Agreement as if the Master Servicer alone
were servicing such Mortgage Loans. The Master Servicer's obligations with
respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Pooling Agreement or Servicing Agreement
(including its obligation to enforce certain purchase and other obligations of
Subservicers and Sellers, as more fully described herein under
"--Representations by Sellers" below, "Servicing of Mortgage
Loans--Subservicers," and "Description of the Securities--Assignment of Trust
Fund Assets," and, if and to the extent set forth in the related
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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 Securities--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 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.
High LTV Loans are underwritten with an emphasis on the creditworthiness of
the related Mortgagor. Such Mortgage Loans are underwritten with a limited
expectation of recovering any amounts from the foreclosure of the related
Mortgaged Property.
In the case of the Multifamily Loans, lenders typically look to the Debt
Service Coverage Ratio of a loan as an important measure of the risk of default
on such a loan. 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
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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 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 Securities may be less than the Value
determined at loan origination, and will likely continue to fluctuate from time
to time based upon changes in economic conditions and the real estate market.
Moreover, even when current, an appraisal is not necessarily a reliable estimate
of value for a Multifamily Property. As stated above, appraised values of
Multifamily Properties are generally based on the market analysis, the cost
analysis, the income analysis, or upon a selection from or interpolation of the
values derived from such approaches. Each of these appraisal methods can present
analytical difficulties. It is often difficult to find truly comparable
properties that have recently been sold; the replacement cost of a property may
have little to do with its current market value; and income capitalization is
inherently based on inexact projections of income and expenses and the selection
of an appropriate capitalization rate. Where more than one of these appraisal
methods are used and provide significantly different results, an accurate
determination of value and, correspondingly, a reliable analysis of default and
loss risks, is even more difficult.
If so specified in the related Prospectus Supplement, the underwriting of a
Multifamily Loan may also include environmental testing. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an
"owner" or "operator", for costs of addressing releases or threatened releases
of hazardous substances at a property, if agents or employees of the lender have
become sufficiently involved in the operations of the borrower, regardless of
whether or not the environmental damage or threat was caused by the borrower or
a prior owner. A lender also risks such liability on foreclosure of the
mortgage. See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation".
With respect to any FHA Loan the Mortgage Loan Seller will be required to
represent that it has complied with the applicable underwriting policies of the
FHA. See "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.
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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.
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 Securities. 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 Securityholders 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 Securities 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 Securities. 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
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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 Securities 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 Securities--Assignment of Trust
Fund Assets" below.
The Company will assign to the Trustee for the benefit of the holders of
the related series of Securities all of its right, title and interest in each
agreement by which it purchased a Mortgage Loan 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 Securityholders 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 Mortgage Security at
a price (the "Purchase Price") set forth in the related Pooling Agreement or
Servicing Agreement which Purchase Price will generally be equal to the
principal balance thereof as of the date of purchase plus accrued and unpaid
interest through or about the date of purchase at the related Mortgage Rate 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, with respect to a series of
Certificates for which no REMIC election is to be made, such substitution must
be effected within 120 days of the date of the initial issuance of the related
series of Securities 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 Securities, 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
Securityholders), (ii) have a Mortgage Rate and a Net Mortgage Rate not less
than (and not more than one percentage point greater than) the Mortgage Rate and
Net Mortgage Rate, respectively, of the Deleted Mortgage Loan as of the date of
substitution, (iii) have a Loan-to-Value Ratio at the time of substitution no
higher than that of the Deleted Mortgage Loan at the time of substitution, (iv)
have a remaining term to maturity not greater than (and not more than one year
less than) that of the Deleted Mortgage Loan, (v) comply with all of the
representations and warranties made by such Affiliated Seller as of the date of
substitution, and (vi) except in the case of High LTV Loans, be covered under a
primary insurance policy if such Mortgage Loan has a Loan-to-Value Ratio greater
than 80%. The related purchase agreement may include additional requirements
relating to ARM Loans or other specific types of Mortgage Loans, or additional
provisions relating to meeting the foregoing requirements on an aggregate basis
where a number of substitutions occur contemporaneously. 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
or Servicing Agreement to use reasonable efforts to enforce this purchase or
substitution obligation for the benefit of the Trustee and the Securityholders,
following such practices it would employ in its good faith business judgment and
which are normal and usual in its general mortgage servicing activities;
provided, however, that this purchase or substitution obligation will not become
an obligation of the Master Servicer in the event the applicable Seller fails to
honor such obligation.
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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 Securities. In accordance with the above described practices, the Master
Servicer will not be required to enforce any purchase obligation of a Seller
arising from any misrepresentation by the Seller, if the Master Servicer
determines in the reasonable exercise of its business judgment that the matters
related to such misrepresentation did not directly cause or are not likely to
directly cause a loss on the related Mortgage Loan 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 Securityholders 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.
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
Securities--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 Securities.
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 either a Pooling Agreement or a
Servicing Agreement. Forms of Pooling Agreements and a form of Servicing
Agreement have been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. However, the provisions of each Pooling Agreement or
Servicing 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 or Servicing Agreement for a Mortgage
Pool that includes Mortgage Loans. The related Prospectus Supplement will
describe any servicing-related provision of such a Pooling Agreement or
Servicing 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 or Servicing 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 or Servicing Agreement and the description of such
provisions in the related Prospectus Supplement.
With respect to any series of Securities 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
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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
Securities will be named in the related Prospectus Supplement and may be Impac
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 or a Servicing 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 or Servicing Agreement to service and
administer the Mortgage Loans in such Mortgage Pool for the benefit of the
related Securityholders, in accordance with applicable law and the terms of such
Pooling Agreement or Servicing Agreement, such Mortgage Loans and any instrument
of credit enhancement included in the related Trust Fund, and, to the extent
consistent with the foregoing, in the same manner as would prudent institutional
mortgage lenders servicing comparable mortgage loans for their own account in
the jurisdictions where the related Mortgaged Properties are located. Subject to
the foregoing, the Master 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 or Servicing Agreement, including the servicing standard specified
therein and generally described in the preceding paragraph (as such may be more
particularly described in the related Prospectus Supplement, the "Servicing
Standard"), and do not impair recovery under any instrument of credit
enhancement included in the related Trust Fund. Consistent with the foregoing,
the Master Servicer will be permitted, in its discretion, to waive any
Prepayment Premium, late payment charge or other charge in connection with any
Mortgage Loan.
Under a Pooling Agreement or Servicing Agreement, a Master Servicer will be
granted certain discretion to extend relief to Mortgagors whose payments become
delinquent. In the case of Single Family Loans and Contracts, a Master Servicer
may, among other things, grant a period of temporary indulgence (generally up to
four months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by such Mortgagor of delinquent amounts within a specified period
(generally up to one year) from the date of execution of the plan. However,
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 or Servicing Agreement and described in the related
Prospectus Supplement, to modify, waive or amend any term of such Mortgage Loan,
including deferring payments, extending the stated maturity date or otherwise
adjusting the payment schedule, provided that such modification, waiver or
amendment (i) is reasonably likely to produce a greater recovery with respect to
such Mortgage Loan on a present value basis than would liquidation and (ii) will
not adversely affect the coverage under any applicable instrument of credit
enhancement.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the related Master Servicer will be required to
monitor any Multifamily Loan that is in default, evaluate whether the causes of
the default can be corrected over a reasonable period without
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significant impairment of the value of the related Mortgaged Property, initiate
corrective action in cooperation with the Mortgagor if cure is likely, inspect
the related Mortgaged Property and take such other actions as are consistent
with the Servicing Standard. A significant period of time may elapse before the
Master Servicer is able to assess the success of any such corrective action or
the need for additional initiatives. The time within which the Master Servicer
can make the initial determination of appropriate action, evaluate the success
of corrective action, develop additional initiatives, institute foreclosure
proceedings and actually foreclose (or accept a deed to a Mortgaged Property in
lieu of foreclosure) on behalf of the Securityholders of the related series may
vary considerably depending on the particular Multifamily Loan, the Mortgaged
Property, the Mortgagor, the presence of an acceptable party to assume the
Multifamily Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a Mortgagor files a bankruptcy petition, the Master
Servicer may not be permitted to accelerate the maturity of the related
Multifamily Loan or to foreclose on the Mortgaged Property for a considerable
period of time. See "Certain Legal Aspects of Mortgage Loans."
Certain of the Mortgage Loans in a Mortgage Pool may contain a due-on-sale
clause that entitles the lender to accelerate payment of the Mortgage Loan upon
any sale or other transfer of the related Mortgaged Property made without the
lender's consent. Certain of the Multifamily Loans in a Mortgage Pool may also
contain a due-on-encumbrance clause that entitles the lender to accelerate the
maturity of the Mortgage Loan upon the creation of any other lien or encumbrance
upon the Mortgaged Property. In any case in which property subject to a Single
Family Loan or Contract is being conveyed by the Mortgagor, unless the related
Prospectus Supplement provides otherwise, the Master Servicer will in general be
obligated, to the extent it has knowledge of such conveyance, to exercise its
rights to accelerate the maturity of such Mortgage Loan under any due-on-sale
clause applicable thereto, but only if the exercise of such rights is permitted
by applicable law and only to the extent it would not adversely affect or
jeopardize coverage under any Primary Insurance Policy or applicable credit
enhancement arrangements. If the Master Servicer is prevented from enforcing
such due-on-sale clause under applicable law or if the Master Servicer
determines that it is reasonably likely that a legal action would be instituted
by the related Mortgagor to avoid enforcement of such due-on-sale clause, the
Master Servicer will enter into an assumption and modification agreement with
the person to whom such property has been or is about to be conveyed, pursuant
to which such person becomes liable under the Mortgage Loan subject to certain
specified conditions. The original Mortgagor may be released from liability on a
Single Family Loan or Contract if the Master Servicer shall have determined in
good faith that such release will not adversely affect the collectability of the
Mortgage Loan. 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
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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 Securityholders, and/or to preserve the security of the related
Mortgage Loan, subject to the application of the REMIC Provisions, if
applicable. 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 Securityholders 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
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 or Servicing 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 or Servicing
Agreement is sufficient to pay such fees. Each Subservicer will be entitled to
reimbursement for certain expenditures which it makes, generally to the same
extent as would the Master Servicer for making the same expenditures. See
"--Servicing and Other Compensation and Payment of Expenses; Spread" below and
"Description of the Securities--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 Servicing Agreement or may be appointed by the Master Servicer or
another specified party to perform certain specified duties in respect of
servicing the related Mortgage Loans that would otherwise be performed by the
Master Servicer (for example, the workout and/or foreclosure of defaulted
Mortgage Loans). The rights and obligations of any Special Servicer will be
specified in the related Prospectus Supplement, and the Master Servicer will be
liable for the performance of a Special Servicer only if, and to the extent, set
forth in such Prospectus Supplement.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below or in the related Prospectus Supplement, the
Master Servicer will be required, in a manner consistent with the Servicing
Standard, to foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Mortgage Loans in the related Mortgage Pool as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection therewith, the
Master Servicer will be authorized to institute foreclosure proceedings,
exercise any power of sale contained in the related Mortgage, obtain a deed in
lieu of foreclosure, or otherwise acquire title to the related Mortgaged
Property, by operation of law or otherwise, if such action is consistent with
the Servicing Standard. The Master Servicer's actions in this regard must be
conducted, however, in a manner that will permit recovery under any instrument
of credit enhancement included in the related Trust Fund. In addition, the
Master Servicer will not be required to expend its own funds in connection with
any foreclosure or to restore any damaged property unless it shall determine
that (i) such foreclosure and/or restoration will increase the proceeds of
liquidation of the Mortgage Loan to the related Securityholders after
reimbursement to itself for such expenses and (ii) such expenses will be
recoverable to it from related Insurance Proceeds, Liquidation Proceeds or
amounts drawn out of any fund or under any instrument constituting credit
enhancement (respecting which it shall have priority for purposes of withdrawal
from the Certificate Account in accordance with the Pooling Agreement or
Servicing Agreement).
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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 Securityholders of the
related series, or any other specified person to be considered to hold title to,
to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator" of
such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Master Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions as
are necessary to bring the Mortgaged Property into compliance therewith is
reasonably likely to produce a greater recovery on a present value basis
than not taking such actions; and
(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or remediation
could be required under any applicable environmental laws and regulations
or, if such circumstances or conditions are present for which any such
action could be required, taking such actions with respect to the Mortgaged
Property is reasonably likely to produce a greater recovery on a present
value basis than not taking such actions. See "Certain Legal Aspects of
Mortgage Loans--Environmental Legislation."
In addition, 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 Securityholders of the related series
if, based on its belief that no such contamination or effect exists, the Master
Servicer forecloses on a Mortgaged Property and takes title to such Mortgaged
Property, and thereafter such Mortgaged Property is determined to be so
contaminated or affected.
With respect to a Mortgage Loan in default, the Master Servicer may pursue
foreclosure (or similar remedies) concurrently with pursuing any remedy for a
breach of a representation and warranty. However, the Master Servicer is not
required to continue to pursue both such remedies if it determines that one such
remedy is more likely to result in a greater recovery. Upon the first to occur
of final liquidation (by foreclosure or otherwise) and a repurchase or
substitution pursuant to a breach of a representation and warranty, such
Mortgage Loan will be removed from the related Trust Fund if it has not been
removed previously. The Master Servicer may elect to treat a defaulted Mortgage
Loan as having been finally liquidated if substantially all amounts expected to
be received in connection therewith have been received. Any additional
liquidation expenses relating to such Mortgage Loan thereafter incurred will be
reimbursable to the Master Servicer (or any Subservicer) from any amounts
otherwise distributable to holders of Securities of the related series, or may
be offset by any subsequent recovery related to such Mortgage Loan.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be distributed to Securityholders, the amount of any Realized Loss
or the amount required to be drawn under any applicable form of credit support,
the Master Servicer may take into account minimal amounts of additional receipts
expected to be received, as well as estimated additional liquidation expenses
expected to be incurred in connection with such defaulted Mortgage Loan. With
respect to certain series of Securities, 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 or Servicing Agreement may grant to the Master Servicer, a
Special Servicer, a provider of credit enhancement and/or the holder or holders
of certain classes of Securities of the related series a right of first refusal
to purchase from the Trust Fund, at a predetermined purchase price (which, if
insufficient to fully fund the entitlements of Securityholders 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 or a Servicing Agreement may
authorize the Master Servicer to sell any defaulted Mortgage Loan if and when
the Master Servicer determines, consistent with the Servicing Standard, that
such a sale would produce a greater recovery to Securityholders on a present
value basis than would liquidation of the related Mortgaged Property.
In the event that title to any Mortgaged Property is acquired in
foreclosure, deed in lieu of foreclosure or otherwise, the deed or certificate
of sale will be issued to the Trustee or to its nominee on behalf of
Securityholders
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of the related series. Notwithstanding any such acquisition of title and
cancellation of the related Mortgage Loan, such Mortgage Loan (an "REO Mortgage
Loan") will be considered for most purposes to be an outstanding Mortgage Loan
held in the Trust Fund until such time as the Mortgaged Property is sold and all
recoverable Liquidation Proceeds and Insurance Proceeds have been received with
respect to such defaulted Mortgage Loan (a "Liquidated Mortgage Loan"). For
purposes of calculations of amounts distributable to Securityholders in respect
of an REO Mortgage Loan, 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 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 Securityholders, amounts that
represent unpaid servicing compensation in respect of the Mortgage Loan,
unreimbursed servicing expenses incurred with respect to the Mortgage Loan and
any unreimbursed advances of delinquent payments made with respect to the
Mortgage Loan. If so provided in the related Prospectus Supplement, the
applicable form of credit enhancement may provide for reinstatement subject to
certain conditions in the event that, following the final liquidation of a
Mortgage Loan and a draw under such credit enhancement, subsequent recoveries
are received. 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 Securities 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
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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 or Servicing Agreement, including, if so specified in the related
Prospectus Supplement, payment of any fee or other amount payable in respect of
any alternative credit enhancement arrangements, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee and the
Security Registrar, and payment of expenses incurred in enforcing the
obligations of Subservicers and Sellers. The Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Subservicers
and Sellers under certain limited circumstances. In addition, the Master
Servicer will be entitled to reimbursements for certain expenses incurred by it
in connection with Liquidated Mortgage Loans and in connection with the
restoration of Mortgaged Properties, such right of reimbursement being prior to
the rights of Securityholders to receive any related Liquidation Proceeds or
Insurance Proceeds. If and to the extent so provided in the related Prospectus
Supplement, the Master Servicer will be entitled to receive interest on amounts
advanced to cover such reimbursable expenses for the period that such advances
are outstanding at the rate specified in such Prospectus Supplement, and the
Master Servicer will be entitled to payment of such interest periodically from
general collections on the Mortgage Loans in the related Trust Fund prior to any
payment to Securityholders or as otherwise provided in the related Pooling
Agreement or Servicing Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for a series of Securities 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
or Servicing Agreement. Any partial recovery of interest in respect of a
Mortgage Loan will be allocated between the owners of any Spread and the holders
of classes of Securities entitled to payments of interest as provided in the
related Prospectus Supplement and the applicable Pooling Agreement or Servicing
Agreement.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any period to any Prepayment Interest
Shortfalls resulting from Mortgagor prepayments during such period. See "Yield
Considerations."
EVIDENCE AS TO COMPLIANCE
Each Pooling Agreement and each Servicing Agreement will provide that on or
before a specified date in each year, beginning the first such date that is at
least a specified number of months after the Cut-off Date, a firm of independent
public accountants will furnish a statement to the Company and the 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 or Servicing Agreement) substantially similar to each other was
conducted in compliance with such agreements except for such significant
exceptions or errors in records that, in the opinion of the firm, the Uniform
Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for 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 and each Servicing 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
or Servicing Agreement throughout the preceding year or, if there has been a
material default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as to
more than one Pooling Agreement or Servicing Agreement.
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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 Securityholders 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 SECURITIES
GENERAL
The Securities 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. Each series of Notes (or, in certain
instances, two or more series of Notes) will be issued pursuant to an Indenture
between the related Issuer and the Trustee, similar to the form filed as an
exhibit to the Registration Statement of which this Prospectus is a part. Such
Trust Fund will be created pursuant to an Owner Trust Agreement (the "Owner
Trust Agreement"; an Owner Trust Agreement, Servicing Agreement, Indenture or
Pooling Agreement, an "Agreement") between the Company and the Owner Trustee.
Each Indenture, along with the related Servicing Agreement and Owner Trust
Agreement, will be filed with the Securities and Exchange Commission as an
exhibit to a Current Report on Form 8-K. The following summaries (together with
additional summaries under "The Agreements" below) describe the material
provisions relating to the Securities common to each 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 related Agreement for
each series and the related Prospectus Supplement. Wherever particular sections
or defined terms of the Agreements are referred to herein, such sections or
defined terms are thereby incorporated herein by reference.
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. Unless otherwise specified in the
related Prospectus Supplement, each series of Notes covered by a particular
Indenture will evidence indebtedness of a separate Trust Fund created pursuant
to the related Owner Trust Agreement. A Trust Fund will consist of, to the
extent provided in the Pooling Agreement or the Owner Trust Agreement: (i) such
Mortgage Loans (and the related mortgage documents) or interests therein
(including any Mortgage Securities) underlying a particular series of Securities
as from time to time are subject to the Pooling Agreement or Servicing
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, Bankruptcy Bond or other type of credit
enhancement 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 Securities 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
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will be distributed as a principal prepayment to the holders of the related
series of Securities 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 Securities. 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 Securities) 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 Securities 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 Securityholders 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 Securities.
Each series of Securities may consist of any one or a combination of the
following: (i) a single class of Securities; (ii) two or more classes of
Securities, one or more classes of which will be senior ("Senior Securities") in
right of payment to one or more of the other classes ("Subordinate Securities"),
and as to which certain classes of Senior (or Subordinate) Securities may be
senior to other classes of Senior (or Subordinate) Securities, as described in
the respective Prospectus Supplement (any such series, a "Senior/Subordinate
Series"); (iii) two or more classes of Securities, one or more classes ("Strip
Securities") of which will be entitled to (a) principal distributions, with
disproportionate, nominal or no interest distributions or (b) interest
distributions, with disproportionate, nominal or no principal distributions;
(iv) two or more classes of Securities 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 Securities ("Accrual Securities") 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 Securities,
as described in the related Prospectus Supplement. With respect to any series of
Notes, the Equity Certificates, insofar as they represent the beneficial
ownership interest in the Issuer, will be subordinate to the related Notes. As
to each series, all Securities offered hereby (the "Offered Securities") will be
rated in one of the four highest rating categories by one or more Rating
Agencies. Credit support for the Offered Securities of each series may be
provided by a Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
Bankruptcy Bond, Letter of Credit, Purchase Obligation, Reserve Fund or other
credit enhancement as described under "Description of Credit Enhancement," by
the subordination of one or more other classes of Securities as described under
"Description of Credit Enhancement--Subordinate Securities" 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 SECURITIES
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Unless otherwise specified in the related Prospectus Supplement, the
Offered Securities of each series will be issued as physical certificates or
notes 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 "Security Registrar") named in the
related Prospectus Supplement. With respect to each series of Certificates or
Notes, the Security Registrar will be referred to as the "Certificate Registrar"
or "Note Registrar," respectively. No service charge will be made for any
registration of exchange or transfer of Offered Securities, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge. The term "Securityholder" or "Holder" as used herein refers to the
entity whose name appears on the records of the Security Registrar (consisting
of or including the "Security Register") as the registered holder of a Security,
except as otherwise indicated in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, specified classes of
a series of Securities will be initially issued through the book-entry
facilities of The Depository Trust Company ("DTC"). As to any such class of
Securities ("DTC Registered Securities"), the record Holder of such Securities
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 Securities (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 Securities 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 Securities for purposes of the related Pooling Agreement or Indenture,
and Beneficial Owners will be able to exercise their rights as owners of such
Securities only indirectly through DTC, Participants and Intermediaries. Any
Beneficial Owner that desires to purchase, sell or otherwise transfer any
interest in DTC Registered Securities 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 Securities will
be required to be made in minimum denominations specified in the related
Prospectus Supplement. The ability of a Beneficial Owner to pledge DTC
Registered Securities to persons or entities that are not Participants in the
DTC system, or to otherwise act with respect to such Securities, may be limited
because of the lack of physical certificates or notes evidencing such Securities
and because DTC may act only on behalf of Participants.
Distributions in respect of the DTC Registered Securities 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 Securities. Under DTC's
procedures, DTC will take actions permitted to be taken by Holders of any class
of DTC Registered Securities under the Pooling Agreement or Indenture only at
the direction of one or more Participants to whose account the DTC Registered
Securities 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 Securities
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
Securities, 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 Securities, 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
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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 Securities 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 or Servicing Agreement. Such schedule will include, among other
things, information as to the principal balance of each Mortgage Loan in the
related Trust Fund as of the Cut-off Date, as well as information respecting the
Mortgage Rate, the currently scheduled monthly payment of principal and
interest, the maturity of the Mortgage Note and the Loan-to-Value Ratio at
origination or modification (without regard to any secondary financing).
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 or
Servicing Agreement. Such assignments may be blanket assignments covering
Mortgages on Mortgaged Properties located in the same county, if permitted by
law. Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans
where the original Mortgage Note is not delivered to the 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 or Servicing
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 or
Servicing Agreement because such Mortgage or assignment has been lost, 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 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
Securities. 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 Securityholders 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 or note 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 Securityholders, and generally
will review such documents within 90 days after receipt thereof in the case of
documents delivered concurrently with the execution and delivery of the related
Pooling Agreement or Indenture, and within the time period specified in the
related Pooling Agreement or Indenture in the case of all other documents
delivered. Unless otherwise specified in the related Prospectus Supplement, if
any such document is found to be
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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
Securityholders 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 Securityholders 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 Securities 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 Securityholders in a Mortgage Loan, the
Company will be obligated to cure the breach in all material respects, to
purchase the Mortgage Loan at its Purchase Price or, 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 Securityholders 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 or Servicing Agreement, the
Master Servicer for any Mortgage Pool, either directly or through Subservicers,
will service and administer the Mortgage Loans included in such Mortgage Pool
and assigned to the related 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 or Servicing 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
Securities 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
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and other investment grade obligations specified in the related Pooling
Agreement or the related Servicing Agreement and Indenture ("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 or the
related Servicing Agreement and Indenture 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 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 Securities 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 Securityholders, 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 or
Servicing Agreement as described under "The Mortgage Pools--Representations
by Sellers," "Servicing of Mortgage Loans--Realization Upon and Sale of
Defaulted Mortgage Loans," "--Assignment of Trust Fund Assets" above, "The
Agreements -- Termination; Retirement of Securities" 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";
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(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 or the related
Servicing Agreement and Indenture 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 Securityholders 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 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 or
the related Servicing Agreement and Indenture 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 Securityholders on each
Distribution Date;
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(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 or the related Servicing
Agreement and Indenture 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
Securities 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 Agreements--Certain Matters Regarding the
Master Servicer and the Company";
(viii) if and to the extent described in the related Prospectus
Supplement, to pay the fees of the 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";
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(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 or the related Servicing
Agreement and Indenture for the benefit of the related Securityholders;
(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 or the related Servicing Agreement and
Indenture 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 or the related Servicing Agreement and Indenture 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 Securities 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
Securities 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 Securityholders 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 Securities of each series (other than the final
distribution in retirement of any such Certificate) will be made to the persons
in whose names such Securities 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 Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class.
Payments will be made either by wire transfer in immediately available funds to
the account of a Security at a bank or other entity having appropriate
facilities therefor, if such Security 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 Security holds Securities in the requisite amount or
denomination specified therein), or by check mailed to the address of such
Security as it appears on the Security Register; provided, however, that the
final distribution in retirement of any class of Securities will be made only
upon presentation and surrender of such Securities at the location specified in
the notice to Securityholders of such final distribution.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE SECURITIES
Each class of Securities of each series (other than certain classes of
Strip Securities and certain REMIC Residual Certificates that have no Security
Interest Rate) may have a different Security Interest Rate, which may be fixed,
variable or adjustable, or any combination of two or more such rates. The
related Prospectus Supplement will specify the Security Interest Rate or, in the
case of a variable or adjustable Security Interest Rate, the method for
determining the Security Interest Rate, for each class. Unless otherwise
specified in the related Prospectus Supplement, interest on the Securities 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 Securities of any class (other
than any class of Securities 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 Securities"), and other
than any class of Strip Securities or
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REMIC Residual Certificates that is not entitled to any distributions of
interest) will be made on each Distribution Date based on the Accrued Security
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 Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the principal balance thereof on
each Distribution Date. With respect to each class of Securities (other than
certain classes of Strip Securities and REMIC Residual Certificates), "Accrued
Security Interest" for each Distribution Date will be equal to interest at the
applicable Security Interest 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 Security Interest for each Distribution Date on Strip
Securities 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 Securities of the same series. Reference to such a
notional amount with respect to a class of Strip Securities 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 Security Interest that is otherwise
distributable on (or, in the case of Accrual Securities, that may otherwise be
added to the principal balance of) one or more classes of the Securities 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 Securities 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 Security Interest that
is otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the principal balance of) a class of Offered Securities
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 Security Interest otherwise distributable on a class of
Securities 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 Securities will be made
on each Distribution Date to the holders of the class or classes of Securities
of such series entitled thereto until the principal balance(s) of such
Securities have been reduced to zero. In the case of a series of Securities
which includes two or more classes of Securities, the timing, sequential order,
priority of payment or amount of distributions in respect of principal, and any
schedule or formula or other provisions applicable to the determination thereof
(including distributions among multiple classes of Senior Securities or
Subordinate Securities), shall be as set forth in the related Prospectus
Supplement. Distributions of principal with respect to one or more classes of
Securities 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 Securities of the same
series, or may be made at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on such Mortgage Loans and/or Mortgage Securities. In
addition, distributions of principal with respect to one or more classes of
Securities may be made, subject to available funds, based on a specified
principal payment schedule and, with respect to one or more classes of
Securities, 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 SECURITIES 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 Securities 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.
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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 Securities 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 Securities, or may be effected simply by a prioritization of payments among
such classes of Securities.
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 Securities 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 Securities 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 Securities, 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 Securities. 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 Securityholders.
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 Securityholders on such date. If so specified in the related
Prospectus Supplement, the obligation of a Master Servicer to make advances may
be secured by a cash advance reserve fund or a surety bond. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If any person other than the Master Servicer has any obligation to make
advances as described above, the related
Prospectus Supplement will identify such person.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest thereon for the
period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to Securityholders or as otherwise
provided in the related Pooling Agreement or Servicing Agreement and described
in such Prospectus Supplement.
As specified in the related Prospectus Supplement with respect to any
series of Securities as to which the Trust Fund includes Mortgage Securities,
the advancing obligations with respect to the underlying Mortgage Loans will be
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pursuant to the terms of such Mortgage Securities, as may be supplemented by the
terms of the applicable Pooling Agreement or Servicing Agreement, and may differ
from the provisions described above.
REPORTS TO SECURITYHOLDERS
With each distribution to Securityholders of a particular class of Offered
Securities, the related Master Servicer or Trustee will forward or cause to be
forwarded to each holder of record of such class of Securities a statement or
statements with respect to the related Trust Fund setting forth the information
specifically described in the related Pooling Agreement or the related Servicing
Agreement and Indenture, which generally will include the following as
applicable except as otherwise provided therein:
(i) the amount, if any, of such distribution allocable to
principal;
(ii) the amount, if any, of such distribution allocable to
interest;
(iii) the amount, if any, of such distribution allocable to (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;
(xi) the amount of coverage under any Letter of Credit, Mortgage
Pool Insurance Policy or other form of credit enhancement covering default
risk as of the close of business on the applicable Determination Date and
a description of any credit enhancement substituted therefor;
(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 Securities 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 Securities 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 Securities or per a specified portion of such
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minimum denomination. In addition to the information described above, reports to
Securityholders will contain such other information as is set forth in the
applicable Pooling Agreement or the applicable Servicing Agreement or Indenture,
which may include, without limitation, prepayments, reimbursements to
Subservicers and the Master Servicer and losses borne by the related Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or Trustee will furnish a report to each
holder of record of a class of Offered Securities 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
Securities 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 Securities 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 Securities 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 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
Securities to provide credit support to one or more classes of Senior
Securities, 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 Securities 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 or
Indenture, the credit enhancement arrangements may be periodically modified,
reduced and substituted for based on the aggregate outstanding principal
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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 Securities
of one series may cover the Offered Securities 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 Securities, 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 SECURITIES
If so specified in the related Prospectus Supplement, one or more classes
of Securities of a series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions from the Certificate Account on any
Distribution Date will be subordinated to the corresponding rights of the
holders of Senior Securities. 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 Securities in a
series and the circumstances under which such subordination will be available.
The Offered Securities of any series may include one or more classes of
Subordinate Securities.
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
Securities of the related series, credit enhancement may be provided by cross-
support provisions requiring that distributions be made on Senior Securities
evidencing interests in one group of Mortgage Loans and/or Mortgage Securities
prior to distributions on Subordinate Securities 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 Securities 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
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
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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
Securityholders. 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 Securityholders, 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. Securityholders will experience a shortfall in the amount of
interest payable on the related Securities 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
Securityholders will also experience losses with respect to the related
Securities 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 Securityholders. 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 Securityholders 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.
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
Securityholders 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 Securities by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties. The
amount of claims paid 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
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and any further losses will be borne by holders of the related series of
Securities. 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 Securities--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
Securityholders.
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 Securities from (i) losses due to direct physical
damage to a Mortgaged Property other than any loss of a type covered by a hazard
insurance policy or a flood insurance policy, if applicable, and (ii) losses
from partial damage caused by reason of the application of the co-insurance
clauses contained in hazard insurance policies ("Special Hazard Losses"). See
"Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder." However, a
Special Hazard Insurance Policy will not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, chemical
contamination, waste by the Mortgagor and certain other risks. Aggregate claims
under a Special Hazard Insurance Policy will be limited to the amount set forth
in the related Prospectus Supplement and will be subject to reduction as
described in such related Prospectus Supplement. A Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid by the
Master Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy
will provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
Special Servicer or the Subservicer, the insurer will pay the lesser of (i) the
cost of repair or replacement of such property or (ii) upon transfer of the
property to the insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the Mortgage Rate to the date of claim
settlement and certain expenses incurred by the Master Servicer, Special
Servicer or Subservicer with respect to such property. If the property is
transferred to a third party in a sale approved by the issuer of the Special
Hazard Insurance Policy (the "Special Hazard Insurer"), the 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
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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 Securityholders, 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 Securities may be
provided, in whole or in part, by a type of Special Hazard Instrument other than
a Special Hazard Insurance Policy or by means of the special hazard
representation of the Company.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a 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 Securities, from the Spread or otherwise. To the extent that the
funding of the Reserve Fund is dependent on amounts otherwise payable on related
Subordinate Securities, 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 Securities as to which credit enhancement includes a
Letter of Credit, if so specified in the related Prospectus Supplement, under
certain circumstances the remaining amount of the Letter of Credit may be drawn
by the Trustee and deposited in a Reserve Fund. Amounts in a Reserve Fund may be
distributed to Securityholders, or applied to reimburse the 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 Securities.
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 Securityholders 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 Securityholders which could adversely
affect the yield to investors on the related Securities.
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.
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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 Securities, 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 or Indenture, unless coverage
thereunder has been exhausted through payment of claims or otherwise, or
substitution therefor is made as described below under "--Reduction or
Substitution of Credit Enhancement." Unless otherwise specified in the
applicable Prospectus Supplement, if a Letter of Credit obtained for a series of
Securities is scheduled to expire prior to the date the final distribution on
such Securities 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
Securityholders.
If a Mortgage Pool Insurance Policy has been obtained for a series of
Securities, 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 or Servicing 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 or
Servicing 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, 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 Securityholders.
In lieu of the Master Servicer's obligation to maintain a Letter of Credit,
Mortgage Pool Insurance Policy or other form of credit enhancement 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, Mortgage Pool Insurance
Policy or other form of credit enhancement, 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 Securities
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 Securities by
such Rating Agency or Agencies.
If a Special Hazard Instrument has been obtained for a series of
Securities, 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 or Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims or otherwise or substitution therefor is made as described below under
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"--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
Securities that such substitution shall not adversely affect the then-current
ratings assigned to such Securities by such Rating Agency or Agencies.
If a Bankruptcy Bond has been obtained for a series of Securities, 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 or Servicing 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 Securities that such substitution shall not adversely
affect the then-current ratings assigned to such Securities by such Rating
Agency or Agencies. See "--Bankruptcy Bonds" above.
The Master Servicer, on behalf of itself, the Trustee and Securityholders,
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
Securityholders 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 Securityholders 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 or Indenture.
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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
Securityholders, upon the written assurance from each applicable Rating Agency
that the then-current rating of the related series of Securities will not be
adversely affected. Furthermore, in the event that the credit rating of any
obligor under any applicable credit enhancement is downgraded, the credit
rating(s) of the related series of Securities 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
Securities. 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 Securities 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 Securities
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 Securityholders 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 Securityholders 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 Securities must look solely to the credit of
such entity for payment under the Purchase Obligation.
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
Except in the case of High LTV Loans and as 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
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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, 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 Securities 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 Securities that is required to be kept in force under
the applicable Pooling Agreement or Indenture 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 Securities for mortgage
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pass-through securities having a rating equal to or better than the highest
then-current rating of any class of such series of Securities. 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 or
Servicing Agreement will require the Master Servicer to cause to be maintained
for each Mortgage Loan a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary in the state in which the property is located. 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 or Servicing Agreement will provide
that the Master Servicer may satisfy its obligation to cause hazard policies to
be maintained by maintaining a blanket policy insuring against losses on the
Mortgage Loans. If such blanket policy contains a deductible clause, the Master
Servicer will 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 federally designated
flood area at the time of origination of such Mortgage Loan, the Pooling
Agreement or Servicing Agreement requires the Master Servicer to cause to be
maintained for each such Mortgage Loan serviced, flood insurance (to the extent
available) in an amount equal in general to the lesser of the amount required to
compensate for any loss or damage on a replacement cost basis or the maximum
insurance available under the federal flood insurance program.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause which in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements damaged or destroyed less physical
depreciation or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement--Special Hazard Insurance Policies"
for a description of the limited protection afforded by any Special Hazard
Insurance Policy against losses
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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
Securityholders, 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.
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 Impac 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. On January 29, 1998, the Company changed its name from
ICIFC Secured Assets Corp. to Impac Secured Assets Corp.
The Company maintains its principal office at 20371 Irvine Avenue, Suite
200, Santa Ana Heights, California 92707. Its telephone number is (714)
556-0122.
IMPAC FUNDING CORPORATION
Impac Funding, the Company's parent, will be a Seller and may act as Master
Servicer with respect to a Mortgage Pool. Impac Funding is a mortgage banking
conduit that acquires conventional one- to four-family
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residential mortgage loans nationwide and has, from time to time, acquired
condominium conversion loans. Impac Funding is a non-consolidating subsidiary of
IMH. Impac Funding primarily acquires mortgage loans from approved
correspondents.
Prior to November 1995, Impac Funding was a division of ICII. In November
1995, ICII restructured its operations pursuant to which Impac Funding became a
separate corporation and ICII contributed, among other things, all of the
outstanding nonvoting preferred stock of Impac Funding, which represents 99% of
the economic interest in Impac Funding, to IMH, in exchange for approximately
10% of the common stock of IMH. The common stock of Impac Funding was retained
by ICII until March 1997 when it was distributed to certain officers and/or
directors of Impac Funding who are also officers and/or directors of IMH.
At March 31, 1997, Impac Funding had approximately 115 employees. Impac
Funding's executive offices are located at 20371 Irvine Avenue, Santa Ana
Heights, California 92707, and its telephone number is (714) 556-0122.
IMPAC MORTGAGE HOLDINGS, INC.
IMH 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 Impac 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 IMH
by Imperial Credit Industries, Inc. ("ICII"), a leading specialty finance
company, in November 1995. IMH 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.
IMH's executive offices are located at 20371 Irvine Avenue, Santa Ana
Heights, California 92707, and its telephone number is (714) 556-0122.
THE AGREEMENTS
GENERAL
Each series of Certificates 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 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 Securities of a
series are issued will be identified in the related Prospectus Supplement. Each
series of Notes will be issued pursuant to an Indenture. The parties to each
Indenture will be the related Issuer and the Trustee. The Issuer will be created
pursuant to an Owner Trust Agreement between the Company and the Owner Trustee.
Forms of the Agreements have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. However, the provisions of each
Agreement will vary depending upon the nature of the Securities to be issued
thereunder and the nature of the related Trust Fund. The following summaries
describe certain provisions that may appear in a Pooling Agreement with respect
to a series of Certificates or in either the Servicing Agreement or Indenture
with respect to a series of Notes. The Prospectus Supplement for a series of
Securities will describe any provision of the related Agreements that materially
differs from the description thereof set forth below. The summaries herein,
while setting forth the material provisions that may be included in the
Agreements, do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, all of the provisions of the Agreements for
each series of Securities 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 Securities of that series, whether or not
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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 Securities 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 or Servicing Agreement for each series of Securities
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
Securities. 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 or Servicing Agreement.
Each Pooling Agreement and each Servicing 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 Securityholders for any action
taken or for refraining from the taking of any action in good faith pursuant to
such Agreements, 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 and each
Servicing 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 Servicing Agreement or the
related series of Securities, 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 and each Servicing 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 or Servicing 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 or Servicing Agreement and the rights and duties of the parties
thereto and the interests of the Securityholders 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 Securityholders.
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 related Pooling
Agreement or Servicing Agreement, provided that (i) such person is 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 Securities 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 or Servicing 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 or Servicing
Agreement, exclusive of liabilities and obligations incurred by it prior to the
time of such assignment.
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EVENTS OF DEFAULT AND RIGHTS UPON EVENTS OF DEFAULT
POOLING AGREEMENT
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 Securities--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.
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
Securityholder) 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 Securityholder 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
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 Securityholders 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
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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 Securityholders.
SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, a "Servicing Default" under the related Servicing Agreement generally
will include: (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 Notes or Equity Certificates of such
series any required payment which continues unremedied for five business days
(or other period of time described in the related Prospectus Supplement) after
the giving of written notice of such failure to the Master Servicer by the
Trustee or the Issuer; (ii) any failure by the Master Servicer duly to observe
or perform in any material respect any other of its covenants or agreements in
the Servicing Agreement with respect to such series of Securities which
continues unremedied for 45 days after the giving of written notice of such
failure to the Master Servicer by the Trustee or the Issuer; (iii) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings regarding the Master Servicer and certain
actions by the Master Servicer indicating its insolvency or inability to pay its
obligations and (iv) any other Servicing Default as set forth in the Servicing
Agreement.
So long as a Servicing Default remains unremedied, either the Company or
the Trustee may, by written notification to the Master Servicer and to the
Issuer or the Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the Mortgage Loans during any period prior to the date of
such termination), whereupon the Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $15,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
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 Servicing
Agreement.
INDENTURE
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, an Event of Default under the Indenture generally will include: (i) a
default for five days or more (or other period of time described in the related
Prospectus Supplement) in the payment of any principal of or interest on any
Note of such series; (ii) failure to perform any other covenant of the Company
or the Trust Fund in the Indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Company or the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such series having been incorrect in a material respect as of the time
made, and such breach is not cured within thirty days after notice thereof is
given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Company or the Trust Fund; or (v) any other Event of Default
provided with respect to Notes of that series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, the Trustee or the holders of a majority
of the then aggregate outstanding amount of the Notes of such series may declare
the principal amount (or, if the Notes of that series are Accrual Securities,
such portion of the principal amount as may be specified in the terms of that
series, as provided in the related Prospectus Supplement) of all the Notes of
such series to be due and payable immediately. Such declaration may, under
certain circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related Notes.
If following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
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possession of the collateral securing the Notes of such series and to continue
to apply payments on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a series following an Event of Default, unless (a) the holders of 100% of the
then aggregate outstanding amount of the Notes of such series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such series at the date of such sale or (c) the Trustee determines that such
collateral would not be sufficient on an ongoing basis to make all payments on
such Notes as such payments would have become due if such Notes had not been
declared due and payable, and the Trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the Notes of such series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default, the Indenture provides that the Trustee will have a prior
lien on the proceeds of any such liquidation for unpaid fees and expenses. As a
result, upon the occurrence of such an Event of Default, the amount available
for payments to the Noteholders would be less than would otherwise be the case.
However, the Trustee may not institute a proceeding for the enforcement of its
lien except in connection with a proceeding for the enforcement of the lien of
the Indenture for the benefit of the Noteholders after the occurrence of such an
Event of Default.
In the event the principal of the Notes of a series is declared due and
payable, as described above, the holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount that is unamortized.
No Noteholder or holder of an Equity Certificate generally will have any
right under an Owner Trust Agreement or Indenture to institute any proceeding
with respect to such Agreement unless (a) such holder previously has given to
the Trustee written notice of default and the continuance thereof, (b) the
holders of Notes or Equity Certificates of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class (i) have made
written request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and (ii) have offered to the Trustee reasonable indemnity,
(c) the Trustee has neglected or refused to institute any such proceeding for 60
days after receipt of such request and indemnity and (d) no direction
inconsistent with such written request has been given to the Trustee during such
60 day period by the Holders of a majority of the Note Balances of such class.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the applicable Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Notes or Equity Certificates covered by such
Agreement, unless such holders have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
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 Securityholder, 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
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thereof, provided that such action will not adversely affect in any material
respect the interests of any Securityholder, 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 662/3% 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.
With respect to each series of Notes, the related Servicing Agreement may
be amended by the parties thereto, provided that any amendment be accompanied by
a letter from the Rating Agencies that the amendment will not result in the
downgrading or withdrawal of the rating then assigned to the Notes; and provided
further, that the Indenture Trustee may decline to consent (or allow the Issuer
to consent) to such amendment if the Noteholders' rights, duties or immunities
shall be adversely affected.
With respect to each series of Notes, the holders of a majority of the
outstanding Notes, the Issuer and the Indenture Trustee may execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify (except as provided below) in any
manner the rights of the Noteholders. Without the consent of the holder of each
outstanding Note affected thereby, however, no supplemental indenture
will:
(i) change the due date of any installment of principal of or interest on any
Note or reduce the principal amount thereof, the interest rate specified thereon
or change any place of payment where or the coin or currency in which any Note
or any interest thereon is payable; (ii) impair the right to institute suit for
the enforcement of certain provisions of the Indenture regarding payment; (iii)
reduce the percentage of the aggregate amount of the outstanding Notes, the
consent of the holders of which is required for any supplemental indenture or
the consent of the holders of which is required for any waiver of compliance
with certain provisions of the Indenture or of certain defaults thereunder and
their consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Issuer,
the Company or an affiliate of any of them; (v) decrease the percentage of the
aggregate principal amount of Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other related
agreements; (vi) modify any of the provisions of the Indenture in such manner as
to affect the calculation of the amount of any payment of interest or principal
due on any Note (including the calculation of any of the individual components
of such calculation); or (vii) permit the creation of any lien ranking prior to
or, except as otherwise contemplated by the Indenture, on a parity with the lien
of the Indenture with respect to any of the collateral for the Notes or, except
as otherwise permitted or contemplated in the Indenture, terminate the lien of
the Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture.
The Issuer and the Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of the Noteholders, for the purpose
of, among other things, curing any ambiguity or correcting or supplementing any
provision in the Indenture that may be inconsistent with any other provision
therein; provided, however, that such action shall not, as evidenced by an
opinion of counsel, (i) adversely affect in any material respect the interests
of any Noteholder or (ii) cause the Issuer to be subject to an entity level tax
for federal income tax purposes.
TERMINATION; RETIREMENT OF SECURITIES
The obligations created by the related Agreements for each series of
Securities (other than certain limited payment and notice obligations of the
Trustee and the Company, respectively) will terminate upon the payment to
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Securityholders 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
Agreements 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 (A) if specified in the related Prospectus
Supplement with respect to each series of Certificates, by the holder of the
REMIC Residual Certificates (see "Federal Income Tax Consequences" below) or (B)
if specified in the Prospectus Supplement with respect to each Series of Notes,
by the Holder of the Equity Certificates, 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 Securities specified in the
related Prospectus Supplement in the manner set forth in the related Prospectus
Supplement. Upon the purchase of such Securities 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 Securities and the
termination of the Trust Fund, or the Securities 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 Securityholder, and the final distribution will be made only upon
surrender and cancellation of the Securities at an office or agency appointed by
the Trustee which will be specified in the notice of termination. If the
Securityholders are permitted to terminate the trust under the applicable
Pooling Agreement, a penalty may be imposed upon the Securityholders 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 Securities shall be made at the option
of the Master Servicer, the Company or, if applicable, the holder of the REMIC
Residual Certificates or Equity Certificates at the price specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Securities 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 Securityholders 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
Securities will set forth the amounts that the holders of such Securities will
be entitled to receive upon such early retirement. Such early termination may
adversely affect the yield to holders of certain classes of such Securities. 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 and Indenture 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 Securities will make no representation as to
the validity or sufficiency of the related Agreements, the Securities 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 Securities 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 Securities will be required to
perform only those duties specifically required under the related Pooling
Agreement or Indenture. However, upon receipt of any of the various securities,
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 Securities 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 or
Indenture; 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 Securities 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
Securities 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 Security will depend on the price paid
by the holder for such Security, the Security Interest Rate on any such Security
entitled to payments of interest (which Security Interest Rate may vary if so
specified in the related Prospectus Supplement) and the rate and timing of
principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Loans and the allocation thereof to reduce the
principal balance of such Security (or notional amount thereof if applicable)
and other factors.
A class of Securities may be entitled to payments of interest at a fixed
Security Interest Rate, a variable Security Interest Rate or adjustable Security
Interest Rate, or any combination of such Security Interest Rates, each as
specified in the related Prospectus Supplement. A variable Security Interest
Rate may be calculated based on the weighted average of the Mortgage Rates (in
each case, net of the per annum rate or rates applicable to the calculation of
servicing and administrative fees and any Spread (each, a "Net Mortgage Rate"))
of the related Mortgage Loans for the month preceding the Distribution Date if
so specified in the related Prospectus Supplement. As will be described in the
related Prospectus Supplement, the aggregate payments of interest on a class of
Securities, and the yield to maturity thereon, will be affected by the rate of
payment of principal on the Securities (or the rate of reduction in the notional
balance of Securities entitled only to payments of interest) and, in the case of
Securities evidencing interests in ARM Loans, by changes in the Net Mortgage
Rates on the ARM Loans. See "Maturity and Prepayment Considerations" below. The
yield on the Securities 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 Securities--Assignment of Trust Fund Assets" above. Holders
of certain Strip Securities or a class of Securities having a Security Interest
Rate that varies based on the weighted average Mortgage Rate of the underlying
Mortgage Loans will be affected by disproportionate prepayments and repurchases
of Mortgage Loans having higher Net Mortgage Rates or rates applicable to the
Strip Securities, as applicable.
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With respect to any series of Securities, 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
Securityholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Securityholders on or near the date they were due.
In general, if a class of Securities 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 Securities 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 Securities having a class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which such class is entitled. Such a
class will likely be sold at a substantial premium to its principal balance 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 Securities,
including Accrual Securities, Securities with a Security Interest 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 Securities, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Securities.
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 Securities
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 Securities 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
Securityholders 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 Securities
of the related series. If and to the extent that any such shortfall is allocated
to a class of Offered Securities, the yield thereon will be adversely affected.
The Prospectus Supplement for a series of Securities will describe the manner in
which any such shortfalls will be allocated among the classes of such
Securities. 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
Securities. 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 Securities will lengthen
the weighted average life thereof and may adversely affect yield to holders
thereof, depending upon the price at which such Securities were purchased. In
addition, with respect to certain ARM Loans subject to negative amortization,
during a period of declining interest rates, it might be expected that each
minimum scheduled monthly payment on such a 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 Securities, the weighted average life of such
Securities will be reduced and may adversely affect yield to holders thereof,
depending upon the price at which such Securities were purchased.
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 Securities 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 Securities.
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 Securities.
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 or Equity Certificates may have the option to purchase the
assets in a Trust Fund and effect early retirement of the related series of
Securities. See "The Agreements-- Termination; Retirement of Securities."
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,
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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
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
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of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home that is prior to the security interest originally
retained by the Seller and transferred to the Company.
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
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a request for a copy of notice of default and notice of sale. In addition, the
trustee must provide notice in some states to any other individual having an
interest of record in the real property, including any junior lienholders. If
the deed of trust is not reinstated within a specified period, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers in 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
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determine the causes for the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of a lender to foreclose if the default under the
mortgage instrument is not monetary, such as the borrower's failure to
adequately maintain the property or the borrower's execution of a second
mortgage or deed of trust affecting the property. Finally, some courts have been
faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under deeds of trust or mortgages receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that the sale by a trustee
under a deed of trust, or under a mortgage having a power of sale, does not
involve sufficient state action to afford constitutional protection to the
borrower.
REPOSSESSION WITH RESPECT TO CONTRACTS
GENERAL. Repossession of manufactured housing is governed by state law. A
few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account current)
before repossession can commence. So long as a manufactured home has not become
so attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice
of the right to cure a default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either through
self-help (peaceable retaking without court order), voluntary repossession
or through judicial process (repossession pursuant to court-issued writ of
replevin). The self-help and/or voluntary repossession methods are more
commonly employed, and are accomplished simply by retaking possession of
the manufactured home. In cases in which the debtor objects or raises a
defense to repossession, a court order must be obtained from the
appropriate state court, and the manufactured home must then be repossessed
in accordance with that order. Whether the method employed is self-help,
voluntary repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured home
to a secure location for refurbishment and resale or by removing the
occupants and their belongings from the manufactured home and maintaining
possession of the manufactured home on the location where the occupants
were residing. Various factors may affect whether the manufactured home is
physically removed or left on location, such as the nature and term of the
lease of the site on which it is located and the condition of the unit. In
many cases, leaving the 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.
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LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
RIGHTS OF REDEMPTION
SINGLE FAMILY PROPERTIES AND MULTIFAMILY PROPERTIES. The purposes of a
foreclosure action in respect of a Single Family Property or Multifamily
Property are to enable the lender to realize upon its security and to bar the
borrower, and all persons who have interests in the property that are
subordinate to that of the foreclosing lender, from exercise of their "equity of
redemption". The doctrine of equity of 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 non-judicial foreclosure by power of
sale. 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
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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 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 single family mortgage loans by numerous
federal and some state consumer protection laws. These laws include the federal
Truth-in-Lending Act, Regulation "Z," Real Estate Settlement Procedures Act,
Regulation "X," Equal Credit Opportunity Act, Regulation "B," Fair Credit
Billing Act, the Fair Housing 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.
In particular, the originators' failure to comply with certain requirements of
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the Federal Truth-in-Lending Act, as implemented by Regulation Z, could subject
both originators and assignees of such obligations to monetary penalties and
could result in obligors' rescinding the mortgage loans against either the
originators or assignees.
In addition, certain of the Mortgage Loans are also subject to the Home
Ownership and Equity Protection Act of 1994 (the "Homeownership Act") (such
mortgage loans, "High Cost Loans"), if such Mortgage Loans were originated on or
after October 1, 1995, are not mortgage loans made to finance the purchase of
the mortgaged property and have interest rates or origination costs in excess of
certain prescribed levels. The Homeownership Act requires certain additional
disclosures, specifies the timing of such disclosures and limits or prohibits
inclusion of certain provisions in mortgages subject to the Homeownership Act.
Remedies available to the mortgagor include monetary penalties, as well as
recission rights if the appropriate disclosures were not given as required or if
the particular mortgage includes provisions prohibited by the law. The
Homeownership Act also provides that any purchaser or assignee of a mortgage
covered by the Homeownership Act is subject to all of the claims and defenses to
loan payment, whether under the Federal Truth-in-Lending Act, as amended by the
Homeownership Act or other law, which the borrower could assert against the
original lender unless the purchaser or assignee did not know and could not with
reasonable diligence have determined that the Mortgage Loan was subject to the
provisions of the Homeownership Act. The maximum damages that may be recovered
under the Homeownership Act from an assignee is the remaining amount of
indebtedness plus the total amount paid by the borrower in connection with the
Mortgage Loan.
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 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.
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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 Securityholders of the related series.
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, the Real Estate Settlement
Procedures Act, Regulation "X," the Fair Housing 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. In particular, the originators' failure to comply
with certain requirements of the Federal Truth-in- Lending Act, as implemented
by Regulation Z, could subject both originators and assignees of such
obligations to monetary penalties and could result in obligors' rescinding the
Contracts against either the originators or assignees. Further, if such
Contracts are deemed High Cost Loans within the meaning of the Homeownership
Act, they would be subject to the same provisions of the Homeownership Act as
Mortgage Loans as described in "--Anti-Deficiency Legislation and Other
Limitations on Lenders" above.
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
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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.
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
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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 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
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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
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
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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 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
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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.
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
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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.
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 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 inadvertently 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
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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
860G(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 Administrator 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 any 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 of the Code. If
so, the related Prospectus Supplement will describe the Mortgage Loans that may
not be so treated. The REMIC Regulations do provide, however, that cash received
from payments on Mortgage Loans held pending distribution is considered part of
the Mortgage Loans for purposes of Section 856(c)(4)(A) of the Code.
Furthermore, foreclosure property will qualify as "real estate assets" under
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.
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 reasonable 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
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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" is interest that is unconditionally payable at least
annually (during the entire term of the instrument) 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
the day prior to each 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 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
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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, (ii) using a discount rate equal to the
original yield to maturity of the Certificate and (iii) taking into account
events (including actual prepayments) that have occurred before the close of the
accrual period. 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 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
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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) in income as interest, and to
amortize premium, 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 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
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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 the 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
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC generally is not subject to entity-level taxation, except with
regard to prohibited transactions and certain other transactions. See
"-Prohibited Transactions Tax and Other Possible REMIC Taxes" below. Rather, the
taxable income or net loss of a REMIC is generally taken into account by the
holder of the REMIC Residual Certificates. Accordingly, 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
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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. Such disparity between income and distributions may not be offset by
corresponding losses or reductions of income attributable to the REMIC Residual
Certificateholder until subsequent tax years and, then, may not be completely
offset due to changes in the Code, tax rates or character of the income or loss.
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 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
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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.
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
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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
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.
Furthermore, for purposes of the alternative minimum tax, excess inclusions
will not be permitted to be offset by the alternative tax net operating loss
deduction and alternative minimum taxable income may not be less than the
taxpayer's excess inclusions. The latter rule has the effect of preventing
nonrefundable tax credits from reducing the taxpayer's income tax to an amount
lower than the alternative minimum tax on excess inclusions.
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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 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. On December 24, 1996, the IRS released final
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held for
investment. The Mark-to-Market Regulations provide that for purposes of this
mark-to-market requirement, a Residual Certificate issued after January 4, 1995
is not treated as a security and thus may not be marked to market. Prospective
purchasers of a Residual Certificate should consult their tax advisors regarding
the possible application of the mark-to-market requirement to Residual
Certificates.
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. Except as 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.
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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 consult with
their 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 four 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."
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
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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 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 disclosed 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 Agreement and in respect of compliance with
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
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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 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.
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.
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The REMIC Administrator, as the tax matters person or as agent for the tax
matters person, 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 IRS 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. 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 IRS; 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 IRS. 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.
FOREIGN INVESTORS IN REMIC CERTIFICATES. A REMIC Regular Certificateholder
that is not a "United States person" (as defined below) and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate will
not be subject to United States federal income or withholding tax in respect of
a distribution on a REMIC Regular Certificate, provided that the holder complies
to the extent necessary with certain identification requirements (including
delivery of a statement, signed by the Certificateholder under penalties of
perjury, certifying that such Certificateholder is not a United States person
and providing the name and address of such Certificateholder). For these
purposes, "United States person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in, or
under the laws of, the United States or any political subdivision thereof
(except, in the case of a partnership, to the extent provided in regulations),
or an estate whose income is subject to United States federal income tax
regardless of its source, or a trust if a court within the United States is able
to exercise primary supervision over the
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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. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
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 Agreement.
NOTES
On or prior to the date of the related Prospectus Supplement with respect
to the proposed issuance of each series of Notes, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion to the effect that, assuming
compliance with all provisions of the Indenture, Owner Trust Agreement and
certain related documents and upon issuance of the Notes, for federal income tax
purposes (i) the Notes will be treated as indebtedness and (ii) the
Issuer,
as created pursuant to the terms and conditions of the Owner Trust Agreement,
will not be characterized as an association (or publicly traded partnership)
taxable as a corporation or as a taxable mortgage pool. The following discussion
is based in part upon the OID 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 Notes. For purposes of this tax
discussion, references to a "Noteholder" or a "holder" are to the beneficial
owner of a Note.
STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not constitute
"loans . . . secured by an interest in real property" within the meaning of Code
section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate investment trust
will not constitute "real estate assets" within the meaning of Code section
856(c)(4)(A) and interest on Notes will not be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
TAXATION OF NOTEHOLDERS
Notes generally will be subject to the same rules of taxation as REMIC
Regular Certificates issued by a REMIC, as described above, except that (i)
income reportable on the Notes is not required to be reported under the accrual
method unless the holder otherwise used the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a REMIC Regular
Certificate as ordinary income is inapplicable to the Notes. See "--REMICs --
Taxation of Owners of REMIC Regular Certificates" and "-- Sales of REMIC
Certificates."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS. On or prior to the date of the
related Prospectus Supplement with respect the proposed issuance of 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 Agreement and upon issuance of such
Grantor Trust Certificates, the related Grantor Trust Fund will be classified as
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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.
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 860G(a)(3) of the Code; and (iii) "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code. In addition, 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.
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 860G(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
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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 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
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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 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 1.1286-1, 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
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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 "Characteristics of Investments in Grantor Trust
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" is 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. The determination as to whether original issue discount
will be considered to be de minimis will be calculated using the same test
described in the REMIC discussion. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
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 Master
Servicer or the Trustee in preparing information returns to the
Certificateholders and the IRS.
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
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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 Master Servicer or the Trustee,
except as 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 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
under rules similar to those described in "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" above.
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 may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described above in "-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount" with the exception that it is less likely
that a prepayment assumption will be used for purposes of such rules with
respect to the Mortgage Loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, 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
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the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans 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 "Characterization of Investments in
Grantor Trust 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 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 "Characterization of Investments in Grantor Trust
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
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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 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 Section 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 rules under the Contingent Payment Regulations
were to apply, the holder of a Grantor Trust Strip Certificate would be required
to apply the "noncontingent bond method." Under the "noncontingent bond method,"
the issuer of a Grantor Trust Strip Certificate determines a projected payment
schedule on which interest will accrue. Holders of Grantor Trust Strip
Certificates are bound by the issuer's projected payment schedule. The projected
payment schedule consists 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 is
determined so that the projected payment schedule reflects the projected yield.
The projected amount of each payment must reasonably reflect the relative
expected values of the payments to be received by the holder of a Grantor Trust
Strip Certificate. The projected yield referred to above is a reasonable rate,
not less than the "applicable Federal rate" that, as of the issue date, reflects
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, and would add to, or subtract
from, such income any variation between the payment actually received in such
month and the payment originally projected to be made in such month.
Assuming that a prepayment assumption were used, if the Contingent Payment
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 rules
to the Grantor Trust Strip Certificates.
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SALES OF GRANTOR TRUST CERTIFICATES. Any gain or loss equal to the
difference between the amount realized on the sale or exchange of a Grantor
Trust Certificate and its adjusted basis, recognized on such 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.
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. Except as set forth in the related Prospectus
Supplement, the Master Servicer or 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 Master Servicer or 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 Master Servicer or 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 IRS 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 IRS will agree with the Trust Fund's information reports of such
items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, 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.
Except as disclosed in the related Prospectus Supplement, the
responsibility for complying with the foregoing reporting rules will be borne by
the Master Servicer or the Trustee.
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" applies to
Grantor Trust Certificates except that Grantor Trust Certificates will, except
as 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
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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
Securities 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 Securities offered
hereunder.
ERISA CONSIDERATIONS
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
Securities 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 the Securities, 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
the 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. In addition, the DOL Regulations provide that the term
"equity interest" means any interest in an entity other than an instrument which
is treated as indebtedness under applicable local law and which has no
"substantial equity features." Under the DOL Regulations, Plan Assets will be
deemed to include an interest in the instrument evidencing the equity interest
of a Plan (such as a Certificate or a Note with "substantial equity features"),
and, because of the factual nature of certain of the rules set forth in the DOL
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Regulations, Plan Assets may be deemed to include an interest in the underlying
assets of the entity in which a Plan acquires an interest (such as the Trust
Fund). Without regard to whether the Notes are characterized as equity
interests, the purchase, sale and holding of Notes by or on behalf of a Plan
could be considered to give rise to a prohibited transaction if the Issuer, the
Trustee or any of their respective affiliates is or becomes a Party in Interest
with respect to such Plan. Neither Plans nor persons investing Plan Assets
should acquire or hold Securities 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 the 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 Securities 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.
The DOL issued an individual prohibited transactions exemption
("Exemption") to certain underwriters, 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 underwriter, (b)
any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the underwriter 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 Rating 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 Master Servicer, the Special Servicer, any
Sub-Servicer 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, the Special
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 Certificates 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
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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 holding 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, 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 Plan 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 Securities 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
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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
Securities 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 Securities after the date which is 18 months
after the date the 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY FEATURES"
OR CERTAIN CERTIFICATES
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 Securities, such as Notes with "substantial equity features,"
Subordinate Securities, REMIC Residual Certificates, any Securities which are
not rated in one of the three highest generic rating categories by the Exemption
Rating Agencies transfers of any such Securities 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 Trustees and the Master Servicer with
an opinion of counsel satisfactory to the Company, the Trustee (or Indenture
Trustee in the case of transfer of Notes) and the Master Servicer, which opinion
will not be at the expense of the Company, the Trustee (or the Indenture Trustee
in the case of the transfer of Notes) or the Master Servicer, that the purchase
of such Securities 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 Indenture Trustee in the case of the transfer of Notes) 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 Securities 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 Trustees or the Master
Servicer to any obligation in addition to those undertaken in the Agreement and
the following statements are correct: (i) the transferee is an insurance
company, (ii) the source of funds used to purchase such Securities is an
"insurance company general account" (as such term is defined in PTCE 95-60),
(iii) the conditions set forth in PTCE 95-60 have been satisfied and (iv) 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 Securities.
An opinion of counsel or certification will not be required with respect to
the purchase of DTC registered Securities. Any purchaser of a DTC registered
Security will be deemed to have represented by such purchase that either (a)
such purchaser is not a Plan and is not purchasing such Securities on behalf of,
or with Plan Assets of, any Plan or (b) the purchase of any such Security 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.
TAX EXEMPT INVESTORS
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A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusion" of a REMIC allocated to a REMIC Residual Certificate and held by a
Tax-Exempt investor will be considered UBTI and thus will be subject to federal
income tax. See "Federal Income Tax Consequences -- Taxation of Owners of REMIC
Residual Certificates -- Excess Inclusions."
CONSULTATION WITH COUNSEL
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires the Securities or, even if all the conditions
specified therein were satisfied, that any such exemption would apply to
transactions involving the 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 Securities. Neither the Company, the Trustees, the Master
Servicer nor any of their respective affiliates will make any representation to
the effect that the Securities satisfy all legal requirements with respect to
the investment therein by Plans generally or any particular Plan or to the
effect that the Securities are an appropriate investment for Plans generally or
any particular Plan.
BEFORE PURCHASING THE SECURITIES, 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 WOULD 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 410(C) OF ERISA, THE PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE THE
SECURITIES ON BEHALF OF A PLAN.
LEGAL INVESTMENT MATTERS
Each class of Securities 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
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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 itexhibits 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 Securities 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 Securities. 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 Securities. Similar policy statements have been issued by
regulators having jurisdiction over other types of depository institutions.
Certain classes of Securities 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 Securities will be identified in the related Prospectus
Supplement. Prospective investors in such classes of Securities, 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 Securities or to purchase any class of
Offered Securities representing more than a specified percentage of the
investors' assets. The Company will make no representations as to the proper
characterization of any class of Offered Securities for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Securities under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Securities.
Accordingly, all 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 Securities 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 Securities
will be applied by the Company to finance the purchase of, or to repay
short-term loans incurred to finance the purchase of, the 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 Securities
from time to time, but the timing and amount of any such additional offerings
will be dependent upon a number of factors, including the volume of mortgage
loans purchased by the Company, prevailing interest rates, availability of funds
and general market conditions.
METHODS OF DISTRIBUTION
The Securities 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 Securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of the
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Offered Securities 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 Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. 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 Securities 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 Securities, underwriters may
receive compensation from the Company or from purchasers of such Securities in
the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Offered Securities may be deemed to be
underwriters in connection with such Securities, and any discounts or
commissions received by them from the Company and any profit on the resale of
Offered Securities 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 Securities 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 Securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities Act or
will contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Company and purchasers of
Offered Securities of such series.
The Company anticipates that the Securities offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Offered Securities, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be "underwriters"
within the meaning of the Securities Act in connection with reoffers and sales
by them of such Securities. Holders of Offered Securities 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 Securities 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 Securities,
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 Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the
related Prospectus Supplement.
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RATING
It is a condition to the issuance of any class of Offered Securities 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 and mortgage-backed notes
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 and notes, the nature of the underlying mortgage assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and mortgage-backed notes 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,
Securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped interest Securities in extreme cases might fail to recoup
their initial investments.
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INDEX OF PRINCIPAL DEFINITIONS
401(c) Regulations..........................................................112
Accrual Certificates..................................................7, 40, 47
Accrued Certificate Interest.................................................47
Affiliated Sellers...........................................................23
Agreement ...........................................................38
ARM Loans ...........................................................23
Available Distribution Amount................................................47
Balloon Loans ...........................................................24
Balloon Payment ...........................................................24
Bankruptcy Code ...........................................................78
Bankruptcy Loss ...........................................................51
Beneficial Owner ...........................................................41
Buydown Account .......................................................16, 26
Buydown Agreement ...........................................................45
Buydown Funds .......................................................16, 26
Buydown Mortgage Loans...................................................16, 26
Buydown Period .......................................................16, 26
CERCLA ...........................................................29
Certificate ...........................................................63
Certificate Account..........................................................43
Certificate Register.........................................................40
Certificate Registrar........................................................40
Certificateholder .......................................................40, 86
Certificateholders............................................................1
Certificates .........................................................1, 5
Class Exemptions ..........................................................112
Closing Date ...........................................................88
Code ........................................................8, 86
Commission ............................................................3
Committee Report ...........................................................88
Company .........................................................1, 5
Conservation Act ...........................................................80
Contingent Payment Regulations..............................................108
Contracts ...........................................................22
Contributions Tax ...........................................................98
Convertible Mortgage Loan....................................................26
Crime Control Act ...........................................................85
Debt Service Coverage Ratio..................................................28
Debt Service Reduction.......................................................55
Defaulted Mortgage Loss......................................................51
Deferred Interest ...........................................................24
Deficient Valuation..........................................................55
Deleted Mortgage Loan........................................................30
Designated Seller Transaction................................................23
Determination Date...........................................................47
Distribution Date ...........................................................10
DOL ..........................................................110
DOL Regulations ..........................................................110
DTC ...........................................................40
DTC Registered Certificates..................................................40
Due Period ...........................................................49
Equity Certificates...........................................................6
Equity Participation.........................................................25
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ERISA ......................................................13, 110
ERISA Plans ..........................................................110
Event of Default ...........................................................65
Exchange Act ............................................................3
Excluded Plan ..........................................................112
Exemption Rating Agencies...................................................111
Extraordinary Losses.........................................................51
Fannie Mae ...........................................................28
FDIC ...........................................................23
FHA ...........................................................22
FHA Loans ...........................................................22
FIRREA ...........................................................28
Fraud Loss ...........................................................51
Freddie Mac ...........................................................28
FTC Rule ...........................................................81
Garn-St Germain Act..........................................................81
Grantor Trust Certificates...............................................13, 86
Grantor Trust Fractional Interest Certificate...............................101
Grantor Trust Fund...........................................................86
Grantor Trust Strip Certificate.............................................101
High Cost Loans ...........................................................79
Holder .......................................................40, 86
Homeownership Act ...........................................................79
Housing Act ...........................................................29
HUD ...........................................................61
ICII ...........................................................62
IMH ............................................................5
Impac Funding ............................................................5
Indenture ............................................................6
Index ...........................................................24
Installment Contract.........................................................82
Insurance Proceeds...........................................................44
Intermediaries ...........................................................41
IRS .......................................................86, 88
Issue Premium ...........................................................94
Issuer ............................................................6
Letter of Credit ...........................................................52
Letter of Credit Bank........................................................52
Liquidated Mortgage Loan.....................................................36
Liquidation Proceeds.........................................................44
Loan-to-Value Ratio..........................................................25
Lock-out Expiration Date.....................................................25
Lock-out Period ...........................................................25
Loss ...........................................................59
Manufactured Homes...........................................................22
Manufacturer's Invoice Price.................................................25
Master Servicer .....................................................1, 5, 32
Mortgage Loans .....................................................1, 8, 52
Mortgage Notes ...........................................................22
Mortgage Pool .........................................................1, 8
Mortgage Pool Insurance Policy...............................................52
Mortgage Rate ...........................................................23
Mortgage Securities.......................................................9, 23
Mortgaged Property............................................................8
Mortgages ...........................................................22
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Multifamily Loans ...........................................................22
Multifamily Properties.......................................................22
Net Mortgage Rate ...........................................................69
Net Operating Income.........................................................28
Nonrecoverable Advance.......................................................49
Note Margin ...........................................................24
Note Registrar ...........................................................40
Offered Certificates......................................................5, 40
Offered Notes ............................................................5
Offered Securities............................................................5
OID Regulations ...........................................................86
OTS ..........................................................115
Owner Trust ............................................................6
Owner Trustee ............................................................6
Participants ...........................................................40
Parties in Interest.........................................................110
Pass-Through Rate ............................................................7
Permitted Investments........................................................43
Plan ...........................................................13
Plan Assets ..........................................................110
Plans ..........................................................110
Policy Statement ..........................................................114
Pool Insurer ...........................................................45
Pooling Agreement .....................................................1, 7, 62
Pre-Funding Account..........................................................39
Prepayment Assumption...................................................88, 104
Prepayment Interest Shortfall................................................70
Prepayment Penalty...........................................................25
Primary Insurance Policy.....................................................59
Primary Insurer ...........................................................59
Prohibited Transactions Tax..................................................98
Prospectus Supplement.........................................................1
PTCE ..........................................................112
PTCE 83-1 ..........................................................112
Purchase Obligation..........................................................58
Purchase Price ...........................................................30
Qualified Substitute Mortgage Loan...........................................30
Rating Agency ...........................................................13
Realized Losses ...........................................................51
Record Date ...........................................................47
Related Proceeds ...........................................................49
Relief Act ...........................................................84
REMIC .....................................................1, 8, 86
REMIC Administrator..........................................................86
REMIC Certificates...........................................................86
REMIC Provisions ...........................................................86
REMIC Regular Certificates...............................................13, 87
REMIC Regulations ...........................................................86
REMIC Residual Certificates..................................................87
REO Mortgage Loan ...........................................................36
REO Property ...........................................................34
Reserve Fund ...........................................................55
RICO ...........................................................85
RTC ...........................................................23
Securities Act ............................................................3
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Seller ............................................................9
Sellers ........................................................1, 23
Senior Certificates.......................................................8, 40
Senior Liens ...........................................................24
Senior/Subordinate Series....................................................40
Servicing Default ...........................................................65
Servicing Standard...........................................................33
Single Family Loans..........................................................22
Single Family Property.......................................................22
SMMEA ...........................................................13
Special Hazard Instrument....................................................51
Special Hazard Insurance Policy..............................................54
Special Hazard Insurer.......................................................54
Special Hazard Loss..........................................................51
Special Hazard Losses........................................................54
Special Servicer ............................................................5
Spread ............................................................6
Strip Certificates........................................................7, 40
Subordinate Certificates..................................................8, 40
Subservicer ...........................................................34
Subservicers ...........................................................27
Tax Favored Plans ..........................................................110
Tax-Exempt Investor.........................................................113
Tiered REMICS ...........................................................87
Title V ...........................................................83
Title VIII ...........................................................83
Trust Agreement ............................................................6
Trust Fund .........................................................1, 7
Trustee ............................................................6
UBTI ..........................................................113
Unaffiliated Sellers.........................................................23
Underwriter ..........................................................111
United States person........................................................100
Value ...........................................................25
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