Prospectus Supplement dated September 28, 1999 (To Prospectus
dated June 25, 1998)
$133,180,000
[insert Impac logo]
IMPAC FUNDING CORPORATION
Master Servicer
IMPAC SECURED ASSETS CORP.
Company
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1999-1
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS
PROSPECTUS SUPPLEMENT AND PAGE 15 IN THE PROSPECTUS.
The certificates offered hereby will represent interests only in the trust
created for Series 1999-1 and will not represent ownership interests in or
obligations of Impac Secured Assets Corp., Impac Funding Corporation or any of
their affiliates. This prospectus supplement may be used to offer and sell the
certificates offered hereby only if accompanied by the prospectus.
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THE TRUST
The trust will consist of a pool of adjustable-rate first lien mortgage loans.
The trust will issue five classes of certificates, one of which, the Class A
Certificates, is offered hereby.
CREDIT ENHANCEMENT
To the extent provided in this prospectus supplement, credit enhancement will be
provided to the Class A Certificates by:
o the net monthly excess cash flow on the mortgage loans;
o a reserve fund funded by a yield maintenance agreement;
o overcollateralization represented by the excess of the balance of the
mortgage loans over the balance of the Class A Certificates;
o a certificate guaranty insurance policy issued by Ambac Assurance
Corporation.
[Insert Ambac Logo]
UNDERWRITING
The Class A Certificates will be purchased from the Company by the Underwriter
and will be offered by the Underwriter from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The proceeds to the Company from the sale of the Class A
Certificates are expected to be approximately $132,857,000 before the deduction
of expenses payable by the Company estimated to be approximately $335,000.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. 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.
DONALDSON, LUFKIN & JENRETTE
UNDERWRITER
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the Class A Certificates in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to your Class A Certificates; and
o this prospectus supplement, which describes the specific terms of your
Class A Certificates.
IF THE DESCRIPTION OF YOUR CLASS A CERTIFICATES IN THIS PROSPECTUS SUPPLEMENT
DIFFERS FROM THE RELATED DESCRIPTION IN THE ACCOMPANYING PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You can find a listing of the pages where capitalized terms used both in the
prospectus and prospectus supplement are defined under the caption "Index of
Principal Definitions" beginning on page 118 in the accompanying prospectus.
The Company's principal offices are located at 1401 Dove Street, Newport Beach,
CA 92660 and its phone number is (949) 475-3600.
TABLE OF CONTENTS
Section Page
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Summary ....................................................................S-3
Risk Factors................................................................S-8
Introduction...............................................................S-11
Description of the Mortgage Pool...........................................S-11
The Certificate Insurer....................................................S-31
Description of the Certificates............................................S-32
Description of the Certificate Guaranty
Insurance Policy.................................................S-41
The Yield Maintenance Agreement Counterparty...............................S-42
Certain Yield and Prepayment Considerations................................S-42
Section Page
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Pooling and Servicing Agreement............................................S-47
Federal Income Tax Consequences............................................S-51
Method of Distribution.....................................................S-54
Legal Opinions.............................................................S-54
Ratings....................................................................S-54
Legal Investment...........................................................S-55
ERISA Considerations.......................................................S-56
Experts....................................................................S-56
Annex I -- Global Clearance, Settlement
and Tax Documentation Procedures..........................................I-1
Appendix A -- Underwriting Guidelines
for the Mortgage Loans....................................................A-1
S-2
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SUMMARY
THE FOLLOWING SUMMARY IS A VERY GENERAL OVERVIEW OF THE CLASS A CERTIFICATES AND
DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE CLASS A CERTIFICATES,
YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING PROSPECTUS.
Title of securities................... Mortgage Pass-Through Certificates,
Series 1999-1.
Initial certificate principal balance. $133,180,000.
Ratings............................... With respect to the Class A
Certificates, "AAA" by Standard & Poor's
and "Aaa" by Moody's.
Company .............................. Impac Secured Assets Corp., an affiliate
of Impac Funding Corporation.
Master servicer....................... Impac Funding Corporation.
Subservicer........................... Wendover Funding, Inc.
Trustee............................... Bankers Trust Company of California,
N.A.
Certificate insurer................... Ambac Assurance Corporation.
Yield maintenance
agreement counterparty.............. DLJ International Capital, an affiliate
of the Underwriter.
Mortgage pool ........................ 663 adjustable-rate mortgage loans with
an aggregate principal balance of
approximately $137,303,027 as of the
cut-off date, secured by first liens on
one- to four-family residential
properties.
Cut-off date.......................... September 1, 1999.
Delivery date......................... On or about September 30, 1999.
Distribution dates.................... The 25th of each month or, if the 25th
is not a business day, on the next
business day, beginning on October 25,
1999.
Final scheduled distribution date..... The distribution date in October 2029.
The actual final distribution date could
be substantially earlier.
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THE TRUST
The company will establish a trust, pursuant to a pooling and servicing
agreement among the company, the master servicer and the trustee. The trust will
issue the Certificates pursuant to the pooling and servicing agreement. On the
delivery date, the company will deposit into the trust the pool of mortgage
loans described below and the yield maintenance agreement described below.
The trust will also include the following assets, each of which will provide
partial credit enhancement for the Class A Certificates:
o a yield maintenance agreement, which will fund a reserve fund, which
will cover certain losses and interest distributions on the Class A
Certificates; and
o a certificate guaranty insurance policy provided by Ambac Assurance
Corporation, which guarantees certain distributions on the Class A
Certificates.
The Class A Certificates will represent an ownership interest in the trust.
Distributions of interest and/or principal on the Class A Certificates will be
made from payments received from the assets of the trust as described herein.
THE MORTGAGE POOL
The mortgage loans are secured by first liens on the related mortgaged property.
All of the mortgage loans have adjustable rates. The mortgage loans have the
following characteristics as of the cut-off date:
Minimum principal balance $ 36,040
Maximum principal balance $650,000
Average principal balance $207,094
Range of current mortgage rates 5.500% to
12.990%
Weighted average current
mortgage rate 8.284%
Range of gross margins 2.750% to 8.000%
Range of remaining terms to 313 months to 360
stated maturity months
Weighted average remaining 359 months
term to stated maturity
The interest rate on the mortgage loans will adjust on each adjustment date to
equal the sum of the related index and the related gross margin on such
mortgage, subject to periodic rate caps and a maximum and minimum interest rate,
as described herein.
SEE "DESCRIPTION OF THE MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES
THE CLASS A CERTIFICATES. The Class A Certificates will have the adjustable
pass-through rate and initial certificate principal balance described herein.
THE CLASS SB AND CLASS R CERTIFICATES. The trust will also issue the Class SB,
Class R-I, Class R-II and Class R-III Certificates, which are not offered by
this prospectus supplement. The Class SB and Class R-I, Class R-II and Class
R-III Certificates are subordinated to the Class A Certificates, and will
receive cash flow from the trust to the extent not paid to the Class A
Certificates and the certificate insurer.
DISTRIBUTIONS ON THE CERTIFICATES
REMITTANCES. Subservicers will collect payments of interest and principal on the
mortgage loans. Each month, the subservicers will retain their subservicing fee
and forward the remainder of such collections, together with any advance that
they make for delinquent mortgage payments, to the master servicer. After
retaining its master servicing fee, paying the fees of the trustee, paying to
the certificate insurer the premium with respect to the certificate guaranty
insurance policy, paying certain fees for a pool primary insurance coverage
policy and reimbursing the subservicer or master servicer for reimbursable
expenses and advances, the master servicer will forward all collections on the
mortgage loans, together with any advances that it makes for delinquent mortgage
payments, to the trustee.
The amount of such forwarded collections, plus any amounts received with respect
to the yield maintenance agreement, is the available funds for any distribution
date. See "Description of the Certificates-Available
Funds" in this prospectus supplement.
PAYMENTS FROM THE MORTGAGE POOL.
The available funds in respect of the mortgage pool will be distributed
generally as follows:
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Step 1
Interest distributions to the Class A Certificates
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Step 2
Principal distributions to the Class A Certificates
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Step 3
Reimbursement to the certificate insurer of payments
made by the certificate insurer to the Class A
Certificates and reimbursement to the certificate
insurer for amounts due
under the insurance agreement
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Step 4
Principal distributions of net monthly excess cash flow
to the Class A Certificates as required to create
overcollateralization, until the amount of
overcollateralization
reaches the amount specified herein
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Step 5
Payments to the reserve fund in respect of certain
interest shortfalls on the Class A Certificates
and to provide coverage for losses
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Step 6
Distribution of any remaining funds to the Class SB
Certificates
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SEE "DESCRIPTION OF THE CERTIFICATES--PRIORITY OF PAYMENT" IN THIS PROSPECTUS
SUPPLEMENT.
INTEREST DISTRIBUTIONS. The amount of interest owed to the Class A Certificates
on each distribution date will generally equal:
o the pass-through rate on the Class A Certificates for the related
distribution date,
MULTIPLIED BY
o the certificate principal balance of the Class A Certificates
immediately prior to the related distribution date,
MULTIPLIED BY
o the actual number of days in the related interest accrual period
divided by 360,
MINUS
o certain interest shortfalls allocated to the Class A
Certificates.
The pass-through rate on the Class A Certificates will be the least of (i)
One-Month LIBOR plus the Class A margin, (ii) 12.50% per annum and (iii) the
weighted average of the net rates on the mortgage loans. To the extent the
pass-through rate on the Class A Certificates is based on the weighted average
of the net rates on the mortgage loans, basis risk shortfalls may result. Basis
risk shortfalls will be covered by the reserve fund to the extent described
herein, but will not be covered by the certificate guaranty insurance policy.
The Class A Certificates may receive additional interest distributions, as
described below under "Description of the Certificates--The Reserve Fund and the
Yield Maintenance Agreement."
SEE "DESCRIPTION OF THE CERTIFICATES--INTEREST DISTRIBUTIONS ON THE CLASS A
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
PRINCIPAL DISTRIBUTIONS. Principal distributions on the Class A Certificates
will consist of the following:
o the principal portion of scheduled monthly payments on the
mortgage loans;
o principal prepayments on the mortgage loans; and
o the principal portion of other recoveries on the mortgage loans,
including repurchases for breaches of representations and
warranties.
In addition, the Class A Certificates will receive a distribution in respect of
principal, to the extent that any net monthly excess cash flow is available to
cover certain realized losses and then to increase the amount of
overcollateralization until the overcollateralization target is reached. In
addition, the Class A Certificates will receive a distribution in respect of
principal from the reserve fund to cover realized losses not otherwise covered
by net monthly excess cash flow on the mortgage loans. In addition, the Class A
Certificates will receive a distribution in respect of principal from
the certificate guaranty insurance policy if the
S-5
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aggregate certificate principal balance is greater than the aggregate principal
balance of the mortgage loans.
SEE "DESCRIPTION OF THE CERTIFICATES--PRINCIPAL DISTRIBUTIONS ON THE
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
CREDIT ENHANCEMENT
COVERAGE OF LOSSES. Realized losses on the mortgage loans will be covered by net
monthly excess cash flow, the reserve fund, overcollateralization and the policy
as follows:
o FIRST, realized losses will be covered by a distribution from any
net monthly excess cash flow to the Class A Certificates,
o SECOND, realized losses will be covered by a distribution in respect
of principal from the reserve fund to the Class A Certificates,
o THIRD, realized losses will result in a decrease
in the level of overcollateralization, until
reduced to zero, and
o FOURTH, realized losses will be covered by the certificate guaranty
insurance policy, and if so covered, will result in a reduction of
the certificate principal balance of the Class A Certificates.
Neither the Class A Certificates nor the mortgage loans are insured or
guaranteed by any governmental agency or instrumentality or by the company, the
master servicer, the trustee, or any affiliate thereof.
SEE "DESCRIPTION OF THE CERTIFICATES-- OVERCOLLATERALIZATION PROVISIONS" IN THIS
PROSPECTUS SUPPLEMENT.
THE CERTIFICATE GUARANTY INSURANCE POLICY. Ambac Assurance Corporation will
issue a certificate guaranty insurance policy as a means of providing additional
credit enhancement to the Class A Certificates. Under this policy, the
certificate insurer will pay to the trustee, for the benefit of the holders of
the Class A Certificates, on each distribution date, as further described
herein, an amount that will cover any shortfalls in amounts available to pay
accrued certificate interest for the Class A Certificates on any distribution
date, the principal portion of any realized losses allocated to the Class A
Certificates and the certificate principal balance of the Class A Certificates
to the extent unpaid on the final scheduled distribution date. The policy will
not provide coverage for certain interest shortfalls, including basis risk
shortfalls.
SEE "THE CERTIFICATE INSURER" AND "DESCRIPTION OF THE CERTIFICATE GUARANTY
INSURANCE POLICY" HEREIN.
THE YIELD MAINTENANCE AGREEMENT AND THE RESERVE FUND. The trust will include a
yield maintenance agreement between DLJ International Capital and the trustee on
behalf of the certificateholders, which will be assigned to the trust on the
closing date. Payments under the yield maintenance agreement will be deposited
in a reserve fund. Payments from the yield maintenance agreement will be made
pursuant to the formula described in "Description of the Certificates--The
Reserve Fund and the Yield Maintenance Agreement."
On each distribution date, to the extent of amounts in the reserve fund, an
amount will be withdrawn from the reserve fund and distributed in the following
order of priority:
o To reimburse the insurer for any payments made under the certificate
guaranty insurance policy; and
o To the Class A Certificates, to cover any losses on the mortgage loans
that were not covered by net monthly excess cash flow.
In addition, following the distributions to be made on any distribution date, if
sum of the amount in the reserve fund and the current level of
overcollateralization exceeds the overcollateralization target, the amount of
that excess will be withdrawn from the reserve fund and distributed in the
following order of priority:
o To cover certain amounts owed to the Class A Certificates from prior
distribution dates as a result of limiting their pass-through rate to
the weighted average of the net mortgage rates on the mortgage loans;
and
o To be released to the Class SB Certificates.
SEE "DESCRIPTION OF THE CERTIFICATES--THE RESERVE FUND AND THE YIELD MAINTENANCE
AGREEMENT" IN THIS PROSPECTUS SUPPLEMENT.
ADVANCES
For any month, if the master servicer receives a payment on a mortgage loan that
is less than the full scheduled payment (or if no payment is received at all),
the master servicer will advance its own funds to cover that shortfall to the
extent described herein. However, the master servicer will make such advance
only if it determines that such advance will be recoverable from future payments
or collections on that mortgage loan.
SEE "DESCRIPTION OF THE CERTIFICATES--ADVANCES" IN THIS
PROSPECTUS SUPPLEMENT.
S-6
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OPTIONAL TERMINATION
On the distribution date on which the aggregate outstanding principal balance of
the mortgage loans as of the related due date is less than or equal to 10% of
their aggregate principal balance as of the cut-off date, the Master Servicer
may, but will not be required to, purchase from the trust all remaining mortgage
loans and thereby cause an early retirement of the Class A Certificates.
No such purchase of the mortgage loans will be permitted if it would result in a
draw under the policy unless the certificate insurer consents to such
termination.
SEE "POOLING AND SERVICING AGREEMENT-- TERMINATION" IN THIS PROSPECTUS
SUPPLEMENT AND "THE AGREEMENTS--TERMINATION; RETIREMENT OF CERTIFICATES" IN THE
PROSPECTUS.
RATINGS
When issued, the Class A Certificates will receive the ratings set forth on page
S-3 of this prospectus supplement. The ratings on the Class A Certificates
address the likelihood that holders of the Class A Certificates will receive all
distributions on the underlying mortgage loans to which they are entitled. A
security rating is not a recommendation to buy, sell or hold a security and is
subject to change or withdrawal at any time by the assigning rating agency. The
ratings also do not address the rate of principal prepayments on the mortgage
loans or the likelihood of recovery of certain interest shortfalls on the Class
A Certificates.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
LEGAL INVESTMENT
When issued, the Class A Certificates will be "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 for so long as
they are rated in at least the second highest rating category by one or more
nationally recognized statistical rating agencies. Institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities may be subject to
restrictions on investment in the Class A Certificates and should consult with
their legal advisors.
SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT FOR IMPORTANT INFORMATION
CONCERNING POSSIBLE RESTRICTIONS ON OWNERSHIP OF THE CLASS A CERTIFICATES BY
REGULATED INSTITUTIONS.
TAX STATUS
Three separate REMIC elections will be made with respect to the trust. For
federal income tax purposes:
o the Class R-I Certificates will be the sole class of "residual
interests" in REMIC I,
o the Class R-II Certificates will be the sole class of "residual
interests" in REMIC II,
o the Class R-III Certificates will be the sole Class of "residual
interests" in REMIC III and
o the Class A Certificates and Class SB Certificates will be the
"regular interests" in, and will be treated as debt instruments
of, REMIC III.
In addition, the Class A Certificates will represent the contractual right to
receive, under certain circumstances, payments from the reserve fund to cover
certain amounts owed to the Class A Certificates as a result of limiting their
pass-through rate to the weighted average of the net mortgage rates on the
mortgage loans.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
INVESTING IN THE CLASS A CERTIFICATES, SEE "FEDERAL INCOME TAX CONSEQUENCES" IN
THIS PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS.
ERISA CONSIDERATIONS
The Class A Certificates may be purchased by persons investing assets of
employee benefit plans or individual retirement accounts, subject to important
considerations. Plans should consult with their legal advisors before investing
in the Class A Certificates.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
S-7
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S-8
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RISK FACTORS
Prospective Class A Certificateholders should consider, among other
things, the items discussed under "Risk Factors" in the Prospectus and the
following factors in connection with the purchase of the Class A Certificates:
THE UNDERWRITING STANDARDS OF THE MORTGAGE LOANS ARE NOT AS STRINGENT AS THE
UNDERWRITING STANDARDS OF FANNIE MAE AND FREDDIE MAC
The mortgage loans were underwritten generally in accordance with
underwriting standards described in "Description of the Mortgage
Pool--Underwriting" below and Appendix A attached hereto which are primarily
intended to provide for single family "non-conforming" mortgage loans. A
"non-conforming" mortgage loan means a mortgage loan which is ineligible for
purchase by Fannie Mae or Freddie Mac due to credit characteristics of the
related mortgagor that do not meet the Fannie Mae or Freddie Mac underwriting
guidelines for "A" credit mortgagors, including mortgagors whose
creditworthiness and repayment ability do not satisfy such Fannie Mae or Freddie
Mac underwriting guidelines and mortgagors who may have a record of credit
write-offs, outstanding judgments, prior bankruptcies and other credit items
that do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines.
For a detailed description of the underwriting guidelines of the
mortgage loans, see "Description of the Mortgage Pool--Underwriting" herein and
Appendix A hereto.
THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATE OF CALIFORNIA, WHICH MAY
PRESENT A GREATER RISK OF LOSS WITH RESPECT TO SUCH MORTGAGE LOANS
Approximately 74.72% of the mortgage loans (by aggregate outstanding
principal balance as of the cut-off date), are secured by mortgaged properties
located in the State of California. 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.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES WILL
BE AFFECTED BY PREPAYMENT SPEEDS
The rate and timing of distributions allocable to principal on the
Class A Certificates will depend, in general, on the rate and timing of
principal payments (including prepayments and collections upon defaults,
liquidations and repurchases) on the mortgage loans and the allocation thereof
to pay principal on the Class A Certificates as provided herein. As is the case
with mortgage pass-through certificates generally, the Class A Certificates are
subject to substantial inherent cash-flow uncertainties because the mortgage
loans may be prepaid at any time. See "The Mortgage Pool" herein.
Generally, when prevailing interest rates are increasing, prepayment
rates on mortgage loans tend to decrease; a decrease in the prepayment rates on
the mortgage loans will result in a reduced rate of return of principal to
investors in the Class A Certificates at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when prevailing interest rates
are declining, prepayment rates on mortgage loans tend to increase; an increase
in the prepayment rates on the mortgage loans will result in a greater rate of
return of principal to investors in the Class A Certificates at a time when
reinvestment at comparable yields may not be possible.
For further information regarding the effect of principal prepayments
on the weighted average lives of the Class A Certificates, see "Certain Yield
and Prepayment Considerations" herein, including the tables
therein.
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS INCLUDING THE EARLY TERMINATION OF THE TRUST BY THE MASTER SERVICER
The yield to maturity on the Class A Certificates will depend, in
general, on:
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o the early termination of the trust by the Master Servicer;
o the applicable pass-through rate thereon from time to time;
o the purchase price paid for the Class A Certificates; and
o the rate and timing of principal payments (including
prepayments and collections upon defaults, liquidations and
repurchases) and adjustments to the mortgage rates on the
mortgage loans, payments by the certificate insurer, and the
allocation thereof to reduce the certificate principal balance
of such Class A Certificates, payments to the Class A
Certificates from the reserve fund, and other factors.
The yield to investors on the Class A Certificates will be adversely
affected by any allocation thereto of interest shortfalls on the mortgage loans
not covered by the certificate insurer or by the yield maintenance agreement.
In general, if the Class A Certificates are purchased at a premium and
principal distributions 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 the Class A Certificates
are purchased at a discount and principal distributions thereon occur at a rate
slower than that anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that originally assumed.
Any termination of the trust by the Master Servicer would result in the
concurrent retirement of the Class A Certificates, and would decrease the
average lives thereof, perhaps significantly. The earlier that such termination
occurs, the greater the effect on the yield of the Class A Certificates.
THE MASTER SERVICER AND THE SUBSERVICER HAVE LIMITED HISTORICAL DELINQUENCY AND
FORECLOSURE EXPERIENCE
The master servicer 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. See "Description of the Mortgage Pool--Delinquency and
Foreclosure Experience of Impac Funding" herein.
In addition, there can be no assurance that the delinquency experience
of the servicing portfolios described herein with respect to mortgage loans
serviced by the initial subservicer will correspond to the delinquency
experience of the mortgage loans. See "Pooling and Servicing Agreement--The
Master Servicer; the Subservicer" herein.
THE DIFFERENCE BETWEEN THE INTEREST RATES ON THE CLASS A CERTIFICATES AND THE
MORTGAGE LOANS MAY RESULT IN BASIS RISK SHORTFALL WITH RESPECT TO THE CLASS A
CERTIFICATES
The pass-through rate with respect to the Class A Certificates changes
each month and is based upon the value of an index (One-Month LIBOR) plus a
margin, limited by a maximum pass-through rate and the weighted average net
mortgage rate. However, the mortgage rate of each mortgage loan is based
generally upon a different index (Six-Month LIBOR) and the related gross margin,
and generally adjusts semi-annually, commencing after an initial fixed-rate
period. One-Month LIBOR and the indices on the mortgage loans may respond
differently to economic and market factors, and there is not necessarily any
correlation between them. Moreover, the mortgage loans are subject to periodic
rate caps, maximum mortgage rates and minimum mortgage rates. Thus, it is
possible, for example, that One-Month LIBOR may rise during periods in which
Six-Month LIBOR is stable or falling or that, even if both One-Month LIBOR and
Six-Month LIBOR rise during the same period, One-Month LIBOR may rise much more
rapidly than Six-Month LIBOR. See "Description of the Certificates--Interest
Distributions on the Class A Certificates."
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The trustee will enter into a yield maintenance agreement which will
provide some protection against any resulting shortfall. However, payments under
the yield maintenance agreement are based on the lesser of the actual principal
balance of the mortgage pool and the principal balance that would have resulted
under the assumptions described herein; a slower or faster prepayment speed may
result in the yield maintenance agreement providing insufficient funds to cover
such shortfalls on the Class A Certificates. In addition, payments under the
yield maintenance agreement are limited to a specified rate in effect from time
to time. Such shortfalls are not covered by the certificate guaranty insurance
policy and may remain unpaid on the final scheduled distribution date.
See "Risk Factors" in the prospectus for a description of certain other
risks and special considerations applicable to the Class A Certificates.
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INTRODUCTION
The Trust will be formed pursuant to a Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement") dated September 1, 1999, among Impac
Secured Assets Corp. (the "Company"), Impac Funding Corporation ("Impac
Funding," and in its capacity as master servicer, the "Master Servicer") and
Bankers Trust Company of California, N.A. (the "Trustee"). The Class A
Certificates will be issued pursuant to the Pooling and Servicing Agreement and
delivered on September 30, 1999 (the "Delivery Date"). Pursuant to the Pooling
and Servicing Agreement, the Trust will also issue the Class SB, Class R-I,
Class R-II and Class R-III Certificates. The Class A Certificates, the Class SB
Certificates, the Class R-I Certificates, the Class R-II Certificates and the
Class R-III Certificates are collectively referred to herein as the
"Certificates." Only the Class A Certificates are offered hereby. On the
Delivery Date, the Company will deposit into the Trust (i) a group of first lien
adjustable-rate mortgage loans (the "Mortgage Pool" and such loans, the
"Mortgage Loans") secured by one- to four-family residential properties with
terms to maturity of not more than thirty years and (ii) the Yield Maintenance
Agreement described herein.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Loans had an aggregate outstanding principal balance as of
the Cut-off Date of approximately $137,303,027 (the "Cut-off Date Balance"). The
"Cut-off Date" for the Mortgage Loans is September 1, 1999. The Mortgage Loans
will have adjustable rates and will be secured by first liens on the
related Mortgage Property as described herein.
The Company will acquire the Mortgage Loans to be included in the
Mortgage Pool from Impac Funding Corporation (in such capacity, the "Seller")
pursuant to a Mortgage Loan Purchase Agreement dated the Cut-off Date (the
"Mortgage Loan Purchase Agreement") among the Seller, Impac Mortgage Holdings,
Inc. ("Impac Holdings"), as guarantor and the Company. Impac Funding acquired
approximately 96.77% of the Mortgage Loans pursuant to various agreements with
affiliates of Impac Funding and various mortgage loan conduit sellers pursuant
to the underwriting guidelines of Impac Funding described herein. Impac Funding
acquired approximately 2.98% of the Mortgage Loans from New America Financial
Corp. ("New America"). Impac Funding acquired approximately 0.26% of the
Mortgage Loans in bulk purchases from third-party underwriters.
The Company will convey the Mortgage Loans to the Trust on the Delivery
Date pursuant to the Pooling and Servicing Agreement. The Seller will make
certain representations and warranties with respect to the Mortgage Loans in the
Mortgage Loan Purchase Agreement. These representations and warranties will be
assigned to the Trustee for the benefit of the Certificateholders and the
Certificate Insurer. As more particularly described in the Prospectus, the
Seller 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, if such breach, omission or
defect cannot be cured and it materially and adversely affects the interests of
holders of the Certificates or the Certificate Insurer. In the event the Seller
fails to repurchase a Mortgage Loan, Impac Holdings will be required to do so.
See "The Mortgage Pools--Representations by Sellers" and "Description of the
Securities--Assignment of Trust Fund Assets" in the Prospectus.
The Mortgage Loans will have been originated or acquired by Impac
Funding in accordance with the underwriting criteria described herein. See
"--Underwriting" below and Appendix A.
All of the Mortgage Loans will initially be subserviced by Wendover
Funding, Inc. ("Wendover").
S-12
<PAGE>
The Mortgage Loans are generally assumable pursuant to the terms of the
related Mortgage Note. See "Maturity and Prepayment Considerations" in the
Prospectus.
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate on each Mortgage Loan will generally adjust
semi-annually commencing after an initial period after origination (the "Initial
Period") of generally six months, two years or three years, in each case on the
date provided in the related Mortgage Note (the "Adjustment Date") to a rate
equal to the sum, generally rounded to the nearest one-eighth of one percentage
point (12.5 basis points), of (i) Six- Month LIBOR plus (ii) a fixed percentage
(the "Gross Margin"). In addition, the Mortgage Rate on each Mortgage Loan is
subject on its first Adjustment Date following its origination to a cap (the
"Initial Periodic Rate Cap") and on each Adjustment Date thereafter to a
periodic rate cap (the "Periodic Rate Cap"). All of the Mortgage Loans are also
subject to specified maximum and minimum lifetime Mortgage Rates ("Maximum
Mortgage Rates" and "Minimum Mortgage Rates," respectively). The Mortgage Loans
were generally originated with an initial Mortgage Rate below the sum of
Six-Month LIBOR at origination and the Gross Margin. Due to the application of
the Periodic Rate Caps, Maximum Mortgage Rates and Minimum Mortgage Rates, the
Mortgage Rate on any Mortgage Loan, as adjusted on any related Adjustment Date,
may not equal the sum of Six-Month LIBOR and the Gross Margin. The Due Date for
each Mortgage Loan is the first day of the month.
Approximately 98.96% of the Mortgage Loans will not have reached their
first Adjustment Date as of the Delivery Date. The initial Mortgage Rate is
generally lower than the rate that would have been produced if the applicable
Gross Margin had been added to Six-Month LIBOR at origination. Mortgage Loans
that have not reached their first Adjustment Date are, therefore, more likely to
be subject to the
Periodic Rate Cap on their first Adjustment Date.
SIX-MONTH LIBOR
The index applicable to the determination of the Mortgage Rate on the
Mortgage Loans will be the average of the interbank offered rates for six-month
United States dollar deposits in the London market as published by Fannie Mae
and as most recently available as of the first business day generally 45 days
prior to such Adjustment Date ("Six-Month LIBOR").
The table below sets forth historical average rates of Six-Month LIBOR
for the months indicated as made available from Fannie Mae. The rates are
determined from information that is available as of 11:00 A.M. (London time) on
the second to last business day of each month. Such average rates may fluctuate
significantly from month to month as well as over longer periods and may not
increase or decrease in a constant pattern from period to period. There can be
no assurance that levels of Six-Month LIBOR published by Fannie Mae, or
published on a different Reference Date would have been at the same levels as
those set forth below. The following does not purport to be representative of
future levels of Six-Month LIBOR (as published by Fannie Mae). No assurance can
be given as to the level of Six-Month LIBOR on any Adjustment Date or during the
life of any Mortgage Loan based on Six-Month LIBOR.
S-13
<PAGE>
SIX-MONTH LIBOR
MONTH 1994 1995 1996 1997 1998 1999
- ----- ------ ------ ------ ------ ------ -----
January............. 3.39% 6.69% 5.34% 5.71% 5.75% 5.04%
February............ 4.00 6.44 5.29 5.68 5.78 5.17
March............... 4.25 6.44 5.52 5.96 5.80 5.08
April............... 4.63 6.31 5.42 6.08 5.87 5.08
May................. 5.00 6.06 5.64 6.01 5.81 5.19
June................ 5.25 5.88 5.84 5.94 5.87 5.62
July................ 5.33 5.88 5.92 5.83 5.82 5.65
August.............. 5.33 5.94 5.74 5.86 5.69 5.90
September........... 5.69 5.99 5.75 5.85 5.36
October............. 6.00 5.95 5.58 5.81 5.13
November............ 6.44 5.74 5.55 6.04 5.28
December............ 7.00 5.56 5.62 6.01 5.17
MORTGAGE INSURANCE
Except with respect to approximately 1.00% of the Mortgage Loans, each
Mortgage Loan with a Loan-to-Value Ratio at origination in excess of 80.00% will
be insured by either (i) a Primary Insurance Policy (as defined in the
Prospectus) issued by a private mortgage insurer or (ii) by an insurance policy
(the "Radian PMI Policy," and the Mortgage Loans covered by such policy, the
"Radian PMI Insured Loans") issued by Radian Guaranty, Inc., formerly known as
Commonwealth Mortgage Assurance Company ("Radian"). Each Primary Insurance
Policy will insure against default under each insured Mortgage Note as follows:
(i) for which the outstanding principal balance at origination of such Mortgage
Loan is greater than or equal to 80.01% and up to and including 90.00% of the
Appraised Value, such Mortgage Loan is covered by a Primary Insurance Policy in
an amount equal to at least 20.00% of the Appraised Value and (ii) for which the
outstanding principal balance at origination of such Mortgage Loan equaled or
exceeded 90.00% of the Appraised Value, such Mortgage Loan is covered by a
Primary Insurance Policy in an amount equal to at least 25.00% of the Appraised
Value. The Radian PMI Policy will insure against default under each insured
Mortgage Note as follows: (i) for which the outstanding principal balance at
origination of such Mortgage Loan is at least 80.01% and up to and including
89.99% of the Appraised Value, such Mortgage Loan is covered by the Radian PMI
Policy in an amount equal to at least 22.00% of the Appraised Value and (B) for
which the outstanding principal balance at origination of such Mortgage Loan
equaled or exceeded 90.00% of the Appraised Value, such Mortgage Loan is covered
by the Radian PMI Policy in an amount equal to at least 30.00% of the Appraised
Value.
The Radian PMI Policy will be issued with respect to approximately
70.65% of the Mortgage Loans. The Radian PMI Policy will cover Mortgage Loans
originated under the "Progressive Express(TM) Program". The aggregate amount
payable under the Radian PMI Policy will not exceed 10.00% of the aggregate
Stated Principal Balance of the Radian PMI Insured Loans as of the Cut-off Date.
Otherwise, coverage under the Radian PMI Policy will be identical to typical
primary mortgage insurance coverage. The premium for the Radian PMI Policy will
be payable by the Master Servicer out of interest collections on the Radian PMI
Insured Loans, and will range from 0.61% per annum to 0.75% per annum (the
"Radian PMI Rate") of the then current aggregate Stated Principal Balance of
such Radian PMI Insured Loans.
Each Mortgage Loan is required to be covered by a standard hazard
insurance policy (a "Primary Hazard Insurance Policy"). See "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder--Hazard Insurance Policies" in
the Prospectus.
PREPAYMENT CHARGES
Approximately 20.42% of the Mortgage Loans provide for payment of a
prepayment charge. As to each such Mortgage Loan, the prepayment charge
generally is the maximum amount permitted under
S-14
<PAGE>
applicable state law (or, if no maximum prepayment charge is specified, the
prepayment charge generally is calculated as set forth in the following
sentence). Approximately 1.66%, 0.97%, 8.33% and 9.46% of the Mortgage Loans
provide for payment of a prepayment charge for partial prepayments and full
prepayments made within approximately one year, two years, three years and five
years, respectively, of the origination of such Mortgage Loan calculated in
accordance with the terms of the related Mortgage Note; provided, that certain
of such Mortgage Loans will not have a prepayment charge if the related
Mortgagor sells the related Mortgaged Property. All prepayment charges received
on the Mortgage Loans will be retained by the Master Servicer.
MORTGAGE LOAN CHARACTERISTICS
All of the Mortgage Loans have original terms to stated maturity of 30
years.
Effective with the first payment due on a Mortgage Loan after each
related Adjustment Date, the Monthly Payment will be adjusted to an amount that
will fully amortize the outstanding principal balance of the Mortgage Loan over
its remaining term. The weighted average number of months from the Cut-off Date
to the next Adjustment Date is 22 months.
As of the Cut-off Date, each Mortgage Loan will have an unpaid
principal balance of not less than $36,040 or more than $650,000 and the average
unpaid principal balance of the Mortgage Loans will be approximately $207,094.
The latest stated maturity date of any of the Mortgage Loans will be October 1,
2029; however, the actual date on which any Mortgage Loan is paid in full may be
earlier than the stated maturity date due to unscheduled payments of principal.
The weighted average remaining term to stated maturity of the Mortgage
Loans will be approximately 359 months.
The earliest month and year in which the first payment was due on any
Mortgage Loan is November 1, 1995 and the latest month and year of first payment
will be November 1, 1999.
None of the Mortgage Loans are Buydown Mortgage Loans.
None of the Mortgage Loans were 30 days or more delinquent as of the
Cut-off Date.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date (except as otherwise indicated).
Dollar amounts and percentages may not add up to totals due to rounding.
S-15
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES AT ORIGINATION
ORIGINAL
MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID PERCENTAGE OF CUT-OFF
PRINCIPAL BALANCE($) MORTGAGE LOANS PRINCIPAL BALANCE DATE PRINCIPAL BALANCE
-------------------- -------------- ----------------- ----------------------
<S> <C> <C> <C>
0.01 - 50,000.00............... 3 $ 123,936 0.09%
50,000.01 - 100,000.00 .............. 78 6,243,360 4.55
100,000.01 - 150,000.00............... 135 17,164,127 12.50
150,000.01 - 200,000.00............... 139 24,106,650 17.56
200,000.01 - 250,000.00............... 108 24,189,676 17.62
250,000.01 - 300,000.00............... 99 27,142,611 19.77
300,000.01 - 350,000.00............... 45 14,631,851 10.66
350,000.01 - 400,000.00............... 32 12,190,598 8.88
400,000.01 - 450,000.00............... 11 4,636,852 3.38
450,000.01 - 500,000.00............... 8 3,933,192 2.86
500,000.01 - 550,000.00............... 1 524,378 0.38
550,000.01 - 600,000.00............... 2 1,151,169 0.84
600,000.01 - 650,000.00............... 2 1,264,627 0.92
--- ------------ ------
Total............................ 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
The average principal balance of the Mortgage Loans at origination was
approximately $207,280.
S-16
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID PERCENTAGE OF CUT-OFF
PRINCIPAL BALANCE($) MORTGAGE LOANS PRINCIPAL BALANCE DATE PRINCIPAL BALANCE
----------------- -------------- ----------------- ----------------------
<S> <C> <C> <C>
0.01 - 50,000.00............... 3 $ 123,936 0.09%
50,000.01 - 100,000.00 .............. 78 6,243,360 4.55
100,000.01 - 150,000.00............... 135 17,164,127 12.50
150,000.01 - 200,000.00............... 139 24,106,650 17.56
200,000.01 - 250,000.00............... 109 24,439,545 17.80
250,000.01 - 300,000.00............... 98 26,892,742 19.59
300,000.01 - 350,000.00............... 45 14,631,851 10.66
350,000.01 - 400,000.00............... 32 12,190,598 8.88
400,000.01 - 450,000.00............... 11 4,636,852 3.38
450,000.01 - 500,000.00............... 8 3,933,192 2.86
500,000.01 - 550,000.00............... 1 524,378 0.38
550,000.01 - 600,000.00............... 2 1,151,169 0.84
600,000.01 - 650,000.00............... 2 1,264,627 0.92
--- ------------ ------
Total............................ 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
As of the Cut-off Date, the average current principal balance of the
Mortgage Loans will be approximately $207,094.
S-17
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES AT ORIGINATION
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID CUT-OFF DATE
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.500 - 5.999 ............. 1 $ 213,550 0.16%
6.000 - 6.499.............. 3 498,405 0.36
6.500 - 6.999.............. 15 3,838,284 2.80
7.000 - 7.499.............. 61 13,878,931 10.11
7.500 - 7.999.............. 110 26,030,845 18.96
8.000 - 8.499.............. 187 39,956,823 29.10
8.500 - 8.999.............. 183 34,457,130 25.10
9.000 - 9.499.............. 46 8,653,266 6.30
9.500 - 9.999.............. 32 5,604,915 4.08
10.000 - 10.499.............. 7 854,357 0.62
10.500 - 10.999.............. 8 1,606,703 1.17
11.000 - 11.499.............. 8 1,249,063 0.91
11.500 - 11.999.............. 1 240,323 0.18
12.500 - 12.999.............. 1 220,433 0.16
--- --------- ----
Total.................... 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
The weighted average Mortgage Rate of the Mortgage Loans at origination
was approximately 8.276% per annum.
S-18
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES AT THE CUT-OFF DATE
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID CUT-OFF DATE
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.500 - 5.999................... 1 $ 213,550 0.16%
6.000 - 6.499 .................. 2 311,733 0.23
6.500 - 6.999................... 15 3,838,284 2.80
7.000 - 7.499................... 60 13,884,576 10.11
7.500 - 7.999................... 108 25,197,178 18.35
8.000 - 8.499................... 189 40,137,850 29.23
8.500 - 8.999................... 185 35,290,797 25.70
9.000 - 9.499................... 46 8,653,266 6.30
9.500 - 9.999................... 32 5,604,915 4.08
10.000 - 10.499.................. 7 854,357 0.62
10.500 - 10.999.................. 8 1,606,703 1.17
11.000 - 11.499.................. 8 1,249,063 0.91
11.500 - 11.999.................. 1 240,323 0.18
12.500 - 12.999.................. 1 220,433 0.16
--- ----------- ------
Total....................... 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the
Mortgage Loans will be approximately 8.284% per annum.
S-19
<PAGE>
NEXT ADJUSTMENT DATE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF AGGREGATE UNPAID CUT-OFF DATE
NEXT ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
October 1999...................... 2 $ 407,105 0.30%
November 1999..................... 2 285,323 0.21
December 1999..................... 1 478,718 0.35
January 2000...................... 8 1,463,308 1.07
February 2000..................... 11 2,814,036 2.05
March 2000........................ 10 3,378,956 2.46
November 2000..................... 2 273,427 0.20
December 2000..................... 3 518,844 0.38
January 2001...................... 1 80,498 0.06
February 2001..................... 3 773,786 0.56
March 2001........................ 3 720,147 0.52
April 2001........................ 2 393,703 0.29
May 2001.......................... 2 181,784 0.13
June 2001......................... 25 3,976,152 2.90
July 2001......................... 122 25,455,835 18.54
August 2001....................... 175 37,274,028 27.15
September 2001.................... 260 54,213,487 39.48
October 2001...................... 11 2,163,450 1.58
May 2002.......................... 1 83,062 0.06
June 2002......................... 17 2,088,678 1.52
September 2004.................... 1 174,300 0.13
October 2004...................... 1 104,400 0.08
---- ------------ ------
Total............................. 663 $137,303,027 100.00%
==== ============ ======
</TABLE>
As of the Cut-off Date, the weighted average remaining months to the
Next Adjustment Date of the Mortgage Loans will be approximately 22 months.
S-20
<PAGE>
GROSS MARGIN
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
2.750 - 2.999............ 2 $ 318,937 0.23%
3.000 - 3.249............ 3 638,776 0.47
3.250 - 3.499............ 34 7,059,437 5.14
3.500 - 3.749............ 9 2,041,084 1.49
3.750 - 3.999............ 21 5,036,342 3.67
4.000 - 4.249............ 359 77,307,049 56.30
4.250 - 4.499............ 132 25,706,325 18.72
4.500 - 4.749............ 20 3,629,186 2.64
4.750 - 4.999............ 10 2,492,738 1.82
5.000 - 5.249............ 17 3,985,045 2.90
5.250 - 5.499............ 6 1,392,853 1.01
5.500 - 5.749............ 3 690,800 0.50
5.750 - 5.999............ 8 1,129,385 0.82
6.000 - 6.249............ 8 1,798,147 1.31
6.250 - 6.499............ 3 376,718 0.27
6.500 - 6.749............ 6 623,077 0.45
6.750 - 6.999............ 2 348,834 0.25
7.000 - 7.249............ 7 728,092 0.53
7.250 - 7.499............ 2 310,115 0.23
7.500 - 7.749............ 7 1,237,975 0.90
8.000 - 8.249............ 4 452,112 0.33
--- ----------- ------
Total................... 663 $137,303,027 100.00%
=== ============ ======
As of the Cut-off Date, the weighted average Gross Margin of the
Mortgage Loans will be approximately 4.277% per annum.
S-21
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATE
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
MAXIMUM MORTGAGE RATE (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
11.500 - 11.999.............. 1 $ 213,550 0.16%
12.500 - 12.999.............. 17 4,132,936 3.01
13.000 - 13.499.............. 58 12,771,494 9.30
13.500 - 13.999.............. 114 27,342,035 19.91
14.000 - 14.499.............. 185 39,449,863 28.73
14.500 - 14.999.............. 177 33,827,536 24.64
15.000 - 15.499.............. 44 8,328,007 6.07
15.500 - 15.999.............. 30 5,561,011 4.05
16.000 - 16.499.............. 9 1,648,794 1.20
16.500- 16.999.............. 10 1,378,763 1.00
17.000- 17.499.............. 4 413,916 0.30
17.500- 17.999.............. 5 709,303 0.52
18.000- 18.499.............. 7 1,065,063 0.78
18.500- 18.999.............. 2 460,756 0.34
--- ----------- ------
Total.................... 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
As of the Cut-off Date, the weighted average Maximum Mortgage Rate of
the Mortgage Loans will be approximately 14.313% per annum.
<TABLE>
<CAPTION>
INITIAL PERIODIC RATE CAP
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
INITIAL PERIODIC RATE CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
1.000........................... 33 $ 8,693,808 6.33%
3.000........................... 630 128,609,219 93.67%
--- ------------ ------
Total....................... 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
PERIODIC RATE CAP
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
PERIODIC RATE CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
1.000................... 622 $131,072,659 95.46%
1.500................... 41 6,230,368 4.54
--- ------------ ------
Total............... 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
35.00 - 40.00..................... 1 $ 55,000 0.04%
40.01 - 45.00..................... 1 38,454 0.03
45.01 - 50.00..................... 1 155,000 0.11
50.01 - 55.00..................... 2 494,885 0.36
55.01 - 60.00..................... 2 538,107 0.39
60.01 - 65.00..................... 8 1,823,060 1.33
65.01 - 70.00..................... 5 1,117,662 0.81
70.01 - 75.00..................... 26 6,822,699 4.97
75.01 - 80.00..................... 100 21,654,247 15.77
80.01 - 85.00..................... 30 5,289,770 3.85
85.01 - 90.00..................... 361 75,782,646 55.19
90.01 - 95.00..................... 125 23,343,617 17.00
95.01 - 100.00.................... 1 187,880 0.14
--- ------------ ------
Total......................... 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
The minimum and maximum Loan-to-Value Ratios of the Mortgage Loans at
origination were approximately 36.67% and 95.01%, respectively, and the weighted
average of the Loan-to-Value Ratios of the Mortgage Loans at origination was
approximately 87.15%.
S-23
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
OCCUPANCY (AS INDICATED BY BORROWER) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------ -------------- ----------------- ------------------
<S> <C> <C> <C>
Primary Residence.................. 654 $135,895,002 98.97%
Non-Owner Occupied................. 1 220,433 0.16
Second Home........................ 8 1,187,592 0.86
--- ------------ ------
Total.......................... 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
<TABLE>
<CAPTION>
MORTGAGE LOAN PROGRAM
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ------------------ -----------------
<S> <C> <C> <C>
Full............................ 36 $ 6,090,905 4.44%
Limited (Stated)................ 17 3,618,797 2.64
Alternative..................... 1 220,433 0.16
No Income/No Asset.............. 1 137,405 0.10
Express (Non Verified Assets)... 359 69,198,412 50.40
Express (Verified Assets)....... 249 58,037,074 42.27
--- ---------- -----
Total....................... 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
See "--Underwriting" below and Appendix A attached hereto for a
description of Impac Funding's documentation programs.
S-24
<PAGE>
<TABLE>
<CAPTION>
RISK CATEGORIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
A(1)........................... 9 $ 2,352,753 1.71%
A-(1).......................... 35 5,881,923 4.28
B(1)........................... 8 1,048,803 0.76
C(1)........................... 2 563,629 0.41
CX(1).......................... 1 220,433 0.16
Progressive Express(TM)I(2).... 282 59,091,508 43.04
Progressive Express(TM)II(2)... 262 55,199,738 40.20
Progressive Express(TM)III(2).. 30 5,447,495 3.97
Progressive Express(TM)IV(2)... 26 5,841,300 4.25
Progressive Express(TM)V(2).... 8 1,655,445 1.21
--- ------------ ------
Total.................... 663 $137,303,027 100.00%
=== ============ ======
__________________
</TABLE>
(1) All of these Mortgage Loans were reviewed and placed into risk categories
based on the credit standards of the Progressive Series Program. Credit grades
of A, A-, B, C and CX correspond to Progressive Series I and II, III and III+,
IV, V and VI, respectively. See "-Underwriting" and Appendix A attached hereto.
Mortgage Loans originated by New America or acquired in bulk purchases have also
been placed in credit grades corresponding to one or a combination of series of
the related Progressive Series Programs as described above.
(2) These Mortgage Loans were originated under Impac Funding's Progressive
Express(TM) Program. The underwriting for such Mortgage Loans is generally based
on the borrower's "FICO" score and therefore such Mortgage Loans do not
correspond to the alphabetical risk categories listed above.
S-25
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPES
PERCENTAGE OF CUT-OFF
NUMBER OF AGGREGATE UNPAID DATE AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family................... 571 $121,765,172 88.68%
Condominium..................... 55 8,763,277 6.38
Planned Unit Development........ 22 4,257,099 3.10
Two- to Four-Family............. 11 2,134,371 1.55
Hi-Rise......................... 2 271,336 0.20
Manufactured.................... 2 111,773 0.08
--- ------------ -----
Total........................ 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES RELATED TO THE MORTGAGE LOANS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
California............................ 449 $102,591,630 74.72%
Colorado.............................. 40 7,089,300 5.16
Other (less than 3% in any one state). 174 27,622,097 20.12
--- ------------ ------
Total.............................. 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
No more than approximately 1.41% of the Mortgage Loans will be secured
by Mortgaged Properties located in any one zip code.
<TABLE>
<CAPTION>
LOAN PURPOSES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
Purchase..................... 538 $108,930,845 79.34%
Cash-Out Refinance........... 70 16,235,653 11.82
Rate and Term Refinance...... 55 12,136,529 8.84
--- ----------- ------
Total..................... 663 $137,303,027 100.00%
=== ============ ======
</TABLE>
In general, in the case of a Mortgage Loan made for "rate and term"
refinance purposes, substantially all of the proceeds are used to pay in full
the principal balance of a previous mortgage loan of the mortgagor with respect
to a Mortgaged Property and to pay origination and closing costs associated with
such refinancing. Mortgage Loans made for "cash-out" refinance purposes may
involve the use of the proceeds to pay in full the principal balance of a
previous mortgage loan and related costs except that a portion of the proceeds
are generally retained by the mortgagor for uses unrelated to the Mortgaged
Property. The amount of such proceeds retained by the mortgagor may be
substantial.
See "--Underwriting" below and Appendix A attached hereto for a
description of Impac Funding's risk categories.
S-26
<PAGE>
Specific information with respect to the Mortgage Loans will be
available to purchasers of the Class A Certificates on or before the time of
issuance of the Class A Certificates. If not included in the Prospectus
Supplement, such information will be included in the Form 8-K.
UNDERWRITING
The Mortgage Loans were originated or acquired by Impac Funding.
Approximately 92.67% and approximately 4.26% of the Mortgage Loans were
underwritten pursuant to Impac Funding's Progressive Express Program and the
Progressive Series Program, respectively, as described in Appendix A attached
hereto. Approximately 2.98% of the Mortgage Loans were underwritten by New
America. Approximately 0.26% of the Mortgage Loans were acquired by Impac
Funding in bulk purchases from underwriters the underwriting standards of which
were reviewed for acceptability by Impac Funding.
All of the Mortgage Loans were generally underwritten in accordance
with the description in the Prospectus. All of the Mortgage Loans were reviewed
for completeness of documentation. See "The Mortgage Pools-Underwriting
Standards" in the Prospectus.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF IMPAC FUNDING
The following information does not include statistical information on
mortgage loans which have recently been sold on a servicing-released basis by
Impac Funding to third-parties. A substantial majority of mortgage loan sales by
Impac Funding during the first two quarters of 1999 were made on a servicing-
released basis. In addition, the following information does not include
statistical information for mortgage loans that were being held in portfolio for
which the servicing rights were sold by Impac Funding in March, 1999.
Generally, mortgage loan delinquencies increase during the life of the
mortgage loan. As a result of the above-referenced servicing-released sales of
recent originations, the aggregate principal balance of non-delinquent mortgage
loans currently being serviced by Impac Funding is not as high as it would
otherwise be, resulting in increased delinquency percentages for the total
portfolio of mortgage loans currently being serviced as of December 31, 1998 and
June 30, 1999.
Based solely upon information provided by Impac Funding, the following
tables summarize, for the respective dates indicated, the delinquency,
foreclosure, bankruptcy and REO property status with respect to all mortgage
loans originated or acquired by Impac Funding. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. The
monthly payments under all of such mortgage loans are due on the first day of
each calendar month. A mortgage loan is considered "30 days" delinquent if a
payment due on the first of the month is not received by the second day of the
following month, and so forth.
S-27
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1997 At December 31, 1998 At June 30, 1999
--------------------- ---------------------- -------------------- ----------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ -------- ------ -------- ------
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Loans Outstanding........ 11,996 $1,550,121 28,494 $3,028,554 33,414 $3,713,986 23,531 $2,370,657
DELINQUENCY1 2
Period of Delinquency:
30-59 Days.............. 587 $66,272 1,167 $136,427 1,677 $172,723 1,133 $123,032
60-89 Days.............. 118 15,089 282 33,203 506 46,719 318 32,463
90 Days or More......... 3 95 69 6,454 799 51,454 1,203 110,527
----- --------- -------- --------- ------ -------- ------- ----------
Total Delinquencies........ 708 $81,456 1,518 $176,084 2,982 $270,896 2,654 $266,022
===== ======= ======= ======== ===== ======== ======= ========
Delinquencies as a Percentage
of Total Loans Outstanding..... 5.90% 5.25% 5.33% 5.81% 8.92% 7.29% 11.28% 11.22%
</TABLE>
___________________
1 The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were in foreclosure at
the respective dates indicated ("Foreclosure Loans"), (b) delinquent
mortgage loans as to which the related mortgagor was in bankruptcy
proceedings at the respective dates indicated ("Bankruptcy Loans") and (c)
REO properties that have been purchased upon foreclosure of the related
mortgage loans. All Foreclosure Loans, Bankruptcy Loans and REO properties
have been segregated into the sections of the table entitled "Foreclosures
Pending," "Bankruptcies Pending" and "REO Properties," respectively, and
are not included in the "30-59 Days," "60-89 Days," "90 Days or More" and
"Total Delinquencies" sections of the table. See the section of the table
entitled "Total Delinquencies plus Foreclosures Pending and Bankruptcies
Pending" for total delinquency balances, percentages and numbers which
include Foreclosure Loans and Bankruptcy Loans, and see the section of the
table entitled "REO Properties" for delinquency balances, percentages and
numbers related to REO properties that have been purchased upon foreclosure
of the related mortgage loans.
2 The information on this table does not include statistical information on
mortgage loans which have recently been sold on a servicing-released basis
by Impac Funding to third-parties. In addition, it does not include
statistical information for mortgage loans for which the servicing rights
were sold by Impac Funding in March, 1999. As a result, the aggregate
principal balance of non-delinquent mortgage loans currently being serviced
has decreased, resulting in increased delinquency percentages for mortgage
loans currently being serviced as of December 31, 1998 and June 30, 1999.
S-28
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1997 At December 31, 1998 At June 30, 1999
-----------------------------------------------------------------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ -------- ------ -------- ------
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FORECLOSURES PENDING3.............. 180 $ 25,697 378 $ 41,792 459 $ 54,678 356 $44,843
Foreclosures Pending as a
Percentage of Total Loans
Outstanding........................ 1.50% 1.66% 1.33% 1.38% 1.37% 1.47% 1.51% 1.89%
BANKRUPTCIES PENDING4.............. 55 $ 6,315 140 $ 15,517 362 $ 25,973 419 $34,244
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding........................ 0.46% 0.41% 0.49% 0.51% 1.08% 0.70% 1.78% 1.44%
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending............... 943 $113,468 2,036 $233,393 3,803 $351,547 3,429 $345,109
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding........................ 7.86% 7.32% 7.15% 7.71% 11.38% 9.47% 14.57% 14.56%
REO PROPERTIES5.................... 2 $ 429 80 $ 9,276 116 $ 13,958 133 $15,512
REO Properties as a Percentage of
Total Loans Outstanding............ 0.02% 0.03% 0.28% 0.31% 0.35% 0.38% 0.57% 0.65%
</TABLE>
__________________
3 Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated. It is
generally the Master Servicer's policy, with respect to mortgage loans
originated by Impac Funding, to commence foreclosure proceedings when a
mortgage loan is between 31 and 60 days delinquent.
4 Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
5 REO properties that have been purchased upon foreclosure of the related
mortgage loans, including mortgaged properties that were purchased by Impac
Funding after the respective dates indicated.
S-29
<PAGE>
The above data on delinquency, foreclosure, bankruptcy and REO property
status are calculated on the basis of the total mortgage loans originated or
acquired by Impac Funding. However, the total amount of mortgage loans on which
the above data are based includes many mortgage loans which were not, as of the
respective dates indicated, outstanding long enough to give rise to some of the
indicated periods of delinquency or to foreclosure or bankruptcy proceedings or
REO property status. In the absence of such mortgage loans, the delinquency,
foreclosure, bankruptcy and REO property percentages indicated above would be
higher and could be substantially higher.
The above data on delinquency, foreclosure, bankruptcy and REO property
status as of December 31, 1998, include mortgage loans which were sold
servicing-released by Impac Funding, but for which the
servicing had not yet been transferred as of such date.
The following information does not include statistical information on
mortgage loans which have recently been sold on a servicing-released basis by
Impac Funding to third-parties. In addition, it does not include statistical
information for mortgage loans for which the servicing rights were sold by Impac
Funding in March, 1999. As a result, the aggregate principal balance of
non-delinquent mortgage loans currently being serviced has decreased, resulting
in increased loss percentages for mortgage loans currently being serviced as of
December 31, 1998 and June 30, 1999.
Based solely on information provided by Impac Funding, the following
table presents the changes in Impac Funding's charge-offs and recoveries for the
period indicated.
S-30
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS SIX MONTHS
ENDED ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 JUNE 30, 1999
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Charge-offs:
Mortgage Loan Properties........ $ 291 $ 2,684 $ 4,454
REO Properties.................. 4,862 (153) 1,556
Recoveries:
Mortgage Loan Properties........ 62 0 0
REO Properties.................. 18 0 0
Net charge-offs:..................... 5,073 2,531* 6,010
Ratio of net charge-offs to average
loans
outstanding during the indicated 0.22%** 0.08%** 0.46%**
period***............................
</TABLE>
___________________
* Does not include losses from the sale of delinquent loans of $358,354
recorded by Impac Funding during the twelve months ended December 31, 1998.
** The ratio of net charge-offs was based upon annualized charge-offs for the
indicated periods. The average loans outstanding was computed using monthly
balances for the indicated periods.
*** The information on this table does not include statistical information on
mortgage loans which have recently been sold on a servicing-released basis
by Impac Funding to third-parties. In addition, it does not include
statistical information for mortgage loans for which the servicing rights
were sold by Impac Funding in March, 1999. As a result, the aggregate
principal balance of non-delinquent mortgage loans currently being serviced
has decreased, resulting in increased loss percentages for mortgage loans
currently being serviced as of December 31, 1998 and June 30, 1999.
From November 1995 through December 1996, Impac Funding experienced no
charge-offs and no recoveries.
The above data on charge-offs and recoveries are calculated on the
basis of the total mortgage loans originated or acquired by Impac Funding.
However, the total amount of mortgage loans on which the above data are based
includes many mortgage loans which were not, as of the respective dates
indicated, outstanding long enough to give rise to some of the indicated
charge-offs. In the absence of such mortgage loans, the charge-off percentages
indicated above would be higher and could be substantially higher. Because the
Mortgage Pool will consist of a fixed group of Mortgage Loans, the actual
charge-off percentages with respect to the Mortgage Pool may therefore be
expected to be higher, and may be substantially higher, than the percentages
indicated above.
The information set forth in the preceding paragraphs concerning Impac
Funding has been provided by Impac Funding.
For loss and delinquency information with respect to mortgage loans
similar to the Mortgage Loans serviced by Wendover, see "Pooling and Servicing
Agreement--The Master Servicer; the Subservicer"
herein.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. 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 Class A Certificates
are issued although the range of
S-31
<PAGE>
Mortgage Rates and maturities and certain other characteristics of the Mortgage
Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Class A Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K.
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage Loans"
in the Prospectus.
THE CERTIFICATE INSURER
Ambac Assurance Corporation (the "Certificate Insurer") is a
Wisconsin-domiciled stock insurance corporation regulated by the Office of the
Commissioner of Insurance of the State of Wisconsin and licensed to do business
in 50 states, the District of Columbia, the Commonwealth of Puerto Rico and the
Territory of Guam. The Certificate Insurer primarily insures newly issued
municipal and structured finance obligations. The Certificate Insurer is a
wholly owned subsidiary of Ambac Financial Group, Inc. (formerly, AMBAC, Inc.),
a 100% publicly-held company. Moody's, Standard & Poor's and Fitch IBCA, Inc.
have each assigned a triple-A financial strength rating to the Certificate
Insurer.
The consolidated financial statements of the Certificate Insurer and
subsidiaries as of December 31, 1998 and December 31, 1997, and for each of the
years in the three-year period ended December 31, 1998, prepared in accordance
with generally accepted accounting principles, included in the Annual Report on
Form 10-K of Ambac Financial Group, Inc. (which was filed with the Commission on
March 30,
1999;
Commission File Number 1-10777) and the unaudited consolidated financial
statements of the Certificate Insurer and subsidiaries as of June 30, 1999 and
for the periods ending June 30, 1999 and June 30, 1998 included in the Quarterly
Report on Form 10-Q of Ambac Financial Group, Inc. for the period ended June 30,
1999 (which was filed with the Commission on August 13, 1999), are hereby
incorporated by reference into this Prospectus Supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated herein by
reference shall be modified or superseded for the purposes of this Prospectus
Supplement to the extent that a statement contained herein by reference herein
also modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this Prospectus Supplement and prior
to the termination of the offering of the Class A Certificates shall be deemed
to be incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The following table sets forth the Certificate Insurer's capitalization
as of December 31, 1996, December 31, 1997, December 31, 1998 and June 30, 1999,
respectively, in conformity with generally accepted accounting principles.
S-32
<PAGE>
<TABLE>
<CAPTION>
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
December 31, December 31, December 31, June 30,
1996 1997 1998 1999
---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Unearned premiums............................ $ 995 $ 1,184 $ 1,303 $ 1,349
Other liabilities............................ 259 562 548 413
------- ------- ------- -------
Total liabilities....................... 1,254 1,746 1,851 1,762
------- ------- ------- -------
Stockholder's equity:(1)
Common stock............................ 82 82 82 82
Additional paid-in capital.............. 515 521 541 644
Accumulated other comprehensive income.. 66 118 138 39
Retained earnings....................... 992 1,180 1,405 1,530
------- ------- ------- -------
Total stockholder's equity................... 1,655 1,901 2,166 2,295
------- ------- ------- -------
Total liabilities and stockholder's equity... $ 2,909 $ 3,647 $ 4,017 $ 4,057
======= ======= ======= =======
_________________
</TABLE>
(1) Components of stockholder's equity have been restated for all periods
presented to reflect "Accumulated other comprehensive income" in accordance with
the Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" Adopted by the Certificate Insurer Effective January 1, 1998. As this
new standard only requires additional information on the financial statements,
it does not affect the Certificate Insurer's financial position or results of
operations.
For additional financial information concerning the Certificate
Insurer, see the audited and unaudited financial statements of the Certificate
Insurer incorporated by reference herein. Copies of the financial statements of
the Certificate Insurer incorporated herein by reference and copies of the
Certificate Insurer's annual statement for the year ended December 31, 1998
prepared in accordance with statutory accounting standards are available,
without charge, from the Certificate Insurer. The address of the Certificate
Insurer's administrative offices and its telephone number are One State Street
Plaza, 19th Floor, New York, New York 10004 and (212) 668-0340.
The Certificate Insurer makes no representation regarding the Class a
Certificates or the advisability of investing in the Class a Certificates and
makes no representation regarding, nor has it participated in the preparation
of, this Prospectus Supplement other than the information supplied by the
Certificate Insurer and presented under the headings "The Certificate Insurer"
and "The Certificate Guaranty Insurance Policy" and in the financial statements
incorporated herein by reference.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1999-1 Mortgage Pass-Through Certificates (the
"Certificates") will include the following five classes: (i) Class A
Certificates; (ii) Class SB Certificates; and (iii) Class R-I Certificates,
Class R-II Certificates and Class R-III Certificates (collectively, the
"Residual Certificates"). Only the Class A Certificates are offered hereby.
The Certificates will evidence ownership interests in a trust fund
which will consist of the following (such assets, collectively, the "Trust
Fund"): (i) the Mortgage Loans; (ii) collections in respect of principal and
interest on the Mortgage Loans received after the Cut-off Date (other than
payments due on or before the Cut-off Date); (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 Certificateholders (the
"Certificate Account"), including net earnings thereon; (iv) certain insurance
policies maintained by the related Mortgagors or by or on behalf of the Master
Servicer or related
S-33
<PAGE>
subservicer in respect of the Mortgage Loans; (v) an assignment of the Company's
rights under the Mortgage Loan Purchase Agreement (as defined herein); (vi) the
Yield Maintenance Agreement and the Reserve Fund; (vii) the Radian PMI Policy;
and (viii) proceeds of the foregoing.
The Class A Certificates will be issued in denominations of $25,000 and
integral multiples of $1 in excess thereof. See "--Book-Entry Certificates"
below.
BOOK-ENTRY CERTIFICATES
GENERAL. The Class A Certificates will initially be issued as
Book-Entry Certificates. Persons acquiring beneficial ownership interests in the
Class A Certificates may elect to hold their Class A Certificates through the
DTC in the United States, or Cedel or Euroclear, in Europe if they are
Participants of such systems, or indirectly through organizations which are
Participants in such systems. 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
Certificates may do so only through Participants and Intermediaries. Cedel and
Euroclear will hold omnibus positions on behalf of their Participants through
customers' securities accounts in Cedel's and Euroclear's names on the books of
their respective depositaries (in such capacities, individually, the "Relevant
Depositary" and collectively, the "European Depositaries") which in turn will
hold such positions in customers' securities accounts in the depositaries' names
on the books of DTC. In addition, Beneficial Owners will receive all payments of
principal of and interest on the related Book-Entry Certificates from the Paying
Agent (as defined in the Prospectus) through DTC and Participants. Accordingly,
Beneficial Owners may experience delays in their receipt of payments. Payments
with respect to Class A Certificates held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Unless and until Definitive Certificates are issued for the related Book-Entry
Certificates, it is anticipated that the only registered Class A
Certificateholder of such Book-Entry Certificates will be Cede & Co. ("Cede"),
as nominee of DTC. Beneficial Owners will not be recognized by the Trustee or
the Master Servicer as Class A Certificateholders, as such term is used in the
Pooling and Servicing Agreement, and Beneficial Owners will be permitted to
receive information furnished to Class A Certificateholders and to exercise the
rights of Class A Certificateholders only indirectly through DTC, its
Participants and Intermediaries. Cedel or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by Class A
Certificateholders under the Pooling and Servicing Agreement on behalf of a
Cedel Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC.
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 Certificates among Participants and to receive and transmit
payments of principal of, and interest on, such Book-Entry Certificates.
Participants and Intermediaries with which Beneficial Owners have accounts with
respect to such Book-Entry Certificates similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess physical Certificates evidencing their interests in the Book-Entry
Certificates, 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 Certificates.
DTC management is aware that some computer applications, systems, and
the like for processing data (the "DTC Systems") that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter "Year 2000 problems." DTC has informed its Participants and other
members of the financial community (the "Industry") that it has developed and is
implementing a program so that the DTC Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within
S-34
<PAGE>
DTC ("DTC Services"), continue to function appropriately. This program includes
a technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom DTC
acquires services to: (i) impress upon them the importance of such services
being Year 2000 compliant; and (ii) determine the extent of their efforts for
Year 2000 remediation (and, as appropriate, testing) of their services. In
addition, DTC is in the process of developing such contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
Participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time. See Annex I hereto.
None of the Company, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the Book-Entry Certificates held
by Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Securities--Form of Securities."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Securities--Form of Securities," the
Trustee is required to notify, through DTC, Participants who have ownership of
Book-Entry Certificates as indicated on the records of DTC of the availability
of Definitive Certificates for their Book-Entry Certificates. Upon surrender by
DTC of the definitive Certificates representing the Book-Entry Certificates and
upon receipt of instructions from DTC for re-registration, the Trustee will
reissue the Book-Entry Certificates as Definitive Certificates issued in the
respective principal amounts owned by individual Beneficial Owners, and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and the Book-Entry
Certificates, see "Description of the Securities--Form of Securities" in the
Prospectus.
PAYMENTS
Payments on the Class A Certificates will be made by the 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 October 1999. Payments
on the Class A Certificates will be made to the persons in whose names such
Class A Certificates are registered at the close of business on the day prior to
each Distribution Date or, if the Class A Certificates are no longer Book-Entry
Certificates, on the Record Date. See "Description of the
Securities--Distributions" 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 by wire transfer) to the address of the
person entitled thereto (which, in the case of
S-35
<PAGE>
Book-Entry Certificates, 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 Class A
Certificates will be made only upon presentation and surrender thereof at the
office or the agency of the 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, California or in
the city in which the corporate trust offices of the Trustee are located, are
required or authorized by law to be closed.
AVAILABLE FUNDS
The "Available Funds" for any Distribution Date will equal the amount
received by the Trustee and available in the Certificate Account on each
Distribution Date. The Available Funds will generally be equal to the sum of (i)
the aggregate amount of scheduled payments on the Mortgage Loans received or
Advanced during the related Due Period and (ii) any unscheduled payments and
receipts, including Mortgagor prepayments on such Mortgage Loans and payments
under the Radian PMI Policy, received during the related Prepayment Period, in
each case net of amounts reimbursable therefrom to the Master Servicer and any
Subservicer and reduced by Servicing Fees, the fees of Radian under the Radian
PMI Policy, the fees of the Trustee and the premium with respect to the
Certificate Guaranty Insurance Policy.
With respect to any Distribution Date and the Mortgage Loans, the "Due
Period" is the period commencing on the second day of the month preceding the
month of such Distribution Date (or, with respect to the first Due Period, the
day following the Cut-off Date) and ending on the Due Date of the month of such
Distribution Date. With respect to any Distribution Date and the Mortgage Loans,
the "Prepayment Period" is the calendar month preceding the month of such
Distribution Date.
INTEREST DISTRIBUTIONS ON THE CLASS A CERTIFICATES
On each Distribution Date, holders of the Class A Certificates will be
entitled to receive an amount (the "Accrued Certificate Interest") equal to
interest accrued during the related Accrual Period (as defined herein) on the
Certificate Principal Balance thereof at the then-applicable Pass-Through Rate
(as defined below), subject to the limitations described below. The
"Pass-Through Rate" on each Distribution Date will be a floating rate equal to
the least of (i) One-Month LIBOR (as defined herein) plus the Class A Margin,
(ii) 12.50% per annum (the "Maximum Pass-Through Rate") and (iii) the Net WAC
Cap Rate.
For any Distribution Date, the Net WAC Cap Rate is equal to (i) the
weighted average of the Net Mortgage Rates on the Mortgage Loans, based on the
Principal Balances thereof as of the beginning of the related Due Period, minus
(ii) the Minimum Spread Rate. The "Net Mortgage Rate" on each Mortgage Loans is
equal to the Mortgage Rate thereon minus the sum of (i) the Servicing Fee Rate,
(ii) the Trustee Fee Rate, (iii) if such Mortgage Loan is a Radian PMI Loan, the
Radian Policy Rate, and (iv) the rate per annum at which the premium on the
Certificate Insurance Policy accrues. Interest that would be payable on the
Class A Certificates if the Pass-Through Rate were not limited to the Net WAC
Cap Rate may be payable as described below under "--The Reserve Fund and the
Yield Maintenance Agreement."
The "Class A Margin" will equal 0.40% prior to the Step-Up Date and 0.80%
thereafter. The "Step- Up Date" is the first Distribution Date following the
first Distribution Date on which the Master Servicer can cause the termination
of the Trust as described in "Pooling and Servicing Agreement--Termination"
below.
The "Minimum Spread Rate" is 0.50% per annum commencing on the tenth
Distribution Date.
Interest on the Class A Certificates in respect of any Distribution Date
will accrue (such period, an "Accrual Period") from the preceding Distribution
Date (or in the case of the first Distribution Date, from the Delivery Date)
through the day preceding such Distribution Date on the basis of the actual
number of days in the Accrual Period and a 360-day year.
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If on any Distribution Date the Available Funds is insufficient to pay
Accrued Certificate Interest on the Class A Certificates, the shortfall will be
covered by the Certificate Guaranty Insurance Policy, unless such shortfalls are
caused by Prepayment Interest Shortfalls, Relief Act Shortfalls or Basis Risk
Shortfalls. Such covered 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.
Any such shortfalls in respect of Prepayment Interest Shortfalls and Relief
Act Shortfalls will be carried forward and will bear interest at the related
Pass-Through Rate (such amount, together with interest thereon, the "Unpaid
Interest Shortfall") and be payable on future Distribution Dates from the Net
Monthly Excess Cash Flow to the extent of funds available therefor as described
below in "--Priority of Payment."
The "Prepayment Interest Shortfall" for any Distribution 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 Prepayment 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
Distribution 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 Distribution 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.
On each Distribution Date on which the Net WAC Cap Rate is used to
determine the Pass-Through Rate on the Class A Certificates, the "Basis Risk
Shortfall" is equal to the excess, if any, of (x) Accrued Certificate Interest
on the Class A Certificates calculated pursuant to the lesser of clause (i) or
clause (ii) of the definition of Pass-Through Rate over (y) one month's interest
accrued on the Certificate Principal Balance of the Class A Certificates at the
Net WAC Cap Rate. The "Basis Risk Shortfall Carry-Forward Amount" is equal to
the aggregate amount of Basis Risk Shortfall for the Class A Certificates on
such Distribution Date, plus any unreimbursed Basis Risk Shortfall from prior
Distribution Dates, plus interest thereon at the related Pass-Through Rate.
Basis Risk Shortfall will only be recoverable from the Reserve Fund to the
extent funded by the Net Monthly Excess Cash Flow and the Yield Maintenance
Agreement, and not from the Policy or otherwise.
As described herein, Accrued Certificate Interest on the Class A
Certificates is based on the Certificate Principal Balance thereof immediately
prior to the related Distribution Date. The "Certificate Principal Balance" of
the Class A Certificates means the initial Certificate Principal Balance thereof
as reduced by all amounts actually distributed to the holders of such Class A
Certificates (including from the Policy and the Reserve Fund) on all prior
Distribution Dates on account of principal.
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 distributed to the
Certificateholders with respect to such mortgage loan, and as further reduced to
the extent of any Realized Loss thereon on or before the date of determination.
CALCULATION OF ONE-MONTH LIBOR FOR THE CLASS A CERTIFICATES
On the first Distribution Date, "One-Month LIBOR" will be equal to 5.38%
per annum. On the second business day preceding each Distribution Date after the
first Distribution Date (each such date, an "Interest Determination Date"), the
Trustee will determine the London interbank offered rate for one-month United
States dollar deposits ("One-Month LIBOR") for the next Accrual Period for the
Class A Certificates on the basis of the offered rates of the Reference Banks
for one-month United States dollar deposits, as such rate appears on the
Telerate Screen Page 3750, as of 11:00 a.m. (London time) on such
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Interest Determination Date. As used in this section, "business day" means a day
on which banks are open for dealing in foreign currency and exchange in London
and New York City; "Telerate Screen Page 3750" means the display designated as
page 3750 on the Telerate Service (or such other page as may replace page 3750
on that service for the purpose of displaying London interbank offered rates of
major banks); and "Reference Banks" means leading banks selected by the Trustee
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Telerate Screen Page 3750 on the Interest
Determination Date in question, (iii) which have been designated as such by the
Trustee and (iv) not controlling, controlled by, or under common control with,
the Company or the Seller.
On each Interest Determination Date, One-Month LIBOR for the related
Accrual Period for the Class A Certificates will be established by the Trustee
as follows:
(a) If on such Interest Determination Date two or more Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Accrual Period shall be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two Reference
Banks provide such offered quotations, One-Month LIBOR for the related
Accrual Period shall be the higher of (x) One-Month LIBOR as determined on
the previous Interest Determination Date and (y) the Reserve Interest Rate.
The "Reserve Interest Rate" shall be the rate per annum that the Trustee
determines to be either (i) the arithmetic mean (rounded upwards if
necessary to the nearest whole multiple of 0.0625%) of the one-month United
States dollar lending rates which New York City banks selected by the
Trustee are quoting on the relevant Interest Determination Date to the
principal London offices of leading banks in the London interbank market or
(ii) in the event that the Trustee can determine no such arithmetic mean,
the lowest one-month United States dollar lending rate which New York City
banks selected by the Trustee are quoting on such Interest Determination
Date to leading European banks.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Trustee and the Trustee's calculation of the rate of interest applicable to
the Class A Certificates for the related Accrual Period shall (in the absence of
manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE CERTIFICATES
The "Principal Distribution Amount" for any Distribution Date will be equal
to the lesser of (a) the sum of the Available Funds remaining after
distributions of Accrued Certificate Interest for such Distribution Date and any
portion of any Insured Amount for such Distribution Date representing an
Overcollateralization Deficit and (b) the sum of:
(i) the principal portion of all scheduled monthly payments on the
Mortgage Loans received or Advanced (as defined herein) on such Mortgage
Loans with respect to the related Due Date;
(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 Pooling and Servicing
Agreement during the preceding calendar month;
(iii) the principal portion of all other unscheduled collections
received on the Mortgage Loans during the related Prepayment Period (or
deemed to be received during the related Prepayment Period (including,
without limitation, full and partial Principal Prepayments made by the
respective Mortgagors, Liquidation Proceeds and Insurance Proceeds
(excluding proceeds paid in respect of the Certificate Guaranty Insurance
Policy)), to the extent not distributed in the preceding month; and
(iv) any Insured Amount paid with respect to any
overcollateralization Deficit;
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MINUS
(v) the amount of any Overcollateralization Reduction Amount for
such Distribution Date.
In no event will the Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the then outstanding
Certificate Principal Balance of the Class A Certificates.
On any Distribution Date, the "Overcollateralization Deficit" is the amount
by which the Certificate Principal Balance of the Class A Certificates exceeds
the aggregate Principal Balance of the Mortgage Loans.
PRIORITY OF PAYMENT
On each Distribution Date, the Available Funds and any Insured Amount with
respect to such Distribution Date will be allocated to the Certificates in the
following order of priority, in each case to the
extent of amounts remaining:
(i) to the Class A Certificateholders, the Accrued Certificate Interest
with respect to such Distribution Date;
(ii) to the Class A Certificateholders, the Principal Distribution
Amount with respect to such Distribution Date;
(iii) to the Certificate Insurer, the aggregate of all payments, if any,
made by the Certificate Insurer under the Certificate Guaranty Insurance
Policy and any other amounts due to the Certificate Insurer pursuant to the
Insurance Agreement, to the extent not previously paid or reimbursed (the
"Reimbursement Amount");
(iv) to the Class A Certificateholders, the Overcollateralization
Increase Amount (as defined in "--Overcollateralization Provisions" below),
in reduction of the Certificate Principal Balance thereof, until the
Certificate Principal Balance has been reduced to zero;
(v) to the Class A Certificateholders in respect of any Unpaid Interest
Shortfalls previously allocated thereto, until the amount of such Unpaid
Interest Shortfalls have been reduced to zero;
(vi) to be deposited in the Reserve Fund Account, the amount required to
be deposited therein as
described in "--The Reserve Fund and Yield Maintenance Agreement";
(vii) to the Trustee, for amounts owing to the Trustee other than its
Trustee's Fees; and
(viii) any remaining amounts to the holders of the Class SB Certificates.
In no event will any Principal Distribution Amount paid with respect to any
Distribution Date and the Certificates be less than zero.
OVERCOLLATERALIZATION PROVISIONS
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate Principal Balance of the Mortgage Loans immediately following such
Distribution Date over (b) the Certificate Principal Balance of the Class A
Certificates (after taking into account distributions of the Principal
Distribution Amount) is the "Overcollateralization Amount" as of such
Distribution Date. On the Delivery Date, the Overcollateralization Amount will
be approximately $4,123,027, or approximately 3.00% of the aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date. This amount is the
required level of overcollateralization (the "Required Overcollateralization
Amount") as of the Delivery Date and may increase or decrease, subject to
certain trigger tests, in accordance with the provisions of the Pooling and
Servicing Agreement.
The Pooling and Servicing Agreement requires that the Net Monthly Excess
Cash Flow, to the extent
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available therefor as described above, will be applied as an accelerated payment
of principal on the Class A Certificates to the extent that the Required
Overcollateralization Amount exceeds the Overcollateralization Amount as of such
Distribution Date (such excess, the "Overcollateralization Increase Amount").
The "Net Monthly Excess Cash Flow" means, the amount remaining to be distributed
on each Distribution Date following clause (iii) of the distributions in
"--Priority of Payment" above. The "Required Overcollateralization Amount"
means, as of any Distribution Date (i) prior to the Step-Down Date, 3.00% of the
Cut-off Date Balance and (ii) on or after the Step-Down Date, the greatest of
(a) 6.00% of the then current aggregate Principal Balance of the Mortgage Loans
as of the end of the related Due Period, (b) the aggregate Principal Balance of
the three largest Mortgage Loans, (c) two times the excess of (1) 50% of the
aggregate Principal Balance of the Mortgage Loans 90 or more days delinquent
over (2) three times the Net Monthly Excess Cash Flow for such Distribution Date
and (d) the Overcollateralization Floor.
The "Stepdown Date" means the later of (i) the first Distribution Date
occurring after September 2002 and (ii) the first Distribution Date on which the
Principal Balance of the Mortgage Loans is equal to or less
than 50% of the Cut-off Date Balance.
The "Overcollateralization Floor" is 0.50% of the Cut-off Date Balance.
In the event that the Required Overcollateralization Amount is permitted to
decrease or "step down" on a Distribution Date in the future, a portion of the
principal which would otherwise be distributed to the holders of the Class A
Certificates on such Distribution Date shall not be distributed to the holders
of such Class A Certificates on such Distribution Date. This has the effect of
decelerating the amortization of the Class A Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Overcollateralization
Amount. With respect to any Distribution Date, the excess, if any, of (a) the
Overcollateralization Amount on such Distribution Date over (b) the Required
Overcollateralization Amount is the "Excess Overcollateralization Amount" with
respect to such Distribution Date. If, on any Distribution Date, the Excess
Overcollateralization Amount is, or, after taking into account all other
distributions to be made on such Distribution 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 Class A Certificates on
such Distribution Date shall instead be distributed as excess cash flow to the
Class A Certificates and the Class SB Certificates as described under
"--Priority of Payment" herein; such amount being the "Overcollateralization
Reduction Amount" for such Distribution Date.
THE RESERVE FUND AND THE YIELD MAINTENANCE AGREEMENT
On the Delivery Date, the Trustee will establish a reserve fund account
(the "Reserve Fund") to cover certain payments on the Class A Certificates. The
Reserve Fund will be an asset of the Trust Fund but not of any one of the
REMICs. The Reserve Fund shall be invested in Permitted Investments. In
addition, on the Delivery Date, a yield maintenance agreement (the "Yield
Maintenance Agreement") will be entered into by DLJ International Capital
("DLJIC") and the Trustee, as trustee for the benefit of the Certificate Insurer
and the Certificateholders. Pursuant to the Yield Maintenance Agreement, on each
Distribution Date, an amount will be deposited in the Reserve Fund equal to the
Reserve Fund Addition (as defined below). In addition, on any Distribution Date
for which the Overcollateralization Amount is equal to the Required
Overcollateralization Amount, and if the Net WAC Cap Rate does not exceed the
lesser of clauses (i) and (ii) of the definition of Pass-Through Rate of the
Class A Certificates by at least 0.25%, all Net Monthly Excess Cash Flow
remaining following distributions pursuant to clause (v) of "--Priority of
Payment" above shall be deposited in the Reserve Fund. In no event, however,
will the amount held in the Reserve Fund exceed the sum of any Basis Risk
Shortfall Carry Forward Amount and 0.50% of the aggregate Principal Balance of
the Mortgage Loans as of the beginning of the related Due Period. Moreover, if
on any Distribution Date for which the Overcollateralization Amount is equal to
the Required Overcollateralization Amount and the Net WAC Cap Rate exceeds the
Pass-Through Rate by at least 0.25%, the amount required to be held in the
Reserve Fund shall equal the Basis Risk Shortfall
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Carry Forward Amount and any amounts held in the Reserve Fund in excess of such
amount shall be released to the holders of the Class SB Certificates.
On each Distribution Date, to the extent required, the Trustee will
withdraw from amounts in the Reserve Fund to cover the following items, in the
following order:
(i) first, to reimburse the Certificate Insurer up to any Cumulative
Insurance Payments; and
(ii) second, to pay the Class A Certificates in respect of any Realized
Losses to the extent not covered
by the Net Monthly Excess Cash Flow.
In addition, if following any Distribution Date and the allocation of
Realized Losses with respect to such Distribution Date, the amount in the
Reserve Fund will be withdrawn and paid as follows:
(i) first, to the Class A Certificates, to pay any Basis Risk
Shortfall Carry-Forward Amount; and
(ii) second, to the holder of the Class SB Certificates to the extent
amounts held in the Reserve Fund exceed the amounts required to be
held in the Reserve Fund, as described above.
The Basis Risk Shortfall Carry-Forward Amount will only be recoverable from the
Reserve Fund, including Net Monthly Excess Cash Flow to the extent deposited in
the Reserve Fund, and not from the Policy or otherwise.
With respect to any Distribution Date, the "Reserve Fund Addition" will
equal interest accrued during the related Interest Accrual Period at a rate
equal to the excess of (x) One-Month LIBOR (determined as described above under
"--Determination of One-Month LIBOR" above; provided, however, on the first
Distribution Date, One-Month LIBOR for purposes of the Yield Maintenance
Agreement will be 5.38% per annum) over (y) the Strike Price, on an amount equal
to the lesser of (i) the aggregate Stated Principal Balance of the Mortgage
Loans in the Mortgage Pool at the beginning of the related Due Period and (ii)
the Projected Principal Balance for such Interest Accrual Period. The "Strike
Price" will equal 7.000% per annum for the first 8 Distribution Dates, 6.625%
per annum for the 9th Distribution Date through the 21st Distribution Date,
7.375% for the 22nd Distribution Date, 8.500% for the 23rd Distribution Date and
9.500% for the 24th Distribution Date through the 28th Distribution Date. After
the 28th Distribution Date, the Yield Maintenance Agreement will terminate.
For the first Distribution Date, the "Projected Principal Balance" with
respect to the Cap Contract shall be the Cut-off Date Balance. For each
Distribution Date thereafter, the Projected Principal Balance for the Cap
Contract is then based on a prepayment assumption of a constant prepayment rate
("CPR") of 0% per annum for the first Distribution Date, increasing by
approximately 1.3636% per annum each Distribution Date until the twelfth
Distribution Date, and 15% CPR thereafter. There can be no assurance that the
Mortgage Loans will pay at these rates or at any other rate. See "Certain Yield
and Prepayment Considerations" herein.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required under the
Pooling and 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 and principal (net of the related Servicing Fees) which were due on
the 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, Insurance
Proceeds, or Liquidation Proceeds with respect to the related Mortgage Loan. The
purpose of making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. Any
failure by the Master Servicer to make an Advance as required under the Pooling
and Servicing Agreement will constitute an
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Event of Default thereunder, in which case the Trustee, as successor Master
Servicer, will be obligated to make any such Advance, in accordance with the
terms of the Pooling and Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from late collections, Insurance Proceeds 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, Insurance Proceeds and
Liquidation Proceeds may be reimbursed to the Master Servicer out of any funds
in the Collection Account prior to payments on the Certificates.
YEAR 2000 PROBLEM
The "Year 2000 Problem" relates to the fact that many existing computer
programs and applications use only two digits to identify a year in the date
field. A failure to modify such programs and applications to be Year 2000
compliant may adversely impact the operations at the turn of the century of the
Master Servicer and the Trustee. The Master Servicer and the Trustee plan to
modify or replace computer programs and applications in order to deal with the
Year 2000 Problem. There can be no guarantee that such plans will be timely
completed.
DESCRIPTION OF THE CERTIFICATE GUARANTY INSURANCE POLICY
On the Delivery Date, the Certificate Insurer will issue the Certificate
Guaranty Insurance Policy in favor of the Trustee on behalf of the Class A
Certificateholders. The Certificate Guaranty Insurance Policy will
unconditionally and irrevocably guarantee certain payments on the Class A
Certificates. Draws will be made on the Certificate Guaranty Insurance Policy
(any such draw, an "Insured Amount") to cover related Deficiency Amounts and
Preference Amounts. A "Deficiency Amount" means (A) with respect to each
Distribution Date prior to the Final Scheduled Distribution Date, an amount
equal to the sum of (i) the excess, if any, of Accrued Certificate Interest on
the Class A Certificates for such Distribution Date over Available Funds for
such Distribution Date and (ii) any Overcollateralization Deficit; and (B) with
respect to the Final Scheduled Distribution Date, an amount equal to the sum of
(i) the excess, if any, of Accrued Certificate Interest on the Class A
Certificates over Available Funds for such Distribution Date and (ii) the
excess, if any, of the Certificate Principal Balance of all Outstanding
Certificates due on such Final Scheduled Distribution Date over Available Funds
not used to pay Accrued Certificate Interest on the Class A Certificates for
such Final Scheduled Distribution Date. For purposes of the foregoing, amounts
in the Certificate Account available for interest distributions on any
Distribution Date shall be deemed to include all amounts in the Certificate
Account for such Distribution Date available for distribution on such
Distribution Date. A "Preference Amount" means any amount previously distributed
to a Class A Certificateholder that is recoverable and sought to be recovered as
a voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a
final nonappealable order of a court having competent jurisdiction. Prepayment
Interest Shortfalls, Relief Act Shortfalls and any Basis Risk Shortfalls will
not be covered by the Certificate Guaranty Insurance Policy. Pursuant to the
terms of the Pooling and Servicing Agreement, draws under the Certificate
Guaranty Insurance Policy in respect of any Overcollateralization Deficit will
be paid to the Class A Certificateholders by the Paying Agent as principal. In
the absence of payments under the Certificate Guaranty Insurance Policy,
Certificateholders will directly bear the credit risks associated with their
investment to the extent such risks are not covered by the Overcollateralization
Amount or otherwise.
In the event that the Certificate Insurer were to become insolvent, any
claims arising under the Certificate Guaranty Insurance Policy would be excluded
from coverage by the California Insurance Guaranty Association, established
pursuant to the laws of the State of California.
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THE YIELD MAINTENANCE AGREEMENT COUNTERPARTY
DLJIC will be a party to the Yield Maintenance Agreement. DLJIC is an
ordinary exempted Cayman Islands company. DLJIC is 80% owned by Donaldson,
Lufkin & Jenrette Inc. ("DLJ Inc.") and 20% owned by DLJ Capital Corporation, a
wholly owned subsidiary of DLJ, Inc. DLJIC will look to DLJ Inc. for a guarantee
of its obligations under the Yield Maintenance Agreement. DLJ Inc. has a ratings
classification of "A-" from Standard & Poor's and "A3" from Moody's. As of June
30, 1999, DLJ Inc. had assets of approximately $86,900,000, liabilities of
approximately $83,100,000, DLJ Inc.-obligated, mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures of DLJ Inc. of $200,000
and stockholder's equity of approximately $3,600,000. All figures are reported
in thousands. DLJ Inc. will provide upon request, without charge, to each person
to whom this Prospectus Supplement is delivered, a copy of (i) the ratings
analysis from each of Standard & Poor's and Moody's evidencing those respective
ratings or (ii) the most recent audited annual financial statements of DLJ Inc.
Requests for such information should be directed to Anne Buckley at (212)
312-3109 or in writing at Donaldson, Lufkin & Jenrette, Inc., 120 Broadway, 37th
Floor, New York, New York 10271.
DLJIC and DLJ Inc. are affiliates of the Underwriter.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Class A Certificates will depend on the price
paid by the holder for such Class A Certificate, the Pass-Through 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 Class A Certificates.
The Mortgage Loans may be prepaid in full or in part at any time, although
approximately half of the Mortgage Loans provide for payment of a prepayment
charge. 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. In the event the Master
Servicer or any Subservicer does not approve an assumption, the related Mortgage
Loan will be due on sale. 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 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 Class A Certificates and may result in a
prepayment experience on the Mortgage Loans that differs from that on other
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 Class A Certificates of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans. Factors
affecting prepayment
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<PAGE>
(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.
Increases in the monthly payments of the Mortgage Loans to an amount in
excess of the monthly payment required at the time of origination may result in
a default rate higher than that on level payment mortgage loans, particularly
since the Mortgagor under each Mortgage Loan was qualified on the basis of the
Mortgage Rate in effect at origination. The repayment of such Mortgage Loans
will be dependent on the ability of the Mortgagor to make larger monthly
payments as the Mortgage Rate increases.
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 otherwise payable to holders of the Class A
Certificates 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 Certificates--Interest Distributions
on the Class A Certificates" herein for a discussion of the effect of principal
prepayments on the Mortgage Loans on the yield to maturity of the Class A
Certificates and certain possible shortfalls in the collection of interest.
In addition, the yield to maturity of the Class A Certificates will depend
on, among other things, the price paid by the holders of the Class A
Certificates and the then applicable Pass-Through Rate. The extent to which the
yield to maturity of a Class A Certificate is sensitive to prepayments will
depend, in part, upon the degree to which it is purchased at a discount or
premium. In general, if a Class A Certificate 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 Class A Certificate 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 Class A Certificates, see "Yield
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus.
The Pass-Through Rate with respect to the Class A Certificates changes each
month and is based upon One-Month LIBOR plus the Class A Margin, limited by the
Maximum Pass-Through Rate and the Net WAC Cap Rate. However, the Mortgage Rate
of each Mortgage Loan is based generally upon a different index, Six-Month
LIBOR, and the related Gross Margin, and generally adjusts semi-annually,
commencing after an initial fixed-rate period. One-Month LIBOR and the indices
on the Mortgage Loans may respond differently to economic and market factors,
and there is not necessarily any correlation between them. Moreover, the
Mortgage Loans are subject to Periodic Rate Caps, Maximum Mortgage Rates and
Minimum Mortgage Rates. Thus, it is possible, for example, that One-Month LIBOR
may rise during periods in which Six-Month LIBOR is stable or falling or that,
even if both One-Month LIBOR and Six- Month LIBOR rise during the same period,
One-Month LIBOR may rise much more rapidly than Six- Month LIBOR. See
"Description of the Certificates--Interest Distributions on the Class A
Certificates."
The Trustee will enter into the Yield Maintenance Agreement which will
provide some protection against any resulting shortfall. However, payments under
the Yield Maintenance Agreement are based on the principal balance that would
have resulted under the assumed prepayment speed described herein; a slower or
faster prepayment speed may result in the Yield Maintenance Agreement providing
insufficient
S-44
<PAGE>
funds to cover such shortfalls on the Class A Certificates. In addition,
payments under the Yield Maintenance Agreement are limited to a specified rate
in effect from time to time. Such shortfalls may remain unpaid on the Final
Scheduled Distribution Date.
The "Final Scheduled Distribution Date" for the Class A Certificates is the
Distribution Date in October 2029, which is the Distribution Date following the
latest scheduled maturity date for any Mortgage
Loan.
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 Class A Certificates will be
influenced by, among other things, the rate at which principal of the Mortgage
Loans is paid, which may be in the form of scheduled amortization, prepayments
or liquidations. Because the amortization schedule of each Mortgage Loan will
generally be recalculated semi-annually after the initial Adjustment Date for
such Mortgage Loan, any partial prepayments thereof will not reduce the term to
maturity of such Mortgage Loan. In addition, an increase in the Mortgage Rate on
a Mortgage Loan will result in a larger monthly payment and in a larger
percentage of such monthly payment being allocated to interest and a smaller
percentage being allocated to principal, and conversely, a decrease in the
Mortgage Rate on the Mortgage Loan will result in a lower monthly payment and in
a larger percentage of each monthly payment being allocated to principal and a
smaller percentage being allocated to interest.
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 CPR of 4.0% of the then outstanding principal balance of
such mortgage loans in the first month of the life of the mortgage loans and an
additional amount of approximately 2.3636% per annum in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of the mortgage loans, a 100% Prepayment Assumption
assumes a CPR of 30% per annum each month. "CPR" is a constant prepayment rate
equal to the percentage of the outstanding principal balance then outstanding
which is assumed to prepay over the course of one year. 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. To
assume a 100% Prepayment Assumption or any other Prepayment Assumption
percentage is to assume that the stated percentage of the outstanding principal
balance of the related pool is prepaid over the course of a year. No
representation is made that the Mortgage Loans will prepay at these or any other
rates.
The tables set forth below have been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust Fund as
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 eleven hypothetical mortgage loans with the following
characteristics:
<TABLE>
<CAPTION>
MONTHS TO REMAINING RADIAN
MORTGAGE RATE ORIGINAL TERM NEXT TERM TO MAXIMUM MINIMUM SUBSEQUENT PMI
PRINCIPAL AT TO MATURITY ADJUSTMENT MATURITY MORTGAGE MORTGAGE PERIODIC POLICY
BALANCE CUT-OFF DATE (IN MONTHS) DATE (IN MONTHS) GROSS MARGIN RATE RATE CAP RATE
- ----------- ------------- ------------- ---------- ----------- ------------ -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,171,146 9.61515360 360 2 347 5.64128% 15.88444% 7.12303% 1.00000% 0.14418%
1,463,308 8.40732360 360 4 356 4.26438 14.38096 5.09247 1.00000 0.17926
2,814,036 8.56514360 360 5 358 4.64449 14.44334 6.53894 1.00000 0.39399
3,378,956 8.70914360 360 6 359 4.01655 14.41973 4.75794 1.00000 0.38763
2,942,188 7.48796360 360 17 353 4.01702 13.63893 4.22676 1.02137 0.34183
3,976,152 9.05897360 360 21 357 5.37710 15.63237 8.16776 1.29392 0.29541
25,455,835 8.22113360 360 22 358 4.16637 14.22113 4.60160 1.00000 0.46983
37,274,028 8.24197360 360 23 359 4.17172 14.24386 4.69647 1.00579 0.46640
56,376,937 8.18754360 360 24 360 4.19543 14.18679 4.64580 1.01032 0.43282
2,171,741 10.07398360 360 33 357 6.99859 17.07398 10.07398 1.50000 0.18599
278,700 8.48412360 360 60 360 4.34365 14.48412 4.34365 1.00000 0.61000
</TABLE>
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<PAGE>
(ii) Six-Month LIBOR, which remains constant at 5.9262% per annum; (iii) the
monthly payments on the Mortgage Loans adjust every six months after the first
adjustment date set forth above; (iv) the initial periodic cap on the first,
third and fourth hypothetical loans is 1.00000%, the second hypothetical loan is
1.18265% and on the fifth through eleventh hypothetical loans is 3.00000%; (v)
payments on the Class A Certificates are based upon the actual number of days in
the month and a 360-day year, and are received, in cash, on the 25th day of each
month, commencing in October 1999; (vi) there are no delinquencies or losses on
the Mortgage Loans and principal payments on the Mortgage Loans are timely
received together with prepayments, if any, at the respective percentages of the
Prepayment Assumption and the constant percentages of the Prepayment Assumption
set forth in the following table; (vii) there are no repurchases of the Mortgage
Loans; (viii) there is no Prepayment Interest Shortfall or any other interest
shortfall in any month; (ix) the scheduled monthly payment for the Mortgage Loan
is calculated based on its principal balance, Mortgage Rate and remaining term
to maturity such that such Mortgage Loan will amortize in amounts sufficient to
repay the remaining principal balance of such Mortgage Loan by its remaining
term to maturity; (x) with respect to each Mortgage Loan, Six-Month LIBOR
remains constant at the rate set forth above and the Mortgage Rate on each
Mortgage Loan is adjusted on the next Adjustment Date (and on subsequent
Adjustment Dates, as necessary) to equal Six-Month LIBOR plus the applicable
Gross Margin, subject to the Maximum Mortgage Rates, Minimum Mortgage Rates and
Periodic Rate Caps listed above; (xi) the monthly payment on each Mortgage Loan
is adjusted on the Due Date immediately following the next related Adjustment
Date (and on subsequent Adjustment Dates, as necessary) to equal a fully
amortizing payment as described in clause (ix) above; (xii) the sum of the
Servicing Fee Rate, the Trustee Fee Rate and the rate per annum at which the
premium on the Certificate Guaranty Insurance Policy accrues is 0.6175%; (xiii)
One-Month LIBOR remains constant at 5.3825% per annum; (xiv) there are no
additional ongoing Trust Fund expenses payable out of the Trust Fund; (xv) the
Master Servicer exercises its option to purchase the Mortgage Loans on the first
Distribution Date on which it would be permitted to do so as described in
"Pooling and Servicing Agreement--Termination" herein; and (xvi) the Class A
Certificates will be purchased on September 30, 1999.
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 Certificate Principal Balance
outstanding over time and the weighted average life of the Class A Certificates.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Class A Certificates, and sets forth
the percentages of the initial Certificate Principal Balance of the Class A
Certificates that would be outstanding after each of the dates shown at various
percentages of the Prepayment Assumption.
S-46
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A CERTIFICATES
DISTRIBUTION DATE 0% 50% 75% 100% 150% 150% 200%
- ----------------- -- --- --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100% 100% 100% 100% 100% 100% 100%
September 25, 2000................ 99 89 84 79 69 63 58
September 25, 2001................ 98 75 64 54 36 28 21
September 25, 2002................ 98 63 49 37 18 12 0
September 25, 2003................ 97 52 37 26 11 0 0
September 25, 2004................ 96 44 29 18 0 0 0
September 25, 2005................ 95 37 22 12 0 0 0
September 25, 2006................ 94 31 17 0 0 0 0
September 25, 2007................ 93 26 13 0 0 0 0
September 25, 2008................ 92 22 10 0 0 0 0
September 25, 2009................ 90 18 0 0 0 0 0
September 25, 2010................ 89 15 0 0 0 0 0
September 25, 2011................ 87 13 0 0 0 0 0
September 25, 2012................ 85 11 0 0 0 0 0
September 25, 2013................ 83 0 0 0 0 0 0
September 25, 2014................ 81 0 0 0 0 0 0
September 25, 2015................ 78 0 0 0 0 0 0
September 25, 2016................ 76 0 0 0 0 0 0
September 25, 2017................ 72 0 0 0 0 0 0
September 25, 2018................ 69 0 0 0 0 0 0
September 25, 2019................ 65 0 0 0 0 0 0
September 25, 2020................ 61 0 0 0 0 0 0
September 25, 2021................ 56 0 0 0 0 0 0
September 25, 2022................ 51 0 0 0 0 0 0
September 25, 2023................ 46 0 0 0 0 0 0
September 25, 2024................ 40 0 0 0 0 0 0
September 25, 2025................ 33 0 0 0 0 0 0
September 25, 2026................ 26 0 0 0 0 0 0
September 25, 2027................ 18 0 0 0 0 0 0
September 25, 2028 and thereafter. 0 0 0 0 0 0 0
Weighted Average Life in Years*... 21.26 5.49 3.74 2.81 1.85 1.56 1.35
___________________
</TABLE>
(*) The weighted average life of a Class A Certificate is determined by (i)
multiplying the net reduction, if any, of Certificate Principal Balance by
the number of years from the date of issuance of the Class A Certificate to
the related Distribution Date, (ii) adding the results, and (iii) dividing
the sum by the aggregate of the net reductions of the Certificate Principal
Balance described in (i) above.
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<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement dated as of September 1, 1999, among the Company, the Master Servicer,
and the Trustee. Reference is made to the Prospectus for important information
in addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class A Certificates. The Class A
Certificates will be transferable and exchangeable at the corporate trust office
of the Trustee. The Company will provide a prospective or actual Class A
Certificateholder without charge, on written request, a copy (without exhibits)
of the Pooling and Servicing Agreement. Requests should be addressed to Impac
Secured Assets Corp., 1401 Dove Street, Newport Beach, California 92660.
THE TRUSTEE
The Trustee shall be entitled to compensation for its services each month
at a rate (the "Trustee Fee Rate") equal to 0.0125% per annum of the aggregate
Principal Balance of the Mortgage Loans. In addition to the circumstances
described in the Prospectus, the Company may terminate the Trustee for cause
under certain circumstances. See "The Agreements--The Trustee" in the
Prospectus.
THE MASTER SERVICER; THE SUBSERVICER
Impac Funding (in its capacity as master servicer, the "Master Servicer")
will act as master servicer for the Mortgage Loans pursuant to the Pooling and
Servicing Agreement. See "Impac Funding" in the Prospectus. Impac Funding has
entered into a subservicing arrangement with Wendover. Notwithstanding this
agreement, Impac Funding will remain primarily liable for servicing the Mortgage
Loans.
Wendover is a subservicer of residential, consumer and commercial mortgage
loans in 50 states. As of June 30, 1999, Wendover serviced approximately $7.4
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 June 30, 1999, Wendover employed 340 employees. Wendover is
located in Greensboro, North Carolina. Wendover is an approved servicer in good
standing with Freddie Mac.
Established in 1986, Wendover was originally owned by Sunbelt Savings FSB,
which was formed to receive the assets and certain liabilities of Independent
American Mortgage Services Inc. ("IAMSI") and other insolvent Texas savings and
loan associations. Wendover was a subsidiary of IAMSI until it was purchased by
Wendover Financial Services Corp. in June 1990. In October 1992, Wendover was
acquired by State Street Bank and Trust Company ("State Street"). In June 1997,
Wendover was acquired by Electronic Data Systems Corporation.
The Certificate Insurer will have the right to terminate Impac Funding as
Master Servicer (and thereby Wendover as subservicer) if certain loss and
delinquency tests in the Pooling and Servicing Agreement are failed.
DELINQUENCY AND LOSS EXPERIENCE OF THE SUBSERVICER
The following table sets forth certain information concerning delinquency
experience including bankruptcies and foreclosures in progress on one- to
four-family residential mortgage, consumer, and commercial loans included in
Wendover's servicing portfolio at the dates indicated. Consumer and commercial
loans represented less than 1.0% of the overall portfolio volume at June 30,
1999. As of December 31, 1995, 1996, 1997 and 1998 and June 30, 1999, the total
principal balance of loans being serviced by Wendover was (in millions)
$7,637.4, $9,819.8, $7,811.4, $7,746.8 and $7,384.7,
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<PAGE>
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.
S-49
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996 1997 1998
--------------------- ----------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
NUMBER SERVICING NUMBER SERVICING NUMBER SERVICING NUMBER SERVICING
OF LOANS PORTFOLIO(3) OF LOANS PORTFOLIO(3) OF LOANS PORTFOLIO(3) OF LOANS PORTFOLIO(3)
-------- ------------ -------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio(1) 94,662 100% 112,980 100% 95,164 100% 82,949 100%
====== ==== ======= ==== ====== ==== ====== ====
Period of Delinquency:
30-59 days............ 5,364 6.10% 5,273 4.57% 4,789 4.78% 3,565 4.02%
60-89 days............ 1,291 1.46% 1,311 1.11% 1,845 1.15% 964 0.99%
90 days or more(2).... 8,409 7.31% 6,097 4.20% 13,464 3.62% 3,551 2.43%
------ ------ ----- ----- ------ ----- ----- -----
Total Delinquencies(2)
(excluding
Foreclosures) 15,064 14.87% 12,681 9.88% 20,098 9.55% 8,080 7.44%
====== ====== ====== ===== ====== ===== ===== =====
Foreclosures Pending 4,041 4.86% 4,240 4.41% 2,469 3.01% 1,727 2.05%
</TABLE>
JUNE 30,
1999
----------------------
PERCENT OF
NUMBER SERVICING
OF LOANS PORTFOLIO(3)
Total Portfolio(1) 84,377 100%
====== ====
Period of Delinquency:
30-59 days............ 3,196 3.83%
60-89 days............ 827 0.95%
90 days or more(2).... 3,075 2.18%
----- -----
Total Delinquencies(2)
(excluding
Foreclosures) 7,098 6.96%
===== =====
Foreclosures Pending 1,430 1.79%
_________________
1 Includes loans subject to purchased mortgage servicing rights owned by
Wendover totaling 6,332 loans for $614.9 million unpaid principal balance
and 9,004 loans for $890.4 million unpaid principal balance as of December
31, 1995 and 1996, respectively, 2,717 loans for $178.1 million unpaid
principal balance as of December 31, 1997, 2,913 loans for $149.9 million
unpaid principal balance as of December 31, 1998 and 3,474 loans for $198.5
million unpaid principal balance as of June 30, 1999.
2 Includes bankruptcy delinquencies and pending foreclosure referrals.
3 Computed based on unpaid principal balance.
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<PAGE>
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 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.
Wendover has an "above average" rating from Standard & Poor's as a
residential servicer, and an "average" ranking from Standard & Poor's as a
special servicer.
There can be no assurance that the delinquency and foreclosure
experience of the Mortgage Loans will correspond to the delinquency and
foreclosure experience of the servicing portfolio of Wendover set forth in the
foregoing tables. The statistics shown above represent the respective
delinquency and foreclosure experiences only at the dates presented, whereas the
aggregate delinquency and foreclosure experience on the Mortgage Loans will
depend on the results obtained over the life of the Trust Fund. Each servicing
portfolio includes mortgage loans with a variety of payment and other
characteristics (including geographic location) which are not necessarily
representative of the payment and other characteristics of the Mortgage Loans.
In addition, Wendover's servicing portfolio includes consumer and commercial
loans. Each servicing portfolio includes mortgage loans underwritten pursuant to
guidelines not necessarily representative of those applicable to the Mortgage
Loans. It should be noted that if the residential real estate market should
experience an overall decline in property values, the actual rates of
delinquencies and foreclosures could be higher than those previously experienced
by Wendover. In addition, adverse economic conditions may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
Mortgage Loans and, accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Loans.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each Mortgage Loan is payable out of the interest
portion of payments received on such Mortgage Loan. The "Servicing Fee Rate" in
respect of each Mortgage Loan will be equal to 0.405% 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 in an amount equal to 0.030% per annum and (b)
subservicing and other related compensation payable to the Subservicer or to the
Master Servicer if the Master Servicer is directly servicing the loan, equal to
0.375% per annum. The Master Servicer will be entitled to retain in the form of
additional servicing compensation late payment charges on the Mortgage Loans.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by
holders of Certificates evidencing a specified percentage of all undivided
interests in the Trust Fund may be taken by holders of Certificates entitled in
the aggregate to such percentage of the Voting Rights. 98% of all Voting Rights
will be allocated among all holders of the Class A Certificates in proportion to
their then outstanding Certificate Principal Balances, 1% of all Voting Rights
will be allocated to the holders of the Class SB Certificates, 1/3 of 1% of all
Voting Rights will be allocated to the holders of the Class R-I Certificates,
1/3 of 1% of all Voting Rights will be allocated to the holders of the Class
R-II Certificates and 1/3 of 1% of all Voting Rights will be allocated to the
holders of the Class R-III Certificates, in each case, in proportion to the
Percentage Interests (as defined in the Prospectus) evidenced by their
Certificates. However, provided that the Certificate Insurer is not in default,
the Certificate Insurer may exercise all of the Voting Rights of the Class A
Certificates on their behalf.
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<PAGE>
TERMINATION
The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the Class A Certificates
are described in "The Pooling Agreement-- Termination; Retirement of
Certificates" in the Prospectus. The Master Servicer will have the option, on
any Distribution Date on which the aggregate Stated Principal Balance of the
Mortgage Loans is less than 10% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, to purchase all remaining Mortgage Loans
and other assets in the Trust Fund, thereby effecting early retirement of the
Class A Certificates. Any such purchase of Mortgage Loans and other assets of
the Trust Fund shall be made at a price equal to the sum of (a) 100% of the
unpaid principal balance of each Mortgage Loan (or the fair market value of the
related underlying Mortgaged Properties with respect to defaulted Mortgage Loans
as to which title to such Mortgaged Properties has been acquired if such fair
market value is less than such unpaid principal balance) (net of any
unreimbursed Advance attributable to principal) as of the date of repurchase
plus (b) accrued interest thereon at the Net Mortgage Rate to, but not
including, the first day of the month in which such repurchase price is
distributed. If the exercise of this termination option will result on a draw
under the Certificate Guaranty Insurance Policy, this option may not be
exercised without the prior consent of the Certificate Insurer. Distributions on
the Certificates in respect of any such optional termination will be paid,
first, to the Class A Certificates and second, to the Class SB Certificates. The
proceeds of any such distribution may not be sufficient to distribute the full
amount to the Class A Certificates if the purchase price is based in part on the
fair market value of the underlying Mortgaged Property and such fair market
value is less than 100% of the unpaid principal balance of the related Mortgage
Loan.
Upon presentation and surrender of the Class A Certificates in
connection with the termination of the Trust Fund under the circumstances
described above, the holders of the Class A Certificates will receive an amount
equal to the Certificate Principal Balance thereof plus interest for the prior
calendar month thereon at the applicable Pass-Through Rate, plus any previously
unpaid Accrued Certificate Interest (reduced, as described above, in the case of
the termination of the Trust Fund resulting from a purchase of all the assets of
the Trust Fund).
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund (other than the Yield
Maintenance Agreement and the Reserve Fund) will qualify as three separate
REMICs ("REMIC I", "REMIC II", and "REMIC III") under the Code.
For federal income tax purposes, (i) the Class R-I Certificates will
constitute the sole class of "residual interests" in REMIC I; (ii) the Class
R-II Certificates will constitute the sole class of "residual interests" in
REMIC II; (iii) the Class R-III Certificates will constitute the sole class of
"residual interests" in REMIC III; and (iv) the Class A Certificates and the
Class SB Certificates will represent ownership of "regular interests" in, and
will be treated as debt instruments of, REMIC III. See "Federal Income Tax
Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates may
be treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual 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 that rate or at
any other rate. See "Certain Federal Income Tax Consequences--REMICs-- Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" in the
Prospectus.
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<PAGE>
The IRS has issued the OID Regulations under sections 1271 to 1275 of
the Code generally addressing the treatment of debt instruments issued with
original issue discount. Purchasers of the Class A Certificates should be aware
that Section 1272(a)(6) of the Code and the OID Regulations do not adequately
address certain issues relevant to, or applicable to, prepayable securities
bearing a variable rate of interest such as the Class A Certificates. In the
absence of other authority, the Master Servicer intends to be guided by certain
principles of the OID Regulations applicable to variable rate debt instruments
in determining whether such Certificates should be treated as issued with
original issue discount and in adapting the provisions of Section 1272(a)(6) of
the Code to such Certificates for the purpose of preparing reports furnished to
Certificateholders and the IRS. Because of the uncertainties concerning the
application of Section 1272(a)(6) of the Code to such Certificates and because
the rules relating to debt instruments having a variable rate of interest are
limited in their application in ways that could preclude their application to
such Certificates even in the absence of Section 1272(a)(6) of the Code, the IRS
could assert that the Class A Certificates should be governed by some other
method not yet set forth in regulations or should be treated as having been
issued with original issue discount. Prospective purchasers of the Class A
Certificates are advised to consult their tax advisors concerning the tax
treatment of such Certificates.
In certain circumstances the OID Regulations permit the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, the holder of an Class A Certificate
may be able to select a method for recognizing original issue discount that
differs from that used by the Master Servicer in preparing reports to the
Certificateholders and the IRS.
Each holder of a Class A Certificate is deemed to own an undivided
beneficial ownership interest in two assets, a REMIC regular interest and the
right to receive payments from the Reserve Fund in respect of the Basis Risk
Shortfall Carry-Forward Amount. The Reserve Fund is not an asset of any REMIC.
The treatment of amounts received by a Class A Certificateholder under such
Certificateholder's right to receive the Basis Risk Shortfall Carry-Forward
Amount will depend on the portion, if any, of the Class A Certificateholder's
purchase price allocable thereto. Under the REMIC Regulations, each holder of a
Class A Certificate must allocate its purchase price for the Class A Certificate
between its undivided interest in the regular interest of REMIC III and its
undivided interest in the right to receive payments from the Reserve Fund in
respect of the Basis Risk Shortfall Carry-Forward Amount in accordance with the
relative fair market values of each property right. The Trustee intends to treat
payments made to the holders of the Class A Certificates with respect to the
Basis Risk Shortfall Carry-Forward Amount as includable in income based on the
regulations relating to notional principal contracts (the "Notional Principal
Contract Regulations"). The OID Regulations provide that the Trust's allocation
of the issue price is binding on all holders unless the holder explicitly
discloses on its tax return that its allocation is different from the Trust's
allocation. For tax reporting purposes, the Master Servicer intends to assign a
value of 88 basis points to the right to receive payments from the Reserve Fund
in respect of the Basis Risk Shortfall Carry-Forward Amount. However, such
assignment of value is not binding on the IRS and the IRS could argue that a
greater value should have been allocated to the right to receive payments from
the Reserve Fund in respect of the Basis Risk Shortfall Carry Forward Amount. If
such an argument were to be sustained, the Class A Certificates could be viewed
as having been issued with an additional amount of original issue discount.
Under the REMIC Regulations, the Master Servicer is required to account for the
REMIC regular interest and the right to receive payments from the Reserve Fund
in respect of the Basis Risk Shortfall CarryForward Amount as discrete property
rights. Holders of the Class A Certificates are advised to consult their own tax
advisors regarding the allocation of issue price, timing, character and source
of income and deductions resulting from the ownership of the Class A
Certificates. Treasury regulations have been promulgated under Section 1275 of
the Code generally providing for the integration of a "qualifying debt
instrument" with a hedge if the combined cash flows of the components are
substantially equivalent to the cash flows on a variable rate debt instrument.
However, such regulations specifically disallow integration of debt instruments
subject to Section 1272(a)(6) of the Code. Therefore, holders of the Class A
Certificates will be unable to use the integration method provided for under
such regulations with respect to such Class A Certificates.
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Ownership of the right to the Basis Risk Shortfall Carry-Forward Amount will
nevertheless entitle the owner to amortize the separate price paid for the right
to the Basis Risk Shortfall Carry-Forward Amount under the Notional Principal
Contract Regulations if such right is treated as a "notional principal
contract.".
In the event that the Class A Certificateholder's rights to receive the
Basis Risk Shortfall Carry Forward Amount is characterized as a "notional
principal contract," upon the sale of a Class A Certificate, the amount of the
sale allocated to the selling Class A Certificateholder's right to receive
payments from the Reserve Fund in respect of the Basis Risk Shortfall
Carry-Forward Amount would be considered a "termination payment" under the
Notional Principal Contract Regulations allocable to the related Class A
Certificate. A Class A Certificateholder will have gain or loss from such a
termination of the right to receive payments from the Reserve Fund in respect of
the Basis Risk Shortfall Carry-Forward Amount equal to (i) any termination
payment it received or is deemed to have received minus (ii) the unamortized
portion of any amount paid (or deemed paid) by the Certificateholder upon
entering into or acquiring its interest in the right to receive payments from
the Reserve Fund in respect of the Basis Risk Shortfall CarryForward Amount.
Gain or loss realized upon the termination of the right to receive
payments from the Reserve Fund in respect of the Basis Risk Shortfall
Carry-Forward Amount will generally be treated as capital gain or loss.
Moreover, in the case of a bank or thrift institution, Code Section 582(c) would
likely not apply to treat such gain or loss as ordinary.
This paragraph applies to the Class A Certificates exclusive of any
rights in the Reserve Fund. The Class A Certificates will be treated as assets
described in Section 7701(a)(19)(C) of the Code and "real estate assets" under
Section 856(c)(4)(A) of the Code generally in the same proportion that the
assets of the Trust Fund would be so treated. In addition, interest on the Class
A Certificates will be treated as "interest on obligations secured by mortgages
on real property" under Section 856(c)(3)(B) of the Code generally to the extent
that such Class A Certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. Moreover, the Class A Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code. However,
prospective investors in Class A Certificates that will be generally treated as
assets described in Section 860G(a)(3) of the Code should note that,
notwithstanding such treatment, any repurchase of such a Certificate pursuant to
the right of the Master Servicer or the Company to repurchase such Class A
Certificates may adversely affect any REMIC that holds such Class A Certificates
if such repurchase is made under circumstances giving rise to a Prohibited
Transaction Tax. See "Pooling and Servicing Agreement--Termination" herein and
"Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
The holders of the Class A Certificates will be required to include in
income, interest on such Certificates in accordance with the accrual method of
accounting. As noted above, each holder of a Class A Certificate will be
required to allocate a portion of the purchase price paid for the Class A
Certificates to the right to receive payments from the Reserve Fund in respect
of the Basis Risk Shortfall Carry-Forward Amount. The value of the right to
receive any such Basis Risk Shortfall Carry-Forward Amount is a question of fact
which could be subject to differing interpretations. Because the Basis Risk
Shortfall CarryForward Amount is treated as a separate right of the Class A
Certificates not payable by the REMIC, such right will not be treated as a
qualifying asset for any Certificateholder that is a mutual savings bank,
domestic building and loan association, real estate investment trust, or real
estate mortgage investment conduit and any amounts received from the Reserve
Fund will not be qualifying real estate income for real estate investment
trusts.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
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METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated September 28, 1999 (the "Underwriting Agreement"), among
Donaldson, Lufkin & Jenrette Securities Corporation (the "Underwriter"), the
Company, Impac Funding and Impac Holdings, the Underwriter has agreed to
purchase and the Company has agreed to sell to the Underwriter the Class A
Certificates. It is expected that delivery of the Class A Certificates will be
made only in book-entry form through the Same Day Funds Settlement System of DTC
on or about September 30, 1999, against payment therefor in immediately
available funds.
The Class A Certificates will be purchased from the Company by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Company from the sale of the
Class A Certificates are expected to be approximately $132,857,000, before the
deduction of expenses payable by the Company estimated to be approximately
$335,000. The Underwriter may effect such transactions by selling the Class A
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter. In connection with the sale of the Class A Certificates, 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 Class A Certificates
may be deemed to be underwriters and any profit on the resale of the Class A
Certificates positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933.
The Underwriting Agreement provides that the Company, Impac Funding and
Impac Holdings will jointly and severally indemnify the Underwriter, and that
under limited circumstances the Underwriter will indemnify the Company, Impac
Funding and Impac Holdings 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 Class A
Certificates will develop or, if it does develop, that it will continue or
provide the Class A Certificateholders with sufficient liquidity of investment.
The primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Securities--Reports to Securityholders," which will include
information as to the outstanding principal balance of the Class A Certificates.
There can be no assurance that any additional information regarding the Class A
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Class A Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Class A Certificates may
adversely affect the liquidity of the Class A Certificates, even if a secondary
market for the Class A Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Class A Certificates will be
passed upon for the Company by Thacher Proffitt & Wood, New York, New York and
for the Underwriter by Brown & Wood LLP, New York, New York. Brown & Wood LLP
represents Impac Holdings on certain matters from time to time.
RATINGS
It is a condition of the issuance of the Class A Certificates that they
be rated "AAA" by Standard & Poor's, a division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's") and "Aaa" by Moody's Investors Service, Inc.
("Moody's").
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Standard & Poor's ratings on mortgage pass-through certificates address
the likelihood of the receipt by Class A Certificateholders of payments required
under the Pooling and Servicing Agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Class A Certificates, and the extent to which the
payment stream in the mortgage pool is adequate to make payments required under
the Class A Certificates. Standard & Poor's rating on the Class A Certificates
does not, however, constitute a statement regarding frequency of prepayments on
the mortgages. See "Certain Yield and Prepayment Considerations" herein. The
ratings issued by Standard & Poor's on payment of principal and interest do not
cover the payment of the Basis Risk Shortfall Carry-Forward Amount.
The rating process of Moody's addresses the structural and legal
aspects associated with the Class A Certificates, including the nature of the
underlying mortgage loans. The ratings assigned to the Class A Certificates do
not represent any assessment of the likelihood or rate of principal prepayments.
The ratings do not address the possibility that Class A Certificateholders might
suffer a lower than anticipated yield. The ratings do not address the likelihood
that Class A Certificateholders will be paid any Prepayment Interest Shortfalls,
Relief Act Shortfalls or the Basis Risk Shortfall Carry-Forward Amount.
The Company has not requested a rating on the Class A Certificates by
any rating agency other than Standard & Poor's and Moody's. However, there can
be no assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Class A Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Class A
Certificates by Standard & Poor's and Moody's.
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 Class A Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support or
credit enhancement with respect to the Class A Certificates.
LEGAL INVESTMENT
The Class A Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA")
so long as they are rated in at least the second highest rating category by one
of the Rating Agencies, and, as such, are legal investments for certain entities
to the extent provided in SMMEA. SMMEA provides, however, that states could
override its provisions on legal investment and restrict or condition investment
in mortgage related securities by taking statutory action on or prior to October
3, 1991. Certain states have enacted legislation which overrides the preemption
provisions of SMMEA.
The Company makes no representation as to the proper characterization
of the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A Certificates. Accordingly, all institutions
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their legal advisors in determining whether and to what
extent the Class A Certificates constitutes a legal investment or is subject to
investment, capital or other restrictions. See "Legal Investment" in the
Prospectus.
See "Legal Investment Matters" in the Prospectus.
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ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), any insurance company
(whether through its general or separate accounts) or any other person investing
"Plan Assets" of any Plan, as described under "ERISA Considerations--Plan Asset
Regulations" in the Prospectus, should carefully review with its legal advisors
whether the purchase or holding of Class A Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code.
The DOL issued an individual exemption, Prohibited Transaction
Exemption 90-83, 55 F.R. 50,250 (December 5, 1990) (the "Exemption"), as
described under "ERISA Considerations" in the Prospectus, to the Underwriter.
The Exemption generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools and the initial purchase, holding and subsequent resale of
mortgage pass-through certificates underwritten by the Underwriter, provided
that the conditions set forth in the Exemption are satisfied. The purchase of
the Class A Certificates by, on behalf of or with the Plan Assets of any Plan
may qualify for relief under the Exemption. However, the Exemption contains a
number of conditions which must be met for the Exemption to apply, including the
requirement that any such Plan must be an "accredited investor" as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933, as amended. A fiduciary of a Plan contemplating
purchasing a Class A Certificate must make its own determination that the
conditions set forth in the Exemption will be satisfied with respect to such
Class A Certificates.
Any fiduciary or other investor of "Plan Assets" that proposes to
acquire or hold the Class A Certificates on behalf of or with "Plan Assets" of
any Plan should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of the ERISA and the Code to the proposed
investment. See "ERISA Considerations" in the Prospectus.
The sale of Class A Certificates to a Plan is in no respect a
representation by the Company or the Underwriter that such an investment meets
all relevant legal requirements with respect to investments by Plans generally
or any particular Plan, or that such an investment is appropriate for Plans
generally or any particular Plan.
EXPERTS
The consolidated financial statements of the Certificate Insurer, Ambac
Assurance Corporation and subsidiaries, as of December 31, 1998 and 1997 and for
each of the years in the three-year period ended December 31, 1998 are
incorporated by reference herein and in the registration statement in reliance
upon the report of KPMG LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Impac
Secured Assets Corp., Mortgage Pass-Through Certificates, Series 1999-1 (the
"Global Securities") will be available only in book-entry form. Investors in the
Global Securities may hold such Global Securities through any of DTC, Cedel or
Euroclear. The Global Securities will be tradeable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (I.E., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Global Securities will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel
and Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan pass-through certificates issues in same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through
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a Cedel Participant or Euroclear Participant at least one business day prior to
settlement. Cedel or Euroclear will instruct the Relevant Depositary, as the
case may be, to receive the Global Securities against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment date to and excluding the settlement date, on the basis of the
actual number of days in such accrual period and a year assumed to consist of
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the Relevant Depositary to the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Cedel or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later. As an
alternative, if Cedel or Euroclear has extended a line of credit to them, Cedel
Participants or Euroclear Participants can elect not to preposition funds and
allow that credit line to be drawn upon to finance settlement. Under this
procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds. Since the settlement is taking
place during New York business hours, DTC Participants can employ their usual
procedures for crediting Global Securities to the respective European Depositary
for the benefit of Cedel Participants or Euroclear Participants. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to
the DTC Participants a cross-market transaction will settle no differently than
a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases Cedel
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
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Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate: Exemption for
Non-U.S. Persons (Form W-8). Beneficial Holders of Global Securities that are
Non-U.S. Persons (as defined below) can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Holdership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the holders of Global Securities or
their agent. Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds the
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
Person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity treated as a corporation or a
partnership for United States federal income tax purposes, organized in or under
the laws of the United States or any state thereof, including for this purpose
the District of Columbia (unless, in the case of a partnership, future Treasury
regulations provide otherwise), (iii) an estate that is subject to U.S. federal
income tax regardless of the source of its income, or (iv) a trust if a court
within the United States is able to exercise
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primary supervision of the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of the
trust. Certain trusts not described in clause (iv) above in existence on August
20, 1996 that elect to be treated as a United States Person will also be a U.S.
Person. The term "Non-U.S. Person" means any person who is not a U.S. Person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
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APPENDIX A -- UNDERWRITING GUIDELINES FOR THE MORTGAGE LOANS
IMPAC FUNDING PROGRAMS
4.26% and 92.67% of the Mortgage Loans were underwritten pursuant to,
or in accordance with, the standards of Impac Funding's Progressive Series
Program or Progressive Express(TM) Program, respectively, each of which is
described below.
THE PROGRESSIVE SERIES PROGRAM
GENERAL. The underwriting guidelines utilized in the Progressive Series
Program, as developed by Impac Funding, are intended to assess the borrower's
ability and willingness to repay the mortgage loan obligation and to assess the
adequacy of the mortgaged property as collateral for the mortgage loan. The
Progressive Series Program is designed to meet the needs of borrowers with
excellent credit, as well as those whose credit has been adversely affected. The
Progressive Series Program consists of six mortgage loan programs. Each program
has different credit criteria, reserve requirements, qualifying ratios and
Loan-to-Value Ratio restrictions. Series I is designed for credit history and
income requirements typical of "A" credit borrowers. In the event a borrower
does not fit the Series I criteria, the borrower's mortgage loan is placed into
either Series II, III, III+, IV, V or VI, depending on which series' mortgage
loan parameters meets the borrower's unique credit profile. Series II, III,
III+, IV, V or VI allow for less restrictive standards because of certain
compensating or offsetting factors such as a lower Loan-to-Value Ratio, verified
liquid assets, job stability, pride of ownership and, in the case of refinance
mortgage loans, length of time owning the mortgaged property. The philosophy of
the Progressive Series Program is that no single borrower characteristic should
automatically determine whether an application for a mortgage loan should be
approved or disapproved. Lending decisions are based on a risk analysis
assessment after the review of the entire mortgage loan file. Each mortgage loan
is individually underwritten with emphasis placed on the overall quality of the
mortgage loan. The Progressive Series I Program utilizes an average annual
salary to calculate the debt service-to-income ratio. Salaried borrowers are
evaluated based on a 12 month salary history, and self-employed and commission
borrowers are evaluated on a 24 month basis. The debt service-to-income ratio
for Series I borrowers is required to be within the range of 36% to 50%. The
Progressive Series II, III, III+, IV, V and VI Program borrowers are required to
have debt service-to- income ratios within the range of 45% to 60% calculated on
the basis of monthly income and depending on the Loan-to-Value Ratio of the
Mortgage Loan.
Under the Progressive Series Program, Impac Funding underwrites one- to
four-family mortgage loans with Loan-to-Value Ratios at origination of up to
95%, depending on, among other things, a borrower's credit history, repayment
ability and debt service-to-income ratio, as well as the type and use of the
mortgaged property. Second lien financing of the mortgaged properties may be
provided by lenders other than Impac Funding at origination; however, the
combined Loan-to-Value Ratio ("CLTV") generally may not exceed 95% for mortgage
loan amounts up to $400,000 and 90% for mortgage loan amounts above $400,000. In
certain circumstances, Impac Funding may allow second lien financing with CLTVs
of up to 100%. The mortgage loans in the Progressive Series Program generally
bear rates of interest that are greater than those which are originated in
accordance with FHLMC and FNMA standards. In general, the maximum amount for
mortgage loans originated under the Progressive Series Program is $750,000;
however, Impac Funding may approve mortgage loans in excess of such amount on a
case-by-case basis.
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All of the mortgage loans originated under the Progressive Series I, II
and III Programs are underwritten either by employees of Impac Funding or by
contracted mortgage insurance companies or delegated conduit sellers. Generally
all of the mortgage loans originated under the Series III+, IV, V and VI
Programs are underwritten by employees of Impac Funding. Substantially all of
the Series I Program mortgage loans and all of the Series II and III Program
mortgage loans with Loan-to-Value Ratios at origination in excess of 80% are
insured by a Primary Insurance Policy. None of the Series III+ Program Mortgage
Loans with Loan-to-Value Ratios at origination in excess of 80% will be insured
by a Primary Insurance Policy. In general, all Series IV, V and VI Program
Mortgage Loans have Loan-to-Value Ratios at origination which are less than or
equal to 85% and do not require a Primary Insurance Policy. Impac Funding
receives verbal verification from Impac Funding's conduit seller of employment
prior to funding or acquiring each Progressive Series Program mortgage loan.
FULL/ALTERNATIVE DOCUMENTATION AND REDUCED DOCUMENTATION PROGRESSIVE
SERIES PROGRAMS. Each prospective borrower completes a mortgage loan application
which includes information with respect to the applicant's liabilities, income,
credit history, employment history and personal information. Impac Funding
requires a credit report on each applicant from a credit reporting company. The
report typically contains information relating to credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments.
The Progressive Series Program allows for approval of an application
pursuant to the (a) Full/Alternative Documentation Program, or (b) the Limited
Documentation Program, the Lite Documentation Program, the "No Ratio" Program or
the "No Income, No Assets" Program (any of the foregoing, a "Reduced
Documentation Program"). The Full/Alternative Documentation Program requires the
following documents: (i) Uniform Residential Loan Application (FNMA Form 1003 or
FHLMC Form 65), (ii) Statement of Assets and Liabilities (FNMA Form 1003A or
FHLMC 65A), (iii) Residential Mortgage Credit Report with records obtained from
at least two separate repositories, (iv) Verification of Employment Form
providing a complete two year employment history, (v) Verification of Deposit
Form for all liquid assets, verifying minimum cash reserves based upon the
Loan-to-Value Ratio and borrower's income, and (vi) a Uniform Residential
Appraisal Report (FNMA Form 1004 or FHLMC Form 70). The Full/Alternative
Documentation Program allows for the use of certain alternative documents in
lieu of the Verification of Deposit Form and Verification of Employment Form.
These include W-2 Statements, tax returns and one pay check from the most recent
full month for verification of income and the most recent three months personal
bank statements for verification of liquid assets. In addition, self-employed
borrowers must provide federal tax returns for the previous two to three years,
including K-l's, federal business tax returns for two years, year-to-date
financial statements, a business credit report (for corporations) and a signed
IRS Form 4506 (Request for Copy of Tax Returns).
Under the Limited Documentation Program, which is available to
borrowers in every Progressive Series Program, Impac Funding obtains from
prospective borrowers either a verification of deposits or bank statements for
the most recent two-month period preceding the mortgage loan application. In
addition, the Lite Documentation Program is available to Series III+, Series IV,
Series V and Series VI self-employed borrowers where the previous 12 months bank
statements are utilized in lieu of tax returns. Under these programs the
borrower provides income information on the mortgage loan application, and the
debt service-to-income ratio is calculated. However, income is not verified.
Permitted maximum Loan- to-Value Ratios (including secondary financing) under
the Limited Documentation and Lite Documentation Programs generally are limited.
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Under all Progressive Series Programs, Impac Funding's or the conduit
seller verbally verifies the borrower's employment prior to closing. Credit
history, collateral quality and the amount of the down payment are important
factors in evaluating a mortgage loan submitted under one of the Reduced
Documentation Programs. In addition, in order to qualify for a Reduced
Documentation Program, a mortgage loan must conform to certain criteria
regarding maximum loan amount, property type and occupancy status. Mortgage
loans having a Loan-to-Value Ratio at origination in excess of 80% for Series I,
II and III and mortgage loans on mortgaged property used as a second or vacation
home by the prospective borrowers are not eligible for a Reduced Documentation
Program. In general, the maximum loan amount for mortgage loans underwritten in
accordance with Series I, II and III Reduced Documentation Program is $750,000
for purchase transactions and rate-term transactions and a maximum loan amount
of $650,000 for cash out refinance transactions. The maximum loan amount for
mortgage loans underwritten in accordance with Series III+, IV, V and VI Reduced
Documentation Program is $450,000, however, exceptions are granted on a
case-by-case basis. Secondary financing is allowed in the origination of the
Limited Documentation Program but must meet the CLTV requirements described
above and certain other requirements for subordinate financing. In all cases,
liquid assets must support the level of income of the borrower as stated in
proportion to the type of employment of the borrower. Full Documentation is
requested by the underwriter if it is the judgment of the underwriter that the
compensating factors are insufficient for loan approval.
CREDIT HISTORY. The Progressive Series Program defines an acceptable
credit history in each of the Series I, II and III Programs. The Series I
Program defines an acceptable credit history as a borrower who has "A" credit,
meaning a minimum of four trade accounts, with 24 months credit history, no
30-day delinquent mortgage payments in the last 24 months, and a maximum of two
30-day delinquent payments on any installment credit account within the past 24
months. No bankruptcies or foreclosures are allowed in the past 24 months. No
judgments, suits, liens, collections or charge-offs are allowed within the past
24 months.
With respect to the Series II Program, a borrower must have a minimum
of four trade accounts with no late mortgage payments for the past 12 months and
may have one 30-day delinquent mortgage payment within the past 13th through
24th months. A borrower may not have more than three 30-day delinquent payments
on any revolving credit account and a maximum of three 30-day delinquent
payments within the past 24 months on any installment credit account. All
bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established a satisfactory credit history. Foreclosures are not
allowed in the past 24 months.
With respect to the Series III Program, a borrower may not have more
than two 30-day delinquent mortgage payments within the past 12 months and may
have no more than three 30-day delinquent mortgage payments within the past 13th
through 24th months. The borrower may not have more than three 30-day delinquent
payments and one 60-day delinquent payment on revolving debt in the last 24
months and may not have more than three 30-day delinquent and one 60-day
delinquent payment on any installment credit account in the past 24 months. Any
open judgment, suit, lien, collection or charge-off generally are paid prior to
or at closing. Bankruptcies must be at least 24 months old, fully discharged and
the borrower must have re-established a satisfactory credit history. No late
mortgage payments are permitted on equity take-out refinances under the Limited
Documentation Program offered under the Progressive Series Program.
With respect to the Series III+ Program, a borrower may not have more
than two 30-day
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delinquent mortgage payments within the past 12 months. The borrower may not
have more than two 30- day delinquent payments and one 60-day delinquent payment
on revolving debt in the last 12 months and may not have more than two 30-day
delinquent payments and one 60-day delinquent payment on any installment credit
account in the past 12 months. Any open judgments, suits, liens, collections,
charge-offs not to exceed $500 generally are paid prior to or at closing.
Bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established a satisfactory credit history. Foreclosures are not
allowed in the past 24 months.
With respect to the Series IV Program, a borrower may not have more
than four 30-day delinquent mortgage payments or three 30-day delinquent
mortgage payments and one 60-day delinquent mortgage payment within the past 12
months. The borrower may not have more than four 30-day delinquent payments or
two 60-day delinquent payments or one 90-day delinquent payment on revolving
debt in the last 12 months and may not have more than four 30-day delinquent
payments or two 60-day delinquent payments or one 90-day delinquent payment on
any installment credit account in the past 12 months. Any open judgments, suits,
liens, collections, charge-offs not to exceed $1,000 generally are paid prior to
or at closing. Bankruptcies must be at least 18 months old, fully discharged and
the borrower must have reestablished a satisfactory credit history. Foreclosures
are not allowed in the past 18 months.
With respect to the Series V Program, a borrower may not have more than
five 30-day delinquent mortgage payments or two 60-day delinquent mortgage
payments and one 90-day delinquent mortgage payment within the past 12 months.
The borrower may not have more than six 30-day delinquent payments or three
60-day delinquent payments or two 90-day delinquent payments on revolving debt
in the last 12 months and may not have more than six 30-day delinquent payments
or three 60-day delinquent payments or two 90-day delinquent payments on any
installment credit account in the past 12 months. Any open judgments, suits,
liens, collections, charge-offs not to exceed $4,000 generally are paid prior to
or at closing. Bankruptcies must be at least 12 months old, fully discharged and
the borrower must have reestablished a satisfactory credit history. Foreclosures
are not allowed in the past 12 months.
With respect to the Series VI program, a borrower may not have more
than one 90-day delinquent mortgage payment within the past 12 months. For both
revolving and installment debt, the borrower is sporadic in some or all areas
with a general disregard for timely payment or credit standing. Any open
judgements, suits, liens, collections, charge-offs, generally are paid prior to
or at closing. Bankruptcies must be at least 6 months old. Foreclosures are not
allowed in the past 6 months.
QUALITY CONTROL. Impac Funding generally performs a pre-funding audit
on each Progressive Series Program mortgage loan. This audit includes a review
for compliance with Progressive Series Program parameters and accuracy of the
legal documents. Impac Funding performs a quality control review on a minimum of
25% of the mortgage loans originated or acquired under the Progressive Series
Program for complete re-verification of employment, income and liquid assets
used to qualify for such mortgage loan. Such review also includes procedures
intended to detect evidence of fraudulent documentation and/or imprudent
activity during the processing, funding, servicing or selling of the mortgage
loan. Verification of occupancy and applicable information is made by regular
mail.
APPRAISALS. Impac Funding does not publish an approved appraiser list
for the conduit seller. Conduit sellers may select any appraiser of choice,
regardless of the LTV of the related loan, from the seller's approved appraiser
list. At the discretion of the underwriter a full appraisal or enhanced desk
review appraisal, or a field review appraisal may be required.
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The seller is responsible for maintaining an approved appraiser list
with appraisers meeting the following requirements: (i) be a state licensed or
certified appraiser; (ii) meet the independent appraiser requirements for staff
appraisers, or, if appropriate, be on appraisers specified by the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the FDIC and the Office of Thrift Supervision under their respective
real estate appraisal regulations adopted in accordance with Title XI of the
Financial Institutions Reform Recovery and Enforcement Act of 1989, regardless
of whether the seller is subject to those regulations; (iii) be experienced in
the appraisal of properties similar to the type being appraised; (iv) be
actively engaged in appraisal work; and (v) subscribe to a code of ethics that
is at least as strict as the code of the American Institute of Real Estate
Appraisers or the Society of Real Estate Appraisers.
One full appraisal is required on each loan, however, an enhanced desk
review is also required when the loan amount is between $350,000 and $500,000;
the Loan-to-Value Ratio is over 90%; or the property has multiple units and the
Loan-to-Value Ratio is equal to or greater than 80%; the property is unique; or
the property exceeds 10 acres. An enhanced field review is also required when
the loan amount is above $500,000.
VARIATIONS. Impac Funding uses the foregoing parameters as guidelines
only. On a case-by-case basis, Impac Funding may determine that the prospective
mortgagor warrants an exception outside the standard Progressive Series Program
guidelines. An exception may be allowed if the loan application reflects certain
compensating factors, including (i) the prospective mortgagor has demonstrated
an ability to save and devote a greater portion of income to basic housing
needs; (ii) the prospective mortgagor may have a potential for increased
earnings and advancement because of education or special job training, even if
the prospective mortgagor has just entered the job market; (iii) the prospective
mortgagor has demonstrated an ability to maintain a debt free position; (iv) the
prospective mortgagor may have short term income that is verifiable but could
not be counted as stable income because it does not meet the remaining term
requirements; and (v) the prospective mortgagor's net worth is substantial
enough to suggest that repayment of the loan is within the prospective
mortgagor's ability.
THE PROGRESSIVE EXPRESSTM PROGRAM
GENERAL. In July 1996, Impac Funding developed an additional Series to
the Progressive Program, the "Progressive Express(TM) Program". The concept of
the Progressive Express(TM) Program is to underwrite the loan focusing on the
borrower's Credit Score, ability and willingness to repay the mortgage loan
obligation, and assess the adequacy of the mortgage property as collateral for
the loan. The Credit Score is an electronic evaluation of past and present
credit accounts on the borrower's credit bureau report. This includes all
reported accounts as well as public records and inquiries. The Progressive
Express(TM) Program offers six levels of mortgage loan programs. The Progressive
Express(TM) Program has a minimum Credit Score that must be met by the
borrower's primary wage earner and does not allow for exceptions to the Credit
Score requirement. The Credit Score requirement is as follows: Progressive
Express(TM) I above 680, Progressive Express(TM) II 680-620, Progressive
Express(TM) III 619-601, Progressive Express(TM) IV 600- 581, Progressive
Express(TM) V 580-551, and Progressive Express(TM) VI 550-500. Each Progressive
Express(TM) program has different Credit Score requirements, credit criteria,
reserve requirements, and Loan-to-Value Ratio restrictions. Progressive
Express(TM) I is designed for credit history and income requirements typical of
"A+" credit borrowers. In the event a borrower does not fit the Progressive
Express(TM) I criteria, the borrower's mortgage loan is placed into either
Progressive Express(TM) II, III, IV, V, or VI, depending on which series'
mortgage loan parameters meets the borrower unique credit profile.
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All of the mortgage loans originated under the Progressive Express(TM)
program are underwritten either by employees of Impac Funding or by contracted
mortgage insurance companies or delegated conduit sellers. Under the Progressive
Express(TM) Program, Impac Funding underwrites single family dwellings with
Loan-to-Value Ratios at origination of up to 95%. In order for the property to
be eligible for the Progressive Express(TM) Program, it must be a single family
residence (1 unit only), condominium, and/or planned unit development (PUD).
Progressive Express(TM) Programs I through IV loans with Loan-to-Value Ratios at
origination in excess of 80% are insured by Radian. The borrower can elect to
have primary mortgage insurance covered by their loan payment. If the borrower
makes such election, a Loan-to-Value Ratio between 80.01% and 85.00% requires
25% coverage, and a Loan-to-Value Ratio between 85.01% and 95.00% requires 30%
coverage. If the borrower does not make such election, the related mortgage loan
will be covered by a modified primary mortgage insurance policy issued by Radian
to Impac Funding providing coverage in the amount of 22% for a mortgage loan
with a Loan-to-Value Ratio between 80.01% and 89.99% and of 30% for a mortgage
loan with a Loan-to-Value Ratio between 90% and 95%.
Each borrower completes a Progressive Express(TM) Doc loan application
or a Residential Loan Application (Fannie Mae 1003 or FHLMC Form 65). The
borrower must disclose employment and assets on the application, however, there
is no verification of the information. The conduit seller obtains a verbal
verification of employment on each borrower. At the signing of loan documents,
each such borrower executes a "Borrower's Certification" certifying the
following: (i) loan terms stated on the Progressive Express(TM) Application
and/or Residential Loan Application for the loan are true, accurate, and
complete; (ii) borrower intends to occupy the property; (iii) if the property is
a condominium, attached planned unit development (PUD), attached
townhouse/rowhouse or the loan is securing a second home funds used to close the
loan are not a gift and are from the Borrower's own funds; (iv) borrower has
four months reserves available after closing, exclusive of cash-out proceeds
(for Progressive Express(TM) V and VI the reserve requirement is not
applicable); (v) borrower and co-borrower, if applicable, are currently employed
as stated on the loan application; and (vi) the transaction is an arms length
transaction. Impac Funding uses the foregoing parameters as guidelines only.
Sellers may include certain provisions in the note that Impac Funding may not
enforce, particularly, when a fixed rate loan provides in the addendum to the
note for a prepayment penalty. Full documentation is requested by the
underwriter if it is the judgment of the underwriter that the compensating
factors are insufficient for loan approval under the Progressive Product Line.
CREDIT HISTORY. The Progressive Express(TM) Program defines an
acceptable credit history in each of the programs I through VI. Progressive
Express(TM) I defines an acceptable credit history as a borrower who has "A+"
credit, meaning a minimum of four trade accounts, no 30-day delinquent mortgage
payments in the past 24 months, and a maximum of two 30-day delinquent payments
on any revolving credit accounts within the past 24 months and one 30-day
delinquent payment on any installment credit accounts within the past 24 months.
All bankruptcies must be at least 24 months old, fully discharged and the
borrower must have re-established a satisfactory credit history. Foreclosures
are not allowed in the past 3 years. No judgments, suits, tax liens, other
liens, collections or charge-offs are allowed within the past 24 months.
With respect to Progressive Express(TM) II, a borrower must have a
minimum of four trade accounts, no late mortgage payments for the past 12
months, and a maximum of two 30-day or no 60-day delinquent payments on any
revolving credit accounts and a maximum of one 30-day or no 60-day delinquent
payments on any installment credit accounts in the past 12 months. All
bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established a satisfactory credit history.
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Foreclosures are not allowed in the past 3 years. Judgments, suits, liens,
collections or charge-offs must be paid prior to closing. Tax liens are not
allowed within the last 24 months.
With respect to Progressive Express(TM) III, a borrower must have a
minimum of four trade accounts, no late mortgage payments for the past 12 months
and may have one 30-day late mortgage payment within the past 13 and 24 months.
A borrower may not have more than a maximum of three 30-day delinquent payments
on any revolving credit accounts or installment credit accounts in the past 24
months. All bankruptcies must be at least 24 months old, fully discharged and
the borrower must have reestablished a satisfactory credit history. Foreclosures
are not allowed in the past 3 years. Judgments, suits, liens, collections or
charge-offs must be paid prior to closing. Tax liens are not allowed within the
last 24 months.
With respect to Progressive Express(TM) IV, a borrower must have a
minimum of four trade accounts, no more than two 30-day late mortgage payments
for the past 12 months or three 30-day late mortgage payments in the past 24
months. A borrower may not have more than a maximum of three 30-day or one
60-day delinquent payments on any revolving credit accounts or installment
credit accounts in the past 24 months. All bankruptcies must be at least 24
months old, fully discharged and the borrower must have re-established a
satisfactory credit history. Foreclosures are not allowed in the past 3 years.
Judgments, suits, liens, collections or charge-offs and must be paid prior to
closing. Tax liens are not allowed within the last 24 months.
With respect to Progressive Express(TM) V, a borrower must have a
minimum of 3 trade accounts, no more than two 30-day late mortgage payments in
the past 12 months. A borrower may not have more than a maximum of two 30-day or
one 60-day delinquent payments on any revolving credit accounts or installment
credit accounts in the past 12 months. All bankruptcies must be at least 24
months old, fully discharged and the borrower must have re-established a
satisfactory credit history. Foreclosures are not allowed in the past 24 months.
Judgments, suits, liens, collections or charge-offs, may not exceed $500, and
must be paid at closing. Tax liens are not allowed within the last 12 months.
With respect to Progressive Express(TM) VI, a borrower must have a
minimum of 3 trade accounts, no more than four 30-day or three 30-day and one
60-day late mortgage payments in the past 12 months. A borrower may not have
more than a maximum of four 30-day or two 60-day or one 90-day delinquent
payments on any revolving credit accounts or installment credit accounts in the
past 12 months. All bankruptcies must be at least 18 months old and fully
discharged. Foreclosures are not allowed in the past 18 months. Judgments,
suits, liens, collections or charge-offs, may not exceed $1,000, and must be
paid at closing. Tax liens are not allowed within the last 12 months.
QUALITY CONTROL. Impac Funding generally performs a pre-funding audit
on each Progressive Express(TM) Program mortgage loan. This audit includes a
review for compliance with Progressive Express(TM) Program parameters and
accuracy of the legal documents. Impac Funding performs a quality control review
on a minimum of 25% of the mortgage loans originated or acquired under the
Progressive Express(TM) Program for complete re-verification of employment,
income and liquid assets used to qualify for such mortgage loan. Such review
also includes procedures intended to detect evidence of fraudulent documentation
and/or imprudent activity during the processing, funding, servicing or selling
of the mortgage loan. Verification of occupancy and applicable information is
made by regular mail.
APPRAISALS. Impac Funding does not publish an approved appraiser list
for the conduit seller.
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Conduit sellers may select any appraiser of choice, regardless of the LTV of the
related mortgage loan, from the seller's approved appraiser list. At the
discretion of the underwriter a full appraisal or enhanced
desk review appraisal, or a field review appraisal may be required.
The seller is responsible for maintaining an approved appraiser list
with appraisers meeting the following requirements: (i) be a state licensed or
certified appraiser; (ii) meet the independent appraiser requirements for staff
appraisers, or, if appropriate, fee appraisers specified by the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the FDIC and the Office of Thrift Supervision consistent with their
respective real estate appraisal regulations adopted in accordance with Title XI
of the Financial Institutions Reform Recovery and Enforcement Act of 1989,
regardless of whether the seller is subject to those regulations; (iii) be
experienced in the appraisal of properties similar to the type being appraised;
(iv) be actively engaged in appraisal work; and (v) subscribe to a code of
ethics that is at least as strict as the code of the American Institute of Real
Estate Appraisers or the Society of Real Estate Appraisers.
One full appraisal is required on each loan, however, an enhanced desk
review is also required when the loan amount is between $350,000 and $500,000;
the Loan-to-Value Ratio is over 90%; the property has multiple units and the
Loan-to-Value Ratio is equal to or greater than 80%. An enhanced field
review is required when the loan amount is above $500,000.
Impac Funding commenced acquiring mortgage loans underwritten pursuant
to the Progressive Series Program in November 1995 and pursuant to the
Progressive Express(TM) Program in late 1996. Accordingly, Impac Funding has
limited historical delinquency or default experience that may be referred to for
purposes of estimating the future delinquency and loss experience of the
Mortgage Loans underwritten pursuant to the Progressive Series Program and the
Progressive Express(TM) Program. It is contemplated that all of the Progressive
Series Program and Progressive Express(TM) Program mortgage loans originated or
acquired by Impac Funding will also be underwritten with a view toward the
resale thereof in the secondary mortgage market.
VARIATIONS. Impac Funding uses the foregoing parameters as guidelines
only. On a case-by-case basis, Impac Funding may determine that the prospective
mortgagor warrants an exception outside the standard Progressive Express(TM)
Program guidelines. An exception may be allowed if the loan application reflects
certain compensating factors, including instances where the prospective
mortgagor (i) has demonstrated an ability to save and devote a greater portion
of income to basic housing needs; (ii) may have a potential for increased
earnings and advancement because of education or special job training, even if
the prospective mortgagor has just entered the job market; (iii) has
demonstrated an ability to maintain a debt free position; (iv) may have short
term income that is verifiable but could not be counted as stable income because
it does not meet the remaining term requirements; and (v) has net worth
substantial enough to suggest that repayment of the loan is within the
prospective mortgagor's ability.
In addition, see "The Mortgage Pools--Underwriting Standards" in the
Prospectus.
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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-8 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 June 25, 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........................................................-69-
Limitations on the Duties of the Trustee...........................-69-
Certain Matters Regarding the Trustee..............................-69-
Resignation and Removal of the Trustee.............................-69-
YIELD CONSIDERATIONS........................................................-70-
MATURITY AND PREPAYMENT CONSIDERATIONS......................................-72-
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.....................................-73-
Single Family Loans and Multifamily Loans..........................-73-
Contracts..........................................................-74-
Foreclosure on Mortgages and Certain Contracts.....................-75-
Repossession with respect to Contracts.............................-76-
Rights of Redemption...............................................-78-
Anti-Deficiency Legislation and Other Limitations on
Lenders...................................................-78-
Environmental Legislation..........................................-80-
Consumer Protection Laws with respect to Contracts
.........................................................-81-
Enforceability of Certain Provisions...............................-81-
Subordinate Financing..............................................-82-
Applicability of Usury Laws........................................-83-
Alternative Mortgage Instruments...................................-84-
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...........................................-110-
ERISA CONSIDERATIONS.......................................................-110-
Tax Exempt Investors..............................................-114-
Consultation with Counsel.........................................-114-
LEGAL INVESTMENT MATTERS...................................................-114-
USE OF PROCEEDS............................................................-115-
METHODS OF DISTRIBUTION....................................................-116-
LEGAL MATTERS..............................................................-117-
FINANCIAL INFORMATION......................................................-117-
RATING ..................................................................-117-
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<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 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."
-3-
<PAGE>
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
-5-
<PAGE>
Special Servicer may either be an entity
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
-7-
<PAGE>
which certain accrued interest will not
be distributed but rather will be added
to the principal balance thereof on each
Distribution Date, as hereinafter
defined, in the manner described in the
related Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a series of 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."
-8-
<PAGE>
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 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
-9-
<PAGE>
Indenture, with respect to each series
of Notes, 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
-10-
<PAGE>
entitled thereto, on a pro rata basis
among all such 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."
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<PAGE>
Advances................................If and to the extent described in the
related Prospectus Supplement, and
subject to any limitations specified
therein, the Master Servicer for any
Trust Fund will be obligated to make, or
have the option of making, certain
advances with respect to delinquent
scheduled payments on the Mortgage Loans
in such Trust Fund. Any such advance
made by the Master Servicer with respect
to a Mortgage Loan is recoverable by it
as described herein under "Description
of the 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.
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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 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.
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<PAGE>
Investors are advised to consult their
tax advisors as to the tax consequences
of an 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-8 of the Prospectus
Supplement for a discussion of
significant matters affecting
investments in the Securities.
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<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Securities:
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
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<PAGE>
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 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
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<PAGE>
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.
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.
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<PAGE>
RISKS OF UNDERWRITING STANDARDS OF UNAFFILIATED SELLERS. Mortgage Loans to
be included in a Mortgage Pool will have been purchased by the Company, either
directly or indirectly from Sellers. Such Mortgage Loans will generally have
been originated in accordance with underwriting standards acceptable to the
Company and generally described herein under "The Mortgage Pools--Underwriting
Standards" as more particularly described in the underwriting criteria included
in the related Prospectus Supplement. Nevertheless, in some cases, particularly
those involving Unaffiliated Sellers, the Company may not be able to establish
the underwriting standards used in the origination of the related Mortgage
Loans. In those cases, the related Prospectus Supplement will include a
statement to such effect and will reflect what, if any, re-underwriting of the
related Mortgage Loans was completed by the Company or any of its affiliates. To
the extent the Mortgage Loans cannot be re-underwritten or the underwriting
criteria cannot be verified, the Mortgage Loans might suffer losses greater than
they would had they been directly underwritten by the Company or an affiliate
thereof. Any such losses, to the extent not covered by credit enhancement, may
adversely affect the yield to maturity of the 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
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<PAGE>
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 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
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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 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
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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 "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.
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THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist primarily of Mortgage Loans, minus the
Spread, if any, or any other interest retained by the Company or any affiliate
of the Company. The Mortgage Loans may consist of Single Family Loans,
Multifamily Loans and Contracts, each as described below.
The Mortgage Loans (other than the Contracts) will be evidenced by
promissory notes ("Mortgage Notes") and secured by mortgages, deeds of trust or
other similar security instruments ("Mortgages") that, in each case, create a
first or junior lien on the related Mortgagor's fee or leasehold interest in the
related Mortgaged Property. The Mortgaged Properties for such loans may consist
of attached or detached one-family dwelling units, two- to four-family dwelling
units, condominiums, townhouses, row houses, individual units in planned-unit
developments and certain other individual dwelling units (a "Single Family
Property" and the related loans, "Single Family Loans"), which in each case may
be owner-occupied or may be a vacation, second or non-owner-occupied home. The
Mortgaged Properties for such loans may also consist of residential properties
consisting of five or more rental or cooperatively owned dwelling units in
high-rise, mid-rise or garden apartment buildings or projects ("Multifamily
Properties" and the related loans, "Multifamily Loans").
The "Contracts" will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
Unless otherwise specified in the related Prospectus Supplement, each 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.
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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 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
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generally adjusts initially either three months, six months or one, three,
five or seven years subsequent to the initial payment date, and thereafter
at either three-month, six-month, one-year or other intervals (with
corresponding adjustments in the amount of monthly payments) over the term
of the mortgage loan to equal the sum of a fixed percentage set forth in
the related Mortgage Note (the "Note Margin") and an index.1 The related
Prospectus Supplement will set forth the relevant index and the highest,
lowest and weighted average Note Margin with respect to the ARM Loans in
the related Mortgage Pool. The related Prospectus Supplement will also
indicate any periodic or lifetime limitations on changes in any per annum
Mortgage Rate at the time of any adjustment. If specified in the related
Prospectus Supplement, an ARM Loan may include a provision that allows the
Mortgagor to convert the adjustable Mortgage Rate to a fixed rate at some
point during the term of such ARM Loan generally not later than six to ten
years subsequent to the initial payment date;
(4) Negatively-amortizing ARM Loans having original or modified
terms to maturity of not more than approximately 25 or 30 years with
Mortgage Rates which generally adjust initially on the payment date
referred to in the related Prospectus Supplement, and on each of certain
periodic payment dates thereafter, to equal the sum of the Note Margin and
the index. The scheduled monthly payment will be adjusted as and when
described in the related Prospectus Supplement to an amount that would
fully amortize the Mortgage Loan over its 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
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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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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.
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
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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 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
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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 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
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Supplement, the "Debt Service Coverage Ratio" of a Multifamily Loan at any given
time is the ratio of (i) the Net Operating Income of the related Mortgaged
Property for a twelve-month period to (ii) the annualized scheduled payments on
the Mortgage Loan and on any other loan that is secured by a lien on the
Mortgaged Property prior to the lien of the related Mortgage. Unless otherwise
defined in the related Prospectus Supplement, "Net Operating Income" means, for
any given period, the total operating revenues derived from a Multifamily
Property during such period, minus the total operating expenses incurred in
respect of such property during such period other than (i) non-cash items such
as depreciation and amortization, (ii) capital expenditures and (iii) debt
service on loans (including the related Mortgage Loan) secured by liens on such
property. The Net Operating Income of a Multifamily Property will fluctuate over
time and may or may not be sufficient to cover debt service on the related
Mortgage Loan at any given time. As the primary source of the operating revenues
of a Multifamily Property, rental income (and maintenance payments from
tenant-stockholders of a cooperatively owned Multifamily Property) may be
affected by the condition of the applicable real estate market and/or area
economy. Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Multifamily Loan.
Lenders also look to the Loan-to-Value Ratio of a Multifamily Loan as a measure
of risk of loss if a property must be liquidated following a default.
It is expected that each prospective Mortgagor will complete a mortgage
loan application that includes information with respect to the applicant's
liabilities, income, credit history, employment history and personal
information. One or more credit reports on each applicant from national credit
reporting companies will generally be required. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions, or judgments. In the case of a Multifamily Loan,
the Mortgagor will also be required to provide certain information regarding the
related Multifamily Property, including a current rent roll and operating income
statements (which may be pro forma and unaudited). In addition, the originator
will generally also consider the location of the Multifamily Property, the
availability of competitive lease space and rental income of comparable
properties in the relevant market area, the overall economy and demographic
features of the geographic area and the Mortgagor's prior experience in owning
and operating properties similar to the Multifamily Properties.
Unless otherwise specified in the related Prospectus Supplement, Mortgaged
Properties will be appraised by licensed appraisers. The appraiser will
generally address neighborhood conditions, site and zoning status and condition
and valuation of improvements. In the case of Single Family Properties, the
appraisal report will generally include a reproduction cost analysis (when
appropriate) based on the current cost of constructing a similar home and a
market value analysis based on recent sales of comparable homes in the area.
With respect to Multifamily Properties, the appraisal must specify whether an
income analysis, a market analysis or a cost analysis was used. An appraisal
employing the income approach to value analyzes a property's projected net cash
flow, capitalization and other 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
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approaches. Each of these appraisal methods can present analytical difficulties.
It is often difficult to find truly comparable properties that have recently
been sold; the replacement cost of a property may have little to do with its
current market value; and income capitalization is inherently based on inexact
projections of income and expenses and the selection of an appropriate
capitalization rate. Where more than one of these appraisal methods are used and
provide significantly different results, an accurate determination of value and,
correspondingly, a reliable analysis of default and loss risks, is even more
difficult.
If so specified in the related Prospectus Supplement, the underwriting of a
Multifamily Loan may also include environmental testing. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under the
laws of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), a lender may be liable, as an
"owner" or "operator", for costs of addressing releases or threatened releases
of hazardous substances at a property, if agents or employees of the lender have
become sufficiently involved in the operations of the borrower, regardless of
whether or not the environmental damage or threat was caused by the borrower or
a prior owner. A lender also risks such liability on foreclosure of the
mortgage. See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation".
With respect to any FHA Loan the Mortgage Loan Seller will be required to
represent that it has complied with the applicable underwriting policies of the
FHA. See "Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder--FHA
Insurance".
To the extent available, the related Prospectus Supplement will include
delinquency and foreclosure experience for the applicable Seller(s) and/or
Master Servicer.
QUALIFICATIONS OF ORIGINATORS AND SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be originated, directly or through mortgage brokers and
correspondents, by a savings and loan association, savings bank, commercial
bank, credit union, insurance company, or similar institution which is
supervised and examined by a federal or state authority, or by a mortgagee
approved by the Secretary of Housing and Urban Development pursuant to sections
203 and 211 of the National Housing Act of 1934, as amended (the "Housing Act").
Except with respect to Designated Seller Transactions or unless otherwise
specified in the related Prospectus Supplement, each Seller must satisfy certain
criteria as to financial stability evaluated on a case-by-case basis by the
Company. These criteria include, but are not limited to requirements that each
Seller must (i) be properly licensed to originate and sell loans; (ii) have been
conducting business for a pre-determined time period; (iii) meet minimum net
worth standards; (iv) maintain insurance at pre-determined levels of coverage;
and (v) be in "good standing" with governmental licensing and revenue collection
agencies.
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,
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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 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
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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. 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
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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 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
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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 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
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liable under the Mortgage Loan subject to certain specified conditions. The
original Mortgagor may be released from liability on a Single Family Loan or
Contract if the Master Servicer shall have determined in good faith that such
release will not adversely affect the collectability of the Mortgage Loan.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will determine whether to exercise any right the Trustee may have under
any due-on-sale or due-on-encumbrance provision in a Multifamily Loan in a
manner consistent with the Servicing Standard. Unless otherwise specified in the
related Prospectus Supplement, the Master Servicer will be entitled to retain as
additional servicing compensation any fee collected in connection with the
permitted transfer of a Mortgaged Property. See "Certain Legal Aspects of
Mortgage Loans--Enforceability of Certain Provisions." FHA Loans contain no such
clause and may be assumed by the purchaser of the mortgaged property.
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and other
similar matters. The Master Servicer may approve such a request if it has
determined, exercising its good faith business judgment in the same manner as it
would if it were the owner of the related Mortgage Loan, that such approval will
not adversely affect the security for, or the timely and full collectability of,
the related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Single Family and Multifamily Loans secured by junior liens
on the related Mortgaged Properties, unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will be required to file (or cause to
be filed) of record a request for notice of any action by a superior lienholder
under the Senior Lien for the protection of the related Trustee's interest,
where permitted by local law and whenever applicable state law does not require
that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose such junior lienholder's equity of redemption.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer also will be required to notify any superior lienholder in writing of
the existence of the Mortgage Loan and request notification of any action (as
described below) to be taken against the Mortgagor or the Mortgaged Property by
the superior lienholder. If the Master Servicer is notified that any superior
lienholder has accelerated or intends to accelerate the obligations secured by
the related Senior Lien, or has declared or intends to declare a default under
the mortgage or the promissory note secured thereby, or has filed or intends to
file an election to have the related Mortgaged Property sold or foreclosed,
then, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will be required to take, on behalf of the related Trust Fund,
whatever actions are necessary to protect the interests of the related
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
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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).
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
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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 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
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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 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
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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.
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
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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 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
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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
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
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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 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
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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 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
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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
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,
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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";
(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
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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;
(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;
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(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";
(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
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(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 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
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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.
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.
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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
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
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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
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
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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 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.
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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 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,
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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 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
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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 of repair or of the
unpaid principal balance of the related Mortgage Loan plus accrued interest and
certain expenses
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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
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been exhausted through payment of claims or otherwise or substitution therefor
is made as described below under "--Reduction or Substitution of Credit
Enhancement." If the Special Hazard Instrument takes the form of a Special
Hazard Insurance Policy, such policy will provide coverage against risks of the
type described herein under "Description of Credit Enhancement--Special Hazard
Insurance Policies." The Master Servicer may obtain a substitute Special Hazard
Instrument for the existing Special Hazard Instrument if prior to such
substitution the Master Servicer obtains written confirmation from the Rating
Agency or Agencies that rated the related 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
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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.
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.
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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
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
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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 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.
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Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement--Special Hazard Insurance Policies"
for a description of the limited protection afforded by any Special Hazard
Insurance Policy against losses occasioned by hazards which are otherwise
uninsured against (including losses caused by the application of the
co-insurance clause described in the preceding paragraph).
Under the terms of the Mortgage Loans, Mortgagors are generally required to
present claims to insurers under hazard insurance policies maintained on the
Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
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.
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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 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
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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
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
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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.
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.
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The holders of Certificates representing at least 66% of the aggregate
undivided interests (or, if applicable, voting rights) evidenced by those
Certificates affected by a default or Event of Default may waive such default or
Event of Default (other than a failure by the Master Servicer to make an
advance); provided, however, that (a) a default or Event of Default under clause
(i) or (iv) under "--Events of Default" above may be waived only by all of the
holders of Certificates affected by such default or Event of Default and (b) no
waiver shall reduce in any manner the amount of, or delay the timing of,
payments received on Mortgage Loans which are required to be distributed to, or
otherwise materially adversely affect, any non-consenting 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
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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
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 defective or inconsistent with any other provision therein or to
correct any error, (iii) to amend such Pooling Agreement in any respect subject
to the provisions in clauses (A) and (B) below, or (iv) if such amendment, as
evidenced by an opinion of counsel delivered to the Trustee, is reasonably
necessary to comply with any requirements imposed by the Code or any successor
or amendatory statute or any temporary or final regulation, revenue ruling,
revenue procedure or other written official announcement or interpretation
relating to federal income tax laws or any proposed such action which, if made
effective, would apply retroactively to the related Trust Fund at least from the
effective date of such amendment; provided that such action (except any
amendment described in (iv) above) shall not adversely affect in any material
respect the interests of any holder of a Certificate (other than a holder of a
Certificate who shall consent to such amendment), as evidenced by (A) an opinion
of counsel (provided by the
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party requesting such amendment) delivered to the Trustee, and (B) a letter from
each applicable Rating Agency, confirming that such amendment shall not cause it
to lower its rating on any of the related Certificates.
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 voting rights 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, (ii) adversely affect in any material respect
the interests of the holders of any class of Certificates in a manner other than
as described in (i), without the consent of the holders of Certificates of such
class evidencing at least 66-2/3% of the voting rights of such Class, or or
(iii) 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 any other provision of the related Pooling
Agreement, for purposes of the giving or withholding of consents pursuant to the
amendment section in the related Pooling Agreement, Certificates registered in
the name of the Seller or the Master Servicer or any affiliate thereof shall be
entitled to voting rights with respect to matters described in (i), (ii) and
(iii) of this paragraph.
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.
Promptly after the execution of any amendment the Trustee will furnish a
copy of such amendment or a written statement describing the amendment to each
holder of a Certificate, with a copy to the applicable Rating Agencies.
It will not be necessary for the consent of the holders of Certificates to
approve the particular form of any proposed amendment, but it shall be
sufficient if such consent shall approve the substance thereof. The manner of
obtaining such consents and of evidencing the authorization of the execution
thereof by the holders of Certificates will be subject to such reasonable
regulations as the Trustee may prescribe.
Prior to executing any amendment pursuant to the related Pooling Agreement,
the Trustee will be entitled to receive an opinion of counsel (provided by the
party requesting such amendment) to the effect that such amendment is authorized
or permitted by the related Pooling Agreement. The cost of an opinion of counsel
delivered pursuant to a Pooling Agreement will be an expense of the party
requesting such amendment, but in any case will not be an expense of the
Trustee.
The Trustee may, but will not be obligated to enter into any amendment
pursuant to the related Pooling Agreement that affects its rights, duties and
immunities under the related Pooling Agreement or otherwise.
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
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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
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
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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.
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.
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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.
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.
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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 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.
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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 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
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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, 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.
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CONTRACTS
Except as set forth below, under the laws of most states, manufactured
housing constitutes personal property and is subject to the motor vehicle
registration laws of the state or other jurisdiction in which the unit is
located. In a few states, where certificates of title are not required for
manufactured homes, security interests are perfected by the filing of a
financing statement under Article 9 of the UCC which has been adopted by all
states. Such financing statements are effective for five years and must be
renewed prior to the end of each five year period. The certificate of title laws
adopted by the majority of states provide that ownership of motor vehicles and
manufactured housing shall be evidenced by a certificate of title issued by the
motor vehicles department (or a similar entity) of such state. In the states
that have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law.
The Master Servicer will be required under the related Pooling Agreement or
Servicing Agreement to effect such notation or delivery of the required
documents and fees, and to obtain possession of the certificate of title, as
appropriate under the laws of the state in which any Manufactured Home is
registered. In the event the Master Servicer fails, due to clerical errors or
otherwise, to effect such notation or delivery, or files the security interest
under the wrong law (for example, under a motor vehicle title statute rather
than under the UCC, in a few states), the Trustee may not have a first priority
security interest in the Manufactured Home securing a Contract. As manufactured
homes have become larger and often have been attached to their sites without any
apparent intention by the borrowers to move them, courts in many states have
held that manufactured homes may, under certain circumstances, become subject to
real estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a "fixture filing"
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located. Generally,
Contracts will contain provisions prohibiting the obligor from permanently
attaching the Manufactured Home to its site. So long as the obligor does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is 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.
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In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter until the owner re-registers the Manufactured Home in such state. If
the owner were to relocate a Manufactured Home to another state and re- register
the Manufactured Home in such state, and if the Company did not take steps to
re-perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured Home;
accordingly, the Company must surrender possession if it holds the certificate
of title to such Manufactured Home or, in the case of Manufactured Homes
registered in states that provide for notation of lien, the Company would
receive notice of surrender if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the Company would have the
opportunity to re-perfect its security interest in the Manufactured Home in the
state of relocation. In states that do not require a certificate of title for
registration of a manufactured home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. Under each related Pooling Agreement or Servicing Agreement, the Master
Servicer will be obligated to take such steps, at the Master Servicer's expense,
as are necessary to maintain perfection of security interests in the
Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Company will obtain the representation of the related Seller that it has no
knowledge of any such liens with respect to any Manufactured Home securing a
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee or Securityholders in the event
such a lien arises.
FORECLOSURE ON MORTGAGES AND CERTAIN CONTRACTS
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, the trustee must record a notice
of default and send a copy to the borrower trustor and to any person who has
recorded a request for a copy of notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed 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
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the mortgagor's debt will be extinguished unless the lender purchases the
property for a lesser amount in order to preserve its right against a borrower
to seek a deficiency judgment and such remedy is available under state law and
the related loan documents. In the same states, there is a statutory minimum
purchase price which the lender may offer for the property and generally, state
law controls the amount of foreclosure costs and expenses, including attorneys'
fees, which may be recovered by a lender. Thereafter, subject to the right of
the borrower in some states to remain in possession during the redemption
period, the lender will assume the burdens of ownership, including obtaining
hazard insurance, paying taxes and making such repairs at its own expense as are
necessary to render the property suitable for sale. Generally, the lender will
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property and, in some states, the lender may be entitled to a
deficiency judgment. Any loss may be reduced by the receipt of any mortgage
insurance proceeds or other forms of credit enhancement for a series of
Certificates. See "Description of Credit Enhancement".
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Single Family and
Multifamily Loans which are junior mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens. The proceeds received by the referee or trustee from
the sale are applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. Any remaining proceeds are generally payable to
the holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial 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:
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(i) Except in those states where the debtor must receive notice
of the right to cure a default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either through
self-help (peaceable retaking without court order), voluntary repossession
or through judicial process (repossession pursuant to court-issued writ of
replevin). The self-help and/or voluntary repossession methods are more
commonly employed, and are accomplished simply by retaking possession of
the manufactured home. In cases in which the debtor objects or raises a
defense to repossession, a court order must be obtained from the
appropriate state court, and the manufactured home must then be repossessed
in accordance with that order. Whether the method employed is self-help,
voluntary repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured home
to a secure location for refurbishment and resale or by removing the
occupants and their belongings from the manufactured home and maintaining
possession of the manufactured home on the location where the occupants
were residing. Various factors may affect whether the manufactured home is
physically removed or left on location, such as the nature and term of the
lease of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale provided the method, manner,
time, place and terms of the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession
expenses (expenses incurred in retaking, storage, preparing for sale to
include refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the full
amount of the indebtedness, the remainder may be sought from the debtor in
the form of a deficiency judgement in those states that do not prohibit or
limit such judgments. The deficiency judgment is a personal judgment
against the debtor for the shortfall. Occasionally, after resale of a
manufactured home and payment of all expenses and indebtedness, there is a
surplus of funds. In that case, the UCC requires the party suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner of a manufactured home generally has very little capital
or income available following repossession, a deficiency judgment may not
be sought in many cases or, if obtained, will be settled at a significant
discount in light of the defaulting owner's strained financial condition.
LOUISIANA LAW. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
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.
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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 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
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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
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.
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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.
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
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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 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
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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 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.
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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 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.
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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 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
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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 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
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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 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.
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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 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
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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 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
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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 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.
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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 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
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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
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
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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 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
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(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 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
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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 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
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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.
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
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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.
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
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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
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
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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 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
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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.
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
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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 administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
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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
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as a grantor trust under subpart E, part I of subchapter J of Chapter 1 of the
Code and not as a partnership or an association taxable as a corporation.
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
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account of a Grantor Trust Fractional Interest Certificate may differ
significantly from the amount distributable thereon representing interest on the
Mortgage Loans. Under Section 67 of the Code, an individual, estate or trust
holding a Grantor Trust Fractional Interest Certificate directly or through
certain pass-through entities will be allowed a deduction for such reasonable
servicing fees and expenses only to the extent that the aggregate of such
holder's miscellaneous itemized deductions exceeds two percent of such holder's
adjusted gross income. In addition, Section 68 of the Code provides that the
amount of itemized deductions otherwise allowable for an individual whose
adjusted gross income exceeds a specified amount will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over such
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
the taxable year. The amount of additional taxable income reportable by holders
of Grantor Trust Fractional Interest Certificates who are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Further, Certificateholders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates or
(ii) the Company or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon. For
purposes of determining what constitutes reasonable servicing fees 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
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share of future payments on the Mortgage Loans will not include any payments
made in respect of any ownership interest in the Mortgage Loans retained by the
Company, the Master Servicer, any subservicer or their respective affiliates,
but will include such Certificateholder's share of any reasonable servicing fees
and other expenses.
To the extent the Grantor Trust Fractional Interest Certificates represent
an interest in any pool of debt instruments the yield on which may be affected
by reason of prepayments, for taxable years beginning after August 5, 1997,
Section 1272(a)(6) of the Code requires (i) the use of a reasonable prepayment
assumption in accruing original issue discount and (ii) adjustments in the
accrual of original issue discount when prepayments do not conform to the
prepayment assumption. It is unclear whether those provisions would be
applicable to the Grantor Trust Fractional Interest Certificates that do not
represent an interest in any pool of debt instruments the yield on which may be
affected by reason of prepayments, or for taxable years beginning prior to
August 5, 1997 or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain, if
a prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates and, in particular, whether a prepayment
assumption should be used in reporting original issue discount.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or 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
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or market discount on a Grantor Trust Fractional Interest Certificate determined
under the stripped bond rules is less than 0.25% of the stated redemption price
multiplied by the weighted average maturity of the Mortgage Loans, then such
original issue discount or market discount will be considered to be de minimis.
Original issue discount or market discount of only a de minimis amount will be
included in income in the same manner as de minimis original issue and market
discount described in "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
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adjusted issue price of a Mortgage Loan at the beginning of any accrual period
will equal the issue price of such Mortgage Loan, increased by the aggregate
amount of original issue discount with respect to such Mortgage Loan that
accrued in prior accrual periods, and reduced by the amount of any payments made
on such Mortgage Loan in prior accrual periods of amounts included in its stated
redemption price.
In addition to its regular reports, the 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.
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PREMIUM. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans 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.
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The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and Certificateholders on the
Prepayment Assumption disclosed in the related Prospectus Supplement and on a
constant yield computed using a representative initial offering price for each
class 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.
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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.
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.
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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
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
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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 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
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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 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
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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 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.
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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
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
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such securities, so long as such contractual commitment was made or such
securities acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS with an effective date of
February 10, 1992. The Policy Statement generally indicates that a mortgage
derivative product will be deemed to be high risk if it exhibits greater price
volatility than a standard fixed rate thirty-year mortgage security. According
to the Policy Statement, prior to purchase, a depository institution will be
required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the proposed acquisition
would reduce the institution's overall interest rate risk. Reliance on analysis
and documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There can be
no assurance as to which classes of Offered 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
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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 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.
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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.
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.........................................................113
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, 87
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.........................................................82
Grantor Trust Certificates..............................................13, 87
Grantor Trust Fractional Interest Certificate..............................102
Grantor Trust Fund..........................................................87
Grantor Trust Strip Certificate............................................102
High Cost Loans ..........................................................79
Holder ......................................................40, 87
Homeownership Act ..........................................................79
Housing Act ..........................................................29
HUD ..........................................................61
ICII ..........................................................62
IMH ...........................................................5
Impac Funding ...........................................................5
Indenture ...........................................................6
Index ..........................................................24
Installment Contract........................................................83
Insurance Proceeds..........................................................44
Intermediaries ..........................................................41
IRS ......................................................86, 89
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 ..........................................................70
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 ..........................................................87
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 .........................................................115
Pool Insurer ..........................................................45
Pooling Agreement ....................................................1, 7, 62
Pre-Funding Account.........................................................39
Prepayment Assumption..................................................88, 104
Prepayment Interest Shortfall...............................................71
Prepayment Penalty..........................................................25
Primary Insurance Policy....................................................59
Primary Insurer ..........................................................59
Prohibited Transactions Tax.................................................98
Prospectus Supplement........................................................1
PTCE .........................................................113
PTCE 83-1 .........................................................113
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, 87
REMIC Administrator.........................................................87
REMIC Certificates..........................................................87
REMIC Provisions ..........................................................87
REMIC Regular Certificates..............................................13, 87
REMIC Regulations ..........................................................87
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........................................................114
Tiered REMICS ..........................................................88
Title V ..........................................................83
Title VIII ..........................................................84
Trust Agreement ...........................................................6
Trust Fund ........................................................1, 7
Trustee ...........................................................6
UBTI .........................................................114
Unaffiliated Sellers........................................................23
Underwriter .........................................................111
United States person.......................................................100
Value ..........................................................25
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IMPAC SECURED ASSETS CORP.
$133,180,000
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 1999-1
PROSPECTUS SUPPLEMENT
DONALDSON, LUFKIN & JENRETTE
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED HEREBY IN ANY STATE WHERE
THE OFFER IS NOT PERMITTED.
WE REPRESENT THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS ONLY AS OF THE DATES ON THEIR RESPECTIVE COVERS.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling
the certificates offered hereby, whether or not participating in this
offering, may be required to deliver a prospectus supplement and
prospectus until 90 days after the date hereof.
