PROSPECTUS SUPPLEMENT
dated November 28, 2000 (To Prospectus dated June 27, 2000)
$200,000,000
[insert Impac logo]
IMPAC FUNDING CORPORATION
MASTER SERVICER
IMPAC SECURED ASSETS CORP.
COMPANY
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2000-4
--------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-8 IN THIS
PROSPECTUS SUPPLEMENT.
--------------------------------------------------------------------------------
THE TRUST
The trust will consist primarily of a pool of one- to four-family fixed-rate
first lien residential mortgage loans. The trust will be represented by eleven
classes of certificates, eight of which are offered under this prospectus
supplement.
CREDIT ENHANCEMENT
The offered certificates will have credit enhancement in the form of
o excess interest and overcollateralization; and
o subordination of other classes of certificates.
The price to investors will vary from time to time and will be determined at the
time of sale. The proceeds to the company from the offering will be
approximately 101.73% of the aggregate principal balance of the offered
certificates, plus accrued interest from the cut-off date, less expenses
estimated to be approximately $325,000. SEE "METHOD OF DISTRIBUTION" IN THIS
PROSPECTUS SUPPLEMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
BEAR, STEARNS & CO. INC.
UNDERWRITER
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We provide information to you about the offered 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 this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
The company's principal offices are located at 1401 Dove Street, Newport Beach,
CA 92660 and its phone number is (949) 475-3600.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
<S> <C>
Summary of Prospectus Supplement................................................................................S-3
Risk Factors....................................................................................................S-8
The Mortgage Pool..............................................................................................S-16
Yield on the Certificates......................................................................................S-39
Description of the Certificates................................................................................S-48
Pooling and Servicing Agreement................................................................................S-55
Federal Income Tax Consequences................................................................................S-58
Method of Distribution.........................................................................................S-61
Secondary Market...............................................................................................S-61
Legal Opinions.................................................................................................S-61
Ratings........................................................................................................S-62
Legal Investment...............................................................................................S-62
ERISA Considerations...........................................................................................S-63
Glossary.......................................................................................................S-64
Annex I-- Global Clearance, Settlement
and Tax Documentation Procedures..............................................................................I-1
</TABLE>
S-2
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS A VERY BROAD OVERVIEW OF THE OFFERED
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 OFFERED CERTIFICATES, READ CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS. A GLOSSARY IS INCLUDED AT THE END OF THIS
PROSPECTUS SUPPLEMENT. CAPITALIZED TERMS USED BUT NOT DEFINED IN THE GLOSSARY AT
THE END OF THIS PROSPECTUS SUPPLEMENT HAVE THE MEANINGS ASSIGNED TO THEM IN THE
GLOSSARY AT THE END OF THE PROSPECTUS.
Title of Series..................... Impac Secured Assets Corp., Mortgage
Pass-Through Certificates, Series 2000-4.
Cut-off Date........................ November 1, 2000.
Closing Date........................ November 30, 2000.
Company............................. Impac Secured Assets Corp., an affiliate
of Impac Funding Corporation.
Seller.............................. Impac Funding Corporation.
Master Servicer..................... Impac Funding Corporation.
Subservicer......................... GMAC Mortgage Corporation.
Trustee............................. Bankers Trust Company of California, N.A.
Distribution Date................... Distributions on the offered certificates
will be made on the 25th day of each
month or, if the 25th day is not a
business day, on the next business day,
beginning in December 2000.
Offered Certificates................ The classes of offered certificates and
their pass-through rates and certificate
principal balances or notional amounts
are set forth in the table below.
S-3
<PAGE>
<TABLE>
<CAPTION>
OFFERED CERTIFICATES
--------------------------------------------------------------------------------------------------------------------
PASS-THROUGH INITIAL CERTIFICATE INITIAL RATING
CLASS RATE PRINCIPAL BALANCE (S&P/MOODY'S/FITCH)(1) DESIGNATION
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A CERTIFICATES:
--------------------------------------------------------------------------------------------------------------------
A-1 7.45% $58,900,000 AAA/Aaa/AAA Senior/Sequential/Fixed Rate
--------------------------------------------------------------------------------------------------------------------
A-2 7.29%(2) $67,100,000 AAA/Aaa/AAA Senior/Sequential/Fixed Rate
--------------------------------------------------------------------------------------------------------------------
A-3 7.85%(2) $42,000,000 AAA/Aaa/AAA Senior/Sequential/Fixed Rate
--------------------------------------------------------------------------------------------------------------------
A-4 7.43%(2)(3) $20,000,000 AAA/Aaa/AAA Senior/Lockout/Fixed Rate
--------------------------------------------------------------------------------------------------------------------
A-IO 8.00%(4) N/A(5) AAA/Aaa/AAA Senior/Interest Only/Fixed Rate
--------------------------------------------------------------------------------------------------------------------
Total Class A Certificates: $188,000,000
-------------------------------------------------------------------------------------- ------------------------------
MEZZANINE CERTIFICATES:
---------------------------------------------------------------------------------------------------------------------
M-1 7.92%(2)(3) $4,500,000 AA/Aa2/AA Mezzanine/Fixed Rate
---------------------------------------------------------------------------------------------------------------------
M-2 8.16%(2)(3) $4,000,000 A/A2/A Mezzanine/Fixed Rate
---------------------------------------------------------------------------------------------------------------------
B 8.50%(2)(3) $3,500,000 BBB/Baa2/BBB Mezzanine/Fixed Rate
---------------------------------------------------------------------------------------------------------------------
Total Mezzanine Certificates: $12,000,000
---------------------------------------------------------------------------------------------------------------------
Total offered certificates: $200,000,000
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
(2) Subject to a cap equal to the weighted average of the net mortgage
rates on the mortgage loans adjusted for the interest payable on the
Class A-IO Certificates.
(3) Subject to an increase of 0.50% per annum on the first distribution
date after the first possible optional termination date.
(4) Subject to a cap equal to the weighted average of the net mortgage
rates on the mortgage loans. The Class A-IO Certificates will only be
entitled to distributions of interest on the first thirty distribution
dates.
(5) The Class A-IO Certificates will not have a certificate principal
balance and will not be entitled to distributions of principal. The
Class A-IO Certificates will accrue interest on their notional amount.
The initial notional amount of the Class A-IO Certificates will be
$20,000,000, and for any distribution date, the notional amount of the
Class A-IO Certificates will be the lesser of $20,000,000 and the then
aggregate principal balance of the mortgage loans.
S-4
<PAGE>
THE TRUST
The company will establish a trust with respect to the Series 2000-4
Certificates, pursuant to a pooling and servicing agreement dated as of November
1, 2000 among the company, the master servicer and the trustee. There are eleven
classes of certificates representing the trust, eight of which are offered by
this prospectus supplement.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. Distributions of interest and/or principal on the offered
certificates will be made only from payments received in connection with the
mortgage loans as described below.
The Class C Certificates, the Class P Certificates and the Class R Certificates
are the classes of certificates that are not offered by this prospectus
supplement.
SEE "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
THE MORTGAGE LOANS
The trust will contain approximately 1,339 conventional, one- to four-family,
fixed-rate mortgage loans secured by first liens on residential mortgage
properties. The mortgage loans have an aggregate principal balance of
approximately $200,017,319 as of November 1, 2000.
The mortgage loans have original terms to maturity of not greater than 30 years
and the following characteristics as of November 1, 2000:
Range of mortgage rates 7.875% to 13.125%
(approximate):
Weighted average mortgage 9.821%
rate (approximate):
Weighted average remaining 350 months
term to stated maturity
(approximate):
Range of principal balances $20,338 to $511,667
(approximate):
Average principal balance: $149,378
Range of loan-to-value ratios 20.00% to 97.00%
(approximate):
Weighted average 85.91%
loan-to-value
ratio (approximate):
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
THE OFFERED CERTIFICATES
PRIORITY OF DISTRIBUTIONS. In general, on any distribution date, funds available
for distribution from payments and other amounts received on the mortgage loans
will be distributed in the following order:
INTEREST DISTRIBUTIONS
first, to pay current interest and any previously
unpaid interest on the Class A Certificates; and
second, to pay current interest on Class M-1 Certificates, the Class M-2
Certificates and the Class B Certificates, in that order of priority.
PRINCIPAL DISTRIBUTIONS
to pay principal (including the payment of amounts to create and maintain
overcollateralization) on the Class A Certificates (other than the Class A-IO
Certificates) and the Mezzanine Certificates, but only in the order of priority
and in the amounts described herein.
S-5
<PAGE>
SEE "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT FOR
ADDITIONAL INFORMATION.
The Class A-IO Certificates are interest-only certificates. The notional amount
of the Class A-IO Certificates is equal to the lesser of $20,000,000 and the
aggregate principal balance of the mortgage loans.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the offered
certificates consists of excess spread, overcollateralization and the
subordination provided to the more senior classes of certificates by the more
subordinate classes of certificates as described under "Description of the
Certificates--Allocation of Losses; Subordination" in this prospectus
supplement.
OPTIONAL TERMINATION
At its option, the holder of the Class C Certificates (or, if there is no single
holder, the majority holder of the Class C Certificates) may either purchase all
of the mortgage loans, together with any properties in respect thereof acquired
on behalf of the trust, or purchase the certificates, and thereby effect
termination and early retirement of the certificates, after the aggregate
principal balance of the mortgage loans, and properties acquired in respect
thereof, remaining in the trust has been reduced to less than or equal to 10% of
the aggregate principal balance of the mortgage loans as of the Cut-off Date.
SEE "POOLING AND SERVICING AGREEMENT-- TERMINATION" IN THIS PROSPECTUS
SUPPLEMENT.
FEDERAL INCOME TAX CONSEQUENCES
Elections will be made to treat the trust as comprising three real estate
mortgage investment conduits for federal income tax purposes.
SEE "FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT.
RATINGS
When issued, the offered certificates will receive the ratings set forth on page
S-4 of this prospectus supplement. The ratings on the offered certificates
address the likelihood that holders of the offered certificates will receive all
distributions on the underlying mortgage loans to which they are entitled.
However, the ratings do not address the possibility that certificateholders
might suffer a lower than anticipated yield.
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. In particular, the rate of prepayments, if different than originally
anticipated, could adversely affect the yield realized by holders of the offered
certificates.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
LEGAL INVESTMENT
The offered certificates, other than the Class M-2 Certificates and the Class B
Certificates, will constitute "mortgage related securities" for purposes of
SMMEA. The Class M-2 Certificates and the Class B Certificates will not
constitute "mortgage related securities" for purposes of SMMEA.
SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
S-6
<PAGE>
ERISA CONSIDERATIONS
The offered 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 offered certificates.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
S-7
<PAGE>
RISK FACTORS
You should carefully consider, among other things, the following
factors in connection with the purchase of the offered certificates:
THE OFFERED CERTIFICATES MAY HAVE LIMITED LIQUIDITY, SO YOU MAY BE UNABLE TO
SELL YOUR SECURITIES OR MAY BE FORCED TO SELL THEM AT A DISCOUNT FROM THEIR FAIR
MARKET VALUE
There can be no assurance that a secondary market for the offered
certificates will develop or, if one does develop, that it will provide holders
of the offered certificates with liquidity of investment or that it will
continue for the life of the offered certificates. As a result, any resale
prices that may be available for any offered certificate in any market that may
develop may be at a discount from the initial offering price or the fair market
value thereof. The offered certificates will not be listed on any securities
exchange.
THE CREDIT ENHANCEMENT IS LIMITED, AND THE POTENTIAL INADEQUACY OF THE CREDIT
ENHANCEMENT MAY CAUSE LOSSES OR SHORTFALLS TO BE INCURRED ON THE OFFERED
CERTIFICATES
The credit enhancement features described in the summary of this
prospectus supplement are intended to enhance the likelihood that holders of the
Class A Certificates, and to a limited extent, the holders of the Mezzanine
Certificates, will receive regular payments of interest and principal. However,
we cannot assure you that the applicable credit enhancement will adequately
cover any shortfalls in cash available to pay your certificates as a result of
delinquencies or defaults on the mortgage loans. The aggregate principal balance
of the mortgage loans as of the Cut-off Date will exceed the aggregate
certificate principal balance of the certificates on the Closing Date by only
approximately $17,219, and therefore the initial overcollateralization will be
considerably below the initial overcollateralization target described herein.
If delinquencies or defaults occur on the mortgage loans, neither the
master servicer nor any other entity will advance scheduled monthly payments of
interest and principal on delinquent or defaulted mortgage loans if such
advances are not likely to be recovered.
If substantial losses occur as a result of defaults and delinquent
payments on the mortgage loans, you may suffer losses.
The ratings of the offered certificates by the rating agencies may be
lowered following the initial issuance thereof as a result of losses on the
mortgage loans in excess of the levels contemplated by the rating agencies at
the time of their initial rating analysis. None of the company, the master
servicer, the trustee or any of their respective affiliates will have any
obligation to replace or supplement any credit enhancement, or to take any other
action to maintain the ratings of the offered certificates. SEE "DESCRIPTION OF
CREDIT ENHANCEMENT" IN THE PROSPECTUS.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO CREATE OR
MAINTAIN OVERCOLLATERALIZATION
The weighted average of the interest rates on the mortgage loans (net
of fees and expenses) is expected to be higher than the weighted average of the
pass-through rates on the offered certificates. The mortgage loans are expected
to generate more interest than is needed to pay interest owed on the offered
certificates and to pay certain fees and expenses of the trust. Any remaining
interest generated by the mortgage loans will then be used to absorb losses that
occur on the mortgage loans. After these financial
S-8
<PAGE>
obligations of the trust are covered, the available excess interest generated by
the mortgage loans will be used to create and maintain overcollateralization. We
cannot assure you, however, that enough excess interest will be generated to
create or maintain the required level of overcollateralization. The factors
described below will affect the amount of excess interest that the mortgage
loans will generate:
o Every time a mortgage loan is prepaid in full, excess interest may be
reduced because the mortgage loan will no longer be outstanding and
generating interest or, in the case of a partial prepayment, will be
generating less interest.
o Every time a mortgage loan is liquidated or written off, excess
interest may be reduced because such mortgage loans will no longer be
outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the mortgage loans
turn out to be higher than expected, excess interest will be reduced by
the amount necessary to compensate for any shortfalls in cash available
on such date to make required distributions on the offered
certificates.
o If prepayments, defaults and liquidations occur more rapidly on the
mortgage loans with relatively higher interest rates than on the
mortgage loans with relatively lower interest rates, the amount of
excess interest generated by the mortgage loans will be less than would
otherwise be the case.
THE PASS-THROUGH RATES ON THE OFFERED CERTIFICATES (OTHER THAN THE CLASS A-1
CERTIFICATES) ARE SUBJECT TO LIMITATION
The offered certificates accrue interest at fixed pass-through rates,
but except in the case of the Class A-1 Certificates each such pass- through
rate is subject to a limit. The limit on the pass-through rates on the offered
certificates (other than the Class A-1 Certificates and the Class A-IO
Certificates) is based on the weighted average of the interest rates on the
mortgage loans, net of the amount of interest payable on the Class A-IO
Certificates and net of certain fees and expenses of the trust. The limit on the
pass-through rate on the Class A-IO Certificates is based on the weighted
average of the interest rates on the mortgage loans, net of certain fees and
expenses of the trust.
A variety of factors could limit the pass-through rate on one or more
classes of the offered certificates (other than the Class A-1 Certificates) and
adversely affect the yield to maturity on such class or classes of certificates:
o If prepayments, defaults and liquidations occur more rapidly on the
mortgage loans with relatively higher interest rates than on the mortgage loans
with relatively lower interest rates, the pass-through rates on the offered
certificates (other than the Class A-1 Certificates) are more likely to be
limited.
o The interest rates on the mortgage loans are fixed and will not
adjust. Consequently, if the pass-through rate on any class of the offered
certificates is limited, such pass-through rate may remain limited for an
indefinite period, reducing the amount of interest accruing on such class of
certificates for an indefinite period.
o The required payment by the trust of mortgage insurance premiums
(payable on certain of the mortgage loans at rates ranging from 0.29% per annum
to 1.05% per annum on the principal balance of such mortgage loans as described
under "The Mortgage Pool--Mortgage Insurance" in this prospectus supplement)
will result in the limits on the pass-through rates on the offered certificates
(other than the Class A-1
S-9
<PAGE>
Certificates) being lower than would be the case if the trust did not have such
obligations.
o The limit on the pass-through rates on the offered certificates
(other than the Class A-1 Certificates and the Class A-IO Certificates) will be
affected by the amount of interest payable on the Class A- IO Certificates. As
the aggregate principal balance of the mortgage loans is reduced by payments of
principal (including prepayments and the proceeds of liquidations of defaulted
mortgage loans), the portion of the total amount of interest generated by the
mortgage pool that is used to pay interest on the Class A-IO Certificates will
increase. A rapid rate of prepayments on the mortgage loans before the end of
the first 30 distribution dates would lower the pass-through rate ceiling
applicable to the offered certificates (other than the Class A-1 Certificates
and the Class A-IO Certificates) increasing the likelihood that such ceiling
will limit the pass- through rates on one or more of such classes of offered
certificates. See the definition of the pass-through rates of the offered
certificates under "Glossary" in this prospectus supplement.
The holders of the offered certificates WILL NOT be entitled to recover
interest in excess of any applicable limited rate on any future Distribution
Date from excess cashflow or from any other source.
STATUTORY AND JUDICIAL LIMITATIONS ON FORECLOSURE PROCEDURES MAY DELAY RECOVERY
IN RESPECT OF THE MORTGAGED PROPERTIES AND, IN SOME INSTANCES, LIMIT THE AMOUNT
THAT MAY BE RECOVERED BY THE FORECLOSING LENDER, RESULTING IN LOSSES ON THE
MORTGAGE LOANS THAT MIGHT CAUSE LOSSES OR SHORTFALLS TO BE INCURRED ON THE
OFFERED CERTIFICATES
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage instrument are judicial foreclosure, involving court
proceedings, and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. A foreclosure action is subject to most of the delays
and expenses of other lawsuits if defenses are raised or counterclaims are
asserted. Delays may also result from difficulties in locating necessary
defendants. Non-judicial foreclosures may be subject to delays resulting from
state laws mandating the recording of notice of default and notice of sale and,
in some states, notice to any party having an interest of record in the real
property, including junior lienholders. Some states have adopted
"anti-deficiency" statutes that limit the ability of a lender to collect the
full amount owed on a loan if the property sells at foreclosure for less than
the full amount owed. In addition, United States courts have traditionally
imposed general equitable principles to limit the remedies available to lenders
in foreclosure actions that are perceived by the court as harsh or unfair. The
effect of these statutes and judicial principles may be to delay and/or reduce
distributions in respect of the offered certificates. SEE "LEGAL ASPECTS OF
MORTGAGE LOANS--FORECLOSURE ON MORTGAGES AND SOME CONTRACTS" IN THE PROSPECTUS.
THE VALUE OF THE MORTGAGE LOANS MAY BE AFFECTED BY, AMONG OTHER THINGS, A
DECLINE IN REAL ESTATE VALUES AND CHANGES IN THE BORROWERS' FINANCIAL CONDITION,
WHICH MAY CAUSE LOSSES OR SHORTFALLS TO BE INCURRED ON THE OFFERED CERTIFICATES
No assurance can be given that values of the mortgaged properties have
remained or will remain at their levels as of the dates of origination of the
related mortgage loans. If the residential real estate market should experience
an overall decline in property values so that the outstanding balances of the
mortgage loans, and any secondary financing on the mortgaged properties, become
equal to or greater than the value of the mortgaged properties, the actual rates
of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In particular, mortgage
loans with high loan-to- value ratios will be affected by any decline in real
estate values. Any decrease in the value of the mortgage loans may result in the
allocation of losses to the offered certificates to the extent not covered by
credit enhancement.
S-10
<PAGE>
THE MORTGAGE LOANS WERE UNDERWRITTEN TO NON-CONFORMING UNDERWRITING STANDARDS,
WHICH MAY CAUSE LOSSES OR SHORTFALLS TO BE INCURRED ON THE OFFERED CERTIFICATES
The mortgage loans were underwritten generally in accordance with
underwriting standards 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 either credit characteristics of the related mortgagor or documentation
standards in connection with the underwriting of the related mortgage loan that
do not meet the Fannie Mae or Freddie Mac underwriting guidelines for "A" credit
mortgagors. These credit characteristic include 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.
These documentation standards may include mortgagors who provide limited or no
documentation in connection with the underwriting of the related mortgage loan.
Accordingly, mortgage loans underwritten under the seller's non-conforming
credit underwriting standards are likely to experience rates of delinquency,
foreclosure and loss that are higher, and may be substantially higher, than
mortgage loans originated in accordance with the Fannie Mae or Freddie Mac
underwriting guidelines. Any resulting losses, to the extent not covered by
credit enhancement, may affect the yield to maturity of the offered
certificates.
THE MORTGAGE LOANS ARE CONCENTRATED IN THE STATES OF CALIFORNIA AND FLORIDA,
WHICH MAY RESULT IN LOSSES WITH RESPECT TO THESE MORTGAGE LOANS
Approximately 35.54% and 17.20% of the mortgage loans (by aggregate
outstanding principal balance as of the Cut-off Date) are in the states of
California and Florida, respectively. Investors should note that some 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
concentration of the mortgage loans in the states of California and Florida may
present risk considerations in addition to those generally present for similar
mortgage-backed securities without this concentration. Moreover, any mortgage
loan for which a breach of a representation or warranty exists will remain in
the trust fund in the event that a seller is unable, or disputes its obligation,
to repurchase the mortgage loan and the breach does not also constitute a breach
of any representation made by any other person. In this event, any resulting
losses will be borne by credit enhancement, to the extent available. Any risks
associated with mortgage loan concentration may affect the yield to maturity of
the offered certificates to the extent losses caused by these risks which are
not covered by credit enhancement are allocated to the offered certificates.
SOME OF THE MORTGAGE LOANS PROVIDE FOR BALLOON PAYMENTS AT MATURITY, WHICH MAY
RESULT IN A GREATER RISK OF LOSS WITH RESPECT TO THESE MORTGAGE LOANS
Approximately 2.45% of the mortgage loans (by aggregate outstanding
principal balance as of the Cut-off Date) are balloon loans. These mortgage
loans will require a substantial payment of principal (that is, a balloon
payment) at their stated maturity in addition to their scheduled monthly
payment. Mortgage loans of this type involve a greater degree of risk than
self-amortizing loans because the ability of a mortgagor to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related
S-11
<PAGE>
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. Any risks associated with the balloon
loans may affect the yield to maturity of the offered certificates to the extent
losses or delays in payment caused by these risks which are not covered by
credit enhancement are allocated to, or result in a slower rate of principal
payments on, the offered certificates.
THE RATE AND TIMING OF PREPAYMENTS WILL AFFECT YOUR YIELD
Borrowers may prepay their mortgage loans in whole or in part at any
time. We cannot predict the rate at which borrowers will repay their mortgage
loans. A prepayment of a mortgage loan generally will result in a prepayment on
the certificates.
o If you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The yield to maturity of the Class A-IO Certificates will become
extremely sensitive to the rate of principal prepayment on the mortgage
loans, if prior to April 1, 2003 the aggregate principal balance of the
mortgage loans is reduced to or below $20,000,000. Investors in the
Class A-IO Certificates should fully consider the risk that an
extremely rapid rate of principal prepayment on the mortgage loans
could result in the failure of such investors to recover their initial
investments.
o The rate of prepayments on the mortgage loans will be sensitive to
prevailing interest rates. Generally, if interest rates decline,
mortgage loan prepayments may increase due to the availability of other
mortgage loans at lower interest rates. Conversely, if prevailing
interest rates rise significantly, the prepayments on mortgage loans
may decrease.
o Approximately 61.93% of the mortgage loans (by aggregate principal
balance as of the Cut-off Date) require the mortgagor to pay a charge
in certain instances if the mortgagor prepays the mortgage loan during
a stated period, which may be from one year to five years after the
mortgage loan was originated. A prepayment charge may or may not
discourage a mortgagor from prepaying the mortgage loan during the
applicable period.
o The seller may be required to purchase mortgage loans from the trust in
the event certain breaches of representations and warranties occur and
have not been cured. In addition, the master servicer has the option to
purchase mortgage loans that become 90 days or more delinquent, subject
to certain limitations and conditions described in this prospectus
supplement. These purchases will have the same effect on the holders of
the offered certificates as a prepayment of the mortgage loans.
o If the rate of default and the amount of losses on the mortgage loans
is higher than you expect, then your yield may be lower than you
expect.
S-12
<PAGE>
o The overcollateralization provisions, initially and whenever
overcollateralization is at a level below the required level, are
intended to result in an accelerated rate of principal distributions to
holders of the classes of offered certificates then entitled to
distributions of principal. An earlier return of principal to the
holders of the offered certificates as a result of the
overcollateralization provisions will influence the yield on the
offered certificates in a manner similar to the manner in which
principal prepayments on the mortgage loans will influence the yield on
the offered certificates.
o The multiple class structure of the Class A Certificates causes the
yield of certain of such classes to be particularly sensitive to
changes in the rates of prepayments of mortgage loans. Because
distributions of principal will be made to the classes of Class A
Certificates according to the priorities described herein, the yield to
maturity on such classes of certificates will be sensitive to the rates
of prepayment on the mortgage loans experienced both before and after
the commencement of principal distributions on such class. In
particular, the Class A-4 Certificates do not receive (unless the
certificate principal balances of the other classes of Class A
Certificates have been reduced to zero) any portion of the amount of
principal payable to the Class A Certificates prior to the Distribution
Date in December 2003. In addition, the Class A-4 Certificates will
receive (unless the certificate principal balances of the other classes
of Class A Certificates in have been reduced to zero) a
disproportionately small or large portion of the amount of principal
then payable to the Class A Certificates thereafter. The weighted
average life of the Class A-4 Certificates will therefore be longer or
shorter than would otherwise be the case. The effect on the market
value of the Class A-4 Certificates of changes in market interest rates
or market yields for similar securities may be greater or lesser than
for the other classes of Class A Certificates.
SEE "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR A DESCRIPTION OF FACTORS THAT MAY INFLUENCE THE RATE AND TIMING
OF PREPAYMENTS ON THE MORTGAGE LOANS AND THE WEIGHTED AVERAGE LIVES OF THE
OFFERED CERTIFICATES.
THE MORTGAGE LOANS MAY HAVE ENVIRONMENTAL RISKS, WHICH MAY RESULT IN INCREASED
LOSSES WITH RESPECT TO THESE MORTGAGE LOANS
To the extent the master servicer for a mortgage loan acquires title to
any related mortgaged property contaminated with or affected by hazardous wastes
or hazardous substances, these mortgage loans may incur losses. SEE "SERVICING
OF MORTGAGE LOANS--REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS" AND
"LEGAL ASPECTS OF MORTGAGE LOANS--ENVIRONMENTAL LEGISLATION" IN THE PROSPECTUS.
To the extent these environmental risks result in losses on the mortgage loans,
the yield to maturity of the offered certificates, to the extent not covered by
credit enhancement, may be affected.
SOME ADDITIONAL RISKS ARE ASSOCIATED WITH THE MEZZANINE CERTIFICATES
The weighted average lives of, and the yields to maturity on, the Class
M-1 Certificates, the Class M-2 Certificates and the Class B Certificates will
be progressively more sensitive, in that order, to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the mortgage loans. If
the actual rate and severity of losses on the mortgage loans is higher than
those assumed by an investor in such certificates, the actual yield to maturity
of such certificates may be lower than the yield anticipated by such holder
based on such assumption. The timing of losses on the mortgage loans will also
affect an investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the mortgage pool are consistent with an
investor's expectations. In general, the earlier a loss occurs, the greater the
effect on an investor's yield to maturity. Realized losses on the mortgage
loans, to the extent they exceed the amount of
S-13
<PAGE>
overcollateralization following distributions of principal on the related
distribution date, will reduce the certificate principal balance of the class of
Mezzanine Certificate then outstanding with the lowest payment priority. As a
result of such reductions, less interest will accrue on such class of Mezzanine
Certificates than would otherwise be the case. Once a realized loss is allocated
to a Mezzanine Certificate, no amounts will be distributable with respect to
such written down amount. However, the amount of any realized losses allocated
to the Mezzanine Certificates may be paid to the holders of the Mezzanine
Certificates according to the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
Unless the certificate principal balance of the Class A Certificates
has been reduced to zero, the Mezzanine Certificates will not be entitled to any
principal distributions until at least December 2003 or a later date as provided
in this prospectus supplement or during any period in which delinquencies and
losses on the mortgage loans exceed certain levels. As a result, the weighted
average lives of such certificates will be longer than would otherwise be the
case if distributions of principal were allocated among all of the certificates
at the same time. As a result of the longer weighted average lives of such
certificates, the holders of such certificates have a greater risk of suffering
a loss on their investments. Further, because such certificates might not
receive any principal if certain delinquency levels occur, it is possible for
such certificates to receive no principal distributions even if no losses have
occurred on the mortgage pool.
In addition, the multiple class structure of the Class M-1
Certificates, the Class M-2 Certificates and the Class B Certificates causes the
yield of such classes to be particularly sensitive to changes in the rates of
prepayment of the mortgage loans. Because distributions of principal will be
made to the holders of such certificates according to the priorities described
in this prospectus supplement, the yield to maturity on such classes of
certificates will be sensitive to the rates of prepayment on the mortgage loans
experienced both before and after the commencement of principal distributions on
such classes. The yield to maturity on such classes of certificates will also be
extremely sensitive to losses due to defaults on the mortgage loans (and the
timing thereof), to the extent such losses are not covered by excess interest,
overcollateralization or a class of Mezzanine Certificates with a lower payment
priority. Furthermore, as described in this prospectus supplement, the timing of
receipt of principal and interest by the Mezzanine Certificates may be adversely
affected by losses even if such classes of certificates do not ultimately bear
such loss.
PREPAYMENT INTEREST SHORTFALLS AND RELIEF ACT SHORTFALLS WILL AFFECT YOUR YIELD
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only up to the date of the principal prepayment,
instead of for a full month. When a partial principal prepayment is made on a
mortgage loan, the mortgagor is not charged interest on the amount of the
prepayment for the month in which the prepayment is made. In addition, the
application of the Relief Act to any mortgage loan will adversely affect, for an
indeterminate period of time, the ability of the Master Servicer to collect full
amounts of interest on the mortgage loan. This may result in a shortfall in
interest collections available for distribution to certificateholders on the
next distribution date. The Master Servicer is required to cover a portion of
the shortfall in interest collections that are attributable to prepayments, but
only up to the amount of the Master Servicer's aggregate servicing fee for the
related calendar month. In addition, certain shortfalls in interest collections
arising from the application of the Relief Act will not be covered by the Master
Servicer.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest paid by the Master Servicer will be allocated,
first, in reduction of amounts otherwise distributable to the holders of the
Class C
S-14
<PAGE>
Certificates and Class R Certificates, and thereafter, to the Monthly Interest
Distributable Amounts with respect to the offered certificates on a pro rata
basis based on the respective amounts of interest accrued on such Certificates
for such Distribution Date. The Holders of the offered certificates will not be
entitled to reimbursement for any such interest shortfalls. If these shortfalls
are allocated to the offered certificates the amount of interest paid to those
certificates will be reduced, adversely affecting the yield on your investment.
VIOLATION OF VARIOUS FEDERAL AND STATE LAWS MAY RESULT IN LOSSES ON THE MORTGAGE
LOANS
Applicable state laws generally regulate interest rates and other
charges, require specific disclosure, and require licensing of the seller. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the mortgage loans.
The mortgage loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z
promulgated thereunder, which require specific
disclosures to the borrowers regarding the terms of
the mortgage loans;
o the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination
on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public
assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of
credit; and
o the Fair Credit Reporting Act, which regulates the
use and reporting of information related to the
borrower's credit experience.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these federal or state laws,
policies and principles may limit the ability of the trust to collect all or
part of the principal of or interest on the mortgage loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the trust to damages and administrative enforcement.
The seller will represent that as of the Closing Date, to the best of
seller's knowledge, each mortgage loan at the time it was made complied in all
material respects with applicable state and federal laws, including, without
limitation, usury, equal credit opportunity, truth-in-lending and disclosure
laws; and each mortgage loan is being serviced in all material respects in
accordance with applicable state and federal laws, including, without
limitation, usury, equal credit opportunity and disclosure laws. In the event of
a breach of this representation, it will be obligated to cure the breach or
repurchase or replace the affected mortgage loan in the manner described in the
prospectus.
THE RATINGS ON THE OFFERED CERTIFICATES ARE NOT A RECOMMENDATION TO BUY, SELL OR
HOLD THE OFFERED CERTIFICATES AND ARE SUBJECT TO WITHDRAWAL AT ANY TIME, WHICH
MAY RESULT IN LOSSES ON THE OFFERED CERTIFICATES
It is a condition to the issuance of the offered certificates that each
class of offered certificates be rated no lower than the ratings described on
page S-4 of this prospectus supplement. 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
offered certificate, and, accordingly, there can be no
S-15
<PAGE>
assurance that the ratings assigned to any offered certificate on the date on
which the offered certificates are initially issued will not be lowered or
withdrawn by a rating agency at any time thereafter. In the event any rating is
revised or withdrawn, the liquidity or the market value of the related offered
certificates may be adversely affected. SEE "RATINGS" IN THIS PROSPECTUS
SUPPLEMENT AND IN THE PROSPECTUS.
A TRANSFER OF SUBSERVICING MAY RESULT IN INCREASED LOSSES AND DELINQUENCIES ON
THE MORTGAGE LOANS
The mortgage loans will initially be subserviced by Wendover Funding,
Inc. as described herein under "Pooling and Servicing Agreement--The
Subservicers." However, the master servicer has entered into a contract to
transfer the subservicing with respect to the mortgage loans to GMAC Mortgage
Corporation on or about January 1, 2001. Investors should note, however, that
when the servicing of mortgage loans is transferred, there is generally a rise
in delinquencies associated with such transfer. Such increase in delinquencies
may result in losses, which, to the extent they are not absorbed by credit
enhancement, will cause losses or shortfalls to be incurred by the holders of
the offered certificates. In addition, any higher default rate resulting from
such transfer may result in an acceleration of prepayments on the mortgage
loans.
THE MORTGAGE POOL
GENERAL
References to percentages of the mortgage loans unless otherwise noted
are calculated based on the aggregate principal balance of the mortgage loans as
of the Cut-off Date.
The mortgage pool will consist of approximately 1,339 conventional,
one- to four-family, fixed-rate, fully-amortizing and balloon payment mortgage
loans secured by first liens on mortgaged properties and having an aggregate
principal balance as of the Cut-off Date of approximately $200,017,319, after
application of scheduled payments due on or before the Cut-off Date whether or
not received. The mortgage loans have original terms to maturity of not greater
than 30 years.
The company will convey the mortgage loans to the trust on the Closing
Date pursuant to the 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. 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 the Certificateholders. 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" IN THE PROSPECTUS.
The mortgage loans will have been originated or acquired by the Seller
in accordance with the underwriting criteria described herein. SEE
"--UNDERWRITING" BELOW.
All of the mortgage loans will initially be subserviced by Wendover
Funding, Inc. The subservicing with respect to the mortgage loans will be
transferred to GMAC Mortgage Corporation on or about January 1, 2001, as
described herein under "Pooling and Servicing Agreement--The Subservicers."
S-16
<PAGE>
All of the mortgage loans have scheduled monthly payments due on the
Due Date. Each mortgage loan will contain a customary "due-on-sale" clause.
Certain of the mortgage loans will have their first scheduled monthly
payments due on January 1, 2001. As to those mortgage loans, no principal
amortization payments will be distributed (unless prepayments are received
thereon) until the distribution date occurring in January 2001, the month in
which the first scheduled monthly payment is due. However, on the Closing Date,
cash will be deposited in the Certificate Account in an amount equal to one
month's interest accrued from November 1, 2000 (at the related mortgage rates)
on such mortgage loans, to be remitted to the Trustee for distribution on the
distribution date occurring in December 2000, the month prior to the month in
which the first scheduled monthly payment is due on such mortgage loans.
PREPAYMENT CHARGES
Approximately 61.93% of the mortgage loans provide for payment by the
mortgagor of a prepayment charge in limited circumstances on prepayments.
Generally, these mortgage loans provide for payment of a prepayment charge on
partial or full prepayments made within one year, five years or other period as
provided in the related mortgage note from the date of origination of the
mortgage loan. The amount of the prepayment charge is as provided in the related
mortgage note, and the prepayment charge will generally apply if, in any
twelve-month period during the first year, five years or other period as
provided in the related mortgage note from the date of origination of the
mortgage loan, the mortgagor prepays an aggregate amount exceeding 20% of the
original principal balance of the mortgage loan. The amount of the prepayment
charge will generally be equal to 6 months' advance interest calculated on the
basis of the mortgage rate in effect at the time of the prepayment on the amount
prepaid in excess of 20% of the original principal balance of the mortgage loan.
The holders of the Class P Certificates will be entitled to all prepayment
charges received on the mortgage loans, and these amounts will not be available
for distribution on the other classes of certificates. The Master Servicer may
waive the collection of any otherwise applicable prepayment charge or reduce the
amount thereof actually collected, but only if the Master Servicer does so in
compliance with the prepayment charge waiver standards set forth in the
Agreement. If the Master Servicer waives any prepayment charge other than in
accordance with the standards set forth in the Agreement, the Master Servicer
will be required to pay the amount of the waived prepayment charge. There can be
no assurance that the prepayment charges will have any effect on the prepayment
performance of the mortgage loans.
MORTGAGE INSURANCE
Except with respect to approximately 0.44% of the mortgage loans (by
aggregate outstanding principal balance as of the Cut-off Date), each mortgage
loan with a loan-to-value ratio at origination in excess of 80.00% will be
insured by one of the following: (1) a Primary Insurance Policy issued by a
private mortgage insurer (other than a Radian Lender-Paid PMI Policy) or (2) a
Radian Lender-Paid PMI Policy.
Each Primary Insurance Policy will insure against default under each
insured mortgage note as follows: (A) 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 lesser of the Appraised Value and the
sales price, such mortgage loan is covered by a Primary Insurance Policy in an
amount equal to at least 20.00% of the Allowable Claim and (B) for which the
outstanding principal balance at origination of such mortgage loan exceeded
90.00% of the lesser of the Appraised Value and the sales price, such mortgage
loan is covered by a Primary Insurance Policy in an amount equal to at least
25.00% of the Allowable Claim.
S-17
<PAGE>
Each Radian Lender-Paid PMI Policy will insure against default under
each insured mortgage note as follows: (A) 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 89.99% of the lesser of the Appraised Value and the
sales price, such mortgage loan is covered by a Primary Insurance Policy in an
amount equal to at least 22.00% of the Allowable Claim, (B) for which the
outstanding principal balance at origination of such mortgage loan is at least
90.00% and up to and including 95.00% of the lesser of the Appraised Value and
the sales price, such mortgage loan is covered by a Primary Insurance Policy in
an amount equal to at least 25.00% of the Allowable Claim and (C) for which the
outstanding principal balance at origination of such mortgage loan is at least
95.01% and up to and including 97.00% of the lesser of the Appraised Value and
the sales price, such mortgage loan is covered by such Primary Insurance Policy
in an amount equal to at least 35.00% of the Allowable Claim.
With respect to the Radian Lender-Paid PMI Policies, the premium will
be payable by the Master Servicer out of interest collections on the mortgage
loans at rate equal to the related Radian PMI Rate. The Radian PMI Rates range
from 0.29% to 1.05% of the Stated Principal Balance of the related Radian PMI
Insured Loan. For the remainder of the mortgage loans with primary mortgage
insurance, the related mortgagor will pay for the coverage.
Each mortgage loan is required to be covered by a standard hazard
insurance policy.
SEE "PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS
THEREUNDER--HAZARD INSURANCE POLICIES" IN THE PROSPECTUS.
MORTGAGE LOAN CHARACTERISTICS
The average principal balance of the mortgage loans at origination was
approximately $149,588. No mortgage loan had a principal balance at origination
of greater than approximately $511,900 or less than approximately $33,000. The
average principal balance of the mortgage loans as of the Cut-off Date was
approximately $149,378. No mortgage loan had a principal balance as of the
Cut-off Date of greater than approximately $511,667 or less than approximately
$20,338.
As of the Cut-off Date, the mortgage loans had mortgage rates ranging
from approximately 7.875% per annum to approximately 13.125% per annum and the
weighted average mortgage rate was approximately 9.821% per annum. The weighted
average remaining term to stated maturity of the mortgage loans will be
approximately 350 months as of the Cut-off Date. None of the mortgage loans will
have a first Due Date prior to December 1, 1979 or after January 1, 2001, or
will have a remaining term to maturity of less than 108 months or greater than
360 months as of the Cut-off Date. The latest maturity date of any mortgage loan
is December 1, 2030.
The weighted average loan-to-value ratio at origination of the mortgage
loans was approximately 85.91%. No loan-to-value ratio at origination was
greater than approximately 97.00% or less than approximately 20.00%.
Approximately 38 mortgage loans, representing approximately 2.45% of
the mortgage pool (by aggregate outstanding principal balance as of the Cut-off
Date), are balloon loans. The amount of the balloon payment on each of these
mortgage loans is substantially in excess of the amount of the scheduled monthly
payment on such mortgage loan for the period prior to the Due Date of the
balloon payment. These mortgage loans have a weighted average remaining term to
maturity of approximately 178 months.
S-18
<PAGE>
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. All
percentages of the mortgage loans are approximate percentages by aggregate
principal balance as of the Cut-off Date, except as otherwise indicated. Dollar
amounts and percentages may not add up to totals due to rounding.
<TABLE>
<CAPTION>
PRINCIPAL BALANCES AT ORIGINATION
PERCENTAGE OF
ORIGINAL CUT-OFF DATE
MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 50,000.00...................... 34 $ 1,506,289 0.75%
50,000.01 - 100,000.00...................... 371 28,646,879 14.32
100,000.01 - 150,000.00...................... 419 52,055,334 26.03
150,000.01 - 200,000.00...................... 233 39,786,776 19.89
200,000.01 - 250,000.00...................... 130 28,901,006 14.45
250,000.01 - 300,000.00...................... 68 18,713,301 9.36
300,000.01 - 350,000.00...................... 47 15,269,359 7.63
350,000.01 - 400,000.00...................... 22 8,305,738 4.15
400,000.01 - 450,000.00...................... 9 3,885,057 1.94
450,000.01 - 500,000.00...................... 5 2,435,913 1.22
500,000.01 - 550,000.00...................... 1 511,667 0.26
----- ------------ ------
Total................................... 1,339 $200,017,319 100.00%
===== ============ ======
</TABLE>
The average principal balance of the mortgage loans at origination
was approximately $149,588.
S-19
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
PERCENTAGE OF
CUT-OFF DATE
CURRENT MORTGAGE LOAN NUMBER OF AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 50,000.00..................... 37 $ 1,624,910 0.81%
50,000.01 - 100,000.00..................... 369 28,627,808 14.31
100,000.01 - 150,000.00...................... 419 52,105,774 26.05
150,000.01 - 200,000.00...................... 233 39,836,747 19.92
200,000.01 - 250,000.00...................... 129 28,701,045 14.35
250,000.01 - 300,000.00...................... 68 18,713,301 9.36
300,000.01 - 350,000.00...................... 47 15,269,359 7.63
350,000.01 - 400,000.00...................... 22 8,305,738 4.15
400,000.01 - 450,000.00...................... 9 3,885,057 1.94
450,000.01 - 500,000.00...................... 5 2,435,913 1.22
500,000.01 - 550,000.00...................... 1 511,667 0.26
----- ------------ ------
Total................................... 1,339 $200,017,319 100.00%
===== ============ ======
</TABLE>
As of the Cut-off Date, the average current principal balance of the
mortgage loans will be approximately $149,378.
S-20
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.500 - 7.999...................... 2 $ 223,046 0.11%
8.000 - 8.499...................... 14 2,594,952 1.30
8.500 - 8.999...................... 123 22,725,906 11.36
9.000 - 9.499...................... 240 36,075,604 18.04
9.500 - 9.999...................... 455 68,117,506 34.06
10.000 - 10.499...................... 205 29,718,425 14.86
10.500 - 10.999...................... 171 23,833,287 11.92
11.000 - 11.499...................... 51 6,929,376 3.46
11.500 - 11.999...................... 45 6,169,198 3.08
12.000 - 12.499...................... 18 2,342,642 1.17
12.500 - 12.999...................... 12 1,088,207 0.54
13.000 - 13.499...................... 3 199,172 0.10
----- ------------ ------
Total............................ 1,339 $200,017,319 100.00%
===== ============ ======
</TABLE>
The weighted average mortgage rate of the mortgage loans was
approximately 9.821% per annum.
S-21
<PAGE>
<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>
15.01 - 20.00.............................. 1 $ 49,872 0.02%
20.01 - 25.00.............................. 1 49,865 0.02
25.01 - 30.00.............................. 1 208,889 0.10
30.01 - 35.00.............................. 1 72,922 0.04
35.01 - 40.00.............................. 4 263,250 0.13
40.01 - 45.00.............................. 2 225,805 0.11
45.01 - 50.00.............................. 6 498,090 0.25
50.01 - 55.00.............................. 9 777,313 0.39
55.01 - 60.00.............................. 10 1,363,630 0.68
60.01 - 65.00.............................. 15 2,034,432 1.02
65.01 - 70.00.............................. 37 5,408,534 2.70
70.01 - 75.00.............................. 48 6,934,246 3.47
75.01 - 80.00.............................. 324 51,553,429 25.77
80.01 - 85.00.............................. 39 5,624,778 2.81
85.01 - 90.00.............................. 625 91,869,824 45.93
90.01 - 95.00.............................. 186 28,928,795 14.46
95.01 -100.00.............................. 30 4,153,646 2.08
----- ------------ ------
Total.................................. 1,339 $200,017,319 100.00%
===== ============ ======
</TABLE>
The minimum and maximum loan-to-value ratios of the mortgage loans at
origination were approximately 20.00% and 97.00%, respectively, and the weighted
average of the loan-to-value ratios of the mortgage loans at origination was
approximately 85.91%.
<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>
Second Home.............................. 39 $ 4,194,023 2.10%
Non-Owner Occupied....................... 51 5,518,373 2.76
Primary Residence........................ 1,249 190,304,923 95.14
----- ------------ ------
Total................................ 1,339 $200,017,319 100.00%
===== ============ ======
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE LOAN PROGRAM AND DOCUMENTATION TYPE
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM AND DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Progressive Series Program (Full
Documentation)........................... 140 $ 24,250,336 12.12%
Progressive Series Program (Alternative
Documentation)........................... 19 3,518,303 1.76
Progressive Series Program (Limited
(Stated) Documentation).................. 82 10,153,166 5.08
Progressive Series Program (No
Income/No Asset Documentation)........... 7 1,224,554 0.61
Progressive Series Program (Full
Income/No Asset Documentation)........... 4 771,810 0.39
Progressive Express(TM)Program
(Verified Assets)........................ 317 50,902,140 25.45
Progressive Express(TM)Program (Non
Verified Assets)......................... 725 101,744,288 50.87
Progressive Express(TM)No Doc Program
(No Documentation)....................... 35 5,369,321 2.68
Express Priority Refi(TM)Program (No
Income/No Asset Documentation)........... 10 2,083,402 1.04
----- ------------ ------
Total................................ 1,339 $200,017,319 100.00%
===== ============ ======
</TABLE>
SEE "--UNDERWRITING STANDARDS" BELOW FOR A DETAILED DESCRIPTION OF THE
SELLER'S LOAN PROGRAMS AND DOCUMENTATION REQUIREMENTS.
S-23
<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)...................................... 53 $ 10,300,968 5.15%
A(1)....................................... 153 23,926,536 11.96
A-(1)...................................... 39 5,046,525 2.52
B(1)....................................... 5 479,640 0.24
Progressive Express(TM)I(2)................ 483 72,738,821 36.37
Progressive Express(TM)II(2)............... 429 61,093,774 30.54
Progressive Express(TM)III(2).............. 94 14,323,334 7.16
Progressive Express(TM)IV(2)............... 71 10,589,584 5.29
Progressive Express(TM)V(2)................ 7 770,264 0.39
Progressive Express(TM)VI(2)............... 5 747,873 0.37
----- ------------ ------
Total................................ 1,339 $200,017,319 100.00%
===== ============ ======
</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, A- and B correspond to Progressive Series I, I and II, III and III+
and IV, respectively. All of the mortgage loans originated pursuant to the
Express Priority Refi(TM) Program have been placed in Progressive Express(TM)
Programs II and III. All of the mortgage loans originated by Placer Sierra Bank
were reunderwritten and placed in credit grades based on the seller's
"Progressive Series" Program. SEE "-UNDERWRITING STANDARDS."
(2) These mortgage loans were originated under the Seller's Progressive
Express(TM) Program. The underwriting for these mortgage loans is generally
based on the borrower's "FICO" score and therefore these mortgage loans do not
correspond to the alphabetical risk categories listed above.
<TABLE>
<CAPTION>
PROPERTY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single-Family............................... 1,080 $166,416,821 83.20%
Condominium................................. 112 13,472,215 6.74
Planned Unit Development.................... 48 6,576,819 3.29
Two- to Four-Family......................... 54 7,774,079 3.89
Hi-Rise..................................... 16 1,612,083 0.81
De Minimis PUD.............................. 23 3,746,422 1.87
Manufactured Home........................... 6 418,880 0.21
----- ------------ ------
Total.................................... 1,339 $200,017,319 100.00%
===== ============ ======
</TABLE>
S-24
<PAGE>
<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................................. 364 $ 71,089,221 35.54%
Florida.................................... 281 34,399,421 17.20
Georgia.................................... 75 10,814,740 5.41
New Jersey................................. 43 6,045,230 3.02
Texas...................................... 118 12,991,307 6.50
Other (less than 3% in any one state)...... 458 64,677,401 32.34
----- ------------ ------
Total................................... 1,339 $200,017,319 100.00%
===== ============ ======
</TABLE>
No more than approximately 0.71% of the mortgage loans (by aggregate
outstanding principal balance as of the Cut-off Date) 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................................... 1,125 $168,172,433 84.08%
Cash-Out Refinance......................... 138 20,558,728 10.28
Rate and Term Refinance.................... 76 11,286,158 5.64
----- ------------ ------
Total................................... 1,339 $200,017,319 100.00%
===== ============ ======
</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 these proceeds retained by the mortgagor may be
substantial.
SEE "--UNDERWRITING STANDARDS" BELOW FOR A DESCRIPTION OF THE SELLER'S
RISK CATEGORIES.
UNDERWRITING STANDARDS
GENERAL
All of the mortgage loans were originated by the Seller, generally in
accordance with the underwriting criteria specified in the prospectus, except as
described in this prospectus supplement.
S-25
<PAGE>
All of the mortgage loans will initially be subserviced by Wendover
Funding, Inc. The subservicing with respect to the mortgage loans will be
transferred to GMAC Mortgage Corporation on or about January 1, 2001, as
described herein under "Pooling and Servicing Agreement--The Subservicers."
Approximately 19.88% and approximately 79.08% of the mortgage loans
were underwritten pursuant to, or in accordance with, the standards of the
Seller's Progressive Series Program or Progressive Express(TM) Program,
respectively, each of which is described below. Approximately 0.13% of the
mortgage loans, all of which were originated by Placer Sierra Bank, were
reunderwritten in accordance with the standards of the Seller's Progressive
Series Program. These loans are all seasoned at least three months.
Approximately 1.04% of the mortgage loans were underwritten pursuant to, or in
accordance with, the standards of the Seller's "Express Priority Refi(TM)
Program."
DETAILS OF SPECIFIC PROGRAMS
The following provisions apply to all of the mortgage loans originated
under the Seller's Progressive Series Program and Progressive Express(TM)
Program.
ELIGIBILITY. The Seller generally performs a pre-funding audit on each
mortgage loan. This audit includes a review for compliance with the related
program parameters and accuracy of the legal documents.
QUALITY CONTROL. The Seller performs a post-closing quality control
review on a minimum of 25% of the mortgage loans originated or acquired under
the programs described below 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.
VARIATIONS. The Seller uses the following parameters as guidelines
only. On a case-by-case basis, the Seller may determine that the prospective
mortgagor warrants an exception outside the standard program guidelines. An
exception may be allowed if the loan application reflects certain compensating
factors, including instances where the prospective mortgagor:
o has demonstrated an ability to save and devote a greater
portion of income to basic housing needs;
o 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;
o has demonstrated an ability to maintain a debt free position;
o 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
o has net worth substantial enough to suggest that repayment of
the loan is within the prospective mortgagor's ability.
APPRAISALS. The Seller does not publish an approved appraiser list for
the conduit seller. Conduit sellers may select any appraiser of choice,
regardless of the loan-to-value ratio of the related loan, from the
S-26
<PAGE>
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:
o be a state licensed or certified appraiser;
o 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;
o be experienced in the appraisal of properties similar to the
type being appraised;
o be actively engaged in appraisal work; and
o 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.
With respect to the Seller's Progressive Series Program or Progressive
Express(TM) Program (other than the Progressive Express(TM) No Doc Program), 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.
THE PROGRESSIVE SERIES PROGRAM
GENERAL. The underwriting guidelines utilized in the Progressive Series
Program, as developed by the Seller, 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 seven 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, II, III, III+, IV, V and VI Program
borrowers are required to have debt service-
S-27
<PAGE>
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, the Seller 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 the Seller 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, the Seller 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 Freddie Mac and Fannie Mae standards. In general, the maximum amount for
mortgage loans originated under the Progressive Series Program is $750,000;
however, the Seller may approve mortgage loans in excess of such amount on a
case-by-case basis.
All of the mortgage loans originated under the Progressive Series I, II
and III Programs are underwritten either by employees of the Seller 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 the Seller and designated conduit
sellers. 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. 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. The Seller receives verbal
verification from the 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. The Seller 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 "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 (Fannie Mae Form 1003 or Freddie Mac Form
65), (ii) Statement of Assets and Liabilities (Fannie Mae Form 1003A or Freddie
Mac Form 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 (Fannie Mae Form 1004 or Freddie Mac 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
one month personal bank statement for verification of liquid assets. In
addition, self-employed borrowers must provide federal tax
S-28
<PAGE>
returns for the previous two to three years, including K-l's, federal business
tax returns for two years, year-to- date financial statements and a signed IRS
Form 4506 (Request for Copy of Tax Returns).
Under the Reduced Documentation Program, which is available to
borrowers in every Progressive Series Program, the Seller obtains from
prospective borrowers either a verification of deposits or bank statements for
the most recent one-month period preceding the mortgage loan application. Under
this program 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 Reduced Documentation Program generally is limited.
Under all Progressive Series Programs, the Seller 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 $650,000 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
$400,000, however, exceptions are granted on a case-by-case basis. Secondary
financing is allowed in the origination of the Reduced 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, including a mortgage and/or rental
history, along with one non-traditional trade account to satisfy five trades,
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 revolving
credit account within the past 24 months and a maximum of one 30-day delinquent
payment on installment credit account within the past 24 months. However, if the
Loan-to-Value Ratio of the loan is 90% or less, consumer credit is disregarded.
Bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established or re-affirmed satisfactory credit history.
Foreclosures are not allowed in the past 3 years. No judgments, suits liens,
collections or charge-offs in the past 24 months, generally older items must be
paid prior to or at closing. Tax liens are not allowed within the last 24
months.
With respect to the Series II Program, a borrower must have a minimum
of four trade accounts including a mortgage and/or rental history, along with
one non-traditional trade account to satisfy five trades, 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. However, if the Loan-to-Value Ratio of the loan is
90% or less, consumer credit is disregarded. All bankruptcies must be at least
24 months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures
S-29
<PAGE>
are not allowed in the past 3 years. No judgments, suits liens, collections or
charge-offs in the past 24 months, generally older items must be paid prior to
or at closing. Tax liens are not allowed within the last 24 months.
With respect to the Series III Program, a borrower must have a minimum
of four trade accounts including a mortgage and/or rental history, along with
one non-traditional trade account to satisfy five trades, with 24-months credit
history, 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.
Bankruptcies must be at least 24 months old, fully discharged and the borrower
must have re-established or re-affirmed satisfactory credit history.
Foreclosures are not allowed in the past 3 years. No judgments, suits liens,
collections or charge-offs in the past 24 months, generally older items must be
paid prior to or at closing. Tax liens are not allowed within the last 24
months.
With respect to the Series III+ Program, a borrower must have a minimum
of two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than two 30-day delinquent mortgage
payments within the past 12 months. Any open judgments, suits, liens,
collections, charge-offs not to exceed $500 per incident 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 or re-affirmed satisfactory
credit history. Foreclosures are not allowed during the past 24 months. Tax
liens are not allowed within the last 12 months.
With respect to the Series IV Program, a borrower must have a minimum
of two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, 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. Any open judgments, suits, liens,
collections, charge-offs not to exceed $1,000 per incident generally are paid
prior to or at closing. Bankruptcies must be at least 18 months old, fully
discharged and the borrower must have re-established or re-affirmed satisfactory
credit history. Foreclosures are not allowed in the past 18 months. Tax liens
are not allowed within the last 12 months.
With respect to the Series V Program, a borrower must have a minimum of
two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, 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. Any open judgments, suits, liens,
collections, charge-offs not to exceed $4,000 per incident generally are paid
prior to or at closing. Bankruptcies must be at least 12 months old, fully
discharged and the borrower must have re-established or re-affirmed satisfactory
credit history. Foreclosures are not allowed in the past 12 months. Tax liens
are not allowed within the last 12 months.
With respect to the Series VI program, a borrower must have a minimum
of two trade accounts including a mortgage and/or rental history, along with one
non-traditional trade account to satisfy three trades, with 12 months credit
history, a borrower may not have more than one 90-day delinquent mortgage
payment within the past 12 months. 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. Tax liens are not allowed within the last 6 months.
S-30
<PAGE>
THE PROGRESSIVE EXPRESSTM PROGRAMS
PROGRESSIVE EXPRESSTM PROGRAMS WITH DOCUMENTATION
GENERAL. In July 1996, the Seller 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 borrowers unique credit profile.
All of the mortgage loans originated under the Progressive Express(TM)
program are underwritten either by employees of the Seller or by contracted
mortgage insurance companies or delegated conduit sellers. Under the Progressive
Express(TM) Program, the Seller underwrites single family dwellings with
loan-to-value ratios at origination of up to 97%. In order for the property to
be eligible for the Progressive Express(TM) Program, it must be a single family
residence (1 unit only) or on Express I 2-units, 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 or
RMIC. 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 and a loan-to-value ratio between 95.01%
and 97% requires 35% 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 the Seller providing coverage in the amount of (i)
22% for a mortgage loan with a loan-to-value ratio between 80.01% and 89.99%,
(ii) 30% for a mortgage loan with a loan-to-value ratio between 90% and 95% and
(iii) 35% for mortgage loan with a loan-to-value ratio between 95.01% and 97%.
Each borrower completes a Progressive Express(TM) Doc loan application
or a Residential Loan Application (Fannie Mae 1003 or Freddie Mac 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:
o loan terms stated on the Residential Loan Application
for the loan are true, accurate, and complete;
o borrower intends to occupy the property;
S-31
<PAGE>
o 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); and
o borrower and co-borrower, if applicable, are
currently employed as stated on the loan application.
The Seller uses the foregoing parameters as guidelines only. Sellers
may include certain provisions in the note that the Seller 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 including a mortgage and/or
rental history, along with one non-traditional trade account to satisfy five
trades, 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. However, if the Loan-to-Value Ratio
of the loan is 90% or less, consumer credit is disregarded. All bankruptcies
must be at least 24 months old, fully discharged and the borrower must have
re-established or re- affirmed satisfactory credit history. Foreclosures are not
allowed in the past 3 years. No judgments, suits liens, collections or
charge-offs in the past 24 months, generally older items must be paid prior to
or at closing. Tax liens are not allowed within the last 24 months.
With respect to Progressive Express(TM) II, a borrower must have a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, and no late
mortgage payments for the past 12 months. All bankruptcies must be at least 24
months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures are not allowed in the
past 3 years. No judgments, suits, tax liens, other liens, collections or
charge-offs allowed within the past 24 months, generally older items must be
paid prior to or at closing.
With respect to Progressive Express(TM) III, a borrower must have a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, 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. All bankruptcies must be at least 24 months
old, fully discharged and the borrower must have re-established or re-affirmed
satisfactory credit history. Foreclosures are not allowed in the past 3 years.
No judgments, suits, tax liens, other liens, collections or charge-offs allowed
within the past 24 months, generally older items must be paid prior to or at
closing.
With respect to Progressive Express(TM) IV, a borrower must have a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, 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. All bankruptcies must be at least 24
months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures are not allowed in the
past 3 years. Tax liens are not allowed within the last 24 months. No judgments,
suits, tax liens, other liens, collections or charge-offs allowed within the
past 24 months, generally older items must be paid prior to or at closing.
S-32
<PAGE>
With respect to Progressive Express(TM) V, a borrower must have a
minimum of two trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy three trades, with 12 months
credit history, no more than two 30-day late mortgage payments in the past 12
months. All bankruptcies must be at least 24 months old, fully discharged and
the borrower must have re-established or re- affirmed 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 prior
to or 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 two trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy three trades, with 12 months
credit history, no more than four 30-day or three 30-day and one 60-day late
mortgage payments 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 prior to or at closing. Tax liens are not allowed
within the last 12 months.
PROGRESSIVE EXPRESS(TM) NO DOC PROGRAM
In May, 1999, the Seller introduced a Progressive Express(TM) No Doc
Program (the "No Doc program"). The concept of the No Doc 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 No Doc program has a
minimum credit score and does not allow for exceptions to the credit score. The
credit score requirement is as follows: 681 for Progressive Express(TM) No Doc I
and 660 for Progressive Express(TM) No Doc II. Each program has a different
credit score requirement and credit criteria.
All of the mortgage loans originated under the Progressive Express(TM)
No Doc program are underwritten either by employees of the Seller or by
contracted mortgage insurance companies or delegated conduit sellers. Under the
Progressive Express(TM) No Doc program, the Seller employees or contracted
mortgage insurance companies or delegated conduit sellers underwrite single
family dwellings with loan-to- value ratios at origination up to 90% and
$350,000. In order for the property to be eligible for the Progressive
Express(TM) No Doc program, it must be a single family residence (single unit
only), condominium and/or planned unit development (PUD). The borrower can elect
to have primary mortgage insurance covered by their loan payment. If the
borrower makes such election, the loan-to-value ratios at origination in excess
of 80%, are insured by Radian. Loan-to-value ratios of 80.01% to 85% mortgage
insurance coverage is 25% and loan-to-value ratios of 85.01% to 90% mortgage
insurance coverage is 30%. If the borrower does not make such election, the
related mortgage loan will be covered by a modified primary insurance policy
issued by Radian to the Seller providing coverage in the amount of 22% for a
mortgage loan with a loan-to-value ratio between 80.01% and 89.99% and 30% for a
mortgage loan with a loan-to-value ratio of 90%.
Each borrower completes a Residential Loan Application (Fannie Mae 103
or Freddie Mac Form 65). The borrower does not disclose income, employment, or
assets and a Verbal Verification of Employment is not provided. Generally,
borrowers provide a daytime telephone number as well as an evening telephone
number. At the signing of loan documents, each such borrower executes a
"Borrower's Certification" certifying the following: (i) loan terms stated on
the Residential Loan application for the loan are true, accurate, and complete:
(ii) borrower intends to occupy the property.
S-33
<PAGE>
CREDIT HISTORY. The Progressive Express(TM) No Doc program defines an
acceptable credit history as follows: Progressive Express(TM) No Doc I defines
an acceptable credit history as a borrower who has "A+" credit, meaning a
minimum of four trade accounts including a mortgage and/or rental history, along
with one non-traditional trade account to satisfy five trades, and no 30-day
delinquent mortgage payments in the past 24 months. All bankruptcies must be at
least 24 months old, fully discharged and the borrower must have re- established
or re-affirmed a satisfactory credit history. Foreclosures are not allowed in
the past 3 years. No judgments, suits, liens, collections or charge-offs are
allowed within the past 24 months. Tax liens are not allowed within the past 24
months.
With respect to Progressive Express(TM) No Doc II a borrower must have
a minimum of four trade accounts including a mortgage and/or rental history,
along with one non-traditional trade account to satisfy five trades, and no late
mortgage payments for the past 12 months. All bankruptcies must be at least 24
months old, fully discharged and the borrower must have re-established or
re-affirmed satisfactory credit history. Foreclosures are not allowed in past 3
years. No judgments, suits, tax liens, other liens, collections or charge-offs
allowed within the past 24 months, generally older items must be paid prior to
or at closing. Tax liens are not allowed within the past 24 months.
IN ADDITION, SEE "THE MORTGAGE POOLS--UNDERWRITING STANDARDS" IN THE
PROSPECTUS.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE SELLER
Based solely upon information provided by the Seller, the following
tables summarize, for the respective dates indicated, the delinquency,
foreclosure, bankruptcy and REO property status with respect to all mortgage
loans originated or acquired by the Seller which were being master serviced by
the Seller at the dates indicated. The indicated periods of delinquency are
based on the number of days past due on a contractual basis. The monthly
payments under all of such mortgage loans are due on the first day of each
calendar month. 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.
A substantial majority of mortgage loan sales by the Seller during 1999
were made on a servicing- released basis. The following information does not
include statistical information on such mortgage loans. As a result, the
aggregate principal balance of non-delinquent mortgage loans serviced by the
Seller is not as high as it would otherwise be, resulting in increased
delinquency percentages for the total portfolio of mortgage loans serviced as of
December 31, 1999.
S-34
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1997 At December 31, 1998
------------------------------------------------------------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Loans Outstanding.... 11,996 $1,550,121 28,494 $3,028,554 33,414 $3,713,986
DELINQUENCY 1 2 Period of
Delinquency:
30-59 Days........... 587 $66,272 1,167 $136,427 1,677 $172,723
60-89 Days........... 118 15,089 282 33,203 506 46,719
90 Days or More...... 3 95 69 6,454 799 51,454
--- ------- ----- -------- ----- --------
Total Delinquencies...... 708 $81,456 1,518 $176,084 2,982 $270,896
=== ======= ===== ======== ===== ========
Delinquencies as a
Percentage of Total
Loans Outstanding.......... 5.90% 5.25% 5.33% 5.81% 8.92% 7.29%
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999 At September 30, 2000
-------------------------- ----------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Loans Outstanding.... 26,002 $2,878,701 29,862 $3,625,230
DELINQUENCY 1 2 Period of
Delinquency:
30-59 Days........... 1,103 $124,875 1,570 $187,358
60-89 Days........... 286 27,997 372 43,494
90 Days or More...... 369 21,113 285 24,270
------ -------- ----- --------
Total Delinquencies...... 1,758 $173,985 2,227 $255,122
===== ======== ===== ========
Delinquencies as a
Percentage of Total
Loans Outstanding.......... 6.76% 6.04% 7.46% 7.04%
</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 A substantial majority of mortgage loan sales by the Seller during 1999 were
made on a servicing-released basis. The information on this table does not
include statistical information on such mortgage loans. As a result, the
aggregate principal balance of non-delinquent mortgage loans serviced by the
Seller is not as high as it would otherwise be, resulting in increased
delinquency percentages for the total portfolio of mortgage loans serviced
as of December 31, 1999.
S-35
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1997 At December 31, 1998
---------------------------------------------------------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FORECLOSURES PENDING3............ 180 $ 25,697 378 $ 41,792 459 $ 54,678
Foreclosures Pending as a
Percentage of Total Loans
Outstanding...................... 1.50% 1.66% 1.33% 1.38% 1.37% 1.47%
BANKRUPTCIES PENDING4............ 55 $ 6,315 140 $ 15,517 362 $ 25,973
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 0.46% 0.41% 0.49% 0.51% 1.08% 0.70%
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending............. 943 $113,468 2,036 $233,393 3,803 $351,547
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%
REO PROPERTIES5.................. 2 $ 429 80 $ 9,276 116 $ 13,958
REO Properties as a Percentage
of Total Loans Outstanding....... 0.02% 0.03% 0.28% 0.31% 0.35% 0.38%
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999 At September 30, 2000
------------------------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FORECLOSURES PENDING3............ 334 $ 46,969 349 $ 47,855
Foreclosures Pending as a
Percentage of Total Loans
Outstanding...................... 1.28% 1.63% 1.17% 1.32%
BANKRUPTCIES PENDING4............ 419 $ 33,188 262 $ 24,679
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 1.61% 1.15% 0.88% 0.68%
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending............. 2,511 $254,142 2,838 $327,656
Total Delinquencies plus
Foreclosures Pending and
Bankruptcies Pending as a
Percentage of Total Loans
Outstanding...................... 9.66% 8.83% 9.50% 9.04%
REO PROPERTIES5.................. 119 $ 13,882 98 $ 13,283
REO Properties as a Percentage
of Total Loans Outstanding....... 0.46% 0.48% 0.33% 0.37%
</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 the Seller, to commence foreclosure proceedings when a
mortgage loan is 60 days or more delinquent. However, the Master Servicer
may delay the foreclosure process as a result of loss mitigation efforts.
4 Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
5 REO properties that have been purchased upon foreclosure of the related
mortgage loans, including mortgaged properties that were purchased by the
Seller after the respective dates indicated.
S-36
<PAGE>
The above data on delinquency, foreclosure, bankruptcy and REO property
status as of December 31, 1999, include mortgage loans which were sold
servicing-released by the Seller, but for which the servicing had not yet been
transferred as of such date.
A substantial majority of mortgage loan sales by the Seller during 1999
were made on a servicing- released basis. The following information does not
include statistical information on such mortgage loans. As a result, the
aggregate principal balance of non-delinquent mortgage loans serviced by the
Seller is not as high as it would otherwise be, resulting in increased loss
percentages for the total portfolio of mortgage loans serviced as of December
31, 1999.
Based solely on information provided by the Seller, the following table
presents the changes in the Seller's charge-offs and recoveries for the periods
indicated.
S-37
<PAGE>
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------------- ----------------------- ------------------------ ------------------------
(DOLLARS IN (DOLLARS IN (DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS) THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C>
Charge-offs:
Mortgage Loan Properties.. $ 291 $ 2,684 $ 7,026 $10,486
REO Properties............ 4,862 (153) 2,165 3,469
Recoveries:
Mortgage Loan Properties.. 62 0 713 306
REO Properties............ 18 0 0 0
Net charge-offs:............... 5,073 2,531* 8,477 13,649
Ratio of net charge-offs to
average loans outstanding
during the indicated
period***...................... 0.22%** 0.08%** 0.34%** 0.58%**
</TABLE>
---------------
* Does not include losses of $358,354 from the sale of delinquent loans
recorded by the Seller 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 the Seller to third parties. In addition, it does not include
statistical information for mortgage loans for which the servicing
rights were sold by the Seller in 1999. As a result, the aggregate
principal balance of non- delinquent mortgage loans serviced has
decreased, resulting in increased loss percentages for mortgage loans
serviced as of December 31, 1998 and December 31, 1999.
From November 1995 through December 1996, the Seller 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 the Seller. However,
the total amount of mortgage loans on which the above data are based includes
many mortgage loans which were not, as of the respective dates indicated,
outstanding long enough to give rise to some of the indicated 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 the
Seller has been provided by the Seller.
S-38
<PAGE>
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 this date. Prior to the issuance of the Certificates,
mortgage loans may be removed from the mortgage pool as a result of incomplete
documentation or otherwise if the company deems this removal necessary or
desirable, and may be prepaid at any time. In no event, however, will more than
5% (by principal balance at the Cut-off Date) of the mortgage loans deviate from
the characteristics of the mortgage loans set forth in the related prospectus
supplement.
YIELD ON THE CERTIFICATES
SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a mortgage loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of the principal prepayment, instead of
for a full month. When a partial principal prepayment is made on a mortgage
loan, the mortgagor is not charged interest on the amount of the prepayment for
the month in which the prepayment is made. In addition, the application of the
Relief Act to any mortgage loan will adversely affect, for an indeterminate
period of time, the ability of the Master Servicer to collect full amounts of
interest on the mortgage loan. SEE "LEGAL ASPECTS OF THE MORTGAGE
LOANS--SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940" IN THE PROSPECTUS. The
Master Servicer is obligated to pay from its own funds only those interest
shortfalls attributable to full and partial prepayments by the mortgagors on the
mortgage loans master serviced by it, but only to the extent of its aggregate
Servicing Fee for the related Due Period. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" in this
prospectus supplement. Accordingly, the effect of (1) any principal prepayments
on the mortgage loans, to the extent that any resulting Prepayment Interest
Shortfall exceeds any Compensating Interest or (2) any shortfalls resulting from
the application of the Relief Act, will be to reduce the aggregate amount of
interest collected that is available for distribution to holders of the
Certificates. Any resulting shortfalls will be allocated among the Certificates
as provided in this prospectus supplement under "Description of the
Certificates--Interest Distributions."
GENERAL YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the offered certificates will be sensitive to
defaults on the mortgage loans. If a purchaser of an offered certificate
calculates its anticipated yield based on an assumed rate of default and amount
of losses that is lower than the default rate and amount of losses actually
incurred, its actual yield to maturity will be lower than that so calculated. In
general, the earlier a loss occurs, the greater is the effect on an investor's
yield to maturity. There can be no assurance as to the delinquency, foreclosure
or loss experience with respect to the mortgage loans. Because the mortgage
loans were underwritten in accordance with standards less stringent than those
generally acceptable to Fannie Mae and Freddie Mac with regard to a borrower's
credit standing and repayment ability, the risk of delinquencies with respect
to, and losses on, the mortgage loans will be greater than that of mortgage
loans underwritten in accordance with Fannie Mae and Freddie Mac standards.
The rate of principal payments, the aggregate amount of distributions
and the yields to maturity of the offered certificates will be affected by the
rate and timing of payments of principal on the mortgage loans.
S-39
<PAGE>
The rate of principal payments on the mortgage loans will in turn be affected by
the amortization schedules of the mortgage loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the mortgage loans due to defaults, casualties or condemnations
and repurchases by the Seller). Certain of the mortgage loans contain prepayment
charge provisions. The rate of principal payments may or may not be less than
the rate of principal payments for mortgage loans that did not have prepayment
charge provisions. The mortgage loans are subject to the "due-on-sale"
provisions included therein. SEE "THE MORTGAGE POOL" HEREIN.
Prepayments, liquidations and purchases of the mortgage loans
(including any optional purchases) will result in distributions on the offered
certificates (other than the Class A-IO Certificates) of principal amounts which
would otherwise be distributed over the remaining terms of the mortgage loans.
Since the rate of payment of principal on the mortgage loans will depend on
future events and a variety of other factors, no assurance can be given as to
such rate or the rate of principal prepayments. The extent to which the yield to
maturity of a class of offered certificates may vary from the anticipated yield
will depend, in the case of the offered certificates (other than the Class A-IO
Certificates), upon the degree to which such class of certificates is purchased
at a discount or premium. Further, an investor should consider the risk that, in
the case of any offered certificate (other than the Class A-IO Certificates)
purchased at a discount, a slower than anticipated rate of principal payments
(including prepayments) on the mortgage loans could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of any
offered certificate (other than the Class A-IO Certificates) purchased at a
premium, a faster than anticipated rate of principal payments on the mortgage
loans could result in an actual yield to such investor that is lower than the
anticipated yield.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the mortgage rates on the
mortgage loans, such mortgage loans could be subject to higher prepayment rates
than if prevailing interest rates were to remain at or above the mortgage rates
on such mortgage loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on such mortgage loans would generally be
expected to decrease. The mortgage loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, mortgagors may be inclined to refinance
their mortgage loans with a fixed-rate loan to "lock in" a lower interest rate
or to refinance their Mortgage Loans with adjustable-rate mortgage loans with
low introductory interest rates. No assurances can be given as to the rate of
prepayments on the mortgage loans in stable or changing interest rate
environments.
Because principal distributions are paid to certain classes of offered
certificates before other such classes, holders of classes of offered
certificates having a later priority of payment bear a greater risk of losses
than holders of classes having earlier priorities for distribution of principal.
In particular, with respect to the Class A-4 Certificates, during certain
periods, no principal payments or a disproportionately small portion of the
amount of principal then payable to the offered certificates will be distributed
on the Class A-4 Certificates, and during certain other periods, a
disproportionately large portion of the amount of principal then payable to the
offered certificates will be distributed on the Class A-4 Certificates. Unless
the Certificate Principal Balances of the offered certificates (other than the
Class A-4 Certificates) have been reduced to zero, the Class A-4 Certificates
will not be entitled to receive any distributions of principal payments prior to
the distribution date in December 2003.
S-40
<PAGE>
To the extent the Net WAC Rate becomes the Pass-Through Rate on the
Class A-2 Certificates, the Class A-3 Certificates, the Class A-4 Certificates
or any class of the Mezzanine Certificates, or to the extent the Class A-IO Cap
Rate becomes the Pass-Through Rate on the Class A-IO Certificates, then in any
such case, less interest will accrue on such certificates than would otherwise
be the case. The holders of the offered certificates WILL NOT be entitled to
recover interest in excess of any applicable limited rate on any future
Distribution Date from excess cashflow or from any other source. For a
discussion of factors that could cause the Pass-Through Rate on the Class A-IO
Certificates to be capped at the Class A-IO Cap Rate, see "Risk Factors--The
Pass-Through Rates on the Offered Certificates (other than the Class A-1
Certificates) are Subject to Limitation" in this prospectus supplement.
Approximately 61.93% of the mortgage loans provide for payment by the
borrower of a prepayment charge in limited circumstances on certain prepayments.
The holders of the Class P Certificates will be entitled to all prepayment
charges received on the mortgage loans, and these amounts will not be available
for distribution on the other classes of certificates. The Master Servicer may
waive the collection of any otherwise applicable prepayment charge or reduce the
amount thereof actually collected, but only if the Master Servicer does so in
compliance with the prepayment charge waiver standards set forth in the
Agreement. If the Master Servicer waives any prepayment charge other than in
accordance with the standards set forth in the Agreement, the Master Servicer
will be required to pay the amount of the waived prepayment charge. There can be
no assurance that the prepayment charges will have any effect on the prepayment
performance of the mortgage loans. Investors should conduct their own analysis
of the effect, if any, that the prepayment premiums, and decisions by the master
servicer with respect to the waiver thereof, may have on the prepayment
performance of the mortgage loans.
MARKET INTEREST RATE CONSIDERATIONS
Because the mortgage rates on the mortgage loans are fixed interest
rates and the Pass-Through Rates on the offered certificates are fixed rates
(which may be subject to limitation or increase as described herein), these
rates will not change in response to changes in market interest rates.
Accordingly, if mortgage market interest rates or market yields for securities
similar to these offered certificates were to rise, the market value of these
offered certificates may decline.
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the overcollateralization and the certificate principal balances of
the Class B Certificates and the Class M-2 Certificates have been reduced to
zero, the yield to maturity on the Class M-1 Certificates will become extremely
sensitive to losses on the mortgage loans (and the timing thereof) that are
covered by subordination, because the entire amount of any Realized Losses (to
the extent not covered by Net Monthly Excess Cashflow) will be allocated to the
Class M-1 Certificates. If the overcollateralization and the certificate
principal balance of the Class B Certificates have been reduced to zero, the
yield to maturity on the Class M-2 Certificates will become extremely sensitive
to losses on the mortgage loans (and the timing thereof) that are covered by
subordination, because the entire amount of any Realized Losses (to the extent
not covered by Net Monthly Excess Cashflow) will be allocated to the Class M-2
Certificates. If the overcollateralization has been reduced to zero, the yield
to maturity on the Class B Certificates will become extremely sensitive to
losses on the mortgage loans (and the timing thereof) that are covered by
subordination, because the entire amount of any Realized Losses (to the extent
not covered by Net Monthly Excess Cashflow) will be allocated to the Class B
Certificates. The initial undivided interests in the trust evidenced by the
Class M-1 Certificates, the Class M-2 Certificates and the Class B Certificates
are approximately 2.25%, approximately 2.00% and approximately 1.75%,
respectively. The aggregate principal balance of the
S-41
<PAGE>
mortgage loans as of the Cut-off Date will exceed the aggregate certificate
principal balance of the certificates on the Closing Date by only approximately
$17,219, and therefore the initial overcollateralization will be considerably
below the initial Overcollateralization Target Amount of $1,000,000. Investors
in the Mezzanine Certificates should fully consider the risk that Realized
Losses on the Mortgage Loans could result in the failure of such investors to
fully recover their investments. In addition, once Realized Losses have been
allocated to the Mezzanine Certificates, such amounts with respect to such
Certificates will no longer accrue interest and will not be reinstated
thereafter. However, Allocated Realized Loss Amounts may be paid to the holders
of the Mezzanine Certificates from Net Monthly Excess Cashflow in the priorities
set forth under "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement.
Unless the certificate principal balances of the Class A Certificates
have been reduced to zero, the Mezzanine Certificates will not be entitled to
any principal distributions until the Stepdown Date or during any period in
which a Trigger Event is in effect. As a result, the weighted average lives of
the Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a pro rata basis among the Class A
Certificates and Mezzanine Certificates. As a result of the longer weighted
average lives of the Mezzanine Certificates, the holders of such certificates
have a greater risk of suffering a loss on their investments. Further, because a
Trigger Event could result from either delinquencies or losses, it is possible
for the Mezzanine Certificates to receive no principal distributions (unless the
certificate principal balance of the Class A Certificates have been reduced to
zero) on and after the Stepdown Date even if no losses have occurred on the
mortgage loans.
SPECIAL YIELD CONSIDERATIONS RELATING TO THE CLASS A-IO CERTIFICATES
Investors should note that the Class A-IO Certificates are only
entitled to distributions through the Distribution Date in May 2003. In
addition, if, at any time prior to April 1, 2003, the aggregate Principal
Balance of the mortgage loans is reduced to $20,000,000, the yield to investors
in the Class A-IO Certificates will become extremely sensitive to the rate and
timing of principal payments on the mortgage loans (including prepayments,
defaults and liquidations), which rate may fluctuate significantly over time.
Further, if the holder of the Class C Certificates (or, if there is no single
holder, the majority holder of the Class C Certificates) is permitted to
exercise, and exercises, its option to terminate the trust as described under
"Pooling and Servicing Agreement--Termination" in this prospectus supplement and
such action results in the retirement of the certificates prior to the
distribution date in May 2003, then the holders of the Class A-IO Certificates
will receive fewer than the thirty distributions of interest that they would
otherwise have been entitled to receive. Investors in the Class A-IO
Certificates should fully consider the risk that an extremely rapid rate of
prepayments on the Mortgage Loans could result in the failure of such investors
to fully recover their investments.
In addition, if the weighted average of the Net Mortgage Rates of the
mortgage loans falls below 8.00% per annum, the Pass-Through Rate on the Class
A-IO Certificates will be the Class A-IO Cap Rate, resulting in a diminution of
the amount of interest that will accrue on the Class A-IO Certificates. See
"--General Yield and Prepayment Considerations" above.
Based upon the Structuring Assumptions, and further assuming
prepayments at approximately 63% CPR and an assumed Purchase Price of
$3,522,757, the pre-tax yield of the Class A-IO Certificates would be
approximately 0%. If the actual prepayment rate on the Mortgage Loans were to
exceed such rate, then assuming the mortgage loans behave in conformity with all
other Structuring Assumptions, initial investors in the Class A-IO Certificates
would not fully recover their initial investment. Timing of changes in the rate
of prepayments may significantly affect the actual yield to investors, even if
the average rate of principal
S-42
<PAGE>
prepayments is consistent with the expectations of investors. Investors must
make their own decisions as to the appropriate prepayment assumption to be used
in deciding whether to purchase any Class A-IO Certificates.
The 0% pre-tax yield described above was calculated by determining the
monthly discount rates which, when applied to the assumed stream of cash flow to
be paid on the Class A-IO Certificates, would cause the discounted present value
of such assumed stream of cash flow to the Closing Date to equal the assumed
purchase price (which includes accrued interest), and converting such monthly
rate to a corporate bond equivalent rate. Such calculations do not take into
account the interest rates at which funds received by holders of the Class A-IO
Certificates may be reinvested and consequently does not purport to reflect the
return on any investment in the Class A-IO Certificates when such reinvestment
rates are considered.
WEIGHTED AVERAGE LIVES
The timing of changes in the rate of principal prepayments on the
mortgage loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal prepayments is consistent with such
investor's expectation. In general, the earlier a principal prepayment on the
mortgage loans occurs, the greater the effect of such principal prepayment on an
investor's yield to maturity. The effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the offered
certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal prepayments.
The weighted average life of an offered certificate (other than a Class
A-IO Certificate) is the average amount of time that will elapse from the
Closing Date, until each dollar of principal is repaid to the investors in such
certificate. Because it is expected that there will be prepayments and defaults
on the mortgage loans, the actual weighted average lives of these certificates
are expected to vary substantially from the weighted average remaining terms to
stated maturity of the mortgage loans as set forth herein under "The Mortgage
Pool."
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement (the
"Prepayment Assumption") assumes a constant prepayment rate ("CPR") of 4% per
annum of the then unpaid principal balance of such mortgage loans in the first
month of the life of such mortgage loans and an additional approximately 1.27%
(precisely 14/11 percent) per annum in each month until the 12th month, and then
beginning in the 12th month and in each month thereafter during the life of such
mortgage loans, a CPR of 18%. CPR is a prepayment assumption that represents a
constant assumed rate of prepayment each month relative to the then outstanding
principal balance of a pool of mortgage loans for the life of such mortgage
loans. The model does not purport to be either an historical description of the
prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any mortgage loans, including the mortgage
loans to be included in the trust.
The tables entitled "Percent of Original Certificate Principal Balance
Outstanding" were prepared on the basis of the assumptions in the following
paragraph and the table set forth below. There are certain differences between
the loan characteristics included in such assumptions and the characteristics of
the actual mortgage loans. Any such discrepancy may have an effect upon the
percentages of original certificate principal balances outstanding and weighted
average lives of the Class A Certificates (other than the Class A- IO
Certificates) and the Mezzanine Certificates set forth in the tables. In
addition, since the actual mortgage loans in the trust will have characteristics
that differ from those assumed in preparing the tables set forth
S-43
<PAGE>
below, the distributions of principal of the Class A Certificates (other than
the Class A-IO Certificates) and the Mezzanine Certificates may be made earlier
or later than indicated in the table.
The percentages and weighted average lives in the tables entitled
"Percent of Original Certificate Principal Balance Outstanding" were determined
assuming that (the "Structuring Assumptions"): (i) the mortgage pool consists of
five mortgage loans having the characteristics set forth in the table below,
(ii) the closing date for the offered certificates occurs on November 30, 2000
and the offered certificates are sold to investors on such date, (iii)
distributions on the certificates are made on the 25th day of each month
regardless of the day on which the distribution date actually occurs, commencing
in December 2000, in accordance with the allocation of the Available
Distribution Amount set forth above under "Description of the
Certificates--Allocation of Available Funds," (iv) the prepayment rates are the
percentages of the related Prepayment Assumption set forth in the "Percent of
Original Certificate Principal Balance Outstanding" tables below, (v)
prepayments representing payment in full of individual mortgage loans are
received on the last day of each month commencing in November 2000, and include
30 days' interest thereon, (vi) none of the Company, the Seller, the Master
Servicer or any other person purchases from the trust fund any mortgage loan
pursuant to any obligation or option under the Agreement and, except as
indicated in the row for each table entitled "Weighted Average Life to Call," no
optional termination is exercised, (vii) the Overcollateralization Target Amount
is equal to 0.50% of the aggregate principal balance of the mortgage loans as of
the Cut-off Date, (viii) scheduled payments for all mortgage loans are received
on the first day of each month commencing in December 2000, the principal
portion of such payments is computed prior to giving effect to prepayments
received in such month, there are no losses, defaults or delinquencies with
respect to the mortgage loans and no shortfalls due to the application of the
Relief Act are incurred, (ix) the scheduled monthly payment for each mortgage
loan is calculated based on its principal balance, mortgage rate and remaining
term to maturity so 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) the Pass-Through Rates for the offered certificates are as
set forth herein, (xi) the Trustee Fee Rate is equal to 0.005% per annum (xii)
the Servicing Fee for each Mortgage Loan is 0.28% per annum and (xiii) the
Radian PMI Rate for each Radian PMI Insured Loan is 0.18% per annum. Nothing
contained in the foregoing assumptions should be construed as a representation
that the Mortgage Loans will not experience delinquencies or losses or will
otherwise behave in accordance with any of the Structuring Assumptions.
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
ORIGINAL REMAINING REMAINING
TERM TO TERM TO AMORTIZATION
MATURITY MATURITY TERM
PRINCIPAL BALANCE MORTGAGE RATE NET MORTGAGE RATE (MONTHS) (MONTHS) (MONTHS)
----------------- ------------- ----------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 107,058,832.01 9.82417% 9.38605% 353 351 351
11,925,484.91 9.99706% 9.55560% 359 357 357
78,616,327.72 9.81078% 9.36034% 357 354 354
1,758,689.83 10.32071% 9.61715% 360 358 358
640,665.53 9.32833% 9.04333% 360 358 358
</TABLE>
Based on the foregoing assumptions, the following tables indicate the
projected weighted average lives of each class of the offered certificates
(other than the Class A-IO Certificates) and set forth the percentages of the
original Certificate Principal Balance of each such class of offered
certificates that would be outstanding after each of the dates shown, at various
constant percentages of the Prepayment Assumption.
S-44
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES
---------------------- ----------------------
DISTRIBUTION DATE 50% 75% 100% 125% 150% 175% 200% 50% 75% 100% 125% 150% 175% 200%
----------------- --- --- ---- ---- ---- ---- ---- --- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
November 25, 2001................ 73 62 50 38 27 15 3 100 100 100 100 100 100 100
November 25, 2002................ 43 19 0 0 0 0 0 100 100 96 77 59 41 25
November 25, 2003................ 15 0 0 0 0 0 0 100 84 58 34 12 0 0
November 25, 2004................ 0 0 0 0 0 0 0 93 59 30 8 0 0 0
November 25, 2005................ 0 0 0 0 0 0 0 74 37 10 0 0 0 0
November 25, 2006................ 0 0 0 0 0 0 0 59 22 0 0 0 0 0
November 25, 2007................ 0 0 0 0 0 0 0 45 10 0 0 0 0 0
November 25, 2008................ 0 0 0 0 0 0 0 38 3 0 0 0 0 0
November 25, 2009................ 0 0 0 0 0 0 0 30 0 0 0 0 0 0
November 25, 2010................ 0 0 0 0 0 0 0 22 0 0 0 0 0 0
November 25, 2011................ 0 0 0 0 0 0 0 14 0 0 0 0 0 0
November 25, 2012................ 0 0 0 0 0 0 0 7 0 0 0 0 0 0
November 25, 2013................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2014................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2015................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2016................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2017................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2018................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2019................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2020................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2021................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2022................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2023................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2024................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2025................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2026................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2027................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2028................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2029................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in Years(1) 1.8 1.3 1.0 0.9 0.7 0.7 0.6 7.4 4.7 3.4 2.7 2.3 1.9 1.7
Weighted Average Life to Call(1). 1.8 1.3 1.0 0.9 0.7 0.7 0.6 7.4 4.7 3.4 2.7 2.3 1.9 1.7
</TABLE>
<TABLE>
<CAPTION>
CLASS A-3 CERTIFICATES
----------------------
DISTRIBUTION DATE 50% 75% 100% 125% 150% 175% 200%
----------------- --- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............... 100% 100% 100% 100% 100% 100% 100%
November 25, 2001................ 100 100 100 100 100 100 100
November 25, 2002................ 100 100 100 100 100 100 100
November 25, 2003................ 100 100 100 100 100 88 60
November 25, 2004................ 100 100 100 100 82 56 34
November 25, 2005................ 100 100 100 81 53 31 14
November 25, 2006................ 100 100 92 60 36 18 6
November 25, 2007................ 100 100 74 45 25 12 4
November 25, 2008................ 100 100 68 42 25 12 4
November 25, 2009................ 100 94 58 35 20 10 4
November 25, 2010................ 100 83 49 27 15 7 2
November 25, 2011................ 100 71 40 21 10 4 1
November 25, 2012................ 100 61 32 16 7 2 0
November 25, 2013................ 100 52 26 11 4 * 0
November 25, 2014................ 89 44 20 8 2 0 0
November 25, 2015................ 79 37 16 5 1 0 0
November 25, 2016................ 70 30 12 3 0 0 0
November 25, 2017................ 61 25 9 2 0 0 0
November 25, 2018................ 53 20 6 1 0 0 0
November 25, 2019................ 46 16 4 * 0 0 0
November 25, 2020................ 39 13 3 0 0 0 0
November 25, 2021................ 33 10 2 0 0 0 0
November 25, 2022................ 27 7 1 0 0 0 0
November 25, 2023................ 22 5 0 0 0 0 0
November 25, 2024................ 17 3 0 0 0 0 0
November 25, 2025................ 13 2 0 0 0 0 0
November 25, 2026................ 9 1 0 0 0 0 0
November 25, 2027................ 5 0 0 0 0 0 0
November 25, 2028................ 2 0 0 0 0 0 0
November 25, 2029................ 0 0 0 0 0 0 0
Weighted Average Life in Years(1) 19.1 14.3 10.7 8.1 6.3 5.0 3.9
Weighted Average Life to Call(1). 17.7 12.7 9.2 7.0 5.5 4.5 3.7
</TABLE>
---------------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the number
of years from the date of issuance of the Certificate to the related
distribution date, (b) adding the results and (c) dividing the sum by
the initial Certificate Principal Balance of the Certificate.
S-45
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-4 CERTIFICATES CLASS M-1 CERTIFICATES
---------------------- ----------------------
DISTRIBUTION DATE 50% 75% 100% 125% 150% 175% 200% 50% 75% 100% 125% 150% 175% 200%
----------------- --- --- ---- ---- ---- ---- ---- --- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............... 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
November 25, 2001................ 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 25, 2002................ 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 25, 2003................ 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 25, 2004................ 95 93 90 89 87 86 85 100 100 92 75 60 47 37
November 25, 2005................ 90 86 82 79 75 72 69 100 97 75 58 43 32 23
November 25, 2006................ 82 76 69 63 58 52 47 100 83 61 44 31 22 15
November 25, 2007................ 73 64 56 48 41 34 28 100 71 49 34 23 15 9
November 25, 2008................ 52 40 29 20 15 13 13 89 60 40 26 16 10 6
November 25, 2009................ 38 24 15 9 5 3 3 80 52 32 20 12 7 4
November 25, 2010................ 27 15 7 4 2 1 * 72 44 26 15 8 5 2
November 25, 2011................ 19 9 4 1 * * * 64 37 21 11 6 3 1
November 25, 2012................ 13 5 2 1 * * 0 57 32 17 9 4 2 0
November 25, 2013................ 9 3 1 * * * 0 51 27 14 7 3 1 0
November 25, 2014................ 6 2 * * * 0 0 45 22 11 5 2 0 0
November 25, 2015................ 4 1 * * * 0 0 40 19 9 4 2 0 0
November 25, 2016................ 3 1 * * 0 0 0 35 16 7 3 * 0 0
November 25, 2017................ 2 * * * 0 0 0 31 13 5 2 0 0 0
November 25, 2018................ 1 * * * 0 0 0 27 11 4 2 0 0 0
November 25, 2019................ 1 * * 0 0 0 0 23 9 3 1 0 0 0
November 25, 2020................ * * * 0 0 0 0 20 7 3 0 0 0 0
November 25, 2021................ * * * 0 0 0 0 17 6 2 0 0 0 0
November 25, 2022................ * * * 0 0 0 0 14 5 1 0 0 0 0
November 25, 2023................ * * 0 0 0 0 0 12 4 0 0 0 0 0
November 25, 2024................ * * 0 0 0 0 0 9 3 0 0 0 0 0
November 25, 2025................ * * 0 0 0 0 0 7 2 0 0 0 0 0
November 25, 2026................ * * 0 0 0 0 0 5 1 0 0 0 0 0
November 25, 2027................ * 0 0 0 0 0 0 4 0 0 0 0 0 0
November 25, 2028................ * 0 0 0 0 0 0 2 0 0 0 0 0 0
November 25, 2029................ 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life in Years(1) 8.7 7.7 7.1 6.6 6.3 6.1 6.0 14.6 10.7 8.3 6.6 5.5 4.8 4.4
Weighted Average Life to Call(1). 8.7 7.7 7.0 6.5 6.1 5.5 5.0 13.8 9.8 7.5 6.0 5.0 4.3 3.9
</TABLE>
<TABLE>
<CAPTION>
CLASS M-2 CERTIFICATES
DISTRIBUTION DATE 50% 75% 100% 125% 150% 175% 200%
----------------- --- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............... 100% 100% 100% 100% 100% 100% 100%
November 25, 2001................ 100 100 100 100 100 100 100
November 25, 2002................ 100 100 100 100 100 100 100
November 25, 2003................ 100 100 100 100 100 100 100
November 25, 2004................ 100 100 92 75 60 47 37
November 25, 2005................ 100 97 75 58 43 32 23
November 25, 2006................ 100 83 61 44 31 22 15
November 25, 2007................ 100 71 49 34 23 15 9
November 25, 2008................ 89 60 40 26 16 10 6
November 25, 2009................ 80 52 32 20 12 7 4
November 25, 2010................ 72 44 26 15 8 5 2
November 25, 2011................ 64 37 21 11 6 3 1
November 25, 2012................ 57 32 17 9 4 2 0
November 25, 2013................ 51 27 14 7 3 1 0
November 25, 2014................ 45 22 11 5 2 0 0
November 25, 2015................ 40 19 9 4 2 0 0
November 25, 2016................ 35 16 7 3 1 0 0
November 25, 2017................ 31 13 5 2 0 0 0
November 25, 2018................ 27 11 4 2 0 0 0
November 25, 2019................ 23 9 3 1 0 0 0
November 25, 2020................ 20 7 3 0 0 0 0
November 25, 2021................ 17 6 2 0 0 0 0
November 25, 2022................ 14 5 1 0 0 0 0
November 25, 2023................ 12 4 1 0 0 0 0
November 25, 2024................ 9 3 0 0 0 0 0
November 25, 2025................ 7 2 0 0 0 0 0
November 25, 2026................ 5 1 0 0 0 0 0
November 25, 2027................ 4 0 0 0 0 0 0
November 25, 2028................ 2 0 0 0 0 0 0
November 25, 2029................ 0 0 0 0 0 0 0
Weighted Average Life in Years(1) 14.6 10.7 8.3 6.6 5.5 4.8 4.3
Weighted Average Life to Call(1). 13.8 9.8 7.4 6.0 5.0 4.3 3.9
</TABLE>
-----------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the
number of years from the date of issuance of the Certificate to the
related distribution date, (b) adding the results and (c) dividing
the sum by the initial Certificate Principal Balance of the
Certificate.
S-46
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS B CERTIFICATES
DISTRIBUTION DATE 50% 75% 100% 125% 150% 175% 200%
----------------- --- --- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............... 100% 100% 100% 100% 100% 100% 100%
November 25, 2001................ 100 100 100 100 100 100 100
November 25, 2002................ 100 100 100 100 100 100 100
November 25, 2003................ 100 100 100 100 100 100 100
November 25, 2004................ 100 100 92 75 60 47 37
November 25, 2005................ 100 97 75 58 43 32 23
November 25, 2006................ 100 83 61 44 31 22 15
November 25, 2007................ 100 71 49 34 23 15 9
November 25, 2008................ 89 60 40 26 16 10 6
November 25, 2009................ 80 52 32 20 12 7 4
November 25, 2010................ 72 44 26 15 8 5 2
November 25, 2011................ 64 37 21 11 6 3 1
November 25, 2012................ 57 32 17 9 4 2 0
November 25, 2013................ 51 27 14 7 3 1 0
November 25, 2014................ 45 22 11 5 2 0 0
November 25, 2015................ 40 19 9 4 2 0 0
November 25, 2016................ 35 16 7 3 1 0 0
November 25, 2017................ 31 13 5 2 0 0 0
November 25, 2018................ 27 11 4 2 0 0 0
November 25, 2019................ 23 9 3 1 0 0 0
November 25, 2020................ 20 7 3 0 0 0 0
November 25, 2021................ 17 6 2 0 0 0 0
November 25, 2022................ 14 5 1 0 0 0 0
November 25, 2023................ 12 4 1 0 0 0 0
November 25, 2024................ 9 3 0 0 0 0 0
November 25, 2025................ 7 2 0 0 0 0 0
November 25, 2026................ 5 1 0 0 0 0 0
November 25, 2027................ 4 0 0 0 0 0 0
November 25, 2028................ 2 0 0 0 0 0 0
November 25, 2029................ 0 0 0 0 0 0 0
Weighted Average Life in Years(1) 14.6 10.7 8.3 6.6 5.5 4.8 4.3
Weighted Average Life to Call(1). 13.8 9.8 7.4 6.0 5.0 4.3 3.9
</TABLE>
-----------------
(1) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal by the
number of years from the date of issuance of the Certificate to the
related distribution date, (b) adding the results and (c) dividing
the sum by the initial Certificate Principal Balance of the
Certificate.
S-47
<PAGE>
There is no assurance that prepayments of the mortgage loans will
conform to any of the percentages of the Prepayment Assumption indicated in the
tables above or to any other level, or that the actual weighted average life of
any class of offered certificates will conform to any of the weighted average
lives set forth in the tables above. Furthermore, the information contained in
the tables with respect to the weighted average life of each specified class of
offered certificates is not necessarily indicative of the weighted average life
that might be calculated or projected under different or varying prepayment
assumptions or other structuring assumptions.
The characteristics of the mortgage loans will differ from those
assumed in preparing the table above. In addition, it is unlikely that any
mortgage loan will prepay at any constant percentage of the Prepayment
Assumption until maturity or that all of the mortgage loans will prepay at the
same rate. The timing of changes in the rate of prepayments may significantly
affect the actual yield to maturity to investors, even if the average rate of
principal prepayments is consistent with the expectations of investors.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 2000-4 Certificates will consist of eleven classes of
certificates, eight of which are offered hereby. Only the offered certificates
are offered by this prospectus supplement.
The Class C Certificates and the Class R Certificates, which are not
offered hereby, will be entitled to distributions on any distribution date only
after all required distributions have been made on the offered certificates. The
Certificate Principal Balance of the Class C Certificates as of any date of
determination will be equal to the aggregate principal balance of the mortgage
loans minus the aggregate Certificate Principal Balance of all other classes of
certificates and will be entitled to distributions of interest as provided in
the Agreement. The Class R Certificates will not have principal balances and
will not be entitled to distributions of interest.
The Class P Certificates, which are not offered hereby, will have an
initial Certificate Principal Balance of $100 and will not be entitled to
distributions in respect of interest. The Class P Certificates will be entitled
to all prepayment charges received in respect of the mortgage loans.
The certificates represent in the aggregate the entire beneficial
ownership interest in a trust fund consisting primarily of a pool of mortgage
loans with an aggregate principal balance as of the Cut-off Date, after
application of scheduled payments due whether or not received, of approximately
$200,017,319, subject to a permitted variance as described in this prospectus
supplement under "The Mortgage Pool."
Each class of the offered certificates will have the approximate
initial Certificate Principal Balance or Notional Amount, as applicable, as set
forth on page S-4 hereof and will have the Pass-Through Rate as defined under
"Glossary" in this prospectus supplement. The Pass-Through Rate on each class of
the offered certificates (other than the Class A-1 Certificates and the Class
A-IO Certificates) will be limited to the Net WAC Rate. The Pass-Through Rate on
the Class A-IO Certificates will be limited to the Class A-IO Cap Rate. In
addition, the Pass-Through Rate on the Class A-4 Certificates and on each class
of the Mezzanine Certificates will be subject to increase after the Optional
Termination Date. The holders of the offered certificates WILL NOT be entitled
to recover interest in excess of any applicable limitation on the Pass-Through
Rate thereof on any future Distribution Date from excess cashflow or from any
other source.
S-48
<PAGE>
The offered certificates will be issued, maintained and transferred on
the book-entry records of DTC and its participants in minimum denominations
representing Certificate Principal Balances or Notional Amounts of $25,000 and
integral multiples of $1 in excess thereof.
The Book-Entry Certificates will initially be represented by one or
more global certificates registered in the name of a nominee of DTC. The company
has been informed by DTC that DTC's nominee will be Cede & Co. No person
acquiring an interest in any class of the Book-Entry Certificates will be
entitled to receive a certificate representing such person's interest, except as
set forth below under "--Definitive Certificates." Unless and until definitive
certificates are issued under the limited circumstances described in this
prospectus supplement, all references to actions by certificateholders with
respect to the Book-Entry Certificates shall refer to actions taken by DTC upon
instructions from its participants and all references in this prospectus
supplement to distributions, notices, reports and statements to
certificateholders with respect to the Book-Entry Certificates shall refer to
distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Book-Entry Certificates, for distribution to
Certificate Owners in accordance with DTC procedures. SEE "--REGISTRATION OF THE
BOOK-ENTRY CERTIFICATES" AND "--DEFINITIVE CERTIFICATES" IN THIS PROSPECTUS
SUPPLEMENT.
The definitive certificates, if ever issued, will be transferable and
exchangeable at the offices of the Trustee designated by the Trustee from time
to time for these purposes. The Trustee has initially designated its offices
located at 123 Washington Street, New York, New York 10006 for such purpose. No
service charge will be imposed for any registration of transfer or exchange, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
All distributions to holders of the certificates, other than the final
distribution on any class of certificates, will be made on each distribution
date by or on behalf of the Trustee to the persons in whose names the
certificates are registered at the close of business on the related Record Date.
Distributions will be made by wire transfer in immediately available funds to
the account of the certificateholders specified in the request. The final
distribution on any class of Certificates will be made in like manner, but only
upon presentment and surrender of the class at the location specified by the
Trustee in the notice to certificateholders of the final distribution.
REGISTRATION OF THE BOOK-ENTRY CERTIFICATES
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Exchange Act. DTC was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transactions between
participants through electronic book entries, thereby eliminating the need for
physical movement of certificates.
Certificate Owners that are not participants or indirect participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, the Book-Entry Certificates may do so only through participants
and indirect participants. In addition, Certificate Owners will receive all
distributions of principal of and interest on the Book-Entry Certificates from
the Trustee through DTC and DTC participants. Accordingly, Certificate Owners
may experience delays in their receipt of payments. Unless and until definitive
certificates are issued, it is anticipated that the only certificateholders of
the Book-Entry Certificates will be Cede & Co., as nominee of DTC. Certificate
Owners will not be recognized by the Trustee as certificateholders, as such term
is used in the Agreement and Certificate Owners will be permitted to exercise
S-49
<PAGE>
the rights of certificateholders only indirectly through DTC and its
participants.
Under the Rules, DTC is required to make book-entry transfers of
Book-Entry Certificates among participants and to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants and indirect participants with which Certificate Owners have
accounts with respect to the Book-Entry Certificates similarly are required to
make book-entry transfers and receive and transmit these payments on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess definitive certificates, the Rules provide a mechanism by which
Certificate Owners, through their participants and indirect participants, will
receive payments and will be able to transfer their interest in the Book-Entry
Certificates.
Because DTC can only act on behalf of participants, who in turn act on
behalf of indirect participants and on behalf of certain banks, the ability of a
Certificate Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to
Book-Entry Certificates, may be limited due to the absence of physical
certificates for the Book-Entry Certificates. In addition, under a book-entry
format, Certificate Owners may experience delays in their receipt of payments
since distribution will be made by the Trustee to Cede & Co., as nominee for
DTC.
Under the Rules, DTC will take action permitted to be taken by a
certificateholders under the Agreement only at the direction of one or more
participants to whose DTC account the Book-Entry Certificates are credited.
Additionally, under the Rules, DTC will take actions with respect to specified
Voting Rights only at the direction of and on behalf of participants whose
holdings of Book-Entry Certificates evidence these specified Voting Rights. DTC
may take conflicting actions with respect to Voting Rights, to the extent that
participants whose holdings of Book-Entry Certificates evidence Voting Rights,
authorize divergent action.
The company, the Master Servicer and the Trustee will have no liability
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 &
Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
DEFINITIVE CERTIFICATES
Definitive certificates will be issued to Certificate Owners or their
nominees, respectively, rather than to DTC or its nominee, only if (1) the
company advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as clearing agency with respect to the
Book-Entry Certificates and the company is unable to locate a qualified
successor, (2) the company, at its option, elects to terminate the book-entry
system through DTC, or (3) after the occurrence of an Event of Default,
Certificate Owners representing in the aggregate not less than 51% of the Voting
Rights of the Book-Entry Certificates advise the Trustee and DTC through
participants, in writing, that the continuation of a book-entry system through
DTC (or a successor thereto) is no longer in the Certificate Owners' best
interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee is required to notify all Certificate Owners through
participants of the availability of definitive certificates. Upon surrender by
DTC of the definitive certificates representing the Book-Entry Certificates and
receipt of instructions for re-registration, the Trustee will reissue the
Book-Entry Certificates as definitive certificates issued in the respective
principal amounts owned by individual Certificate Owners, and thereafter the
Trustee will recognize the holders of definitive certificates as
certificateholders under the Agreement. Definitive
S-50
<PAGE>
certificates will be issued in minimum denominations of $25,000, except that any
beneficial ownership represented by a Book-Entry Certificate in an amount less
than $25,000 immediately prior to the issuance of a definitive certificate shall
be issued in a minimum denomination equal to the amount of the beneficial
ownership.
ALLOCATION OF AVAILABLE FUNDS
Distributions to holders of each class of offered certificates will be
made on each Distribution Date from the Available Distribution Amount.
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each distribution date the Trustee shall withdraw from the
Certificate Account that portion of the Available Distribution Amount for such
distribution date consisting of the Interest Remittance Amount for such
distribution date, and make the following disbursements and transfers in the
order of priority described below, in each case to the extent of the Interest
Remittance Amount remaining for such distribution date.
(i) concurrently, to the holders of the Class A Certificates, the
related Monthly Interest Distributable Amount for each such class for such
Distribution Date, on a pro rata basis based on the entitlement of each such
class pursuant to this clause (i);
(ii) concurrently, to the holders of the Class A Certificates, the
related Unpaid Interest Shortfall Amount, if any, for such class for such
Distribution Date, on a pro rata basis based on the entitlement of each such
class pursuant to this clause (ii);
(iii) to the holders of the Class M-1 Certificates, the Monthly
Interest Distributable Amount for such class;
(iv) to the holders of the Class M-2 Certificates, the Monthly Interest
Distributable Amount for such class; and
(v) to the holders of the Class B Certificates, the Monthly Interest
Distributable Amount for such class.
On any distribution date, any shortfalls resulting from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not
covered by Compensating Interest paid by the Master Servicer will be allocated,
first, in reduction of amounts otherwise distributable to the Class C
Certificates and Class R Certificates, and thereafter, to the Monthly Interest
Distributable Amounts with respect to the Offered Certificates on a pro rata
basis based on the respective amounts of interest accrued on such certificates
for such distribution date. The Holders of the offered certificates will not be
entitled to reimbursement for any such interest shortfalls.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each distribution date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, the holders of each class of offered
certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Distribution Amount in the following amounts and
order of priority:
S-51
<PAGE>
(i) first, to the holders of the Class A Certificates (other than the
Class A-IO Certificates), allocated among such classes of Class A Certificates
as described below, until the Certificate Principal Balances thereof are reduced
to zero;
(ii) second, to the holders of the Class M-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(iii) third, to the holders of the Class M-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(iv) fourth, to the holders of the Class B Certificates, until the
Certificate Principal Balance thereof has been reduced to zero.
On each distribution date (a) on or after the Stepdown Date and (b) on
which a Trigger Event is not in effect, the holders of each class of offered
certificates shall be entitled to receive distributions in respect of principal
to the extent of the Principal Distribution Amount in the following amounts and
order of priority:
(i) first, to the holders of the Class A Certificates (other than the
Class A-IO Certificates), the Class A Principal Distribution Amount, allocated
among such classes of Class A Certificates as described below, until the
Certificate Principal Balances thereof are reduced to zero;
(ii) second, to the holders of the Class M-1 Certificates, the Class
M-1 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero;
(iii) third, to the holders of the Class M-2 Certificates, the Class
M-2 Principal Distribution Amount until the Certificate Principal Balance
thereof has been reduced to zero; and
(iv) fourth, to the holders of the Class B Certificates, the Class B
Principal Distribution Amount until the Certificate Principal Balance thereof
has been reduced to zero.
The allocation of distributions in respect of principal to the Class A
Certificates on each distribution date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the mortgage loans evidenced by the Mezzanine Certificates. Increasing the
respective percentage interest in the trust of the Mezzanine Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Mezzanine Certificates.
The distributions to the Class A Certificates set forth in subclause
(i) of each priority sequence above shall be paid as follows: (i) first, to the
holders of the Class A-4 Certificates, the Lockout Distribution Percentage of
the amount to be distributed pursuant to such subclause, until the Certificate
Principal Balance of the Class A-4 Certificates has been reduced to zero; (ii)
second, to the holders of the Class A-1 Certificates until the Certificate
Principal Balance of the Class A-1 Certificates has been reduced to zero, (iii)
third, to the holders of the Class A-2 Certificates until the Certificate
Principal Balance of the Class A-2 Certificates has been reduced to zero, (iv)
fourth, to the holders of the Class A-3 Certificates until the Certificate
Principal Balance of the Class A-3 Certificates has been reduced to zero and (v)
fifth, to the holders of the Class A-4 Certificates until the Certificate
Principal Balance of the Class A-4 Certificates has been reduced to zero.
S-52
<PAGE>
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the
Class A Certificates consists of subordination, as described below, and excess
interest and overcollateralization, as described under "--Overcollateralization
Provisions" herein.
The rights of the holders of the Mezzanine Certificates, the Class C
Certificates and the Class R Certificates to receive distributions will be
subordinated, to the extent described herein, to the rights of the holders of
the Class A Certificates.
The protection afforded to the holders of the Class A Certificates by
means of the subordination of the Mezzanine Certificates, Class C Certificates
and Class R Certificates will be accomplished by (i) the preferential right of
the holders of the Class A Certificates (other than the Class A-IO Certificates)
to receive on any distribution date, prior to distributions on the Mezzanine
Certificates, Class C Certificates and Class R Certificates, distributions in
respect of interest and principal, and the preferential right of the holders of
the Class A-IO Certificates to receive on any Distribution Date, prior to
distribution on the Mezzanine Certificates, Class C Certificates and Class R
Certificates, distributions in respect of interest, in each case subject to
funds available for such distributions and (ii) if necessary, the right of the
holders of the Class A Certificates to receive future distributions of amounts
that would otherwise be payable to the holders of the Mezzanine Certificates,
Class C Certificates and Class R Certificates.
In addition, the rights of the holders of Mezzanine Certificates with
higher payment priorities to receive distributions will be senior to the rights
of holders of Mezzanine Certificates with lower payment priorities, and the
rights of the holders of the Mezzanine Certificates to receive distributions
will be senior to the rights of the holders of the Class C Certificates and
Class R Certificates, in each case to the extent described herein.
The subordination feature is intended to enhance the likelihood of
regular receipt by the holders of more senior certificates of distributions in
respect of interest and principal and to afford such holders protection against
Realized Losses.
OVERCOLLATERALIZATION PROVISIONS
The weighted average of the Net Mortgage Rates for the mortgage loans
is generally expected to be higher than the weighted average of the Pass-Through
Rates on the offered certificates. As a result, interest collections on the
mortgage loans are expected to be generated in excess of the amount of interest
payable to the holders of the offered certificates and the fees and expenses
payable by the trust. The Pooling Agreement requires that, on each distribution
date, the Net Monthly Excess Cashflow, if any, be applied on such distribution
date as an accelerated payment of principal on the class or classes of offered
certificates then entitled to receive distributions in respect of principal, but
only to the limited extent hereafter described.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
shall be paid as follows:
(i) to the holders of the class or classes of Certificates then
entitled to receive distributions in respect of principal, in an amount equal to
any Extra Principal Distribution Amount, payable to such holders as part of the
Principal Distribution Amount as described under "--Allocation of Available
Funds--Principal Distributions on the Offered Certificates" above;
S-53
<PAGE>
(ii) to the holders of the Class M-1 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount for such certificates;
(iii) to the holders of the Class M-1 Certificates, in an amount equal
to the Allocated Realized Loss Amount for the Class M-1 Certificates;
(iv) to the holders of the Class M-2 Certificates, in an amount equal
to the Unpaid Interest Shortfall Amount for such certificates;
(v) to the holders of the Class M-2 Certificates, in an amount equal to
the Allocated Realized Loss Amount for the Class M-2 Certificates;
(vi) to the holders of the Class B Certificates, in an amount equal to
the Unpaid Interest Shortfall Amount for such certificates;
(vii) to the holders of the Class B Certificates, in an amount equal to
the Allocated Realized Loss Amount for the Class B Certificates; and
(ix) to the holders of the Class C Certificates and Class R
Certificates as provided in the Agreement.
ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Losses on the mortgage loans will be allocated on any
distribution date, first, to Net Monthly Excess Cashflow, second, in reduction
of the Overcollateralized Amount, third, to the Class B Certificates, fourth, to
the Class M-2 Certificates, and fifth, to the Class M-1 Certificates.
The Agreement does not permit the allocation of Realized Losses to the
Class A Certificates. Investors in the Class A Certificates should note that
although Realized Losses cannot be allocated to the Class A Certificates, under
certain loss scenarios there will not be enough principal and interest on the
mortgage loans to pay the Class A Certificates all interest and principal
amounts to which they are then entitled.
Once Realized Losses have been allocated to the Mezzanine Certificates,
such amounts with respect to such certificates will no longer accrue interest
nor will such amounts be reinstated thereafter. However, Allocated Realized Loss
Amounts may be paid to the holders of the Mezzanine Certificates from Net
Monthly Excess Cashflow, according to the priorities set forth under
"--Overcollateralization Provisions" above.
Any allocation of a Realized Loss to a certificate will be made by
reducing the Certificate Principal Balance thereof by the amount so allocated as
of the distribution date in the month following the calendar month in which such
Realized Loss was incurred. Notwithstanding anything to the contrary described
herein, in no event will the Certificate Principal Balance of any certificate be
reduced more than once in respect of any particular amount both (i) allocable to
such certificate in respect of Realized Losses and (ii) payable as principal to
the holder of such certificate from Net Monthly Excess Cashflow.
S-54
<PAGE>
P&I ADVANCES
Subject to the following limitations, the Master Servicer will be
obligated to advance or cause to be advanced on or before each distribution date
its own funds, advances made by a Subservicer or funds in the Certificate
Account that are not included in the Available Distribution Amount for such
distribution date, in an amount equal to the P&I Advances for such distribution
date. With respect to a delinquent balloon payment, the Master Servicer is not
required to make a P&I Advance of such delinquent balloon payment. The Master
Servicer will, however, make monthly Advances with respect to balloon loans with
delinquent balloon payments, in each case in an amount equal to the assumed
monthly principal and interest payment (net of the related Servicing Fees) that
would have been due on the related Due Date based on the original principal
amortization schedule for such balloon loan.
P&I Advances are required to be made only to the extent they are
deemed, in the good faith judgment of the Master Servicer, to be recoverable
from related late collections, Insurance Proceeds or Liquidation Proceeds. The
purpose of making P&I Advances is to maintain a regular cash flow to the
certificateholders, rather than to guarantee or insure against losses. The
Master Servicer will not be required to make any P&I Advances with respect to
reductions in the amount of the monthly payments due on the mortgage loans due
to bankruptcy proceedings or the application of the Relief Act.
All P&I Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the mortgage loan
as to which the unreimbursed P&I Advance was made. In addition, any P&I Advances
previously made in respect of any mortgage loan that are deemed by the Master
Servicer to be nonrecoverable from related late collections, insurance proceeds
or liquidation proceeds may be reimbursed to the Master Servicer out of any
funds in the Certificate Account prior to the distributions on the Certificates.
In the event the Master Servicer fails in its obligation to make any such
advance, the Trustee, as successor Master Servicer, will be obligated to make
any such advance, to the extent required in the Agreement.
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued pursuant to the Agreement, a form of
which is filed as an exhibit to the registration statement. A Current Report on
Form 8-K relating to the certificates containing a copy of the Agreement as
executed will be filed by the company with the Securities and Exchange
Commission within fifteen days of the initial issuance of the certificates. The
trust fund created under the Agreement will consist of the following: (1) the
mortgage loans; (2) 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); (3) the amounts on deposit in any Certificate Account
(as defined in the prospectus); (4) certain insurance policies maintained by the
related mortgagors or by or on behalf of the Master Servicer or related
subservicer in respect of the mortgage loans; (5) an assignment of the company's
rights under the Mortgage Loan Purchase Agreement; and (6) proceeds of the
foregoing. Reference is made to the prospectus for important information in
addition to that set forth in this prospectus supplement regarding the trust
fund, the terms and conditions of the Agreement and the offered certificates.
The offered certificates will be transferable and exchangeable at the office
designated by the Trustee for such purposes located in New York. The company
will provide to prospective or actual certificateholders without charge, on
written request, a copy (without exhibits) of the
S-55
<PAGE>
Agreement. Requests should be addressed to the Secretary, Impac Secured Assets
Corp., 1401 Dove Street, Newport Beach, CA 92660 and its phone number is (949)
475-3600.
ASSIGNMENT OF THE MORTGAGE LOANS
The company will deliver to the Trustee with respect to each mortgage
loan (1) the mortgage note endorsed without recourse to the Trustee to reflect
the transfer of the mortgage loan, (2) the original mortgage with evidence of
recording indicated thereon and (3) an assignment of the mortgage in recordable
form to the Trustee, reflecting the transfer of the mortgage loan.
THE TRUSTEE
Bankers Trust Company of California, N.A., will act as Trustee for the
Certificates pursuant to the Agreement. The Trustee's offices for notices under
the Agreement are located at 1761 East St. Andrew Place, Santa Ana, California
92705, Attention: Impac Secured Assets Corp., Series 2000-4.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to the Trustee's Fee. The Trustee
and any director, officer, employee or agent of the Trustee shall be indemnified
and held harmless by the trust fund against any claim, loss, liability, fee or
expense incurred in connection with any Event of Default, any breach of the
Agreement or any claim or legal action (including any pending or threatened
claim or legal action) relating to the acceptance or administration of its
obligations and duties under the Agreement or the certificates, other than any
claim, loss, liability or expense (i) sustained in connection with the Agreement
related to the willful misfeasance, bad faith or negligence of the Master
Servicer in the performance of its duties under the Agreement or (ii) incurred
in connection with a breach constituting willful misfeasance, bad faith or
negligence of the Trustee in the performance of its duties under the Agreement
or by reason of reckless disregard of its obligations and duties under the
Agreement.
The Trustee will make no representation or warranty, express or
implied, and will have no liability as to the validity, adequacy or accuracy of
any of the information contained in this prospectus supplement.
THE SUBSERVICERS
All of the mortgage loans will initially be subserviced by Wendover
Funding, Inc. However, the Master Servicer has entered into a contract to
transfer the subservicing with respect to the mortgage loans to GMAC Mortgage
Corporation on or about January 1, 2001.
Wendover Funding, Inc. is a subservicer of residential, consumer and
commercial mortgage loans in 50 states. Wendover Funding, Inc. 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. Wendover Funding, Inc. is located in Greensboro, North Carolina.
Wendover Funding, Inc. is an approved servicer in good standing with Freddie
Mac.
GMAC Mortgage Corporation is to become the subservicer for all of the
mortgage loans. GMAC Mortgage Corporation is an indirect wholly-owned subsidiary
of General Motors Acceptance Corporation and is one of the nation's largest
mortgage bankers. GMAC Mortgage Corporation is engaged in the mortgage banking
business, including the origination, purchase, sale and servicing of residential
loans. GMAC
S-56
<PAGE>
Mortgage Corporation maintains its executive and principal offices at 100 Witmer
Road, Horsham, Pennsylvania 19044, and its telephone number is (215) 682-1000.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its servicing activities for the Certificates will be equal to the Servicing
Fee. As additional servicing compensation, the Master Servicer is entitled to
retain all assumption fees and late payment charges in respect of mortgage loans
master serviced by it, to the extent collected from mortgagors, together with
any interest or other income earned on funds held in the Certificate Account and
any escrow accounts in respect of mortgage loans master serviced by it. The
Master Servicer is not entitled to retain any prepayment charges or penalties;
prepayment charges will be distributed to the holders of the Class P
Certificates. The Master Servicer is obligated to offset any Prepayment Interest
Shortfall in respect of the mortgage loans on any distribution date with
Compensating Interest to the extent of its aggregate Servicing Fee for such
distribution date. The Master Servicer is obligated to pay insurance premiums
and ongoing expenses associated with the mortgage pool in respect of mortgage
loans and incurred by the Master Servicer in connection with its
responsibilities under the Agreement. However, the Master Servicer is entitled
to reimbursement therefor as provided in the Agreement.
VOTING RIGHTS
At all times 97% of all Voting Rights will be allocated among the
holders of the Class A Certificates (other than the Class A-IO Certificates),
the Mezzanine Certificates and the Class C Certificates in proportion to the
then outstanding Certificate Principal Balances of their respective
certificates. At all times 1% of all Voting Rights will be allocated to the
holders of the Class A-IO Certificates. At all times 1% of all Voting Rights
will be allocated to the holders of the Class P Certificates. At all times 1% of
all Voting Rights will be allocated to the holders of the Class R Certificates.
The Voting Rights allocated to any class of certificates shall be allocated
among all holders of the certificates of such class in proportion to the
outstanding percentage interests in such class represented thereby.
TERMINATION
The circumstances under which the obligations created by the Agreement
will terminate in respect of the Certificates are described in "The
Agreements--Termination; Retirement of Securities" in the prospectus. The holder
of the Class C Certificates (or, if there is no single holder, the majority
holder of the Class C Certificates) will have the option, on any distribution
date on which the aggregate Stated Principal Balance of the mortgage loans is
less than or equal to 10% of the aggregate principal balance of the mortgage
loans as of the Cut-off Date, either (i) to purchase all remaining mortgage
loans and other assets in the trust, thereby effecting early retirement of the
certificates or (ii) to purchase, in whole but not in part, the certificates.
Any such purchase of mortgage loans and other assets of the trust fund
shall be made at a price equal to the sum of (a) 100% of the unpaid principal
balance of each mortgage loan (or the fair market value of the related
underlying mortgaged properties with respect to defaulted mortgage loans as to
which title to such mortgaged properties has been acquired if such fair market
value is less than such unpaid principal balance) (net of any unreimbursed P&I
Advance attributable to principal) as of the date of repurchase plus (b) accrued
interest thereon at the mortgage rate to, but not including, the first day of
the month in which such repurchase price is distributed. In the event the holder
of the Class C Certificates (or, if there is no single holder, the
S-57
<PAGE>
majority holder of the Class C Certificates) exercises this option, the portion
of the purchase price allocable to the offered certificates will be, to the
extent of available funds:
(i) 100% of the then outstanding certificate principal balance of
the offered certificates, plus
(ii) one month's interest on the then outstanding certificate
principal balance or notional amount, as applicable, of the
offered certificates at the then applicable Pass-Through Rate
for each class of offered certificates, plus
(iii) any previously accrued but unpaid interest thereon to which
the holders of the offered certificates are entitled, plus
(iv) in the case of the Mezzanine Certificates, any previously
unpaid Allocated Realized Loss Amounts.
The proceeds of any such distribution may not be sufficient to distribute the
full amount to each class of certificates if the purchase price is based in part
on the fair market value of the underlying mortgaged property and such fair
market value is less than 100% of the unpaid principal balance of the related
mortgage loan.
Any such purchase of the certificates will be made at a price equal to
100% of the then outstanding certificate principal balance of the offered
certificates, plus one month's interest on the then outstanding certificate
principal balance or notional amount, as applicable, of the offered certificates
at the then applicable Pass-Through Rate for each class of offered certificates,
plus any previously accrued but unpaid interest thereon to which the holders of
the offered certificates are entitled, plus, in the case of the Mezzanine
Certificates, any previously unpaid Allocated Realized Loss Amounts. Upon the
purchase of the certificates or at any time thereafter, at the option of the
holder of the Class C Certificates (or, if there is no single holder, the
majority holder of the Class C Certificates), the mortgage loans may be sold,
thereby effecting a retirement of the certificates and the termination of the
trust, or the certificates so purchased may be held or resold by the holder of
the Class C Certificates.
FEDERAL INCOME TAX CONSEQUENCES
Elections will be made to treat the trust fund as three separate REMICs
for federal income tax purposes. Upon the issuance of the offered certificates,
Thacher Proffitt & Wood, counsel to the company, will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
Agreement, for federal income tax purposes, the trust fund will consist of three
REMICs, and each REMIC elected by the trust fund will qualify as a REMIC under
Sections 860A through 860G of the Code.
For federal income tax purposes, (i) the Class R Certificates will
consist of components, each of which will represent the sole class of "residual
interests" in each REMIC elected by the trust fund and (ii) the Class A
Certificates, the Mezzanine Certificates, the Class P Certificates and the Class
C Certificates will represent the "regular interests" in, and which generally
will be treated as debt instruments of, a REMIC. SEE "FEDERAL INCOME TAX
CONSEQUENCES--REMIC--CLASSIFICATION OF REMICS" IN THE PROSPECTUS.
For federal income tax reporting purposes, the Class A Certificates
(other than the Class A-IO Certificates) and the Mezzanine Certificates will
not, and the Class A-IO Certificates will, be treated as having been issued with
original issue discount. The prepayment assumption that will be used in
determining
S-58
<PAGE>
the rate of accrual of original issue discount, premium and market discount, 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
the Prepayment Assumption. No representation is made that the Mortgage Loans
will prepay at that rate or at any other rate. SEE "FEDERAL INCOME TAX
CONSEQUENCES--REMICS--TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES--ORIGINAL
ISSUE DISCOUNT" IN THE PROSPECTUS.
The IRS has issued 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 offered certificates should be aware that the
OID Regulations do not adequately address certain issues relevant to, or are not
applicable to, prepayable securities such as the offered certificates. Because
of the uncertainty concerning the application of Section 1272(a)(6) of the Code
to the offered certificates, the IRS could assert that the offered certificates
should be treated as issued with original issue discount or should be governed
by the rules applicable to debt instruments having contingent payments or by
some other method not yet set forth in regulations. Prospective purchasers of
the offered certificates are advised to consult their tax advisors concerning
the tax treatment of such certificates.
If the method of computing original issue discount described in the
prospectus results in a negative amount for any period with respect to any
certificateholders, in particular, the holders of the Class A-IO Certificates,
the amount of original issue discount allocable to such period would be zero,
and such certificateholders will be permitted to offset such amounts only
against the respective future income (if any) from such certificate. Although
uncertain, a certificateholder may be permitted to deduct a loss to the extent
that his or her respective remaining basis in such certificate exceeds the
maximum amount of future payments to which such certificateholders is entitled,
assuming no further prepayments of the mortgage loans. Although the matter is
not free from doubt, any such loss might be treated as a capital loss.
The OID Regulations in some circumstances permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that of the issuer. Accordingly, it is possible that holders of offered
certificates issued with original issue discount may be able to select a method
for recognizing original issue discount that differs from that used in preparing
reports to certificateholders and the IRS. Prospective purchasers of offered
certificates issued with original issue discount are advised to consult their
tax advisors concerning the tax treatment of such certificates in this regard.
Some classes of offered certificates may be treated for federal income
tax purposes as having been issued with a premium. Certificateholders may elect
to amortize such premium under a constant yield method in which case such
amortizable premium will generally be allocated among the interest payments on
such certificates and will be applied as an offset against such interest
payments. SEE "FEDERAL INCOME TAX CONSEQUENCES--REMICS--TAXATION OF OWNERS OF
REMIC REGULAR CERTIFICATES--PREMIUM" IN THE PROSPECTUS.
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code, generally in the same proportion that the assets in the related
trust fund would be so treated. In addition, interest on the offered
certificates will be treated as "interest on obligations secured by mortgages on
real property" under Section 856(c)(3)(B) of the Code, generally to the extent
that the offered certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. Moreover, the offered certificates also will be
treated as "qualified mortgages" under Section 860G(a)(3) of the Code. However,
prospective investors in offered certificates that will be generally treated as
assets described in Section 860G(a)(3) of the Code should note that,
notwithstanding such treatment, any repurchase of such a certificate pursuant to
the right of the Master Servicer to repurchase such offered certificates may
adversely affect any REMIC that holds such offered certificates if such
repurchase is
S-59
<PAGE>
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. SEE "FEDERAL INCOME TAX
CONSEQUENCES--REMICS--CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES" IN
THE PROSPECTUS.
It is not anticipated that any REMIC elected by the trust will engage
in any transactions that would subject it to the prohibited transactions tax as
defined in Section 860F(a)(2) of the Code, the contributions tax as defined in
Section 860G(d) of the Code or the tax on net income from foreclosure property
as defined in Section 860G(c) of the Code. However, in the event that any such
tax is imposed on any such REMIC, such tax will be borne (1) by the Trustee, if
the Trustee has breached its obligations with respect to REMIC compliance under
the Agreement, (2) by the Master Servicer, if the Master Servicer has breached
its obligations with respect to REMIC compliance under the Agreement and (3)
otherwise by the trust fund, with a resulting reduction in amounts otherwise
distributable to holders of the offered certificates. SEE "DESCRIPTION OF THE
CERTIFICATES-- GENERAL" AND "FEDERAL INCOME TAX CONSEQUENCES--REMICS--PROHIBITED
TRANSACTIONS TAX AND OTHER TAXES" IN THE PROSPECTUS.
The responsibility for filing annual federal information returns and
other reports will be borne by the Trustee. SEE "FEDERAL INCOME TAX
CONSEQUENCES--REMICS--REPORTING AND OTHER ADMINISTRATIVE MATTERS" IN THE
PROSPECTUS.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES
OF INVESTING IN THE OFFERED CERTIFICATES, SEE "FEDERAL INCOME TAX
CONSEQUENCES--REMICS" IN THE PROSPECTUS.
S-60
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting
agreement, dated November 28, 2000, the Underwriter has agreed to purchase and
the company has agreed to sell to the Underwriter the offered certificates. It
is expected that delivery of the offered certificates will be made only in
book-entry form through the Same Day Funds Settlement System of DTC on or about
November 30, 2000, against payment therefor in immediately available funds.
The offered 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
offered certificates are expected to be approximately 101.73% of the aggregate
initial Certificate Principal Balance of the offered certificates, plus accrued
interest on the offered certificates from the Cut-off Date, less expenses
expected to equal approximately $325,000. The Underwriter may effect such
transactions by selling the offered 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 offered 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 offered certificates may be deemed to be underwriters and
any profit on the resale of the offered certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
The underwriting agreement provides that the company, the Seller and
Impac Holdings will jointly and severally indemnify the Underwriter, and that
under limited circumstances the Underwriter will indemnify the company, the
Seller and Impac Holdings against certain civil liabilities under the Securities
Act of 1933, or contribute to payments required to be made in respect thereof.
SECONDARY MARKET
There can be no assurance that a secondary market for the offered
certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the offered
certificates will be the monthly statements discussed in the prospectus under
"Description of the Securities--Reports to Securityholders", which will include
information as to the outstanding principal balance of the offered certificates
and the status of the applicable form of credit enhancement. There can be no
assurance that any additional information regarding the offered certificates
will be available through any other source. In addition, the company is not
aware of any source through which price information about the offered
certificates will be generally available on an ongoing basis. The limited nature
of information regarding the offered certificates may adversely affect the
liquidity of the offered certificates, even if a secondary market for the
offered certificates becomes available.
LEGAL OPINIONS
Legal matters relating to the offered 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.
S-61
<PAGE>
RATINGS
It is a condition to the issuance of the Certificates that the Class A
Certificates be rated "AAA" by Standard & Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"), "Aaa" by Moody's Investors Service, Inc. ("Moody's")
and "AAA" by Fitch, Inc. ("Fitch"), that the Class M-1 Certificates be rated at
least "AA" by S&P, "Aa2" by Moody's and "AA" by Fitch, that the Class M-2
Certificates be rated at least "A" by S&P, "A2" by Moody's and "A" by Fitch and
that the Class B Certificates be rated at least "BBB" by S&P, "Baa2" by Moody's
and "BBB" by Fitch.
The ratings of S&P, Moody's and Fitch assigned to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which the certificateholders are entitled. The rating process
addresses structural and legal aspects associated with the certificates,
including the nature of the underlying mortgage loans. The ratings assigned to
mortgage pass-through certificates do not represent any assessment of the
likelihood that principal prepayments will be made by the mortgagors or the
degree to which the rate and timing principal prepayments will differ from that
originally anticipated. The ratings do not address the possibility that
certificateholders might suffer a lower than anticipated yield due to non-credit
events or that the holders of the Class A-IO Certificates may fail to recover
fully their initial investments.
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 offered certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional credit
support or credit enhancement with respect to the offered certificates.
The company has not requested that any rating agency rate any class of
the offered certificates other than as stated above. However, there can be no
assurance as to whether any other rating agency will rate any class of the
offered certificates, or, if it does, what rating would be assigned by any other
rating agency. A rating on any class of the offered certificates by another
rating agency, if assigned at all, may be lower than the ratings assigned to the
offered certificates as stated above.
LEGAL INVESTMENT
The Class A Certificates and the Class M-1 Certificates will constitute
"mortgage related securities" for purposes of SMMEA for so long as they are
rated not lower than the second highest rating category by a Rating Agency (as
defined in the prospectus) and, as such, will be legal investments for entities
to the extent provided in SMMEA. SMMEA, however, provides for state limitation
on the authority of these entities to invest in "mortgage related securities"
provided that restrictive legislation by the state was enacted prior to October
3, 1991. Some states have enacted legislation which overrides the preemption
provisions of SMMEA. The Class M-2 Certificates and the Class B Certificates
will not constitute "mortgage related securities" for purposes of SMMEA.
The company makes no representations as to the proper characterization
of any class of offered certificates for legal investment or other purposes, or
as to the ability of particular investors to purchase any class of offered
certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of offered certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any
S-62
<PAGE>
class of offered certificates constitutes a legal investment or is subject to
investment, capital or other restrictions.
SEE "LEGAL INVESTMENT" IN THE PROSPECTUS.
ERISA CONSIDERATIONS
A fiduciary of any Plan and any person investing Plan Assets of any
Plan should carefully review with its legal advisors whether the purchase, sale
or holding of Certificates will give rise to a prohibited transaction under
ERISA or Section 4975 of the Code.
The U.S. Department of Labor has issued an Exemption, as described
under "ERISA Considerations" in the prospectus, to the Underwriter. On November
13, 2000, the Department of Labor amended the Exemption to broaden the scope of
the Exemption. See Prohibited Transaction Exemption 2000-58, 65 Fed. Reg. 67765
(November 13, 2000). The Exemption, as amended and as currently in effect
generally exempts from the application of certain of the prohibited transaction
provisions of Section 406 of ERISA, and the excise taxes imposed on such
prohibited transactions by Section 4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to the purchase, sale and holding of
pass-through certificates rated at least "BBB-" (or its equivalent) by S&P,
Fitch or Moody's at the time of purchase and underwritten by the Underwriter,
such as the offered certificates, and the servicing and operation of asset
pools, such as the mortgage pool, provided that the conditions of the Exemption
are satisfied. The purchase of the offered certificates by, on behalf of or with
the Plan Assets of any Plan may qualify for exemptive relief under the
Exemption, as amended and as currently in effect. However, the Exemption
contains a number of conditions which must be met for the Exemption, as amended,
to apply (as described in the prospectus), 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 an offered
certificate must make its own determination that the conditions set forth in the
Exemption, as amended, will be satisfied with respect to such certificates,
including the requirement that the rating on a particular class of certificates
be "BBB-" or higher at the time of purchase.
Any fiduciary or other investor of "Plan Assets" that proposes to
acquire or hold the offered certificates on behalf of or with "Plan Assets" of
any Plan should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of the ERISA and the Code to the proposed
investment. SEE "ERISA CONSIDERATIONS" IN THE PROSPECTUS.
The sale of any class of offered certificates to a Plan is in no
respect a representation by the company, the Trustee 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.
S-63
<PAGE>
GLOSSARY
ACCRUAL PERIOD -- For any class of offered certificates and any distribution
date, the calendar month preceding the month of such distribution date based on
a 360-day year consisting of twelve 30-day months.
AGREEMENT -- The pooling and servicing agreement, dated as of November 1, 2000,
among Impac Secured Assets Corp., as company, Impac Funding Corporation, as
master servicer, and Bankers Trust Company of California, N.A., as trustee.
ALLOCATED REALIZED LOSS AMOUNT -- With respect to any class of the Mezzanine
Certificates and any distribution date, an amount equal to the sum of any
Realized Loss allocated to that class of Certificates on that distribution date
and any Allocated Realized Loss Amount for that class remaining unpaid from the
previous distribution date.
ALLOWABLE CLAIM -- For any mortgage loan covered by a Primary Insurance Policy,
the current principal balance of such mortgage loan plus accrued interest and
allowable expenses at the time of the claim.
APPRAISED VALUE -- The appraised value of the related mortgaged property at the
time of origination of such mortgage loan.
AVAILABLE DISTRIBUTION AMOUNT -- For any distribution date, an amount equal to
the amount received by the Trustee and available in the Certificate Account on
that distribution date. The Available Distribution Amount will generally be
equal to the sum of (1) the aggregate amount of scheduled payments on the
mortgage loans received or advanced that were due during the related Due Period
and (2) any unscheduled payments and receipts, including mortgagor prepayments
on such mortgage loans, Insurance Proceeds and Liquidation Proceeds, received
during the related Prepayment Period, in each case net of amounts reimbursable
therefrom to the Trustee, the Master Servicer and any Subservicer and reduced by
Servicing Fees, the fees of the Trustee and any amounts in respect of the
premiums payable to Radian under the Radian Lender-Paid PMI Policies. The
holders of the Class P Certificates will be entitled to all prepayment charges
received on the Mortgage Loans, and such amounts will not be available for
distribution to the holders of the other classes of certificates.
BASIC PRINCIPAL DISTRIBUTION AMOUNT -- With respect to any distribution date,
the excess of (i) the Principal Remittance Amount for such distribution date
over (ii) the Overcollateralization Release Amount, if any, for such
distribution date.
BOOK-ENTRY CERTIFICATES -- Each class of the offered certificates for so long as
they are issued, maintained and transferred at the DTC.
CERTIFICATE PRINCIPAL BALANCE -- With respect to any offered certificate (other
than the Class A-IO Certificates) as of any date of determination, the initial
Certificate Principal Balance thereof, reduced by the aggregate of (a) all
amounts allocable to principal previously distributed with respect to such
offered certificate and (b) in the case of any Mezzanine Certificate, any
reductions in the Certificate Principal Balance thereof deemed to have occurred
in connection with allocations of Realized Losses in the manner described
herein.
CLASS A CERTIFICATES -- The Class A-1, Class A-2, Class A-3, Class A-4 and Class
A-IO Certificates.
S-64
<PAGE>
CLASS C CERTIFICATES-- The Class C Certificates.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT -- For any applicable distribution date,
an amount equal to the excess of (x) the Certificate Principal Balance of the
Class A Certificates immediately prior to such distribution date over (y) the
lesser of (A) the product of (i) the percentage (but not less than zero) which
is equal to 100% minus the sum of 12.00% and the Class Principal Distribution
Amount Calculation Fraction and (ii) the aggregate principal balance of the
mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) and (B) the aggregate principal balance of
the mortgage loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) minus $1,000,000.
CLASS A-IO CAP RATE -- For any distribution date, a per annum rate equal to the
weighted average of the Net Mortgage Rates of the Mortgage Loans as of the first
day of the month preceding the month in which such distribution date occurs.
CLASS B PRINCIPAL DISTRIBUTION AMOUNT -- For any applicable distribution date,
an amount equal to the excess of (x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such distribution date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
distribution date), (iii) the Certificate Principal Balance of the Class M-2
Certificates (after taking into account the payment of the Class M-2 Principal
Distribution Amount on such distribution date) and (iv) the Certificate
Principal Balance of the Class B Certificates immediately prior to such
distribution date over (y) the lesser of (A) the product of (i) the percentage
(but not less than zero) which is equal to 100% minus the Class Principal
Distribution Amount Calculation Fraction and (ii) the aggregate principal
balance of the mortgage loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the mortgage loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) minus
$1,000,000.
CLASS PRINCIPAL DISTRIBUTION AMOUNT CALCULATION FRACTION -- For any distribution
date, the percentage equivalent of a fraction, the numerator of which is (x)
$1,000,000 and the denominator of which is (y) the aggregate principal balance
of the mortgage loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period).
CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT -- For any applicable distribution date,
an amount equal to the excess of (x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such distribution date) and (ii)
the Certificate Principal Balance of the Class M-1 Certificates immediately
prior to such distribution date over (y) the lesser of (A) the product of (i)
the percentage (but not less than zero) which is equal to 100% minus the sum of
7.50% and the Class Principal Distribution Amount Calculation Fraction and (ii)
the aggregate principal balance of the mortgage loans as of the last day of the
related Due Period (after giving effect to
S-65
<PAGE>
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate principal balance of the
mortgage loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $1,000,000.
CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT -- For any applicable distribution date,
an amount equal to the excess of (x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates (after taking into account the payment of
the Class A Principal Distribution Amount on such distribution date), (ii) the
Certificate Principal Balance of the Class M-1 Certificates (after taking into
account the payment of the Class M-1 Principal Distribution Amount on such
distribution date) and (iii) the Certificate Principal Balance of the Class M-2
Certificates immediately prior to such distribution date over (y) the lesser of
(A) the product of (i) the percentage (but not less than zero) which is equal to
100% minus the sum of 3.50% and the Class Principal Distribution Amount
Calculation Fraction and (ii) the aggregate principal balance of the mortgage
loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate principal balance of the
mortgage loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus $1,000,000.
CLASS P CERTIFICATES-- The Class P Certificates.
CLASS R CERTIFICATES-- The Class R Certificates.
CODE-- The Internal Revenue Code of 1986.
COMPENSATING INTEREST -- Any payments made by the Master Servicer from its own
funds to cover Prepayment Interest Shortfalls.
CPR -- A constant rate of prepayment on the mortgage loans.
CREDIT SCORE -- A measurement of the relative degree of risk a borrower
represents to a lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
CUT-OFF DATE -- November 1, 2000.
DETERMINATION DATE -- With respect to any distribution date is on the 15th day
of the month in which such distribution date occurs or, if such day is not a
business day, on the immediately preceding business day.
DUE DATE -- With respect to each mortgage loan, the first day of the month.
DUE PERIOD -- With respect to any distribution date commences on the second day
of the month immediately preceding the month in which such distribution date
occurs and ends on the first day of the month in which such distribution date
occurs.
ERISA -- The Employee Retirement Income Security Act of 1974, as amended.
S-66
<PAGE>
EXTRA PRINCIPAL DISTRIBUTION AMOUNT -- For any distribution date, the lesser of
(x) the Net Monthly Excess Cashflow for such distribution date and (y) the
Overcollateralization Deficiency Amount for such distribution date.
EXEMPTION -- Prohibited Transaction Exemption 90-30, as amended.
FINAL DISPOSITION -- With respect to a defaulted mortgage loan, when a
determination is made by the Master Servicer that it has received all Insurance
Proceeds, Liquidation Proceeds and other payments or cash recoveries which the
Master Servicer reasonably and in good faith expects to be finally recoverable
with respect to such mortgage loan.
IMPAC HOLDINGS-- Impac Mortgage Holdings, Inc., an affiliate of the company and
the Seller.
INTEREST REMITTANCE AMOUNT -- For any distribution date, that portion of the
Available Distribution Amount for such distribution date that represents
interest received or advance on the mortgage loans.
IRS-- The Internal Revenue Service.
LOCKOUT CERTIFICATE PERCENTAGE -- For the Class A-4 Certificates and each
distribution date, the percentage equal to the Certificate Principal Balance of
the Class A-4 Certificates immediately prior to such distribution date divided
by the aggregate Certificate Principal Balance of the Class A Certificates
(other than the Class A- IO Certificates) immediately prior to such distribution
date.
LOCKOUT DISTRIBUTION PERCENTAGE -- For the Class A-4 Certificates and each
distribution date, the indicated percentage of the Lockout Certificate
Percentage for such distribution date:
PERCENTAGE OF LOCKOUT
DISTRIBUTION DATE CERTIFICATE PERCENTAGE
----------------- ----------------------
December 2000 to November 2003 0%
December 2003 to November 2005 45%
December 2005 to November 2006 80%
December 2006 to November 2007 100%
December 2007 and thereafter 300%
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class A Certificates (other than the Class A-4 Certificates) have been reduced
to zero, the Lockout Distribution Percentage will be equal to 100%.
MASTER SERVICER -- Impac Funding Corporation, in its capacity as master servicer
under the Agreement.
MEZZANINE CERTIFICATES -- The Class M-1, Class M-2 and Class B Certificates.
MONTHLY INTEREST DISTRIBUTABLE AMOUNT -- For any distribution date and each
class of offered certificates, the amount of interest accrued during the related
Accrual Period at the related Pass-Through Rate on the Certificate Principal
Balance or Notional Amount of such Class immediately prior to such distribution
date, in each case, reduced by any Prepayment Interest Shortfalls to the extent
not covered by Compensating Interest payable by the Master Servicer and any
shortfalls resulting from the application of the Relief Act (in each case to the
extent allocated to such class of offered certificates as described under
"Description of the
S-67
<PAGE>
Certificates--Allocation of Available Funds--INTEREST DISTRIBUTIONS ON THE
OFFERED CERTIFICATES"in this prospectus supplement.
MORTGAGE LOAN PURCHASE AGREEMENT -- The Mortgage Loan Purchase Agreement among
the Seller, Impac Holdings and the company, whereby the mortgage loans are being
sold to the company.
NET MONTHLY EXCESS CASHFLOW -- For any distribution date, the sum of (a) any
Overcollateralization Release Amount and (b) the excess of (x) the Available
Distribution Amount for such distribution date over (y) the sum for such
distribution date of (A) the Monthly Interest Distributable Amounts for the
offered certificates, (B) the Unpaid Interest Shortfall Amounts for the Class A
Certificates and (C) the Principal Remittance Amount.
NET MORTGAGE RATE -- On any mortgage loan, the then applicable mortgage rate
thereon minus the sum of (1) the Servicing Fee Rate, (2) the Trustee's Fee Rate
and (3) the related Radian PMI Rate, if such mortgage loan is a Radian PMI
Insured Loan.
NET WAC RATE -- For any distribution date, a per annum rate equal to (1) the
weighted average of the Net Mortgage Rates of the Mortgage Loans as of the first
day of the month preceding the month in which such distribution date occurs
minus (2) the Pass-Through Rate for the Class A-IO Certificates for such
distribution date multiplied by a fraction, the numerator of which is (x) the
Notional Amount of the Class A-IO Certificates immediately prior to such
distribution date, and the denominator of which is (y) the aggregate Stated
Principal Balance of the mortgage loans as of the first day of the month
preceding the month in which such distribution date occurs.
NOTIONAL AMOUNT -- With respect to the Class A-IO Certificates immediately prior
to any distribution date, the lesser of (i) $20,000,000 and (ii) the sum of the
aggregate principal balance of the mortgage loans (prior to giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period).
OID REGULATIONS -- Treasury regulations under Sections 1271 to 1275 of the Code
generally addressing the treatment of debt instruments issued with original
issue discount.
OPTIONAL TERMINATION DATE -- The first distribution date on which the trust fund
may be terminated at the option of the holder of the Class C Certificates (or,
if there is no single holder, the majority holder of the Class C Certificates)
as described under "Pooling and Servicing Agreement-- Termination" in this
prospectus supplement.
OVERCOLLATERALIZATION DEFICIENCY AMOUNT -- With respect to any distribution
date, the amount, if any, by which the Overcollateralization Target Amount
exceeds the Overcollateralized Amount on such distribution date (after giving
effect to distributions in respect of the Basic Principal Distribution Amount on
such distribution date).
OVERCOLLATERALIZATION RELEASE AMOUNT -- With respect to any distribution date,
the lesser of (x) the Principal Remittance Amount for such distribution date and
(y) the excess, if any, of (i) the Overcollateralized Amount for such
distribution date (assuming that 100% of the Principal Remittance Amount is
applied as a principal payment on such distribution date) over (ii) the
Overcollateralization Target Amount for such distribution date.
S-68
<PAGE>
OVERCOLLATERALIZATION TARGET AMOUNT -- With respect to any distribution date,
$1,000,000.
OVERCOLLATERALIZED AMOUNT -- For any distribution date, the amount, if any, by
which (i) the the aggregate principal balance of the mortgage loans (after
giving effect to scheduled payments of principal due during the related Due
Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) exceeds (ii) the
aggregate Certificate Principal Balance of the offered certificates (other than
the Class A-IO Certificates) and the Class P Certificates as of such
distribution date (after giving effect to distributions to be made on such
distribution date).
P&I ADVANCE -- The aggregate of all payments of principal and interest, net of
the Servicing Fee, that were due during the related Due Period on the mortgage
loans master serviced by it and that were delinquent on the related
Determination Date.
PASS-THROUGH RATE-- With respect to any distribution date and
o the Class A-1 Certificates, 7.45% per annum;
o the Class A-2 Certificates, the lesser of (x) 7.29% per annum
and (y) the Net WAC Rate;
o the Class A-3 Certificates, the lesser of (x) 7.85% per annum
and (y) the Net WAC Rate;
o the Class A-4 Certificates, (A) in the case of any
distribution date up to and including the Optional Termination
Date, the lesser of (x) 7.43% per annum and (y) the Net WAC
Rate and (B) in the case of any distribution date after the
Optional Termination Date, the lesser of (x) 7.93% per annum
and (y) the Net WAC Rate;
o the Class A-IO Certificates, (A) in the case of any
distribution date up to and including the 30th distribution
date, the lesser of (x) 8.00% per annum and (y) the Class A-IO
Cap Rate and (B) in the case of any distribution date after
the 30th distribution date, 0% per annum;
o the Class M-1 Certificates, (A) in the case of any
distribution date up to and including the Optional Termination
Date, the lesser of (x) 7.92% per annum and (y) the Net WAC
Rate and (B) in the case of any distribution date after the
Optional Termination Date, the lesser of (x) 8.42% per annum
and (y) the Net WAC Rate;
o the Class M-2 Certificates, (A) in the case of any
distribution date up to and including the Optional Termination
Date, the lesser of (x) 8.16% per annum and (y) the Net WAC
Rate and (B) in the case of any distribution date after the
Optional Termination Date, the lesser of (x) 8.66% per annum
and (y) the Net WAC Rate; and
o the Class B Certificates, (A) in the case of any distribution
date up to and including the Optional Termination Date, the
lesser of (x) 8.50% per annum and (y) the Net WAC Rate and (B)
in the case of any distribution date after the Optional
Termination Date, the lesser of (x) 9.00% per annum and (y)
the Net WAC Rate.
PLAN -- Any employee benefit plan subject to Title IV of ERISA and any plan or
other arrangement described in Section 4975(e)(1) of the Code.
S-69
<PAGE>
PLAN ASSETS -- The assets of a Plan as determined under Department of Labor
regulation section 2510.3-101 or other applicable law.
PREPAYMENT PERIOD -- With respect to any distribution date is the calendar month
immediately preceding the month in which such distribution date occurs.
PREPAYMENT ASSUMPTION -- A Prepayment Assumption of 100% assumes that the
outstanding balance of a pool of mortgage loans prepays at a rate of 4% CPR in
the first month of the life of such pool, such rate increasing by an additional
approximate 1.27% CPR (precisely 14/11 percent) each month thereafter through
the eleventh month of the life of such pool, and such rate thereafter remaining
constant at 18% CPR for the remainder of the life of such pool.
PRINCIPAL DISTRIBUTION AMOUNT -- For any distribution date, the Basic Principal
Distribution Amount plus the Extra Principal Distribution Amount.
PRINCIPAL REMITTANCE AMOUNT-- For any distribution date, the sum of
(1) the principal portion of all scheduled monthly payments on
the mortgage loans due on the related Due Date, to the extent received or
advanced;
(2) the principal portion of all proceeds of the repurchase of
a mortgage loan (or, in the case of a substitution, certain amounts representing
a principal adjustment) as required by the Agreement during the preceding
calendar month; and
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month, including full and partial
prepayments, Liquidation Proceeds and Insurance Proceeds, in each case to the
extent applied as recoveries of principal.
RADIAN-- Radian Guaranty, Inc., formerly known as Commonwealth Mortgage
Assurance Company.
RADIAN LENDER-PAID PMI POLICY -- A Primary Insurance Policy issued by Radian in
accordance with a May 1, 2000 letter between the Seller and Radian.
RADIAN PMI INSURED LOANS -- The mortgage loans covered by a Radian Lender-Paid
PMI Policy.
RADIAN PMI RATE -- With respect to each Radian PMI Insured Loan, the per annum
rate payable to Radian under the related Radian Lender-Paid PMI Policy.
RATING AGENCIES-- Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., and Moody's Investors Services, Inc.
RECORD DATE -- For each distribution date, the close of business on the last
business day of the month preceding the month in which such distribution date
occurs.
REMIC -- A real estate mortgage investment conduit.
REMIC REGULATIONS -- Treasury regulations under Sections 860A to 860G of the
Code generally addressing the treatment of REMICs.
S-70
<PAGE>
RULES -- The rules, regulations and procedures creating and affecting DTC and
its operations.
SELLER -- Impac Funding Corporation, in its capacity as seller under the
Mortgage Loan Purchase Agreement.
SERVICING FEE -- With respect to each mortgage loan, accrued interest at the
Servicing Fee Rate with respect to the mortgage loan on the same principal
balance on which interest on the mortgage loan accrues for the calendar month.
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 0.03% 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 0.25% per annum.
SERVICING FEE RATE -- On each mortgage loan, a rate equal to 0.28% per annum.
STATED PRINCIPAL BALANCE -- With respect to any mortgage loan as of any date of
determination, the principal balance thereof as of the Cut-off Date, after
application of all scheduled principal payments due on or before the Cut-off
Date, whether or not received, reduced by all amounts allocable to principal
that have been distributed to certificateholders with respect to such mortgage
loan on or before such date, and as further reduced to the extent that any
Realized Loss thereon has been allocated to one or more classes of certificates
on or before the date of determination.
STEPDOWN DATE -- The earlier to occur of (i) the distribution date on which the
Certificate Principal Balance of the Class A Certificates has been reduced to
zero and (ii) later to occur of (x) the distribution date occurring in December
2003 and (y) the first distribution date with respect to which the aggregate
percentage interest in the trust fund represented by the Certificate Principal
Balances of the Mezzanine Certificates and the Class C Certificates is greater
than or equal to 13.00%.
SUBSERVICERS-- Wendover Funding, Inc. and GMAC Mortgage Corporation.
TRIGGER EVENT-- A Trigger Event is in effect with respect to any distribution
date if
(1) the aggregate principal balance of mortgage loans that are
60 or more days delinquent as of the close of business on the last day of the
preceding calendar month exceeds 2.25% (in the case of the 36th distribution
date through the 60th distribution date) or 3.25% (in the case of any
distribution date thereafter) of the aggregate principal balance of the mortgage
loans as of such distribution date (prior to giving effect to scheduled payments
of principal due during the related Due Period, to the extent received or
advanced, and unscheduled collections of principal received during the related
Prepayment Period); or
(2) in the case of any distribution date after the 36th
distribution date, the cumulative amount of Realized Losses incurred on the
mortgage loans from the Cut-off Date through the end of the calendar month
immediately preceding such distribution date exceeds 10.00% of the sum of (x)
the aggregate Certificate Principal Balance of the Mezzanine Certificates (or,
if the Certificate Principal Balances of the Class A Certificates have been
reduced to zero, the aggregate Certificate Principal Balance of the Mezzanine
Certificates other than the class of Mezzanine Certificates with the highest
payment priority) after giving effect to distributions that would be made on
such distribution date if no Trigger Event were in effect and (y) the
Overcollateralized Amount.
For purposes of the foregoing calculation, a mortgage loan is considered "60
days" delinquent if a payment due on the first day of a month has not been
received by the second day of the second following month.
S-71
<PAGE>
TRUSTEE-- Bankers Trust Company of California, N.A.
TRUSTEE'S FEE -- Accrued interest at the Trustee's Fee Rate on the Stated
Principal Balance of each mortgage loan.
TRUSTEE'S FEE RATE -- On each mortgage loan, a rate equal to 0.005% per annum.
UNDERWRITER-- Bear, Stearns & Co. Inc.
UNPAID INTEREST SHORTFALL AMOUNT -- For each class of offered certificates and
the first distribution date, zero, and (ii) with respect to each class of
offered certificates and any distribution date after the first distribution
date, the amount, if any, by which (a) the sum of (1) the Monthly Interest
Distributable Amount for such class for the immediately preceding distribution
date and (2) the outstanding Unpaid Interest Shortfall Amount, if any, for such
class for such preceding distribution date exceeds (b) the aggregate amount
distributed on such class in respect of interest pursuant to clause (a) of this
definition on such preceding distribution date, plus interest on the amount of
interest due but not paid on the certificates of such class on such preceding
distribution date, to the extent permitted by law, at the Pass-Through Rate for
such class for the related Accrual Period.
S-72
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Impac
Mortgage Pass-Through Certificates, Series 2000-4 Class A-1, Class A-2, Class
A-3, Class A-4, Class A-IO, Class M-1, Class M-2 and Class B (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold interests in such Global Securities through any of DTC,
Clearstream or Euroclear. Initial settlement and all secondary trades will
settle in same day funds. Capitalized terms used but not defined in this Annex I
have the meanings assigned to them in the Prospectus Supplement and the
Prospectus.
Secondary market trading between investors holding interests in Global
Securities through Clearstream and Euroclear will be conducted in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice. Secondary market trading between investors
holding interests in Global Securities through DTC will be conducted according
to the rules and procedures applicable to U.S. corporate debt obligations.
Secondary cross-market trading between investors holding interests in
Global Securities through Clearstream or Euroclear and investors holding
interests in Global Securities through DTC Participants will be effected on a
delivery-against-payment basis through the respective depositories of
Clearstream and Euroclear (in such capacity) and other DTC Participants.
Although DTC, Euroclear and Clearstream are expected to follow the
procedures described below in order to facilitate transfers of interests in the
Global Securities among participants of DTC, Euroclear and Clearstream, they are
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Issuer nor the Indenture
Trustee will have any responsibility for the performance by DTC, Euroclear and
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
obligations.
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
The Global Securities will be registered 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. Clearstream and Euroclear will hold positions on
behalf of their participants through their respective depositories, which in
turn will hold such positions in accounts as DTC Participants.
Investors electing to hold interests in Global Securities through DTC
Participants, rather than through Clearstream or Euroclear accounts, will be
subject to the settlement practices applicable to similar issues of pass-through
certificates. Investors' securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold interests in Global Securities through
Clearstream or Euroclear accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no
I-1
<PAGE>
temporary global security and no "lock-up" or restricted period. Interests in
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.
TRANSFERS BETWEEN DTC PARTICIPANTS. Secondary market trading between
DTC Participants will be settled using the DTC procedures applicable to similar
issues of pass-through certificates in same-day funds.
TRANSFERS BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream Participants or Euroclear Participants and/or
investors holding interests in Global Securities through them will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRANSFERS BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER.
When interests in Global Securities are to be transferred on behalf of a seller
from the account of a DTC Participant to the account of a Clearstream
Participant or a Euroclear Participant for a purchaser, the purchaser will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
or the Euroclear Operator will instruct its respective depository to receive an
interest in the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last distribution date
to but excluding the settlement date. Payment will then be made by the
respective depository to the DTC Participant's account against delivery of an
interest in the Global Securities. After such settlement has been completed,
such interest will be credited to the respective clearing system, and by the
clearing system, in accordance with its usual procedures, to the Clearstream
Participant's or Euroclear Participant's account. The credit of such interest
will appear on the next business day and the cash debit 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 through DTC on the intended value date (i.e., the
trade fails), the Clearstream or Euroclear cash debit will be valued instead as
of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing system the funds necessary to process
same-day funds settlement. The most direct means of doing so is to pre-position
funds for settlement from cash on hand, in which case such Clearstream
Participants or Euroclear Participants will take on credit exposure to
Clearstream or the Euroclear Operator until interests in the Global Securities
are credited to their accounts one day later.
As an alternative, if Clearstream or the Euroclear Operator has
extended a line of credit to them, Clearstream Participants or Euroclear
Participants can elect not to pre-position funds and allow that credit line to
be drawn upon. Under this procedure, Clearstream Participants or Euroclear
Participants receiving interests in Global Securities for purchasers would incur
overdraft charges for one day, to the extent they cleared the overdraft when
interests in the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
the investment income on the interest in the Global Securities earned during
that one-day period would tend to offset the amount of such overdraft charges,
although this result will depend on each Clearstream Participant's or Euroclear
Participant's particular cost of funds.
I-2
<PAGE>
Since the settlement through DTC will take place during New York
business hours, DTC Participants are subject to DTC procedures for transferring
interests in Global Securities to the respective depository of Clearstream or
Euroclear for the benefit of Clearstream Participants or Euroclear Participants.
The sale proceeds will be available to the DTC seller on the settlement date.
Thus, to the seller settling the sale through a DTC Participant, a cross-market
transaction will settle no differently than a sale to a purchaser settling
through a DTC Participant.
Finally, intra-day traders that use Clearstream Participants or
Euroclear Participants to purchase interests in Global Securities from DTC
Participants or sellers settling through them for delivery to Clearstream
Participants or Euroclear Participants should note that these trades will
automatically fail on the sale side unless affirmative action is taken. At least
three techniques should be available to eliminate this potential condition:
(a) borrowing interests in Global Securities through
Clearstream or Euroclear for one day (until the purchase side of the
intra-day trade is reflected in the relevant Clearstream or Euroclear
accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing interests in Global Securities in the United
States from a DTC Participant no later than one day prior to
settlement, which would give sufficient time for such interests to be
reflected in the relevant Clearstream or Euroclear accounts 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 Clearstream Participant or Euroclear Participant.
TRANSFERS BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER.
Due to time zone differences in their favor, Clearstream Participants and
Euroclear Participants may employ their customary procedures for transactions in
which interests in Global Securities are to be transferred by the respective
clearing system, through the respective depository, to a DTC Participant. The
seller will send instructions to Clearstream or the Euroclear Operator through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct its respective depository,
to credit an interest in 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 distribution date to but excluding the settlement
date. The payment will then be reflected in the account of the Clearstream
Participant or Euroclear Participant the following business day, and receipt of
the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred through DTC in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), receipt of the
cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would instead be valued as of the actual settlement date.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream 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
I-3
<PAGE>
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 or Form W-8BEN). 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) or Form W-8BEN (Certificate of Foreign Status of Beneficial
Owner for United States Tax Withholding). If the information shown on Form W-8
or Form W-8BEN changes, a new Form W-8 or Form W-8BEN must be filed within 30
days of such change. After December 31, 2000, only Form W-8BEN will be
acceptable.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224 OR FORM W-8ECI). 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) or Form W-8ECI (Certificate
of Foreign Person's Claim for Exemption from Withholding 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 OR FORM W- 8BEN). 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) or Form W-8BEN (Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding). Form 1001 or Form
W-8BEN may be filed by Bond Holders or their agent. After December 31, 2000,
only Form W-8BEN will be acceptable.
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, Form 1001 and Form 4224 are effective
until December 31, 2000. Form W- 8BEN and Form W-8ECI are effective until the
third succeeding calendar year from the date the form is signed. 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 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.
I-4
<PAGE>
Impac Secured Assets Corp.
Company
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
--------------------------------------------------------------------------------
You should consider carefully the risk factors in the prospectus supplement.
--------------------------------------------------------------------------------
THE OFFERED SECURITIES
The company proposes to establish one or more trusts to issue and sell from time
to time one or more classes of offered securities, which shall be mortgage
pass-through certificates or mortgage- backed notes.
THE TRUST FUND
Each series of securities will be secured by a trust fund consisting primarily
of a segregated pool of mortgage loans, including:
o mortgage loans secured by first and junior liens on
the related mortgage property;
o home equity revolving lines of credit;
o mortgage loans where the borrower has little or no
equity in the related mortgaged property;
o mortgage loans secured by one-to-four-family
residential properties;
o mortgage loans secured by multifamily properties;
o mortgage loans secured by commercial properties;
o mortgage loans secured by mixed residential and
commercial properties; and
o manufactured housing conditional sales contracts and
installment loan agreements or interests therein;
in each case acquired by the company from one or more affiliated or unaffiliated
institutions.
CREDIT ENHANCEMENT
If so specified in the related prospectus supplement, the trust for a series of
securities may include any one or any combination of a financial guaranty
insurance policy, mortgage pool insurance policy, letter of credit, special
hazard insurance policy or reserve fund, and currency or interest rate exchange
agreements. 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, by
cross-support or by overcollateralization.
The offered securities may be offered to the public through different methods as
described in "Methods of Distribution" in this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED HEREBY OR
DETERMINED THAT THIS PROSPECTUS OR THE PROSPECTUS SUPPLEMENT IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is June 27, 2000.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Caption Page
------- ----
<S> <C>
INTRODUCTION......................................................................................................3
General ................................................................................................3
THE MORTGAGE POOLS................................................................................................4
General ................................................................................................4
The Mortgage Loans.......................................................................................6
Underwriting Standards..................................................................................10
Qualifications of Originators and Sellers...............................................................13
Representations by Sellers..............................................................................13
SERVICING OF MORTGAGE LOANS......................................................................................16
General ...............................................................................................16
The Master Servicer.....................................................................................17
Collection and Other Servicing Procedures; Mortgage
Loan Modifications.............................................................................17
Subservicers............................................................................................19
Special Servicers.......................................................................................19
Realization Upon or Sale of Defaulted Mortgage Loans ...................................................20
Servicing and Other Compensation and Payment of
Expenses; Retained Interest....................................................................22
Evidence as to Compliance...............................................................................23
DESCRIPTION OF THE SECURITIES....................................................................................24
General ...............................................................................................24
Form of Securities......................................................................................26
Global Securities.......................................................................................27
Assignment of Trust Fund Assets.........................................................................30
Certificate Account.....................................................................................33
Distributions...........................................................................................37
Distributions of Interest and Principal on the Securities...............................................38
Pre-Funding Account.....................................................................................39
Distributions on the Securities in Respect of Prepayment
Premiums.......................................................................................39
Allocation of Losses and Shortfalls.....................................................................39
Advances ...............................................................................................40
Reports to Securityholders..............................................................................41
DESCRIPTION OF CREDIT ENHANCEMENT................................................................................42
General ...............................................................................................42
Subordinate Securities..................................................................................43
Cross-support...........................................................................................43
Overcollateralization...................................................................................43
Financial Guaranty Insurance Policy.....................................................................44
Mortgage Pool Insurance Policies........................................................................44
Letter of Credit........................................................................................46
Special Hazard Insurance Policies.......................................................................46
Reserve Funds...........................................................................................47
Cash Flow Agreements....................................................................................48
Maintenance of Credit Enhancement.......................................................................48
Reduction or Substitution of Credit Enhancement.........................................................50
OTHER FINANCIAL OBLIGATIONS RELATED TO THE
SECURITIES..............................................................................................51
Swaps and Yield Supplement Agreements...................................................................51
Purchase Obligations....................................................................................51
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER.......................................................................................52
General ...............................................................................................52
Primary Mortgage Insurance Policies.....................................................................52
Hazard Insurance Policies...............................................................................53
FHA Insurance...........................................................................................55
VA Mortgage Guaranty....................................................................................55
THE COMPANY......................................................................................................56
IMPAC FUNDING CORPORATION........................................................................................56
IMPAC MORTGAGE HOLDINGS, INC.....................................................................................56
THE AGREEMENTS...................................................................................................57
General ...............................................................................................57
Certain Matters Regarding the Master Servicer and the
Company........................................................................................57
Events of Default and Rights Upon Event Default.........................................................58
Amendment...............................................................................................62
Termination; Retirement of Securities...................................................................64
The Trustee.............................................................................................65
Duties of the Trustee...................................................................................65
Some Matters Regarding the Trustee......................................................................65
Resignation and Removal of the Trustee..................................................................65
YIELD CONSIDERATIONS.............................................................................................66
MATURITY AND PREPAYMENT CONSIDERATIONS...........................................................................69
LEGAL ASPECTS OF MORTGAGE LOANS..................................................................................70
Mortgages...............................................................................................70
Cooperative Mortgage Loans..............................................................................71
Tax Aspects of Cooperative Ownership....................................................................72
Leases and Rents........................................................................................73
Contracts...............................................................................................73
Foreclosure on Mortgages and Some Contracts.............................................................75
Foreclosure on Shares of Cooperatives...................................................................76
Repossession with respect to Contracts..................................................................78
Rights of Redemption....................................................................................79
Anti-Deficiency Legislation and Other Limitations on
Lenders........................................................................................80
Environmental Legislation...............................................................................81
Consumer Protection Laws with respect to Contracts......................................................82
Enforceability of Some Provisions.......................................................................83
Subordinate Financing...................................................................................84
Installment Contracts...................................................................................85
Applicability of Usury Laws.............................................................................85
Alternative Mortgage Instruments........................................................................86
Formaldehyde Litigation with respect to Contracts.......................................................86
Soldiers' and Sailors' Civil Relief Act of 1940.........................................................87
Forfeitures in Drug and RICO Proceedings................................................................87
Junior Mortgages........................................................................................88
Negative Amortization Loans.............................................................................88
FEDERAL INCOME TAX CONSEQUENCES..................................................................................89
General ...............................................................................................89
REMICs ...............................................................................................90
Notes ..............................................................................................107
Grantor Trust Funds....................................................................................107
STATE AND OTHER TAX CONSEQUENCES................................................................................117
ERISA CONSIDERATIONS............................................................................................117
Representation from Plans Investing in Notes with
"Substantial Equity Features" or Non-Exempt
Certificates..................................................................................122
Tax Exempt Investors...................................................................................123
Consultation with Counsel..............................................................................123
LEGAL INVESTMENT MATTERS........................................................................................123
USE OF PROCEEDS.................................................................................................125
METHODS OF DISTRIBUTION.........................................................................................125
LEGAL MATTERS...................................................................................................126
FINANCIAL INFORMATION...........................................................................................126
RATING .......................................................................................................126
AVAILABLE INFORMATION...........................................................................................127
REPORTS TO SECURITYHOLDERS......................................................................................127
INCORPORATION OF INFORMATION BY REFERENCE.......................................................................127
</TABLE>
2
<PAGE>
INTRODUCTION
ALL CAPITALIZED TERMS IN THIS PROSPECTUS ARE DEFINED IN THE
GLOSSARY AT THE END.
GENERAL
The mortgage pass-through certificates or mortgage-backed notes
offered by this prospectus and the prospectus supplement will be offered from
time to time in series. The securities of each series will consist of the
offered securities of the series, together with any other mortgage pass-through
certificates or mortgage-backed notes of the series.
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 to be established by the company. Each trust fund
will consist primarily of a mortgage pool of mortgage loans or interests
therein, which may include mortgage securities, acquired by the company from one
or more affiliated or unaffiliated sellers. See "The Company" and "The Mortgage
Pools." The mortgage loans may include sub-prime mortgage loans. The trust fund
assets may only include, if applicable, the mortgage loans, reinvestment income,
reserve funds, cash accounts and various forms of credit enhancement as
described in this prospectus and will be held in trust for the benefit of the
related securityholders pursuant to: (1) with respect to each series of
certificates, a pooling and servicing agreement or other agreement, or (2) with
respect to each series of notes, an indenture, in each case as more fully
described in this prospectus and in the related prospectus supplement.
Information regarding the offered securities of a series, and the general
characteristics of the mortgage loans and other trust fund assets in the related
trust fund, will be set forth in the related prospectus supplement.
Each series of 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 the other trust fund assets in the related
trust fund in the manner described in this prospectus under "Description of the
Securities" and in the related prospectus supplement. A series may include one
or more classes of securities entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. 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 representations and warranties made by the
company, except as provided in the related prospectus supplement. 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 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
financial guaranty insurance policy, mortgage pool insurance policy, letter of
credit, special hazard insurance policy, reserve fund or currency or interest
rate exchange agreements. 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 or by overcollateralization. See "Description of Credit Enhancement."
3
<PAGE>
The rate of payment of principal of each class of securities
entitled to a portion of principal payments on the mortgage loans in the related
mortgage pool and the trust fund assets will depend on the priority of payment
of the class and the rate and timing of principal payments on the mortgage loans
and other trust fund assets, including by reason of prepayments, defaults,
liquidations and repurchases of mortgage loans. A rate of principal payment
slower or faster than that anticipated may affect the yield on a class of
securities in the manner described in this prospectus and in the related
prospectus supplement.
See "Yield Considerations."
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 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" in this prospectus.
The offered securities may be offered through one or more
different methods, including offerings through underwriters, as more fully
described under "Methods of Distribution" and in the related prospectus
supplement.
There will be no secondary market for the 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.
THE MORTGAGE POOLS
GENERAL
Each mortgage pool will consist primarily of mortgage loans,
minus any interest retained by the company or any affiliate of the company. The
mortgage loans may consist of single family loans, multifamily loans, commercial
loans, mixed-use loans and Contracts, each as described below.
The single family loans will be evidenced by mortgage notes and
secured by 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 related mortgaged property for a single family loan may be owner-occupied or
may be a vacation, second or non-owner-occupied home.
If specified in the related prospectus supplement relating to a
series of securities, the single family loans may include cooperative apartment
loans evidenced by a mortgage note secured by security interests in the related
mortgaged property including shares issued by cooperatives and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the related buildings.
The multifamily loans will be evidenced by mortgage notes and
secured by mortgages that create a first or junior lien on residential
properties consisting of five or more dwelling units in high-rise, mid- rise or
garden apartment structures or projects.
The commercial loans will be evidenced by mortgage notes and
secured mortgages that create a first or junior lien on commercial properties
including office building, retail building and a variety of
4
<PAGE>
other commercial properties as may be described in the related prospectus
supplement. No more than 10% of the mortgage loans in any mortgage pool, by
original principal balance of the mortgage pool, will be secured by commercial
properties.
The mixed-use loans will be evidenced by mortgage loans and
secured by mortgages that create a first or junior lien on properties consisting
of mixed residential and commercial structures.
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 or any of its affiliates. However, if so specified in the related
prospectus supplement, the mortgage loans may be insured by the FHA or the VA.
See "Description of Primary Insurance Policies--FHA Insurance" and "-- VA
Insurance."
A mortgage pool may include mortgage loans that are delinquent as
of the date the related series of securities is issued. In that case, the
related prospectus supplement will set forth, as to each mortgage loan,
available information as to the period of delinquency and any other information
relevant for a prospective purchaser to make an investment decision. No mortgage
loan in a mortgage pool shall be 90 days or more delinquent. Mortgage loans
which are more than 30 and less than 90 days delinquent included in any mortgage
pool will have delinquency data relating to them included in the related
prospectus supplement. No mortgage pool will include a concentration of mortgage
loans which is more than 30 and less than 90 days delinquent of 20% or more.
The mortgage loans may include "sub-prime" mortgage loans.
"Sub-prime" mortgage loans will be underwritten in accordance with underwriting
standards which are less stringent than guidelines for "A" quality borrowers.
Mortgagors may have a record of outstanding judgments, prior bankruptcies and
other credit items that do not satisfy the guidelines for "A" quality borrowers.
They may have had past debts written off by past lenders.
A mortgage pool may include mortgage loans that do not meet the
purchase requirements of Fannie Mae and Freddie Mac. These mortgage loans are
known as nonconforming loans. The mortgage loans may be nonconforming because
they exceed the maximum principal balance of mortgage loans purchased by Fannie
Mae and Freddie Mac, known as jumbo loans, because they are sub-prime mortgage
loans, or because of some other failure to meet the purchase criteria of Fannie
Mae and Freddie Mac. The related prospectus supplement will detail to what
extent the mortgage loans are nonconforming mortgage loans.
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 Unaffiliated Sellers or Affiliated 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 the mortgage pool.
The mortgage loans may be delivered to the trust fund pursuant to
a Designated Seller Transaction, concurrently with the issuance of the related
series of securities. These securities may be sold in whole or in part to the
Seller in exchange for the related mortgage loans, or may be offered under
5
<PAGE>
any of the other methods described in this prospectus 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.
If specified in the related prospectus supplement, the trust fund
for a series of securities may include mortgage securities, as described in this
prospectus. 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 trusts, and selling beneficial interests in trusts. The
mortgage securities will be generally similar to securities offered under this
prospectus. However, any mortgage securities included in a trust fund will (1)
either have been (a) previously registered under the Securities Act, or (b)
eligible for sale under Rule 144(k) under the Exchange Act; and (2) be acquired
in bona fide secondary market transactions. If the mortgage securities are the
securities of the company or an affiliate thereof, they will be registered under
the Securities Act, even if they satisfy the requirements of the preceding
sentence. As to any series of mortgage securities, the related prospectus
supplement will include a description of (1) the mortgage securities and any
related credit enhancement, and (2) the mortgage loans underlying the mortgage
securities.
THE MORTGAGE LOANS
Each of the mortgage loans will be a type of mortgage loan
described or referred to below, with any variations described in the related
prospectus supplement:
o 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;
o 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 30 years;
o Fully-amortizing ARM Loans having an original or
modified term to maturity of not more than
approximately 30 years with a related mortgage rate
which generally adjusts initially either three
months, six months or one, two, three, five, seven
or ten years or other intervals 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 the related Note
Margin and the Note Index. The related prospectus
supplement will set forth the relevant Index and
the highest, lowest and weighted average Note
Margin with respect to the ARM Loans in the related
mortgage pool. The related prospectus supplement
will also indicate any periodic or lifetime
limitations on changes in any per annum mortgage
rate at the time of any adjustment. If specified in
the related prospectus supplement, an ARM Loan may
include a provision that allows the mortgagor to
convert the adjustable mortgage rate to a fixed
rate at some point during the term of the ARM Loan
generally not later than six to ten years
subsequent to the initial payment date;
6
<PAGE>
o Negatively-amortizing ARM Loans having original or
modified terms to maturity of not more than
approximately 30 years with mortgage rates which
generally adjust initially on the payment date
referred to in the related prospectus supplement,
and on each of specified 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 limitations as specified in the related
prospectus supplement. Any Deferred Interest will
be added to the principal balance of the mortgage
loan;
o 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 the mortgage
loan. Monthly payments on these mortgage loans
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 these mortgage loans;
o Fixed-rate, graduated payment mortgage loans having
original or modified terms to maturity of not more
than approximately 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. The monthly
payments on these mortgage loans 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 these mortgage loans;
o Balloon loans having payment terms similar to those
described in one of the preceding paragraphs,
calculated on the basis of an assumed amortization
term, but providing for a balloon payment of all
outstanding principal and interest to be made at
the end of a specified term that is shorter than
the assumed amortization term.
o Mortgage loans that provide for a line of credit
pursuant to which amounts may be advanced to the
borrower from time to time; or
o Another type of mortgage loan described in the
related prospectus supplement.
The mortgage pool may contain mortgage loans secured by junior
liens, and the related senior liens may not be included in the mortgage pool.
The primary risk to holders of mortgage loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related senior liens to satisfy fully both the senior liens
and the mortgage loan. In the event that a holder of a senior lien forecloses on
a mortgaged property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the senior liens. The claims of the holders
of the senior liens will be satisfied in full out of proceeds of the liquidation
of the related mortgaged property, if the proceeds are sufficient, before the
trust fund as holder of the junior lien receives any payments in
7
<PAGE>
respect of the mortgage loan. If the master servicer were to foreclose on a
mortgage loan secured by a junior lien, 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 the sale, a bidder at the foreclosure sale of the 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 the 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 (1) the risk of delay in distributions while a deficiency
judgment against the borrower is sought and (2) the risk of loss if the
deficiency judgment is not realized upon. Moreover, deficiency judgments may not
be available in some 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.
A mortgage loan may contain a prohibition on prepayment or
lock-out period or require payment of a prepayment penalty. A multifamily,
commercial or mixed-use 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. If the holders of any class or classes of offered
securities of a series will be entitled to all or a portion of this type of
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.
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, some or all of the
single family loans secured by junior liens may be High LTV Loans.
A mortgage pool may contain convertible ARM Loans which allow the
mortgagors to convert the adjustable rates on these mortgage loans to a fixed
rate at some point during the life of these mortgage loans, 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 specified party) may agree to act as remarketing
agent with respect to the converted mortgage loans and, in this 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
converted mortgage loan, the inability of any remarketing agent to arrange for
the sale of the converted mortgage loan and the unwillingness of the 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.
8
<PAGE>
If provided for in the related prospectus supplement, the
mortgage loans may include buydown mortgage loans. Under the terms of a buydown
mortgage loan, the monthly payments made by the mortgagor during the early years
of the mortgage loan will be less than the scheduled monthly payments on the
mortgage loan. The resulting difference will made up from:
o funds contributed by the seller of the mortgaged
property or another source and placed in a
custodial account,
o if funds contributed by the seller are contributed
on a present value basis, investment earnings on
these funds or
o additional funds to be contributed over time by the
mortgagor's employer or another source.
See "Description of the Securities--Payments on Mortgage Loans; Deposits to
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 some buydown mortgage loans, during the Buydown Period.
The prospectus supplement for each series of securities will
contain information, to the extent known or reasonably ascertainable, as to the
loss and delinquency experience of the Seller and/or the master servicer with
respect to mortgage loans similar to those included in the trust fund.
Information generally will be provided when the Seller and/or master servicer
have a seasoned portfolio of mortgage loans.
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 information, generally as of the cut-off date and to the
extent then available to the company, on an approximate basis, as to the
following:
o the aggregate principal balance of the mortgage
loans,
o the type of property securing the mortgage loans,
o the original or modified terms to maturity of the
mortgage loans,
o the range of principal balances of the mortgage
loans at origination or modification,
o the earliest origination or modification date and
latest maturity date of the mortgage loans,
o the loan-to-value ratios of the mortgage loans,
o the mortgage rate or range of mortgage rates borne
by the mortgage loans,
o if any of the mortgage loans are ARM Loans, the
applicable Index, the range of Note Margins and the
weighted average Note Margin,
9
<PAGE>
o the geographical distribution of the mortgage
loans,
o the number of buydown mortgage loans, if
applicable, and
o 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 and servicing agreement, with respect to each series of certificates, or
the related servicing agreement, owner trust agreement and indenture, with
respect to each series of notes, with the Commission within fifteen days after
the initial issuance of the securities. In the event that mortgage loans are
added to or deleted from the trust fund after the date of the related prospectus
supplement, the addition or deletion will be noted in the Current Report on Form
8-K. In no event, however, will more than 5% (by principal balance at the
cut-off date) of the mortgage loans or mortgage securities deviate from the
characteristics of the mortgage loans or mortgage securities set forth in the
related prospectus supplement.
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 subservicers,
pursuant to a pooling and servicing agreement, with respect to each series of
certificates, or a servicing agreement, with respect to each series of notes,
and will receive a fee for these 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 and servicing agreement or servicing agreement as if the master servicer
alone were servicing the 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 and servicing agreement or
servicing agreement (including its obligation to enforce the purchase and other
obligations of subservicers and Sellers, as more fully described in this
prospectus under "--Representations by Sellers" in this prospectus, "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 cash advances in the event of
delinquencies in payments on or with respect to the mortgage loans as described
in this prospectus 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. The
mortgage loans, as well as mortgage loans underlying mortgage securities, will
have been originated in accordance with underwriting standards acceptable to the
company and generally described below. Any mortgage loan not directly
underwritten by the company or its affiliates will be reunderwritten by the
company or its affiliates, except in the case of a Designated Seller's
Transaction, in which case each mortgage loan will be underwritten by the Seller
or an affiliate thereof. The reunderwriting standards of the company or its
affiliates for these mortgage loans generally will be in accordance with the
same standards as those for mortgage loans directly underwritten, with any
variations described in the related prospectus supplement.
10
<PAGE>
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 the property as
collateral for the mortgage loan.
The primary considerations in underwriting a mortgage loan are
the mortgagor's employment stability and whether the mortgagor has sufficient
monthly income available (1) 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
(including property taxes and hazard insurance) and (2) 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. High LTV 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, commercial loans or
mixed-use loans, lenders typically look to the debt service coverage ratio of a
loan as an important measure of the risk of default on that loan. Unless
otherwise defined in the related prospectus supplement, the debt service
coverage ratio of a multifamily loan or commercial loan at any given time is the
ratio of (1) the net operating income of the related mortgaged property for a
twelve-month period which is to (2) 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. The total operating revenues
derived from a multifamily, commercial or mixed-use property, as applicable,
during that period, minus the total operating expenses incurred in respect of
that property during that period other than (a) non-cash items such as
depreciation and amortization, (b) capital expenditures and (c) debt service on
loans (including the related mortgage loan) secured by liens on that property.
The net operating income of a multifamily, commercial or mixed-use property, as
applicable, 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, commercial or mixed-use
property, as applicable, 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,
commercial or mixed-use loan. Lenders also look to the loan-to-value ratio of a
multifamily, commercial or mixed-use loan as a measure of risk of loss if a
property must be liquidated following a default.
Each prospective mortgagor will generally complete a mortgage
loan application that includes information on 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
generally will be required. 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. In the case of a multifamily loan, commercial loan or mixed-use loan,
the mortgagor will also be required to provide certain information regarding the
related mortgaged 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 mortgaged property, the
availability of competitive lease space and rental income of comparable
properties in the relevant market
11
<PAGE>
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 or commercial properties, as the case may be.
Mortgaged properties generally 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
mortgaged properties secured by single family loans, 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, commercial properties and mixed-use 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 support, and
support in the future, the outstanding loan balance. All appraisals are required
to be on forms acceptable to Fannie Mae or 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. Mortgage loans which are subject to negative amortization will have
loan-to-value ratios which will increase after origination as a result of
negative amortization. Also, even when current, an appraisal is not necessarily
a reliable estimate of value for a multifamily property or commercial property.
As stated above, appraised values of multifamily, commercial and mixed-use
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 those 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, commercial loan or mixed-use loan may also
include environmental testing. Under the laws of some states, contamination of
real property may give rise to a lien on the property to assure the costs of
cleanup. In several states, this type of lien has priority over an existing
mortgage lien on that property. In addition, under the laws of some states and
under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, 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 as described
under "Legal Aspects of Mortgage Loans--Environmental Legislation" in this
prospectus.
12
<PAGE>
With respect to any FHA loan or VA loans the mortgage loan Seller
will be required to represent that it has complied with the applicable
underwriting policies of the FHA or VA, respectively. See "Description of
Primary Insurance Policies--FHA Insurance" and "--VA Insurance" in this
prospectus.
QUALIFICATIONS OF ORIGINATORS AND SELLERS
Each mortgage loan generally 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 Housing Act.
REPRESENTATIONS BY SELLERS
Each Seller will have made representations and warranties in
respect of the mortgage loans and/or mortgage securities sold by the Seller and
evidenced by a series of securities. In the case of mortgage loans,
representations and warranties will generally include, among other things, that
as to each mortgage loan:
o any required hazard and primary mortgage insurance
policies were effective at the origination of the
mortgage loan, and each the policy remained in
effect on the date of purchase of the mortgage loan
from the Seller by or on behalf of the company;
o with respect to each mortgage loan other than a
Contract or a cooperative mortgage loan, 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 the mortgage loan and the 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 the mortgage loan is located in an area
where these policies are generally not available,
there is in the related mortgage file an attorney's
certificate of title indicating (subject to
permissible exceptions set forth therein) the lien
status of the mortgage;
o the Seller has good title to the mortgage loan and
the 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;
o there are no mechanics' liens or claims for work,
labor or material affecting the related mortgaged
property which are, or may be a lien prior to, or
equal with, the lien of the related mortgage
(subject only to permissible title insurance
exceptions);
o the related mortgaged property is free from damage
and in good repair;
o there are no delinquent tax or assessment liens
against the related mortgaged property;
o the mortgage loan is not more than 90 days
delinquent as to any scheduled payment of principal
and/or interest;
o if a Primary Insurance Policy is required with
respect to the mortgage loan, the mortgage loan is
the subject of the policy; and
13
<PAGE>
o the mortgage loan was made in compliance with, and
is enforceable under, all applicable local, state
and federal laws in all material respects.
If the mortgage loans include cooperative mortgage loans, representations and
warranties with respect to title insurance or hazard insurance may not be given.
Generally, the cooperative itself is responsible for the maintenance of hazard
insurance for property owned by the cooperative, and the borrowers
(tenant-stockholders) of the cooperative do not maintain hazard insurance on
their individual dwelling units. In the case of mortgage securities,
representations and warranties will generally include, among other things, that
as to each mortgage security: (1) the mortgage security is validly issued and
outstanding and entitled to the benefits of the agreement pursuant to which it
was issued; and (2) the Seller has good title to the 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, the related Seller will be obligated to cure the breach or
repurchase or, if permitted, replace the 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 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 the mortgage loan or mortgage security was purchased from the Seller by or
on behalf of the company. As a result, the date as of which the representations
and warranties were made may 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 a purchase obligation had
the event occurred prior to sale of the affected mortgage loan or mortgage
security, as the case may be. 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
the mortgage loan or mortgage security by the Seller to or on behalf of the
company will be the 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 purchase agreement by which it purchased a mortgage loan or mortgage
security from a Seller insofar as the purchase agreement relates to the
representations and warranties made by the Seller in respect of the mortgage
loan or mortgage security and any remedies provided for with respect to any
breach of representations and warranties with respect to the mortgage loan or
mortgage security. 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 a
breach, then, the Seller will be obligated to purchase the mortgage loan or
mortgage security at a purchase price set forth in the related pooling and
servicing agreement or other agreement which purchase price generally will 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 this
interest payable to the Seller in respect of master servicing compensation,
special servicing compensation or subservicing compensation, as applicable, and
any interest retained by the company).
14
<PAGE>
As to any mortgage loan required to be purchased by a Seller as
provided above, rather than repurchase the mortgage loan, the Seller, if so
specified in the related prospectus supplement, will be entitled, at its sole
option, to remove the Deleted Mortgage Loan from the trust fund and substitute
in its place a Qualified Substitute Mortgage Loan; however, with respect to a
series of certificates for which no REMIC election is to be made, the
substitution must be effected within 120 days of the date of the initial
issuance of the related series of certificates. With respect to a trust fund for
which a REMIC election is to be made, the substitution of a defective mortgage
loan must be effected within two years of the date of the initial issuance of
the related series of certificates, and may not be made if the 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. Any Qualified
Substitute Mortgage Loan generally will, on the date of substitution:
o 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
related Seller or the master servicer in the month
of substitution for distribution to the
securityholders),
o 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,
o 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,
o have a remaining term to maturity not greater than
(and not more than one year less than) that of the
Deleted Mortgage Loan and
o comply with all of the representations and
warranties made by the Seller as of the date of
substitution.
The related mortgage loan 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. No 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
and servicing 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 those 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 the 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 the related Seller that could provide for the purchase of only a
portion of the affected mortgage loans and/or mortgage securities. Any
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
15
<PAGE>
determines in the reasonable exercise of its business judgment that the matters
related to the 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, the repurchase obligation of the Seller will not become an
obligation of the company or any other party. 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
the 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 their purchase obligations. A default by a Seller is not a default by the
company or by the master servicer. However, to the extent that a breach of the
representations and warranties of a Seller also constitutes a breach of a
representation made by the company or the master servicer, as described below
under "Description of the Securities--Assignment of Trust Fund Assets," the
company or the master servicer may have a purchase or substitution obligation.
Any mortgage loan or mortgage security not so purchased or substituted for shall
remain in the related trust fund and any losses related thereto shall be
allocated to the related credit enhancement, to the extent available, and
otherwise to one or more classes of the related series of securities.
If a person other than a Seller makes the representations and
warranties referred to in the first paragraph of this "--Representations by
Sellers" section, or a person other than a Seller is responsible for
repurchasing or replacing any mortgage loan or mortgage security for a breach of
those representations and warranties, the identity of that 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 and
servicing agreement or a servicing agreement. Forms of pooling and servicing
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 and servicing 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 and servicing agreement or servicing agreement for a mortgage pool
that includes mortgage loans. The related prospectus supplement will describe
any servicing-related provision of its related pooling and servicing agreement
or servicing agreement that materially differs from the description thereof
contained in this prospectus. If the related mortgage pool includes mortgage
securities, the related prospectus supplement will summarize the material
provisions of the related pooling and servicing agreement and identify the
responsibilities of the parties to that pooling and servicing agreement.
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 any mortgage securities will be pursuant to the
terms of those mortgage securities. Mortgage loans underlying mortgage
securities in a mortgage pool will be serviced and administered generally in the
same manner as mortgage loans included in a mortgage pool, however, there can be
no assurance that this will be the case, particularly if
16
<PAGE>
the 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 the
mortgage loans underlying mortgage securities in any mortgage pool.
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 Corporation
or another affiliate of the company. The master servicer is required to maintain
a fidelity bond and errors and omissions policy with respect to its officers and
employees and other persons acting on behalf of the master servicer in
connection with its activities under a pooling and servicing agreement or a
servicing agreement.
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
The master servicer for any mortgage pool, directly or through
subservicers, will be obligated under the pooling and servicing agreement or
servicing agreement to service and administer the mortgage loans in the mortgage
pool for the benefit of the related securityholders, in accordance with
applicable law, the terms of the pooling and servicing agreement or servicing
agreement, the mortgage loans and any instrument of credit enhancement included
in the related trust fund, and, to the extent consistent with the foregoing, the
customs and standards of 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 servicing and administration that it may deem necessary and
desirable.
As part of its servicing duties, the 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. The master servicer
will be obligated to follow the same collection procedures as it would follow
for comparable mortgage loans held for its own account, so long as these
procedures are consistent with the servicing standard of and the terms of the
related pooling and servicing agreement or servicing agreement and the servicing
standard generally described in the preceding paragraph, 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 and servicing agreement or a servicing agreement,
a master servicer will be granted discretion to extend relief to mortgagors
whose payments become delinquent. In the case of single family loans and
Contracts, a master servicer may, for example, grant a period of temporary
indulgence to a mortgagor or may enter into a liquidating plan providing for
repayment of delinquent amounts within a specified period from the date of
execution of the plan. However, the master servicer must first determine that
any waiver or extension will not impair the coverage of any related insurance
policy or materially adversely affect the security for the 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, commercial loan or mixed-use loan, the master
servicer will be permitted, subject to any specific limitations set forth in the
related pooling and servicing 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 the modification,
waiver or amendment (1) is reasonably likely to produce a greater recovery with
respect to that mortgage loan on a present value basis than would liquidation
and (2) will not adversely affect the coverage under any applicable instrument
of credit enhancement.
17
<PAGE>
In the case of multifamily loans, commercial loans and mixed-use
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, commercial or mixed-use 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.
Generally, the related master servicer will be required to monitor any
multifamily loan or commercial 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 any other actions as are consistent with
the servicing standard described above and in the pooling and servicing
agreement or servicing agreement. 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, commercial
or mixed-use loan, the mortgaged property, the mortgagor, the presence of an
acceptable party to assume that 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, commercial or mixed-use loan or to foreclose on the
mortgaged property for a considerable period of time. See "Legal Aspects of
Mortgage Loans."
Some or all 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. In any case in which a mortgaged property is
being conveyed by the mortgagor, the master servicer will in general be
obligated, to the extent it has knowledge of the conveyance, to exercise its
rights to accelerate the maturity of the related mortgage loan under any
due-on-sale clause applicable thereto, but only if the exercise of these 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 applicable law prevents the master servicer
from enforcing a due-on-sale or due-on-encumbrance clause or if the master
servicer determines that it is reasonably likely that the related mortgagor
would institute a legal action to avoid enforcement of a due-on-sale or
due-on-encumbrance clause, the master servicer may enter into an assumption and
modification agreement with the person to whom the property has been or is about
to be conveyed, pursuant to which this person becomes liable under the mortgage
loan subject to specified conditions. The original mortgagor may be released
from liability on a single family loan if the master servicer shall have
determined in good faith that the release will not adversely affect the
collectability of the mortgage loan. 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, commercial loan or mixed-use
loan in a manner consistent with the servicing standard. The master servicer
generally will be entitled to retain as additional servicing compensation any
fee collected in connection with the permitted transfer of a mortgaged property.
See "Legal Aspects of Mortgage Loans--Enforceability of Certain Provisions." FHA
loans do not contain due-on-sale or due-on-encumbrance clauses 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 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 approval will not
adversely affect the
18
<PAGE>
security for, or the timely and full collectability of, the related mortgage
loan. Any fee collected by the master servicer for processing these requests
will be retained by the master servicer as additional servicing compensation.
In the case of mortgage loans secured by junior liens on the
related mortgaged properties, the master servicer will be required to file (or
cause to be filed) of record a request for notice of any action by a superior
lienholder under the senior lien for the protection of the related 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 the junior lienholder's equity of
redemption. The master servicer also will be required to notify any superior
lienholder in writing of the existence of the mortgage loan and request
notification of any action (as described below) to be taken against the
mortgagor or the mortgaged property by the superior lienholder. If the master
servicer is notified that any superior lienholder has accelerated or intends to
accelerate the obligations secured by the related senior lien, or has declared
or intends to declare a default under the mortgage or the promissory note
secured thereby, or has filed or intends to file an election to have the related
mortgaged property sold or foreclosed, then, the master servicer will be
required to take, on behalf of the related trust fund, whatever actions are
necessary to protect the interests of the related securityholders, and/or to
preserve the security of the related mortgage loan, subject to the REMIC
Provisions, if applicable. The master servicer will be required to advance the
necessary funds to cure the default or reinstate the superior lien, if the
advance is in the best interests of the related securityholders and the master
servicer determines the 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 REO properties; and
maintaining servicing records relating to the mortgage loans in the mortgage
pool. 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
subservicers, but the master servicer will remain liable for its obligations
under the related pooling and servicing agreement or servicing agreement. The
master servicer will be solely liable for all fees owed by it to any
subservicer, regardless of whether the master servicer's compensation pursuant
to the related pooling and servicing agreement or servicing agreement is
sufficient to pay the subservicer's fees. Each subservicer will be entitled to
reimbursement for some of the expenditures which it makes, generally to the same
extent as would the master servicer for making the same expenditures. See
"--Servicing and Other Compensation and Payment of Expenses; Retained Interest"
below and "Description of the Securities--The Certificate Account."
SPECIAL SERVICERS
If and to the extent specified in the related prospectus
supplement, a special servicer may be a party to the related pooling and
servicing agreement or servicing agreement or may be appointed by the master
servicer or another specified party to perform 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
19
<PAGE>
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 that prospectus supplement.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below, 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 any mortgage
loans in the related mortgage pool that come into and continue in default and as
to which no satisfactory arrangements can be made for collection of delinquent
payments. Generally, the foreclosure process will commence no later than 90 days
after delinquency of the related mortgage loan. 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 the 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 (1) the foreclosure and/or
restoration will increase the proceeds of liquidation of the mortgage loan to
the related securityholders after reimbursement to itself for these expenses and
(2) these 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 and servicing agreement or servicing agreement).
However, unless otherwise specified in the related prospectus
supplement, the master servicer may not acquire title to any multifamily
property or commercial 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 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:
(1) the mortgaged property is in compliance with
applicable environmental laws and regulations or, if not, that
taking actions as are necessary to bring the mortgaged property
into compliance with these laws is reasonably likely to produce a
greater recovery on a present value basis than not taking those
actions; and
(2) 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 those
circumstances or conditions are present for which any such action
could be required, taking those actions with respect to the
mortgaged property is reasonably likely to produce a greater
recovery on a present value basis than not taking those actions.
See "Legal Aspects of Mortgage Loans--Environmental Legislation."
The master servicer will not be obligated to foreclose upon or
otherwise convert the ownership of any mortgaged property securing a single
family loan if it has received notice or has actual knowledge that the property
may be contaminated with or affected by hazardous wastes or hazardous
substances; however, environmental testing will not be required. The master
servicer will not be liable to the
20
<PAGE>
securityholders of the related series if, based on its belief that no such
contamination or effect exists, the master servicer forecloses on a mortgaged
property and takes title to the mortgaged property, and thereafter the 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 remedies if it determines
that one remedy is more likely than the other 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, the 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 the 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 the 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 the defaulted
mortgage loan.
With respect to a series of securities, if so provided in the
related prospectus supplement, the applicable form of credit enhancement may
provide, to the extent of coverage, that a defaulted mortgage loan will be
removed from the trust fund prior to the final liquidation thereof. In addition,
a pooling and servicing 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 specified classes of securities of the related series a right of
first refusal to purchase from the trust fund, at a predetermined purchase
price, any mortgage loan as to which a specified number of scheduled payments
are delinquent. If the purchase price is insufficient to fully fund the
entitlements of securityholders to principal and interest, it will be specified
in the related prospectus supplement. Furthermore, a pooling and servicing
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 the 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 by
foreclosure or by deed in lieu of foreclosure, 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 acquisition of title and cancellation of
the related mortgage loan, the REO Mortgage Loan will be considered for most
purposes to be an outstanding mortgage loan held in the trust fund until the
mortgaged property is sold and all recoverable Liquidation Proceeds and
Insurance Proceeds have been received with respect to the defaulted mortgage
loan. For purposes of calculations of amounts distributable to securityholders
in respect of an REO Mortgage Loan, the amortization schedule in effect at the
time of any 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, the amortization schedule will be deemed to have adjusted in
accordance with any interest rate changes occurring on any adjustment date
therefor) so long as the REO Mortgage Loan is considered to remain in the trust
fund.
21
<PAGE>
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 three years
of acquisition, unless (1) the IRS grants an extension of time to sell the
property or (2) the trustee receives an opinion of independent counsel to the
effect that the holding of the property by the trust fund for more than three
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 generally will be
required to solicit bids for any mortgaged property so acquired in a manner as
will be reasonably likely to realize a fair price for the property. 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 Section 860G(a)(8) of the Code at all times, that the sale
of the property does not result in the receipt by the trust fund of any income
from non-permitted assets as described in Section 860F(a)(2)(B) of the Code, and
that the trust fund does not derive any "net income from foreclosure property"
within the meaning of Section 860G(c)(2) of the Code with respect to the
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 accrued interest plus the aggregate amount of reimbursable
expenses incurred by the master servicer with respect to the 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 the 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 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
specified conditions in the event that, following the final liquidation of a
mortgage loan and a draw under the 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 be entitled to
retain the 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; RETAINED INTEREST
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 or range of percentages per annum
described in the related prospectus supplement of the outstanding principal
balance of each mortgage loan, and this compensation will be retained by it on a
monthly or other periodic basis from collections of interest on each mortgage
loan in the related trust fund at the time the collections are deposited into
the applicable Certificate Account. This portion of the servicing fee will be
calculated with respect to each mortgage loan by multiplying the fee by the
principal balance of the mortgage loan. In addition, the master servicer may
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
22
<PAGE>
be described in the related prospectus supplement. Any subservicer will receive
a portion of the master servicer's compensation as its subservicing
compensation.
In addition to amounts payable to any subservicer, the master
servicer will pay or cause to be paid some of the ongoing expenses associated
with each trust fund and incurred by it in connection with its responsibilities
under the pooling and servicing 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 limited circumstances. In addition, the master
servicer will be entitled to reimbursements for some of its expenses incurred in
connection with liquidated mortgage loans and in connection with the restoration
of mortgaged properties, this 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 reimbursable expenses for the period that the advances are outstanding at
the rate specified in the prospectus supplement, and the master servicer will be
entitled to payment of the 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 and servicing agreement or
servicing agreement and described in the prospectus supplement.
The prospectus supplement for a series of securities will specify
whether there will be any interest in the mortgage loans retained by the
company. Any retained interest 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 retained interest will be established on a loan-by-loan
basis and the amount thereof with respect to each mortgage loan in a mortgage
pool will be specified on an exhibit to the related pooling and servicing
agreement or servicing agreement. Any partial recovery of interest in respect of
a mortgage loan will be allocated between the owners of any retained interest
and the holders of classes of securities entitled to payments of interest as
provided in the related prospectus supplement and the applicable pooling and
servicing 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 that
period. See "Yield Considerations."
EVIDENCE AS TO COMPLIANCE
Each pooling and servicing agreement and 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 the 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 and servicing agreement or servicing agreement) substantially
similar to each other was conducted in compliance with the agreements except for
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 the firm may rely, as to the matters relating to the direct servicing
of mortgage loans by subservicers, upon
23
<PAGE>
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 the
statement) of firms of independent public accountants with respect to those
subservicers which also have been the subject of this type of examination.
Each pooling and servicing agreement and 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 officer, the master
servicer has fulfilled in all material respects its obligations under the
pooling and servicing agreement or servicing agreement throughout the preceding
year or, if there has been a material default in the fulfillment of any
obligation, the statement shall specify each known default and the nature and
status thereof. This statement may be provided as a single form making the
required statements as to more than one pooling and servicing agreement or
servicing agreement.
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 or trustee.
DESCRIPTION OF THE SECURITIES
GENERAL
The securities will be issued in series. Each series of
certificates (or, in some instances, two or more series of certificates) will be
issued pursuant to a pooling and servicing agreement, similar to one of the
forms filed as an exhibit to the registration statement of which this prospectus
is a part. Each pooling and servicing agreement will be filed with the
Commission as an exhibit to a Current Report on Form 8- K. Each series of notes
(or, in some 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. The trust fund will be created pursuant to an owner trust 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
Commission as an exhibit to a Current Report on Form 8-K. Qualified counsel will
render an opinion to the effect that the trust fund's assets will not be
considered assets of the Seller or the company in the event of the bankruptcy
Seller or the company. The following summaries (together with additional
summaries under "The Agreements" below) describe the material provisions
relating to the securities common to each Agreements.
Certificates of each series covered by a particular pooling and
servicing agreement will evidence specified beneficial ownership interests in a
separate trust fund created pursuant to the pooling and servicing agreement.
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 and servicing agreement or owner trust agreement:
o the 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 and servicing agreement or servicing
agreement, exclusive of, if specified in the
related prospectus supplement, any interest
retained by the company or any of its affiliates
with respect to each mortgage loan;
24
<PAGE>
o 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;
o any property acquired in respect of mortgage loans
in the trust fund, whether through foreclosure of a
mortgage loan or by deed in lieu of foreclosure;
o hazard insurance policies, Primary Insurance
Policies and FHA insurance policies, if any,
maintained in respect of mortgage loans in the
trust fund and the proceeds of these policies;
o the rights of the company under any mortgage loan
purchase agreement, including in respect of any
representations and warranties therein; and
o any combination, as and to the extent specified in
the related prospectus supplement, of a financial
guaranty insurance policy, mortgage pool insurance
policy, letter of credit, special hazard insurance
policy, or currency or interest rate exchange
agreements as described under "Description of
Credit Enhancement."
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 this difference will be deposited into a
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. Any amounts remaining in the pre-funding account at the end
of the 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.
Each series of securities may consist of any one or a combination
of the following:
o a single class of securities;
o two or more classes of securities, one or more
classes of which will be senior in right of payment
to one or more of the other classes, and as to
which some classes of senior (or subordinate)
securities may be senior to other classes of senior
(or subordinate) securities, as described in the
respective prospectus supplement;
o two or more classes of securities, one or more
classes of which will be Strip Securities;
o 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 a 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 Accrual Securities; or
o other types of classes of securities, as described
in the related prospectus supplement.
25
<PAGE>
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. As to each series, 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 financial guaranty insurance policy, mortgage pool insurance
policy, letter of credit, reserve fund, overcollateralization, and currency or
interest rate exchange agreements as described under "Description of Credit
Enhancement," by the subordination of one or more other classes of securities as
described under "Subordination" 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 an election is made with
respect to a series of certificates, one of the classes of certificates in the
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 the residual interests. All other classes
of certificates in the series will constitute "regular interests" in the related
REMIC, as defined in the Code. 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 specified actions required in order to comply
with applicable laws and regulations.
FORM OF SECURITIES
Except as described below, 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
named in the related prospectus supplement. 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. A "securityholder" or "holder" is the entity whose name appears on the
records of the registrar (consisting of or including the security register) as
the registered holder of a security.
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 DTC. As to any class of DTC Registered Securities,
the record holder of the 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 participants and facilitates the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in the accounts of participants. Intermediaries have indirect
access to DTC's clearance system.
No Beneficial Owner will be entitled to receive a Security
representing its interest in registered, certificated form, unless either (1)
DTC ceases to act as depository in respect thereof and a successor depository is
not obtained, or (2) the company elects in its sole discretion to discontinue
the registration of the securities through DTC. Prior to one of these events,
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 and
servicing agreement or indenture, and Beneficial Owners will be able to exercise
their rights as owners of the 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 the 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
26
<PAGE>
pledge DTC Registered Securities to persons or entities that are not
participants in the DTC system, or to otherwise act with respect to the
securities, may be limited because of the lack of physical certificates or notes
evidencing the 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 the payments to participants, each of which will be
responsible for disbursing the 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 and servicing
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 these 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 the beneficial ownership
interests.
GLOBAL SECURITIES
Some of the offered securities may be Global Securities. Except
in some limited circumstances, the Global Securities will be available only in
book-entry form. Investors in the Global Securities may hold those Global
Securities through any of DTC, Clearstream Banking, societe anonyme, forferly
known as Cedelbank SA, or Euroclear. The Global Securities will be traceable 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 Clearstream
and Euroclear will be conducted in the ordinary way in accordance with the
normal rules and operating procedures of Clearstream 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 Clearstream or Euroclear
and DTC participants holding Notes will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream and Euroclear (in that capacity) and as DTC participants.
Non-U.S. holders (as described below) of Global Securities will
be subject to U.S. withholding taxes unless those holders meet various
requirements and deliver appropriate U.S. tax documents to the securities
clearing organizations or their participants.
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, Clearstream and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold those positions in their accounts as
DTC participants.
27
<PAGE>
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
Clearstream 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.
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.
Secondary market trading between DTC participants will be settled
using the procedures applicable to prior mortgage loan asset-backed notes issues
in same-day funds. Secondary market trading between Clearstream participants or
Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds. When Global Securities are to be
transferred from the account of a DTC participant to the account of a
Clearstream participant or a Euroclear participant, the purchaser will send
instructions to Clearstream or Euroclear through a Clearstream participant or
Euroclear participant at least one business day prior to settlement. Clearstream
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 that 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 Clearstream
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 Clearstream or Euroclear cash debt will be valued instead as of the actual
settlement date.
Clearstream 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 Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their account one day later. As an
alternative, if Clearstream or Euroclear has extended a line of credit to them,
Clearstream 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, Clearstream 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 those overdraft charges, although the result will depend on each Clearstream
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 Clearstream participants or Euroclear
participants. The
28
<PAGE>
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.
Due to time zone differences in their favor, Clearstream
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 Clearstream or Euroclear
through a Clearstream participant or Euroclear participant at least one business
day prior to settlement. In these cases Clearstream 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
that 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 Clearstream participant or Euroclear participant the
following day, and receipt of the cash proceeds in the Clearstream 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
Clearstream 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 Clearstream participant's or Euroclear participant's account would instead
be valued as of the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC participants for delivery to Clearstream
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:
o borrowing through Clearstream or Euroclear for one
day (until the purchase side of the trade is
reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's
customary procedures;
o 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
Clearstream or Euroclear account in order to settle
the sale side of the trade; or
o 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
Clearstream participant or Euroclear participant.
A beneficial owner of Global Securities holding securities
through Clearstream 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 that beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (ii) that
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
29
<PAGE>
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 that change.
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).
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 Noteholders or their agent.
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).
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 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 Persons have the authority to control all substantial
decisions of the trust. The term "Non-U.S. Person" means any person who is not a
U.S. Person. This 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.
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, all principal and interest received on or
with respect to the 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 an interest in the trust fund assets, if any, for itself
or transfer the same to others. The trustee will, concurrently with the
assignment, deliver the securities of the 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 and servicing agreement or
servicing agreement. The 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).
30
<PAGE>
In addition, 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 following documents:
o the mortgage note endorsed, without recourse,
either in blank or to the order of the trustee (or
its nominee),
o the mortgage with evidence of recording indicated
on the mortgage (except for any mortgage not
returned from the public recording office) or, in
the case of a cooperative mortgage loan, on the
related financing statement,
o an assignment of the mortgage in blank or to the
trustee (or its nominee) in recordable form (or,
with respect to a cooperative mortgage loan, an
assignment of the respective security agreements,
any applicable UCC financing statements,
recognition agreements, relevant stock
certificates, related blank stock powers and the
related proprietary leases or occupancy
agreements),
o any intervening assignments of the mortgage with
evidence of recording on the assignment (except for
any assignment not returned from the public
recording office),
o if applicable, any riders or modifications to the
mortgage note and mortgage, and
o any other documents set forth in the related
pooling and servicing agreement, mortgage loan
purchase agreement or servicing agreement.
The 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 on the
assignment concurrently with the execution and delivery of the related pooling
and servicing 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 the
mortgage or assignment as submitted for recording within one year. The company
will deliver, or cause to be delivered, to the related trustee (or the
custodian) the mortgage or assignment with evidence of recording indicated on
the assignment 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 on the mortgage or assignment
concurrently with the execution and delivery of the related pooling and
servicing agreement or servicing agreement because the 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 the mortgage
or assignment with evidence of recording on the mortgage or assignment.
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, 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 the mortgage loan.
31
<PAGE>
As to each Contract, the company will deliver, or cause to be
delivered, to the related trustee (or the custodian) the following documents:
o the original Contract endorsed, without recourse,
to the order of the trustee,
o copies of documents and instruments related to the
Contract and the security interest in the
Manufactured Home securing the Contract, and
o a blanket assignment to the trustee of all
Contracts in the related trust fund and the related
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.
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 the 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) will hold the documents in trust
for the benefit of the related securityholders, and generally will review the
documents within 120 days after receipt thereof in the case of documents
delivered concurrently with the execution and delivery of the related pooling
and servicing agreement or indenture, and within the time period specified in
the related pooling and servicing agreement or indenture in the case of all
other documents delivered. If any document is found to be missing or defective
in any material respect, the trustee (or the 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 the omission or defect
materially and adversely affects the interests of securityholders in the
affected mortgage loan or mortgage security, then, the related Seller will be
obligated to purchase the 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 the 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. The company
will not be obligated to purchase or substitute for the mortgage loan or
mortgage security if the Seller defaults on its obligation to do so. This
purchase or substitution obligation constitutes the sole remedy available to the
related securityholders and the related trustee for omission of, or a material
defect in, a constituent document. Any affected mortgage loan or mortgage
security not so purchased or substituted for shall remain in the related trust
fund.
The trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the mortgage loans
and/or mortgage securities in any mortgage pool, and to maintain possession of
and, if applicable, to review, the documents relating to the mortgage loans
and/or mortgage securities, in any case as the agent of the trustee. The
identity of any custodian to be appointed on the date of initial issuance of the
securities will be set forth in the related prospectus supplement. A custodian
may be an affiliate of the company or the master servicer.
32
<PAGE>
Except in the case of a Designated Seller Transaction or as to
mortgage loans underlying any mortgage securities, the company will make
representations and warranties as to the types and geographical concentrations
of the mortgage loans and as to the accuracy of some of the information
furnished to the related trustee in respect of each mortgage loan (for example,
the original Loan-to-Value Ratio, the principal balance as of the cut-off date,
the mortgage rate and maturity). Upon a breach of any of these representations
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, to substitute
for the mortgage loan a Qualified Substitute Mortgage Loan in accordance with
the provisions for 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 the breach also
constitutes fraud in the origination of the related mortgage loan. This purchase
or substitution obligation constitutes the sole remedy available to
securityholders or the trustee for a breach of a 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 and servicing 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 the mortgage pool and assigned to the related trustee as more fully set forth
under "Servicing of Mortgage Loans." The master servicer will make
representations and warranties regarding its authority to enter into, and its
ability to perform its obligations under, the pooling and servicing 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 a
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 shall be maintained as
an Eligible Account, and the funds held therein may be held as cash or invested
in Permitted Investments. Any Permitted Investments shall not cause the company
to register under the Investment Company Act of 1940. 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 the
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. With respect to each series of securities, the related
master servicer, trustee or special servicer will be required to deposit or
cause to be deposited in the Certificate Account for the related trust fund
within a period following receipt (in the case of collections and payments), the
following payments and collections received, or advances made, by the master
servicer, the trustee or any special servicer subsequent to the cut-off date
with respect to the mortgage loans and/or mortgage securities in the trust fund
(other than payments due on or before the cut-off date):
o all payments on account of principal, including
principal prepayments, on the mortgage loans;
o 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
33
<PAGE>
special servicer or subservicer as its servicing
compensation or as compensation to the trustee, and
further net of any retained interest of the
company;
o all payments on the mortgage securities;
o all Insurance Proceeds and Liquidation Proceeds;
o 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";
o any advances made as described under "--Advances"
below;
o any Buydown Funds (and, if applicable, investment
earnings on the Buydown Funds) required to be paid
to securityholders, as described below;
o 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; Retained
Interest";
o to the extent that any item does not constitute
additional servicing compensation to the master
servicer or a special servicer, any payments on
account of modification or assumption fees, late
payment charges or prepayment premiums on the
mortgage loans;
o 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
o any other amounts required to be deposited in the
Certificate Account as provided in the related
pooling and servicing agreement or the related
servicing agreement and indenture and described in
this prospectus 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 in this
prospectus with respect to the Certificate Account. The terms of all buydown
mortgage loans provide for the contribution of Buydown Funds in an amount equal
to or exceeding either (1) the total payments to be made from the funds pursuant
to the related buydown plan or (2) if the Buydown Funds are to be deposited on a
discounted basis, that amount of Buydown Funds which, together with investment
earnings on the Buydown Funds 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 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 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 on the Buydown Funds) for each buydown mortgage
loan that, when added to the amount due from the mortgagor on the buydown
mortgage loan, equals the full monthly payment which would be due on the buydown
mortgage loan if it
34
<PAGE>
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 the 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 the
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 generally will be required to
withdraw from the Buydown Account and deposit in the Certificate Account the
Buydown Funds and investment earnings on the Buydown Funds, if any, which
together with the prepayment will result in a prepayment in full; provided that
Buydown Funds may not be available to cover a prepayment under some 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 the other designated party pursuant to the Buydown
Agreement relating to each buydown mortgage loan. If the mortgagor defaults
during the Buydown Period with respect to a buydown mortgage loan and the
property securing the buydown mortgage loan is sold in liquidation (either by
the master servicer, the primary insurer, any 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 on the Buydown Funds, 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 the insurer and the insurer pays all of
the loss incurred in respect of the default.
WITHDRAWALS. With respect to each series of securities, the
master servicer, trustee or special servicer may make withdrawals from the
Certificate Account for the related trust fund for any of the following
purposes, unless otherwise provided in the related agreement and described in
the related prospectus supplement:
(1) to make distributions to the related
securityholders on each distribution date;
(2) to reimburse the master servicer or any other
specified person for unreimbursed amounts advanced
by it in respect of mortgage loans in the trust
fund as described under "--Advances" below, these
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 the
mortgage loans;
(3) to reimburse the master servicer or a special
servicer for unpaid servicing fees earned by it and
some unreimbursed servicing expenses incurred by it
with respect to mortgage loans in the trust fund
and properties acquired in respect thereof, these
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 the
fees were earned or the expenses were incurred or
out of amounts drawn under any form of credit
enhancement with respect to the mortgage loans and
properties;
35
<PAGE>
(4) to reimburse the master servicer or any other
specified person for any advances described in
clause (2) above made by it and any servicing
expenses referred to in clause (3) above incurred
by it which, in the good faith judgment of the
master servicer or the other person, will not be
recoverable from the amounts described in clauses
(2) and (3), respectively, the 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 and servicing
agreement or the related servicing agreement and
indenture and described in the related prospectus
supplement, only from that portion of amounts
collected on the other mortgage loans that is
otherwise distributable on one or more classes of
subordinate securities of the related series;
(5) 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 (2) above made by it and the servicing
expenses described in clause (3) above incurred by
it while these remain outstanding and unreimbursed;
(6) to reimburse the master servicer, the company, or
any of their respective directors, officers,
employees and agents, as the case may be, for
expenses, costs and liabilities incurred thereby,
as and to the extent described under "The
Agreements--Certain Matters Regarding the Master
Servicer and the Company";
(7) if and to the extent described in the related
prospectus supplement, to pay the fees of the
trustee;
(8) to reimburse the trustee or any of its directors,
officers, employees and agents, as the case may be,
for expenses, costs and liabilities incurred
thereby, as and to the extent described under "The
Agreements--Certain Matters Regarding the Trustee";
(9) 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;
(10) to pay (generally from related income) the master
servicer or a special servicer for costs incurred
in connection with the operation, management and
maintenance of any mortgaged property acquired by
the trust fund by foreclosure or by deed in lieu of
foreclosure;
(11) 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";
(12) 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 the
mortgage loan or property;
(13) to pay for the cost of various opinions of counsel
obtained pursuant to the related pooling and
servicing agreement or the related servicing
agreement and indenture for the benefit of the
related securityholders;
36
<PAGE>
(14) 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 and servicing
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;
(15) to make any other withdrawals permitted by the
related pooling and servicing agreement or the
related servicing agreement and indenture and
described in the related prospectus supplement;
(16) to pay for costs and expenses incurred by the trust
fund for environmental site assessments performed
with respect to multifamily or commercial
properties that constitute security for defaulted
mortgage loans, and for any containment, clean-up
or remediation of hazardous wastes and materials
present on that mortgaged properties, as described
under "Servicing of Mortgage Loans--Realization
Upon or Sale of Defaulted Mortgage Loans"; and
(17) 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 the series and the distribution date. The available distribution
amount for any series of securities and any distribution date will generally
refer to the total of all payments or other collections (or advances in lieu
thereof) on, under or in respect of the mortgage loans and/or mortgage
securities and any other assets included in the related trust fund that are
available for distribution to the securityholders of the series on that 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.
Distributions on the securities of each series (other than the
final distribution in retirement of any certificate) will be made to the persons
in whose names the securities are registered on the Record Date, and the amount
of each distribution will be determined as of the Determination Date. All
distributions with respect to each class of securities on each distribution date
will be allocated in equal proportion among the outstanding securities in the
class. Payments will be made either by wire transfer in immediately available
funds to the account of a securityholder at a bank or other entity having
appropriate facilities therefor, if the securityholder has provided the trustee
or other person required to make the payments with wiring instructions no later
than five business days prior to the related Record Date or other date specified
in the related prospectus supplement (and, if so provided in the related
prospectus supplement, the securityholder holds securities in the requisite
amount or denomination specified therein), or by check mailed to the address of
the securityholder 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 the securities at the location
specified in the notice to securityholders of the final distribution. Payments
will be made to each certificateholder in accordance with the holder's
Percentage Interest in a particular class.
37
<PAGE>
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE SECURITIES
Each class of securities of each series, other than Strip
Securities and REMIC Residual Certificates that have no security interest rate,
may have a different per annum rate at which interest accrues on that class of
securities, which may be fixed, variable or adjustable, or any combination of
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. The related
prospectus supplement will specify whether interest on the securities of the
series will be calculated on the basis of a 360-day year consisting of twelve
30-day months or on a different method.
Distributions of interest in respect of the securities of any
class, other than any class of Accrual Securities, 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 interest for the
class and the distribution date, subject to the sufficiency of the portion of
the available distribution amount allocable to the class on the distribution
date. Prior to the time interest is distributable on any class of Accrual
Securities, the amount of accrued interest otherwise distributable on the class
will be added to the principal balance thereof on each distribution date. With
respect to each class of interest-bearing securities, accrued 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 the distribution date. Accrued
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 based on either (1) based on the principal
balances of some or all of the mortgage loans and/or mortgage securities in the
related trust fund or (2) equal to the principal balances of one or more other
classes of securities of the same series. Reference to a notional amount with
respect to a class of Strip Securities is solely for convenience in making
calculations of accrued interest and does not represent the right to receive any
distribution of principal. If so specified in the related prospectus supplement,
the amount of accrued 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 the shortfalls. The particular manner
in which the 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 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 the mortgage loans. Any reduction in the amount of accrued interest
otherwise distributable on a class of securities by reason of the allocation to
the 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 the 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 the series entitled thereto until the principal balance(s) of the
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
38
<PAGE>
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 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 the
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.
PRE-FUNDING ACCOUNT
If so specified in the related prospectus supplement, the pooling
and servicing agreement or other agreement may provide for the transfer by the
Sellers of additional mortgage loans to the related trust after the Closing
Date. The additional mortgage loans will be required to conform to the
requirements set forth in the related Agreement or other agreement providing for
the transfer, and will be underwritten to the same standards as the mortgage
loans initially included in the trust fund as described in the prospectus
supplement. As specified in the related prospectus supplement, the transfer may
be funded by the establishment of a pre-funding account with the trustee. If a
pre-funding account is established, all or a portion of the proceeds of the sale
of one or more classes of securities of the related series will be deposited in
the account to be released as additional mortgage loans are transferred. A
pre-funding account will be required to be maintained as an Eligible Account,
the amounts therein may be required to be invested in Permitted Investments and
the amount held therein shall at no time exceed 40% of the aggregate outstanding
principal balance of the related securities. The related Agreement or other
agreement providing for the transfer of additional mortgage loans generally will
provide that the transfers must be made within up to three months (with respect
to any series of certificates) or up to one year (with respect to any series of
notes) after the Closing Date, and that amounts set aside to fund the 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 the prospectus supplement. 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, which may
affect their yield to maturity. In addition, securityholders may not be able to
reinvest amounts received from any pre-funding account in comparable securities,
or may only be able to do so at a lower interest rate.
DISTRIBUTIONS ON THE SECURITIES IN RESPECT OF PREPAYMENT PREMIUMS
Prepayment premiums will generally be retained by the master
servicer or by the Seller as additional compensation. However, if so provided in
the related prospectus supplement, prepayment premiums received on or in
connection with the mortgage loans or mortgage securities in any trust fund will
be distributed on each distribution date to the holders of the class or classes
of securities of the related series entitled thereto in accordance with the
provisions described in the prospectus supplement.
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
39
<PAGE>
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, these allocations may result in reductions in the
entitlements to interest and/or principal balances of one or more classes of
securities, or may be effected simply by a prioritization of payments among
classes of securities.
ADVANCES
If and to the extent provided in the related prospectus
supplement, and subject to any limitations specified therein, the related master
servicer may be obligated to advance, or have the option of advancing, on or
before each distribution date, from its or their own funds or from excess funds
held in the related Certificate Account that are not part of the available
distribution amount for the related series of securities for the distribution
date, an amount up to the aggregate of any payments of interest (and, if
specified in the related prospectus supplement, principal) that were due on or
in respect of the mortgage loans during the related Due Period and were
delinquent on the related Determination Date. No notice will be given to the
certificateholders of these advances. 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 the 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 advances were made and other specific sources as may be
identified in the related prospectus supplement, including amounts which would
otherwise be payable to the offered securities. No Nonrecoverable Advance will
be required to be made by the master servicer; 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 the funds will be required to replace
the 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 that 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, a 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 the person.
If and to the extent so provided in the related prospectus
supplement, any entity making advances will be entitled to receive interest on
the advances for the period that the advances are outstanding at the rate
specified in the prospectus supplement, and the entity will be entitled to
payment of the 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 and servicing agreement or servicing
agreement and described in the 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
40
<PAGE>
underlying mortgage loans will be pursuant to the terms of the mortgage
securities, as may be supplemented by the terms of the applicable pooling and
servicing 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 the class of securities a
statement or statements with respect to the related trust fund setting forth the
information specifically described in the related pooling and servicing
agreement or the related servicing agreement or indenture, which generally will
include the following as applicable except as otherwise provided therein:
o the amount, if any, of the distribution allocable
to principal;
o the amount, if any, of the distribution allocable
to interest;
o the amount, if any, of the distribution allocable
to prepayment premiums;
o 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 the
distribution date;
o 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 subservicer);
o the aggregate amount of advances included in the
distributions on the distribution date, and the
aggregate amount of unreimbursed advances at the
close of business on the distribution date;
o the aggregate principal balance of the mortgage
loans in the related mortgage pool on, or as of a
specified date shortly prior to, the distribution
date;
o 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;
o the book value of any real estate acquired the
trust fund by foreclosure or by a deed in lieu of
foreclosure;
o the balance of the reserve fund, if any, at the
close of business on the distribution date;
o the amount of coverage under any financial guaranty
insurance policy, mortgage pool insurance policy or
letter of credit covering default risk as of the
close of business on the applicable Determination
Date and a description of any credit enhancement
substituted therefor;
41
<PAGE>
o 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 these amounts;
o with respect to any series of securities as to
which the trust fund includes mortgage securities,
additional information as required under the
related pooling and servicing agreement and
specified in the related prospectus supplement; and
o any other material information as required under
the related pooling and servicing agreement.
In the case of information furnished pursuant to the first three
items 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 the minimum denomination. In addition to the information described
above, reports to securityholders will contain other information as is set forth
in the applicable pooling and servicing agreement or the applicable servicing
agreement or indenture, which may include 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 the
calendar year which, for example, will include information as to the aggregate
of amounts reported pursuant to the first three items above for the calendar
year or, in the event the person was a holder of record of a class of securities
during a portion of the calendar year, for the applicable portion of the year.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
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 limitations and will provide coverage with respect to
Realized Losses on the related mortgage loans. Credit support will cover
Defaulted Mortgage Losses, but coverage may be limited or unavailable with
respect to Special Hazard Losses, Fraud Losses, Bankruptcy Losses and
Extraordinary Losses. To the extent that the credit support for the offered
securities of any series is exhausted, the holders thereof will bear all further
risk of loss.
As set forth below and in the applicable prospectus supplement,
coverage with respect to Realized Losses may be provided by one or more of a
financial guaranty insurance policy, a special hazard insurance policy, a
mortgage pool insurance policy or a letter of credit. 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 the 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, in the form of overcollateralization, or in the
form of a combination of the foregoing. The credit support may be provided by an
assignment of the right to receive specified 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
42
<PAGE>
supplement. To the extent provided in the applicable prospectus supplement and
the pooling and servicing 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.
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 in this prospectus. The related prospectus
supplement will specify, as to each form of credit support, the information
indicated below with respect thereto, to the extent the information is material
and available.
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) some 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 the subordination will be available.
The offered securities of any series may include one or more classes of
subordinate securities.
CROSS-SUPPORT
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 the provisions.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, interest
collections on the mortgage loans may exceed interest payments on the securities
for the related distribution date. The excess interest may be deposited into a
reserve fund or applied as a payment of principal on the securities. To the
extent excess interest is applied as principal payments on the securities, the
effect will be to reduce the principal balance of the securities relative to the
outstanding balance of the mortgage loans, thereby creating
overcollateralization and additional protection to the securityholders, as
specified in the related prospectus supplement. If so provided in the related
prospectus supplement, overcollateralization may also be provided as to any
series of securities by the issuance of securities in an initial aggregate
principal amount which is less than the aggregate principal amount of the
related mortgage loans.
43
<PAGE>
FINANCIAL GUARANTY INSURANCE POLICY
If so specified in the related prospectus supplement, a financial
guaranty insurance policy may be obtained and maintained for a class or series
of securities. The insurer with respect to a financial guaranty insurance policy
will be described in the related prospectus supplement and a copy of the form of
financial guaranty insurance policy will be filed with the related Current
Report on Form 8-K.
A financial guaranty insurance policy will be unconditional and
irrevocable and will guarantee to holders of the applicable securities that an
amount equal to the full amount of payments due to the holders will be received
by the trustee or its agent on behalf of the holders for payment on each
distribution date. The specific terms of any financial guaranty insurance policy
will be set forth in the related prospectus supplement. A financial guaranty
insurance policy may have limitations and generally will not insure the
obligation of the Sellers or the master servicer to purchase or substitute for a
defective mortgage loan and will not guarantee any specific rate of principal
prepayments. The insurer will be subrogated to the rights of each holder to the
extent the insurer makes payments under the financial guaranty insurance policy.
MORTGAGE POOL INSURANCE POLICIES
Any mortgage pool insurance policy obtained by the company for
each trust fund will be issued by the pool insurer named in the applicable
prospectus supplement. Each mortgage pool insurance policy will, subject to the
limitations described below, cover Defaulted Mortgage Losses in an amount equal
to a percentage specified in the applicable prospectus supplement of the
aggregate principal balance of the mortgage loans on the cut-off date. As set
forth under "Maintenance of Credit Enhancement," the master servicer will use
reasonable efforts to maintain the mortgage pool insurance policy and to present
claims thereunder to the pool insurer on behalf of itself, the related trustee
and the related securityholders. The mortgage pool insurance policies, however,
are not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted mortgage loans and only upon satisfaction of the
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:
o any required Primary Insurance Policy is in effect
for the defaulted mortgage loan and a claim
thereunder has been submitted and settled,
o hazard insurance on the property securing the
mortgage loan has been kept in force and real
estate taxes and other protection and preservation
expenses have been paid by the master servicer,
o 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
o the insured has acquired good and merchantable
title to the mortgaged property free and clear of
liens, except for permitted encumbrances.
Upon satisfaction of these conditions, the pool insurer will have the option
either (1) to purchase the property securing the defaulted mortgage loan at a
price equal to the principal balance thereof plus
44
<PAGE>
accrued and unpaid interest at the applicable mortgage rate to the date of
purchase and expenses incurred by the master servicer, special servicer or
subservicer on behalf of the related trustee and securityholders, or (2) 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
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 the 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 the
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 the policies), from the
related hazard insurance policy or applicable special hazard insurance policy
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 the 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 the expenses
will be recoverable by it through Liquidation Proceeds or Insurance Proceeds.
A mortgage pool insurance policy (and most Primary Insurance
Policies) will likely not insure against loss sustained by reason of a default
arising from, among other things, (1) 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 (2) 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. This 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, this 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 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 the proceeds of the liquidation of the mortgage loan or otherwise, the
master servicer would not be obligated to make an advance respecting the
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."
45
<PAGE>
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, the 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 the
losses. Further, no coverage in respect of Special Hazard Losses, Fraud Losses
or Bankruptcy Losses will cover all risks, and the amount of the coverage will
be limited. See "Special Hazard Insurance Policies" below. As a result, some
hazard risks will not be insured against and will therefore be borne by the
related securityholders.
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, a 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. The bank
that delivered the letter of credit, 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 some 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.
SPECIAL HAZARD INSURANCE POLICIES
Any special hazard insurance policy covering Special Hazard
Losses 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 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,
some governmental actions, errors in design, faulty workmanship or materials
(except under some circumstances), nuclear reaction, chemical contamination,
waste by the mortgagor and 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 the
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 the 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 (1) the
cost of repair or replacement of the property or (2) upon transfer of the
property to the insurer, the unpaid principal balance of the mortgage loan at
the time of acquisition of the property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the mortgage rate to the date of claim
settlement and expenses incurred by the master servicer, special servicer or
subservicer with respect to the property. If the property is transferred to a
third party in a sale
46
<PAGE>
approved by the issuer of the special hazard insurance policy, the amount that
the issuer 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 issuer of the special hazard insurance
policy). If the unpaid principal balance plus accrued interest and expenses is
paid by the insurer, the amount of further coverage under the related special
hazard insurance policy will be reduced by that 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 that amount. Restoration of the
property with the proceeds described under (1) above will satisfy the condition
under each mortgage pool insurance policy that the property be restored before a
claim under the mortgage pool insurance policy may be validly presented with
respect to the defaulted mortgage loan secured by the property. The payment
described under (2) above will render presentation of a claim in respect of the
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 expenses will not affect the total Insurance Proceeds paid
to securityholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy.
As and to the extent set forth in the applicable prospectus
supplement, coverage in respect of Special Hazard Losses for a series of
securities may be provided, in whole or in part, by a type of instrument other
than a special hazard insurance policy or by means of a special hazard
representation of the Seller or the company.
RESERVE FUNDS
If so provided in the related prospectus supplement, the company
will deposit or cause to be deposited in a reserve fund account 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 the prospectus supplement. In the
alternative or in addition to the 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 retained interest of the company or otherwise. To the
extent that the funding of the reserve fund is dependent on amounts otherwise
payable on related subordinate securities, any retained interest of the company
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 the 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, if specified conditions are met,
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. The related prospectus
supplement will disclose whether a reserve fund is 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, 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
47
<PAGE>
interest in any reserve fund, in the event of the bankruptcy, receivership or
insolvency of that 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.
CASH FLOW AGREEMENTS
If so provided in the related prospectus supplement, the trust
fund may include guaranteed investment contracts pursuant to which moneys held
in the funds and accounts established for the related series will be invested at
a specified rate. The principal terms of a guaranteed investment contract or
other cash flow agreement, and the identity of the obligor, will be described in
the prospectus supplement for a series of notes.
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 financial guaranty insurance policy has been obtained for a
series of securities, the master servicer will be obligated to exercise
reasonable efforts to keep the financial guaranty insurance policy in full force
and effect throughout the term of the applicable pooling and servicing
agreement, unless coverage thereunder has been exhausted through payment of
claims or until the financial guaranty insurance policy is replaced in
accordance with the terms of the applicable pooling and servicing agreement. The
master servicer will agree to pay the premiums for each financial guaranty
insurance policy on a timely basis. In the event the insurer ceases to be a
qualified insurer as described in the related prospectus supplement, or fails to
make a required payment under the related financial guaranty insurance policy,
the master servicer will have no obligation to replace the insurer. Any losses
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the related 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 the mortgage pool insurance policy (or an alternate
form of credit support) in full force and effect throughout the term of the
applicable pooling and servicing agreement or servicing agreement, unless
coverage thereunder has been exhausted through payment of claims or until the
mortgage pool insurance policy is replaced in accordance with the terms of the
applicable pooling and servicing agreement or servicing agreement. 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 because it ceases to be qualified by law to transact pool insurance
business or coverage is terminated for any reason other than exhaustion of the
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
the mortgage pool insurance policy, provided that, if the cost of the
replacement policy is greater than the cost of the 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 the 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,
48
<PAGE>
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.
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 cause to be kept or to keep the letter of credit
(or an alternate form of credit support) in full force and effect throughout the
term of the applicable pooling and servicing 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
the securities is made and coverage under the 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 the amount in trust for the
securityholders.
In lieu of the master servicer's obligation to maintain a
financial guaranty insurance policy, mortgage pool insurance policy or letter of
credit as provided above, the master servicer may obtain a substitute financial
guaranty insurance policy, mortgage pool insurance policy or letter of credit.
If the master servicer obtains a substitute, it will maintain and keep the
substitute in full force and effect as provided in this prospectus. Prior to its
obtaining any substitute financial guaranty insurance policy, mortgage pool
insurance policy or letter of credit, the master servicer will obtain written
confirmation from the Rating Agency or Agencies that rated the related series of
securities that the substitution of the financial guaranty insurance policy,
mortgage pool insurance policy or letter of credit for the existing credit
enhancement will not adversely affect the then-current ratings assigned to the
securities by the Rating Agency or Agencies.
If a special hazard insurance policy has been obtained for a
series of securities, the master servicer will also be obligated to exercise
reasonable efforts to maintain and keep the policy in full force and effect
throughout the term of the applicable pooling and servicing agreement or
servicing agreement, unless coverage thereunder has been exhausted through
payment of claims or otherwise or substitution therefor is made as described
below under "--Reduction or Substitution of Credit Enhancement." If coverage for
Special Hazard Losses takes the form of a special hazard insurance policy, the
policy will provide coverage against risks of the type described in this
prospectus under "Description of Credit Enhancement--Special Hazard Insurance
Policies." The master servicer may obtain a substitute policy for the existing
special hazard insurance policy if prior to the substitution the master servicer
obtains written confirmation from the Rating Agency or Agencies that rated the
related securities that the substitution shall not adversely affect the
then-current ratings assigned to the securities by the Rating Agency or
Agencies.
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 each pool insurer,
to the issuer of each special hazard insurance policy, and, in respect of
defaulted mortgage loans for which there is no subservicer, to each primary
insurer and take any reasonable steps as are necessary to permit recovery under
the letter of credit, insurance policies or comparable coverage respecting
defaulted mortgage loans or mortgage loans which are the subject of a bankruptcy
proceeding. As set forth above, all collections by the master servicer under any
mortgage pool insurance policy or any
49
<PAGE>
Primary Insurance Policy and, where the related property has not been restored,
any special hazard insurance policy, 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 paid claims 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 insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any financial guaranty
insurance policy, mortgage pool insurance policy, letter of credit 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 (1) that the
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 (2) that the expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds. If recovery under any financial
guaranty insurance policy, mortgage pool insurance policy, letter of credit or
any related Primary Insurance Policy is not available because the master
servicer has been unable to make the above determinations, has made the
determinations incorrectly or recovery is not available for any other reason,
the master servicer is nevertheless obligated to follow the 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 the
determination has been incorrectly made, is entitled to reimbursement of its
expenses in connection with the restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided pursuant to any form of
credit enhancement may be reduced. In most cases, the amount available pursuant
to any form of credit enhancement will be subject to periodic reduction in
accordance with a schedule or formula on a nondiscretionary basis pursuant to
the terms of the related pooling and servicing agreement or indenture.
Additionally, in most cases, the 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, 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 the
credit support with other credit enhancement instruments issued by obligors
whose credit ratings are equivalent to the downgraded level and in lower amounts
which would satisfy the 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 the other person that is
entitled thereto. Any assets so released will not be available for distributions
in future periods.
50
<PAGE>
OTHER FINANCIAL OBLIGATIONS RELATED TO THE SECURITIES
SWAPS AND YIELD SUPPLEMENT AGREEMENTS
The trustee on behalf of a trust fund may enter into interest
rate swaps and related caps, floors and collars to minimize the risk of
securityholders from adverse changes in interest rates, which are collectively
referred to as swaps, and other yield supplement agreements or similar yield
maintenance arrangements that do not involve swap agreements or other notional
principal contracts, which are collectively referred to as yield supplement
agreements.
An interest rate swap is an agreement between two parties to
exchange a stream of interest payments on an agreed hypothetical or "notional"
principal amount. No principal amount is exchanged between the counterparties to
an interest rate swap. In the typical swap, one party agrees to pay a fixed rate
on a notional principal amount, while the counterparty pays a floating rate
based on one or more reference interest rates including the London Interbank
Offered Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill
rates. Interest rate swaps also permit counterparties to exchange a floating
rate obligation based upon one reference interest rate, such as LIBOR, for a
floating rate obligation based upon another referenced interest rate, such as
U.S. Treasury Bill rates.
Yield supplement agreements may be entered into to supplement the
interest rate or other rates on one or more classes of the securities of any
series. Additionally, agreements relating to other types of derivative products
that are designed to provide credit enhancement to the related series may be
entered into by a trustee and one or more counterparties. The terms of any
derivative product agreement and any counterparties will be described in the
accompanying prospectus supplement.
There can be no assurance that the trustee will be able to enter
into or offset swaps or enter into yield supplement agreements or derivative
product agreements at any specific time or at prices or on other terms that are
advantageous. In addition, although the terms of the swaps and yield supplement
agreements may provide for termination under various circumstances, there can be
no assurance that the trustee will be able to terminate a swap or yield
supplement agreement when it would be economically advantageous to the trust
fund to do so.
PURCHASE OBLIGATIONS
Some types of trust assets and some classes of securities of any
series, as specified in the accompanying prospectus supplement, may be subject
to a purchase obligation that would become applicable on one or more specified
dates, or upon the occurrence of one or more specified events, or on demand made
by or on behalf of the applicable securityholders. A purchase obligation may be
in the form of a conditional or unconditional purchase commitment, liquidity
facility, remarketing agreement, maturity guaranty, put option or demand
feature. The terms and conditions of each purchase obligation, including the
purchase price, timing and payment procedure, will be described in the
accompanying prospectus supplement. A purchase obligation relating to trust
assets may apply to those trust assets or to the related securities. Each
purchase obligation may be a secured or unsecured obligation of the provider
thereof, which may include a bank or other financial institution or an insurance
company. Each purchase obligation will be evidenced by an instrument delivered
to the trustee for the benefit of the applicable securityholders of the related
series. As specified in the accompanying prospectus supplement, each purchase
obligation relating to trust assets will be payable solely to the trustee for
the benefit of the securityholders of the related series. Other purchase
obligations may be payable to the trustee or directly to the holders of the
securities to which that obligation relate.
51
<PAGE>
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER
GENERAL
The mortgaged property with respect to each mortgage loan will be
required to be covered by a hazard insurance policy and, if required as
described below, a Primary Insurance Policy. The following is only a brief
description of these insurance policies and does not purport to summarize or
describe all of the provisions of these policies. The insurance is subject to
underwriting and approval of individual mortgage loans by the respective
insurers.
PRIMARY MORTGAGE INSURANCE POLICIES
In a securitization of single family loans, single family loans
included in the related mortgage pool having a loan-to-value ratio at
origination of over 80% (or other percentage as described in the related
prospectus supplement) may be required by the company to be covered by a Primary
Insurance Policy. The Primary Insurance Policy will insure against default on a
mortgage loan as to at least the principal amount thereof exceeding 75% of the
Value of the related mortgaged property (or other percentage as described in the
related prospectus supplement) 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% (or other
percentage as described in the prospectus supplement). The company will
represent and warrant that, to the best of the company's knowledge, mortgage
loans of this type are so covered. This type of 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
the above loan-to-value ratio percentage 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 the coverage was so required upon their
origination, notwithstanding that subsequent negative amortization may cause the
mortgage loan's loan-to-value ratio, based on the then-current balance, to
subsequently exceed the limits which would have required the coverage upon their
origination. Multifamily, commercial and mixed-use 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 a primary insurer will differ from those in Primary Insurance Policies
issued by other primary insurers, each Primary Insurance Policy will in general
cover the Primary Insurance Covered Loss. The primary insurer generally will be
required to pay:
o the insured percentage of the Primary Insurance
Covered Loss;
o the entire amount of the Primary Insurance Covered
Loss, after receipt by the primary insurer of good
and merchantable title to, and possession of, the
mortgaged property; or
o at the option of the primary insurer, 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 (1) the date the mortgage loan would have been
discharged in full if the default had not occurred
or (2) an approved sale.
52
<PAGE>
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:
o advance or discharge (1) hazard insurance premiums
and (2) as necessary and approved in advance by the
primary insurer, real estate taxes, protection and
preservation expenses and foreclosure and related
costs;
o 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
o tender to the primary insurer good and merchantable
title to, and possession of, the mortgaged
property.
For any single family loan for which the coverage is required
under the standard described above, 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, provided that the Primary Insurance Policy was in place
as of the cut-off date and the company had knowledge of the Primary Insurance
Policy. In the event the company gains knowledge that as of the Closing Date, a
mortgage loan which required a Primary Insurance Policy did not have one, then
the master servicer is required to use reasonable efforts to obtain and maintain
a Primary Insurance Policy to the extent that the policy is obtainable at a
reasonable price. The master servicer or the Seller will not cancel or refuse to
renew a 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 and servicing agreement or indenture unless the replacement
Primary Insurance Policy for the canceled or non-renewed policy is maintained
with an insurer whose claims-paying ability is acceptable to the Rating Agency
or Agencies that rated the series of securities for mortgage pass-through
certificates having a rating equal to or better than the highest then-current
rating of any class of the 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 and servicing 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. The coverage generally will be in an amount equal to the
lesser of the principal balance owing on the mortgage loan or 100% of the
insurable value of the improvements securing the mortgage loan except that, if
generally available, the 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
53
<PAGE>
related Certificate Account. The pooling and servicing 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 the 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 the
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 of these 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, depending on the case, vandalism. The foregoing
list is merely indicative of the 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 the mortgage
loan, the pooling and servicing agreement or servicing agreement requires the
master servicer to cause to be maintained for this mortgage loan, 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, the clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(1) the replacement cost of the improvements damaged or destroyed less physical
depreciation or (2) the proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of the
improvements.
Since the amount of hazard insurance that mortgagors are required
to maintain on the improvements securing the mortgage loans may decline as the
principal balances of the related mortgage loans 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 and any blanket insurance policy insuring against hazard
losses on the mortgaged properties. However, the ability of the master servicer
to present the claims is dependent upon the extent to which information in this
regard is furnished to the master servicer or the subservicers by mortgagors.
54
<PAGE>
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 HUD to insure mortgage loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such mortgage loans made under Sections
221 (d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a mortgage loan may be up to 40 years and the ratio of the loan
amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage
loans made for the purchase or refinancing of existing apartment projects which
are at least three years old. Section 244 also provides for co-insurance of
mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work, but repairs may be
made for up to, in general, the greater of 15% of the value of the project or a
dollar amount per apartment unit established from time to time by HUD. In
general the loan term may not exceed 35 years and a loan to value ratio of no
more than 85% is required for the purchase of a project and 70% for the
refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in
cash or in debentures issued by HUD. Presently, claims are being paid in cash,
and claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The master servicer will be obligated to purchase a
debenture issued in satisfaction of a defaulted FHA insured mortgage loan
serviced by it for an amount equal to the principal amount of any the debenture.
The master servicer will be required to take steps reasonably
necessary to keep FHA insurance in full force and effect.
VA MORTGAGE GUARANTY
The Servicemen's Readjustment Act of 1944, as amended, permits a
veteran or, in some instances, his or her spouse, to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one-to
four-family dwelling unit to be occupied as the veteran's home at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment for the purchaser and permits the guaranty of mortgage
loans with terms, limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a dollar
limit established by the VA. The liability on the guaranty is reduced or
increased pro rata with any reduction or increase in amount of indebtedness, but
in no event will the amount payable on the guaranty exceed the amount of the
original guaranty. Notwithstanding the dollar and percentage limitations of the
guaranty, a mortgagee will ordinarily suffer a monetary loss only when the
difference between the unsatisfied indebtedness and the proceeds of a
foreclosure sale of mortgaged premises is greater than the original guaranty as
adjusted. The VA may, at its option, and without regard to the guaranty, make
full payment to a mortgagee of the unsatisfied indebtedness on a mortgage upon
its assignment to the VA.
Since there is no limit imposed by the VA on the principal amount
of a VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary
55
<PAGE>
Mortgage Insurance Policy may be required by the company for VA loans in excess
of amounts specified by the VA. The amount of the additional coverage will be
set forth in the related prospectus supplement. Any VA guaranty relating to
Contracts underlying a series of certificates will be described in the related
prospectus supplement.
THE COMPANY
The company is a wholly-owned subsidiary of Impac Funding
Corporation. The company was incorporated in the State of Delaware 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 2037 Irvine Avenue,
Suite 200, Santa Ana Heights, California 92707. Its telephone number is (714)
556-0122.
IMPAC FUNDING CORPORATION
Impac Funding Corporation, 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
Impac Mortgage Holdings, Inc. Impac Funding primarily acquires mortgage loans
from approved correspondents.
Prior to November 1995, Impac Funding was a division of Imperial Credit
Industries, Inc. In November 1995, Imperial Credit Industries, Inc. restructured
its operations pursuant to which Impac Funding became a separate corporation and
Imperial Credit Industries, Inc. 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 Impac Mortgage Holdings, Inc., in
exchange for approximately 10% of the common stock of Impac Mortgage Holdings,
Inc. The common stock of Impac Funding was retained by Imperial Credit
Industries, Inc. until March 1997 when it was distributed to certain officers
and/or directors of Impac Funding who are also officers and/or directors of
Impac Mortgage Holdings, Inc.
Impac Funding's executive offices are located at 1401 Dove Street,
Newport Beach, California 92660, and its telephone number is (949) 475-3700.
IMPAC MORTGAGE HOLDINGS, INC.
Impac Mortgage Holdings, Inc. 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 Impac Mortgage Holdings by Imperial Credit Industries,
Inc., a leading specialty finance company, in November 1995. Impac Mortgage
56
<PAGE>
Holdings 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.
Impac Mortgage Holdings, Inc.'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 general, the parties to a pooling and servicing agreement will
include the company, the trustee, the master servicer and, in some cases, a
special servicer. However, a pooling and servicing agreement that relates to a
trust fund that includes mortgage securities may include a party solely
responsible for the administration of the mortgage securities, and a pooling and
servicing 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 and servicing 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 related securities and the
nature of the related trust fund. The following summaries describe provisions
that may appear in a pooling and servicing agreement with respect to a series of
certificates or in either the servicing agreement or indenture with respect to a
series of notes. The prospectus supplement for a series of securities will
describe any provision of the related Agreements that materially differs from
the description thereof set forth below. The company will provide a copy of the
Agreement (without exhibits) that relates to any series of securities without
charge upon written request of a holder of an offered security of the series
addressed to it at its principal executive offices specified in this prospectus
under "The Company".
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The pooling and servicing agreement or servicing agreement for each
series of securities will provide that the master servicer may not resign from
its obligations and duties except upon a determination that performance of the
duties is no longer permissible under applicable law or except (1) in connection
with a permitted transfer of servicing or (2) 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 the resignation
and appointment will not, in and of itself, result in a downgrading of the
securities. No resignation will become effective until the trustee or a
successor servicer has assumed the master servicer's responsibilities, duties,
liabilities and obligations under the pooling and servicing agreement or
servicing agreement.
Each pooling and servicing agreement and servicing agreement will also
provide that the master servicer, the company and their directors, officers,
employees or agents will not 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, or for errors in judgment, unless the liability which
would otherwise be imposed was by
57
<PAGE>
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties or by reason of reckless disregard of obligations and duties. Each
pooling and servicing agreement and 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 are 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 and
servicing 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 a loss, liability or expense otherwise reimbursable
pursuant to the pooling and servicing agreement) and any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties or by reason of reckless disregard of
obligations and duties. In addition, each pooling and servicing agreement and
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 and servicing 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 action which it may deem
necessary or desirable with respect to the pooling and servicing agreement or
servicing agreement and the rights and duties of the parties to that agreement
and the interests of the securityholders. The legal expenses and costs of the
action and any resulting liability 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 reimbursement from 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
and servicing agreement or servicing agreement, provided that (1) the person is
qualified to service mortgage loans on behalf of Fannie Mae or Freddie Mac and
(2) the 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 and
servicing agreement or servicing agreement to any person to whom the master
servicer is transferring a substantial portion of its mortgage servicing
portfolio, provided clauses (1) and (2) above are satisfied and the person is
reasonably satisfactory to the company and the trustee. In the case of an
assignment, the master servicer will be released from its obligations under the
pooling and servicing agreement or servicing agreement, exclusive of liabilities
and obligations incurred by it prior to the time of the assignment.
EVENTS OF DEFAULT AND RIGHTS UPON EVENT DEFAULT
POOLING AND SERVICING AGREEMENT
Events of default under the pooling and servicing agreement in respect
of a series of certificates, unless otherwise specified in the prospectus
supplement, will include:
o 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 the series any required payment which continues
unremedied for 5 days (or other time period described in the
related prospectus supplement) after the giving of written notice
of the 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;
58
<PAGE>
o 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 and servicing agreement with respect to the 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 and
servicing agreement) after the giving of written notice of the
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;
o events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings regarding the master
servicer and some actions by the master servicer indicating its
insolvency or inability to pay its obligations, as specified in
the related pooling and servicing agreement; and
o any failure of the master servicer to make advances as described
in this prospectus under "Description of the
Securities--Advances."
Additional events of default will be described in the related prospectus
supplement. 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 and servicing 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 and servicing agreement (other than any rights of the master
servicer as certificateholder) covering the 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 the
pooling and servicing agreement (other than any obligation to purchase mortgage
loans) 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 established mortgage loan servicing institution with a net worth of at least
$15,000,000 to act as successor to the master servicer under the pooling and
servicing agreement (unless otherwise set forth in the pooling and servicing
agreement). Pending an appointment, the trustee is obligated to act as master
servicer. The trustee and the 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 and servicing agreement.
No certificateholder will have any right under a pooling and servicing
agreement to institute any proceeding with respect to the pooling and servicing
agreement unless (1) that holder previously gave the trustee written notice of a
default that is continuing, (2) the holders of certificates evidencing not less
than 25% of the aggregate undivided interests (or, if applicable, voting rights)
in the related trust fund requested the trustee in writing to institute the
proceeding in its own name as trustee, (3) the trustee receives reasonable
security or indemnity against the costs, expenses and liabilities that may be
incurred in or because of the proceeding and (4) the trustee for a reasonable
time after receipt of the request and indemnity has neglected or refused to
institute any proceeding. .
59
<PAGE>
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 the default or
event of default (other than a failure by the master servicer to make an
advance); provided, however, that (1) a default or event of default under the
first or fourth items listed under "--Events of Default" above may be waived
only by all of the holders of certificates affected by the default or event of
default and (2) no waiver shall reduce in any manner the amount of, or delay the
timing of, payments received on mortgage loans which are required to be
distributed to, or otherwise materially adversely affect, any non-consenting
certificateholder.
SERVICING AGREEMENT
For a series of notes, a servicing default under the related servicing
agreement generally will include:
o 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 the series any required payment which
continues unremedied for 5 business days (or other period of time
described in the related prospectus supplement) after the giving
of written notice of the failure to the master servicer by the
trustee or the Issuer;
o 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 the series of securities
which continues unremedied for 45 days after the giving of
written notice of the failure to the master servicer by the
trustee or the Issuer;
o events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings regarding the master
servicer and some actions by the master servicer indicating its
insolvency or inability to pay its obligations, as specified in
the related servicing agreement; and
o 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
the termination), whereupon the trustee will succeed to all responsibilities,
duties and liabilities of the master servicer under the servicing agreement
(other than any obligation to purchase mortgage loans) 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 the appointment, the trustee is obligated to act
in the capacity. The trustee and the 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.
60
<PAGE>
INDENTURE
For a series of notes, an event of default under the indenture generally
will include:
o 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 the series;
o 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;
o 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 the series having been incorrect in a
material respect as of the time made, and the breach is not cured
within thirty days after notice thereof is given in accordance
with the procedures described in the related prospectus
supplement;
o events of bankruptcy, insolvency, receivership or liquidation of
the company or the trust fund, as specified in the indenture; or
o 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 the series may
declare the principal amount of all the notes of the series to be due and
payable immediately. The declaration may, in some 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 the series have been declared to be due and payable, the trustee
may, in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue to
apply payments on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of the series as they would
have become due if there had not been 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 (1) the holders of 100% of the then
aggregate outstanding amount of the notes of the series consent to the sale, (2)
the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding notes of
the series at the date of the sale or (3) the trustee determines that the
collateral would not be sufficient on an ongoing basis to make all payments on
the notes as the payments would have become due if the 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 the 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 the liquidation for unpaid fees and expenses. As a
result, upon the occurrence of the 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
61
<PAGE>
enforcement of the lien of the indenture for the benefit of the noteholders
after the occurrence of the 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 the 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 the 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 the Agreement unless (1) that holder previously has given to the
trustee written notice of default and the continuance thereof, (2) the holders
of notes or Equity Certificates of any class evidencing not less than 25% of the
aggregate Percentage Interests constituting that class (a) have made written
request upon the trustee to institute the proceeding in its own name as trustee
and (b) have offered to the trustee reasonable security or indemnity against the
costs, expenses and liabilities that may be incurred in or because of the
proceeding, (3) the trustee has neglected or refused to institute the proceeding
for 60 days after receipt of the request and indemnity and (4) no direction
inconsistent with the written request has been given to the trustee during the
60 day period by the holders of a majority of the Note Balances of that class.
AMENDMENT
Each pooling and servicing agreement may be amended by the parties
thereto, without the consent of any of the holders of certificates covered by
the pooling and servicing agreement,
o to cure any ambiguity,
o to correct, modify or supplement any provision therein which may
be inconsistent with any other provision therein or to correct
any error,
o to change the timing and/or nature of deposits in the Certificate
Account, provided that (1) the change would not adversely affect
in any material respect the interests of any certificateholder,
as evidenced by an opinion of counsel, and (2) the change would
not adversely affect the then-current rating of any rated classes
of certificates, as evidenced by a letter from each applicable
Rating Agency,
o if a REMIC election has been made with respect to the related
trust fund, to modify, eliminate or add to any of its provisions
(A) to the extent as shall be necessary to maintain the
qualification of the trust fund as a REMIC or to avoid or
minimize the risk of imposition of any tax on the related trust
fund, provided that the trustee has received an opinion of
counsel to the effect that (1) the action is necessary or
desirable to maintain the qualification or to avoid or minimize
the risk, and (2) the action will not adversely affect in any
material respect the interests of any holder of certificates
covered by the pooling and servicing agreement, or (B) to
restrict the transfer of the REMIC Residual Certificates,
provided that the company has determined that the then-current
ratings of the classes of the certificates that have been rated
will not be adversely affected, as evidenced by a letter from
each applicable Rating Agency, and that the amendment will not
give rise to any tax with respect to the transfer of the REMIC
Residual Certificates to a non-permitted transferee,
o to make any other provisions with respect to matters or questions
arising under the pooling and servicing agreement which are not
materially inconsistent with the provisions thereof, provided
62
<PAGE>
that the action will not adversely affect in any material respect
the interests of any certificateholder, or
o to amend specified provisions that are not material to holders of
any class of certificates offered under this prospectus.
The pooling and servicing 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, at least 66% of the aggregate Percentage
Interests constituting the class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the pooling and
servicing agreement or of modifying in any manner the rights of the holders of
certificates covered by the pooling and servicing agreement, except that the
amendment may not (1) 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 the certificate
or (2) reduce the aforesaid percentage of certificates of any class the holders
of which are required to consent to the amendment without the consent of the
holders of all certificates of the class covered by the pooling and servicing
agreement then outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related trust fund, the trustee will not be entitled to consent
to any amendment to a pooling and servicing agreement without having first
received an opinion of counsel to the effect that the amendment or the exercise
of any power granted to the master servicer, the company, the trustee or any
other specified person in accordance with the amendment will not result in the
imposition of a tax on the related trust fund or cause the trust fund to fail to
qualify as a REMIC.
With respect to each series of notes, each related servicing agreement
or indenture may be amended by the parties thereto without the consent of any of
the holders of the notes covered by the Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that the action
will not adversely affect in any material respect the interests of any holder of
notes covered by the Agreement. Each Agreement may also be amended by the
parties thereto with the consent of the holders of notes evidencing not less
than 66% of the voting rights, for any purpose; provided, however, that the
amendment may not:
(1) reduce in any manner the amount of or delay the timing of,
payments received on trust fund assets which are required to
be distributed on any certificate without the consent of the
holder of the certificate,
(2) adversely affect in any material respect the interests of the
holders of any class of notes in a manner other than as
described in (1), without the consent of the holders of notes
of the class evidencing not less than 66% of the aggregate
voting rights of the class or
(3) reduce the aforesaid percentage of voting rights required for
the consent to the amendment without the consent of the
holders of all notes covered by the Agreement then
outstanding.
The voting rights evidenced by any security will be the portion of the voting
rights of all of the securities in the related series allocated in the manner
described in the related prospectus supplement.
63
<PAGE>
TERMINATION; RETIREMENT OF SECURITIES
The obligations created by the related Agreements for each series of
securities (other than the 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 the
Agreements following the earlier of (1) 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 (2) 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 the 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. With respect to any series of certificates, the purchase shall not
be made unless either: (1) the aggregate principal balance of the certificates
as of the date is equal to or less than the percentage specified in the related
prospectus supplement (which shall not be greater than 10%) of the aggregate
principal balance of the certificates as of the Closing Date or (2) the
aggregate principal balance of the mortgage loans as of the date is equal to or
less than the percentage specified in the related prospectus supplement (which
shall not be greater than 10%) of the aggregate principal balance of the
mortgage loans as of the cut-off date. With respect to any series of notes, the
purchase shall not be made unless the aggregate principal balance of the notes
as of the date is equal to or less than the percentage specified in the related
prospectus supplement (which shall not be greater than 25%) of the aggregate
principal balance of the notes as of the Closing Date or a period specified in
the related prospectus supplement (which shall not be shorter than seven years)
has elapsed since the initial distribution date. Upon the purchase of the
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 and
servicing agreement continue beyond the expiration of 21 years from the death of
the survivor of the persons named in the pooling and servicing agreement.
Written notice of termination of the pooling and servicing agreement will be
given to each securityholder, and the final distribution will be made only upon
surrender and cancellation of the securities at an office or agency appointed by
the trustee which will be specified in the notice of termination. If the
securityholders are permitted to terminate the trust under the applicable
pooling and servicing agreement, a penalty may be imposed upon the
securityholders based upon the fee that would be foregone by the master servicer
because of the termination.
The 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 the right will effect early
retirement of the securities of that series, but the right of the master
servicer, the company or, if applicable, the 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 the 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 the securities will be
entitled to receive upon the early retirement. The early termination may
adversely affect the yield to holders of the securities. With respect to any
series of certificates, an
64
<PAGE>
optional purchase of the mortgage loans in the related trust fund may not result
in the related certificates receiving an amount equal to the principal balance
thereof plus accrued and unpaid interest and any undistributed shortfall on the
related certificates. If a REMIC election has been made, the termination of the
related trust fund will be effected in a manner consistent with applicable
federal income tax regulations and its status as a REMIC.
Following any optional termination, there will be no continuing direct
or indirect liability of the trust fund or any securityholder as sellers of the
assets of the trust fund.
THE TRUSTEE
The trustee under each pooling and servicing 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. The trustee shall at all times be a corporation or an association
organized and doing business under the laws of any state or the United States of
America, authorized under the laws to exercise corporate trust powers, having a
combined capital and surplus of at least $15,000,000 and subject to supervision
or examination by federal or state authority.
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 the 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 and
servicing agreement or indenture. However, upon receipt of any of the various
certificates, reports or other instruments required to be furnished to it
pursuant to the related Agreement, a trustee will be required to examine the
documents and to determine whether they conform to the requirements of the
agreement.
SOME 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.
The trustee for each series of securities generally will be entitled to
indemnification, from amounts held in the Certificate Account for the 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 and servicing agreement or indenture unless the loss, liability, cost or
expense was 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, or by reason of its reckless disregard of its obligations or duties.
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
65
<PAGE>
continue under the pooling and servicing agreement or if the trustee becomes
insolvent. Upon becoming aware of the circumstances, the company will be
obligated to appoint a successor trustee. The trustee may also be removed at any
time by the holders of securities evidencing not less than 51% of the aggregate
undivided interests (or, if applicable, voting rights) in the related trust
fund. Any resignation or removal of the trustee and appointment of a successor
trustee will not become effective until acceptance of the appointment by the
successor trustee.
YIELD CONSIDERATIONS
The yield to maturity of an offered certificate will depend on the price
paid by the holder for the certificate, the security interest rate on a
certificate 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 the certificate (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 the 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 Net Mortgage Rates
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 their yield to maturity, 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 the 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 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 may 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 the payments are passed through to
securityholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on the 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.
Similarly, 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
66
<PAGE>
high relative to the principal payments to which the class is entitled. This
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. Extremely rapid prepayments may result in the failure of the
holders to recoup their original investment. In addition, the yield to maturity
on other types of classes of securities, including Accrual Securities and
securities with a security interest rate which fluctuates inversely with or at a
multiple of an index, may be relatively more sensitive to the rate of prepayment
on the related mortgage loans than other classes of securities.
The timing of changes in the rate of principal payments on or
repurchases of the mortgage loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. In general, the earlier
a prepayment of principal on the underlying mortgage loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments and repurchases
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of a series of securities
would not be fully offset by a subsequent like reduction (or increase) in the
rate of principal payments.
When a principal prepayment in full is made on a mortgage loan, the
borrower is generally charged interest only for the period from the due date of
the preceding scheduled payment up to the date of the 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
accrued interest for less than the full accrual period). However, interest
accrued and distributable on any series of securities 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 the prepayment is not accompanied by accrued
interest for the full accrual period, the interest charged to the borrower (net
of servicing and administrative fees and any retained interest of the company)
may be less than the corresponding amount of interest accrued and otherwise
payable on the related mortgage loan, and a Prepayment Interest Shortfall will
result. If and to the extent that the shortfall is allocated to a class of
offered securities, its yield will be adversely affected. The prospectus
supplement for a series of securities will describe the manner in which the
shortfalls will be allocated among the classes of the 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 the shortfalls. The related
prospectus supplement will also describe any other amounts available to offset
the shortfalls. See "Servicing of Mortgage Loans--Servicing and Other
Compensation and Payment of Expenses; Retained Interest".
The trust fund with respect to any series may include convertible ARM
Loans. As is the case with conventional, fixed-rate mortgage loans originated in
a high interest rate environment which may be subject to a greater rate of
principal prepayments when interest rates decrease, convertible ARM Loans may be
subject to a greater rate of principal prepayments (or purchases by the related
subservicer or the master servicer) due to their refinancing or conversion to
fixed interest rate loans in a low interest rate environment. For example, if
prevailing interest rates fall significantly, convertible ARM Loans could be
subject to higher prepayment and conversion rates than if prevailing interest
rates remain constant because the availability of fixed-rate or other
adjustable-rate mortgage loans at competitive interest rates may encourage
mortgagors to refinance their adjustable-rate mortgages to "lock in" a lower
fixed interest rate or to take advantage of the availability of other
adjustable-rate mortgage loans, or, in the case of convertible adjustable-rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in a
rising interest rate environment
67
<PAGE>
as mortgagors attempt to limit their risk of higher rates. A rising interest
rate environment may also result in an increase in the rate of defaults on the
mortgage loans. If the related subservicer or the master servicer purchases
convertible ARM Loans, a mortgagor's exercise of the conversion option will
result in a distribution of the principal portion thereof to the
securityholders, as described in this prospectus. Alternatively, to the extent
subservicers or the master servicer fail to purchase converting ARM Loans, the
mortgage pool will include fixed-rate mortgage loans.
The rate of defaults on the mortgage loans will also affect the rate and
timing of principal payments on the mortgage loans and thus the yield on the
securities. In general, defaults on single family loans are expected to occur
with greater frequency in their early years. The rate of default on single
family 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.
With respect to some mortgage loans in a mortgage pool, 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 the 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 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 the mortgage loans may exceed
the amount of their minimum scheduled monthly payment. 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 the 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 the securities were
purchased. In addition, with respect to ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on the mortgage loan would exceed
the amount of scheduled principal and accrued interest on the principal balance
thereof, and since the excess will be applied to reduce the principal balance of
the related class or classes of securities, the weighted average life of the
securities will be reduced and may adversely affect yield to holders thereof,
depending upon the price at which the securities were purchased.
68
<PAGE>
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 the 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. 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 the mortgage loans, is expected to be a
substantial amount) will generally depend on the mortgagor's ability to obtain
refinancing of the 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 real estate values, the mortgagor's financial situation, prevailing
mortgage loan interest rates, the mortgagor's equity in the related mortgaged
property, tax laws and prevailing general economic conditions. None of the
company, the master servicer, or any of their affiliates will be obligated to
refinance or repurchase any mortgage loan or to sell the mortgaged property.
The extent of prepayments of principal of the mortgage loans may be
affected by a number of factors, including 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, commercial and
mixed-use 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 the provisions may be practicably enforced. See "Servicing of Mortgage
Loans--Collection and Other Servicing Procedures" and "Legal Aspects of the
Mortgage Loans--Enforceability of Some Provisions" for a description of
provisions of the pooling and servicing agreement and legal aspects of mortgage
loans 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 (1) converting
to a fixed rate loan and thereby "locking in" the rate or (2) 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, the adjustments generally will
not increase or decrease the mortgage rates by more than a fixed percentage
amount on each adjustment date, will not increase the mortgage rates over a
fixed percentage amount during the life of any ARM Loan and will 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 high interest
rate environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently high in relation to the then-current mortgage rates on newly
originated ARM Loans that the
69
<PAGE>
rate of prepayment may increase as a result of refinancings. There can be no
assurance as to the rate of prepayments on the mortgage loans during any period
or over the life of any series of securities.
If the applicable pooling and servicing agreement for a series of
securities provides for a pre-funding account or other means of funding the
transfer of additional mortgage loans to the related trust fund, as described
under "Description of the Securities--Pre-Funding Account" in this prospectus,
and the trust fund is unable to acquire the additional mortgage loans within any
applicable time limit, the amounts set aside for the purpose may be applied as
principal payments on one or more classes of securities of the series. See
"Yield Considerations."
There can be no assurance as to the rate of prepayment of the mortgage
loans. The company is not aware of any publicly available statistics relating to
the principal prepayment experience of diverse portfolios of mortgage loans such
as the mortgage loans over an extended period of time. All statistics known to
the company that have been compiled with respect to prepayment experience on
mortgage loans indicate that while some mortgage loans may remain outstanding
until their stated maturities, a substantial number will be paid prior to their
respective stated maturities. No representation is made as to the particular
factors that will affect the prepayment of the mortgage loans or as to the
relative importance of these factors.
As described in this prospectus and in the prospectus supplement, the
master servicer, the company or a person specified in the related prospectus
supplement (other than holder of any class of offered certificates, other than
the REMIC Residual Certificates, if offered) 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."
LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion summarizes legal aspects of mortgage loans that
is general in nature. The summaries do not purport to be complete. They do not
reflect the laws of any particular state nor the laws of all states in which the
mortgaged properties may be situated. This is because these legal aspects are
governed in part by the law of the state that applies to a particular mortgaged
property and the laws of the states may vary substantially. You should refer to
the applicable federal and state laws governing the mortgage loans.
MORTGAGES
Each single family, multifamily, commercial and mixed-use loan and, if
applicable, the Contracts (in each case other than cooperative mortgage loans),
will be evidenced by a note or bond and secured by an instrument granting a
security interest in real property, which may be a mortgage, deed of trust or a
deed to secure debt, depending upon the prevailing practice and law in the state
in which the related mortgaged property is located, and may have first, second
or third priority. Mortgages and deeds to secure debt are 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 the 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 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
70
<PAGE>
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 deed of trust transactions, the directions of the
beneficiary.
COOPERATIVE MORTGAGE LOANS
If specified in the prospectus supplement relating to a series of
certificates, the mortgage loans and Contracts may include cooperative mortgage
loans. Each mortgage note evidencing a cooperative mortgage loan will be secured
by a security interest in shares issued by the related Cooperative, and in the
related proprietary lease or occupancy agreement granting exclusive rights to
occupy a specific dwelling unit in the Cooperative's building. The security
agreement will create a lien upon the shares of the Cooperative, the priority of
which will depend on, among other things, the terms of the particular security
agreement as well as the order of recordation and/or filing of the agreement (or
financing statements related thereto) in the appropriate recording office.
All Cooperative buildings relating to the cooperative mortgage loans are
located primarily in the State of New York. Generally, each Cooperative owns in
fee or has a long-term leasehold interest in all the real property and owns in
fee or leases the building and all separate dwelling units therein. The
Cooperative is directly responsible for property management and, in most cases,
payment of real estate taxes, other governmental impositions and hazard and
liability insurance. If there is an underlying mortgage (or mortgages) on the
Cooperative's building or underlying land, as is generally the case, or an
underlying lease of the land, as is the case in some instances, the Cooperative,
as mortgagor or lessor, as the case may be, is also responsible for fulfilling
the mortgage or rental obligations. An underlying mortgage loan is ordinarily
obtained by the Cooperative in connection with either the construction or
purchase of the Cooperative's building or the obtaining of capital by the
Cooperative. The interest of the occupant under proprietary leases or occupancy
agreements as to which that Cooperative is the landlord is generally subordinate
to the interest of the holder of an underlying mortgage and to the interest of
the holder of a land lease. If the Cooperative is unable to meet the payment
obligations (1) arising under an underlying mortgage, the mortgagee holding an
underlying mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (2) arising under its
land lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements. In
addition, an underlying mortgage on a Cooperative may provide financing in the
form of a mortgage that does not fully amortize, with a significant portion of
principal being due in one final payment at maturity. The inability of the
Cooperative to refinance a mortgage and its consequent inability to make the
final payment could lead to foreclosure by the
71
<PAGE>
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land,
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
a foreclosure by the holder of an underlying mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the mortgagee who financed the purchase by an individual
tenant-stockholder of shares of the Cooperative or, in the case of the mortgage
loans, the collateral securing the cooperative mortgage loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly payment to the Cooperative pursuant to the
proprietary lease, which payment represents the tenant-stockholder's
proportional share of the Cooperative's payments for its underlying mortgage,
real property taxes, maintenance expenses and other capital or ordinary
expenses. An ownership interest in a Cooperative and accompanying occupancy
rights may be financed through a cooperative mortgage loan evidenced by a
mortgage note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
shares of the related Cooperative. The mortgagee generally takes possession of
the share certificate and a counterpart of the proprietary lease or occupancy
agreement and a financing statement covering the proprietary lease or occupancy
agreement and the Cooperative shares is filed in the appropriate state and local
offices to perfect the mortgagee's interest in its collateral. Subject to the
limitations discussed below, upon default of the tenant-stockholder, the lender
may sue for judgment on the mortgage note, dispose of the collateral at a public
or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of Cooperative shares. See "--Foreclosure on Shares of Cooperatives"
below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of
the Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of interest expenses and real estate taxes allowable as
a deduction under Section 216(a) of the Code to the corporation under Sections
163 and 164 of the Code. In order for a corporation to qualify under Section
216(b)(1) of the Code for its taxable year in which the items are allowable as a
deduction to the corporation, the section requires, among other things, that at
least 80% of the gross income of the corporation be derived from its
tenant-stockholders. By virtue of this requirement, the status of a corporation
for purposes of Section 216(b)(1) of the Code must be determined on a year-to-
year basis. Consequently, there can be no assurance that Cooperatives relating
to the cooperative mortgage loans will qualify under the section for any
particular year. In the event that the Cooperative fails to qualify for one or
more years, the value of the collateral securing any related cooperative
mortgage loans could be significantly impaired because no deduction would be
allowable to tenant- stockholders under Section 216(a) of the Code with respect
to those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that a failure would be permitted to continue over a
period of years appears remote.
72
<PAGE>
LEASES AND RENTS
Mortgages that encumber income-producing multifamily and commercial
properties often contain an assignment of rents and leases, pursuant to which
the borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived therefrom, while (unless rents
are to be paid directly to the lender) retaining a revocable license to collect
the rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
CONTRACTS
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. 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 the 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 the 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 the office, depending on state law.
The master servicer will be required under the related pooling and
servicing agreement or servicing agreement to effect the 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 the 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 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.
73
<PAGE>
The company will assign or cause to be assigned a security interest in
the Manufactured Homes to the trustee, on behalf of the securityholders. 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, the assignment is an effective conveyance of
the 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, the 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, the security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the trustee, on
behalf of the securityholders, as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the trustee
could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which the 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 the relocation and
thereafter until the owner re-registers the Manufactured Home in the state. If
the owner were to relocate a Manufactured Home to another state and re-register
the Manufactured Home in the state, and if the company did not take steps to
re-perfect its security interest in the 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 the 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 and servicing agreement or servicing agreement,
the master servicer will be obligated to take these 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 of these liens with respect to any Manufactured Home securing a
Contract. However, these 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
this type of lien arises.
74
<PAGE>
FORECLOSURE ON MORTGAGES AND SOME 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 these states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating necessary parties. Judicial foreclosure proceedings are
often not contested by any of the applicable parties. If the mortgagee's right
to foreclose is contested, the legal proceedings necessary to resolve the issue
can be time-consuming.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of note plus the accrued and unpaid interest and the expense of
foreclosure, in which case the mortgagor's debt will be extinguished unless the
lender purchases the property for a lesser amount in order to preserve its right
against a borrower to seek a deficiency judgment and the 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 the 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. The junior
mortgagee must either pay the entire amount due on the senior mortgages prior to
or at the time of the foreclosure sale or undertake to pay on any senior
75
<PAGE>
mortgages that the mortgagor is currently in a state of default under. Under
either course of action, the junior mortgagee may add the amounts paid 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 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 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.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with
the rights of the tenant- stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The Cooperative may cancel the proprietary lease or occupancy
agreement, even while pledged, for failure by the tenant- stockholder to pay its
obligations or charges owed by the tenant-stockholder, including mechanics'
liens against the Cooperative's building incurred by the tenant-stockholder.
Generally, obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the Cooperative are made liens upon the
shares to which the proprietary lease or occupancy agreement relates. In
addition, the Cooperative may generally terminate a proprietary lease or
occupancy agreement in the event the borrower breaches its covenants in the
proprietary lease or occupancy agreement. Typically, the lender and the
Cooperative enter into a recognition agreement which, together with any lender
protection provisions contained in the proprietary lease or occupancy agreement,
establishes the rights and obligations of both parties in the event of a default
by the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease
76
<PAGE>
or occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the cooperative
mortgage loan and accrued and unpaid interest on the loan.
Recognition agreements also generally provide that in the event the
lender succeeds to the tenant- shareholder's shares and proprietary lease or
occupancy agreement as the result of realizing upon its collateral for a
cooperative mortgage loan, the lender must obtain the approval or consent of the
board of directors of the Cooperative as required by the proprietary lease
before transferring the Cooperative shares or assigning the proprietary lease.
The approval or consent is usually based on the prospective purchaser's income
and net worth, among other factors, and may significantly reduce the number of
potential purchasers, which could limit the ability of the lender to sell and
realize upon the value of the collateral. Generally, the lender is not limited
in any rights it may have to dispossess the tenant- stockholder.
Because of the nature of cooperative mortgage loans, lenders do not
require the tenant-stockholder (i.e., the borrower) to obtain title insurance of
any type. Consequently, the existence of any prior liens or other imperfections
of title affecting the Cooperative's building or real estate also may adversely
affect the marketability of the shares allocated to the dwelling unit in the
event of foreclosure.
In New York, foreclosure on the Cooperative shares is accomplished by
public sale in accordance with the provisions of Article 9 of the New York UCC
and the security agreement relating to those shares. Article 9 of the New York
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the sale and the sale price. Generally, a sale conducted
according to the usual practice of banks selling similar collateral in the same
area will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
77
<PAGE>
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 the home in the
event of a default by the obligor generally will 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 small particulars, the general repossession procedure
established by the UCC is as follows:
o 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.
o 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.
o 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 the 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
78
<PAGE>
for perfection and enforcement of security interests in manufactured housing
used as collateral for an installment sale contract or installment loan
agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
RIGHTS OF REDEMPTION
SINGLE FAMILY, MULTIFAMILY AND COMMERCIAL PROPERTIES. The purposes of a
foreclosure action in respect of a mortgaged property is 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
79
<PAGE>
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, MULTIFAMILY AND COMMERCIAL LOANS. Some 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 the 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 other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting the security;
however in some of these states, the lender, following judgment on the 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 the election, is
that lenders will usually proceed against the security first rather than
bringing a personal action against the borrower. Finally, in some 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.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
Shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in some
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a cooperative mortgage loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
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, virtually all actions (including foreclosure actions and deficiency
judgment proceedings) to collect a debt are automatically stayed upon the filing
of the bankruptcy petition and, often, no interest or principal payments are
made during the course of the bankruptcy case. The delay and the consequences
thereof caused by the 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 the
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
80
<PAGE>
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.
Tax liens arising under the Code may have priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
CONTRACTS. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the market
value of the home at the time of bankruptcy (as determined by the court),
leaving the party providing financing as a general unsecured creditor for the
remainder of 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 CERCLA, and under state law in some 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 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
81
<PAGE>
those who, without participating in the management of a facility, hold indicia
of ownership primarily to protect a security interest in the facility.
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 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. The cleanup
costs may be substantial. It is possible that the 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, federal statutes and
states by statute may impose a lien for any cleanup costs incurred by the state
on the property that is the subject of the cleanup costs. All subsequent liens
on the property generally are subordinated to the lien and, in some states, even
prior recorded liens are subordinated to such lien. In the latter states, the
security interest of the trustee in a related parcel of real property that is
subject to the 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 the evaluations prior to the origination of the Secured
Contracts. Neither the company nor any replacement Servicer will be required by
any Agreement to undertake these evaluations prior to foreclosure or accepting a
deed-in-lieu of foreclosure. The company does not make any representations or
warranties or assume any liability with respect to the absence or effect of
contaminants on any related real property or any casualty resulting from the
presence or effect of contaminants. However, the company will not be obligated
to foreclose on related real property or accept a deed-in-lieu of foreclosure if
it knows or reasonably believes that there are material contaminated conditions
on the property. A failure so to foreclose may reduce the amounts otherwise
available to certificateholders 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, 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.
82
<PAGE>
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. Federal and state
law may specifically limit the amount of late charges that may be collected.
Under the related pooling and servicing 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 FTC Rule has the effect of subjecting a seller (and some 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 under the contract.
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 the claim or defense, and if the Seller
had or should have had knowledge of the 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 SOME PROVISIONS
TRANSFER OF MORTGAGED PROPERTIES. Unless the related prospectus
supplement indicates otherwise, the mortgage loans generally contain due-on-sale
clauses. These clauses permit the lender to accelerate the maturity of the loan
if the borrower sells, transfers or conveys the property without the prior
consent of the lender. The enforceability of these clauses has been the subject
of legislation or litigation in many states, and in some cases the
enforceability of these clauses was limited or denied. However, 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 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, some transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations
83
<PAGE>
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 the contracts by the obligee on
the contract upon the sale or transfer that is not consented to. The master
servicer will, to the extent it has knowledge of the 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 some 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 a Manufactured Home.
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 some states, there are or may be specific limitations upon the
late charges which a lender may collect from a borrower for delinquent payments.
Some 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
proceedings by the senior lender.
84
<PAGE>
INSTALLMENT CONTRACTS
The trust fund assets may also consist of installment sales contracts.
Under an installment contract the seller (referred to in this section as the
"lender") retains legal title to the property and enters into an agreement with
the purchaser (referred to in this section as the "borrower") for the payment of
the purchase price, plus interest, over the term of the 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 this
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 these 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 provides that state usury limitations shall not apply to some
types of residential first mortgage loans originated by some 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. Some 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
some kinds of manufactured housing. Contracts would be covered if they satisfy
conditions including, among other things, terms governing 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
85
<PAGE>
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 this type of law prior to the April 1,
1983 deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the trust fund.
Usury limits apply to junior mortgage loans in many states. Any
applicable usury limits in effect at origination will be reflected in the
maximum mortgage rates for ARM Loans, as set forth in the related prospectus
supplement.
As indicated above under "The Mortgage Pools--Representations by
Sellers," each Seller of a mortgage loan will have represented that the mortgage
loan was originated in compliance with then applicable state laws, including
usury laws, in all material respects. However, the mortgage rates on the
mortgage loans will be subject to applicable usury laws as in effect from time
to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders historically have been subjected to a variety of restrictions. The
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. Title
VIII provides that, notwithstanding any state law to the contrary, (1)
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,
(2) 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 (3) 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 the provisions. Some states have taken
this 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 components of manufactured housing such 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
86
<PAGE>
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 this
claim, the related securityholders could suffer a loss if (1) the related Seller
fails or cannot be required to repurchase the affected Contract for a breach of
representation and warranty and (2) 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 these 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 Relief Act, a mortgagor who enters military
service after the origination of the mortgagor's mortgage loan (including a
mortgagor who was in reserve status and is called to active duty after
origination of the mortgage loan), may not be charged interest (including fees
and charges) above an annual rate of 6% during the period of the mortgagor's
active duty status, unless a court orders otherwise upon application of the
lender. The Relief Act applies to mortgagors who are members of the Army, Navy,
Air Force, Marines, National Guard, Reserves, Coast Guard, and officers of the
U.S. Public Health Service assigned to duty with the military. Because the
Relief Act applies to mortgagors who enter military service, including
reservists who are called to active duty, after origination of the related
mortgage loan, 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 the mortgage loans subject to the Relief
Act. Any shortfall in interest collections resulting from the application of the
Relief Act or similar legislation or regulations, which would not be recoverable
from the related mortgage loans, would result in a reduction of the amounts
distributable to the holders of the related securities, and would not be covered
by advances by the master servicer or other entity or by any form of credit
enhancement provided in connection with the related series of securities, unless
described in the prospectus supplement. In addition, the Relief Act imposes
limitations that would impair the ability of the master servicer to foreclose on
an affected single family loan or enforce rights under a Contract during the
mortgagor's period of active duty status, and, under some circumstances, during
an additional three month period thereafter. Thus, in the event that the Relief
Act or similar legislation or regulations applies to any mortgage loan which
goes into default, there may be delays in payment and losses on the related
securities in connection therewith. Any other interest shortfalls, deferrals or
forgiveness of payments on the mortgage loans resulting from similar legislation
or regulations may result in delays in payments or losses to securityholders of
the related series.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of RICO can be seized by the
government if the property was used in, or purchased with the proceeds of, these
crimes. Under procedures contained in 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: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the
87
<PAGE>
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 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
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 some 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 the 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 this 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 the proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in the order the
mortgagee may determine. Thus, in the event improvements on the property are
damaged or destroyed by fire or other casualty, or in the event the property is
taken by condemnation, the mortgagee or beneficiary under underlying senior
mortgages will have the prior right to collect any insurance proceeds payable
under a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the senior
mortgages. Proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, may be applied to the indebtedness of junior mortgages in the order
of their priority.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which are prior to the mortgage
or deed of trust, to provide and maintain fire insurance on the property, to
maintain and repair the property and not to commit or permit any waste thereof,
and to appear in and defend any action or proceeding purporting to affect the
property or the rights of the mortgagee under the mortgage. Upon a failure of
the mortgagor to perform any of these obligations, the mortgagee or beneficiary
is given the right under some 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 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
88
<PAGE>
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 discussion is the opinion of Thacher Proffitt & Wood,
counsel to the company, with respect to the anticipated material federal income
tax consequences of the purchase, ownership and disposition of offered
securities offered under this prospectus and the prospectus supplement insofar
as it relates to matters of law or legal conclusions with respect thereto. This
discussion is directed solely to securityholders that hold the securities as
capital assets within the meaning of Section 1221 of the Code and does not
purport to discuss all federal income tax consequences that may be applicable to
the individual circumstances of particular categories of investors, some of
which (such as banks, insurance companies and foreign investors) may be subject
to special treatment under the Code. Further, the authorities on which this
discussion, and the opinion referred to below, are based are subject to change
or differing interpretations, which could apply retroactively. Prospective
investors should note that no rulings have been or will be sought from the IRS
with respect to any of the federal income tax consequences discussed below, and
no assurance can be given the IRS will not take contrary positions. Taxpayers
and preparers of tax returns (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 (1) 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 (2) is directly relevant to the determination of an
entry on a tax return. 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 in this
prospectus. In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
securities. See "State and Other Tax Consequences."
The following discussion addresses securities of three general types:
o REMIC Certificates representing interests in a trust fund, or
a portion thereof, that the REMIC Administrator will elect to
have treated as a REMIC under the REMIC Provisions of the
Code,
o notes representing indebtedness of a trust fund as to which no
REMIC election will be made and
o Grantor Trust Certificates representing interests in a Grantor
Trust Fund as to which no REMIC 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
this 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
"securityholder" or a "holder" are to the beneficial owner of a security.
The following discussion is based in part upon the OID Regulations and
in part upon REMIC Regulations. The OID Regulations do not adequately address
issues relevant to securities such as the
89
<PAGE>
offered securities. In some instances, the OID Regulations provide that they are
not applicable to securities such as the offered securities.
REMICS
CLASSIFICATION OF REMICS. On or prior to the date of the related
prospectus supplement with respect to the proposed issuance of each 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, for federal income
tax purposes, 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 REMIC Regular Certificates or REMIC
Residual Certificates in that REMIC within the meaning of the REMIC Provisions.
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 status as a REMIC during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, the 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
REMIC's income for the period in which the requirements for status as a REMIC
are not satisfied. The pooling and servicing agreement with respect to each
REMIC will include provisions designed to maintain the related 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 the
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 the 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 the calendar quarter. The REMIC Administrator will report
those determinations to certificateholders in the manner and at the times
required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC Certificates
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether the 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 Code sections mentioned in the immediately preceding paragraph. In addition,
in some instances
90
<PAGE>
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 some series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the related
trust fund as REMICs for federal income tax purposes. As to each such series of
REMIC Certificates, in the opinion of counsel to the company, assuming
compliance with all provisions of the related pooling and servicing agreement,
each of the REMICs in that trust fund will qualify as a REMIC and the REMIC
Certificates issued by these REMICs 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 the certificates is interest described in
Section 856(c)(3)(B) of the Code, all of the REMICs in that trust fund 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. A REMIC Regular Certificate may be issued with
"original issue discount" within the meaning of Section 1273(a) of the Code. Any
holder of a REMIC Regular Certificate issued with original issue discount
generally will be required to include original issue discount in income as it
accrues, in accordance with the "constant yield" method described below, in
advance of the receipt of the cash attributable to that income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and some 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 that 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 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 the REMIC Regular
Certificate. 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,
none of the company, the master servicer or 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.
91
<PAGE>
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 Closing Date, the issue price
for that class will be the fair market value of that 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 the 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 the 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
the REMIC Regular Certificates. If the original issue discount rules apply to
the certificates in a particular series, those related prospectus supplement
will describe the manner in which these rules will be applied with respect to
the certificates in that series that bear an adjustable interest rate in
preparing information returns to the certificateholders and the IRS.
The first interest payment on a REMIC Regular Certificate may be made
more than one month after the date of issuance, which is a period 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 the 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 the
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 the REMIC Regular Certificate. However, the OID Regulations
state that all or some portion of the 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 a REMIC Regular Certificate is computed as the sum
of the amounts determined, as to each payment included in the stated redemption
price of the REMIC Regular
92
<PAGE>
Certificate, by multiplying (1) the number of complete years (rounding down for
partial years) from the issue date until that payment is expected to be made
(presumably taking into account the Prepayment Assumption) by (2) 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 the 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 de minimis original issue discount attributable
to that certificate and a fraction, the numerator of which is the amount of the
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
this election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of the 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 the 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, each period that ends on a date
that corresponds to the day prior to each 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 the accrual
period. The portion of original issue discount that accrues in any accrual
period will equal the excess, if any, of (1) 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 the REMIC Regular Certificate during the accrual period of
amounts included in the stated redemption price, over (2) the adjusted issue
price of the 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 (1) 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, (2) using a discount rate
equal to the original yield to maturity of the certificate and (3) 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 the certificate, increased by the
aggregate amount of original issue discount that accrued with respect to the
certificate in prior accrual periods, and reduced by the amount of any
distributions made on the 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 that day.
A subsequent purchaser of a REMIC Regular Certificate that purchases a
certificate that is treated as having been issued with original issue discount
at a cost (excluding any portion of the 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 the certificate. However, each such daily portion will
be reduced, if the cost of the certificate is in excess of its "adjusted issue
price," in proportion to the ratio the excess bears to the aggregate original
issue discount
93
<PAGE>
remaining to be accrued on the REMIC Regular Certificate. The adjusted issue
price of a REMIC Regular Certificate on any given day equals the sum of (1) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of the certificate at the beginning of the accrual period which includes
that day and (2) the daily portions of original issue discount for all days
during the accrual period prior to that day.
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 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, the election will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the 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 the certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a certificateholder that made this election for a certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that the 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 would be irrevocable, except with the approval 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
the market discount is less than 0.25% of the remaining stated redemption price
of the 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. This treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, the 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: (1) on the basis of a constant yield method,
(2) 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
94
<PAGE>
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 (3) 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 these 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 the 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 the 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 the taxable year and is, in general, allowed as a deduction not later
than the year in which the market discount is includible in income. If a holder
elects to include market discount in income currently as it accrues on all
market discount instruments acquired by the 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 the 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 a REMIC Regular Certificate may elect under Section 171
of the Code to amortize the premium under the constant yield method over the
life of the certificate. If made, the election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the certificateholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC Regular Certificates--Market
Discount" above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules will require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether the 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, both corporate holders
of the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire the 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 the holder's certificate
becomes wholly worthless (i.e.,
95
<PAGE>
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 the certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the mortgage loans or the certificate underlying the REMIC
Certificates, as the case may be, until it can be established this the 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 that holder in the 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 this 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 some other transactions. See "--Prohibited
Transactions Tax and Other 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 the holder owned the 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 that 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 the certificate
from a prior holder of that 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 the 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 some modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased the REMIC Residual Certificate from a prior
holder of the certificate at a price greater than (or less than) the adjusted
basis (as defined below) the REMIC Residual Certificate would have had in the
hands of an original holder of the certificate. The REMIC Regulations, however,
do not provide for any such modifications.
96
<PAGE>
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of the REMIC Residual Certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that any of these payments would be
includible in income immediately upon its receipt, the IRS might assert that
these payments 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 these payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the treatment
of these payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with the 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 the REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect the REMIC Residual Certificateholders' after-tax rate of
return. This 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 by the
prospectus), 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). The 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 offered REMIC
Certificates 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 the
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 the 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 the 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 discount income that is
97
<PAGE>
analogous to that required to be used by a REMIC as to mortgage loans with
market discount that it holds.
A mortgage loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to the 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 the 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
the 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 by
this prospectus) 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 by this prospectus)
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 by this prospectus) described therein will
not apply.
If a class of REMIC Regular Certificates is issued with 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 that 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 clear, 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 these 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, the 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 the REMIC Residual
Certificate, increased by amounts included in the
98
<PAGE>
income of the REMIC Residual Certificateholder and decreased (but not below
zero) by distributions made, and by net losses allocated, to the REMIC Residual
Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent the net loss exceeds the
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of the calendar quarter (determined without regard
to the 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 the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds the adjusted basis, it will be treated
as gain from the sale of the REMIC Residual Certificate. Holders of REMIC
Residual Certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC Residual
Certificates will not be sufficiently large that the distributions will be
treated as nontaxable returns of capital. Their bases in the REMIC Residual
Certificates will initially equal the amount paid for the REMIC Residual
Certificates and will be increased by their allocable shares of taxable income
of the REMIC. However, these bases increases may not occur until the end of the
calendar quarter, or perhaps the end of the calendar year, with respect to which
the REMIC taxable income is allocated to the REMIC Residual Certificateholders.
To the extent the REMIC Residual Certificateholders' initial bases are less than
the distributions to the REMIC Residual Certificateholders, and increases in
initial bases either occur after the distributions or (together with their
initial bases) are less than the amount of the distributions, gain will be
recognized to the REMIC Residual Certificateholders on these 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 the REMIC Residual Certificate to the REMIC Residual
Certificateholder and the adjusted basis the 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 (1) the
daily portions of REMIC taxable income allocable to the REMIC Residual
Certificate over (2) the sum of the "daily accruals" (as defined below) for each
day during the quarter that the REMIC Residual Certificate was held by the 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
99
<PAGE>
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 the REMIC Residual Certificate before the beginning of that 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. Although it
has not done so, the Treasury has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered to have
"significant value."
For REMIC Residual Certificateholders, an excess inclusion (1) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (2) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (3) 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 tentative 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 the 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 the trust in proportion to the dividends received by the shareholders from
the trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by the
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and 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 the
transfer is disregarded, the purported transferor will continue to remain liable
for any taxes due with respect to the income on the "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 restrictions under the terms of the related pooling and servicing
agreement that are intended to reduce the possibility of any such transfer being
disregarded. These restrictions will require each party to a transfer to provide
an affidavit that no
100
<PAGE>
purpose of the transfer is to impede the assessment or collection of tax,
including 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 the 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 the 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 the 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
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 REMIC Residual Certificates to foreign persons.
Mark-to-Market Rules. In general, all securities owned by a dealer,
except to the extent that the dealer has specifically identified a security as
held for investment, must be marked to market in accordance with the applicable
Code provision and the related regulations. However, the IRS recently issued
regulations which provide that for purposes of this mark-to-market requirement,
a Residual Certificate acquired 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 these fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Except as stated in the
related prospectus supplement, these 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, (1) an amount equal to the
individual's, estate's or trust's share of the fees and expenses will be added
to the gross income of the holder and (2) the individual's, estate's or trust's
share of the fees and expenses will be treated as a miscellaneous itemized
deduction allowable subject to the limitation of Section 67 of the Code, which
permits these 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 (1) 3% of the excess of the individual's adjusted gross
income over that amount or (2) 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 the holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount
101
<PAGE>
equal to the amount of the fees and other deductions will be included in the
holder's gross income. Accordingly, these 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.
Prospective investors should consult with their tax advisors prior to making an
investment in the 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 the REMIC Regular Certificate to the certificateholder, increased by income
reported by the certificateholder with respect to the REMIC Regular Certificate
(including original issue discount and market discount income) and reduced (but
not below zero) by distributions on the REMIC Regular Certificate received by
the 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 the 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 the gain does
not exceed the excess, if any, of (1) the amount that would have been includible
in the seller's income with respect to the 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 the certificate, which
rate is computed and published monthly by the IRS), determined as of the date of
purchase of the REMIC Regular Certificate, over (2) the amount of ordinary
income actually includible in the seller's income prior to the sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased the REMIC Regular Certificate at a market discount will be taxable
as ordinary income in an amount not exceeding the portion of the discount that
accrued during the period the REMIC Certificate was held by the 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 this
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 the 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 the 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.
102
<PAGE>
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include the 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 the 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 the 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 the REMIC Residual Certificateholder's adjusted basis in the
newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES. In the event a
REMIC engages in a prohibited transaction, the Code imposes a 100% tax on the
income derived by the REMIC from the prohibited transaction. In general, subject
to 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
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, a contribution to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition on the REMIC of
a tax equal to 100% of the value of the contributed property. Each pooling and
servicing agreement will include provisions designed to prevent the acceptance
of any contributions that would be subject to this 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.
It is not anticipated that any REMIC will recognize "net income from foreclosure
property" subject to federal income tax.
To the extent permitted by then applicable laws, any tax resulting from
a prohibited transaction, tax resulting from a contribution made after the
Closing Date, 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 the tax arises out of a breach of the
master servicer's or the trustee's obligations, as the case may be, under the
related pooling and servicing agreement and in respect of compliance with
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 (1) 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
103
<PAGE>
excess inclusions with respect to the REMIC Residual Certificate for periods
after the transfer and (2) 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 the transfer, the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. Such a tax
generally would be imposed on the transferor of the REMIC Residual Certificate,
except that where the transfer is through an agent for a disqualified
organization, the tax would instead be imposed on the agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for the
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 the
affidavit is false. Moreover, an entity will not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that (1) residual interests in
the entity are not held by disqualified organizations and (2) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and other
provisions that are intended to meet this requirement will be included in the
pooling and servicing agreement, and will be discussed more fully in any
prospectus supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in the entity,
then a tax will be imposed on the entity equal to the product of (1) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by the disqualified organization and
(2) 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 the pass-through entity furnishes to the
pass-through entity (1) the holder's social security number and a statement
under penalties of perjury that the social security number is that of the record
holder or (2) a statement under penalties of perjury that the 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
the 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 the tax paid by the partnership).
For these purposes, a "disqualified organization" means:
o 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 Freddie Mac),
o 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
o 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 the interest, be treated as a pass-through entity.
104
<PAGE>
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 the REMIC Residual Certificate is less than the REMIC Residual
Certificateholder's adjusted basis in the certificate, the REMIC Residual
Certificateholder should (but may not) be treated as realizing a loss equal to
the amount of the difference, and the 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.
The REMIC Administrator (or other party described in the related prospectus
supplement) will file REMIC federal income tax returns on behalf of the related
REMIC, and under the terms of the related Agreement, will either (1) 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 (2)
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 notice requirements and various restrictions and
limitations, generally will have the authority to act on behalf of the REMIC and
the REMIC Residual Certificateholders in connection with the administrative and
judicial review of items of income, deduction, gain or loss of the REMIC, as
well as the REMIC's classification. REMIC Residual Certificateholders generally
will be required to report these 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 the 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 some 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 the 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
105
<PAGE>
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, Treasury 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."
The responsibility for complying with the foregoing reporting rules will
be borne by the REMIC Administrator or other party designated in the related
prospectus supplement.
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 the payments fail to furnish to
the payor certain information, including their taxpayer identification numbers,
or otherwise fail to establish an exemption from the backup withholding tax. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against the recipient's federal income tax. Furthermore,
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 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 identification requirements, including delivery of
a statement, signed by the certificateholder under penalties of perjury,
certifying that the certificateholder is not a United States person and
providing the name and address of the certificateholder. 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 the 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 the
United States shareholder's allocable portion of the interest income received by
the 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.
Except as stated in the related prospectus supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related pooling and servicing agreement.
NEW WITHHOLDING REGULATIONS
The IRS has issued new regulations which make certain modifications to
the withholding, backup withholding and information reporting rules described
above. The new regulations attempt to unify
106
<PAGE>
certification requirements and modify reliance standards. These regulations will
generally be effective for payments made after December 31, 2000, subject to
certain transition rules. Prospective investors are urged to consult their tax
advisors regarding these regulations.
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 other related documents, for federal income tax purposes (1) the notes will
be treated as indebtedness and (2) 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. 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
(1) 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 (2) 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 (1)
income reportable on the notes is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (2) 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 to 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 and servicing agreement,
the related Grantor Trust Fund will be classified as a grantor trust under
subpart E, part I of subchapter J of Chapter 1 of the Code and not as a
partnership or an association taxable as a corporation.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES.
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES. In the case of Grantor
Trust Fractional Interest Certificates, except as disclosed in the related
prospectus supplement, counsel to the company will deliver an opinion that, in
general, Grantor Trust Fractional Interest Certificates will represent interests
in (1) "loans . . . secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; (2) "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 (3) "real estate assets" within the meaning
of Section 856(c)(4)(A) of the
107
<PAGE>
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.
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 these sections (namely, to
encourage or require investments in mortgage loans by thrift institutions and
real estate investment trusts) may suggest that this characterization is
appropriate. Counsel to the company will not deliver any opinion on these
questions. Prospective purchasers to which the characterization of an investment
in Grantor Trust Strip Certificates is material should consult their tax
advisors regarding whether the Grantor Trust Strip Certificates, and the income
therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including
any participation or Certificate of beneficial ownership therein) which . .
.[are] principally secured by an interest in real property" within the meaning
of Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES.
Holders of a particular series of Grantor Trust Fractional Interest Certificates
generally will be required to report on their federal income tax returns their
shares of the entire income from the mortgage loans (including amounts used to
pay reasonable servicing fees and other expenses) and will be entitled to deduct
their shares of any such reasonable servicing fees and other expenses. Because
of stripped interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable 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 some pass-through entities will be allowed a
deduction for the reasonable servicing fees and expenses only to the extent that
the aggregate of the holder's miscellaneous itemized deductions exceeds two
percent of the 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 (1) 3% of the excess of the individual's adjusted gross
income over the amount or (2) 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 the 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, the 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 the expenses among classes of Grantor Trust Certificates with
respect to each period based on the distributions made to each such class during
that period.
108
<PAGE>
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 (1) a class of Grantor
Trust Strip Certificates is issued as part of the same series of certificates or
(2) 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 "safe harbors." The servicing fees
paid with respect to the mortgage loans for a 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
some 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 the 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 the 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 the 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 the certificate, other than "qualified stated interest,"
if any, as well as the 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 the income that accrues
in any month would equal the product of the holder's adjusted basis in the
Grantor Trust Fractional Interest Certificate at the beginning of the month (see
"Sales of Grantor Trust Certificates") and the yield of the Grantor Trust
Fractional Interest Certificate to the holder. This yield would be computed at
the rate (compounded based on the regular interval between distribution 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 the certificate. In computing yield under the
stripped bond rules, a certificateholder's share of future payments on the
mortgage loans will not include any payments made in respect of any ownership
interest in the mortgage loans retained by the company, the master servicer, any
subservicer or their respective affiliates, but will include the
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 (1) the use of a reasonable
prepayment assumption in accruing original issue discount and (2) 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
109
<PAGE>
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 the
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
the principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease the 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 the certificate and the portion of the
adjusted basis of the certificate that is allocable to the 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 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, none of the company, the
master servicer or the trustee will make any representation that the mortgage
loans will in fact prepay at a rate conforming to the Prepayment Assumption or
any other rate and certificateholders should bear in mind that the use of a
representative initial offering price will mean that the 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, some 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 (1) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (2) 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
110
<PAGE>
interest rate payable on the mortgage loans, the related prospectus supplement
will disclose that fact. If the original issue discount or market discount on a
Grantor Trust Fractional Interest Certificate determined under the stripped bond
rules is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the mortgage loans, then that 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
the 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 the 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 the 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 the 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 the
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 these 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 these pools or with respect to taxable years beginning prior to August
5, 1997, it currently is not intended to base the 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 the series.
111
<PAGE>
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases the Grantor Trust Fractional Interest Certificate at a cost less than
the 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 the certificate's daily portions of any original
issue discount with respect to the mortgage loans. However, each such daily
portion will be reduced, if the cost of the Grantor Trust Fractional Interest
Certificate to the purchaser is in excess of the 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 the excess bears to
the certificate's allocable portion of the aggregate original issue discount
remaining to be accrued on the mortgage loans. The adjusted issue price of a
mortgage loan on any given day equals the sum of (1) the adjusted issue price
(or, in the case of the first accrual period, the issue price) of the mortgage
loan at the beginning of the accrual period that includes the day and (2) the
daily portions of original issue discount for all days during the accrual period
prior to the day. The adjusted issue price of a mortgage loan at the beginning
of any accrual period will equal the issue price of the mortgage loan, increased
by the aggregate amount of original issue discount with respect to the mortgage
loan that accrued in prior accrual periods, and reduced by the amount of any
payments made on the 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
the 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 the discount that has accrued (under the rules described in the
next paragraph) through the month that has not previously been included in
income, but limited, in the case of the portion of the discount that is
allocable to any mortgage loan, to the payment of stated redemption price on the
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 the 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, some 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: (1) on the basis of a constant yield method, (2) 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
(3) 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
112
<PAGE>
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 the discount
income. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect the 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, the market discount may be required to be included in income
at a rate that is not significantly slower than the rate at which the 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 these
rules with respect to the mortgage loans.
Further, under the rules described in "--REMICs--Taxation of Owners of
REMIC Regular Certificates--Market Discount," above, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the mortgage loans.
PREMIUM. If a certificateholder is treated as acquiring the underlying
mortgage loans at a premium, that is, at a price in excess of their remaining
stated redemption price, the certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of the 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 these payments are made (or, for a certificateholder using the
accrual method of accounting, when the 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 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.
113
<PAGE>
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 the 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 the holder's adjusted basis in the Grantor Trust
Strip Certificate at the beginning of that month and the yield of the Grantor
Trust Strip Certificate to the holder. The 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 some categories of debt instruments, and that
adjustments be made in the amount and rate of accrual of the discount when
prepayments do not conform to the 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 these provisions. It is also uncertain, if a prepayment
assumption is used, whether the assumed prepayment rate would be determined
based on conditions at the time of the first sale of the Grantor Trust Strip
Certificate or, with respect to any subsequent holder, at the time of purchase
of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. It currently is intended to base
information returns or reports to the IRS and certificateholders on the
Prepayment Assumption disclosed in the related prospectus supplement and on a
constant yield computed using a representative initial offering price for each
class of certificates. However, none of the company, the master servicer or 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 the 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.
114
<PAGE>
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 the
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 the 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 these 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, the income any variation between the payment actually received in that
month and the payment originally projected to be made in that month.
Assuming that a prepayment assumption were used, if the Contingent
Payment Regulations or their principles were applied to Grantor Trust Strip
Certificates, the amount of income reported with respect thereto would be
substantially similar to that described under "Taxation of Owners of Grantor
Trust Strip Certificates". Certificateholders should consult their tax advisors
concerning the possible application of the contingent payment rules to the
Grantor Trust Strip Certificates.
115
<PAGE>
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 the sale or exchange of
a Grantor Trust Certificate by an investor who holds the 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 the Grantor Trust
Certificate.
Gain or loss from the sale of a Grantor Trust Certificate may be
partially or wholly ordinary and not capital in some 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 the 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 the
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. 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 the 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 a holder at any time during that
year, information regarding the amount of servicing compensation received by the
master servicer and subservicer (if any) and any 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 these
items of income and expense. Moreover, these 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 the 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.
116
<PAGE>
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 the
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, the 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 under this prospectus and the prospectus supplement. 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 state and other tax
consequences of investments in the securities offered under this prospectus and
the prospectus supplement.
ERISA CONSIDERATIONS
Sections 404 and 406 of ERISA impose fiduciary and prohibited
transaction restrictions on ERISA Plans and on 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 ERISA Plans are invested. Section 4975 of the Code
imposes essentially the same prohibited transaction restrictions on Tax Favored
Plans. ERISA and the Code prohibit a broad range of transactions involving
assets of Plans and Parties in Interest, unless a statutory or administrative
exemption is available with respect to any such transaction.
Some 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 these 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.
Some 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 DOL has promulgated 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
an exception applies. Exceptions contained in the DOL Regulations provide that a
Plan's assets will not
117
<PAGE>
include an undivided interest in each asset of an entity in which the Plan makes
an equity investment if: (1) the entity is an operating company; (2) the equity
investment made by the Plan is either a "publicly- offered security" that is
"widely held," both as defined in the DOL Regulations, or a security issued by
an investment company registered under the Investment Company Act of 1940, as
amended; or (3) Benefit Plan Investors do not own 25% or more in value of any
class of equity securities issued by the entity. 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
some 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 the 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 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 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 has issued Exemptions to some underwriters, which generally
exempts from the application of the prohibited transaction provisions of Section
406 of ERISA, and the excise taxes imposed on those prohibited transactions
pursuant to Section 4975(a) and (b) of the Code, some 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, provided that the conditions set
forth in the Exemption are satisfied. For purposes of this Section "ERISA
Considerations", the term "Underwriter" shall include (1) the underwriter, (2)
any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the underwriter and (3)
any member of the underwriting syndicate or selling group of which a person
described in (1) or (2) is a manager or co-manager with respect to a class of
securities.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of securities 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 securities evidencing rights and interests that
are not subordinated to the rights and interests evidenced by other securities
of the same trust. Third, the securities 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 an Exemption Rating Agency. 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
118
<PAGE>
servicer, any subservicer and any obligor with respect to assets included in the
trust fund constituting more than 5% of the aggregate unamortized principal
balance of the assets in the trust fund as of the date of initial issuance of
the securities. Fifth, the sum of all payments made to and retained by the
Underwriter(s) must represent not more than reasonable compensation for
underwriting the securities; 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 the obligations; and the sum of
all payments made to and retained by the master servicer, the special servicer
and any subservicer must represent not more than reasonable compensation for the
person's services under the related Agreement and reimbursement of the person's
reasonable expenses in connection therewith. Sixth, the Exemption states that
the investing Plan or Plan Asset investor must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act.
The Exemption also requires that the trust fund meet the following
requirements: (1) the trust fund must consist solely of assets of the type that
have been included in other investment pools; (2) securities evidencing
interests in the 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 securities by or on behalf of a Plan or
with Plan Assets; and (3) securities evidencing interests in the other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any acquisition of securities 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 the 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 securities in the
initial issuance of the securities or the direct or indirect acquisition or
disposition in the secondary market of securities by a Plan or with Plan Assets
or the continued holding of securities 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 Security on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with respect
to the assets of an Excluded Plan. For purposes of the securities, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If the 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
securities in the initial issuance of securities between the Depositor 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
securities 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
securities by a Plan or with Plan Assets and (3) the continued holding of
securities acquired by a Plan or with Plan Assets pursuant to either of the
foregoing.
Further, if the 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 Depositor
119
<PAGE>
expects that the specific conditions of the Exemption required for this purpose
will be satisfied with respect to the securities 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 the 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 a specified
relationship to such a person) solely as a result of the Plan's ownership of
securities.
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Exemption, which will extend exemptive relief to mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the certificates, the
amendment will generally allow mortgage loans supporting payments to
certificateholders, and having a value equal to no more than 25% of the total
principal amount of the certificates being offered by a trust fund, to be
transferred to the trust fund within the Pre-Funding Period instead of requiring
that all the mortgage loans be either identified or transferred on or before the
Closing Date. In general, the relief applies to the purchase, sale and holding
of certificates which otherwise qualify for the Exemption, provided that the
following general conditions are met:
o the ratio of the amount allocated to the pre-funding account
to the total principal amount of the certificates being
offered must be less than or equal to 25%;
o all additional mortgage loans transferred to the related trust
fund after the Closing Date must meet the same terms and
conditions for eligibility as the original mortgage loans used
to create the trust fund, which terms and conditions have been
approved by one of the Exemption Rating Agencies;
o the transfer of the additional mortgage loans to the trust
fund during the Pre-Funding Period must not result in the
certificates to be covered by the Exemptions receiving a lower
credit rating from an Exemption Rating Agency upon termination
of the Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the certificates by the
trust fund;
o solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate for the mortgage loans
included in the related trust fund on the Closing Date and all
additional mortgage loans transferred to the related trust
fund after the Closing Date at the end of the Pre- Funding
Period must not be more than 100 basis points lower than the
rate for the mortgage loans which were transferred to the
trust fund on the Closing Date;
o for transactions occurring on or after May 23, 1997, either:
(1) the characteristics of the additional mortgage
loans transferred to the related trust fund after the Closing
Date must be monitored by an insurer or other credit support
provider which is independent of the Depositor; or
120
<PAGE>
(2) an independent accountant retained by the
Depositor must provide the Depositor with a letter (with
copies provided to the Exemption Rating Agency rating the
certificates, the Underwriter and the trustee) stating whether
or not the characteristics of the additional mortgage loans
transferred to the related trust fund after the Closing Date
conform to the characteristics described in the prospectus or
prospectus supplement and/or Agreement. In preparing the
letter, the independent accountant must use the same type of
procedures as were applicable to the mortgage loans which were
transferred to the trust fund as of the Closing Date;
o the Pre-Funding Period must end no later than three months or
90 days after the Closing Date or earlier in some
circumstances if the pre-funding accounts falls below the
minimum level specified in the Agreement or an event of
default occurs;
o amounts transferred to any pre-funding accounts and/or
capitalized interest account used in connection with the
pre-funding may be invested only in investments which are
permitted by the Exemption Rating Agencies rating the
certificates and must:
(1) be direct obligations of, or obligations fully
guaranteed as to timely payment of principal and interest by,
the United States or any agency or instrumentality thereof
(provided that the obligations are backed by the full faith
and credit of the United States); or
(2) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by one
of the Exemption Rating Agencies ("ERISA Permitted
Investments");
o the prospectus or prospectus supplement must describe the
duration of the Pre-Funding Period;
o the trustee (or any agent with which the trustee contracts to
provide trust services) must be a substantial financial
institution or trust company experienced in trust activities
and familiar with its duties, responsibilities and liabilities
with ERISA. The trustee, as legal owner of the trust fund,
must enforce all the rights created in favor of
certificateholders of the trust fund, including employee
benefit plans subject to ERISA.
In addition to the Exemption, a Plan fiduciary or other Plan Asset
investor should consider any available class exemptions granted by the DOL,
which may provide relief from some of the prohibited transaction provisions of
ERISA and the related excise tax provisions of the Code, including 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 some 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 issued proposed
regulations on December 22, 1997 which propose 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
121
<PAGE>
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 (1) as otherwise provided by the Secretary of Labor in the 401(c)
Regulations to prevent avoidance of the regulations or (2) 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. 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
the 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 proposed 401(c) Regulations become final.
REPRESENTATION FROM PLANS INVESTING IN NOTES WITH "SUBSTANTIAL EQUITY FEATURES"
OR NON-EXEMPT 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 the 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 the 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 the securities by or on behalf of the 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 an opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of securities by or
on behalf of a 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: (1) the transferee is an insurance company,
(2) the source of funds used to purchase the securities is an "insurance company
general account" (as that term is defined in PTCE 95-60), (3) the conditions set
forth in PTCE 95-60 have been satisfied and (4) there is no Plan with respect to
which the amount of the general account's reserves and liabilities for contracts
held by or on behalf of the 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
the general account (as determined under PTCE 95-60) as of the date of the
acquisition of the securities.
An opinion of counsel or certification will not be required with respect
to the purchase of securities registered with the DTC. Any purchaser of a DTC
registered Security will be deemed to have represented by the purchase that
either (a) the purchaser is not a Plan and is not purchasing the 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
122
<PAGE>
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 nonetheless will be subject to federal income taxation to the
extent that its income is "unrelated business taxable income" within the meaning
of Section 512 of the Code. All "excess inclusion" of a REMIC allocated to a
REMIC Residual Certificate and held by such an investor will be considered
"unrelated business taxable income" 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 AN OFFERED SECURITY, 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 certificates offered by this prospectus 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. If so 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 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
the 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 the legislation only to the
extent provided therein. Some States have enacted legislation which overrides
the preemption provisions of SMMEA. SMMEA provides,
123
<PAGE>
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 the securities,
so long as the contractual commitment was made or the securities acquired prior
to the enactment of the 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 the securities, and
national banks may purchase the 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 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 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 the securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having specified characteristics, which may include some classes of offered
securities. In addition, the National Credit Union Administration has issued
regulations governing federal credit union investments which prohibit investment
in specified types of securities, which may include some classes of offered
securities. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
Any class of securities that is not rated in one of the two highest
rating categories by at least one Rating Agency, and any other class of
securities specified in the related prospectus supplement, will not constitute
"mortgage related securities" for purposes of SMMEA. Prospective investors in
these classes of securities, in particular, should consider the matters
discussed in the following paragraph.
There may be other restrictions on the ability of investors either to
purchase some 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 certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
124
<PAGE>
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 the investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
certificates will be applied by the company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the mortgage loans
and/or mortgage securities in the respective mortgage pools and to pay other
expenses. The company expects that it will make additional sales of securities
similar to the offered securities from time to time, but the timing and amount
of any such additional offerings will be dependent upon a number of factors,
including the volume of mortgage loans purchased by the company, prevailing
interest rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The certificates offered by this prospectus 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 the 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. The methods are as follows:
o By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
o By placements by the company with institutional investors
through dealers; and
o 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), the certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. The
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 the series and the members of
the underwriting syndicate, if any, will be named in the prospectus supplement.
In connection with the sale of the offered securities, underwriters may
receive compensation from the company or from purchasers of the certificates 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 the certificates, and any discounts or
commissions received by them
125
<PAGE>
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 conditions precedent, that the underwriters will
be obligated to purchase all such certificates if any are purchased (other than
in connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the company will indemnify the several underwriters and the
underwriters will indemnify the company against specified 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 the
offering and any agreements to be entered into between the company and
purchasers of offered securities of the series.
The company anticipates that the certificates offered by this prospectus
and the prospectus supplement 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 the
purchases, be deemed to be "underwriters" within the meaning of the Securities
Act in connection with reoffers and sales by them of the certificates. Holders
of offered securities should consult with their legal advisors in this regard
prior to any such reoffer or sale.
LEGAL MATTERS
Legal matters, including federal income tax matters, in connection with
the securities of each series will be passed upon for the company by Thacher
Proffitt & Wood, New York, New York. With respect to each series of securities,
a copy of this opinion will be filed with the Commission on Form 8-K within 15
days after the Closing Date.
FINANCIAL INFORMATION
With respect to each series of certificates, a new trust fund will be
formed, and no trust fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related series of
certificates. Accordingly, no financial statements with respect to any trust
fund related to a series of certificates will be included in this prospectus or
in the related prospectus supplement.
With respect to each series of notes, where the issuer is a statutory
business trust or a limited liability company, financial statements will be
filed as required by the Exchange Act. Each such issuer will suspend filing the
reports if and when the reports are no longer required under the Exchange Act.
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.
126
<PAGE>
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 the holders are entitled. These ratings
address the structural, legal and issuer-related aspects associated with the
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 the
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.
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.
AVAILABLE INFORMATION
The company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. Reports and other information filed by the company can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, and its Regional Offices located
as follows: Chicago Regional Office, 500 West Madison, 14th Floor, Chicago,
Illinois 60661; New York Regional Office, Seven World Trade Center, New York,
New York 10048. Copies of the 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
and to which reference is hereby made.
REPORTS TO SECURITYHOLDERS
The master servicer or another 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 with respect to each trust
fund as are required under the Exchange Act and the Commission's related rules
and regulations. See "Description of the Securities--Reports to
Securityholders."
INCORPORATION OF INFORMATION BY REFERENCE
There are incorporated in this prospectus 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 Sections 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 the person, a copy of any or all the reports
incorporated in this prospectus by reference, in each case to the extent the
reports relate to one or more of such classes of the offered securities, other
than the exhibits to the documents, unless the exhibits are
127
<PAGE>
specifically incorporated by reference in the documents. Requests should be
directed in writing to Impac Secured Assets Corp., 20371 Irvine Avenue, 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.
128
<PAGE>
GLOSSARY
ACCRUAL SECURITY -- A security with respect to which some or all of its
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.
AFFILIATED SELLER -- Impac Funding Corporation, the parent of the
company, and their respective affiliates.
AGREEMENT -- An owner trust agreement, servicing agreement, indenture or
pooling and servicing agreement.
ARM LOAN -- A mortgage loan with an adjustable interest rate.
BANKRUPTCY CODE -- Title 11 of the United States Code, as amended from
time to time.
BANKRUPTCY LOSS -- A Realized Loss 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.
BENEFICIAL OWNER -- A person acquiring an interest in any DTC Registered
Security.
BENEFIT PLAN INVESTORS -- 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.
BUYDOWN ACCOUNT -- With respect to a buydown mortgage loan, the
custodial account where the Buydown Funds are placed.
BUYDOWN FUNDS -- With respect a buydown mortgage loan, the amount
contributed by the seller of the mortgaged property or another source and placed
in the Buydown Account.
BUYDOWN PERIOD -- The period during which funds on a buydown mortgage
loan are made up for from the Buydown Account.
CERCLA -- The federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended.
CERTIFICATE ACCOUNT -- One or more separate accounts for the collection
of payments on the related mortgage loans and/or mortgage securities
constituting the related trust fund.
CLOSING DATE -- With respect to any series of securities, the date on
which the securities are issued.
CODE-- The Internal Revenue Code of 1986.
COMMISSION-- The Securities and Exchange Commission.
129
<PAGE>
COMMITTEE REPORT -- The Conference Committee Report accompanying the Tax
Reform Act of 1986.
CONSERVATION ACT -- The Asset Conservation, Lender Liability and Deposit
Insurance Act of 1996.
CONTRACT -- Manufactured housing conditional sales contracts and
installment loan agreements each secured by a Manufactured Home.
CONTRIBUTIONS TAX -- With respect to specific contributions to a REMIC
made after the Closing Date, a tax on the REMIC equal to 100% of the value of
the contributed property.
COOPERATIVE -- With respect to a cooperative mortgage loan, the
corporation that owns the related apartment building.
CRIME CONTROL ACT-- The Comprehensive Crime Control Act of 1984.
DEFAULTED MORTGAGE LOSS -- A Realized Loss other than a Special Hazard
Loss, Extraordinary Loss or other losses resulting from damage to a mortgaged
property, Bankruptcy Loss or Fraud Loss.
DEFERRED INTEREST -- If an adjustment to the mortgage rate on a mortgage
loan has caused the amount of accrued interest on the mortgage loan in any month
to exceed the scheduled monthly payment on the mortgage loan, the resulting
amount of interest that has accrued but is not then payable;
DELETED MORTGAGE LOAN -- A mortgage loan which has been removed from the
related trust fund.
DESIGNATED SELLER TRANSACTION -- A series of securities where the
related mortgage loans are provided either directly or indirectly to the company
by one or more Sellers identified in the related prospectus supplement.
DETERMINATION DATE -- The close of business on the date on which the
amount of each distribution to securityholders will be determined, which shall
be stated in each prospectus supplement.
DIDMC -- The Depository Institutions Deregulation and Monetary Control
Act of 1980.
DOL-- The U.S. Department of Labor.
DOL REGULATIONS-- Regulations by the DOL promulgated at 29
C.F.R.ss.2510.3-101.
DTC REGISTERED SECURITY -- Any security initially issued through the
book-entry facilities of the DTC.
DUE PERIOD -- The period between distribution dates.
ELIGIBLE ACCOUNT -- An account maintained with a federal or state
chartered depository institution (i) the short-term obligations of which are
rated by each of the Rating Agencies in its highest rating at the time of any
deposit therein, or (ii) insured by the FDIC (to the limits established by the
FDIC), the uninsured deposits in which account are otherwise secured such that,
as evidenced by an opinion of counsel (obtained by and at the expense of the
person requesting that the account be held pursuant to this clause (ii))
delivered to the trustee prior to the establishment of the account, the
securityholders will have a claim with respect to the funds in the account and a
perfected first priority security interest against any
130
<PAGE>
collateral (which shall be limited to Permitted Instruments) securing the funds
that is superior to claims of any other depositors or general creditors of the
depository institution with which the account is maintained or (iii) a trust
account or accounts maintained with a federal or state chartered depository
institution or trust company with trust powers acting in its fiduciary capacity
or (iv) an account or accounts of a depository institution acceptable to the
Rating Agencies (as evidenced in writing by the Rating Agencies that use of any
such account as the Certificate Account will not have an adverse effect on the
then-current ratings assigned to the classes of the securities then rated by the
Rating Agencies). Eligible Accounts may or may not bear interest.
EQUITY CERTIFICATES -- With respect to any series of notes, the
certificate or certificates representing a beneficial ownership interest in the
related issuer.
ERISA PLANS -- Employee pension and welfare benefit plans subject to
ERISA.
EXEMPTION -- An individual prohibited transactions exemption issued by
the DOL to an underwriter.
EXEMPTION RATING AGENCY-- Standard & Poor's Structured Rating Group,
Moody's Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch, Inc.
EXCHANGE ACT-- The Securities Exchange Act of 1934, as amended.
EXTRAORDINARY LOSS -- Any Realized Loss occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
FRAUD LOSS -- A Realized Loss incurred on a defaulted mortgage loan as
to which there was fraud in the origination of the mortgage loan.
FTC RULE -- The so-called "Holder-in-Due-Course" Rule of the Federal
Trade Commission.
GARN-ST GERMAIN ACT -- The Garn-St Germain Depository Institutions Act
of 1982.
GLOBAL SECURITIES - The globally offered securities of the classes
specified in the related prospectus supplement.
GRANTOR TRUST CERTIFICATE -- A certificate representing an interest in a
Grantor Trust Fund.
GRANTOR TRUST FRACTIONAL CERTIFICATE -- 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 on the Grantor Trust Certificates at a pass-through rate.
GRANTOR TRUST STRIP CERTIFICATE -- A 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 retained interest of the company) and interest paid to the holders
of Grantor Trust Fractional Interest Certificates issued with respect to the
Grantor Trust Fund. 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.
GRANTOR TRUST FUND -- A trust fund as to which no REMIC election will be
made and which qualifies as a "grantor trust" within the meaning of Subpart E,
part I of subchapter J of the Code.
131
<PAGE>
HIGH LTV LOANS -- Mortgage loans with loan-to-value ratios in excess of
80% and as high as 150% and which are not be insured by a Primary Insurance
Policy.
HOUSING ACT-- The National Housing Act of 1934, as amended.
INDEX -- With respect to an ARM Loan, the related index, which will be
specified in the related prospectus supplement and may include one of the
following indexes: (1) the weekly average yield on U.S. Treasury securities
adjusted to a constant maturity of either six months or one year, (2) the weekly
auction average investment yield of U.S. Treasury bills of six months, (3) the
daily Bank Prime Loan rate made available by the Federal Reserve Board, (4) the
cost of funds of member institutions for the Federal Home Loan Bank of San
Francisco, (5) 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 (6) any other index described in the related prospectus
supplement.
INSURANCE PROCEEDS -- 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.
INTERMEDIARY -- An institution that is not a participant in the DTC but
clears through or maintains a custodial relationship with a participant.
ISSUE PREMIUM -- The excess of the issue price of a REMIC Regular
Certificate over its stated redemption price.
ISSUER -- With respect to a series of notes, the Delaware business trust
or other trust, created pursuant to the owner trust agreement, that issues the
notes.
LIQUIDATION PROCEEDS -- (1) All amounts, other than Insurance Proceeds
received and retained in connection with the liquidation of defaulted mortgage
loans or property acquired in respect thereof, by foreclosure or otherwise,
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 and (2) all proceeds of any mortgage
loan or mortgage security purchased (or, in the case of a substitution, 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 and
servicing 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 and "The Agreements--Termination."
MANUFACTURED HOME -- 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 the term shall include any structure which meets
all the requirements of this paragraph except the size requirements and with
respect to which the manufacturer
132
<PAGE>
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under this chapter."
NET MORTGAGE RATE -- With respect to a mortgage loan, the mortgage rate
net of the per annum rate or rates applicable to the calculation of servicing
and administrative fees and any retained interest of the company.
NONRECOVERABLE ADVANCE -- An advance which, in the good faith judgment
of the master servicer, will not be recoverable from recoveries on the related
mortgage loan or another specifically identified source.
NOTE MARGIN -- With respect to an ARM Loan, the fixed percentage set
forth in the related mortgage note, which when added to the related Index,
provides the mortgage rate for the ARM Loan.
OID REGULATIONS -- The rules governing original issue discount that are
set forth in Sections 1271- 1273 and 1275 of the Code and in the related
Treasury regulations.
OTS-- The Office of Thrift Supervision.
PARTIES IN INTEREST -- With respect to a Plan, persons who have
specified relationships to the Plans, either "Parties in Interest" within the
meaning of ERISA or "Disqualified Persons" within the meaning of the Code.
PERCENTAGE INTEREST -- With respect to a security of a particular class,
the percentage obtained by dividing the initial principal balance or notional
amount of the security by the aggregate initial amount or notional balance of
all the securities of the class.
PERMITTED INVESTMENTS -- United States government securities and other
investment grade obligations specified in the related pooling and servicing
agreement or the related servicing agreement and indenture.
PLANS-- ERISA Plans and Tax Favored Plans.
PREPAYMENT ASSUMPTION -- With respect to a REMIC Regular Certificate or
a Grantor Trust Certificate, the prepayment assumption used in pricing the
initial offering of that security.
PREPAYMENT INTEREST SHORTFALL -- With respect to any mortgage loan with
a prepayment in part or in full the excess, if any, of interest accrued and
otherwise payable on the related mortgage loan over the interest charged to the
borrower (net of servicing and administrative fees and any retained interest of
the company).
PRIMARY INSURANCE COVERED LOSS -- With respect to a mortgage loan
covered by a Primary Insurance Policy, the amount of the related loss covered
pursuant to the terms of the Primary Insurance Policy, which will generally
consist of the unpaid principal amount of the mortgage loan and accrued and
unpaid interest on the mortgage loan and reimbursement of specific expenses,
less (1) 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, (2) hazard insurance proceeds in excess of the amount
required to restore the related mortgaged property and which have not been
applied to the payment of the mortgage loan, (3) amounts expended but not
approved by the primary insurer, (4) claim payments previously made on the
mortgage loan and (5) unpaid premiums and other specific amounts.
133
<PAGE>
PRIMARY INSURANCE POLICY -- A primary mortgage guaranty insurance
policy.
PRIMARY INSURER-- An issuer of a Primary Insurance Policy.
PTCE-- Prohibited Transaction Class Exemption.
QUALIFIED SUBSTITUTE MORTGAGE LOAN -- A mortgage loan substituted for a
Deleted Mortgage Loan, meeting the requirements described under "The Mortgage
Pools-- Representations by Sellers" in this prospectus.
RATING AGENCY -- A "nationally recognized statistical rating
organization" within the meaning of Section 3(a)(41) of the Exchange Act.
REALIZED LOSS -- Any loss on a mortgage loan attributable to the
mortgagor's failure to make any payment of principal or interest as required
under the mortgage note.
RECORD DATE -- The close of business on the last business day of the
month preceding the month in which the applicable distribution date occurs.
RELIEF ACT -- The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
REMIC -- A real estate mortgage investment conduit as defined in
Sections 860A through 860G of the Code.
REMIC ADMINISTRATOR -- The trustee, the master servicer or another
specified party who administers the related REMIC.
REMIC CERTIFICATES -- Certificates evidencing interests in a trust fund
as to which a REMIC election has been made.
REMIC PROVISIONS -- Sections 860A through 860G of the Code.
REMIC REGULAR CERTIFICATE -- A REMIC Certificate designated as a
"regular interest" in the related REMIC.
REMIC RESIDUAL CERTIFICATE -- A REMIC Certificate designated as a
"residual interest" in the related REMIC.
REMIC REGULATIONS -- The REMIC Provisions and the related Treasury
regulations.
REO MORTGAGE LOAN -- A mortgage loan where title to the related
mortgaged property has been obtained by the trustee or to its nominee on behalf
of securityholders of the related series.
RICO-- The Racketeer Influenced and Corrupt Organizations statute.
SECURITIES ACT -- The Securities Act of 1933, as amended.
SELLER -- The seller of the mortgage loans or mortgage securities
included in a trust fund to the company with respect a series of securities, who
shall be an Affiliated Seller or an Unaffiliated Seller.
134
<PAGE>
SINGLE FAMILY PROPERTY -- An attached or detached one-family dwelling
unit, two- to four-family dwelling unit, condominium, townhouse, row house,
individual unit in a planned-unit development and other individual dwelling
units.
SMMEA-- The Secondary Mortgage Market Enhancement Act of 1984.
SPECIAL HAZARD LOSS -- (1) 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 (2) losses from partial
damage caused by reason of the application of the co-insurance clauses contained
in hazard insurance policies.
STRIP SECURITY -- A security which will be entitled to (1) principal
distributions, with disproportionate, nominal or no interest distributions or
(2) interest distributions, with disproportionate, nominal or no principal
distributions.
TAX FAVORED PLANS -- Tax-qualified retirement plans described in Section
401(a) of the Code and on Individual Retirement Accounts described in Section
408 of the Code.
TITLE V -- Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, enacted in March 1980.
TITLE VIII -- Title VIII of the Garn-St Germain Act.
UNAFFILIATED SELLERS -- Banks, savings and loan associations, mortgage
bankers, mortgage brokers, investment banking firms, the Resolution Trust
Corporation, the FDIC and other mortgage loan originators or sellers not
affiliated with the company.
UNITED STATES PERSON -- A citizen or resident of the United States, a
corporation or partnership (including an entity treated as a corporation or
partnership for federal income tax purposes) created or organized in, or under
the laws of, the United States or any state thereof or the District of Columbia
(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 persons have the authority to control all substantial
decisions of the trust. To the extent prescribed in regulations by the Secretary
of the Treasury, which 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 20, 1996 may elect to continue to be
treated as a United States person notwithstanding the previous sentence.
VALUE -- With respect to a mortgaged property securing a single family,
multifamily, commercial or mixed-use loan, the lesser of (x) the appraised value
determined in an appraisal obtained at origination of the mortgage loan, if any,
or, if the related mortgaged property has been appraised subsequent to
origination, the value determined in the subsequent appraisal and (y) the sales
price for the related mortgaged property (except in circumstances in which there
has been a subsequent appraisal). However, in the case of refinanced, modified
or converted single family, multifamily, commercial or mixed-use loans, 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 mortgaged 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
135
<PAGE>
the sales price of the related mortgaged property plus the added value of any
improvements. With respect 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, plus the actual cost of any
accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit, and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. With respect to a
used Manufactured Home, the "Value" is the least of the sale price, the
appraised value, and the National Automobile Dealer's Association book value
plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
136
<PAGE>
IMPAC SECURED ASSETS CORP.
COMPANY
$200,000,000
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 2000-4
PROSPECTUS SUPPLEMENT
BEAR, STEARNS & CO. INC.
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 OFFERED CERTIFICATES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered by this prospectus supplement
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the offered certificates, whether or not participating in this
offering, may be required to deliver a prospectus supplement and prospectus
until 90 days after the date hereof.
