PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 14, 1996)
$200,000,000
SOUTHERN PACIFIC SECURED ASSETS CORP.
COMPANY
$150,000,000 ADJUSTABLE RATE Class A-1 CERTIFICATES
$ 24,400,000 ADJUSTABLE RATE Class A-2 CERTIFICATES
$ 13,800,000 7.15% Class A-3 CERTIFICATES
$ 11,800,000 7.60%* Class A-4 CERTIFICATES
*SUBJECT TO INCREASE TO 8.35% AS DESCRIBED HEREIN.
MORTGAGE LOAN ASSET-BACKED PASS-THROUGH CERTIFICATES, SERIES 1996-3
------------------------------------
SOUTHERN PACIFIC FUNDING CORPORATION
SELLER
------------------------------------
The Series 1996-3 Mortgage Loan Asset-Backed Pass-Through Certificates
(the "Certificates") will include the following four senior classes (the "Class
A Certificates"): (i) Class A-1 Certificates (the "Group I Class A
Certificates") and (ii) Class A-2 Certificates, Class A-3 Certificates and Class
A-4 Certificates (collectively, the "Group II Class A Certificates"). In
addition to the Class A Certificates, the Series 1996-3 Mortgage Loan
Asset-Backed Pass-Through Certificates will include the Class I S Certificates
(the "Group I Subordinate Certificates"), the Class II S Certificates (the
"Group II Subordinate Certificates"; and, together with the Group I Subordinate
Certificates, the "Subordinate Certificates") and the Class R Certificates (the
"Residual Certificates"). Only the Class A Certificates are offered hereby. The
Pass-Through Rates (as defined herein) on the Class A-1 Certificates and Class
A-2 Certificates are adjustable and are calculated as described herein. The
Pass-Through Rates on the Class A-3 Certificates and the Class A-4 Certificates
will be the rates set forth above, subject to increase in the case of the Class
A-4 Certificates as described herein. Interest distributions on the Class A
Certificates will be payable monthly at one-twelfth the annual rate.
The Company has caused MBIA Insurance Corporation (the "Certificate
Insurer") to issue two certificate guaranty insurance policies (the "Certificate
Insurance Policies") for the benefit of the Class A Certificateholders pursuant
to which it will guarantee certain payments to the Class A Certificateholders as
described herein.
(CONTINUED ON FOLLOWING PAGE)
[insert MBIA logo]
--------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE CERTIFICATE
INSURANCE POLICIES ARE THE SOLE SOURCE OF PAYMENTS ON THE CLASS A
CERTIFICATES. THE CLASS A CERTIFICATES DO NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF THE COMPANY, THE CERTIFICATE INSURER,
THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR AFFILIATES.
NEITHER THE CLASS A CERTIFICATES NOR THE UNDERLYING
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE COMPANY, THE MASTER SERVICER OR
ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
--------------------------
There is currently no secondary market for the Class A Certificates.
Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. (together, the
"Underwriters") intend to make a secondary market in the Class A Certificates,
but are not obligated to do so. There can be no assurance that a secondary
market for the Class A Certificates will develop or, if it does develop, that it
will continue. The Class A Certificates will not be listed on any securities
exchange.
The Class A Certificates will be purchased from the Company by the
Underwriters and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Company from the sale of the
Class A Certificates, before deducting expenses payable by the Company, will be
equal to approximately 99.13% of the aggregate initial principal balance of the
Class A Certificates, plus accrued interest on the Class A-3 Certificates and
Class A-4 Certificates from August 1, 1996.
The Class A Certificates are offered by the Underwriters subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to certain other conditions. The Underwriters reserve the right to
withdraw, cancel or modify such offer and to reject any order in whole or in
part. It is expected that delivery of the Class A Certificates will be made only
in book-entry form through the facilities of The Depository Trust Company, CEDEL
S.A. and the Euroclear System as further discussed herein, on or about August
23, 1996, against payment therefor in immediately available funds. The Class A
Certificates will be offered in Europe and the United States of America.
MORGAN STANLEY & CO. INCORPORATED LEHMAN BROTHERS
AUGUST 21, 1996
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Certificates will each evidence a beneficial ownership interest in
one of two loan groups (each, a "Loan Group") comprising a trust fund (the
"Trust Fund") consisting primarily of certain first lien and second lien
mortgage loans, with terms to maturity of approximately 30 years (the "Mortgage
Loans"), to be deposited by Southern Pacific Secured Assets Corp. (the
"Company") into the Trust Fund for the benefit of the Certificateholders and any
funds on deposit in the Interest Coverage Accounts and the Pre-Funding Accounts
(each as defined herein). The separate Loan Groups are referred to herein as the
"Group I Loans" and "Group II Loans." The Group I Loans are conventional,
adjustable-rate, one- to four-family, first lien mortgage loans. The Group II
Loans are conventional, fixed-rate, one- to four-family, first lien and second
lien mortgage loans. Additional Group I and Group II Loans are intended to be
purchased by the Trust Fund from the Company on or before October 15, 1996 from
funds on deposit in the Pre-Funding Accounts. On the Delivery Date (as defined
herein), the Company will pay to the Trustee approximately $40,605,865 and
$9,362,894 for deposit in the Group I and Group II Pre-Funding Account,
respectively. On the Delivery Date, the Company will also pay to the Trustee for
deposit in the Interest Coverage Accounts an amount as required by the
Certificate Insurer and specified in the Pooling and Servicing Agreement. The
interest rate (the "Mortgage Rate") on each Group I Loan will be subject to
semi-annual adjustment (in the case of certain of the Group I Loans, after an
initial period of two years or three years from origination) based on the sum of
the Index (as defined herein) and the related Gross Margin (as defined herein),
subject to certain periodic and lifetime rate limitations (as described herein).
The Mortgage Rate on each Group II Loan will be fixed. The Index for the Group I
Loans will be based on six-month London interbank offered rates for United
States dollar deposits ("Six-Month LIBOR") as described herein. Certain
characteristics of the Mortgage Loans are described herein under "Description of
the Mortgage Pool." All distributions (other than Cross-Collateralization
Payments as described herein) and losses with respect to a Loan Group will be
allocated solely among the Certificates related to such Loan Group. The rights
of the holders of the Group I Subordinate Certificates to receive distributions
with respect to the Group I Loans will be subordinate to the rights of the
holders of the Group I Class A Certificates to the extent described herein and
in the Prospectus. The rights of the holders of the Group II Subordinate
Certificates to receive distributions with respect to the Group II Loans will be
subordinate to the rights of the holders of the Group II Class A Certificates to
the extent described herein and in the Prospectus.
It is a condition of the issuance of the Class A Certificates that
they be rated "AAA" by Standard & Poor's Ratings Services ("S&P") and Duff &
Phelps Credit Rating Co. ("DCR") and "Aaa" by Moody's Investors Service, Inc.
("Moody's").
The Class A Certificates initially will be represented by certificates
registered in the name of Cede & Co., as nominee of The Depository Trust Company
("DTC"), as further described herein. The interests of beneficial owners of the
Class A Certificates will be represented by book entries on the records of DTC
and the participating members of DTC. Persons acquiring beneficial ownership
interests in the Class A Certificates may elect to hold such interests through
DTC in the United States, or CEDEL or Euroclear (each as defined herein) in
Europe. Definitive certificates will be available for the Class A Certificates
only under the limited circumstances described herein. See "Description of the
Certificates--Book-Entry Registration of the Class A Certificates" herein.
As described herein, a "real estate mortgage investment conduit"
("REMIC") election will be made in connection with the Trust Fund (exclusive of
the Interest Coverage Accounts and the Pre-Funding Accounts) for federal income
tax purposes. The Class A Certificates and the Subordinate Certificates will
represent ownership of "regular interests" in the REMIC and the Class R
Certificates will constitute the sole class of "residual interests" in the
REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
Distributions on the Class A Certificates, will be made on the 25th day
of each month or, if such day is not a business day, then on the next business
day, commencing in September 1996 (each, a "Distribution Date"). As described
herein, interest payable with respect to each Distribution Date (i) on the Group
I Class A Certificates and Class A-2 Certificates, will accrue on the basis of a
360-day year and the actual number of days elapsed during the period commencing
on the Distribution Date immediately preceding the month on which such
Distribution Date occurs and ending on the calendar day immediately preceding
such Distribution Date, except with respect to the first Distribution Date,
which has an accrual period from August 23, 1996 to September 24, 1996 and (ii)
on the Class A-3 and Class A-4 Certificates will accrue on the basis of a 30-day
month, and will be based on the Certificate Principal Balance thereof and the
then-applicable Pass-Through Rate thereof, as reduced by certain interest
shortfalls. Distributions in respect of principal of the Class A Certificates
will be made as described herein under "Description of the Certificates--Class A
Principal Distribution Amount."
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-21 OF THE PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER "RISK FACTORS" ON PAGE 12 OF THE PROSPECTUS BEFORE PURCHASING ANY OF
THE CLASS A CERTIFICATES.
If purchased at a price other than par, the yield to maturity on the
Class A Certificates will be sensitive to the rate and timing of principal
payments (including prepayments, defaults and liquidations) on the Mortgage
Loans. The Mortgage Loans generally may be prepaid in full or in part at any
time; however, a prepayment may subject the related Mortgagor to a prepayment
charge with respect to the majority of the Mortgage Loans in each Loan Group.
The yield to investors on the Class A Certificates will be adversely affected by
any shortfalls in interest collected on the Mortgage Loans due to prepayments,
liquidations or otherwise, to the extent not otherwise covered as described
herein. See "Summary--Special Prepayment Considerations" and "--Special Yield
Considerations" herein, "Certain Yield and Prepayment Considerations" herein and
"Yield Considerations" in the Prospectus.
--------------------------
THE CLASS A CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT
CONSTITUTE PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE COMPANY AND
ARE BEING OFFERED PURSUANT TO ITS PROSPECTUS DATED MAY 14, 1996, OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CLASS A
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
S-2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by
reference to the detailed information appearing elsewhere herein and in the
Prospectus. Capitalized terms used herein and not otherwise defined herein have
the meanings assigned in the Prospectus.
Title of Securities.................... Mortgage Loan Asset-Backed Pass-Through
Certificates, Series 1996-3.
Company................................ Southern Pacific Secured Assets Corp.
(the "Company"). See "The Company" in
the Prospectus.
Master Servicer........................ Advanta Mortgage Corp. USA ("Advanta" or
the "Master Servicer"). See "Pooling and
Servicing Agreement--The Master
Servicer" herein.
Seller ................................ Southern Pacific Funding Corporation, an
affiliate of the Company (the "Seller").
See "Description of the Mortgage Pool"
herein.
Trustee................................ Bankers Trust Company of California,
N.A., a national banking association
(the "Trustee").
Cut-off Date........................... August 1, 1996.
Delivery Date.......................... On or about August 23, 1996.
Denominations.......................... The Class A Certificates will be issued,
maintained and transferred on the
book-entry records of The Depository
Trust Company ("DTC") and its
Participants (as defined in the
Prospectus). The Class A Certificates
will be issued in minimum denominations
of $25,000 and integral multiples of $1
in excess thereof.
Certificate Registration............... The Class A Certificates will be
represented by one or more certificates
registered in the name of Cede & Co., as
nominee of DTC (Class A Certificates so
registered, "Book-Entry Certificates").
No person acquiring an interest in the
Book-Entry Certificates (a "Beneficial
Owner") will be entitled to receive a
Class A Certificate in fully registered,
certificated form (a "Definitive
Certificate"), except under the limited
circumstances described herein. The
interests of Beneficial Owners of the
Book-Entry Certificates will be
represented by book entries on the
records of
S-3
<PAGE>
DTC and participating members of DTC.
Beneficial Owners may elect to hold
their interests in the Class A
Certificates through DTC in the United
States, or Centrale de Livraison de
Valeurs Mobilieres S.A. ("CEDEL") or the
Euroclear System ("Euroclear") in
Europe. Transfers within DTC, CEDEL or
Euroclear, as the case may be, will be
in accordance with the usual rules and
operating procedures of the relevant
system. Cross-market transfers between
persons holding directly or indirectly
through DTC, on the one hand, and
counterparties holding directly or
indirectly through CEDEL or Euroclear,
on the other, will be effected in DTC
through Citibank N.A. ("Citibank") or
Morgan Guaranty Trust Company of New
York ("Morgan"), the relevant
depositaries of CEDEL and Euroclear,
respectively, and each a participating
member of DTC. All references herein to
Class A Certificates and Class A
Certificateholders reflect the rights of
Beneficial Owners only as such rights
may be exercised through DTC and its
participating organizations, for so long
as such Certificates remain Book-Entry
Certificates. See "Risk
Factors--Book-Entry Certificates" and
"Description of the
Certificates--Book-Entry Registration of
the Class A Certificates".
The Mortgage Pool...................... The Mortgage Pool will consist of two
groups (each a "Loan Group") of mortgage
loans (the "Mortgage Loans"). The
separate Loan Groups are referred to
herein as the "Group I Loans" and "Group
II Loans." The Group I Loans are
conventional, adjustable-rate, one- to
four-family mortgage loans. The Group II
Loans are conventional, fixed-rate, one-
to four- family mortgage loans. The
Initial Group I Loans (as defined
herein) have an initial aggregate
principal balance as of the Cut-off Date
of $109,394,135.13. The Initial Group II
Loans (as defined herein) have an
initial aggregate principal balance as
of the Cut-off Date of $40,637,106.46.
The Group I Loans are secured by first
liens, and the Group II Loans are
secured by first liens and second liens,
on fee simple interests in one- to
four-family residential real properties
(each, a "Mortgaged Property"). The
Initial Group I Loans had approximate
individual principal balances at
origination of at least $19,500 but not
more than $750,000 with an average
principal
S-4
<PAGE>
balance at origination of approximately
$136,794. The Initial Group II Loans had
approximate individual principal
balances at origination of at least
$16,168 but not more than $585,000 with
an average principal balance at
origination of approximately $79,893.
All of the Initial Group I Mortgage
Loans have terms to maturity from the
date of origination or modification of
30 years. Approximately 85.40% of the
Initial Group II Mortgage Loans have
terms to maturity from the date of
origination or modification of 30 years
and 14.60% of the Initial Group II
Mortgage Loans have terms to maturity
from the date of origination or
modification of 15 years or less. The
Initial Group I Loans have a weighted
average remaining term to stated
maturity of approximately 359 months as
of the Cut-off Date. Approximately
70.73% of the Initial Group I Loans (by
aggregate principal balance as of the
Cut-off Date) are refinance mortgage
loans. The Initial Group II Loans have a
weighted average remaining term to
stated maturity of approximately 332
months as of the Cut-off Date.
Approximately 75.80% of the Initial
Group II Loans (by aggregate principal
balance as of the Cut-off Date) are
refinance mortgage loans. None of the
Initial Group I or Group II Loans were
thirty or more days delinquent in their
Monthly Payments (such Mortgage Loans,
"Delinquent Mortgage Loans") as of the
Cut-off Date. Prospective investors in
the Class A Certificates should be
aware, however, that only approximately
24.39% and 40.00% of the Initial Group I
Loans and Initial Group II Loans,
respectively (by aggregate principal
balance as of the Cut-off Date), had a
first Monthly Payment due on or before
July 1, 1996, and therefore, the
remaining Initial Group I Loans and
Initial Group II Loans could not have
been Delinquent Mortgage Loans as of the
Cut-off Date. Approximately 4.68% of the
Initial Group II Loans (by aggregate
principal balance as of the Cut-off
Date) will be secured by second liens on
the related Mortgaged Property. Each of
the Mortgage Loans will have been
originated by the Seller or acquired by
the Seller as described herein. For a
further description of the Mortgage
Loans, see "Description of the Mortgage
Pool" herein.
S-5
<PAGE>
The Mortgage Rate (as defined herein) on
each Group I Loan will be subject to
adjustment, commencing (i) with respect
to approximately 64.96% of the Initial
Group I Loans, approximately six months
after the date of origination, (ii) with
respect to approximately 34.93% of the
Initial Group I Loans, approximately two
years after origination (each such Group
I Loan, a "2/28 Loan") and (iii) with
respect to approximately 0.10% of the
Initial Group I Loans, approximately
three years after origination (each such
Group I Loan, a "3/27 Loan"), on the
date (the "Adjustment Date") specified
in the related Mortgage Note to a rate
equal to the sum (rounded as described
herein) of the related Index as
described below and the Gross Margin (as
defined herein) set forth in the related
Mortgage Note, subject to the
limitations described herein. The amount
of the monthly payment on each such
Mortgage Loan will be adjusted
semi-annually on the first day of the
month following the month in which the
Adjustment Date occurs to the amount
necessary to pay interest at the then
applicable Mortgage Rate and to fully
amortize the outstanding principal
balance of such Mortgage Loan over its
remaining term to stated maturity. As of
the Cut-off Date, the Initial Group I
Loans will bear interest at Mortgage
Rates of at least 6.75% per annum but no
more than 14.875% per annum, with a
weighted average Mortgage Rate of
approximately 10.27% per annum as of the
Cut-off Date. The Group I Loans will
have different Adjustment Dates, Gross
Margins, Periodic Rate Caps, Lifetime
Rate Caps and Lifetime Rate Floors, each
as described herein.
The Mortgage Rate on each Group II Loan
is fixed. As of the Cut-off Date, the
Initial Group II Loans will bear
interest at Mortgage Rates of at least
9.375% per annum but no more than
16.875% per annum, with a weighted
average Mortgage Rate of approximately
11.77% per annum as of the Cut-off Date.
Pursuant to the Pooling and Servicing
Agreement, the Trust Fund will be
obligated to purchase from the Company
on or before October 15, 1996,
additional Group I Loans and Group II
Loans (the "Group I
S-6
<PAGE>
Subsequent Mortgage Loans" and "Group II
Subsequent Mortgage Loans,"
respectively), subject to certain
conditions described herein. See
"Description of the Mortgage Pool"
herein.
The Mortgage Loans were underwritten in
accordance with the underwriting
standards described in "Description of
the Mortgage Pool--Underwriting
Standards" and Appendix C to this
Prospectus Supplement. See also "Risk
Factors--Underwriting Standards" in this
Prospectus Supplement.
For a further description of the
Mortgage Loans, see "Description of the
Mortgage Pool" herein.
Pre-Funding Accounts................... On the Delivery Date, the Company will
pay to the Trustee approximately
$40,605,865 (the "Group I Original
Pre-Funded Amount") and $9,362,894 (the
"Group II Original Pre-Funded Amount";
and together with the Group I Original
Pre-Funded Amount, the "Original
Pre-Funded Amounts") for deposit in the
Pre-Funding Accounts to provide the
Trust Fund with sufficient funds to
purchase Subsequent Mortgage Loans for
the Group I and Group II Loans. Each
Original Pre-Funded Amount will be
reduced during the related Funding
Period (as defined herein) by the amount
thereof used to purchase Subsequent
Mortgage Loans for the Group I and Group
II Loans in accordance with the Pooling
and Servicing Agreement (on any date of
determination, the related Original
Pre-Funded Amount as so reduced, the
related "Pre-Funded Amount"). See
"Description of the Mortgage
Pool--Conveyance of Subsequent Mortgage
Loans and the Pre-Funding Accounts"
herein.
Interest Coverage Accounts............. On the Delivery Date, the Company will
pay to the Trustee for deposit in the
Interest Coverage Accounts an amount as
required by the Certificate Insurer and
specified in the Pooling and Servicing
Agreement. Funds on deposit in the
Interest Coverage Accounts will be
applied by the Trustee to cover
shortfalls in the Group I and Group II
Class A Interest Distribution Amount
(each, as defined herein) attributable
to the pre-funding feature during the
S-7
<PAGE>
related Funding Period. See "Description
of the Certificates--Interest Coverage
Account" herein.
The Index.............................. The Index applicable with respect to the
Group I Loans shall be based upon the
average of the interbank offered rates
for six-month United States dollar
deposits in the London market
("Six-Month LIBOR") as published in The
Wall Street Journal and as most recently
available as of the first business day
forty-five, thirty or five days prior to
the Adjustment Date, as specified in the
related Mortgage Note.
In the event that the Index specified in
a Mortgage Note is no longer available,
an index reasonably acceptable to the
Trustee that is based on comparable
information will be selected by the
Master Servicer. See "Description of the
Mortgage Pool" herein.
The Class A Certificates............... The Class A Certificates will each
evidence a beneficial ownership interest
in a trust fund (the "Trust Fund")
consisting primarily of the Mortgage
Pool and any amounts on deposit in the
Interest Coverage Accounts and the
Pre-Funding Accounts. The Class A
Certificates will be issued pursuant to
a Pooling and Servicing Agreement, to be
dated as of the Cut-off Date, among the
Company, the Master Servicer and the
Trustee (the "Pooling and Servicing
Agreement"). The Class A Certificates
will have the following approximate
Certificate Principal Balances as of the
Delivery Date:
$150,000,000 Class A-1 Certificates
$ 24,400,000 Class A-2 Certificates
$ 13,800,000 Class A-3 Certificates
$ 11,800,000 Class A-4 Certificates
The Class A-1 Certificates are referred
to herein as the "Group I Class A
Certificates." The Class A-2
Certificates, Class A-3 Certificates and
Class A-4 Certificates are referred to
herein as the "Group II Class A
Certificates."
For a description of the allocation of
interest and principal distributions to
the Class A Certificates, see
"Summary--Interest Distributions" and
"--Principal Distributions" below, and
"Description of the
S-8
<PAGE>
Certificates--Class A Interest
Distribution Amount" and "--Class A
Principal Distribution Amount" herein.
The Class A Certificates will be
entitled to the benefit of two
certificate guaranty insurance policies
(the "Certificate Insurance Policies")
to be issued by MBIA Insurance
Corporation (the "Certificate Insurer"),
which will insure the payment of (i) on
each Distribution Date, an amount equal
to (a) the related Class A Interest
Distribution Amount (as defined herein)
minus the related Available Funds (as
defined herein) and (b) the related
Subordination Deficit (as defined
herein) (to the extent not covered, with
respect to the Group II Class A
Certificates, by Cross-Collateralization
Payments) and (ii) the unpaid related
Preference Amount (as defined herein).
The Certificate Insurance Policies do
not insure the payment of the Group I
Class A Available Funds Cap
Carry-Forward Amount (as defined
herein). See "Description of the
Certificates."
Pass-Through Rate on the
Class A Certificates................. The Pass-Through Rate on the Class A-1
Certificates is adjustable and is
calculated as follows: beginning on the
Distribution Date in September 1996, and
on each Distribution Date thereafter,
the Pass-Through Rate applicable to the
Class A-1 Certificates will be adjusted
to equal the greater of (x) the lesser
of (i) (a) with respect to any
Distribution Date which occurs on or
prior to the date on which the aggregate
Principal Balance of the Mortgage Loans
is less than 10% of the sum of the
aggregate Principal Balance of the
Mortgage Loans as of the Cut-off Date
and the Original Pre-Funded Amounts,
One-Month LIBOR (as defined herein) plus
0.31%, or (b) with respect to any
Distribution Date thereafter, One-Month
LIBOR plus 1.00% and (ii) the Group I
Class A Available Funds Pass-Through
Rate and (y) 4.50%.
The "Group I Class A Available Funds
Pass-Through Rate," as of any
Distribution Date, is equal to (i) the
weighted average of the Mortgage Rates
of the Group I Loans, minus (ii) the sum
of the Servicing Fee Rate and the rates
per annum at which the Trustee's Fee and
Premium Amount accrue and minus (iii)
S-9
<PAGE>
commencing on the seventh Distribution
Date, 0.50% per annum.
The "Class A-1 Formula Pass-Through
Rate" for a Distribution Date is the
lesser of (x) the rate determined by
clause (i) of the definition of
PassThrough Rate for the Class A-1
Certificates on such Distribution Date
and (y) the weighted average of Net
Lifetime Rate Caps of the Group I Loans.
The Net Lifetime Rate Cap on each Group
I Loan is equal to the related Lifetime
Rate Cap minus the sum of the Servicing
Fee Rate and the rates per annum at
which the Trustee's Fee and the Premium
Amount accrue.
The Pooling and Servicing Agreement
provides that if the Pass-Through Rate
on the Class A-1 Certificates is less
than the Class A-1 Formula PassThrough
Rate and any resulting shortfall in
interest is not paid on such
Distribution Date from any available Net
Monthly Excess Cashflow, as defined
herein, then the amount of any such
shortfall will be carried forward and
paid to the extent of available funds,
as described herein, to the Holders of
the Class A-1 Certificates on future
Distribution Dates and shall accrue
interest at the applicable Class A-1
Formula Pass-Through Rate, until paid
(such shortfall, together with such
accrued interest, the "Group I Class A
Available Funds Cap Carry-Forward
Amount"). The Certificate Insurance
Policies do not cover the Group I Class
A Available Funds Cap Carry-Forward
Amount, nor do the ratings assigned to
the Class A-1 Certificates address the
payment of the Group I Class A Available
Funds Cap CarryForward Amount.
The Pass-Through Rate on the Class A-2
Certificates is adjustable and is
calculated as follows: beginning on the
Distribution Date in September 1996, and
on each Distribution Date thereafter,
the Pass-Through Rate applicable to the
Class A-2 Certificates will be adjusted
to equal the lesser of (i) One-Month
LIBOR (as defined herein) plus 0.12% and
(ii) the Class A-2 Available Funds
Pass-Through Rate.
The "Class A-2 Available Funds
Pass-Through Rate," as of any
Distribution Date, is equal to (i) the
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weighted average of the Mortgage Rates
of the Group II Loans, minus (ii) the
sum of the Servicing Fee Rate and the
rates per annum at which the Trustee's
Fee and Premium Amount accrue.
The Pass-Through Rate with respect to
the Class A-3 Certificates is fixed at
7.15% per annum. The Pass- Through Rate
on the Class A-4 Certificates is equal
to (i) with respect to any Distribution
Date which occurs on or prior to the
date on which the aggregate Principal
Balance of the Mortgage Loans is less
than 10% of the sum of the aggregate
Principal Balance of the Mortgage Loans
as of the Cut-off Date and the Original
Pre-Funded Amounts, 7.60% per annum, and
(ii) with respect to any Distribution
Date thereafter, 8.35% per annum. See
"Description of the Certificates--Class
A Interest Distribution Amounts" herein.
See "Description of the
Certificates--Class A Interest
Distribution Amount" and "--Calculation
of One- Month LIBOR" herein.
Interest Distributions................. On each Distribution Date, the holders
of the Class A Certificates will be
entitled to receive, to the extent of
amounts available for distribution as
described herein, interest distributions
in an amount equal to the sum of (i)
interest accrued for the related Accrual
Period (as defined herein) on the
Certificate Principal Balance thereof
immediately prior to such Distribution
Date at the then-applicable Pass-Through
Rate (based on a 360-day year and the
actual number of days elapsed, with
respect to the Group I Class A
Certificates and the Class A-2
Certificates, and a 30- day month, with
respect to the Class A-3 Certificates
and Class A-4 Certificates), subject to
reduction only in the event of
shortfalls caused by the Relief Act (as
defined in the Prospectus and allocated
as described herein) or the failure of
the Master Servicer to cover Prepayment
Interest Shortfalls to the extent
described herein and (ii) the Group I
Class A Carry-Forward Amount or Group II
Class A Carry-Forward Amount (each as
defined herein), as applicable,
allocable to interest. The aggregate
amount of interest allocable to the
Group I and Group II Class A
Certificates (the related "Class A
Interest Distribution Amount") will
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<PAGE>
be allocable to the related Class A
Certificates on a pro rata basis. See
"Description of the
Certificates--Priority of Payment" and
"--Class A Interest Distribution Amount"
herein.
Any Prepayment Interest Shortfalls (as
defined herein) resulting from full or
partial prepayments in any calendar
month will be offset by the Master
Servicer on the Distribution Date in the
following calendar month to the extent
such Prepayment Interest Shortfalls do
not exceed the Servicing Fee payable to
the Master Servicer with respect to such
Distribution Date. An amount equal to
the Class A Certificates' pro rata
share, based on the amount of interest
payable on each such class, of any
Prepayment Interest Shortfalls not so
covered by the Master Servicer will be
made available by the Certificate
Insurer for distribution to the Class A
Certificateholders. See "Pooling and
Servicing Agreement--Servicing and Other
Compensation and Payment of Expenses"
and "Description of the
Certificates--Class A Interest
Distribution Amount" herein.
Principal Distributions................ Holders of the Group I and Group II
Class A Certificates will be entitled to
receive on each Distribution Date, to
the extent of amounts available for
distribution as described herein
remaining after interest on the Group I
and Group II Class A Certificates,
respectively, is distributed, an amount
(the related "Class A Principal
Distribution Amount") equal to the sum
of (i) the portion of any Group I Class
A Carry-Forward Amount or Group II Class
A Carry-Forward Amount, as applicable,
which relates to a shortfall in a
distribution of a related Subordination
Deficit, (ii) all scheduled installments
of principal in respect of the Mortgage
Loans in the related Loan Group received
or advanced during the related Due
Period, together with all unscheduled
recoveries of principal on such Mortgage
Loans received by the Master Servicer
during the prior calendar month, (iii)
the Principal Balance of each Mortgage
Loan in the related Loan Group that was
repurchased by either the Seller or by
the Company, (iv) any amounts delivered
by the Company on the Master Servicer
Remittance Date (as defined herein)
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in connection with a substitution of a
Mortgage Loan in the related Loan Group,
(v) the net Liquidation Proceeds (as
defined in the Prospectus) collected by
the Master Servicer of all Mortgage
Loans in the related Loan Group during
the prior calendar month (to the extent
such net Liquidation Proceeds are
related to principal), (vi) the amount
of any related Subordination Deficit for
such Distribution Date, (vii) the
proceeds received by the Trustee of any
termination of the related Loan Group
(to the extent such proceeds are related
to principal), (viii) the amount of any
related Subordination Increase Amount
(as defined herein) for such
Distribution Date and (ix) with respect
to the Group I and Group II Class A
Certificates, with respect to the
Distribution Date occurring in October
1996, any amounts in the related
Pre-Funding Account after giving effect
to any purchase of related Subsequent
Mortgage Loans; MINUS (x) the amount of
any related Subordination Reduction
Amount (as defined herein) for such
Distribution Date.
In no event will any Class A Principal
Distribution Amount with respect to any
Distribution Date be less than zero or
greater than the Certificate Principal
Balance of the related Class A
Certificates.
See "Description of the
Certificates--Priority of Payment" and
"--Class A Principal Distribution
Amount" herein.
Credit Enhancement..................... The credit enhancement provided for the
benefit of the Class A
Certificateholders consists solely of
(a) the overcollateralization mechanics
which utilize the internal cash flows of
the Mortgage Loans in the related Loan
Group (and, to the extent of Cross-
Collateralization Payments payable to
the Group II Class A Certificates as
described herein, cash flows on the
Mortgage Loans in Loan Group I) and (b)
the related Certificate Insurance
Policy.
OVERCOLLATERALIZATION. The subordination
provisions of the Trust Fund result in a
limited acceleration of the Class A
Certificates relative to the
amortization of the Mortgage Loans in
the related Loan Group, generally in the
early months of the transaction. The
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<PAGE>
accelerated amortization is achieved by
the application of certain excess
interest to the payment of the
Certificate Principal Balance of the
related Class A Certificates. This
acceleration feature creates
overcollateralization which equals the
excess of the aggregate Principal
Balances of the Mortgage Loans in the
related Loan Group and the related
PreFunded Amount over the Certificate
Principal Balance of the related Class A
Certificates. Once the required level of
overcollateralization is reached, and
subject to the provisions described in
the next paragraph, the acceleration
feature will cease, unless necessary to
maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement
provides that, subject to certain
trigger tests, the required level of
overcollateralization with respect to
each Loan Group may increase or decrease
over time. An increase would result in a
temporary period of accelerated
amortization of the related Class A
Certificates to increase the actual
level of overcollateralization to its
required level; a decrease would result
in a temporary period of decelerated
amortization to reduce the actual level
of overcollateralization to its required
level. See "Description of the
Certificates-- Overcollateralization
Provisions."
THE CERTIFICATE INSURANCE POLICIES. The
Class A Certificateholders will have the
benefit of the related Certificate
Insurance Policy, as discussed more
fully below. See "Description of the
Certificates--The Certificate Guaranty
Insurance Policies" herein.
Certificate Insurer.................... MBIA Insurance Corporation (the
"Certificate Insurer"). See "MBIA
Insurance Corporation" herein.
Certificate Guaranty
Insurance Policies................... The Certificate Insurer will issue the
Certificate Insurance Policies as a
means of providing additional credit
enhancement to the Class A Certificates.
Under the Certificate Insurance
Policies, the Certificate Insurer will
pay the Trustee, for the benefit of the
holders of the related Class A
Certificates, as further described
herein, an amount that will insure the
payment of (i) on each Distribution
Date, an amount
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<PAGE>
equal to (a) the related Class A
Interest Distribution Amount minus the
related Available Funds and (b) the
related Subordination Deficit (to the
extent not covered, with respect solely
to the Group II Class A Certificates, by
Cross-Collateralization Payments) and
(ii) the related unpaid Preference
Amount. The Certificate Insurance
Policies do not insure the payment of
the Group I Class A Available Funds Cap
Carry-Forward Amount. A payment by the
Certificate Insurer under a Certificate
Insurance Policy is referred to herein
as an "Insured Payment." See
"Description of the Certificates--The
Certificate Guaranty Insurance Policies"
herein.
Cross-Collateralization................ In the event that on any Distribution
Date after giving effect to
distributions pertaining to a particular
Loan Group and its related Certificates
(except for any payment to be made as
principal from proceeds of the related
Certificate Insurance Policy), either a
Reimbursement Amount with respect to
either Loan Group exists or a
Subordination Deficit exists with
respect to Loan Group II or the
Subordinated Amount with respect to Loan
Group II would be less than the related
Required Subordinated Amount (such
difference, a "Cross-Collateralized
Subordination Shortfall"), the Group II
Class A Certificates or the Certificate
Insurer, as the case may be, will be
entitled to receive an additional
payment (a "CrossCollateralization
Payment") in respect of principal to the
extent of such Subordination Deficit or
CrossCollateralized Subordination
Shortfall or as reimbursement of the
Reimbursement Amount, as the case may
be, out of funds then on deposit in the
Certificate Account for the other Loan
Group that is otherwise payable on such
Distribution Date to the Subordinate
Certificates related to such other Loan
Group.
Mandatory Prepayments
on the Group I and
Group II Class A
Certificates......................... The Group I and Group II Class A
Certificates will be prepaid in part on
the October 1996 Distribution Date in
the event that any amount remains on
deposit in the related Pre-Funding
Account on such Distribution Date after
the purchase by the Trust
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<PAGE>
Fund of the related Subsequent Mortgage
Loans, if any. Although no assurance can
be given, it is anticipated by the
Company that the principal amount of the
related Subsequent Mortgage Loans
purchased by the Trust Fund will require
the application of substantially all of
the related Original Pre-Funded Amount
(as defined herein) and that there
should be no material amount of
principal prepaid to the Group I and
Group II Class A Certificateholders from
the related Pre-Funding Account.
However, it is unlikely that the Company
will be able to deliver Subsequent
Mortgage Loans with an aggregate
principal balance identical to the
related Original Pre-Funded Amount. See
"Description of the
Certificates--Mandatory Prepayments on
Group I and Group II Class A
Certificates" herein.
Advances............................... The Master Servicer is required to make
advances ("Advances") in respect of
delinquent payments of principal and
interest on the Mortgage Loans, subject
to the limitations described herein. See
"Description of the
Certificates--Advances" herein and in
the Prospectus.
Optional Termination....................At its option, on any Distribution Date
when the aggregate Principal Balance of
the Mortgage Loans is less than 10% of
the sum of the aggregate principal
balance of the Mortgage Loans as of the
Cut-off Date and the aggregate principal
balance of the Subsequent Mortgage Loans
as of the related Subsequent Cut-off
Date (as defined herein), the holder of
a majority percentage interest of the
Class R Certificates (or the Master
Servicer (or the Certificate Insurer, if
Advanta is removed as Master Servicer)
if the Principal Balance of the Mortgage
Loans is less than 5% of such sum) may
purchase from the Trust Fund all
remaining Mortgage Loans and other
assets thereof at the price described
herein, and thereby effect early
retirement of the related Certificates.
See "Pooling and Servicing
Agreement--Termination" herein and "The
Pooling Agreement--Termination;
Retirement of Certificates" in the
Prospectus.
Special Prepayment
Considerations....................... The rate and timing of principal
payments on the Class A Certificates
will depend, among other things,
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<PAGE>
on the rate and timing of principal
payments (including prepayments,
defaults, liquidations and purchases of
the Mortgage Loans in the related Loan
Group due to a breach of a
representation or warranty) on the
related Mortgage Loans. As is the case
with mortgage-backed securities
generally, the Class A Certificates are
subject to substantial inherent
cash-flow uncertainties because the
Mortgage Loans in the related Loan Group
may be prepaid at any time; however, a
prepayment may subject the related
Mortgagor to a prepayment charge with
respect to the majority of the Mortgage
Loans in each Loan Group. Generally,
when prevailing interest rates increase,
prepayment rates on mortgage loans tend
to decrease, resulting in a slower
return of principal to investors at a
time when reinvestment at such higher
prevailing rates would be desirable.
Conversely, when prevailing interest
rates decline, prepayment rates on
mortgage loans tend to increase,
resulting in a faster return of
principal to investors at a time when
reinvestment at comparable yields may
not be possible.
SEQUENTIALLY PAYING CLASSES. The Group
II Class A Certificates are subject to
various priorities for payment of
principal as described herein.
Distributions of principal on such
classes having an earlier priority of
payment will be affected by the rates of
prepayments of the Group II Loans
earlier than such classes having a later
priority of payment. The timing of
commencement of principal distributions
and the weighted average lives of the
Group II Class A Certificates with a
later priority of payment will be
affected by the rates of prepayments
experienced both before and after the
commencement of principal distributions
on such classes.
See "Description of the
Certificates--Class A Principal
Distribution Amount" and "Certain Yield
and Prepayment Considerations" herein,
and "Maturity and Prepayment
Considerations" in the Prospectus.
Special Yield
Considerations...................... The yield to maturity on the Class A
Certificates will depend on, among other
things, the rate and timing of principal
payments (including prepayments,
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<PAGE>
defaults, liquidations and purchases of
the Mortgage Loans in the related Loan
Group due to a breach of a
representation or warranty) on the
Mortgage Loans in the related Loan Group
and the allocation thereof to reduce the
Certificate Principal Balance thereof.
The yield to maturity on the Class A
Certificates will also depend on the
related Pass-Through Rate and the
purchase price for such Certificates.
If the Class A Certificates are
purchased at a premium and principal
distributions thereon occur at a rate
faster than anticipated at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed
at the time of purchase. Conversely, if
the Class A Certificates are purchased
at a discount and principal
distributions thereon occur at a rate
slower than that assumed at the time of
purchase, the investor's actual yield to
maturity will be lower than that assumed
at the time of purchase.
The Group I Class A Certificates were
structured assuming, among other things,
a prepayment rate equal to 25% CPR (as
defined herein) and corresponding
weighted average life as described
herein. The Group II Class A
Certificates were structured assuming,
among other things, a prepayment rate
equal to 115% of the Prepayment
Assumption (as defined herein) and
corresponding weighted average lives as
described herein. The prepayment, yield
and other assumptions to be used for
pricing purposes for the Class A
Certificates may vary as determined at
the time of sale.
SEQUENTIALLY PAYING CLASSES. With
respect to the Group II Class A
Certificates, because principal
distributions are paid to certain of
such classes before other classes,
holders of classes having a later
priority of payment bear a greater risk
of losses than holders of classes having
earlier priorities for distribution of
principal.
See "Certain Yield and Prepayment
Considerations" herein and "Yield
Considerations" in the Prospectus.
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<PAGE>
Certain Federal Income Tax
Consequences........................ A real estate mortgage investment
conduit ("REMIC") election will be made
with respect to the Trust Fund
(exclusive of the Interest Coverage
Accounts and the Pre-Funding Accounts)
for federal income tax purposes. Upon
the issuance of the Class A
Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its
opinion generally to the effect that,
assuming compliance with all provisions
of the Pooling and Servicing Agreement,
for federal income tax purposes, the
Trust Fund (exclusive of the Interest
Coverage Accounts and the Pre-Funding
Accounts) will qualify as a REMIC under
Sections 860A through 860G of the
Internal Revenue Code of 1986 (the
"Code").
For federal income tax purposes, the
Class R Certificates will be the sole
class of "residual interests" in the
REMIC and the Class A Certificates and
the Subordinate Certificates will
represent ownership of "regular
interests" in the REMIC and will
generally be treated as representing
ownership of debt instruments of the
REMIC.
For federal income tax reporting
purposes, the Class A Certificates will
not be treated as having been issued
with original issue discount. The
prepayment assumption that will be used
in determining the rate of accrual of
original issue discount, market discount
and premium, if any, for federal income
tax purposes will be a rate equal to 25%
CPR, with respect to the Group I Class A
Certificates, and 115% of the Prepayment
Assumption, with respect to the Group II
Class A Certificates. No representation
is made that the Mortgage Loans will
prepay at these rates or at any other
rates.
For further information regarding the
federal income tax consequences of
investing in the Class A Certificates,
see "Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
Legal Investment....................... The Group I Class A Certificates will
constitute "mortgage related securities"
for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
for so long as they are rated in at
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<PAGE>
least the second highest rating category
by one or more nationally recognized
statistical rating agencies. The Group
II Class A Certificates will not
constitute "mortgage related securities"
for purposes of SMMEA. Institutions
whose investment activities are subject
to legal investment laws and
regulations, regulatory capital
requirements or review by regulatory
authorities may be subject to
restrictions on investment in the Class
A Certificates and should consult with
their legal advisors. See "Legal
Investment" herein and "Legal Investment
Matters" in the Prospectus.
Ratings................................ It is a condition to the issuance of the
Class A Certificates that they be rated
"AAA" by Standard & Poor's Ratings
Services ("S&P") and Duff & Phelps
Credit Rating Co. ("DCR") and "Aaa" by
Moody's Investors Service, Inc.
("Moody's"). A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time by
the assigning rating organization. A
security rating does not address the
frequency of prepayments of Mortgage
Loans, or the corresponding effect on
yield to investors. Also, the ratings
issued by S&P, DCR and Moody's on
payment of principal and interest do not
cover the payment of the Group I Class A
Available Funds Cap Carry-Forward
Amount. See "Certain Yield and
Prepayment Considerations" and "Ratings"
herein and "Yield Considerations" and
"Rating" in the Prospectus.
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<PAGE>
RISK FACTORS
Prospective Class A Certificateholders should consider, among other
things, the items discussed under "Risk Factors" in the Prospectus and the
following factors in connection with the purchase of the Certificates.
UNDERWRITING STANDARDS
The Mortgage Loans were underwritten by the Originators (as defined
herein) in accordance with their respective underwriting standards described in
"Description of the Mortgage Pool--Underwriting" below and in Appendix C to this
Prospectus Supplement which are primarily intended to provide single family
mortgage loans for non-conforming credits. A "non-conforming credit" means a
mortgage loan which is ineligible for purchase by FNMA or FHLMC due to credit
characteristics that do not meet the FNMA or FHLMC underwriting guidelines,
including mortgagors whose creditworthiness and repayment ability do not satisfy
such FNMA or FHLMC 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 FNMA or FHLMC underwriting guidelines.
ACCORDINGLY, MORTGAGE LOANS UNDERWRITTEN UNDER THE ORIGINATORS' 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 FNMA OR FHLMC UNDERWRITING
GUIDELINES.
Under the Originators' non-conforming credit underwriting standards,
the critical factors in underwriting a Mortgage Loan are the income and
employment history of the prospective mortgagor, the creditworthiness of the
prospective mortgagor, an assessment of the value of the related Mortgaged
Property and the adequacy of such property as collateral in relation to the
amount of such Mortgage Loan. Therefore, changes in values of the Mortgaged
Properties may have a greater effect on the delinquency, foreclosure and loss
experience of the related Mortgage Loans than on mortgage loans originated in
accordance with the FNMA or FHLMC credit underwriting guidelines. No assurance
can be given that the values of the Mortgaged Properties in the related Loan
Group have remained or will remain at the levels in effect on the dates of
origination of the related Mortgage Loans. If the values of the Mortgaged
Properties in Loan Group I and Loan Group II decline after the dates of
origination of the related Mortgage Loans, then the rates of delinquencies,
foreclosures and losses on the Group I and Group II Loans may increase and such
increase may be substantial.
The mortgage loan programs of Oceanmark and SPFC (each, as defined
herein) described in "Description of the Mortgage Pool--Underwriting" in this
Prospectus Supplement and in Appendix C to this Prospectus Supplement were
recently implemented and have produced a relatively low total volume of mortgage
loans. Because all of the Mortgage Loans being sold to the Trust Fund were
underwritten in accordance with these programs, neither Oceanmark nor SPFC has
sufficient historical delinquency, foreclosure or loss experience with respect
to its own loan programs that may be referenced for purposes of estimating the
future delinquency, foreclosure or loss experience on mortgage loans similar to
those originated by them included in Loan Group I or Loan Group II. See
"Description of the Mortgage Pool--Delinquency and Foreclosure Experience"
herein.
DELINQUENCIES AND POTENTIAL DELINQUENCIES
None of the Initial Group I or Initial Group II Loans were thirty or
more days delinquent in their Monthly Payments (such Mortgage Loans, "Delinquent
Mortgage Loans") as of the Cut-off Date. Prospective investors in the Class A
Certificates should be aware, however, that only approximately 24.39% and 40.00%
of the Initial Group I Loans and Initial Group II Loans, respectively (by
aggregate principal balance as of the Cut-off Date), had a first Monthly Payment
due on or before July 1, 1996,
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and therefore, the remaining Initial Group I Loans and Initial Group II Loans
could not have been Delinquent Mortgage Loans as of the Cut-off Date.
SECOND LIENS
Approximately 4.68% of the Initial Group II Loans (by aggregate
outstanding principal balance as of the Cut-off Date) are secured by second
liens on the related Mortgaged Properties. Group II Loans secured by second
mortgages will be entitled to proceeds that remain from the sale of the related
Mortgaged Property after any related senior mortgage loans and prior statutory
liens have been satisfied and, if such were satisfied by the Master Servicer,
after the Master Servicer has been reimbursed. In the event that such proceeds
are insufficient to satisfy such loans and prior liens in the aggregate and the
Certificate Insurer is unable to perform its obligations under the related
Certificate Insurance Policy, the Group II Class A Certificates may bear (i) the
risk of delay in distributions while a deficiency judgment against the borrower
is obtained and (ii) the risk of loss if the deficiency judgment is not realized
upon. See "The Mortgage Pool--The Mortgage Loans" in the Prospectus. In
addition, the rate of default of second mortgage loans may be greater than that
of mortgage loans secured by first liens on comparable properties.
RISK OF MORTGAGE LOAN YIELD REDUCING PASS-THROUGH RATES ON THE GROUP I CLASS A
CERTIFICATES AND CLASS A-2 CERTIFICATES
The Pass-Through Rates on the Group I Class A Certificates and the
Class A-2 Certificates are generally expected to be based upon clause (i) of the
definition thereof, which is primarily based upon the value of One-Month LIBOR
(as defined herein) as adjusted every month, while (a) the Group I Loans adjust
semi-annually based upon a different index, Six-Month LIBOR, as described under
"Description of the Mortgage Pool--Mortgage Rate Adjustment" herein and (b) the
Group II Loans have fixed rates, as described herein. However, clause (ii) of
the definition of the Pass-Through Rate on the Group I Class A Certificates and
the Class A-2 Certificates limits the Pass-Through Rate on the Group I Class A
Certificates and the Class A-2 Certificates to the Group I Class A Available
Funds Pass-Through Rate and the Class A-2 Available Funds Pass-Through Rate,
respectively, which is (a) with respect to the Group I Class A Certificates,
generally based upon the Mortgage Rates on the Group I Loans, which are subject
to Six-Month LIBOR, and (b) with respect to the Class A-2 Certificates,
generally based upon the Mortgage Rates on the Group II Loans, which are fixed.
As a result, the interest paid to the Group I Class A Certificates and Class A-2
Certificates may be less than would be determined using clause (i) of the
related definition of Pass-Through Rate. In particular, because the Mortgage
Rates on the Group I Loans adjust less frequently, the Pass-Through Rate on the
Group I Class A Certificates may be determined by the Group I Class A Available
Funds Pass-Through Rate for extended periods in a rising interest rate
environment. In addition, with respect to the Group I Class A Certificates,
One-Month LIBOR and Six-Month LIBOR may respond to different economic and market
factors, and there is not necessarily any correlation between them. Thus, it is
possible, for example, that One-Month LIBOR may rise during periods in which
Six-Month LIBOR is stable or is falling or that, even if both One-Month LIBOR
and Six-Month LIBOR rise during the same period, One-Month LIBOR may rise much
more rapidly than Six-Month LIBOR. In addition, the Mortgage Rates on the Group
I Loans are subject to the Periodic Rate Caps and to specified Lifetime Rate
Caps and Lifetime Rate Floors, and the Mortgage Rates on the 2/28 Loans and 3/27
Loans, which represent 34.93% and 0.10% of the Initial Group I Loans,
respectively (by aggregate outstanding principal balance as of the Cut-off
Date), will not have a first Adjustment Date until two years and three years,
respectively, from the origination of each such 2/28 Loan and 3/27 Loan. In
addition, it is possible, with respect to the Class A-2 Certificates, that
OneMonth LIBOR may rise to a level greater than the Class A-2 Available Funds
Pass-Through Rate, because the interest rates on the Group II Loans are fixed.
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<PAGE>
THE SUBSEQUENT MORTGAGE LOANS
Subsequent Mortgage Loans may have characteristics different from those
of the related Initial Mortgage Loans. However, each Subsequent Mortgage Loan
must satisfy the eligibility criteria referred to herein under "Description of
the Mortgage Pool--Conveyance of Subsequent Mortgage Loans and the Pre-Funding
Accounts" at the time of its conveyance to the Trust Fund and be underwritten in
accordance with the criteria set forth herein under "Description of the Mortgage
Pool--Underwriting" and Appendix C to this Prospectus Supplement.
MANDATORY PREPAYMENT
To the extent that amounts on deposit in the Pre-Funding Accounts have
not been fully applied to the purchase of Subsequent Mortgage Loans by the Trust
Fund by the end of the related Funding Period, the Holders of the related Class
A Certificates will receive, as described herein, on the Distribution Date
occurring in October 1996, any amounts in the related Pre-Funding Account after
giving effect to any purchase of related Subsequent Mortgage Loans. Although no
assurances can be given, the Company intends that the principal amount of
Subsequent Mortgage Loans sold to the Trust Fund will require the application of
substantially all amounts on deposit in the Pre-Funding Accounts and that there
will be no material principal payment to the related Class A Certificateholders
on such Distribution Date.
BOOK-ENTRY CERTIFICATES
Issuance of the Class A Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market since investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Since transactions in the Book-Entry Certificates will be effected only
through DTC, CEDEL, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Beneficial Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
DTC, CEDEL or Euroclear systems, or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical certificate representing
such Certificates.
Beneficial Owners may experience some delay in their receipt of
distributions of interest and principal on the Book-Entry Certificates since
such distributions will be forwarded by the Trustee to DTC, and DTC will credit
such distributions to the accounts of its Participants (as defined herein) which
will thereafter credit them to the accounts of Beneficial Owners either directly
or indirectly through indirect participants.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The statistical information presented in this Prospectus Supplement
describes only the mortgage loans included in the Trust Fund as of the Delivery
Date (with respect to Loan Group I and Loan Group II, the "Initial Group I
Loans" and "Initial Group II Loans," respectively) and does not include mortgage
loans purchased by the Trust Fund after the Delivery Date (the "Subsequent
Mortgage Loans").
With respect to Loan Groups I and II, Subsequent Mortgage Loans are
intended to be purchased by the Trust Fund from the Company from time to time on
or before October 15, 1996, from funds on deposit in the Pre-Funding Accounts.
The Subsequent Mortgage Loans, if available, will be purchased by the Company,
and sold by the Company to the Trust Fund to become part of the related Loan
Group.
S-23
<PAGE>
The Pooling and Servicing Agreement will provide that the Group I and Group II
Loans, following the conveyance of the Subsequent Mortgage Loans, must conform
in the aggregate for each such Loan Group as determined separately to certain
specified characteristics described below under "--Conveyance of Subsequent
Mortgage Loans and the Pre-Funding Accounts." In the sole discretion of the
Certificate Insurer, Subsequent Mortgage Loans with characteristics varying from
those described herein may be purchased by the Trust Fund; provided, however,
that the addition of such Group I and Group II Loans will not materially affect
the aggregate characteristics of the entire related Loan Group.
The Mortgage Loans underlying the Certificates consist of the "Group I
Loans," which had an aggregate outstanding principal balance as of the Cut-off
Date of $109,394,135.13, and the "Group II Loans," which had an aggregate
outstanding principal balance as of the Cut-off Date of $40,637,106.46 (each
such group of Mortgage Loans, "Loan Group I" or "Loan Group II," respectively,
or a "Loan Group"). The Group I Loans will consist of conventional, adjustable
rate, monthly payment, first lien mortgage loans with terms to maturity of
approximately 30 years from the date of origination or modification. The Group
II Loans will generally consist of conventional, fixed-rate, monthly payment,
first lien mortgage loans (except that approximately 4.68% of the Initial Group
II Loans are second lien mortgages). Approximately 85.40% of the Initial Group
II Mortgage Loans have terms to maturity from the date of origination or
modification of 30 years and approximately 14.60% of the Initial Group II
Mortgage Loans have terms to maturity from the date of origination or
modification of 15 years or less. The Mortgage Loans will be originated by one
of the Originators, substantially in accordance with the underwriting criteria
described herein under "--Underwriting" below and in Appendix C. The Company
will acquire the Group I Loans and Group II Loans to be included in Mortgage
Pool from Southern Pacific Funding Corporation ("SPFC"), an affiliate of the
Company (the "Seller"). SPFC in turn either originated such Mortgage Loans or
acquired them pursuant to an agreement with Oceanmark Bank, FSB ("Oceanmark").
Oceanmark and SPFC in their capacity as originators of the Mortgage Loans are
referred to herein as the "Originators." The Seller will make certain
representations and warranties with respect to the Mortgage Loans and, as more
particularly described in the Prospectus, will have certain repurchase or
substitution obligations in connection with a breach of any such representation
or warranty, as well as in connection with an omission or defect in respect of
certain constituent documents required to be delivered with respect to the
Mortgage Loans, in any event if such breach, omission or defect cannot be cured
and it materially and adversely affects the interests of Certificateholders. See
"Description of the Mortgage Pool--Representations by Sellers" and "Description
of the Certificates--Assignment of Trust Fund Assets" in the Prospectus and
"--The Seller" below. The Mortgage Loans will have been originated or acquired
by the Originators in accordance with the underwriting criteria described
herein. See "--Underwriting" below and Appendix C to this Prospectus Supplement.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Company will assign the representations and warranties made by the Seller to the
Trustee for the benefit of the Certificateholders.
Each Mortgage Loan will contain a customary "due-on-sale" clause. See
"Certain Legal Aspects of Mortgage Loans--Enforceability of Certain Provisions"
in the Prospectus.
Approximately 60.26% and 72.33% of the Initial Group I Loans and
Initial Group II Loans, respectively, provide for payment of a prepayment
charge. Generally, each such Mortgage Loan provides for payment of a prepayment
charge for certain partial prepayments and all prepayments in full made within
approximately three or five years of the origination of such Mortgage Loan, in
an amount equal to six months' advance interest on the amount of the prepayment
that, when added to all other amounts prepaid during the twelve-month period
immediately preceding the date of the prepayment, exceeds twenty percent of the
original principal amount of the Mortgage Loan. The Seller will be entitled to
all prepayment charges received on the Mortgage Loans and such amounts will not
be available for distribution on the Certificates.
S-24
<PAGE>
None of the Mortgage Loans originated under the Standard Non-Conforming
Program are insured by a primary mortgage guaranty insurance policy.
Approximately 21.60% and 22.26% of the Initial Group I Loans and Initial Group
II Loans, respectively, by aggregate principal balance as of the Cut-off Date,
had Loan-to-Value Ratios at the date of origination in excess of 80% but will
not be covered by a primary mortgage insurance policy. See "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder" in the Prospectus.
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate (as defined herein) on each Group I Loan will be
subject to adjustment, commencing (i) with respect to approximately 64.96% of
the Initial Group I Loans, approximately six months after the date of
origination, (ii) with respect to approximately 34.93% of the Initial Group I
Loans, approximately two years after origination (each such Group I Loan, a
"2/28 Loan") and (iii) with respect to approximately 0.10% of the Initial Group
I Loans, approximately three years after origination (each such Group I Loan, a
"3/27 Loan"). The Mortgage Rate on each Group I Loan will adjust semi-annually
on the first day of the months specified in the related Mortgage Note (each such
date, an "Adjustment Date") to a rate equal to the sum, generally rounded to the
nearest one-eighth of one percentage point (12.5 basis points), of (i) the
related Index plus (ii) a fixed percentage (the "Gross Margin"), which is
generally subject to a maximum increase or decrease in the Mortgage Rate on any
Adjustment Date (the "Periodic Rate Cap") of 1.00% with respect to approximately
58.35% of the Initial Group I Loans and 1.50% with respect to approximately
41.65% of the Initial Group I Loans (which percentage includes the initial 2/28
Loans, which loans have a Periodic Rate Cap of 1.50% for the first Adjustment
Date and for each Adjustment Date thereafter, and 3/27 Loans, which loans have a
Periodic Rate Cap of 3.00% for the first Adjustment Date and 1.50% for each
Adjustment Date thereafter), each by aggregate Principal Balance as of the
Cut-off Date and to specified maximum and minimum lifetime Mortgage Rates
("Lifetime Rate Caps" and "Lifetime Rate Floors," respectively). The Mortgage
Loans were generally originated with an initial Mortgage Rate below the sum of
the current Index and the Gross Margin. The Index applicable with respect to the
Group I Loans is based upon the average of the interbank offered rates for
six-month United States dollar deposits in the London market ("Six-Month LIBOR")
as published in The Wall Street Journal and as most recently available as of the
first business day forty-five, thirty or five days prior to the Adjustment Date,
as specified in the related Mortgage Note. Due to the application of the
Periodic Rate Caps, Lifetime Rate Caps and Lifetime Rate Floors, the Mortgage
Rate on any Group I Loan as adjusted on any related Adjustment Date, may not
equal the sum of the related Index and the Gross Margin. The Mortgage Rate on
each Group II Loan is fixed. The Due Date is generally the first day of the
month of all of the Mortgage Loans. Four Initial Group II Loans, comprising
approximately 0.24% of the Initial Group II Loans, by aggregate Principal
Balance as of the Cut-off Date, have a first Due Date that is not the first day
of the month.
Approximately 98.95% of the Initial Group I Loans, including all
Initial Group I Loans that are 2/28 Loans and 3/27 Loans, will not have reached
their first Adjustment Date on or before the Cut-off Date. The initial Mortgage
Rate with respect to such Mortgage Loans is generally lower than the rate that
would have been produced if the applicable Gross Margin had been added to the
Index in effect at origination. Group I Loans that have not reached their first
Adjustment Date are, therefore, more likely to be subject to the Periodic Rate
Cap on their first Adjustment Date.
MORTGAGE LOAN CHARACTERISTICS
GROUP I LOANS
The Initial Group I Loans will consist of Mortgage Loans with an
aggregate Principal Balance outstanding as of the Cut-off Date, after deducting
payments of principal due on or prior to such date,
S-25
<PAGE>
of $109,394,135.13. All percentages of the Initial Group I Loans described
herein are approximate percentages (except as otherwise indicated) by aggregate
principal balance as of the Cut-off Date.
Approximately 85.56% and 14.44% of the Initial Group I Loans were
originated by SPFC and Oceanmark, respectively. All of the Initial Group I Loans
have original terms to stated maturity of approximately 30 years.
All of the Group I Loans are secured by first liens.
Effective with the first payment due on a Group I Loan after each
related Adjustment Date, the Monthly Payment will be adjusted to an amount that
will fully amortize the outstanding principal balance of the Mortgage Loan over
its remaining term. The weighted average number of months from the Cutoff Date
to the next Adjustment Date for the Initial Group I Loans is approximately 11
months.
As of the Cut-off Date, each Initial Group I Loan will have an unpaid
principal balance of not less than $19,492 or more than $750,000 and the average
unpaid principal balance of the Initial Group I Loans will be approximately
$136,743. The latest stated maturity date of any of the Initial Group I Loans
will be September 1, 2026; however, the actual date on which any Mortgage Loan
is paid in full may be earlier than the stated maturity date due to unscheduled
payments of principal. Based on information supplied by the mortgagors in
connection with their loan applications at origination, approximately 88.21% of
the Initial Group I Loans will be secured by Mortgaged Properties which are
owner occupied primary residences, approximately 1.36% of the Initial Group I
Loans will be secured by Mortgaged Properties which are second homes and
approximately 10.43% of the Initial Group I Loans will be secured by Mortgaged
Properties which are non-owner occupied properties. No Initial Group I Loan
provides for negative amortization or deferred interest.
Set forth below is a description of certain additional characteristics
of the Initial Group I Loans as of the Cut-off Date (except as otherwise
indicated). Dollar amounts and percentages may not add up to totals due to
rounding.
S-26
<PAGE>
<TABLE>
<CAPTION>
INITIAL MORTGAGE RATES
PERCENTAGE OF
CUT-OFF DATE
INITIAL NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- --------------- ----------------------- --------------------------------
<S> <C> <C> <C>
6.75% - 6.99% 1 $ 109,405.73 0.10%
7.50% - 7.74% 2 181,799.41 0.17
7.75% - 7.99% 8 1,054,945.27 0.96
8.00% - 8.24% 12 1,763,191.75 1.61
8.25% - 8.49% 17 2,371,763.34 2.17
8.50% - 8.74% 20 2,918,877.12 2.67
8.75% - 8.99% 44 5,860,657.66 5.36
9.00% - 9.24% 43 6,996,040.38 6.40
9.25% - 9.49% 35 6,248,110.11 5.71
9.50% - 9.74% 53 7,530,037.01 6.88
9.75% - 9.99% 85 13,163,984.23 12.03
10.00% - 10.24% 44 6,408,553.04 5.86
10.25% - 10.49% 61 8,117,839.16 7.42
10.50% - 10.74% 71 7,759,764.66 7.09
10.75% - 10.99% 60 9,307,916.98 8.51
11.00% - 11.24% 46 5,997,719.52 5.48
11.25% - 11.49% 33 4,739,136.04 4.33
11.50% - 11.74% 37 4,859,492.93 4.44
11.75% - 11.99% 35 3,788,847.86 3.46
12.00% - 12.24% 26 2,894,061.52 2.65
12.25% - 12.49% 15 1,634,566.42 1.49
12.50% - 12.74% 22 2,237,798.90 2.05
12.75% - 12.99% 6 671,094.52 0.61
13.00% - 13.24% 9 1,614,056.49 1.48
13.25% - 13.49% 4 515,903.14 0.47
13.50% - 13.74% 3 184,741.37 0.17
13.75% - 13.99% 2 68,180.57 0.06
14.25% - 14.49% 2 77,750.00 0.07
14.75% - 14.99% 4 317,900.00 0.29
--- --------------- ------
TOTAL.......... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
The weighted average Initial Mortgage Rate of the Initial Group I Loans
will be approximately 10.27% per annum.
S-27
<PAGE>
<TABLE>
<CAPTION>
NEXT INTEREST ADJUSTMENT DATE
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
NEXT INTEREST ADJUSTMENT DATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
September 1996 5 $ 726,984.69 0.66%
October 1996 18 2,316,350.55 2.12
November 1996 18 2,907,257.92 2.66
December 1996 85 11,476,886.81 10.49
January 1997 190 25,819,834.68 23.60
February 1997 181 27,820,124.83 25.43
June 1998 58 8,423,119.33 7.70
July 1998 109 12,022,121.95 10.99
August 1998 134 17,724,963.00 16.20
September 1998 1 45,675.00 0.04
May 1999 1 110,816.37 0.10
--- --------------- ------
Total.................................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
The weighted average remaining months to the next interest Adjustment
Date of the Initial Group I Loans will be approximately 11 months.
<TABLE>
<CAPTION>
GROSS MARGIN
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
GROSS MARGINS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- --------------- ----------------------- ---------------------
<S> <C> <C> <C>
3.50% - 3.74% 1 $ 34,948.60 0.03%
4.00% - 4.24% 1 74,767.79 0.07
4.25% - 4.49% 1 109,405.73 0.10
4.75% - 4.99% 117 13,437,034.77 12.28
5.00% - 5.24% 50 7,126,126.28 6.51
5.25% - 5.49% 196 30,361,797.25 27.75
5.50% - 5.74% 51 6,542,877.72 5.98
5.75% - 5.99% 187 26,674,874.81 24.38
6.00% - 6.24% 53 5,619,937.53 5.14
6.25% - 6.49% 63 9,776,357.67 8.94
6.50% - 6.74% 24 2,984,975.79 2.73
6.75% - 6.99% 23 3,106,018.49 2.84
7.00% - 7.24% 15 1,646,978.51 1.51
7.25% - 7.49% 3 208,600.57 0.19
7.50% - 7.74% 3 314,886.40 0.29
7.75% - 7.99% 3 232,871.93 0.21
8.00% - 8.24% 1 41,976.51 0.04
8.25% - 8.49% 1 56,519.23 0.05
8.50% - 8.74% 3 736,855.84 0.67
8.75% - 8.99% 2 155,871.57 0.14
9.50% - 9.74% 1 65,702.14 0.06
9.75% - 9.99% 1 84,750.00 0.08
--- -------------- ------
TOTAL............................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
The weighted average Gross Margin of the Initial Group I Loans will be
approximately 5.68% per annum.
S-28
<PAGE>
<TABLE>
<CAPTION>
LIFETIME RATE CAP
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LIFETIME RATE CAP GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- -------------------- ---------------------- ----------------------
<S> <C> <C> <C>
13.50% - 13.99% 1 $ 109,405.73 0.10%
14.50% - 14.99% 12 1,503,686.11 1.37
15.00% - 15.49% 31 4,348,929.43 3.98
15.50% - 15.99% 68 9,313,702.15 8.51
16.00% - 16.49% 76 13,030,176.15 11.91
16.50% - 16.99% 134 20,162,768.65 18.43
17.00% - 17.49% 105 14,526,392.20 13.28
17.50% - 17.99% 130 16,858,106.26 15.41
18.00% - 18.49% 81 11,001,943.74 10.06
18.50% - 18.99% 72 8,751,040.33 8.00
19.00% - 19.49% 40 4,451,734.28 4.07
19.50% - 19.99% 26 2,557,718.53 2.34
20.00% - 20.49% 13 2,129,959.63 1.95
20.50% - 20.99% 5 252,921.94 0.23
21.00% - 21.49% 2 77,750.00 0.07
21.50% - 21.99% 4 317,900.00 0.29
--- --------------- ------
TOTAL...................................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
The weighted average Lifetime Rate Cap of the Initial Group I Loans
will be approximately 17.25% per annum.
S-29
<PAGE>
<TABLE>
<CAPTION>
LIFETIME RATE FLOOR
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LIFETIME RATE FLOOR GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------------------- -------------------------- -------------------------
<S> <C> <C> <C>
0.00% 4 $ 732,795.38 0.67%
6.50% - 6.99% 1 109,405.73 0.10
7.50% - 7.99% 10 1,236,744.68 1.13
8.00% - 8.49% 30 4,194,087.43 3.83
8.50% - 8.99% 64 9,441,552.29 8.63
9.00% - 9.49% 79 13,268,176.57 12.13
9.50% - 9.99% 136 19,620,225.00 17.94
10.00% - 10.49% 103 14,263,620.31 13.04
10.50% - 10.99% 130 17,004,132.40 15.54
11.00% - 11.49% 79 10,736,855.56 9.81
11.50% - 11.99% 71 8,570,486.85 7.83
12.00% - 12.49% 41 4,528,627.94 4.14
12.50% - 12.99% 28 2,908,893.42 2.66
13.00% - 13.49% 13 2,129,959.63 1.95
13.50% - 13.99% 5 252,921.94 0.23
14.00% - 14.49% 2 77,750.00 0.07
14.50% - 14.99% 4 317,900.00 0.29
--- --------------- ------
TOTAL............. 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
The weighted average Lifetime Rate Floor of the Initial Group I Loans
(other than the Initial Group I Loans which have a Lifetime Rate Floor of 0.00%)
will be approximately 10.26% per annum.
<TABLE>
<CAPTION>
REMAINING MONTHS TO STATED MATURITY
PERCENTAGE OF
REMAINING MONTHS CUT-OFF DATE
TO NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATED MATURITY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- --------------- ------------------------ ---------------------
<S> <C> <C> <C>
340 - 349 2 $ 491,350.28 0.45%
350 - 359 483 63,510,275.85 58.06
360 315 45,392,509.00 41.49
--- -------------- ------
TOTAL................................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
The weighted average remaining term to stated maturity of the Initial
Group I Loans will be approximately 359 months.
S-30
<PAGE>
<TABLE>
<CAPTION>
YEARS OF ORIGINATION
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
YEARS OF ORIGINATION GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- --------------- ------------------------ ---------------------
<S> <C> <C> <C>
1995 5 $ 859,680.87 0.79%
1996 795 108,534,454.26 99.21
--- -------------- -----
TOTAL.................................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
The earliest month and year of origination of any Initial Group I Loan
is March 1995 and the latest month and year of origination will be August 1996.
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
5.01% - 10.00% 1 $ 243,182.89 0.22%
15.01% - 20.00% 1 60,000.00 0.05
20.01% - 25.00% 1 99,911.16 0.09
25.01% - 30.00% 2 50,550.00 0.05
30.01% - 35.00% 6 301,390.87 0.28
35.01% - 40.00% 7 1,639,730.33 1.50
40.01% - 45.00% 5 1,019,342.24 0.93
45.01% - 50.00% 18 2,356,546.02 2.15
50.01% - 55.00% 29 2,779,970.28 2.54
55.01% - 60.00% 41 4,382,965.09 4.01
60.01% - 65.00% 85 10,753,871.54 9.83
65.01% - 70.00% 123 16,397,571.82 14.99
70.01% - 75.00% 172 24,041,639.72 21.98
75.01% - 80.00% 154 21,633,277.64 19.78
80.01% - 85.00% 97 15,032,670.63 13.74
85.01% - 90.00% 58 8,601,514.90 7.86
--- -------------- ------
TOTAL................................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
The minimum and maximum Loan-to-Value Ratios at origination of the
Initial Group I Loans were approximately 6.68% and 90.00%, respectively, and the
weighted average Loan-to-Value Ratio at origination of the Initial Group I Loans
was approximately 73.36%.
S-31
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE LOAN PROGRAM
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ --------------- ----------------------- ---------------------
<S> <C> <C> <C>
Full Documentation 465 $ 56,611,937.40 51.75%
Alternate Documentation 17 2,095,269.21 1.92
Lite Documentation 61 12,327,856.23 11.27
No Income Qualification 24 4,404,774.67 4.03
Stated Income 185 27,770,249.41 25.39
Quick Documentation 48 6,184,048.21 5.65
--- -------------- ------
TOTAL...................................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
See "--Underwriting" below and Appendix C to the Prospectus Supplement
for a description of each Originator's mortgage loan documentation programs.
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
PERCENTAGE OF
ORIGINAL CUT-OFF DATE
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
$0 - $24,999 8 $179,556.03 0.16%
$ 25,000 - $49,999 79 3,181,335.19 2.91
$ 50,000 - $74,999 149 9,259,633.03 8.46
$ 75,000 - $99,999 141 12,217,487.33 11.17
$100,000 - $124,999 126 13,931,356.57 12.74
$125,000 - $149,999 82 11,138,771.27 10.18
$150,000 - $174,999 43 6,926,682.88 6.33
$175,000 - $199,999 34 6,298,278.88 5.76
$200,000 - $224,999 26 5,492,830.69 5.02
$225,000 - $249,999 21 5,014,093.68 4.58
$250,000 - $274,999 13 3,378,727.46 3.09
$275,000 - $299,999 10 2,872,445.73 2.63
$300,000 - $324,999 14 4,364,669.51 3.99
$325,000 - $349,999 6 2,040,061.77 1.86
$350,000 - $374,999 8 2,912,407.14 2.66
$375,000 - $399,999 5 1,936,066.55 1.77
$400,000 - $424,999 5 2,038,942.12 1.86
$425,000 - $449,999 4 1,742,122.23 1.59
$450,000 - $474,999 3 1,362,914.23 1.25
$475,000 - $499,999 4 1,957,086.49 1.79
$500,000 - $524,999 6 3,066,494.28 2.80
$525,000 - $549,999 1 524,602.92 0.48
$575,000 - $599,999 4 2,337,569.15 2.14
$600,000 - $624,999 2 1,224,000.00 1.12
$625,000 - $649,999 1 646,000.00 0.59
$650,000 - $674,999 4 2,600,000.00 2.38
$750,000 - $774,999 1 750,000.00 0.69
- ---------- ----
TOTAL.............. 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
The average original principal balance of the Initial Group I Loans will be
approximately $136,794.
S-32
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ------------- -------------------- ----------------------
<S> <C> <C> <C>
Single-Family 673 $91,231,946.00 83.40%
2-4 Family 44 6,631,477.25 6.06
Condominium 49 5,662,009.87 5.18
PUD 34 5,868,702.01 5.36
--- -------------- ------
TOTAL................................. 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
<TABLE>
<CAPTION>
RISK CATEGORIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
RISK CLASSIFICATION GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- --------------- ------------------------ -----------------------
<S> <C> <C> <C>
A 107 $14,476,024.49 13.23%
A- 422 62,506,325.39 57.14
B 150 20,634,891.76 18.86
C 77 8,425,649.13 7.70
D 44 3,351,244.36 3.06
-- ------------ ----
TOTAL.................................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
See "--Underwriting" below and Appendix C to this Prospectus Supplement
for a description of each Originator's risk classifications.
S-33
<PAGE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ------------- --------------------- --------------------
<S> <C> <C> <C>
California 165 $29,987,709.90 27.41%
Colorado 108 12,064,590.74 11.03
Oregon 89 9,731,218.02 8.90
Washington 71 9,221,223.98 8.43
Maryland 33 5,839,628.09 5.34
Virginia 26 4,180,967.01 3.82
Florida 27 3,741,984.13 3.42
Hawaii 16 3,304,249.79 3.02
Other (Less than 3%) 265 31,322,563.47 28.63
--- ------------- -----
TOTAL.................................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
No more than approximately 1.34% of the Initial Group I Loans will be
secured by Mortgaged Properties located in any one zip code.
<TABLE>
<CAPTION>
PURPOSES OF GROUP I LOANS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ --------------- ------------------------ ---------------------
<S> <C> <C> <C>
Refinance (Equity Take-Out) 446 $58,506,849.01 53.48%
Purchase 241 32,020,829.72 29.27
Refinance (Rate/Term) 113 18,866,456.40 17.25
--- ------------- -----
TOTAL.................................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term"
refinance purposes (not for "equity take-out"), substantially all of the
proceeds are used to pay in full the principal balance of a previous mortgage
loan of the mortgagor with respect to a Mortgaged Property and to pay
origination and closing costs associated with such refinancing. Mortgage Loans
made for "equity take out" refinance purposes involve the use of the proceeds to
pay in full the principal balance of such previous mortgage loan and related
costs except that a portion of the proceeds are generally retained by the
mortgagor for uses unrelated to the Mortgaged Property. The amount of such
proceeds retained by the mortgagor may be substantial.
S-34
<PAGE>
<TABLE>
<CAPTION>
OCCUPANCY STATUS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
OCCUPANCY GROUP I LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Investment 111 $11,408,938.79 10.43%
Primary 676 96,498,940.99 88.21
Second Homes 13 1,486,255.35 1.36
---- ---------------- -------
TOTAL.................................... 800 $109,394,135.13 100.00%
=== =============== =======
</TABLE>
GROUP II LOANS
The Initial Group II Loans will consist of Mortgage Loans with an
aggregate Principal Balance outstanding as of the Cut-off Date, after deducting
payments of principal due on or prior to such date, of $40,637,106.46. All
percentages of the Initial Group II Loans described herein are approximate
percentages (except as otherwise indicated) by aggregate principal balance as of
the Cut-off Date.
Approximately 27.69% and 72.31% of the Initial Group II Loans were
originated by SPFC and Oceanmark, respectively. Approximately 85.40% of the
Initial Group II Loans have original terms to stated maturity of approximately
30 years.
Approximately 95.32% and 4.68% of the Initial Group II Loans are
secured by first liens and second liens, respectively.
Ten Initial Group II Loans, representing approximately 2.58% of the
Initial Group II Loans, are balloon payment mortgage loans. Each such Group II
Loan generally amortizes over 360 months, but the final payment (the "Balloon
Payment") on each such Mortgage Loan is due and payable on the 180th month,
except with respect to one Group II Loan, which amortizes over 180 months with
the Balloon Payment due and payable on the 60th month. The amount of the Balloon
Payment on each such Group II Loan is substantially in excess of the amount of
the scheduled monthly payment on such Group II Loan for the period prior to the
Due Date of such Balloon Payment.
As of the Cut-off Date, each Initial Group II Loan will have an unpaid
principal balance of not less than $16,054 or more than $585,000 and the average
unpaid principal balance of the Initial Group II Loans will be approximately
$79,837. The latest stated maturity date of any of the Initial Group II Loans
will be August 1, 2026; however, the actual date on which any Mortgage Loan is
paid in full may be earlier than the stated maturity date due to unscheduled
payments of principal. Based on information supplied by the mortgagors in
connection with their loan applications at origination, approximately 90.21% of
the Initial Group II Loans will be secured by Mortgaged Properties which are
owner occupied primary residences, approximately 2.71% of the Initial Group II
Loans will be secured by Mortgaged Properties which are second homes and
approximately 7.08% of the Initial Group II Loans will be secured by Mortgaged
Properties which are non-owner occupied properties. No Initial Group II Loan
provides for negative amortization or deferred interest.
Set forth below is a description of certain additional characteristics
of the Group II Loans as of the Cut-off Date (except as otherwise indicated).
Dollar amounts and percentages may not add up to totals due to rounding.
S-35
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE RATES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
MORTGAGE RATES GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- ---------------- ------------------------- ------------------------
<S> <C> <C> <C>
9.25% - 9.49% 1 $ 108,833.56 0.27%
9.50% - 9.74% 6 479,818.14 1.18
9.75% - 9.99% 2 97,804.02 0.24
10.00% - 10.24% 4 220,299.60 0.54
10.25% - 10.49% 12 987,584.01 2.43
10.50% - 10.74% 26 1,996,688.49 4.91
10.75% - 10.99% 62 6,721,671.38 16.54
11.00% - 11.24% 34 2,727,451.35 6.71
11.25% - 11.49% 57 4,786,094.39 11.78
11.50% - 11.74% 52 4,729,526.39 11.64
11.75% - 11.99% 62 4,817,303.96 11.85
12.00% - 12.24% 22 1,877,010.96 4.62
12.25% - 12.49% 28 1,882,395.10 4.63
12.50% - 12.74% 26 1,935,662.65 4.76
12.75% - 12.99% 32 2,125,375.41 5.23
13.00% - 13.24% 24 1,351,856.74 3.33
13.25% - 13.49% 13 1,329,019.99 3.27
13.50% - 13.74% 14 857,284.12 2.11
13.75% - 13.99% 9 454,786.19 1.12
14.00% - 14.24% 7 373,620.38 0.92
14.25% - 14.49% 4 259,663.64 0.64
14.75% - 14.99% 7 273,822.67 0.67
15.00% - 15.24% 2 135,595.11 0.33
15.25% - 15.49% 1 29,988.21 0.07
15.75% - 15.99% 1 41,450.00 0.10
16.75% - 16.99% 1 36,500.00 0.09
--- ------------- ------
Total............. 509 $40,637,106.46 100.00%
=== ============== ======
</TABLE>
The weighted average Mortgage Rate of the Initial Group II Loans will
be approximately 11.77% per annum.
S-36
<PAGE>
<TABLE>
<CAPTION>
REMAINING MONTHS TO STATED MATURITY
PERCENTAGE OF
REMAINING MONTHS CUT-OFF DATE
TO NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATED MATURITY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ ---------------- ------------------------------------- -----------------------
<S> <C> <C> <C>
40 - 49 1 $ 25,242.16 0.06%
110 - 119 7 178,761.70 0.44
120 - 129 3 60,710.00 0.15
150 - 159 1 21,364.19 0.05
160 - 169 1 71,240.37 0.18
170 - 179 61 4,129,784.99 10.16
180 - 189 30 1,444,650.00 3.56
350 - 359 278 23,919,418.05 58.86
360 127 10,785,935.00 26.54
--- ------------- -----
Total............... 509 $40,637,106.46 100.00%
=== ============== =======
</TABLE>
The weighted average remaining term to stated maturity of the Initial
Group II Loans will be approximately 332 months.
<TABLE>
<CAPTION>
YEARS OF ORIGINATION
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
YEARS OF ORIGINATION GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- ---------------- ------------------------- ---------------------
<S> <C> <C> <C>
1994 1 $ 21,364.19 0.05%
1995 3 232,369.35 0.57
1996 505 40,383,372.92 99.38
--- ------------- -----
Total................................... 509 $40,637,106.46 100.00%
=== ============== ======
</TABLE>
The earliest month and year of origination of any Initial Group II Loan
is December 1994 and the latest month and year of origination is August 1996.
S-37
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
ORIGINAL LOAN-TO-VALUE RATIOS GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- ---------------- --------------------- --------------------
<S> <C> <C> <C>
15.01% - 20.00% 1 $ 25,000.00 0.06%
25.01% - 30.00% 1 29,971.89 0.07
30.01% - 35.00% 5 206,462.73 0.51
35.01% - 40.00% 2 97,997.78 0.24
40.01% - 45.00% 4 193,929.94 0.48
45.01% - 50.00% 18 1,304,554.09 3.21
50.01% - 55.00% 12 1,053,640.88 2.59
55.01% - 60.00% 26 2,045,133.65 5.03
60.01% - 65.00% 53 3,985,246.02 9.81
65.01% - 70.00% 74 5,673,832.10 13.96
70.01% - 75.00% 86 6,669,417.99 16.41
75.01% - 80.00% 120 10,306,529.95 25.36
80.01% - 85.00% 61 5,413,470.39 13.32
85.01% - 90.00% 46 3,631,919.05 8.94
--- -------------- ------
Total............................. 509 $40,637,106.46 100.00%
=== ============== =======
</TABLE>
- -------------------
(1)The Loan-to-Value Ratio of Group II Loans secured by second liens includes
the outstanding principal balance of the related Senior Liens. See "The Mortgage
Pools--The Mortgage Loans" in the Prospectus.
The minimum and maximum Loan-to-Value Ratios at origination of the
Initial Group II Loans were approximately 17.61% and 90.00%, respectively, and
the weighted average Loan-to-Value Ratio at origination of the Initial Group II
Loans was approximately 73.90%.
<TABLE>
<CAPTION>
MORTGAGE LOAN PROGRAM
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PROGRAM GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ---------------- ----------------------- ---------------------
<S> <C> <C> <C>
Full Documentation 341 $25,699,058.61 63.24%
Stated Income 37 2,981,028.56 7.34
Alternate Documentation 7 388,438.64 0.96
Quick Documentation 17 1,108,763.42 2.73
No Income Qualification 66 6,204,717.86 15.27
Lite Documentation 41 4,255,099.37 10.47
--- -------------- ------
Total..................................... 509 $40,637,106.46 100.00%
=== ============== =======
</TABLE>
See "--Underwriting" below and Appendix C to the Prospectus Supplement
for a description of each Originator's mortgage loan documentation programs.
S-38
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
PERCENTAGE OF
ORIGINAL CUT-OFF DATE
MORTGAGE LOAN NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PRINCIPAL BALANCE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- ---------------- ----------------------- ---------------------
<S> <C> <C> <C>
$1 -$24,999 16 $ 333,222.00 0.82%
$25,000 -$49,999 150 5,731,805.69 14.10
$50,000 -$74,999 137 8,311,917.47 20.45
$75,000 -$99,999 92 7,778,865.06 19.14
$100,000 -$124,999 50 5,484,821.95 13.50
$125,000 -$149,999 20 2,707,922.94 6.66
$150,000 -$174,999 13 2,075,196.43 5.11
$175,000 -$199,999 11 2,109,759.57 5.19
$200,000 -$224,999 5 1,035,670.14 2.55
$225,000 -$249,999 3 709,688.19 1.75
$250,000 -$274,999 3 782,591.71 1.93
$275,000 -$299,999 1 287,905.40 0.71
$300,000 -$324,999 1 311,017.01 0.77
$325,000 -$349,999 1 339,612.53 0.84
$350,000 -$374,999 1 368,756.44 0.91
$375,000 -$399,999 2 790,536.54 1.95
$400,000 -$424,999 1 400,000.00 0.98
$475,000 -$499,999 1 492,817.39 1.21
$575,000 -$599,999 1 585,000.00 1.44
--- ------------- ------
Total.......................... 509 $40,637,106.46 100.00%
=== ============== =======
</TABLE>
The average original principal balance of the Initial Group II Loans
will be approximately $79,893.
<TABLE>
<CAPTION>
PROPERTY TYPE
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
PROPERTY TYPE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ---------------- ------------------------ ---------------------
<S> <C> <C> <C>
Single-Family 437 $ 33,461,194.29 82.34%
2-4 Family 34 3,457,385.09 8.51
Condominium 26 2,304,485.23 5.67
PUD 12 1,414,041.85 3.48
--- -------------- ------
Total............................. 509 $40,637,106.46 100.00%
=== ============== =======
</TABLE>
S-39
<PAGE>
<TABLE>
<CAPTION>
RISK CATEGORIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
RISK CLASSIFICATION GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ---------------- ------------------------ ---------------------
<S> <C> <C> <C>
A 148 $12,467,557.59 30.68%
A- 192 16,231,366.47 39.94
B 102 7,299,067.19 17.96
C 45 2,620,944.24 6.45
D 22 2,018,170.97 4.97
--- -------------- ------
Total............................. 509 $40,637,106.46 100.00%
=== ============== =======
</TABLE>
See "--Underwriting" below and Appendix C to this Prospectus Supplement
for a description of each Originator's risk classifications.
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
STATE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ---------------- ------------------------ ---------------------
<S> <C> <C> <C>
Florida 74 $6,716,319.58 16.53%
California 59 4,905,794.20 12.07
Georgia 45 3,503,103.85 8.62
Virginia 24 2,574,308.91 6.33
Tennessee 29 2,148,138.08 5.29
Maryland 16 1,641,089.19 4.04
New York 11 1,601.217.39 3.94
South Carolina 20 1,547,450.93 3.81
Missouri 20 1,365,162.00 3.36
Oregon 20 1,275,939.91 3.14
Washington 24 1,219,583.96 3.00
Other (Less than 3%) 167 12,138,998.46 29.87
--- ------------- ------
Total............................. 509 $40,637,106.46 100.00%
=== ============== =======
</TABLE>
No more than approximately 1.44% of the Initial Group II Loans will be
secured by Mortgaged Properties located in any one zip code.
S-40
<PAGE>
<TABLE>
<CAPTION>
PURPOSES OF GROUP II LOANS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
LOAN PURPOSE GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ ---------------- ------------------------ ---------------------
<S> <C> <C> <C>
Purchase 114 $ 9,835,549.17 24.20%
Refinance (Rate/Term) 53 4,982,059.55 12.26
Refinance (Equity Take-Out) 342 25,819,497.74 63.54
--- ------------- ------
Total................................... 509 $40,637,106.46 100.00%
=== ============== =======
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term"
refinance purposes (not for "equity take-out"), substantially all of the
proceeds are used to pay in full the principal balance of a previous mortgage
loan of the mortgagor with respect to a Mortgaged Property and to pay
origination and closing costs associated with such refinancing. Mortgage Loans
made for "equity take out" refinance purposes involve the use of the proceeds to
pay in full the principal balance of such previous mortgage loan and related
costs except that a portion of the proceeds are generally retained by the
mortgagor for uses unrelated to the Mortgaged Property. The amount of such
proceeds retained by the mortgagor may be substantial.
<TABLE>
<CAPTION>
OCCUPANCY STATUS
PERCENTAGE OF
CUT-OFF DATE
NUMBER OF INITIAL AGGREGATE UNPAID AGGREGATE
OCCUPANCY GROUP II LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------- ---------------- -------------------------- ---------------------
<S> <C> <C> <C>
Investment 42 $2,877,109.16 7.08%
Primary 450 36,659,744.41 90.21
Second Homes 17 1,100,252.89 2.71
--- -------------- ------
Total................................... 509 $40,637,106.46 100.00%
=== ============== ======
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNTS
With respect to Loan Groups I and II, under the Pooling and Servicing
Agreement, following the initial issuance of the Certificates, the Trust Fund
will be obligated to purchase from the Company during the Funding Period,
subject to the availability thereof, additional Mortgage Loans (the "Subsequent
Mortgage Loans") secured by first and second liens on one- to four-family
residential properties. Each Subsequent Mortgage Loan will have been
underwritten in accordance with the criteria set forth herein under "Description
of the Mortgage Pool--Underwriting" and Appendix C to this Prospectus
Supplement. Subsequent Mortgage Loans will be transferred to the Trust Fund
pursuant to subsequent transfer instruments (the "Subsequent Transfer
Instruments") between the Company and the Trust Fund. In connection with the
purchase of Subsequent Mortgage Loans on such dates of transfer (the "Subsequent
Transfer Dates"), the Trust Fund will be required to pay to the Company from
amounts on deposit in one of the Pre-Funding Accounts (as defined below) a cash
purchase price of 100% of the principal balance thereof. The Company will
designate the Subsequent Transfer Date as the cut-off date (the "Subsequent
Cut-off Date") with respect to the related Subsequent Mortgage Loans purchased
on such date. The amount paid from each Pre-Funding Account on each Subsequent
Transfer Date will not include accrued
S-41
<PAGE>
interest on the related Subsequent Mortgage Loans. Following each Subsequent
Transfer Date, the aggregate principal balance of the Mortgage Loans in the
related Loan Group will increase by an amount equal to the aggregate principal
balance of the related Subsequent Mortgage Loans so purchased and the amount in
the related Pre-Funding Account will decrease accordingly.
Two accounts (each, a "Pre-Funding Account") will be established by the
Trustee and funded by the Company with approximately $40,605,865 with respect to
Loan Group I (the "Original Group I PreFunded Amount") and $9,362,894 with
respect to Loan Group II (the "Original Group II Pre-Funded Amount") on the
Delivery Date to provide the Trust Fund with sufficient funds to purchase
Subsequent Mortgage Loans. The related Original Pre-Funded Amount will be
reduced during the Funding Period by the amount used to purchase Subsequent
Mortgage Loans for a related Loan Group in accordance with the Pooling and
Servicing Agreement (on any date of determination, the related Original
Pre-Funded Amount as so reduced, the "Pre-Funded Amount"). During the period
(the "Funding Period"), determined separately for Loan Group I and II, from the
Delivery Date until the earliest of (i) the date on which the amount on deposit
in the related Pre-Funding Account is less than $10,000 or (ii) October 15,
1996, the related Pre-Funded Amount will be maintained in the related
Pre-Funding Account.
Any conveyance of Subsequent Mortgage Loans on a Subsequent Transfer
Date is subject to certain conditions including, but not limited to: (a) each
such Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Instrument and the Pooling and
Servicing Agreement; (b) the Company will not select such Subsequent Mortgage
Loans in a manner that it believes is adverse to the interests of the
Certificateholders or the Certificate Insurer; (c) the Company will deliver
certain opinions of counsel acceptable to the Certificate Insurer with respect
to the validity of the conveyance of such Subsequent Mortgage Loans; (d) as of
the respective Subsequent Cutoff Date the Subsequent Mortgage Loans will satisfy
the following criteria: (i) such Subsequent Mortgage Loan may not be 30 or more
days contractually delinquent as of the related Subsequent Cut-off Date; (ii)
the remaining stated term to maturity of such Subsequent Mortgage Loan will not
exceed 360 months; (iii) such Subsequent Mortgage Loan may not provide for
negative amortization; (iv) such Subsequent Mortgage Loan will be underwritten
in accordance with the criteria set forth under "Description of the Mortgage
Pool--Underwriting" herein and Appendix C to this Prospectus Supplement; (v)
such Subsequent Mortgage Loan will not have a Loan-to-Value Ratio (or Combined
Loan-to-Value Ratio in the case of second lien Mortgage Loans) greater than 90%;
and (vi) such Subsequent Mortgage Loans will have as of the end of the Funding
Period, a weighted average term since origination not in excess of 6 months. In
addition, following the purchase of any Subsequent Mortgage Loan by the Trust
Fund, the Group I and Group II Loans (including the related Subsequent Mortgage
Loans) will, as determined separately for each Loan Group: (i) have a weighted
average original term to stated maturity of not more than 360 months; (ii) have
a weighted average Loan-to-Value Ratio (or weighted average Combined
Loan-to-Value Ratio in the case of second lien Mortgage Loans) of not more than
75.36% with respect to Loan Group I, and 75.90% with respect to Loan Group II,
each by aggregate principal balance of the related Mortgage Loans; (iii) have no
related Mortgage Loan with a principal balance in excess of $750,000; (iv) have
a weighted average Gross Margin not less than 5.18% with respect to the Group I
Loans; and (v) not have a concentration of second lien Mortgage Loans in excess
of 5.00% with respect to Loan Group II, by aggregate principal balance of the
related Mortgage Loans. In addition, the Trustee shall not agree to any
Subsequent Transfer without a signed certification from the Certificate Insurer
that the Subsequent Mortgage Loans meet the above criteria plus any additional
criteria in the Insurance Agreement. In the sole discretion of the Certificate
Insurer, Subsequent Mortgage Loans with characteristics varying from those set
forth above may be purchased by the Trust Fund; provided, however, that the
addition of such Mortgage Loans will not materially affect the aggregate
characteristics of the entire related Loan Group.
S-42
<PAGE>
THE SELLER
SPFC (in its capacity as seller, the "Seller") is a California
corporation. SPFC's residential lending division underwrites first and second
lien mortgage loans secured by one- to four-family residences. SPFC acquires
mortgage loans through a network of branch offices and approved mortgage
brokers. SPFC also acquires mortgage loans from other financial institutions in
accordance with the underwriting standards described below under "Description of
the Mortgage Pool--Underwriting" and Appendix C to this Prospectus Supplement.
SPFC began originating and acquiring mortgage loans as of May 1, 1995. SPFC is a
publicly-traded company based in Lake Oswego, Oregon, with assets as of June 30,
1996 in excess of $163 million.
UNDERWRITING
THE STANDARD NON-CONFORMING PROGRAM
All of the Mortgage Loans were underwritten by Oceanmark and SPFC in
accordance with the "Standard Non-Conforming Program" which does not meet the
credit underwriting standards of FNMA or FHLMC. This program is described in
detail in Appendix C to this Prospectus Supplement. Oceanmark's and SPFC's
current single family mortgage loan volume is generally originated based on loan
packages submitted through a mortgage broker network. Such loan packages, which
generally contain relevant credit, property and underwriting information on the
loan request, are compiled by the applicable mortgage broker and submitted to
the respective Originator for approval and funding. The mortgage broker receives
as compensation all or a portion of the loan origination fee charged to the
mortgagor at the time the loan is made. As part of their quality control
procedures, Oceanmark and SPFC accept loan packages submitted by preapproved
mortgage brokers. In connection with the approval process, they require that the
mortgage broker be licensed by the appropriate state agencies, as required, and
review a package of documents consisting of, among other things, an application,
resumes of key personnel, narrative of the company, organizational documentation
and financial statements. At least annually, each of Oceanmark and SPFC reviews
the performance of each of its respective mortgage brokers for poor processing,
misrepresentation, fraud or delinquency, and substandard mortgage brokers are
terminated.
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. At least two credit
reports on each applicant from national credit reporting companies are required.
The report typically contains information relating to such matters as credit
history with local and national merchants and lenders, installment debt payments
and any record of defaults, bankruptcies, repossessions, or judgments.
Mortgaged properties are appraised by licensed appraisers. Neither
Oceanmark nor SPFC approves all appraisers but instead relies on the mortgage
brokers to evaluate the appraiser's experience and ability; however, in the
event that a mortgage broker uses an appraiser who has not been approved by
Oceanmark or SPFC, the related appraisal will be reviewed by an approved
appraiser of Oceanmark or SPFC, respectively, for conformance with their
guidelines. Oceanmark and SPFC require the appraiser to address neighborhood
conditions, site and zoning status and condition and valuation of improvements.
Following each appraisal, the appraiser prepares a report which includes 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. All appraisals are required to conform to the
Uniform Standards of Professional Appraisal Practice and FIRREA and must be on
forms acceptable to FNMA and FHLMC. Every appraisal is reviewed by a
non-affiliated appraisal review firm, or by another review appraiser acceptable
to Oceanmark or SPFC before the mortgage loan is made.
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ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at the
close of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Class A
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. A limited number of other mortgage loans may be added
to the Mortgage Pool prior to the issuance of the Class A Certificates. The
Company believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as it will be
constituted at the time the Class A Certificates are issued although the range
of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Class A Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K. In addition, a Current Report on Form 8-K will be filed following each
purchase of Subsequent Mortgage Loans.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1996-3 Mortgage Loan Asset-Backed Pass-Through Certificates,
(the "Certificates") will include the following four senior classes (the "Class
A Certificates"): (i) Class A-1 Certificates (the "Group I Class A
Certificates") and (ii) Class A-2 Certificates, Class A-3 Certificates and Class
A-4 Certificates (collectively, the "Group II Class A Certificates"). In
addition to the Class A Certificates, the Series 1996-3 Mortgage Loan
Asset-Backed Pass-Through Certificates will include the Class I S Certificates
(the "Group I Subordinate Certificates"), the Class II S Certificates (the
"Group II Subordinate Certificates"; and together with the Group I Subordinate
Certificates, the "Subordinate Certificates") and the Class R Certificates (the
"Residual Certificates"). Only the Class A Certificates are offered hereby. The
Pass-Through Rates (as defined herein) on the Group I Class A Certificates and
Class A-2 Certificates are adjustable and are calculated as described under
"--Class A Interest Distribution Amounts" below. The Pass-Through Rate on the
Class A-3 Certificates is fixed at 7.15% per annum. The Pass-Through Rate on the
Class A-4 Certificates is initially 7.60% per annum, but may step up to 8.35%
per annum under the circumstances described herein. Interest distributions on
the Class A Certificates will be payable monthly at one-twelfth the annual rate.
The Certificates will evidence the entire beneficial ownership interest
in the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Certificate Account; (iii) property acquired by
foreclosure of such Mortgage Loans or deed in lieu of foreclosure; (iv) the
Trustee's rights with respect to the Mortgage Loans under all insurance policies
(including the Certificate Insurance Policies) required to be maintained
pursuant to the Pooling and Servicing Agreement and any proceeds thereof; (v)
liquidation proceeds; (vi) released mortgaged property proceeds; and (vii)
amounts on deposit in the Interest Coverage Accounts and the Pre-Funding
Accounts.
Distributions on the Class A Certificates will be made on the 25th day
of each month or, if such day is not a business day, then on the next succeeding
business day (each, a "Distribution Date"), commencing in September 1996, to
Certificateholders of record on the immediately preceding Record
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Date. The record date (the "Record Date") for each Distribution Date will be the
close of business on the last day of the month immediately preceding the related
Distribution Date.
The Class A Certificates will be issued, maintained and transferred on
the book-entry records of The Depository Trust Company ("DTC") and its
Participants (as defined in the Prospectus). The Class A Certificates will be
issued in minimum denominations of $25,000 and integral multiples of $1 in
excess thereof.
The Class A Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC (Class A Certificates
so registered, "Book-Entry Certificates"). The Company has been informed by DTC
that DTC's nominee will be Cede & Co. ("Cede"). No person acquiring an interest
in the Class A Certificates (a "Beneficial Owner") will be entitled to receive a
certificate representing such person's interest (a "Definitive Certificate"),
except as set forth below under "--BookEntry Registration of the Class A
Certificates--Definitive Certificates." Unless and until Definitive Certificates
are issued for the Class A Certificates under the limited circumstances
described herein, all references to actions by Certificateholders with respect
to the Class A Certificates shall refer to actions taken by DTC upon
instructions from its Participants, and all references herein to distributions,
notices, reports and statements to Certificateholders with respect to the Class
A Certificates shall refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Class A Certificates, for
distribution to Beneficial Owners by DTC in accordance with DTC procedures.
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
GENERAL. Beneficial Owners that are not Participants or Intermediaries
(as defined in the Prospectus) but desire to purchase, sell or otherwise
transfer ownership of, or other interests in, the related Class A Certificates
may do so only through Participants and Intermediaries. In addition, Beneficial
Owners will receive all distributions of principal of and interest on the
related Class A Certificates from the Paying Agent (as defined in the
Prospectus) through DTC and Participants. Accordingly, Beneficial Owners may
experience delays in their receipt of payments. Unless and until Definitive
Certificates are issued for the related Class A Certificates, it is anticipated
that the only registered Certificateholder of such Class A Certificates will be
Cede, as nominee of DTC. Beneficial Owners will not be recognized by the Trustee
or the Master Servicer as Certificateholders, as such term is used in the
Pooling and Servicing Agreement, and Beneficial Owners will be permitted to
receive information furnished to Certificateholders and to exercise the rights
of Certificateholders only indirectly through DTC, its Participants and
Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Class A Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, such Class A Certificates.
Participants and Intermediaries with which Beneficial Owners have accounts with
respect to such Class A Certificates similarly are required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess physical certificates evidencing their interests in the Class A
Certificates, the Rules provide a mechanism by which Beneficial Owners, through
their Participants and Intermediaries, will receive distributions and will be
able to transfer their interests in the Class A Certificates.
None of the Company, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee or CEDEL or Euroclear,
including, without limitation, actions for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Class A
Certificates held by Cede, as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
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DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Certificates--Form of Certificates."
Upon the occurrence of an event described in the Prospectus in the
third paragraph under "Description of the Certificates-Form of Certificates,"
the Trustee is required to notify, through DTC, Participants who have ownership
of Class A Certificates as indicated on the records of DTC of the availability
of Definitive Certificates for their Class A Certificates. Upon surrender by DTC
of the definitive certificates representing the Class A Certificates and upon
receipt of instructions from DTC for re-registration, the Trustee will reissue
the Class A Certificates as Definitive Certificates issued in the respective
principal amounts owned by individual Beneficial Owners, and thereafter the
Trustee and the Master Servicer will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and the Class A Certificates,
see "Description of the Certificates--Form of Certificates" in the Prospectus.
BOOK-ENTRY FACILITIES. Beneficial Owners may elect to hold their
interests in the Book-Entry Certificates through DTC in the United States or
through CEDEL or Euroclear in Europe, if they are participants of such systems,
or indirectly through organizations which are participants in such systems. The
Book-Entry Certificates of each class will be issued in one or more certificates
which equal the aggregate Certificate Principal Balance of such class and will
initially be registered in the name of Cede, the nominee of DTC. CEDEL and
Euroclear will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for CEDEL and Morgan will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries").
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear Participants or CEDEL Participants (each as defined below) on such
business day. Cash received in CEDEL or Euroclear as a result of sales of
securities by or through a CEDEL Participant or Euroclear Participant to a
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences--REMICS--Backup Withholding with Respect to REMIC
Certificates" and "--Foreign Investors in REMIC Certificates" in the Prospectus.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements,
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deliver instructions to the Relevant Depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same day
funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and its
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from
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Euroclear, and receipts of payments with respect to securities in Euroclear. All
securities in Euroclear are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants, and has no record of or relationship with persons holding through
Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable Participants in
accordance with DTC's normal procedures. Each Participant will be responsible
for disbursing such payments to the Beneficial Owners of the Book-Entry
Certificates that it represents and to each Intermediary for which it acts as
agent. Each such Intermediary will be responsible for disbursing funds to the
Beneficial Owners of the Book-Entry Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. "Certain Federal Income
Tax Consequences--REMICS--Backup Withholding with Respect to REMIC Certificates"
and "--Foreign Investors in REMIC Certificates" in the Prospectus. Since
transactions in the Book-Entry Certificates will be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Beneficial Owner to pledge Class A Certificates to
persons or entities that do not participate in the DTC, CEDEL or Euroclear
systems, or otherwise to take actions in respect of such Certificates, may be
limited due to lack of a physical certificate representing such Certificates. In
addition, issuance of the Book-Entry Certificates in book-entry form may reduce
the liquidity of such Certificates in the secondary market since certain
potential investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates.
DTC has advised the Company and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Agreement only at
the direction of one or more Participants to whose DTC accounts the BookEntry
Certificates are credited, to the extent that such actions are taken on behalf
of Intermediaries whose holdings include such Book-Entry Certificates. CEDEL or
the Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Certificateholder under the Agreement on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the direction
of the related Participants, with respect to some Certificates which conflict
with actions taken with respect to other Certificates.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
MULTIPLE LOAN GROUP STRUCTURE
The Mortgage Loans in the Trust Fund consist of the Group I Loans and
Group II Loans, as described above under "Description of the Mortgage Pool." All
distributions (other than CrossCollateralization Payments) and losses with
respect to the Group I Loans will be allocated solely among the Group I Class A
Certificates, the Class I S Certificates and the Class R Certificates. All
distributions and losses with respect to the Group II Loans (other than
Cross-Collateralization Payments payable to the
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Certificate Insurer) will be allocated solely among the Group II Class A
Certificates and the Class II S Certificates.
OVERCOLLATERALIZATION PROVISIONS AND SUPPORT FEATURES
OVERCOLLATERALIZATION RESULTING FROM CASH FLOW STRUCTURE. The Pooling
and Servicing Agreement requires that, on each Distribution Date, the Net
Monthly Excess Cashflow with respect to each Loan Group, if any, be applied on
such Distribution Date as an accelerated payment of principal on the related
Class A Certificates, but only to the limited extent hereafter described. The
"Net Monthly Excess Cashflow" for any Distribution Date is equal to (x) the
amount on deposit in the Certificate Account on such Distribution Date with
respect to the Mortgage Loans in the related Loan Group, other than the related
Insured Payments and the Trustee's Fee and Premium Amount payable on such
Distribution Date (such amount, the related "Available Funds" for such
Distribution Date) minus (y) the sum of (i) the sum of the related Class A
Interest Distribution Amount and the related Class A Principal Distribution
Amount (calculated for this purpose without regard to any Subordination Increase
Amount, Subordination Reduction Amount or portion thereof included therein) and
(ii) any related Reimbursement Amount (as defined herein) owed to the
Certificate Insurer. This application has the effect of accelerating the
amortization of the related Class A Certificates relative to the amortization of
the Mortgage Loans in the related Loan Group.
With respect to any Distribution Date, the excess, if any, of (x) the
sum of the aggregate Principal Balances of the Mortgage Loans in the related
Loan Group as of the close of business on the last day of the related Due Period
(as defined herein) and the amount of funds in the related Pre-Funding Account
as of such Distribution Date over (y) the Certificate Principal Balance of the
related Class A Certificates as of such Distribution Date (and following the
making of all distributions on such Distribution Date) is the "Subordinated
Amount" as of such Distribution Date. The Pooling and Servicing Agreement
requires that the Net Monthly Excess Cashflows will be applied as an accelerated
payment of principal on the related Class A Certificates until the related
Subordinated Amount has increased to the level equal to the related Required
Subordinated Amount for such Distribution Date. Any amount of Net Monthly Excess
Cashflow actually applied as an accelerated payment of principal is a
"Subordination Increase Amount." The required level of the Subordinated Amount
with respect to a Distribution Date is the "Required Subordinated Amount" with
respect to such Distribution Date. Initially, the Required Subordinated Amount
will be set at an amount equal to a percentage, specified in the Pooling and
Servicing Agreement, of the aggregate Principal Balances of the related Mortgage
Loans in the related Loan Group as of the Cut-off Date and the related Original
Pre-Funded Amount. The Pooling and Servicing Agreement generally provides that
the Required Subordinated Amounts may, over time, decrease, or increase, subject
to certain floors, caps and triggers.
In the event that the Required Subordinated Amount is permitted to
decrease or "step down" on a Distribution Date in the future, the Pooling and
Servicing Agreement provides that a portion of the principal which would
otherwise be distributed to the Holders of the related Class A Certificates on
such Distribution Date shall be distributed to the Holders of the related Group
I or Group II Subordinate Certificates on such Distribution Date, or applied to
the payment of any Group I Class A Available Funds Cap Carry-Forward Amount.
This has the effect of decelerating the amortization of the Class A Certificates
relative to the amortization of the Mortgage Loans in the related Loan Group,
and of reducing the related Subordinated Amount. With respect to any
Distribution Date, the difference, if any, between (a) the related Subordinated
Amount that would apply on such Distribution Date after taking into account all
distributions to be made on such Distribution Date (exclusive of any reductions
thereto attributable to Subordination Reduction Amounts (as described below) on
such Distribution Date) and (b) the related Required Subordinated Amount for
such Distribution Date is the related "Excess Subordinated Amount" with respect
to such Distribution Date. With respect to any Distribution Date, an amount
equal to the lesser of (a) the related Excess Subordinated Amount and (b) the
principal collections received by the
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Master Servicer with respect to the prior Due Period is the related
"Subordination Reduction Amount." In addition, due to the cash flow structure of
the Certificates as described below, Subordination Reduction Amounts may result
even prior to the occurrence of any decrease or "step down" in the related
Required Subordinated Amount. This is because the Holders of the related Class A
Certificates will generally be entitled to receive 100% of collected principal,
even though the Certificate Principal Balances of the related Class A
Certificates will, following the accelerated amortization resulting from the
application of the related Net Monthly Excess Cashflow, represent less than 100%
of the related Mortgage Loan's principal balance. In the absence of the
provisions relating to Subordination Reduction Amounts, the foregoing may
otherwise increase the Subordinated Amounts above their Required Subordinated
Amount requirements even without the application of any Net Monthly Excess
Cashflow.
The Pooling and Servicing Agreement provides that, on any Distribution
Date, all unscheduled collections on account of principal (other than any such
amount applied to the payment of a Subordination Reduction Amount) with respect
to Mortgage Loans in the related Loan Group during the period beginning on the
second day of the calendar month preceding the calendar month in which such
Distribution Date occurs, and ending on the first day of the calendar month in
which such Distribution Date occurs (the "Due Period") will be distributed to
the Holders of the related Class A Certificates on such Distribution Date. If
any Mortgage Loan became a Liquidated Mortgage Loan (as defined below) during
such Due Period, the net Liquidation Proceeds (as defined in the Prospectus)
related thereto and allocated to principal may be less than the Principal
Balance of the related Mortgage Loan; the amount of any such insufficiency is a
"Liquidated Loan Loss." A "Liquidated Mortgage Loan" is, in general, a defaulted
Mortgage Loan as to which the Master Servicer has determined that all amounts
that it expects to recover on such Mortgage Loan have been recovered (exclusive
of any possibility of a deficiency judgment). In addition, the Pooling and
Servicing Agreement provides that the principal balance of any Mortgage Loan
after it becomes a Liquidated Mortgage Loan shall equal zero. The Pooling and
Servicing Agreement does not contain any rule which requires that the amount of
any Liquidated Loan Loss be distributed to the Holders of the related Class A
Certificates on the Distribution Date which immediately follows the event of
loss; I.E., the Pooling and Servicing Agreement does not require the current
recovery of losses. However, the occurrence of a Liquidated Loan Loss will
reduce the Subordinated Amount, which, to the extent that such reduction causes
the Subordinated Amount to be less than the related Required Subordinated Amount
applicable to the related Distribution Date, will require the payment of a
Subordination Increase Amount on such Distribution Date (or, if insufficient
funds are available on such Distribution Date, on subsequent Distribution Dates,
until the Subordinated Amount equals the related Required Subordinated Amount).
The effect of the foregoing is to allocate losses to the Holders of the related
Group I or Group II Subordinate Certificates by reducing, or eliminating
entirely, payments of Net Monthly Excess Cashflow and of Subordination Reduction
Amounts which such Holders would otherwise receive.
OVERCOLLATERALIZATION AND THE CERTIFICATE INSURANCE POLICIES. The
Pooling and Servicing Agreement defines a "Subordination Deficit" with respect
to a Distribution Date to be the amount, if any, by which (x) the aggregate
Certificate Principal Balance of the related Class A Certificates as of such
Distribution Date, and following the making of all distributions to be made on
such Distribution Date (except for any payment to be made as to principal from
proceeds of the related Certificate Insurance Policy), exceeds (y) the aggregate
Principal Balances of the Mortgage Loans in the related Loan Group as of the
close of business on the preceding Due Date and the amount of funds in the
related Pre-Funding Account on such Distribution Date. The Pooling and Servicing
Agreement requires the Trustee to make a claim for an Insured Payment under the
related Certificate Insurance Policy not later than the second Business Day
prior to any Distribution Date as to which the Trustee has determined that a
Subordination Deficit will occur with respect to a Loan Group for the purpose of
applying the proceeds of such Insured Payment as a payment of principal to the
Holders of the related Class A Certificates on such Distribution Date. Investors
in the Class A Certificates should realize that, under extreme loss or
delinquency scenarios, they may temporarily receive no distributions of
principal.
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CROSS-COLLATERALIZATION FEATURE. In the event that on any Distribution
Date after giving effect to distributions pertaining to a particular Loan Group
and its related Certificates (except for any payment to be made as principal
from proceeds of the related Certificate Insurance Policy), either a
Reimbursement Amount exists with respect to either Loan Group or a Subordination
Deficit exists with respect to Loan Group II or the Subordinated Amount with
respect to Loan Group II would be less than the related Required Subordinated
Amount (such difference, a "Cross-Collateralized Subordination Shortfall"), the
Group II Class A Certificates or the Certificate Insurer, as the case may be,
will be entitled to receive an additional payment (a "Cross-Collateralization
Payment") in respect of principal to the extent of such Subordination Deficit or
Cross-Collateralized Subordination Shortfall or as reimbursement of the
Reimbursement Amount, as the case may be, out of funds then on deposit in the
Certificate Account for the other Loan Group that are otherwise payable on such
Distribution Date to the Subordinate Certificates related to such other Loan
Group.
PRIORITY OF PAYMENT
On each Distribution Date, the Trustee shall make the following
distributions, to the extent of funds on deposit in the related Certificate
Account with respect to each Loan Group and the amount of Insured Payments and
Cross-Collateralization Payments (if applicable) to be made on such Distribution
Date, as distributed separately with respect to the Group I and Group II
Certificates:
(a) to the Certificate Insurer, the Premium Amount (as
defined herein) with respect to such Loan Group;
(b) to the Trustee, an amount equal to the Trustee's Fees
then due to it with respect to such Loan Group;
(c) to the Certificate Insurer the lesser of (x) an amount
equal to (i) the amount then on deposit in the related
Certificate Account remaining after the foregoing
distributions minus (ii) the Insured Distribution Amount
for such Distribution Date and (y) the amount of all
Insured Payments and other payments made by the
Certificate Insurer pursuant to the related Certificate
Insurance Policy (together with interest thereon at the
Pass-Through Rate for the related Class A Certificates)
which have not been previously repaid (the "Reimbursement
Amount") as of such Distribution Date;
(d) from amounts then on deposit in the related Certificate
Account (including any Insured Payments), to the related
Class A Certificateholders an amount equal to the related
Class A Interest Distribution Amount (as described
below), distributed on a pro rata basis to the related
Class A Certificateholders as described below;
(e) from amounts then on deposit in the related Certificate
Account (including any related Insured Payments), to the
related Class A Certificateholders an amount equal to the
related Class A Principal Distribution Amount (as
described below) to the extent not covered by payments to
be made pursuant to clause (f) below with respect to a
Subordination Deficit allocated as described below;
(f) with respect to the Group II Class A Certificates, from
amounts then on deposit in the Certificate Account
related to the Group I Loans, to the Group II Class A
Certificateholders or the Certificate Insurer, as the
case may be, an amount equal to the
Cross-Collateralization Payments required to be made on
such Certificates on such Distribution Date;
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(g) from amounts then on deposit in the Certificate Account
related to the Group II Loans, to the Certificate
Insurer, an amount equal to the Cross-Collateralization
Payments required to be made to the Certificate Insurer
from such Certificate Account on such Distribution Date,
to the extent the Certificate Insurer has not been
reimbursed pursuant to clause (c) above;
(h) with respect to the Group I Class A Certificates, an
amount equal to the lesser of (i) any amount then
remaining in the related Certificate Account after the
applications described in clauses (a) through (g) above
and (ii) the aggregate Group I Class A Available Funds
Cap Carry-Forward Amount for such Distribution Date shall
be paid to the Class A-1 Certificateholders on account of
the Group I Class A Available Funds Cap Carry-Forward
Amount, if any; and
(i) from amounts then on deposit in the related Certificate
Account, to the Holders of the related Group I or Group
II Subordinate Certificates, the amount remaining on such
Distribution Date, if any.
CLASS A INTEREST DISTRIBUTION AMOUNTS
On each Distribution Date, holders of each class of Class A
Certificates will be entitled to receive interest distributions in an amount
equal to the sum of (a) interest accrued for the related Accrual Period (as
defined below) on the related Certificate Principal Balance thereof immediately
prior to such Distribution Date at the then-applicable related Pass-Through Rate
(to the extent of the amounts remaining for distributions after payments under
clauses (a) through (c) under "--Priority of Payment" above), as reduced by
shortfalls caused by the Relief Act (as defined in the Prospectus) or the
failure of the Master Servicer to cover Prepayment Interest Shortfalls to the
extent described herein, with all such reductions allocated among the related
Class A Certificates in proportion to their respective amounts of related Class
A Interest Distribution Amount (as defined below) which would have resulted
absent such reductions and (b) the Group I Class A Carry-Forward Amount or Group
II Class A Carry-Forward Amount, as applicable, allocable to interest. The
aggregate amount of interest allocable to the Group I and Group II Class A
Certificates as determined separately (the related "Class A Interest
Distribution Amount") will be allocable to the related Class A Certificates on a
pro rata basis in proportion to the amount of interest payable thereon. The
Class A Interest Distribution Amount with respect to the Group I Class A
Certificates and the Class A-2 Certificates is calculated on the basis of a
360-day year and the actual number of days elapsed; provided that, for any
Distribution Date for which clause (ii) of the related definition of
Pass-Through Rate is applicable, the Class A Interest Distribution Amount will
be calculated on the basis of a 30-day month. The Class A Interest Distribution
Amount with respect to the Class A-3 Certificates and the Class A-4 Certificates
is calculated on the basis of a 360-day year and a 30-day month.
With respect to any Distribution Date and the Group I and Group II
Class A Certificates, the sum of the related Class A Interest Distribution
Amount and the amount of the related Subordination Deficit, if any, with respect
to such Distribution Date is the related "Insured Distribution Amount" for such
Distribution Date.
For each Distribution Date, (i) with respect to the Class A-1
Certificates and Class A-2 Certificates, the "Accrual Period" is the period
commencing on the Distribution Date immediately preceding the month on which
such Distribution Date occurs and ending on the calendar day immediately
preceding such Distribution Date, except with respect to the first Distribution
Date, which has an accrual period from August 23, 1996 to September 24, 1996 and
(ii) with respect to the Class A-3 Certificates and Class A-4 Certificates, the
"Accrual Period" is the previous calendar month.
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With respect to the Group I Class A Certificates, the "Group I Class A
Carry-Forward Amount" as of any Distribution Date equals the sum of (a) the
amount, if any, by which (i) the related Insured Distribution Amount for the
immediately preceding Distribution Date exceeded (ii) the amount actually
distributed to the Holders of the Group I Class A Certificates on such
Distribution Date in respect thereof (including, without limitation, amounts
paid under a Certificate Insurance Policy) and (b) 30 days' interest on such
amount at the Pass-Through Rate applicable to the Group I Class A Certificates
for such Distribution Date. The Group I Class A Carry-Forward Amount does not
include any Group I Class A Available Funds Cap Carry-Forward Amount.
The "Class A-1 Formula Pass-Through Rate" for a Distribution Date is
the lesser of (x) the rate determined by clause (i) of the definition of
Pass-Through Rate for the Class A-1 Certificates on such Distribution Date and
(y) the weighted average of Net Lifetime Rate Caps of the Group I Loans. The Net
Lifetime Rate Cap on each Group I Loan is equal to the related Lifetime Rate Cap
minus the sum of the Servicing Fee Rate and the rates per annum at which the
Trustee's Fee and the Premium Amount accrue.
The Pooling and Servicing Agreement provides that if the Pass-Through
Rate on the Class A-1 Certificates is less than the Class A-1 Formula
Pass-Through Rate and any resulting shortfall in interest is not paid on such
Distribution Date from any available Net Monthly Excess Cashflow, as described
below, then the amount of any such shortfall will be carried forward and be paid
to the extent of available funds, as described herein, to the Holders of the
Class A-1 Certificates on future Distribution Dates and shall accrue interest at
the applicable Class A-1 Formula Pass-Through Rate, until paid (such shortfall,
together with such accrued interest, the "Group I Class A Available Funds Cap
Carry-Forward Amount"). The Certificate Insurance Policy does not cover the
Group I Class A Available Funds Cap Carry-Forward Amount, nor do the ratings
assigned to the Class A-1 Certificates address the payment of the Group I Class
A Available Funds Cap Carry-Forward Amount.
With respect to the Group II Class A Certificates, the "Group II Class
A Carry-Forward Amount" as of any Distribution Date equals the sum of (a) the
amount, if any, by which (i) the related Insured Distribution Amount for the
immediately preceding Distribution Date exceeded (ii) the amount actually
distributed to the Holders of the Group II Class A Certificates on such
Distribution Date in respect thereof (including, without limitation, amounts
paid under a Certificate Insurance Policy) and (b) 30 days' interest on such
amount at the Pass-Through Rate applicable to the Group II Class A Certificates
for such Distribution Date.
The "Prepayment Interest Shortfall" for any Distribution Date is equal
to the aggregate shortfall, if any, in collections of interest (minus the
related Servicing Fee) resulting from Mortgagor prepayments on the Mortgage
Loans during the preceding calendar month. Such shortfalls will result because
interest on prepayments in full is distributed only to the date of prepayment,
and because no interest is distributed on prepayments in part, as such
prepayments in part are applied to reduce the outstanding principal balance of
the related Mortgage Loans as of the Due Date in the month of prepayment.
However, with respect to any Distribution Date, any Prepayment Interest
Shortfalls resulting from full or partial prepayments during the preceding
calendar month will be offset by the Master Servicer, but only to the extent
such Prepayment Interest Shortfalls do not exceed an amount equal to the
Servicing Fee payable to the Master Servicer in respect of its servicing
activities with respect to such Distribution Date. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses" herein. An
amount equal to the Class A Certificates' pro rata share, based on the amount of
interest payable on each such class, of any Prepayment Interest Shortfalls not
so covered by the Master Servicer will be made available by the Certificate
Insurer for distribution to the Class A Certificateholders.
The Pass-Through Rate on the Class A-1 Certificates is adjustable and
is calculated as follows: beginning on the Distribution Date in September 1996,
and on each Distribution Date thereafter, the
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Pass-Through Rate on the Class A-1 Certificates will be adjusted to equal the
greater of (x) the lesser of (i) (a) with respect to any Distribution Date which
occurs on or prior to the date on which the aggregate Principal Balance of the
Mortgage Loans is less than 10% of the sum of the aggregate Principal Balance of
the Mortgage Loans as of the Cut-off Date and the Original Pre-Funded Amounts,
One-Month LIBOR (as defined in "Description of the Certificates--Calculation of
One-Month LIBOR" below) plus 0.31% or (b) with respect to any Distribution Date
thereafter, One-Month LIBOR plus 1.00% and (ii) the Group I Class A Available
Funds Pass-Through Rate and (y) 4.50%.
The "Group I Class A Available Funds Pass-Through Rate," as of any
Distribution Date, is equal to (i) the weighted average of the Mortgage Rates of
the Group I Loans, minus (ii) the sum of the Servicing Fee Rate and the rates
per annum at which the Trustee's Fee and Premium Amount accrue and minus (iii)
commencing on the seventh Distribution Date, 0.50% per annum.
The Pass-Through Rate on the Class A-2 Certificates is adjustable and
is calculated as follows: beginning on the Distribution Date in September 1996,
and on each Distribution Date thereafter, the PassThrough Rate on the Class A-2
Certificates will be adjusted to equal the lesser of (i) One-Month LIBOR plus
0.12% and (ii) the Group II Class A Available Funds Pass-Through Rate.
The "Group II Class A Available Funds Pass-Through Rate," as of any
Distribution Date, is equal to (i) the weighted average of the Mortgage Rates of
the Group II Loans, minus (ii) the sum of the Servicing Fee Rate and the rates
per annum at which the Trustee's Fee and Premium Amount accrue.
The Pass-Through Rate with respect to the Class A-3 Certificates is
fixed at 7.15% per annum. The Pass-Through Rate on the Class A-4 Certificates is
equal to (i) with respect to any Distribution Date which occurs on or prior to
the date on which the aggregate Principal Balance of the Mortgage Loans is less
than 10% of the sum of the aggregate Principal Balance of the Mortgage Loans as
of the Cut-off Date and the Original Pre-Funded Amounts, 7.60% per annum, and
(ii) with respect to any Distribution Date thereafter, 8.35% per annum.
As described herein, the Class A Interest Distribution Amounts
allocable to the Class A Certificates is based on the Certificate Principal
Balances thereof immediately prior to the related Distribution Date. The
Certificate Principal Balance of any Class A Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced as described herein with respect to such Certificate.
On any Distribution Date, the amount of the premium (the "Premium
Amount") payable to the Certificate Insurer is equal to one-twelfth of the
product of a percentage specified in the Pooling and Servicing Agreement and the
Certificate Principal Balance of the Class A Certificates.
CALCULATION OF ONE-MONTH LIBOR
With respect to the first Distribution Date, on the Delivery Date, and,
with respect to each Distribution Date thereafter, on the second business day
preceding such Distribution Date (each such date, an "Interest Determination
Date"), the Trustee will determine the London interbank offered rate for
one-month United States dollar deposits ("One-Month LIBOR") for the next Accrual
Period for the Group I Class A Certificates and the Class A-2 Certificates on
the basis of the offered rates of the Reference Banks for one-month United
States dollar deposits, as such rates appear on the Reuter Screen LIBO Page, as
of 11:00 a.m. (London time) on such Interest Determination Date. As used in this
section, "business day" means a day on which banks are open for dealing in
foreign currency and exchange in London and New York City; "Reuter Screen LIBO
Page" means the display designated as page "LIBO" on the Reuter Monitor Money
Rates Service (or such other page as may replace the LIBO page on that service
for the purpose of displaying London interbank offered rates of major banks);
and "Reference Banks" means
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leading banks selected by the Trustee and engaged in transactions in Eurodollar
deposits in the international Eurocurrency market (i) with an established place
of business in London, (ii) whose quotations appear on the Reuter Screen LIBO
Page on the Interest Determination Date in question, (iii) which have been
designated as such by the Trustee and (iv) not controlling, controlled by, or
under common control with, the Company or any Seller.
On each Interest Determination Date, One-Month LIBOR for the related
Accrual Period for the Group I Class A Certificates and the Class A-2
Certificates will be established by the Trustee as follows:
(a) If on such Interest Determination Date two or more
Reference Banks provide such offered quotations, One-Month LIBOR for
the related Accrual Period shall be the arithmetic mean of such offered
quotations (rounded upwards if necessary to the nearest whole multiple
of 0.0625%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, One-Month LIBOR for
the related Accrual Period shall be the higher of (x) One-Month LIBOR
as determined on the previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate
per annum that the Trustee determines to be either (i) the arithmetic
mean (rounded upwards if necessary to the nearest whole multiple of
0.0625%) of the one-month United States dollar lending rates which New
York City banks selected by the Trustee are quoting on the relevant
Interest Determination Date to the principal London offices of leading
banks in the London interbank market or, in the event that the Trustee
can determine no such arithmetic mean, (ii) the lowest one-month United
States dollar lending rate which New York City banks selected by the
Trustee are quoting on such Interest Determination Date to leading
European banks.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Trustee and the Trustee's calculation of the rates of interest
applicable to the Group I Class A Certificates and the Class A-2 Certificates
for the related Accrual Period shall (in the absence of manifest error) be final
and binding.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the amounts remaining for
distribution after payments under clauses (a) through (d) under "--Priority of
Payment" above, an amount (as determined separately for the Group I and Group II
Class A Certificates, the related "Class A Principal Distribution Amount"), in
reduction of the Certificate Principal Balance thereof as described below, which
equals the sum of (i) the portion of any Group I Class A Carry-Forward Amount or
Group II Class A Carry-Forward Amount, as applicable, which relates to a
shortfall in a distribution of a related Subordination Deficit, (ii) all
scheduled installments of principal in respect of the Mortgage Loans in the
related Loan Group received or advanced during the related Due Period, together
with all unscheduled recoveries of principal on such Mortgage Loan received by
the Master Servicer during the prior calendar month, (iii) the Principal Balance
of each Mortgage Loan in the related Loan Group that was repurchased by either
the Seller or by the Company, (iv) any amounts delivered by the Company on the
Master Servicer Remittance Date (as defined herein) in connection with a
substitution of a Mortgage Loan in the related Loan Group, (v) the net
Liquidation Proceeds (as defined in the Prospectus) collected by the Master
Servicer of all Mortgage Loans in the related Loan Group during the prior
calendar month (to the extent such net Liquidation Proceeds are related to
principal), (vi) the amount of any related Subordination Deficit for such
Distribution Date, (vii) the proceeds received by the Trustee of any termination
of the related Loan Group (to the extent such proceeds are related to
principal), (viii) the amount of any related Subordination Increase Amount (as
defined herein) for such Distribution Date, and (ix) with respect to the Group I
and Group II Class A
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Certificates, with respect to the Distribution Date occurring in October 1996,
any amounts in the related Pre-Funding Account after giving effect to any
purchase of related Subsequent Mortgage Loans; MINUS (x) the amount of any
related Subordination Reduction Amount (as defined herein) for such Distribution
Date.
In no event will the Class A Principal Distribution Amount with respect
to any Distribution Date be (x) less than zero or (y) greater than the then
outstanding Certificate Principal Balance of the Class A Certificates.
Distributions of the Class A Principal Distribution Amount with respect
to the Group I Class A Certificates will be allocated to the Class A-1
Certificates in reduction of the Certificate Principal Balance thereof, until
such Certificate Principal Balance has been reduced to zero. Distributions of
the Class A Principal Distribution Amount with respect to the Group II Class A
Certificates will be allocated first, to the Class A-2 Certificates, second, to
the Class A-3 Certificates and third, to the Class A-4 Certificates, in
reduction of the Certificate Principal Balances thereof, in each case until the
Certificate Principal Balance thereof has been reduced to zero.
The "Master Servicer Remittance Date" with respect to any Distribution
Date is the 18th day of the month in which such Distribution Date occurs, or if
such 18th day is not a business day, the business day immediately preceding such
18th day.
The "Principal Balance" of any Mortgage Loan as of any date of
determination is the principal balance of such Mortgage Loan as of the Due Date
preceding such date of determination, as such principal balance is specified for
such Due Date in the amortization schedule, (before any adjustment to such
amortization schedule by reason of any bankruptcy (other than Deficient
Valuations (as defined in the Prospectus)) or similar proceeding or any
moratorium or similar waiver or grace period) after giving effect to prepayments
received prior to such Due Date, Deficient Valuations incurred prior to such Due
Date, and to the payment of principal due on such Due Date and irrespective of
any delinquency in payment by the related Mortgagor. The Principal Balance of a
Mortgage Loan which becomes a Liquidated Mortgage Loan (as defined herein) on or
prior to such Due Date shall be zero.
See "Summary--Special Prepayment Considerations" and "--Special Yield
Considerations" and "Certain Yield and Prepayment Considerations" herein.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to
make Advances with respect to any payments of principal and interest (net of the
related servicing fees) which were due on the Mortgage Loans on the immediately
preceding Due Date and have not been received as of the business day immediately
preceding the related Master Servicer Remittance Date. With respect to a
delinquent Balloon Payment, the Master Servicer is not required to make an
Advance of such delinquent Balloon Payment. The Master Servicer will, however,
make monthly Advances with respect to balloon Mortgage Loans with delinquent
Balloon Payments, in each case in an amount equal to the assumed monthly
principal and interest payment that would have been due on the related Due Date
based on the original principal amortization schedule for the applicable balloon
Mortgage Loan.
Such Advances are required to be made by the Master Servicer only to
the extent they are deemed by the Master Servicer to be recoverable from related
late collections, insurance proceeds or liquidation proceeds. The purpose of
making such Advances is to maintain a regular cash flow to the
Certificateholders, to maintain a specified level of overcollateralization and
to pay the premium due the Certificate Insurer and to pay the Trustee, rather
than to guarantee or insure against losses. The Master Servicer will not be
required to make any Advances with respect to reductions in the amount of the
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monthly payments on the Mortgage Loans due to application of the Relief Act. Any
failure by the Master Servicer to make an Advance as required under the Pooling
and Servicing Agreement will constitute an Event of Default thereunder, in which
case the Trustee, as successor servicer, will be obligated to make any such
Advance, in accordance with the terms of the Pooling and Servicing Agreement.
All Advances will be reimbursable to the Master Servicer making the
Advance subject to certain conditions and restrictions from late collections,
insurance proceeds and liquidation proceeds from the Mortgage Loan as to which
such unreimbursed Advance was made.
CERTIFICATE GUARANTY INSURANCE POLICIES
The following information regarding the Certificate Insurance Policies
has been supplied by the Certificate Insurer for inclusion in this Prospectus
Supplement.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Certificate Insurance Policies, thereby
unconditionally and irrevocably guarantees to any Owner (as defined below) that
an amount equal to each full and complete Insured Payment (as defined below)
will be received by the Trustee, or its successor as Trustee for the Owners, on
behalf of the Owners from the Certificate Insurer, for distribution by the
Trustee to each Owner of each Owner's proportionate share of the Insured
Payment. The Certificate Insurer's obligations under the Certificate Insurance
Policies with respect to a particular Insured Payment shall be discharged to the
extent funds equal to the applicable Insured Payment are received by the
Trustee, whether or not such funds are properly applied by the Trustee. Insured
Payments shall be made only at the time set forth in the Certificate Insurance
Policies, and no accelerated Insured Payments shall be made regardless of any
acceleration of the Class A Certificates, unless such acceleration is at the
sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust Fund, the REMIC or the Trustee for withholding taxes, if any (including
interest and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount (as described below) on the Business Day following receipt on
a Business Day by the Fiscal Agent (as described below) of (i) a certified copy
of the order requiring the return of a preference payment, (ii) an opinion of
counsel satisfactory to the Certificate Insurer that such order is final and not
subject to appeal, (iii) an assignment in such form as is reasonably required by
the Certificate Insurer, irrevocably assigning to the Certificate Insurer all
rights and claims of the Owner relating to or arising under the Class A
Certificates against the debtor which made such preference payment or otherwise
with respect to such preference payment and (iv) appropriate instruments to
effect the appointment of the Certificate Insurer as agent for such Owner in any
legal proceeding related to such preference payment, such instruments being in a
form satisfactory to the Certificate Insurer, provided that if such documents
are received after 12:00 noon New York City time on such Business Day, they will
be deemed to be received on the following Business Day. Such payments shall be
disbursed to the receiver or trustee in bankruptcy named in the final order of
the court exercising jurisdiction on behalf of the Owner and not to any Owner
directly unless such Owner has returned principal or interest paid on the Class
A Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Certificate Insurance Policies no later than 12:00 noon, New York City time, on
the later of the Distribution Date on which the related Insured Payment is due
or the Business Day following receipt in New York, New York on a Business Day by
State Street Bank and Trust Company, N.A., as the Certificate Insurer's Fiscal
Agent or any successor fiscal agent appointed by the Certificate Insurer (the
"Certificate Insurer's Fiscal Agent") of a Notice (as described below); provided
that if such Notice is received after 12:00 noon, New York City
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time, on such Business Day, it will be deemed to be received on the following
Business Day. If any such Notice received by the Certificate Insurer's Fiscal
Agent is not in proper form or is otherwise insufficient for the purpose of
making a claim under any Certificate Insurance Policy it shall be deemed not to
have been received by the Certificate Insurer's Fiscal Agent for purposes of
this paragraph, and the Certificate Insurer or the Certificate Insurer's Fiscal
Agent, as the case may be, shall promptly so advise the Trustee and the Trustee
may submit an amended Notice.
Insured Payments due under the Certificate Insurance Policies, unless
otherwise stated therein, will be disbursed by the Certificate Insurer's Fiscal
Agent to the Trustee on behalf of the Owners by wire transfer of immediately
available funds in the amount of the Insured Payment less, in respect of Insured
Payments related to Preference Amounts, any amount held by the Trustee for the
payment of such Insured Payment and legally available therefor.
The Certificate Insurer's Fiscal Agent is the agent of the Certificate
Insurer only and the Certificate Insurer's Fiscal Agent shall in no event be
liable to Owners for any acts of the Certificate Insurer's Fiscal Agent or any
failure of the Certificate Insurer to deposit, or cause to be deposited,
sufficient funds to make payments due under the Certificate Insurance Policies.
As used in the Certificate Insurance Policies, the following terms
shall have the following meanings:
"Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions in New York City or in the city
in which the corporate trust office of the Trustee under the Pooling
and Servicing Agreement is located are authorized or obligated by law
or executive order to close.
"Insured Payment" means (i) as of any Distribution Date, an
amount equal to the sum of (a) the related Class A Interest
Distribution Amount minus the related Available Funds and (b) the
related Subordination Deficit (to the extent not covered, with respect
to the Group II Class A Certificates, by Cross-Collateralization
Payments) and (ii) the related unpaid Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to each Certificate Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the
Trustee specifying the Insured Payment which shall be due and owing on
the applicable Distribution Date.
"Owner" means each related Class A Certificateholder (as
defined in the Pooling and Servicing Agreement) who, on the applicable
Distribution Date, is entitled under the terms of the applicable Class
A Certificate, to payment under the related Certificate Insurance
Policy.
"Preference Amount" means any amount previously distributed to
an Owner on the related Class A Certificates that is recoverable and
sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.),
as amended from time to time in accordance with a final nonappealable
order of a court having competent jurisdiction.
Capitalized terms used in the Certificate Insurance Policies and not
otherwise defined in the Certificate Insurance Policies shall have the
respective meanings set forth in the Pooling and Servicing Agreement as of the
date of execution of the Certificate Insurance Policies, without giving effect
to any subsequent amendment or modification to the Pooling and Servicing
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
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Any notice under the Certificate Insurance Policies or service of
process on the Certificate Insurer's Fiscal Agent may be made at the address
listed below for the Certificate Insurer's Fiscal Agent or such other address as
the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Certificate Insurer's Fiscal Agent is 15th
Floor, 61 Broadway, New York, New York 10006, Attention: Municipal Registrar and
Paying Agency, or such other address as the Certificate Insurer's Fiscal Agent
shall specify to the Trustee in writing.
The Certificate Insurance Policies are being issued under and pursuant
to, and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by the Certificate Insurance Policies is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Insurance Policies are not cancelable for any reason.
The premium on each of the Certificate Insurance Policies is not refundable for
any reason including payment, or provision being made for payment, prior to
maturity of the Class A Certificates.
MANDATORY PREPAYMENTS ON GROUP I AND GROUP II CLASS A CERTIFICATES
The Group I and Group II Class A Certificates will be prepaid on the
October 1996 Distribution Date to the extent that any amount remains on deposit
in the related Pre-Funding Account on such Distribution Date. Although no
assurance can be given, it is anticipated by the Company that the principal
amount of Subsequent Mortgage Loans sold to the Trust Fund will require the
application of substantially all of the related Original Pre-Funded Amount and
that there should be no material amount of principal prepaid to the Group I and
Group II Class A Certificateholders from the Pre-Funding Accounts. However, it
is unlikely that the Company will be able to deliver Subsequent Mortgage Loans
for Loan Group I and II with an aggregate principal balance identical to the
related Original Pre-Funded Amount.
INTEREST COVERAGE ACCOUNT
The Company will establish for the benefit of Group I and Group II
Class A Certificateholders two trust accounts (the "Group I Interest Coverage
Account" and the "Group II Interest Coverage Account"; and together the
"Interest Coverage Accounts"). On the Delivery Date, the Company will deposit in
each such account a cash amount as required by the Certificate Insurer and
specified in the Pooling and Servicing Agreement. On each Distribution Date
during the Funding Period and on the Distribution Date immediately following,
funds on deposit in the Interest Coverage Accounts will be applied by the
Trustee to cover shortfalls in the Group I and Group II Class A Interest
Distribution Amount attributable to the pre-funding feature during the related
Funding Period. Such shortfall initially will exist during the Funding Period
because while the Group I and Group II Class A Certificateholders are entitled
to receive interest accruing on the Certificate Principal Balance of the Group I
and Group II Class A Certificates, the Certificate Principal Balance of the
Class A Certificates during the Funding Period will be greater than the
aggregate principal balance of the related Mortgage Loans on the Delivery Date.
On the first business day following the first Distribution Date following the
termination of the related Funding Period, funds on deposit in the related
Interest Coverage Account will be released by the Trustee to the Company.
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MBIA INSURANCE CORPORATION
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement.
The Certificate Insurer, formerly known as Municipal Bond Investors
Assurance Corporation, is the principal operating subsidiary of MBIA Inc., a New
York Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts
of or claims against the Certificate Insurer. The Certificate Insurer is
domiciled in the State of New York and licensed to do business in all 50 states,
the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of
the Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. The Certificate Insurer has one European branch in the
Republic of France.
All information regarding the Certificate Insurer, a wholly owned
subsidiary of MBIA Inc., including the financial statements of the Certificate
Insurer for the year ended December 31, 1995, prepared in accordance with
generally accepted accounting principles, included in the Annual Report on Form
10-K of MBIA Inc. for the year ended December 31, 1995, is hereby incorporated
by reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
----------------------------------------------------------------------
DECEMBER 31, 1995 JUNE 30, 1996
-------------------------------- ------------------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets....................................... $3,814 $4,179
Liabilities........................................... 2,540 2,804
Capital and Surplus................................... 1,274 1,375
</TABLE>
<TABLE>
<CAPTION>
GAAP
----------------------------------------------------------------------
DECEMBER 31, 1995 JUNE 30, 1996
-------------------------------- ------------------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets................................................ $4,463 $4,691
Liabilities........................................... 1,937 2,088
Shareholder's Equity.................................. 2,526 2,602
</TABLE>
Audited financial statements of the Certificate Insurer as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 are included herein as Appendix A. Unaudited financial statements of
the Certificate Insurer for the six-month period ended June 30, 1996 are
included herein as Appendix B. Such financial statements have been prepared on
the basis of generally accepted accounting principles. Copies of the Certificate
Insurer's 1995 year-end audited financial statements prepared in accordance with
statutory accounting practices are available from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
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<PAGE>
A copy of the Annual Report on Form 10-K of MBIA Inc. is available from
the Certificate Insurer or the Securities and Exchange Commission. The address
of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Certificate Insurance Policies and the
Certificate Insurer set forth under the heading "Description of the
Certificates--Certificate Guaranty Insurance Policies" and "MBIA Insurance
Corporation" and in Appendices A and B.
Moody's rates the claims paying ability of the Certificate Insurer
"Aaa."
Standard & Poor's rates the claims paying ability of the Certificate
Insurer "AAA."
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A Certificates and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the Class
A Certificates. The Certificate Insurer does not guaranty the market price of
the Class A Certificates nor does it guaranty that the ratings on the Class A
Certificates will not be reversed or withdrawn.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity and the aggregate amount of distributions on the
Class A Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans in the related Loan Group and the amount, if any,
distributed from the related Pre-Funding Account at the end of the related
Funding Period. Such yield may be adversely affected by a higher or lower than
anticipated rate of principal payments on the Mortgage Loans in the related Loan
Group. The rate of principal payments on such Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of principal prepayments thereon by the Mortgagors, liquidations of
defaulted Mortgage Loans and purchases of Mortgage Loans in the related Loan
Group due to certain breaches of representations or warranties. The timing of
changes in the rate of prepayments, liquidations and purchases of the Mortgage
Loans in the related Loan Group may, and the timing of losses on the Mortgage
Loans in the related Loan Group will, significantly affect the yield on the
related Class A Certificates to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the Mortgage
Loans in the related Loan Group will depend on future events and on a variety of
factors (as described herein and in the Prospectus under "Yield Considerations"
and "Maturity and Prepayment Considerations"), no assurance can be given as to
such rate or the timing of principal payments on the related Class A
Certificates.
The Mortgage Loans may be prepaid by the mortgagors at any time;
however, a majority of the Mortgage Loans in each Loan Group are subject to a
prepayment charge for prepayments. See "Description of the Mortgage Pool"
herein. In addition, the Mortgage Loans contain a provision that
S-61
<PAGE>
may result in the acceleration of the payment of the Mortgage Loan in the event
of the transfer or sale of the related Mortgaged Property. Prepayments,
liquidations and purchases of the Mortgage Loans in the related Loan Group will
result in distributions to holders of the related Class A Certificates of
principal amounts which would otherwise be distributed over the remaining terms
of the Mortgage Loans in the related Loan Group. Factors affecting prepayment
(including defaults and liquidations) of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates, solicitations and servicing decisions. In
addition, if prevailing mortgage rates fell significantly below the Mortgage
Rates on the Mortgage Loans, the rate of prepayments (including refinancings)
would be expected to increase. Conversely, if prevailing mortgage rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayments on the Mortgage Loans would be expected to decrease.
The Mortgage Loans in the Trust Fund which are balloon payment Mortgage
Loans will not be fully amortizing over their terms to maturity, and will
require substantial principal payments at their stated maturity. Mortgage loans
of this type involve a greater degree of risk than self-amortizing loans because
the ability of a borrower to make a balloon payment typically will depend upon
its ability either to fully refinance the loan or to sell the related Mortgaged
Property at a price sufficient to permit the borrower to make the balloon
payment. The ability of a borrower 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 borrower's equity in the related Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for loans
secured by residential property. Because the ability of a borrower to make a
balloon payment typically will depend upon its ability either to refinance the
loan or to sell the related Mortgaged Property, there is a risk that the
Mortgage Loans that require balloon payments may default at maturity. Any
defaulted balloon payment that extends the maturity of a Mortgage Loan may delay
distributions of principal on the related Class A Certificates and thereby
extend the weighted average life of the related Class A Certificates and, if the
related Class A Certificates were purchased at a discount, reduce the yield
thereon.
In addition, the yield to maturity on the Class A Certificates will
depend on, among other things, the price paid by the holders of the Class A
Certificates and the related Pass-Through Rate. The extent to which the yield to
maturity of a Class A Certificate is sensitive to prepayments will depend, in
part, upon the degree to which it is purchased at a discount or premium. In
general, if a class of Class A Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a class of Class A
Certificates is purchased at a discount and principal distributions thereon
occur at a rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that assumed at the time of
purchase. For additional considerations relating to the yield on the
Certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the country
in which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Maturity and Prepayment
Considerations" in the Prospectus.
S-62
<PAGE>
In addition, with respect to the Group II Class A Certificates, because
principal distributions are paid to certain of such classes before other
classes, holders of classes having a later priority of payment bear a greater
risk of losses than holders of classes having earlier priorities for
distribution of principal.
To the extent that the Original Pre-Funded Amounts have not been fully
applied to the purchase of Subsequent Mortgage Loans by the Trust Fund by the
end of the Funding Period, the Holders of the related Group I and Group II Class
A Certificates will receive on the first Distribution Date following the
termination of the Funding Period a prepayment of principal in an amount equal
to the lesser of (i) the related Pre-Funded Amount remaining in the related
Pre-Funding Account and (ii) the outstanding Certificate Principal Balance of
the related Class A Certificates. Although no assurance can be given, it is
anticipated by the Company that the principal amount of Subsequent Mortgage
Loans sold to the Trust Fund will require the application of substantially all
amounts on deposit in the Pre-Funding Accounts and that there will be no
material amount of principal prepaid to the Group I and Group II Class A
Certificateholders. However, it is unlikely that the Company will be able to
deliver Subsequent Mortgage Loans with an aggregate principal balance identical
to the related Pre-Funded Amounts.
The following discussion assumes the characteristics set forth in the
tables below. The Final Scheduled Maturity Date for the Class A Certificates is
as follows: Class A-1 Certificates, October 25, 2027; Class A-2 Certificates,
May 25, 2019; Class A-3 Certificates, December 25, 2023; and the Class A-4
Certificates, October 25, 2027. Such Final Scheduled Maturity Dates with respect
to the Class A-2 Certificates and the Class A-3 Certificates are based on a 0%
Prepayment Assumption with no Net Monthly Excess Cashflow used to make
accelerated payments of principal on such classes of Class A Certificates and on
the assumptions specified below in this section. Such Final Scheduled Maturity
Dates with respect to the Class A-1 Certificates and the Class A-4 Certificates
have been calculated assuming that a subsequent Mortgage Loan in the related
Loan Group has a first Due Date of November 1, 1996, and amortizes according to
its fully amortizing term of 360 months, plus twelve months. The weighted
average life of the Class A Certificates is likely to be shorter than would be
the case if payments actually made on the Mortgage Loans conformed to the
foregoing assumption, and the final Distribution Date with respect to the Class
A Certificates could occur significantly earlier than the Final Scheduled
Maturity Date because (i) prepayments (including, for this purpose, prepayments
attributable to foreclosure, liquidation, repurchase and the like) on Mortgage
Loans are likely to occur, (ii) in the case of the Class A-1 Certificates and
the Class A-4 Certificates, twelve months have been added to obtain the Final
Scheduled Maturity Date above, and (iii) the holder of a majority interest in
the Class R Certificates or the Master Servicer may cause a liquidation of the
Mortgage Loans when the aggregate outstanding principal amount of the Mortgage
Loans is less than 10% (5% with respect to the Master Servicer (or the
Certificate Insurer, if Advanta is removed as Master Servicer)) of the sum of
the aggregate principal balance of the Mortgage Loans as of the Cut-Off Date and
the aggregate principal balance of the Subsequent Mortgage Loans as of the
related Subsequent Cut-off Date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security is scheduled to be repaid to an investor (assuming no losses). The
weighted average life of the Class A Certificates will be influenced by the rate
at which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes liquidations due to default). Prepayments on mortgage loans are
commonly measured relative to a prepayment standard or model. The model used in
this Prospectus Supplement with respect to the Group I Class A Certificates is a
constant prepayment assumption ("CPR"), which represents an assumed constant
rate of prepayment, each month relative to the then outstanding principal
balance of the pool of mortgage loans for the life of such mortgage loans. The
model used in this Prospectus Supplement with respect to the Group II Class A
Certificates is a prepayment assumption (the "Prepayment Assumption"), which
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of the pool of mortgage loans for the life of such
mortgage loans. A 100% Prepayment Assumption assumes a
S-63
<PAGE>
conditional prepayment rate of 3% per annum of the outstanding principal balance
of such mortgage loans in the first month of the life of the mortgage loans and
an additional approximate 1.42% (precisely 17/12) (expressed as a percentage per
annum) in each month thereafter until the twelfth month; beginning in the
twelfth month and in each month thereafter during the life of the mortgage
loans, a conditional prepayment rate of 20% per annum each month is assumed. As
used in the table below, a 0% CPR or a 0% Prepayment Assumption assumes a
prepayment rate equal to 0% CPR or 0% of the Prepayment Assumption, i.e., no
prepayments. Correspondingly, 80% Prepayment Assumption assumes prepayment rates
equal to 80% of the Prepayment Assumption, and so forth. Neither CPR nor the
Prepayment Assumption purports to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans.
The following tables have been prepared assuming that Loan Groups I and
II are comprised of Mortgage Loans having the following characteristics (dollar
amounts are approximate):
LOAN GROUP I
(i) the 1st through 11th hypothetical Mortgage Loans set forth below comprise
the Initial Group I Loans included in Loan Group I and the 12th through 15th
hypothetical Mortgage Loans set forth below comprise the Subsequent Mortgage
Loans included in Loan Group I:
<TABLE>
<CAPTION>
ORIGINAL REMAINING
TERM TO NEXT TERM TO
PRINCIPAL MORTGAGE MATURITY ADJUSTMENT MATURITY GROSS LIFETIME LIFETIME PERIODIC
BALANCE RATE (IN MONTHS) DATE (IN MONTHS) MARGIN CAP FLOOR CAP
--------- -------- ----------- ---------- ----------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 8,423,119.33 10.9235% 360 6/01/98 358 5.68% 17.923% 10.923% 1.500%
$ 12,022,121.95 10.8770% 360 7/01/98 359 5.52% 17.867% 10.877% 1.500%
$ 17,724,963.00 11.2534% 360 8/01/98 360 5.74% 18.253% 11.255% 1.500%
$ 45,675.00 10.7500% 360 9/01/98 360 5.90% 17.750% 10.750% 1.500%
$ 110,816.82 8.9900% 360 5/01/99 357 5.25% 14.990% 8.990% 3.000%
$ 726,984.69 10.1613% 360 9/01/96 355 5.94% 16.161% 11.891% 1.107%
$ 2,316,350.55 9.8140% 360 10/01/96 355 5.66% 16.464% 9.806% 1.227%
$ 2,907,257.92 9.5695% 360 11/01/96 357 6.27% 16.409% 9.449% 1.161%
$ 11,628,415.76 9.6654% 360 12/01/96 358 5.67% 16.665% 9.597% 1.043%
$ 25,819,834.68 9.7064% 360 1/01/97 359 5.70% 16.678% 9.691% 1.065%
$ 27,820,124.83 10.0878% 361 2/01/97 360 5.64% 17.088% 10.087% 1.013%
$ 7,076,879.26 10.5500% 360 8/01/98 360 5.63% 18.055% 10.550% 1.500%
$ 7,076,879.26 10.5500% 360 8/01/98 360 5.63% 18.055% 10.550% 1.500%
$ 13,150,288.70 9.3300% 360 2/01/97 360 5.58% 16.393% 9.330% 1.000%
$ 13,150,288.70 9.3300% 360 2/01/97 360 5.58% 16.393% 9.330% 1.000%
</TABLE>
(ii) the 12th and 14th hypothetical Mortgage Loans set forth above have an
initial Due Date of October 1, 1996; however, on the Delivery Date, an amount
equal to interest at 10.05% and 8.83% per annum, respectively, on the related
principal balance of the Mortgage Loan will be deposited into the related
Certificate Account and will be available for the Distribution Date occurring in
September 1996; and (iii) the 13th and 15th hypothetical Mortgage Loans set
forth above have an initial Due Date of November 1, 1996; however, on the
Delivery Date, an amount equal to interest at 10.05% and 8.83% per annum,
respectively, on the principal balance of the related Mortgage Loan will be
deposited into the related Certificate Account and will be available for the
Distribution Dates occurring in September and October 1996.
S-64
<PAGE>
LOAN GROUP II
(i) the 1st through 3rd hypothetical Mortgage Loans set forth below comprise the
Initial Group II Loans included in Loan Group II and the 4th and 5th
hypothetical Mortgage Loans set forth below comprise the Subsequent Mortgage
Loans included in Loan Group II:
REMAINING ORIGINAL
TERM TO TERM TO
PRINCIPAL MATURITY (IN MATURITY
BALANCE MORTGAGE RATE MONTHS) (IN MONTHS)
------- ------------- ------- -----------
$ 24,914,693.00 11.6985% 358 360
$ 10,627,935.00 11.6714% 360 360
$ 5,961,579.83 12.2209% 175 178
$ 4,247,896.02 11.1700% 359 359
$ 4,247,896.02 11.1700% 359 359
(ii) the 4th hypothetical Mortgage Loan set forth above has an initial
Due Date of October 1, 1996; however, on the Delivery Date an amount equal to
the interest at 10.67% per annum, on the principal balance of the Mortgage Loan
will be deposited into the related Certificate Account and will be available for
the Distribution Date occurring in September, 1996, and (iii) the 5th
hypothetical Mortgage Loan set forth above has an initial due date of November
1, 1996; however, on the Delivery Date an amount equal to the interest at 10.67%
per annum, on the principal balance of the Mortgage Loan will be deposited into
the related Certificate Account and will be available for the Distribution Dates
occurring in September and October 1996.
In addition, the following tables have been prepared assuming that the Mortgage
Loans in each Loan Group have the following characteristics: (i) with respect to
the Group I and Group II Loans, the Subsequent Mortgage Loans are purchased by
October 15, 1996, resulting in no mandatory prepayment from the Pre-Funding
Accounts on the Distribution Date in October 1996; (ii) all calculations for the
Mortgage Loans are done on the basis of a 360-day year consisting of twelve
30-day months; (iii) with respect to the Class A Certificates, all weighted
average lives are calculated on the basis of a 360-day year and a 30-day month;
(iv) Due Dates on each Mortgage Loan are the first day of the month; (v) all
scheduled monthly payments on the Mortgage Loans are made in a timely fashion on
the first day of each month, commencing in September 1996, and prepayments are
assumed to be received on the last day of each month, commencing in August 1996
(except for the hypothetical mortgage loans with an October or November, 1996
first Due Date, for which scheduled monthly payments commence in October or
November, 1996, respectively, and prepayments commence in September or October,
1996, respectively); (vii) the Mortgage Rate for the Group I Loans is adjusted
on its next Adjustment Date and on subsequent Adjustment Dates as necessary to a
rate equal to the sum of the Index and the related Gross Margin, subject to the
related Periodic Rate Cap, Lifetime Rate Cap and Lifetime Rate Floor; (viii)
there are no Prepayment Interest Shortfalls; (ix) distributions on the Class A
Certificates are made on the 25th day of each month, commencing in September
1996, (x) the Delivery Date is August 23, 1996; (xi) the Index remains constant
at 5.6875% per annum; (xii) the Required Subordinated Amounts will be set as
provided in the Pooling and Servicing Agreement, (xiii) the Mortgage Loans will
prepay at the indicated assumed percentages of CPR or the Prepayment Assumption
in the corresponding order set forth below and (xiv) and with regard to the
weighted average lives neither the holder of a majority percentage interest of
the Class R Certificates or the Master Servicer (or the Certificate Insurer, if
Advanta is removed as Master Servicer) exercises its option to terminate the
Trust Fund when the aggregate principal balance of the Mortgage Loans is reduced
to less than 10% (or 5% in the case of the Master Servicer or the Certificate
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<PAGE>
Insurer) of the aggregate Principal Balance of the Mortgage Loans as of the
Cut-off Date and the aggregate Principal Balance of the Subsequent Mortgage
Loans as of the related Subsequent Cut-off Date.
Based upon the foregoing assumptions, certain of which may not reflect
actual experience, the following tables indicate the projected weighted average
life of each class of Class A Certificates and the percentages of the initial
Certificate Principal Balance of each such class that would be outstanding after
each of the dates shown at various percentages of CPR and the Prepayment
Assumption which will occur simultaneously for both Loan Groups. Investors in
the Class A Certificates should note that, irrespective of the assumptions
above, including the assumption of no losses on the Mortgage Loans, the
following tables show both CPR with respect to Loan Group I and the Prepayment
Assumption with respect to Loan Group II because Cross-Collateralization
Payments will occur with respect to distributions on Loan Group I being paid to
the Group II Certificates.
S-66
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR AND THE PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES
-------------------------------------------------------------------------------
GROUP I (CPR) 0% 15% 18% 20% 25% 30% 35% 40%
- ------------- -------- --------- -------- --------- --------- --------- --------- ------
GROUP II (PPA) 0% 50% 75% 100% 115% 125% 150% 200%
- -------------- -------- --------- -------- --------- --------- --------- --------- ------
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100% 100% 100% 100%
August, 1997............... 96 82 79 77 72 67 62 57
August, 1998............... 96 69 64 60 53 46 39 33
August, 1999............... 95 57 51 47 39 32 26 20
August, 2000............... 95 48 41 38 29 22 16 12
August, 2001............... 94 40 34 30 22 15 11 7
August, 2002............... 93 34 27 24 16 11 7 4
August, 2003............... 92 29 22 19 12 7 4 2
August, 2004............... 91 24 18 15 9 5 3 1
August, 2005............... 90 20 15 12 7 3 1 0
August, 2006............... 89 17 12 9 5 2 1 0
August, 2007............... 88 14 10 7 3 1 0 0
August, 2008............... 86 12 8 6 2 1 0 0
August, 2009............... 85 10 6 4 2 0 0 0
August, 2010............... 83 8 5 3 1 0 0 0
August, 2011............... 81 7 4 2 1 0 0 0
August, 2012............... 79 6 3 2 0 0 0 0
August, 2013............... 76 5 2 1 0 0 0 0
August, 2014............... 73 4 2 1 0 0 0 0
August, 2015............... 70 3 1 1 0 0 0 0
August, 2016............... 67 2 1 0 0 0 0 0
August, 2017............... 62 2 1 0 0 0 0 0
August, 2018............... 58 1 0 0 0 0 0 0
August, 2019............... 53 1 0 0 0 0 0 0
August, 2020............... 47 1 0 0 0 0 0 0
August, 2021............... 41 0 0 0 0 0 0 0
August, 2022............... 35 0 0 0 0 0 0 0
August, 2023............... 27 0 0 0 0 0 0 0
August, 2024............... 19 0 0 0 0 0 0 0
August, 2025............... 10 0 0 0 0 0 0 0
August, 2026............... 0 0 0 0 0 0 0 0
Weighted Average
Lives in Years(1).......... 21.28 5.49 4.59 4.12 3.25 2.66 2.22 1.89
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
Certificate.
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<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR AND THE PREPAYMENT ASSUMPTION ("PPA")
CLASS A-2 CERTIFICATES
GROUP I (CPR) 0% 15% 18% 20% 25% 30% 35% 40%
- ------------- --------- --------- --------- --------- --------- --------- -------- ------
GROUP II (PPA) 0% 50% 75% 100% 115% 125% 150% 200%
- -------------- --------- --------- --------- --------- --------- --------- -------- ------
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............ 100% 100% 100% 100% 100% 100% 100% 100%
August, 1997.................. 94 82 76 69 65 63 56 43
August, 1998.................. 93 61 47 33 24 19 6 0
August, 1999.................. 91 43 22 3 0 0 0 0
August, 2000.................. 89 27 1 0 0 0 0 0
August, 2001.................. 87 12 0 0 0 0 0 0
August, 2002.................. 84 0 0 0 0 0 0 0
August, 2003.................. 82 0 0 0 0 0 0 0
August, 2004.................. 79 0 0 0 0 0 0 0
August, 2005.................. 75 0 0 0 0 0 0 0
August, 2006.................. 71 0 0 0 0 0 0 0
August, 2007.................. 67 0 0 0 0 0 0 0
August, 2008.................. 62 0 0 0 0 0 0 0
August, 2009.................. 56 0 0 0 0 0 0 0
August, 2010.................. 49 0 0 0 0 0 0 0
August, 2011.................. 44 0 0 0 0 0 0 0
August, 2012.................. 40 0 0 0 0 0 0 0
August, 2013.................. 35 0 0 0 0 0 0 0
August, 2014.................. 30 0 0 0 0 0 0 0
August, 2015.................. 24 0 0 0 0 0 0 0
August, 2016.................. 18 0 0 0 0 0 0 0
August, 2017.................. 11 0 0 0 0 0 0 0
August, 2018.................. 2 0 0 0 0 0 0 0
August, 2019 and thereafter... 0 0 0 0 0 0 0 0
Weighted Average
Lives in Years(1)............. 13.35 2.78 2.00 1.59 1.42 1.33 1.16 0.94
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
Certificate.
S-68
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-3 CERTIFICATES
GROUP I (CPR) 0% 15% 18% 20% 25% 30% 35% 40%
- ------------- ------- ------- -------- -------- -------- ------- ------- --------
GROUP II (PPA) 0% 50% 75% 100% 115% 125% 150% 200%
- -------------- ------- ------- -------- -------- -------- ------- ------- --------
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage. 100% 100% 100% 100% 100% 100% 100% 100%
August, 1997....... 100 100 100 100 100 100 100 100
August, 1998....... 100 100 100 100 100 100 100 68
August, 1999....... 100 100 100 100 87 76 50 6
August, 2000....... 100 100 100 65 46 34 8 0
August, 2001....... 100 100 72 34 15 3 0 0
August, 2002....... 100 97 47 9 0 0 0 0
August, 2003....... 100 76 25 0 0 0 0 0
August, 2004....... 100 57 7 0 0 0 0 0
August, 2005....... 100 41 0 0 0 0 0 0
August, 2006....... 100 26 0 0 0 0 0 0
August, 2007....... 100 12 0 0 0 0 0 0
August, 2008....... 100 0 0 0 0 0 0 0
August, 2009....... 100 0 0 0 0 0 0 0
August, 2010....... 100 0 0 0 0 0 0 0
August, 2011....... 100 0 0 0 0 0 0 0
August, 2012....... 100 0 0 0 0 0 0 0
August, 2013....... 100 0 0 0 0 0 0 0
August, 2014....... 100 0 0 0 0 0 0 0
August, 2015....... 100 0 0 0 0 0 0 0
August, 2016....... 100 0 0 0 0 0 0 0
August, 2017....... 100 0 0 0 0 0 0 0
August, 2018....... 100 0 0 0 0 0 0 0
August, 2019....... 88 0 0 0 0 0 0 0
August, 2020....... 71 0 0 0 0 0 0 0
August, 2021....... 51 0 0 0 0 0 0 0
August, 2022....... 29 0 0 0 0 0 0 0
August, 2023....... 4 0 0 0 0 0 0 0
August, 2024....... 0 0 0 0 0 0 0 0
August, 2025....... 0 0 0 0 0 0 0 0
August, 2026....... 0 0 0 0 0 0 0 0
Weighted
Average
Lives in Years(1).. 24.98 8.63 6.03 4.60 4.02 3.71 3.11 2.33
- ----------------
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-4 CERTIFICATES
GROUP I (CPR) 0% 15% 18% 20% 25% 30% 35% 40%
- ------------- -------- ------- ------- ------- -------- -------- ------- ------
GROUP II (PPA) 0% 50% 75% 100% 115% 125% 150% 200%
- -------------- -------- ------- ------- ------- -------- -------- ------- ------
DISTRIBUTION DATE
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage. 100% 100% 100% 100% 100% 100% 100% 100%
August, 1997....... 100 100 100 100 100 100 100 100
August, 1998....... 100 100 100 100 100 100 100 100
August, 1999....... 100 100 100 100 100 100 100 100
August, 2000....... 100 100 100 100 100 100 100 64
August, 2001....... 100 100 100 100 100 100 76 37
August, 2002....... 100 100 100 100 89 77 52 21
August, 2003....... 100 100 100 87 68 57 36 12
August, 2004....... 100 100 100 68 51 42 24 6
August, 2005....... 100 100 90 54 38 30 16 3
August, 2006....... 100 100 75 42 28 22 10 1
August, 2007....... 100 100 62 32 21 15 6 0
August, 2008....... 100 100 51 25 15 11 4 0
August, 2009....... 100 87 42 19 11 7 2 0
August, 2010....... 100 75 34 14 7 5 0 0
August, 2011....... 100 65 27 10 5 3 0 0
August, 2012....... 100 57 22 7 3 1 0 0
August, 2013....... 100 50 18 5 2 0 0 0
August, 2014....... 100 43 14 4 1 0 0 0
August, 2015....... 100 37 11 2 0 0 0 0
August, 2016....... 100 31 9 1 0 0 0 0
August, 2017....... 100 26 7 0 0 0 0 0
August, 2018....... 100 22 5 0 0 0 0 0
August, 2019....... 100 17 3 0 0 0 0 0
August, 2020....... 100 14 2 0 0 0 0 0
August, 2021....... 100 10 1 0 0 0 0 0
August, 2022....... 100 7 0 0 0 0 0 0
August, 2023....... 100 5 0 0 0 0 0 0
August, 2024....... 73 2 0 0 0 0 0 0
August, 2025....... 36 0 0 0 0 0 0 0
August, 2026....... 0 0 0 0 0 0 0 0
Weighted
Average
Lives in Years(1).. 28.65 18.02 13.31 10.26 8.95 8.23 6.81 4.97
- ----------------
</TABLE>
(1) The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Principal
Balance by the number of years from the date of issuance of the Certificate
to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the initial Certificate Principal Balance of the
Certificate.
----------------------
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth above,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at the
given levels of CPR or the Prepayment Assumption until maturity or that all of
the Mortgage Loans will prepay at the same level of CPR or the Prepayment
Assumption. Moreover, the diverse remaining terms to maturity of the Mortgage
Loans could produce slower or faster principal distributions than indicated in
the table at the various percentages of CPR or the Prepayment Assumption
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and
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<PAGE>
performance of the Mortgage Loans, or actual prepayment or loss experience, will
affect the percentages of initial Certificate Principal Balances outstanding
over time and the weighted average lives of the Class A Certificates.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement"), dated as of August 1, 1996,
among the Company, the Master Servicer and Bankers Trust Company of California,
N.A., as Trustee. Reference is made to the Prospectus for important information
in addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Class A Certificates. See "The Pooling
Agreement" in the Prospectus.
THE MASTER SERVICER
Advanta Mortgage Corp. USA (in its capacity as master servicer, the
"Master Servicer") will act as master servicer for the Mortgage Loans pursuant
to the Pooling and Servicing Agreement. The Master Servicer is an indirect
subsidiary of Advanta Corp., a Delaware corporation (the "Advanta Parent"), a
publicly-traded company based in Horsham, Pennsylvania with assets as of June
30, 1996 in excess of $5.7 billion. Advanta Parent, through its subsidiaries
(including the Master Servicer) managed assets (including mortgage loans) in
excess of $18.2 billion as of June 30, 1996.
As of June 30, 1996, the Master Servicer and its subsidiaries were
servicing approximately 36,400 Mortgage Loans in the Owned and Managed Servicing
Portfolio (as defined below) representing an aggregate outstanding principal
balance of approximately $2.1 billion, and approximately 34,600 mortgage loans
in the Third-Party Servicing Portfolio (as defined below) representing an
aggregate outstanding principal balance of approximately $1.46 billion.
The Certificates will not represent an interest in or obligation of,
nor are the Mortgage Loans guaranteed by, the Master Servicer or the Advanta
Parent.
In addition to the rights of the Trustee with respect to the Master
Servicer as described in the Prospectus under "The Pooling Agreement," the
Certificate Insurer will have certain rights, described in the Pooling and
Servicing Agreement, with respect to the removal or resignation of the Master
Servicer and the ability of the Master Servicer to assign any of its obligations
under the Pooling and Servicing Agreement.
DELINQUENCY AND LOSS EXPERIENCE OF THE MASTER SERVICER
OWNED AND MANAGED SERVICING PORTFOLIO. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Master Servicer for its Owned and Managed Servicing Portfolio for June 30,
1996, and for each of the four prior years. The Master Servicer's "Owned and
Managed Servicing Portfolio" consists of the Master Servicer's servicing
portfolio of fixed and variable rate mortgage loans excluding certain loans
serviced by the Master Servicer that were not originated or purchased and
reunderwritten by the Master Servicer or any affiliate thereof. In addition to
the Owned and Managed Servicing Portfolio, the Master Servicer serviced as of
June 30, 1996, approximately 34,600 mortgage loans with an aggregate principal
balance as of such date of approximately $1.46 billion; such loans were not
originated by the Master Servicer or any affiliate thereof and are being
serviced for third parties on a contract servicing basis (the "Third-Party
Servicing Portfolio"). No loans in the Third-Party Servicing Portfolio are
included in the tables set forth below.
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<PAGE>
<TABLE>
<CAPTION>
DELINQUENCY AND FORECLOSURE EXPERIENCE OF
THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO
YEAR ENDING DECEMBER 31,
------------------------------------------------------------
Six Months Ending
JUNE 30, 1996 1995 1994
---------------------------- ------------------------------ -----------------------------
Number Dollar Number Dollar Number Dollar
of Amount of Amount of Amount
LOANS (000) LOANS (000) LOANS (000)
------------ -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Portfolio 36,393 $2,074,115 32,592 $1,797,582 26,446 $1,346,100
Delinquency
Percentage(1) 1.79% 1.71% 2.67% 2.44% 2.01% 1.57%
30-59 days 0.63 0.63 0.72 0.71 0.57 0.45
60-89 days 1.61 1.41 1.69 1.23 1.85 1.51
---- ---- ---- ---- ---- ----
90 days or more 4.03% 3.75% 5.08% 4.38% 4.43% 3.53%
Total
Foreclosure Rate(2) 1.34% 1.59% 1.29% 1.53% 1.35% 1.38%
REO Properties(3) 0.44% -- 0.52% -- 0.47% --
</TABLE>
YEAR ENDING DECEMBER 31,
----------------------------------------------------------
1993 1992
----------------------------- ---------------------------
Number Dollar Number Dollar
of Amount of Amount
LOANS (000) LOANS (000)
-------------- -------------- -------------- --------
Portfolio 25,460 $1,149,864 22,318 $908,541
Delinquency
Percentage(1) 2.43% 2.22% 2.71% 2.59%
30-59 days 0.77 0.63 0.64 0.64
60-89 days 2.19 2.12 1.52 1.69
---- ---- ---- ----
90 days or more 5.39% 4.97% 4.87% 4.92%
Total
Foreclosure Rate(2) 1.32% 1.62% 2.13% 2.78%
REO Properties(3) 0.42% -- 0.35% --
- --------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) "Foreclosure Rate" is the number of mortgage loans or the dollar amount of
mortgage loans in foreclosure as a percentage of the total number of
mortgage loans or the dollar amount of mortgage loans, as the case may be,
as of the date indicated.
(3) REO Properties (i.e., "real estate owned" properties -- properties relating
to mortgage foreclosed or for which deeds in lieu of foreclosure have been
accepted, and held by the Master Servicer pending disposition) percentages
are calculated using the number of loans, not the dollar amount.
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<PAGE>
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE OF THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO OF MORTGAGE LOANS
YEAR ENDING DECEMBER 31,
------------------------------------------------------------------------
Six Months Ending
JUNE 30, 1996 1995 1994 1993 1992
----------------------- ------------------ ----------------- ------------------ ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount
outstanding(1) $1,926,067 $1,540,238 $1,225,529 $1,049,447 $786,178
Gross losses(2) $6,710 $13,978 $20,886 $14,115 $6,069
Recoveries(3) $39 $148 $179 $123 $145
Net losses(4) $6,671 $13,830 $20,707 $13,992 $5,924
Net losses as a percentage
of average amount
outstanding 0.69%(5) 0.90% 1.69% 1.33% 0.75%
</TABLE>
- -------------------------
(1) "Average Amount Outstanding" during the period is the arithmetic average of
the principal balances of the mortgage loans outstanding on the last
business day of each month during the period.
(2) "Gross Losses" are amounts which have been determined to be uncollectible
relating to mortgage loans for each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
(5) Annualized.
- --------
* Managed portfolio statistics restated to exclude interest advances on
serviced portfolio to be consistent with presentation of owned portfolio.
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<PAGE>
The Master Servicer experienced an increase in the net loss rate on its
Owned and Managed Servicing Portfolio during the period 1990 through 1994. It
believes that such increase was due to four primary factors: the seasoning of
its portfolio, economic conditions, a decline in property values in certain
regions and the acceleration of charge-offs on loans in 1994. In addition, the
level of net losses during such period was negatively impacted by the
performance on its Non-Income Verification ("NIV") loan program. The net loss
rates as a percentage of the average amount outstanding on its Owned and Managed
Servicing Portfolio, excluding NIV loans, are 0.82%, 1.42%, 0.88% and 0.45% for
the periods ending December 31, 1995, December 31, 1994, December 31, 1993 and
December 31, 1992, respectively.*
There can be no assurance that the delinquency experience of the Group
I Loans and Group II Loans will correspond to the delinquency experience of the
Master Servicer's servicing portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Master
Servicer's servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the Group I Loans and Group II Loans will
depend on the results obtained over the life of the related Loan Group. The
Master Servicer's servicing portfolio includes mortgage loans with a variety of
payment and other characteristics (including geographic location) which are not
necessarily representative of the payment and other characteristics of the Group
I Loans and Group II Loans. The Master Servicer's servicing portfolio includes
mortgage loans underwritten pursuant to guidelines not necessarily
representative of those applicable to the Group I Loans and Group II Loans. It
should be noted that if the residential real estate market should experience an
overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by the Master
Servicer. In addition, adverse economic conditions may affect the timely payment
by mortgagors of scheduled payments of principal and interest on the Group I
Loans and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the Group I Loans and Group II Loans.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Mortgage Loan are payable out of the
interest payments on such Mortgage Loan. The Servicing Fees will accrue at a
rate per annum (the "Servicing Fee Rate") on the outstanding principal balance
of each Mortgage Loan equal to 0.50% per annum. The Servicing Fees consist of
servicing compensation payable to the Master Servicer in respect of its master
servicing and direct servicing activities. In addition, the Master Servicer
shall be entitled to receive, as additional servicing compensation, to the
extent permitted by applicable law and the related Mortgage Notes, any late
payment charges, assumption fees or similar items. The Master Servicer shall pay
all expenses incurred by it in connection with its servicing activities under
the Pooling and Servicing Agreement and shall not be entitled to reimbursement
therefor except as specifically provided in the Pooling and Servicing Agreement.
THE TRUSTEE
Bankers Trust Company of California, N.A. (the "Trustee"), a national
banking association, will act as trustee for the Certificates pursuant to the
Pooling and Servicing Agreement. The Trustee will be entitled to a fee, payable
monthly, of 0.01% per annum of the Principal Balance (as defined herein) of each
Mortgage Loan (the "Trustee's Fee"). See "The Pooling Agreement" in the
Prospectus.
- --------
* MANAGED PORTFOLIO STATISTICS RESTATED TO EXCLUDE INTEREST ADVANCES ON SERVICED
PORTFOLIO TO BE CONSISTENT WITH PRESENTATION OF OWNED PORTFOLIO.
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<PAGE>
EVENTS OF DEFAULT
In addition to the Events of Default listed in the Prospectus under
"The Pooling Agreement--Events of Default," the Master Servicer may be removed
if the delinquency or loss experience of the Mortgage Loans exceeds certain
levels specified in the Pooling and Servicing Agreement.
TERMINATION
The Pooling and Servicing Agreement will terminate upon notice to the
Trustee of either: (a) the later of the distribution to Certificateholders of
the final payment or collection with respect to the last Mortgage Loan (or
Advances of same by the Master Servicer), or the disposition of all funds with
respect to the last Mortgage Loan and the remittance of all funds due under the
Pooling and Servicing Agreement and the payment of all amounts due and payable
to the Certificate Insurer and the Trustee or (b) mutual consent of the Master
Servicer, the Certificate Insurer and all Certificateholders in writing;
provided, however, that in no event will the Trust Fund established by the
Pooling and Servicing Agreement terminate later than twenty-one years after the
death of the last surviving lineal descendant of the person named in the Pooling
and Servicing Agreement.
Subject to provisions in the Pooling and Servicing Agreement, the
holder of a majority percentage interest of the Class R Certificates or the
Master Servicer (or the Certificate Insurer, if Advanta is removed as Master
Servicer) may, at its option and at its sole cost and expense, on any
Distribution Date when the aggregate Principal Balance of the Mortgage Loans is
less than 10% (5% with respect to the exercise of this option by the Master
Servicer or the Certificate Insurer) of the sum of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date and the aggregate principal
balance of the Subsequent Mortgage Loans as of the related Subsequent Cut-off
Date, purchase from the Trust Fund all of the outstanding Mortgage Loans at a
price equal to the sum of (a) 100% of the Principal Balance of each outstanding
Mortgage Loan, (b) the aggregate amount of accrued and unpaid interest on the
Mortgage Loans through the related Due Period and 30 days' accrued interest
thereon at a rate equal to the Mortgage Rate (net of the Servicing Fee Rate in
the case of such a purchase by the Master Servicer), (c) any Group I Class A
Available Funds Cap Carry-Forward Amount for such Distribution Date (unless the
Certificate Insurer exercises this option), (d) any unreimbursed amounts due to
the Certificate Insurer under the Pooling and Servicing Agreement or the
Insurance Agreement (as defined in the Pooling and Servicing Agreement), (e) any
excess of the actual stated principal balance of each such Mortgage Loan over
the Principal Balance thereof, the aggregate amount of accrued and unpaid
interest on such excess through the related due period and 30 days' interest on
such excess at a rate equal to the related Mortgage Interest Rate with respect
to each related Mortgage Loan, and (f) the amount of any unreimbursed Servicing
Advances made by the Master Servicer with respect to the related Mortgage Loans.
Any such purchase shall be accomplished by deposit into the related Certificate
Account of the purchase price specified above. No such termination is permitted
without the prior written consent of the Certificate Insurer if it would result
in a draw on the related Certificate Insurance Policy. See "The Pooling
Agreement--Termination; Retirement of Certificates" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Class A Certificates, Thacher Proffitt & Wood,
counsel to the Company, will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the Pooling and Servicing Agreement,
for federal income tax purposes, the Trust Fund (exclusive of the Interest
Coverage Accounts and the Pre-Funding Accounts) will qualify as a REMIC under
the Code.
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<PAGE>
For federal income tax purposes, the Class A Certificates and the
Subordinate Certificates will represent ownership of "regular interests" in the
REMIC and will generally be treated as representing ownership of debt
instruments issued by the REMIC and the Class R Certificates will constitute the
sole class of "residual interests" in the REMIC. See "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates
will not be treated as having been issued with original issue discount. The
prepayment assumption that will be used with respect to the Group I Class A
Certificates and the Group II Class A Certificates in determining the rate of
accrual of original issue discount, market discount and premium, if any, for
federal income tax purposes will be based on the assumption that, subsequent to
the date of any determination the Mortgage Loans will prepay at a rate equal to
a 25% CPR and a 115% Prepayment Assumption, respectively. No representation is
made that the Mortgage Loans will prepay at this rate or at any other rate. See
"Certain Federal Income Tax Consequences--General--REMICs--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the
"OID Regulations") under Sections 1271 to 1275 of the Code generally addressing
the treatment of debt instruments issued with original issue discount.
Purchasers of the Class A Certificates should be aware that the OID Regulations
do not adequately address certain issues relevant to, or are not applicable to,
securities such as the Class A Certificates. In addition, there is considerable
uncertainty concerning the application of the OID Regulations to REMIC Regular
Certificates that provide for payments based on an adjustable rate. Because of
the uncertainty concerning the application of Section 1272(a)(6) of the Code to
such Certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Class A Certificates are 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 Class A Certificates are advised to consult their tax advisors concerning
the tax treatment of such Certificates.
A reasonable method of reporting original issue discount with respect
to the Class A Certificates if the IRS determines such Certificates are issued
with original issue discount generally would be to report all income with
respect to such Certificates as original issue discount for each period,
computing such original issue discount (i) by assuming that the value of the
applicable index will remain constant for purposes of determining the original
yield to maturity of, and projecting future distributions on, each Class of such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described in the Prospectus
can be applied, and (ii) by accounting for any positive or negative variation in
the actual value of the applicable index in any period from its assumed value as
a current adjustment to original issue discount with respect to such period. See
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" in the Prospectus.
In certain circumstances the OID Regulations permit the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used in preparing reports to the
Certificateholders and the IRS.
The Class A Certificates may be treated for federal income tax purposes
as having been issued at a premium. Whether any holder of a Class A Certificate
will be treated as holding a certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders
S-75
<PAGE>
of the Class A Certificates should consult their tax advisors regarding the
possibility of making an election to amortize such premium. See "Certain Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates" and "--Premium" in the Prospectus.
The Class A Certificates will be treated as "qualifying real property
loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Class A Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that such Class A
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. To the extent the manufactured housing loans meet the requirements of
Section 25(e)(10) of the Code, the Class A Certificates will be treated as
assets described in the foregoing sections of the Code. Moreover, the Class A
Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. See "The Pooling and Servicing Agreement--Termination"
herein and "Certain Federal Income Tax Consequences--REMICs--Characterization of
Investments in REMIC Certificates" in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated August 21, 1996 (the "Underwriting Agreement"), among Morgan
Stanley & Co. Incorporated ("Morgan Stanley"), Lehman Brothers Inc. ("Lehman";
Morgan Stanley and Lehman together, the "Underwriters"), the Company and the
Seller, the Underwriters have agreed to purchase and the Company has agreed to
sell to the Underwriters the Class A Certificates. It is expected that delivery
of the Class A Certificates will be made only in book-entry form through the
Same Day Funds Settlement System of DTC, on or about August 23, 1996, against
payment therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the
Underwriters to pay for and accept delivery of the Class A Certificates is
subject to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
Company's Registration Statement shall be in effect, and that no proceedings for
such purpose shall be pending before or threatened by the Securities and
Exchange Commission.
The distribution of the Class A Certificates by the Underwriters may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Class A Certificates, before deducting expenses payable by
the Company, will be approximately 99.13% of the aggregate initial Certificate
Principal Balance of the Class A Certificates plus accrued interest on the Group
II Class A Certificates from August 1, 1996. The Underwriters may effect such
transactions by selling the Class A Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters. In connection with the sale of
the Class A Certificates, the Underwriters may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Class A Certificates may be deemed to be underwriters and
any profit on the resale of the Class A Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement provides that the Company and the Seller
will jointly and severally indemnify the Underwriters, and that under limited
circumstances the Underwriters will indemnify the
S-76
<PAGE>
Company, against certain civil liabilities under the Securities Act of 1933, or
contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Class A
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Class A
Certificates will be the monthly statements discussed in the Prospectus under
"Description of the Certificates--Reports to Certificateholders," which will
include information as to the outstanding principal balance of the Class A
Certificates. There can be no assurance that any additional information
regarding the Class A Certificates will be available through any other source.
In addition, the Company is not aware of any source through which price
information about the Class A Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Class A
Certificates may adversely affect the liquidity of the Class A Certificates,
even if a secondary market for the Class A Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon
for the Company and the Underwriters by Thacher Proffitt & Wood, New York, New
York and for the Certificate Insurer by Kutak Rock, Omaha, Nebraska.
RATINGS
It is a condition of the issuance of the Class A Certificates that they
be rated "AAA" by Standard & Poor's Ratings Services ("S&P") and Duff & Phelps
Credit Rating Co. ("DCR") and "Aaa" by Moody's Investors Service, Inc.
("Moody's").
S&P's ratings on mortgage loan asset-backed pass-through certificates
address the likelihood of the receipt by Certificateholders of payments required
under the Pooling and Servicing Agreement. S&P's ratings take into consideration
the credit quality of the mortgage pool, structural and legal aspects associated
with the Certificates, and the extent to which the payment stream in the
mortgage pool is adequate to make payments required under the Certificates.
S&P's rating on the Certificates does not, however, constitute a statement
regarding frequency of prepayments on the mortgages. See "Certain Yield and
Prepayment Considerations" herein.
The ratings assigned by Moody's to mortgage loan asset-backed
pass-through certificates also address the likelihood of the receipt by
Certificateholders of all distributions to which such Certificateholders are
entitled. The rating process addresses the structural and legal aspects
associated with the Certificates, including the nature of the underlying
mortgage loans. The ratings assigned to mortgage loan asset-backed pass-through
certificates do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
The ratings assigned by DCR to mortgage loan asset-backed pass-through
certificates address the likelihood of the receipt by Certificateholders of all
distributions to which they are entitled under the transaction structure. DCR's
ratings reflect its analysis of the riskiness of the mortgage loans and its
analysis of the structure of the transaction as set forth in the operative
documents. In addition, DCR considers the claims paying ability of the
Certificate Insurer to be comparable to that of other companies for which DCR
assigns a "AAA" claims paying ability. DCR's ratings do not address the effect
on the certificates' yield attributable to prepayments or recoveries on the
underlying mortgages.
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<PAGE>
The Company has not requested a rating on the Class A Certificates by
any rating agency other than S&P, Moody's and DCR. However, there can be no
assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Class A
Certificates by S&P, Moody's and DCR.
The ratings assigned to the Class A-1 Certificates do not cover the
payment of any Group I Class A Available Funds Cap Carry-Forward Amount.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Class A Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support or
credit enhancement with respect to the Class A Certificates.
LEGAL INVESTMENT
The Group I Class A Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") for so long as they are rated in at least the second highest
rating category by one or more nationally recognized statistical rating
agencies, and, as such, are legal investments for certain entities to the extent
provided in SMMEA. SMMEA provides, however, that states could override its
provision on legal investment and restrict or condition investment in mortgage
related securities by taking statutory action on or prior to October 3, 1991.
The Group II Class A Certificates will not constitute "mortgage related
securities" for purposes of SMMEA.
The Company makes no representations as to the proper characterization
of the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A Certificates. Accordingly, all institutions
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their legal advisors in determining whether and to what
extent the Class A Certificates constitutes a legal investment or is subject to
investment, capital or other restrictions.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and the Code impose certain requirements on employee benefit
plans and certain other retirement plans and arrangements (including, but not
limited to, individual retirement accounts and annuities), as well as on
collective investment funds and certain separate and general accounts in which
such plans or arrangements are invested (all of which are hereinafter referred
to as a "Plan") and on persons who are fiduciaries with respect to such Plans.
Any Plan fiduciary which proposes to cause a Plan to acquire any of the Class A
Certificates would be required to determine whether such an investment is
permitted under the governing Plan instruments and is prudent and appropriate
for the Plan in view of its overall investment policy and the composition and
diversification of its portfolio. In addition, ERISA and the Code prohibit
certain transactions involving the assets of a Plan and "disqualified persons"
(within the meaning of the Code) and "parties in interest" (within the meaning
of ERISA) who have certain specified relationships to the Plan. Therefore, a
Plan fiduciary considering an investment in the Class A Certificates should also
S-78
<PAGE>
consider whether such an investment might constitute or give rise to a
prohibited transaction under ERISA or the Code. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Class A Certificates should
consult with its counsel with respect to the potential consequences under ERISA
and the Code of the Plan's acquisition and ownership of such Certificates.
The U.S. Department of Labor has granted to Morgan Stanley an
administrative exemption (Prohibited Transaction Exemption 90-24, 55 Fed. Reg.
20,548 (1990) (the "Morgan Stanley Exemption") and to Lehman an administrative
exemption (Prohibited Transaction Exemption 91-14, as amended; Exemption
Application No. D-7958, 56 Fed. Reg. 7414 (the "Lehman Exemption"; the Morgan
Stanley Exemption and the Lehman Exemption together, the "Exemptions") from
certain of the prohibited transaction rules of ERISA and the related excise tax
provisions of Section 4975 of the Code with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans, and other obligations that
meet the conditions and requirements of the Exemptions.
Among the conditions that must be satisfied for the Exemptions
to apply are the following:
(1) the acquisition of the Class A Certificates by a Plan is
on terms (including the price for such Certificates) that are at
least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
(2) the rights and interests evidenced by the Class A
Certificates acquired by the Plan are not subordinated to the
rights and interests evidenced by other certificates of the Trust
Fund;
(3) the Class A Certificates acquired by the Plan have
received a rating at the time of such acquisition that is one of
the three highest generic rating categories from either S&P,
Moody's, DCR or Fitch Investors Service, L.P. ("Fitch").
(4) the Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
Underwriters in connection with the distribution of the Class A
Certificates represents not more than reasonable compensation for
underwriting such Certificates; the sum of all payments made to
and retained by the Company pursuant to the assignment of the
Mortgage Loans to the Trust Fund represents not more than the fair
market value of such Mortgage Loans; the sum of all payments made
to and retained by the Master Servicer and any other servicer
represents not more than reasonable compensation for such person's
services under the Pooling and Servicing Agreement and
reimbursements of such person's reasonable expenses in connection
therewith; and
(6) the Plan investing in the Class A Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D
of the Securities and Exchange Commission under the Securities Act
of 1933.
The Trust Fund must also meet the following requirements:
(i) the corpus of the Trust Fund must consists solely of
assets of the type that have been included in other investment
pools;
S-79
<PAGE>
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of S&P,
Moody's, Fitch or DCR for at least one year prior to the Plan's
acquisition of the Class A Certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than
Plans for at least one year prior to any Plan's acquisition of the
Class A Certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
an obligor with respect to five percent or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any Class does not exceed twenty-five percent of all of the certificates of
that Class outstanding at the time of the acquisition; and (iv) immediately
after the acquisition, no more than twenty-five percent of the assets of the
Plan with respect to which such person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing assets
sold or served by the same entity. The Exemptions do not apply to Plans
sponsored by the Seller, the Company, the Underwriters, the Trustee, the Master
Servicer, the Certificate Insurer, any obligor with respect to Mortgage Loans
included in the Trust Fund constituting more than five percent of the aggregate
unamortized principal balance of the assets in the Trust Fund, or any affiliate
of such parties (the "Restricted Group").
The Company believes that the Exemptions will apply to the
acquisition and holding of the Class A Certificates by Plans and that all
conditions of the Exemptions other than those within the control of the
investors will be met. Notwithstanding any of the foregoing, the Exemptions will
not apply with respect to any Class A Certificates until such time as the
balance of the related Pre-Funding Account is reduced to zero. As of the date
hereof, there is no single Mortgage Loan included in the Trust Fund that
constitutes more than five percent of the aggregate unamortized principal
balance of the assets of the Trust Fund.
Prospective Plan investors should consult with their legal
advisors concerning the impact of ERISA and the Code, the applicability of
Prohibited Transaction Class Exemption 83-1, the Exemptions and any other
administrative exemption under ERISA, and the potential consequences in their
specific circumstances, prior to making an investment in the Class A
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Class A Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio. In particular, purchasers that are insurance
companies should consult with their counsel with respect to the recent United
States Supreme Court case, JOHN HANCOCK MUTUAL LIFE INSURANCE CO. V. HARRIS
TRUST AND SAVINGS BANK (decided December 13, 1993). In JOHN HANCOCK, the Supreme
Court ruled that assets held in an insurance company's general account may be
deemed to be "plan assets" under certain circumstances. Purchasers should
analyze whether the decision may have an impact with respect to purchases of the
Class A Certificates. In particular, such an insurance company should consider
the retroactive and prospective exemptive relief proposed by the Department of
Labor for transactions involving insurance company general account in respect of
Application No. D-9622, 59 Fed. Reg. 43134 (August 22, 1994). See "ERISA
Considerations" in the Prospectus.
S-80
<PAGE>
EXPERTS
The consolidated financial statements of the Certificate Insurer, MBIA
Insurance Corporation (formerly known as Municipal Bond Investors Assurance
Corporation), as of December 31, 1995 and 1994 and for the years ended December
31, 1995, 1994 and 1993, included as Appendix A to this Prospectus Supplement
have been audited by Coopers & Lybrand L.L.P., independent auditors, as set
forth in their report thereon appearing in this Prospectus Supplement and are
included in reliance upon the authority of such firm as experts in accounting
and auditing.
S-81
<PAGE>
===============================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
-----------------
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary.................................................................... S-3
Risk actors............................................................... S-21
Description of the Mortgage Pool.......................................... S-23
Description of the Certificates........................................... S-44
MBIA Insurance Corporation................................................ S-59
Certain Yield and Prepayment Considerations............................... S-61
Pooling and Servicing Agreement........................................... S-70
Certain Federal Income Tax Consequences................................... S-74
Method of Distribution.................................................... S-76
Legal Opinions............................................................ S-77
Ratings................................................................... S-77
Legal Investment.......................................................... S-78
ERISA Considerations...................................................... S-78
Experts................................................................... S-81
Appendix A - Audited Financial Statements
of the Certificate Insurer ........................................... A-1
Appendix B - Unaudited Financial Statements
of the Certificate Insurer ........................................... B-1
Appendix C - Underwriting Guidelines
Applicable to the Mortgage Loans...................................... C-1
Prospectus
Summary of Prospectus...................................................... 4
Risk Factors............................................................... 12
The Mortgage Pools......................................................... 15
Servicing of Mortgage Loans ............................................... 24
Description of the Certificates............................................ 31
Description of Credit Enhancement.......................................... 43
Purchase Obligations....................................................... 50
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder.......................................... 50
The Company................................................................ 53
Imperial Credit Industries, Inc............................................ 53
The Pooling Agreement...................................................... 54
Yield Considerations....................................................... 59
Maturity and Prepayment Considerations..................................... 61
Certain Legal Aspects of Mortgage
Loans ................................................................ 62
Certain Federal Income Tax Consequences.................................... 73
State and Other Tax Consequences........................................... 96
ERISA Considerations....................................................... 96
Legal Investment Matters................................................... 99
Use of Proceeds............................................................ 100
Methods of Distribution.................................................... 100
Legal Matters.............................................................. 101
Financial Information...................................................... 101
Rating..................................................................... 101
Index of Principal Definitions............................................. 103
===============================================================================
<PAGE>
===============================================================================
SOUTHERN PACIFIC
SECURED ASSETS CORP.
$200,000,000
MORTGAGE LOAN ASSET-BACKED PASS-THROUGH CERTIFICATES
SERIES 1996-3
$150,000,000 CLASS A-1 CERTIFICATES
$ 24,400,000 CLASS A-2 CERTIFICATES
$ 13,800,000 CLASS A-3 CERTIFICATES
$ 11,800,000 CLASS A-4 CERTIFICATES
------------------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------------------
MORGAN STANLEY & CO. INCORPORATED
LEHMAN BROTHERS
AUGUST 21, 1996
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the years ended
December 31, 1995, 1994 and 1993
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes." As discussed in Note 2 to the
consolidated financial statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
\s\ COOPERS & LYBRAND
New York, New York
January 22, 1996
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------- ----------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturity securities held as available-for-sale
at fair value (amortized cost $3,428,986 and
$3,123,838 $3,652,621 3,051,906
Short-term investments, at amortized cost
(which approximates fair value) 198,035 121,384
Other investments 14,064 11,970
------------ ------------
Total investments 3,864,720 3,185,260
Cash and cash equivalents 2,135 1,332
Accrued investment income 60,247 55,347
Deferred acquisition costs 140,348 133,048
Prepaid reinsurance premiums 200,887 186,492
Goodwill (less accumulated amortization of
$37,366 and $32,437) 105,614 110,543
Property and equipment, at cost (less accumulated
depreciation of $12,137 and $9,501) 41,169 39,648
Receivable for investments sold 5,729 945
Other assets 42,145 46,552
------------ ------------
TOTAL ASSETS $4,462,994 $3,759,167
============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $ 1,616,315 $ 1,512,211
Loss and loss adjustment expense reserves 42,505 40,148
Deferred income taxes 212,925 97,828
Payable for investments purchased 10,695 6,552
Other liabilities 54,682 46,925
------------ ------------
TOTAL LIABILITIES 1,937,122 1,703,664
------------ ------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,021,584 953,655
Retained earnings 1,341,855 1,134,061
Cumulative translation adjustment 2,704 427
Unrealized appreciation (depreciation) of investments,
net of deferred income tax provision (benefit)
of $78,372 and $(25,334) 144,729 (47,640)
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 2,525,872 2,055,503
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,462,994 $3,759,167
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Gross premiums written $349,812 $361,523 $479,390
Ceded premiums (45,050) (49,281) (47,552)
---------- ---------- ----------
Net premiums written 304,762 312,242 431,838
Increase in deferred premium revenue (88,365) (93,226) (200,519)
---------- ---------- ----------
Premiums earned (net of ceded
premiums of $30,655
$33,340 and $41,409) 216,397 219,016 231,319
Net investment income 219,834 193,966 175,329
Net realized gains 7,777 10,335 8,941
Other income 2,168 1,539 3,996
---------- ---------- ----------
Total revenues 446,176 424,856 419,585
---------- ---------- ----------
Expenses:
Losses and loss adjustment expenses 10,639 8,093 7,821
Policy acquisition costs, net 21,283 21,845 25,480
Underwriting and operating expenses 41,812 41,044 38,006
---------- ---------- ----------
Total expenses 73,734 70,982 71,307
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting changes 372,442 353,874 348,278
Provision for income taxes 81,748 77,125 86,684
---------- ---------- ----------
Income before cumulative effect of
accounting changes 290,694 276,749 261,594
Cumulative effect of accounting changes --- --- 12,923
---------- ---------- ----------
Net income $290,694 $276,749 $274,517
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1995, 1994 and 1993
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Additional Cumulative Appreciation
Common Stock Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------- -------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 100,000 $ 15,000 $ 931,943 $ 670,795 $ (474) $ 2,379
Net income --- --- --- 274,517 --- ---
Change in foreign currency translation --- --- --- --- (729) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(1,381) --- --- --- --- --- 2,461
Dividends declared (per
common share $500.00) --- --- --- (50,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 11,851 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1993 100,000 15,000 943,794 895,312 (1,203) 4,840
------- -------- ---------- ---------- ---------- ------------
Net income --- --- --- 276,749 --- ---
Change in foreign currency translation --- --- --- --- 1,630 ---
Change in unrealized depreciation
of investments net of change in
deferred income taxes of $27,940 --- --- --- --- --- (52,480)
Dividends declared (per
common share $380.00) --- --- --- (38,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,861 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1994 100,000 15,000 953,655 1,134,061 427 (47,640)
------- -------- ---------- ---------- ---------- ------------
Exercise of stock options --- --- 5,403 --- --- ---
Net income --- --- --- 290,694 --- ---
Change in foreign currency translation --- --- --- --- 2,277 ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(103,707) --- --- --- --- --- 192,369
Dividends declared (per
common share $829.00) --- --- --- (82,900) --- ---
Capital contribution from MBIA Inc. --- --- 52,800 --- --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,726 --- --- ---
======= ======== ========== ========== ========== ============
Balance, December 31, 1995 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
======= ======== ========== ========== ========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $290,694 $276,749 $274,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (4,900) (3,833) (5,009)
Increase in deferred acquisition costs (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums (14,395) (15,941) (6,143)
Increase in deferred premium revenue 104,104 109,167 206,662
Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225
Depreciation 2,676 1,607 1,259
Amortization of goodwill 4,929 4,961 5,001
Amortization of bond (discount) premium, net (2,426) 621 (743)
Net realized gains on sale of investments (7,778) (10,335) (8,941)
Deferred income taxes 11,391 19,082 7,503
Other, net 29,080 (8,469) 15,234
----------- ------------ ------------
Total adjustments to net income 117,738 90,709 213,015
----------- ------------ ------------
Net cash provided by operating activities 408,432 367,458 487,532
----------- ------------ ------------
Cash flows from investing activities:
Purchase of fixed maturity securities, net
of payable for investments purchased (897,128) (1,060,033) (786,510)
Sale of fixed maturity securities, net of
receivable for investments sold 473,352 515,548 205,342
Redemption of fixed maturity securities,
net of receivable for investments redeemed 83,448 128,274 225,608
(Purchase) sale of short-term investments, net (32,281) 3,547 (40,461)
(Purchase) sale of other investments, net (692) 87,456 (37,777)
Capital expenditures, net of disposals (4,228) (3,665) (3,601)
----------- ------------ ------------
Net cash used in investing activities (377,529) (328,873) (437,399)
----------- ------------ ------------
Cash flows from financing activities:
Capital contribution from MBIA Inc. 52,800 --- ---
Dividends paid (82,900) (38,000) (50,000)
----------- ------------ ------------
Net cash used by financing activities (30,100) (38,000) (50,000)
----------- ------------ ------------
Net increase in cash and cash equivalents 803 585 133
Cash and cash equivalents - beginning of year 1,332 747 614
----------- ------------ ------------
Cash and cash equivalents - end of year $2,135 $1,332 $747
=========== ============ ============
Supplemental cash flow disclosures:
Income taxes paid $ 50,790 $ 53,569 $ 52,967
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through the following series of transactions during December 1986, became
the successor to the business of the Municipal Bond Insurance Association (the
"Association"), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies:
o MBIA Inc. acquired for $17 million all of the outstanding common stock of
New York domiciled insurance company and changed the name of the insurance
company to Municipal Bond Investors Assurance Corporation. In April 1995, the
name was again changed to MBIA Insurance Corp. Prior to the acquisition, all of
the obligations of this company were reinsured and/or indemnified by the former
owner.
o Four of the five member companies of the Association, together with their
affiliates, purchased all of the outstanding common stock of MBIA Inc. and
entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA Inc.'s
reinsurance obligations were then assumed by MBIA Corp. The participation of
these four members aggregated approximately 89% of the net insurance in force of
the Association. The net assets transferred from the predecessor included the
cash transferred in connection with the reinsurance agreements, the related
deferred acquisition costs and contingent commissions receivable, net of the
related unearned premiums and contingent commissions payable. The deferred
income taxes inherent in these assets and liabilities were recorded by MBIA
Corp. Contingent commissions receivable (payable) with respect to premiums
earned prior to the effective date of the reinsurance agreements by the
Association in accordance with statutory accounting practices, remained as
assets (liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company
of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was
subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
-6-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"),
a wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states, municipalities
and municipal authorities which are guaranteed as to principal and interest.
MBIA Corp. insures IMC's outstanding investment agreement liabilities.
In 1993, MBIA Corp. assumed the remaining business from the fifth member of
the Association.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities
Corp. ("SECO"), to provide fixed-income investment management services for MBIA
Inc.'s municipal cash management service businesses. In 1995, portfolio
management for a portion of MBIA Corp.'s insurance related investment portfolio
was transferred to SECO; the management of the balance of this portfolio was
transferred in January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
-7-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp., MBIA
Illinois, MBIA Assurance and BIG Services, Inc. All significant intercompany
balances have been eliminated. Certain amounts have been reclassified in prior
years' financial statements to conform to the current presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial Accounting
Standards ("SFAS") 115 "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS 115, MBIA Corp. reclassified its entire
investment portfolio ("Fixed-maturity securities") as "available-for-sale."
Pursuant to SFAS 115, securities classified as available-for-sale are required
to be reported in the financial statements at fair value, with unrealized gains
and losses reflected as a separate component of shareholder's equity. The
cumulative effect of MBIA Corp.'s adoption of SFAS 115 was a decrease in
shareholder's equity at December 31, 1994 of $46.8 million, net of taxes. The
adoption of SFAS 115 had no effect on MBIA Corp.'s earnings.
Bond discounts and premiums are amortized on the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value and
include all fixed-maturity securities with a remaining term to maturity of less
than one year. Investment income is recorded as earned. Realized gains or losses
on the sale of investments are determined by specific identification and are
included as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited
partnerships and a mutual fund which invests principally in marketable equity
securities. MBIA Corp. records dividends from its investment in marketable
equity securities and its share of limited partnerships and mutual funds as a
-8-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
component of investment income. In addition, MBIA Corp. records its share of the
unrealized gains and losses on these investments, net of applicable deferred
income taxes, as a separate component of shareholder's equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated to
each bond maturity based on par amount and are earned on a straight-line basis
over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where MBIA Corp. insures the refunding issue, is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in marketing, underwriting
and policy issuance functions, certain rating agency fees, state premium taxes
and certain other underwriting expenses, reduced by ceding commission income on
premiums ceded to reinsurers. For business assumed from the Association, such
costs were comprised of management fees, certain rating agency fees and
marketing and legal costs, reduced by ceding commissions received by the
Association on premiums ceded to reinsurers. Policy acquisition costs are
deferred and amortized over the period in which the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in an
amount equal to MBIA Corp.'s estimate of the identified and unidentified losses,
including costs of settlement on the obligations it has insured.
To the extent that specific insured issues are identified as currently
or likely to be in default, the present value of expected payments, including
loss and LAE associated with these issues, net of expected recoveries, is
allocated within the total loss reserve as case basis reserves. Management of
MBIA Corp. periodically evaluates its estimates for losses and LAE and any
resulting adjustments are reflected in current earnings. Management believes
-9-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that the reserves are adequate to cover the ultimate net cost of claims, but the
reserves are necessarily based on estimates, and there can be no assurance that
the ultimate liability will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the Association's
reinsurers under various reinsurance treaties and are accrued as the related
premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA
Inc. The tax provision for MBIA Corp. for financial reporting purposes is
determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result
of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected
directly in shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The Internal Revenue Code permits financial guarantee insurance
companies to deduct from taxable income additions to the statutory contingency
reserve, subject to certain limitations. The tax benefits obtained from such
deductions must be invested in non-interest bearing U. S. Government tax and
loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of
Federal income taxes. The amounts deducted must be restored to taxable income
when the contingency reserve is released, at which time MBIA Corp. may present
the tax and loss bonds for redemption to satisfy the additional tax liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment and
MBIA Assurance's furniture, fixtures and equipment, which are recorded at cost
and, exclusive of land, are depreciated on the straight-line method over their
estimated service lives ranging from 4 to 31 years. Maintenance and repairs are
charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed insurance
-10-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
company includes recognition of the value of the state licenses held by that
company, and is amortized by the straight-line method over 25 years. Goodwill
related to the wholly owned subsidiary of MBIA Inc. contributed in 1988 is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
o premiums are earned only when the related risk has expired
rather than over the period of the risk;
o acquisition costs are charged to operations as incurred rather
than as the related premiums are earned;
o a contingency reserve is computed on the basis of statutory requirements and
reserves for losses and LAE are established, at present value, for specific
insured issues which are identified as currently or likely to be in default.
Under GAAP reserves are established based on MBIA Corp.'s reasonable estimate
of the identified and unidentified losses and LAE on the insured obligations
it has written;
o Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
o fixed-maturity securities are reported at amortized cost rather than fair
value;
-11-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
o tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
o certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
As of December 31
-----------------
(In thousands) 1995 1994 1993
-------------- ---- ---- ----
GAAP shareholder's equity ... $ 2,525,872 $ 2,055,503 $ 1,857,743
Premium revenue recognition . (328,450) (296,524) (242,577)
Deferral of acquisition costs (140,348) (133,048) (120,484)
Unrealized (gains) losses ... (223,635) 71,932 --
Contingent commissions ...... (1,645) (1,706) (1,880)
Contingency reserve ......... (743,510) (620,988) (539,103)
Loss and loss adjustment
expense reserves ........... 28,024 18,181 26,262
Deferred income taxes ....... 205,425 90,328 99,186
Tax and loss bonds .......... 70,771 50,471 25,771
Goodwill .................... (105,614) (110,543 (115,503)
Other ....................... (12,752) (13,568 (11,679)
------------ ----------- -----------
Statutory capital
and surplus ......... $ 1,274,138 1,110,038 $ 977,736
=========== ========= ===========
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1995, 1994 and
1993 was $278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $34.0 million, $53.0 million and $85.6 million for 1995,
1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital and claims-paying capability
through maintenance of high-quality investments with adequate liquidity. MBIA
Corp.'s investment policies limit the amount of credit exposure to any one
-12-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
issuer. The fixed-maturity portfolio is comprised of high-quality (average
rating Double-A) taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1995 and 1994.
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands
December 31, 1995
Taxable bonds
United States Treasury
and Government Agency .. $ 6,742 $ 354 -- $ 7,096
Corporate and other
obligations ............ 592,604 30,536 (212) 622,928
Mortgage-backed .......... 389,943 21,403 (932) 410,414
Tax-exempt bonds municipal
Obligations .............. 2,637,732 175,081 (2,595) 2,810,218
--------- ------- ------ ---------
Total fixed-
maturities $3,627,021 $ 227,374 (3,739) $3,850,656
========== ========== ====== ==========
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands)
Taxable bonds
United States Treasury
and Government Agency $ 15,133 -- (149) $ 14,984
Corporate and other ...
obligations ......... 461,601 2,353 (23,385) 440,569
Mortgage-backed ......... 317,560 3,046 (12,430) 308,176
Tax-exempt bonds
State and municipal
obligations ........... 2,450,928 36,631 (77,998) 2,409,561
--------- ------ ------- ---------
Total fixed-
maturities ......... $3,245,222 $ 42,030 $ (113,962) $3,173,290
========== ========== ========== ==========
Fixed-maturity investments carried at fair value of $8.1 million and
$7.4 million as of December 31, 1995 and 1994, respectively, were on deposit
with various regulatory authorities to comply with insurance laws.
-13-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1995. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Amortized Fair
(In thosands Cost Value
Maturity
Within 1 year ....................... $ 178,328 $ 178,256
Beyond 1 year but within 5 years .... 448,817 477,039
Beyond 5 years but within 10 years .. 1,133,527 1,211,645
Beyond 10 years but within 15 years . 742,790 804,421
Beyond 15 years but within 20 years . 686,871 730,030
Beyond 20 years ..................... 46.745 38,851
-------- --------
3,237,078 3,440,242
Mortgage-backed ..................... 389,943 410,414
------- -------
Total fixed-maturities and short-term
investments ....................... $3,627,021 $3,850,656
========== ==========
6. Investment Income and Gains and Losses
Investment income consists of:
Years ended December 31
-----------------------
(In thousands) ................ 1995 1994 1993
- ------------------------------- ---- ---- ----
Fixed-maturities .............. $ 216,653 $ 193,729 $ 173,070
Short-term investments ...... 6,008 3,003 2,844
Other investments ............. 17 12 2,078
-- -- -----
Gross investment income ..... 222,678 196,744 177,992
Investment expenses ........... 2,844 2,778 2,663
----- ----- -----
Net investment income ....... 219,834 193,966 175,329
Net realized gains (losses):
Fixed-maturities:
Gains..................... 9,941 9,635 9,070
Losses................ .. (2,537) (8,851) (744)
------ ------ ----
Net..................... 7,404 784 8,326
Other investments:
Gains................... 382 9,551 615
Losses................... (9) -- --
---- ------ ----
Net....................... 373 9,551 615
--- ----- ---
Net realized gains .......... 7,777 10,335 8,941
----- ------ -----
Total investment income ....... $ 227,611 $ 204,301 $ 184,270
=========== =========== ===========
-14-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrealized gains (losses) consist of:
As of December 31
-----------------
(In thousands) .................. 1995 1994
- --------------------------------- ---- ----
Fixed-maturities:
Gains ......................... $ 227,374 $ 42,030
Losses ........................ (3,739) (113,962)
Net .......................... 223,635 (71,932)
Other investments:
Gains ......................... 287 --
Losses ........................ (821) (1,042)
------- ------
Net ........................... (534) (1,042)
------ ------
Total ........................... 223,101 (72,974)
Deferred income tax (benefit) ... 78,372 (25,334)
------ -------
Unrealized gains (losses) - net $ 144,729 $ (47,640)
========= =========
The deferred taxes in 1995 and 1994 relate primarily to unrealized
gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected
in shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s
adoption of SFAS 115.
The change in net unrealized gains (losses) consists of:
Years ended December 31
-----------------------
In thousands 1995 1994 1993
- ------------ ---- ---- ----
Fixed-maturities ............... $ 295,567 $(289,327) $ 101,418
Other investments .............. 508 (8,488) 3,842
--- ------ -----
Total ........................ 296,075 (297,815) 105,260
Deferred income taxes (benefit) 103,706 (27,940) 1,381
------- ------- -----
Unrealized gains (losses), net $ 192,369 $(269,875) $ 103,879
========= ========= =========
7. INCOME TAXES
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income Taxes."
MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and
recorded a cumulative adjustment, which increased net income and reduced the
deferred tax liability by $13.0 million. The cumulative effect represents the
impact of adjusting the deferred tax liability to reflect the January 1, 1993
tax rate of 34% as opposed to the higher tax rates in effect when certain of the
deferred taxes originated.
-15-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect on tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as presented below:
(In thousands) ................................ 1995 1994
- ----------------------------------------------- ---- ----
Deferred tax assets
Tax and loss bonds .......................... $ 71,183 $ 50,332
Unrealized losses ........................... -- 25,334
Alternative minimum tax credit carry forwards 39,072 22,391
Loss and loss adjustment expense reserves ... 9,809 6,363
Other ....................................... 954 3,981
--- -----
Total gross deferred tax assets ............. 121,018 108,401
======= =======
Deferred tax liabilities
Contingency reserve ......................... 131,174 91,439
Deferred premium revenue .................... 64,709 54,523
Deferred acquisition costs .................. 49,122 48,900
Unrealized gains ............................ 78,372 --
Contingent commissions ...................... 7,158 4,746
Other ....................................... 3,408 6,621
----- -----
Total gross deferred tax liabilities ........ 333,943 206,229
------- -------
Net deferred tax liability .................. $212,925 $ 97,828
======== ========
Under SFAS 109, a change in the Federal tax rate requires a restatement
of deferred tax assets and liabilities. Accordingly, the restatement for the
change in the 1993 Federal tax rate resulted in a $5.4 million increase in the
tax provision, of which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
Years ended December 31
-----------------------
(In thousands) .................. 1995 1994 1993
- --------------------------------- ---- ---- ----
Current ......................... $70,357 $58,043 $66,086
Deferred ........................ 11,391 19,082 20,598
------ ------ ------
Total ......................... $81,748 $77,125 $86,684
======= ======= =======
-16-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31
-----------------------
1995 1994 1993
---- ---- ----
Income taxes computed on pre-tax
financial income at statutory rates .......... 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest ........................ (12.5) (12.0) (10.6)
Amortization of goodwill ................... 0.5 0.5 0.5
Other ...................................... (1.1) (1.7) --
---- ---- ----
Provision for income taxes ......... 21.9% 21.8% 24.9%
==== ==== ====
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Corp. had approximately $44 million
available for the payment of dividends as of December 31, 1995. In 1995, 1994
and 1993, MBIA Corp. declared and paid dividends of $83 million, $38 million and
$50 million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Illinois may pay a dividend only with
prior approval as of December 31, 1995.
-17-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds insured
by MBIA Corp. have various requirements relating to the maintenance of certain
minimum ratios of statutory capital and reserves to net insurance in force. MBIA
Corp. and MBIA Assurance were in compliance with these requirements as of
December 31, 1995.
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $650 million
with a group of major banks to provide loans to MBIA Corp. after it has incurred
cumulative losses (net of any recoveries) from September 30, 1995 in excess of
the greater of $500 million and 6.25% of average annual debt service. The
obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term and expires on
September 30, 2002 and contains an annual renewal provision subject to the
approval by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$275 million. At December 31, 1995, MBIA Inc. had $18 million outstanding under
these facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional
commitments to guarantee timely payment on the bonds and notes to bondholders.
The creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
-18-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1995, insurance in force, net of cessions to reinsurers,
has a range of maturity of 1-43 years. The distribution of net insurance in
force by geographic location and type of bond, including $2.7 billion and $1.5
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1995 and 1994, respectively, is set forth in the following tables:
<TABLE>
<CAPTION>
As of December 31
-----------------
($ in billions) 1995 1994
- --------------- ---- ----
Net Number % of Net Net Number % of Net
Georgraphic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- -------- -------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
California .. $ 51.2 3,122 14.8 $ 43.9 2,832 14.3%
New York .... 30.1 4,846 8.7 25.0 4,447 8.2
Florida ..... 26.9 1,684 7.7 25.4 1,805 8.3
Texas ....... 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey .. 16.4 1,730 4.7 15.0 1,590 4.9
Illinois .... 15.0 1,090 4.3 14.7 1,139 4.8
Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8
Ohio ........ 9.1 1,017 2.6 8.3 996 2.7
Michigan .... 7.9 1,012 2.3 5.7 972 1.9
--- ----- --- --- --- ---
Subtotal .... 206.0 19,745 59.4 184.7 19,055 60.4
Other ....... 135.6 11,147 39.1 118.8 10,711 38.8
----- ------ ---- ----- ------ ----
Total U.S. 341.6 30,892 98.5 303.5 29,766 99.2
International 5.1 53 1.5 2.5 18 0.8
--- -- --- --- -- ---
$ 346.7 30,945 100.0% $ 306.0 29,784 100.0%
======== ====== ===== ======== ====== =====
</TABLE>
-19-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
-----------------
1995 1994
---- ----
($ in billions) Net Number % of Net Net Number % of Net
Insurance of Issues nsurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- ------------ -------- ----------- -------- -------- ----------- --------
MUNICIPAL
<S> <C> <C> <C> <C> <C> <C>
General Obligation $ 91.6 11,445 26.4% $ 84.2 11,029 27.5%
Utilities ........ 60.3 4,931 17.4 56.0 5,087 18.3
Health Care ...... 51.9 2,458 15.0 50.6 2,670 16.5
Transportation ... 25.5 1,562 7.4 21.3 1,486 7.0
Special Revenue .. 24.4 1,445 7.0 22.7 1,291 7.4
Industrial
development and
pollution control
revenue 17.2 924 5.0 15.1 1,016 4.9
Housing .......... 15.8 2,671 4.5 13.6 2,663 4.5
Higher education . 15.2 1,261 4.4 14.0 1,208 4.6
======= ======= ====== ======= ======= =====
Other ............ 7.3 134 2.1 3.8 124 1.2
309.2 26,831 89.2 281.3 26,574 91.9
======= ======= ======= ======= ======= =====
Non-municipal
Asset/mortgage-
backed 20.2 256 5.8 12.8 151 4.2
Investor-owned
utilities 6.4 3,559 1.8 5.7 2,918 1.9
International .... 5.1 53 1.5 2.5 18 0.8
Other ............ 5.8 246 1.7 3.7 123 1.2
--- --- --- --- --- ---
37.5 4,114 10.8 24.7 3,210 8.1
---- ----- ---- ---- ----- ---
$346.7 30,945 100.0% $306.0 29,784 100.0%
======= ======= ======= ====== ======= =====
</TABLE>
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and $42.6
-20-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
billion, at December 31, 1995 and 1994, respectively. The distribution of ceded
insurance in force by geographic location and type of bond is set forth in the
tables below:
As of December 31
-----------------
(In billions) 1995 1994
- ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- ------------------- -------- -------- -------- --------
California ......... $ 8.8 17.5% $ 7.5 17.6%
New York ........... 5.7 11.4 4.9 11.5
New Jersey ......... 3.1 6.1 2.0 4.7
Texas .............. 2.8 5.6 2.5 5.9
Pennsylvania ....... 2.7 5.4 2.6 6.1
Florida ............ 2.3 4.6 2.1 4.9
Illinois ........... 2.2 4.5 2.3 5.4
District of Columbia 1.5 3.0 1.6 3.8
Washington ......... 1.4 2.7 1.2 2.8
Puerto Rico ........ 1.3 2.6 1.1 2.6
Massachusetts ...... 1.1 2.1 0.9 2.1
Ohio ............... 1.0 2.1 0.9 2.1
--- --- --- ---
Subtotal ........... 33.9 67.6 29.6 69.5
Other .............. 14.4 28.8 12.3 28.9
---- ---- ---- ----
Total U. S ..... 48.3 96.4 41.9 98.4
International ...... 1.8 3.6 0.7 1.6
--- --- --- ---
$ 50.1 100.0% $42.6 100.0%
======= ===== ===== =====
-21-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
-----------------
(In billions) 1995 1994
- ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- ------------ -------- -------- -------- --------
Municipal
General obligation ... $ 11.7 23.3% $ 9.7 22.8%
Utilities ............ 9.0 18.0 8.5 20.0
Health care .......... 6.6 13.1 6.5 15.3
Transportation ....... 5.5 11.0 4.5 10.6
Special revenue ...... 3.2 6.4 2.7 6.3
Industrial development
and pollution
control revenue 3.0 6.0 2.9 6.8
Housing .............. 1.4 2.8 1.0 2.3
Higher education ..... 1.2 2.4 1.2 2.8
Other ................ 2.4 4.8 1.5 3.5
--- --- --- ---
44.0 87.8 38.5 90.4
==== ==== ==== ====
Non-municipal
Asset-/mortgage-backed 3.6 7.2 2.7 6.3
International ........ 1.8 3.6 0.7 1.6
Other ................ 0.7 1.4 0.7 1.7
--- --- --- ---
6.1 12.2 4.1 9.6
--- ---- --- ---
$ 50.1 100.0% $ 42.6 100.0%
======== ===== ======== =====
Included in gross premiums written are assumed premiums from other
insurance companies of $11.7 million, $6.3 million and $20.4 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The percentages of
the amounts assumed to net premiums written were 3.8%, 2.0% and 4.7% in 1995,
1994 and 1993, respectively.
Gross premiums written include $0.2 million in 1994 and $5.4 million in
1993 related to the reassumption by MBIA Corp. of reinsurance previously ceded
by the Association. Also included in gross premiums in 1993 is $10.8 million of
premiums assumed from a member of the Association. Ceded premiums written are
net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993
related to the reassumption of reinsurance previously ceded by MBIA Corp. or
MBIA Illinois.
-22-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1995, 1994 and 1993 was $3.2 million,
$3.0 million and $3.1 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.4 million, $1.4 million and $1.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the
years ended December 31, 1995, 1994 and 1993, respectively, are included in
policy acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
other than pensions during the years that employees render service. Prior to
January 1, 1993, MBIA Corp. had accounted for these post-retirement benefits on
a cash basis. In 1993, MBIA Corp. adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect adjustment which
decreased net income and increased other liabilities by $0.1 million. As of
January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
-23-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes deferred
premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994,
respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred
premium revenue from a member of the Association which had not previously ceded
its insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed $0.4
million of deferred premium revenue relating to one of the trusts which was
previously ceded to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's
claims-paying rating downgraded from Triple-A on their previously issued
Association policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required amounts directly to
the paying agent instead of to the former Association member as was previously
required. The aggregate amount payable by MBIA Corp. on these surety bonds is
limited to $340 million. These surety bonds remain outstanding as of December
31, 1995.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment of
fees on assets under management. Total related expenses for the years ended
December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.4
million, respectively. These agreements were terminated on January 1, 1996 at
which time SECO commenced management of MBIA Corp.'s consolidated investment
portfolios. In addition, investment management expenses of $0.1 million were
paid to SECO for the portion of the investment portfolio transferred in 1995.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million and
$2.0 million for the years ended December 31, 1995, 1994 and 1993, respectively.
-24-
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in other assets at December 31, 1995 and 1994 is $1.1 million
and $14.5 million of net receivables from MBIA Inc. and other subsidiaries.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which, because of their short duration, is a reasonable estimate of fair value.
OTHER INVESTMENTS - Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in marketable
equity securities. The fair value of other investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream at 9% and 13.25% at December 31,
1995 and December 31, 1994, respectively.
As of December 31,
------------------
1995 1994
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
ASSETS:
Fixed-maturity securuities $3,652,621 $3,652,621 $3,051,906 $3,051,906
Short-term investments.. 198,035 198,035 121,384 121,384
Other investments ...... 14,064 14,064 11,970 11,970
Cash and cash equivalents 23,258 23,258 1,332 1,332
Prepaid reinsurance
premiums .............. 200,887 174,444 186,492 159,736
Receivable for
investments sold ...... 5,729 5,729 945 945
LIABILITIES:
Deferred premium
revenue ............. 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss adjustment
expense reserves ..... 42,505 42,505 40,148 40,148
Payable for investments
purchased ........... 10,695 10,695 6,552 6,552
OFF-BALANCE-SHEET
INSTRUMENTS:
Installment premiums ---- 235,371 --- 176,944
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND DECEMBER 31, 1995
AND FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
Consolidated Balance Sheets -
June 30, 1996 (Unaudited) and December 31, 1995 (Audited) ............ 3
Consolidated Statements of Income -
Three months and six months ended June 30, 1996
and 1995 (Unaudited) ............................................... 4
Consolidated Statement of Changes in Shareholder's Equity -
Six months ended June 30, 1996 (Unaudited) ........................... 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1995 (Unaudited) .................. 6
Notes to Consolidated Financial Statements (Unaudited) ................... 7
-2-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
--------------- ------------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $3,735,457 and $3,428,986) ...... $3,813,749 $3,652,621
Short-term investments, at amortized cost
(which approximates fair value) ............................... 219,945 198,035
Other investments ............................................... 13,781 14,064
---------- ----------
TOTAL INVESTMENTS ........................................... 4,047,475 3,864,720
Cash and cash equivalents ........................................... 4,649 2,135
Accrued investment income ........................................... 64,494 60,247
Deferred acquisition costs .......................................... 143,536 140,348
Prepaid reinsurance premiums ........................................ 208,614 200,887
Goodwill (less accumulated amortization of $39,814 and $37,366) ..... 103,166 105,614
Property and equipment, at cost (less accumulated depreciation
of $13,540 and $12,137) ......................................... 42,845 41,169
Receivable for investments sold ..................................... 1,430 5,729
Securities purchased under agreement to resell ...................... 36,750 ---
Other assets ........................................................ 37,614 42,145
---------- ----------
TOTAL ASSETS ................................................ $4,690,573 $4,462,994
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue ........................................ $1,728,845 $1,616,315
Loss and loss adjustment expense reserves ....................... 50,437 42,505
Deferred income taxes ........................................... 168,981 212,925
Payable for investments purchased ............................... 30,857 10,695
Securities sold under agreement to repurchase ................... 36,750 ---
Other liabilities ............................................... 72,506 54,682
---------- ----------
TOTAL LIABILITIES ........................................... 2,088,376 1,937,122
---------- ----------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares ....................... 15,000 15,000
Additional paid-in capital ...................................... 1,030,998 1,021,584
Retained earnings ............................................... 1,506,726 1,341,855
Cumulative translation adjustment ............................... (1,109) 2,704
Unrealized appreciation of investments, net of deferred
income tax provision of $27,542 and $78,372 .................... 50,582 144,729
---------- ----------
TOTAL SHAREHOLDER'S EQUITY .................................. 2,602,197 2,525,872
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY .................. $4,690,573 $4,462,994
========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
Three months ended Six months ended
June 30 June 30
------------------ -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Gross premiums written $134,443 $106,665 $255,454 $177,777
Ceded premiums (11,914) (12,049) (26,629) (19,129)
-------- -------- -------- --------
Net premiums written 122,529 94,616 228,825 158,648
Increase in deferred premium revenue (60,021) (40,406) (105,553) (53,086)
-------- -------- -------- --------
Premiums earned (net of ceded
premiums of $9,682, $6,814
$18,902 and $14,652) 62,508 54,210 123,272 105,562
Net investment income 61,653 53,783 120,656 106,848
Net realized gains 3,895 1,698 6,587 3,422
Other income 354 224 1,323 1,132
-------- -------- -------- --------
Total revenues 128,410 109,915 251,838 216,964
-------- -------- -------- --------
Expenses:
Losses and loss adjustment expenses 4,288 2,710 7,466 4,743
Policy acquisition costs, net 5,990 5,130 11,890 10,270
Underwriting and operating expenses 11,777 9,247 22,326 18,999
-------- -------- -------- --------
Total expenses 22,055 17,087 41,682 34,012
-------- -------- -------- --------
Income before income taxes 106,355 92,828 210,156 182,952
Provision for income taxes 22,786 20,604 45,285 40,080
-------- -------- -------- --------
Net income $83,569 $72,224 $164,871 $142,872
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the six months ended June 30, 1996
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Unrealized
------------------------- Paid-In Retained Translation Appreciation
Shares Amount Capital Earnings Adjustment of Investments
---------- ---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ............... 100,000 $15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
Exercise of stock options .............. -- -- 3,740 -- -- --
Net income ............................. -- -- -- 164,871 -- --
Change in foreign
currency transactions ................ -- -- -- -- (3,813) --
Change in unrealized
appreciation of
investment net of change
in deferred income taxes
of $50,830 ........................... -- -- -- -- -- (94,147)
Tax reduction related to
tax sharing agreement
with MBIA Inc. ....................... -- -- 5,674 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1996 ................ 100,000 $15,000 $1,030,998 $1,506,726 $(1,109) $ 50,582
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-5-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended
June 30
---------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net income ............................................. $164,871 $142,872
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income ................ (4,247) (2,129)
Increase in deferred acquisition costs ............... (3,188) (4,081)
Increase in prepaid reinsurance premiums ............. (7,727) (4,477)
Increase in deferred premium revenue ................. 113,280 59,123
Increase in loss and loss adjustment expense reserves. 7,932 3,872
Depreciation ......................................... 1,442 1,295
Amortization of goodwill ............................. 2,448 2,465
Amortization of bond discount, net ................... (2,870) (620)
Net realized gains on sale of investments ............ (6,587) (3,422)
Deferred income taxes ................................ 6,886 6,092
Other, net ........................................... 27,690 20,094
--------- --------
Total adjustments to net income ...................... 135,059 78,212
--------- --------
Net cash provided by operating activities ............ 299,930 221,084
--------- --------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased ................. (698,356) (381,468)
Sale of fixed-maturity securities, net of
receivable for investments sold ...................... 334,470 237,019
Redemption of fixed-maturity securities,
net of receivable for investments redeemed ........... 75,960 31,546
Purchase of short-term investments, net ................ (6,763) (60,631)
Securities purchased under agreement to resell ......... (36,750) ---
Sale (purchase) of other investments, net .............. 402 (807)
Capital expenditures, net of disposals ................. (3,129) (2,326)
--------- --------
Net cash used in investing activities ................ (334,166) (176,667)
--------- --------
Cash flows from financing activities:
Dividends paid ......................................... --- (43,500)
Securities sold under agreement to repurchase .......... 36,750 ---
--------- --------
Net cash provided (used) by financing activities ..... 36,750 (43,500)
--------- --------
Net increase in cash and cash equivalents ................ 2,514 917
Cash and cash equivalents - beginning of period .......... 2,135 1,332
--------- --------
Cash and cash equivalents - end of period ................ $ 4,649 $ 2,249
========= ========
Supplemental cash flow disclosures:
Income taxes paid ...................................... $ 32,978 $ 26,201
The accompanying notes are an integral part of the consolidated
financial statements.
-6-
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- ----------------------------
The accompanying consolidated financial statements are unaudited and
include the accounts of MBIA Insurance Corporation and its Subsidiaries (the
"Company"). The statements do not include all of the information and disclosures
required by generally accepted accounting principles. These statements should be
read in conjunction with the Company's consolidated financial statements and
notes thereto for the year ended December 31, 1995. The accompanying
consolidated financial statements have not been audited by independent
accountants in accordance with generally accepted auditing standards but in the
opinion of management such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to summarize fairly
the Company's financial position and results of operations. The results of
operations for the six months ended June 30, 1996 may not be indicative of the
results that may be expected for the year ending December 31, 1996. The December
31, 1995 condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
2. Dividends Declared
- ---------------------
No dividends were declared by the Company during the six months ended June
30, 1996.
-7-
<PAGE>
APPENDIX C
UNDERWRITING GUIDELINES APPLICABLE TO THE MORTGAGE LOANS
The Mortgage Loans were originated by the Originators under the
Standard Non-Conforming Program. The Standard Non-Conforming Program are the
"Non-Conforming Credit Programs" applicable to residential loans which, for
credit reasons, do not conform to FNMA or FHLMC underwriting guidelines.
THE STANDARD NON-CONFORMING PROGRAM
The Mortgage Loans underwritten under the Standard Non-Conforming
Program were underwritten in accordance with the underwriting criteria of SPFC
or Oceanmark, which are identical. SPFC began underwriting mortgage loans in
accordance with such standards in July 1993.
The Originators' underwriting standards under the Standard
Non-Conforming Program are primarily intended to assess creditworthiness of the
mortgagor, the value of the mortgaged property and to evaluate the adequacy of
such property as collateral for the mortgage loan. While their primary
consideration in underwriting a mortgage loan is the mortgagor's employment
stability and debt-to-income ratio, the value of the mortgaged property relative
to the amount of the mortgage loan is another critical factor. In addition, they
also consider, among other things, a mortgagor's credit history and repayment
ability, as well as the type and use of the mortgaged property. All of the
Mortgage Loans underwritten under this program are adjustable rate loans, and
generally bear higher rates of interest than mortgage loans that are originated
in accordance with FNMA and FHLMC standards.
The Mortgage Loans underwritten under the Standard Non-Conforming
Program were underwritten pursuant to the "Full Documentation," "Alternate
Documentation", "No Income Qualification," "Stated Income" and "Quick
Documentation" residential loan programs. Under each of the these programs,
Oceanmark or SPFC reviews the loan applicant's source of income, calculates the
amount of income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the debt
service-to-income ratio to determine the applicant's ability to repay the loan,
reviews the type and use of the property being financed and reviews the property
for compliance with their standards. In determining the ability of the applicant
to repay the Mortgage Loan, the Originators use a rate (the "Qualifying Rate")
which generally is a rate equal to the Mortgage Rate at origination plus the
amount of the Periodic Cap. Oceanmark's and SPFC's underwriting standards are
applied in a standardized procedure which complies with applicable federal and
state laws and regulations.
Oceanmark's and SPFC's criteria require them to verify the income of
each borrower and the source of funds (if any) required to be deposited by the
applicant into escrow under its various programs. Borrowers are generally
required to submit written verification of income signed by the employer
covering the most recent two-year period, together with a current paystub and
two years' W-2 forms. Under the Non-Conforming Alternative Documentation
program, borrowers are generally required to submit two years' W-2 Forms and the
most recent paystub showing year-to-date earnings. A telephone confirmation of
employment is made regardless of the origination program. Under the No Income
Qualification, Stated Income and Quick Documentation programs, borrowers may be
qualified based upon monthly income as stated on the mortgage loan application,
without verification; however, self-employed borrowers are required to submit a
business license, one year's bank statements and a current profit and loss
statement. A business credit report, if applicable, is obtained. Verification of
the source of funds (if any) required to be deposited by the applicant into
escrow is generally required under all
C-1
<PAGE>
documentation programs in the form of a standard verification of deposit or two
months' consecutive bank statements or other acceptable documentation. Twelve
months' mortgage payment or rental history must be verified by lender or
landlord. If appropriate compensating factors exist, the Originators may waive
certain documentation requirements for individual borrowers. All documentation
must be no more than 90 days old at underwriting and no more than 120 days old
at the time of the funding of the related loan.
Oceanmark and SPFC use the following categories and characteristics as
guidelines to grade the potential likelihood that the mortgagor will satisfy the
repayment conditions of a mortgage loan:
"A" RISK. Under the "A" risk category, the prospective mortgagor must
have generally repaid installment or revolving debt according to its terms with
a maximum of three 30-day late payments within the last 12 months or five 30-day
late payments or two 60-day late payments within the last 24 months. Within this
24 month period, however, a maximum of one 30-day late payment, and no 60-day
late payments are acceptable in the last 12 months, or a maximum of two 30-day
late payments, and no 60- day late payments, within the last 24 months are
acceptable on an existing mortgage loan on the subject property. The existing
mortgage obligation must be current. Minor derogatory items are allowed as to
non-mortgage credit. No collection accounts or charge-offs or judgments over
$500 within the last five years are allowed. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding five years. A
maximum Loan-to-Value Ratio of up to 90% (or 75% for mortgage loans originated
under the Non-Conforming No-Income Qualifier program, but 80% if the borrower is
self-employed) is permitted for a mortgage loan on a single family
owner-occupied property. A maximum Loan-to-Value Ratio of 80% (or 70% for
mortgage loans originated under the Non-Conforming NoIncome Qualifier program
but 75% if the borrower is self-employed) is permitted for a mortgage loan on a
non-owner occupied property or a second home property. The debt
service-to-income ratio generally is 45% or less based on the Qualifying Rate.
The maximum loan amount is $400,000 for single-family owner-occupied properties,
regardless of the documentation program. Exceptions to the maximum loan amount
for single-family, owner occupied properties are considered by Oceanmark or SPFC
on a limited basis. The maximum loan amount is $350,000 (or $300,000 for
mortgage loans originated under the Non-Conforming No-Income Qualifier Program)
for mortgage loans on a single-family non-owneroccupied properties or second
homes.
"A-" RISK. Under the "A-" risk category, the prospective mortgagor must
have generally repaid installment or revolving debt according to its terms with
a maximum of five 30-day late payments or two 60-day late payments on such
obligations within the last 12 months. A maximum of two 30-day payments, and no
60-day late payments, within the last 12 months is acceptable on an existing
mortgage loan on the subject property. The existing mortgage obligation must be
current. Minor derogatory items are allowed as to non-mortgage credit. No unpaid
collection accounts, charge-offs or judgments over $500 within the last two
years are allowed. No bankruptcy or notice of default filings by the borrower
may have occurred during the preceding two years. A maximum Loan-to-Value Ratio
of up to 85% (or 75% for mortgage loans originated under the Non-Conforming
No-Income Qualifier program, but 80% if the borrower is self-employed) is
permitted for a mortgage loan on a single family owner-occupied property. A
maximum Loan-to-Value Ratio of up to 75% (or 70% for mortgage loans originated
under the Non-Conforming No-Income Qualifier program) is permitted for a
mortgage loan on a non-owner occupied property or a second home. The debt
service-to-income ratio generally is 45% or less based on the Qualifying Rate.
The maximum loan amount is $650,000 for single-family owner-occupied properties,
under the Non-Conforming Full Documentation Program. Exceptions to the maximum
loan amount for single-family, owner occupied properties are considered by
Oceanmark or SPFC on a limited basis. The maximum loan amount is $500,000 for
mortgage loans on single-family owner-occupied properties under the
Non-Conforming No-Income Qualifier Program. The maximum loan amount is $400,000
(or $350,000 for mortgage loans originated under the Non-Conforming No-Income
Qualifier Program) for mortgage loans on a single-family non-owner-occupied
properties or second homes. Loan
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applicants with less favorable credit ratings generally are offered loans with
higher interests rates and lower Loan-to-Value ratios than applicants with more
favorable ratings.
"B" RISK. Under the "B" risk category, the prospective mortgagor must
have generally repaid consumer debt according to its terms, with a maximum of
eight 30-day late payments or four 60-day late payments or two 90-day late
payments on such obligations within the last 12 months. A maximum of four 30-day
late payment, or three 30-day late payments and one 60-day late payment, within
the last 12 months is acceptable on an existing mortgage loan on the subject
property. The existing mortgage obligation must be current. As to non-mortgage
credit, some prior defaults may have occurred. Isolated and insignificant
collections and/or charge-offs and judgments within the last 18 months,
totalling less than $1,000 are acceptable. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding 18 months. A
maximum Loan-to-Value Ratio of 80% (or 70% for mortgage loans originated under
the Non-Conforming No-Income Qualifier program, but 75% if the borrower is
self-employed) is permitted for a mortgage loan on a single family,
owner-occupied property. A maximum Loan-to-Value Ratio of 70% (or 65% for
mortgage loans originated under the NonConforming No-Income Qualifier Program)
is permitted for a mortgage loan on a non-owner occupied property or a second
home. The debt service-to-income ratio generally is 50% or less based on the
Qualifying Rate. The maximum loan amount is $600,000 for single-family
owner-occupied properties, under the Non-Conforming Full Documentation Program.
The maximum loan amount is $350,000 (or $300,000 for mortgage loans originated
under the Non-Conforming No-Income Qualifier Program) for mortgage loans on a
non-owner-occupied property or a second home.
"C" RISK. Under the "C" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. A maximum of twelve
30-day late payments or six 60-day late payments, or four 90-day late payments,
on consumer debt within the last twelve months is acceptable. A maximum of five
30-day late payments or three 30-day late payments and two 60-day late payments
or three 30-day late payments and one 90-day late payment, within the last 12
months is acceptable on an existing mortgage loan on the subject property. The
existing mortgage obligation can be up to 40 days past due at the funding of the
loan. As to non-mortgage credit, significant prior defaults may have occurred.
There may be open collections or charge-offs not to exceed $4,000 and up to
$6,000 in isolated circumstances. No bankruptcy or notice of default filings by
the borrower may have occurred during the preceding year. A maximum
Loan-to-Value Ratio of 75% (or 65% for mortgage loans originated under the
Non-Conforming No-Income Qualifier Program, but 70% if the borrower is
self-employed) is permitted for a mortgage loan on a single-family
owner-occupied property. A maximum Loan-to-Value Ratio of 70% (or 60% for
mortgage loans originated under the Non-Conforming NoIncome Qualifier Program,
but 65% if the borrower is self-employed) is permitted for a mortgage loan on a
non-owner-occupied property or a second home. The debt service-to-income ratio
is generally 55% or less based on the Qualifying Rate. The maximum loan amount
is $500,000 (or $400,000 for mortgage loans originated under the Non-Conforming
No-Income Qualifier Program) for mortgage loans on single-family owner-occupied
properties. The maximum loan amount is $300,000 (or $200,000 for mortgage loans
originated under the Non-Conforming No-Income Qualifier Program) for mortgage
loans on nonowner-occupied properties or second homes.
"CX" RISK. Under the "CX" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a disregard for timely payment or credit standing.
With respect to an existing mortgage loan on the subject property, no payment
can be more than 90 days past due. Such existing mortgage loan is not required
to be current at the time the application is submitted. The borrower may have
open collections, charge-offs and judgments, all of which must be paid prior to
the funding of the loan, but such items must be paid through the loan proceeds.
No bankruptcy or notice of default filings by the borrower may have occurred
during the preceding six months. A maximum Loan-to-Value Ratio of 65% (or 60% or
55% for mortgage loans
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originated under the Non-Conforming No-Income Qualifier Program, depending on
whether the borrower is self-employed) is permitted for a mortgage loan on a
single-family owner-occupied property. No mortgage loans on non-owner-occupied
property or second homes are made in the "CX" risk category. The maximum loan
amount is $200,000 under the Non-Conforming Full Documentation Program or
$175,000 (or $200,000 in the case of borrowers who are self-employed) under the
Non-Conforming NoIncome Qualifier Program. The debt service-to-income ratio
generally is 60% or less based on the Qualifying Rate.
"D" RISK. Under the "D" risk category, the prospective mortgagor may
have experienced significant credit problems in the past. As to non-mortgage
credit, significant prior defaults may have occurred. The borrower is sporadic
in some or all areas with a general disregard for timely payment or credit
standing. With respect to an existing mortgage loan on the subject property, no
payment can be more than 120 days past due. Such existing mortgage loan is not
required to be current at the time the application is submitted. The borrower
may have open collections, charge-offs and judgments, all of which must be paid
simultaneously with the funding of the loan. No current bankruptcy filings by
the borrower are allowed. Borrowers who are in foreclosure are considered. A
maximum Loan-to-Value Ratio of 65% (or 55% for mortgage loans originated under
the Non-Conforming, No-Income Qualifier Program, but 60% if the borrower is
self-employed) is permitted for a mortgage loan in a single-family
owner-occupied property. No mortgage loans on a non-owner-occupied property or a
second home are made in the "D" risk category. The maximum loan amount is
$350,000 under the Non-Conforming, NoIncome Qualifier Program, but $200,000 if
the borrower is self-employed) for mortgage loans on a nonowner-occupied
property or a second home. The debt service-to-income ratio is 60% or less based
on the Qualifying Rate.
EXCEPTIONS. As described above, the Originators use the foregoing
categories and characteristics as underwriting guidelines only. On a
case-by-case basis, it may determine that the prospective mortgagor warrants a
risk category upgrade, a debt service-to-income ratio exception, a pricing
exception, a loan-to-value exception or an exception from certain requirements
of a particular risk category (collectively called an "upgrade" or an
"exception"). An upgrade or exception may generally be allowed if the
application reflects certain compensating factors, among others: low
loan-to-value ratio; pride of ownership; a maximum of one 30-day late payment on
all mortgage loans during the last 12 months; stable employment, and the length
of residence in the subject property. Accordingly, they may classify certain
mortgage loan applications in a more favorable risk category than other mortgage
loan applications that, in the absence of such compensating factors, would
satisfy only the criteria of a less favorable risk category.
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