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As filed with the Securities and Exchange Commission on August 29, 1996
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CWABS, Inc.
(Exact name of registrant as specified in its charter)
Delaware Applied For
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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155 North Lake Avenue
Pasadena, California 91101-7139
(818) 584-2212
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Sandor E. Samuels, Esq.
Countrywide Home Loans, Inc.
155 North Lake Avenue
Pasadena, California 91101-7139
(818) 304-8505
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
With a copy to:
Edward J. Fine, Esq.
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
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Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of the registration statement, as
determined by market conditions.
---------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to Be Registered Registered Per Unit* Offering Price* Fee
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<S> <C> <C> <C> <C>
Asset Backed Securities...... $1,000,000 100% $1,000,000 $344.83
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* Estimated for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 29, 1996
PROSPECTUS SUPPLEMENT
(To Prospectus dated ______________, 199__)
$___________________
(Approximate)
Home Equity Loan Asset Backed Certificates, Series 199_-_
CWABS, Inc.
Depositor
[Countrywide Home Loans, Inc.]
Seller and Master Servicer
Each Home Equity Loan Asset Backed Certificate, Series 199_-_
(collectively, the "Certificates") will represent an undivided interest in the
[Countrywide] Home Equity Loan Trust 199_-_ (the "Trust") to be formed pursuant
to a Pooling and Servicing Agreement among [Countrywide Home Loans, Inc.
("Countrywide")], as Seller and Master Servicer, CWABS, Inc., as Depositor, and
[ ], as Trustee. The property of the Trust will include a pool of [adjustable
rate] home equity revolving credit line loans made or to be made in the future
(the "Mortgage Loans") under certain home equity revolving credit line loan
agreements. The Mortgage Loans are secured primarily by first and second deeds
of trust or mortgages on one- to four-family residential properties.
The aggregate undivided interest in the Trust represented by the
Certificates will, as of ____________, 199_ (the "Cut-off Date"), represent
approximately __% of the outstanding principal balances of the Mortgage Loans.
The remaining undivided interest in the Trust not represented by the
Certificates (the "Transferor Interest") will initially be equal to
$_________________, which as of the Cut-off Date is _% of the outstanding
principal balances of the Mortgage Loans. Only the Certificates are offered
hereby.
Distributions of principal and interest on the Certificates will be made on
the __________th day of each month or, if such date is not a Business Day, then
on the succeeding Business Day (each, a "Distribution Date"), commencing
___________, 199_. On each Distribution Date, holders of the Certificates will
be entitled to receive, from and to the limited extent of funds available in the
Collection Account (as defined herein), distributions with respect to interest
and principal calculated as set forth herein. The Certificates are not
guaranteed by the Depositor, [Countrywide] or any affiliate thereof. [However,
the Certificates will be unconditionally and irrevocably guaranteed as to the
payment of the Guaranteed Distributions (as defined herein) on each Distribution
Date pursuant to the terms of a financial guaranty insurance policy (the
"Policy") to be issued by
[INSURER]
There is currently no market for the Certificates offered hereby and there
can be no assurance that such a market will develop or if it does develop that
it will continue. See "Risk Factors" herein and in the Prospectus.
---------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-16 HEREIN AND ON PAGE 11 IN THE
ACCOMPANYING PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, [COUNTRYWIDE], THE
TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT
PROVIDED HEREIN. NEITHER THE CERTIFICATES NOR
THE MORTGAGE LOANS ARE INSURED OR GUAR-
ANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to
Public (1) Discount(2) the Depositor(3)
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Per Certificate................. % % %
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Total........................... $ $ $
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(1) Plus accrued interest, if any, from _______________, 199_.
(2) The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting expenses, estimated to be $_______________.
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The Certificates are offered subject to prior sale and subject to the
Underwriter's right to reject orders in whole or in part. It is expected that
delivery of the Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company, CEDEL S.A. and the Euroclear System
on or about ______________, 199_ (the "Closing Date"). The Certificates will be
offered in Europe and the United States of America.
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[UNDERWRITER]
________________, 199__.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and Prospectus.
This is in addition to the obligation of dealers acting as underwriters to
deliver a Prospectus Supplement and Prospectus with respect to their unsold
allotments or subscriptions.
---------------
The Certificates offered hereby constitute part of a separate series of
Home Equity Loan Asset Backed Certificates being offered by CWABS, Inc. from
time to time pursuant to its Prospectus dated _______________, 199__. This
Prospectus Supplement does not contain complete information about the offering
of the Certificates. Additional information is contained in the Prospectus and
investors are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Certificates may not be consummated unless the purchaser
has received both this Prospectus Supplement and the Prospectus.
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SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Certain capitalized terms
used in the Summary are defined elsewhere in the Prospectus Supplement or in the
Prospectus. Reference is made to the Index of Defined Terms herein and the Index
of Defined Terms in the Prospectus for the definitions of certain capitalized
terms.
Trust............................. [Countrywide] Home Equity Loan Trust 199_-_
(the "Trust") will be formed pursuant to a
pooling and servicing agreement (the
"Agreement") to be dated as of
______________, 199_ (the "Cut-off Date")
among [Countrywide Home Loans, Inc.
("Countrywide")], as seller and servicer
(together with any successor in such
capacity, the "Seller" and the "Master
Servicer", respectively), CWABS, Inc., as
depositor (the "Depositor"), and [ ], as
trustee (the "Trustee"). The property of the
Trust will include: a pool of [adjustable
rate] home equity revolving credit line loans
made or to be made in the future (the
"Mortgage Loans"), under certain home equity
revolving credit line loan agreements (the
"Credit Line Agreements") and secured by
either first or second mortgages on
residential properties that are primarily
one- to four-family properties (the
"Mortgaged Properties"); the collections in
respect of the Mortgage Loans received after
the Cut-off Date (exclusive of payments in
respect of accrued interest due on or prior
to the Cut-off Date or due in the month of
_____________); property that secured a
Mortgage Loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
an irrevocable and unconditional limited
financial guaranty insurance policy (the
"Policy"); an assignment of the Depositor's
rights under the Purchase Agreement (as
defined herein); rights under certain hazard
insurance policies covering the Mortgaged
Properties; and certain other property, as
described more fully herein.
The Trust property will include the unpaid
principal balance of each Mortgage Loan as of
the Cut-off Date (the "Cut-off Date Principal
Balance") plus any additions thereto as a
result of new advances made pursuant to the
applicable Credit Line Agreement (the
"Additional Balances") during the life of the
Trust. With respect to any date, the "Pool
Balance" will be equal to the aggregate of
the Principal Balances of all Mortgage Loans
as of such date. The aggregate Cut-off Date
Principal Balance of the Mortgage Loans is
$____________________ (the "Cut-off Date Pool
Balance"). The "Principal Balance" of a
Mortgage Loan (other than a Liquidated
Mortgage Loan) on any day is equal to its
Cut-off Date Principal Balance, plus (i) any
Additional Balances in respect of such
Mortgage Loan, minus (ii) all collections
credited against the Principal Balance of
such Mortgage Loan in accordance with the
related Credit Line Agreement prior to such
day. The Principal Balance of a Liquidated
Mortgage Loan (as defined herein) after final
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recovery of related Liquidation Proceeds (as
defined herein) shall be zero.
Securities Offered................ Each of the Home Equity Loan Asset Backed
Certificates, Series 199_-_ offered hereby
(the "Certificates") represents an undivided
interest in the Trust. Each Certificate
represents the right to receive payments of
interest at the variable rate described below
(the "Certificate Rate"), payable monthly,
and payments of principal at such time and to
the extent provided below. The aggregate
undivided interest in the Trust represented
by the Certificates as of the Closing Date
will equal $__________________ (the "Original
Invested Amount"), which represents __% of
the Cut-off Date Pool Balance. The "Original
Certificate Principal Balance" will equal
$__________________. Following the Closing
Date, the "Invested Amount" with respect to
any date will be an amount equal to the
Original Invested Amount minus (i) the amount
of Investor Principal Collections (as defined
herein) previously distributed to
Certificateholders, and minus (ii) an amount
equal to the product of the Investor Floating
Allocation Percentage and the Liquidation
Loss Amounts (each as defined herein). The
Transferor (as described below) will own the
remaining undivided interest (the "Transferor
Interest") in the Mortgage Loans, which is
equal to the Pool Balance minus the Invested
Amount and will initially equal approximately
__% of the Cut-off Date Pool Balance. The
Transferor (the "Transferor") as of any date
is the owner of the Transferor Interest which
initially will be [Countrywide].
The Certificates will be issued pursuant to
the Agreement. The principal amount of the
outstanding Certificates (the "Certificate
Principal Balance") on any date is equal to
the Original Certificate Principal Balance
minus the aggregate of amounts actually
distributed as principal to the
Certificateholders. See "Description of the
Certificiates" herein.
Removal of Certain
Mortgage Loans;
Additional Balances............... Subject to certain conditions, on any
Distribution Date the Transferor may, but
shall not be obligated to, remove from the
Trust certain Mortgage Loans without notice
to the Certificateholders. The Transferor is
permitted to designate the Mortgage Loans to
be removed. Mortgage Loans so designated will
only be removed upon satisfaction of certain
conditions specified in the Agreement,
including: (i) the Transferor Interest as of
the Transfer Date (as defined herein) (after
giving effect to such removal) exceeds the
Minimum Transferor Interest (as defined
below); (ii) the Transferor shall have
delivered to the Trustee a "Mortgage Loan
Schedule" containing a list of all Mortgage
Loans remaining in the Trust after such
removal; (iii) the Transferor shall represent
and warrant that no selection procedures
which are adverse to the
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interests of the Certificateholders or the
Certificate Insurer were used by the
Transferor in selecting such Mortgage Loans;
(iv) in connection with the first such
retransfer of Mortgage Loans, the Rating
Agencies (as defined herein) shall have been
notified of the proposed transfer and prior
to the Transfer Date shall not have notified
the Transferor in writing that such transfer
would result in a reduction or withdrawal of
the ratings assigned to the Certificates
without regard to the Policy; and (v) the
Transferor shall have delivered to the
Trustee and the Certificate Insurer an
officer's certificate confirming the
conditions set forth in clauses (i) through
(iii) above. See "Description of the
Certificates--Optional Transfers of Mortgage
Loans to the Transferor" herein.
The "Minimum Transferor Interest" as of any
date is an amount equal to the lesser of (a)
__% of the Pool Balance on such date and (b)
the Transferor Interest as of the Closing
Date.
During the term of the Trust, all Additional
Balances will be transferred to and become
property of the Trust. The Pool Balance at
any time will generally fluctuate from day to
day because the amount of Additional Balances
and the amount of principal payments with
respect to the Mortgage Loans will usually
differ from day to day. Because the
Transferor Interest is equal to the Pool
Balance minus the Invested Amount, the amount
of the Transferor Interest will fluctuate
from day to day as draws are made with
respect to the Mortgage Loans and as
Principal Collections are received.
The Mortgage Loans................ The Mortgage Loans are secured by first and
second mortgages on Mortgaged Properties
located in ___ states. On the Closing Date,
[Countrywide] will sell the Mortgage Loans to
the Depositor, pursuant to a purchase
agreement (the "Purchase Agreement").
The percentage of the Cut-off Date Principal
Balance of the Mortgage Loans secured
primarily by Mortgaged Properties located in
the states of __________, ________,
__________, _______, ______ and ________ is
approximately ____%, ____%, ____%, ____%,
____% and ____%, respectively. The "Combined
Loan-to-Value Ratio" of each Mortgage Loan is
the ratio of (A) the sum of (i) the maximum
amount the borrower was permitted to draw
down under the related Credit Line Agreement
(the "Credit Limit") and (ii) the amounts of
any related senior mortgage loans (computed
as of the date of origination of each such
Mortgage Loans) to (B) the lesser of (i) the
appraised value of the Mortgaged Property or
(ii) in the case of a Mortgaged Property
purchased within one year of the origination
of the related Mortgage Loan, the purchase
price of such Mortgaged Property. As of the
Cut-off Date the Combined Loan-to-Value
Ratios ranged from ____% to
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______% and, as of the Cut-off Date, the
weighted average Combined Loan-to-Value Ratio
of the Mortgage Loans was approximately
____%.
[Interest on each Mortgage Loan is payable
monthly and computed on the related daily
outstanding Principal Balance for each day in
the billing cycle at a variable rate per
annum (the "Loan Rate") equal at any time
(subject to maximum rates, as described
herein under "Description of the Mortgage
Loans--Mortgage Loan Terms," and further
subject to applicable usury limitations) to
the sum of (i) the highest prime rate
published in the "Money Rates" section of The
Wall Street Journal and (ii) a Margin within
the range of ____% to ____%]. As of the
Cut-off Date, the weighted average Margin was
approximately ____%. Loan Rates are adjusted
monthly on the first business day of the
calendar month preceding the Due Date. As to
each Mortgage Loan, the "Due Date" is the
fifteenth day of each month. The Cut-off Date
Principal Balances ranged from zero to
$__________ and averaged approximately
$__________. Credit Limits under the Mortgage
Loans as of the Cut-off Date ranged from
$__________ to $__________ and averaged
approximately $__________. Each Mortgage Loan
was originated in the period from
_______________, 199_ to ________________,
199_. As of the Cut-off Date, the maximum
Credit Limit Utilization Rate (as defined
herein) was 100% and the weighted average
Credit Limit Utilization Rate was
approximately ____%. As of the Cut-off Date,
approximately ____% by Cut-off Date Principal
Balance of the Mortgage Loans represented
first liens on the related Mortgaged
Properties, while approximately ____% of the
Mortgage Loans represented second liens. As
of the Cut-off Date, the Mortgage Loans had
remaining terms to scheduled maturity ranging
from ___ months to ___ months and had a
weighted average of approximately ___ months.
See "Description of the Mortgage Loans"
herein.
Denominations..................... The Certificates will be offered for purchase
in denominations of $1,000 and multiples of
$1 in excess thereof. The interest in the
Trust evidenced by a Certificate (the
"Percentage Interest") will be equal to the
percentage derived by dividing the
denomination of such Certificate by the
Original Certificate Principal Balance.
Registration of
Certificates...................... The Certificates will initially be issued in
book-entry form. Persons acquiring beneficial
ownership interests in the Certificates
("Certificate Owners") may elect to hold
their Certificate interests through The
Depository Trust Company ("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
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usual rules and operating procedures of the
relevant system. So long as the Certificates
are Book-Entry Certificates (as defined
herein), such Certificates will be evidenced
by one or more Certificates registered in the
name of Cede & Co. ("Cede"), as the nominee
of DTC or one of the relevant depositaries
(collectively, the "European Depositaries").
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 The
Chase Manhattan Bank ("Chase"), the relevant
depositaries of CEDEL or Euroclear,
respectively, and each a participating member
of DTC. The Certificates will initially be
registered in the name of Cede. The interests
of the Certificateholders will be represented
by book entries on the records of DTC and
participating members thereof. No Certificate
Owner will be entitled to receive a
definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein)
are issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Certificates
reflect the rights of Certificate Owners only
as such rights may be exercised through DTC
and its participating organizations for so
long as such Certificates are held by DTC.
See "Risk Factors--Book-Entry Certificates",
"Description of the Certificates--Book-Entry
Certificates" herein and "Annex I" hereto.
Depositor......................... CWABS, Inc., a Delaware corporation and a
limited purpose finance subsidiary of
Countrywide Credit Industries, Inc., a
Delaware corporation. The principal executive
offices of the Depositor are located at 155
North Lake Avenue, Pasadena, California 91101
(Telephone: (818) 584-2212). See "The
Depositor" in the Prospectus.
Master Servicer of the Mortgage
Loans............................. [Countrywide Home Loans, Inc.,a New York
corporation headquartered in Pasadena,
California. The principal executive offices
of the Master Servicer are located at 155
North Lake Avenue, Pasadena, California 91101
(Telephone: (818) 304-8400).] See "Servicing
of the Mortgage Loans--The Master Servicer"
herein.
Collections....................... All collections on the Mortgage Loans will
generally be allocated in accordance with the
Credit Line Agreements between amounts
collected in respect of interest and amounts
collected in respect of principal. As to any
Distribution Date, "Interest Collections"
will be equal to the amounts collected during
the related Collection Period, including the
portion of Net Liquidation Proceeds (as
defined below) allocated to interest pursuant
to the terms of the Credit Line Agreements
less Servicing Fees for the related
Collection Period.
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As to any Distribution Date, "Principal
Collections" will be equal to the sum of (i)
the amounts collected during the related
Collection Period, including the portion of
Net Liquidation Proceeds allocated to
principal pursuant to the terms of the Credit
Line Agreements and (ii) any Transfer Deposit
Amounts (as defined herein).
"Net Liquidation Proceeds" with respect to a
Mortgage Loan are the proceeds (excluding
amounts drawn on the Policy) received in
connection with the liquidation of any
Mortgage Loan, whether through trustee's
sale, foreclosure sale or otherwise, reduced
by related expenses, but not including the
portion, if any, of such amount that exceeds
the Principal Balance of the Mortgage Loan
plus any accrued and unpaid interest thereon
to the end of the Collection Period during
which such Mortgage Loan became a Liquidated
Mortgage Loan.
With respect to any Distribution Date, the
portion of Interest Collections allocable to
the Certificates ("Investor Interest
Collections") will equal the product of (a)
Interest Collections for such Distribution
Date and (b) the Investor Floating Allocation
Percentage. With respect to any Distribution
Date, the "Investor Floating Allocation
Percentage" is the percentage equivalent of a
fraction determined by dividing the Invested
Amount at the close of business on the
preceding Distribution Date (or at the
Closing Date in the case of the first
Distribution Date) by the Pool Balance at the
beginning of the related Collection Period.
The remaining amount of Interest Collections
will be allocated to the Transferor Interest
as more fully described herein.
On each Distribution Date, the Investor
Interest Collections will be applied in the
following order of priority: (i) as payment
to the Trustee for its fee for services
rendered pursuant to the Agreement; (ii) as
payment for the premium for the Policy; (iii)
as payment for the accrued interest due and
any overdue accrued interest (with interest
thereon) on the Certificate Principal Balance
of the Certificates; (iv) to pay any Investor
Loss Amount (as defined herein) for such
Distribution Date; (v) as payment for any
Investor Loss Amount for a previous
Distribution Date that was not previously (a)
funded by Investor Interest Collections
allocable to the Certificateholders, (b)
absorbed by the Overcollateralization Amount,
(c) funded by amounts on deposit in the
Spread Account or (d) funded by draws on the
Policy; (vi) to reimburse prior draws made
from the Policy (with interest thereon);
(vii) to pay principal on the Certificates
until the Invested Amount exceeds the
Certificate Principal Balance by the Required
Overcollateralization Amount, each as defined
herein (such amount, if any, paid pursuant to
this clause (vii) being referred to herein as
the "Accelerated Principal Distribution
Amount"); (viii) any other
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amounts required to be deposited in an
account for the benefit of the Certificate
Insurer and Certificateholders pursuant to
the Agreement or amounts owed to the
Certificate Insurer pursuant to the Insurance
Agreement; (ix) certain amounts that may be
required to be paid to the Master Servicer
pursuant to the Agreement; and (x) to the
Transferor to the extent permitted as
described herein.
Investor Interest Collections available after
the payment of interest on the Certificates
may be insufficient to cover any Investor
Loss Amount. If such insufficiency results in
the Certificate Principal Balance exceeding
the Invested Amount, a draw in an amount
equal to such difference will be made on the
Policy in accordance with the terms of the
Policy.
The "Overcollateralization Amount" on any
date of determination is the amount, if any,
by which the Invested Amount exceeds the
Certificate Principal Balance on such day.
Payments to Certificateholders pursuant to
clause (iii) above will be interest payments
on the Certificates. Payments to
Certificateholders pursuant to clauses (iv),
(v) and (vii) will be principal payments on
the Certificates and will therefore reduce
the Certificate Principal Balance, however,
payments pursuant to clause (vii) will not
reduce the Invested Amount. The Accelerated
Principal Distribution Amount is not
guaranteed by the Policy.
"Liquidation Loss Amount" means with respect
to any Liquidated Mortgage Loan, the
unrecovered Principal Balance thereof at the
end of the related Collection Period in which
such Mortgage Loan became a Liquidated
Mortgage Loan, after giving effect to the Net
Liquidation Proceeds in connection therewith.
The "Investor Loss Amount" shall be the
product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amount
for such Distribution Date. See "Description
of the Certificates--Distributions on the
Certificates" herein.
Principal Collections will be allocated
between the Certificateholders and the
Transferor ("Investor Principal Collections"
and "Transferor Principal Collections",
respectively) in accordance with their
percentage interests in the Mortgage Loans of
__% and __%, respectively, as of the Cut- off
Date (the "Fixed Allocation Percentage"), but
a lesser amount of Principal Collections may
be distributed to Certificateholders during
the Managed Amortization Period, as described
below. The "Investor Fixed Allocation
Percentage" shall be __%.
The Master Servicer will deposit Interest
Collections and Principal Collections in
respect of the Mortgage Loans in an account
established for such purpose under the
Agreement (the "Collection Account"). See
"Description of the Certificates--
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Payments on Mortgage Loans; Deposits to
Collection Account and Distribution Account"
herein.
Collection Period................. As to any Distribution Date other than the
first Distribution Date, the "Collection
Period" is the calendar month preceding the
month of such Distribution Date. As to the
first Distribution Date, the "Collection
Period" is the period beginning after the
Cut-off Date and ending on the last day of
_____________, 199_.
Interest.......................... Interest on the Certificates will be
distributed monthly on the fifteenth day of
each month or, if such day is not a Business
Day, then the next succeeding Business Day
(each, a "Distribution Date"), commencing on
______________, 199_, at the Certificate Rate
for the related Interest Period (as defined
below). The "Certificate Rate" for an
Interest Period will generally equal the sum
of [(a) the London Interbank offered rate for
one-month Eurodollar deposits ("LIBOR")
appearing on the Telerate Screen Page 3750,
as of the second LIBOR Business Day (as
defined herein) prior to the first day of
such Interest Period (or as of two LIBOR
Business Days prior to the Closing Date, in
the case of the first Interest Period) and
(b) ____%.] Notwithstanding the foregoing, in
no event will the amount of interest required
to be distributed in respect of the
Certificates on any Distribution Date exceed
a rate equal to the weighted average of the
Loan Rates (net of the Servicing Fee Rate,
the fee payable to the Trustee and the rate
at which the premium payable to the
Certificate Insurer is calculated) weighted
on the basis of the daily balance of each
Mortgage Loan during the related billing
cycle prior to the Collection Period relating
to such Distribution Date. Interest on the
Certificates in respect of any Distribution
Date will accrue from the preceding
Distribution Date (or in the case of the
first Distribution Date, from the date of the
initial issuance of the Certificates (the
"Closing Date") through the day preceding
such Distribution Date (each such period, an
"Interest Period") on the basis of the actual
number of days in the Interest Period and a
360-day year.
Interest payments on the Certificates will be
funded from Investor Interest Collections,
any funds on deposit in the Spread Account
and from draws on the Policy. See
"Description of the Certificates" herein.
Principal Payments from
Principal Collections............. For the period beginning on the first
Distribution Date and, unless a Rapid
Amortization Event (as defined herein) shall
have earlier occurred, ending on the
Distribution Date in _____________, 200_ (the
"Managed Amortization Period"), the amount of
Principal Collections payable to
Certificateholders as of each Distribution
Date during the Managed Amortization Period
will equal, to the extent funds
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are available therefor, the Scheduled
Principal Collections Distribution Amount for
such Distribution Date. On any Distribution
Date during the Managed Amortization Period,
the "Scheduled Principal Collections
Distribution Amount" shall equal the lesser
of (i) the Maximum Principal Payment (as
defined herein) and (ii) the Alternative
Principal Payment (as defined herein). With
respect to any Distribution Date, the
"Maximum Principal Payment" will equal the
product of the Investor Fixed Allocation
Percentage and Principal Collections for such
Distribution Date. With respect to any
Distribution Date, the "Alternative Principal
Payment" will equal the greater of (x) ____%
of the Certificate Principal Balance
immediately prior to such Distribution Date
and (y) the amount, but not less than zero,
of Principal Collections for such
Distribution Date less the aggregate of
Additional Balances created during the
related Collection Period.
Beginning with the first Distribution Date
following the end of the Managed Amortization
Period, the amount of Principal Collections
payable to Certificateholders on each
Distribution Date will be equal to the
Maximum Principal Payment. See "Description
of the Certificates--Distributions on the
Certificates" herein.
In addition, to the extent funds are
available therefor (including funds available
under the Policy), on the Distribution Date
in _____________ 20__, Certificateholders
will be entitled to receive as payment of
principal an amount equal to the outstanding
Certificate Principal Balance.
Distributions of Principal Collections based
upon the Investor Fixed Allocation Percentage
may result in distributions of principal to
Certificateholders in amounts that are
greater relative to the declining Pool
Balance than would be the case if the
Investor Floating Allocation Percentage were
used to determine the percentage of Principal
Collections distributed in respect of the
Invested Amount. The aggregate distributions
of principal to Certificateholders will not
exceed the Original Certificate Principal
Balance.
The Certificate Insurer........... [Insurer] (the "Certificate Insurer") is a
__________ insurance company engaged
exclusively in the business of writing
financial guaranty insurance, principally in
respect of securities offered in domestic and
foreign markets. The Certificate Insurer's
claims-paying ability is rated ____ by
_________________________________________ and
_____ by
________________________________________. See
"The Certificate Insurer" in this Prospectus
Supplement.
Policy............................ On or before the Closing Date, the Policy
will be issued by the Certificate Insurer
pursuant to the provisions of the Insurance
and Indemnity Agreement (the "Insurance
Agreement") to be
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dated as of _____________, 199_, among the
Seller, the Depositor, the Master Servicer
and the Certificate Insurer.
The Policy will irrevocably and
unconditionally guarantee payment on each
Distribution Date to the Trustee for the
benefit of the Certificateholders the full
and complete payment of (i) the Guaranteed
Principal Distribution Amount (as defined
herein) with respect to the Certificates for
such Distribution Date and (ii) accrued and
unpaid interest due on the Certificates
(together, the "Guaranteed Distributions"),
with such Guaranteed Distributions having
been calculated in accordance with the
original terms of the Certificates or the
Agreement except for amendments or
modifications to which the Certificate
Insurer has given its prior written consent.
The effect of the Policy is to guarantee the
timely payment of interest on, and the
ultimate payment of the principal amount of,
all of the Certificates.
The "Guaranteed Principal Distribution
Amount" for any Distribution Date shall be
the amount by which the Certificate Principal
Balance (after giving effect to all other
amounts distributable and allocable to
principal on the Certificates on such
Distribution Date) exceeds the Invested
Amount for such Distribution Date. In
addition, the Policy will guarantee the
payment of the outstanding Certificate
Principal Balance on the Distribution Date in
____________, 20__ (after giving effect to
all other amounts distributable and allocable
to principal on such Distribution Date).
In accordance with the Agreement, the Trustee
will be required to establish and maintain an
account (the "Spread Account") for the
benefit of the Certificate Insurer and the
Certificateholders. The Trustee shall deposit
the amounts into the Spread Account as
required by the Agreement.
In the absence of payments under the Policy,
Certificateholders will directly bear the
credit and other risks associated with their
undivided interest in the Trust. See
"Description of the Certificates--The Policy"
herein.
Overcollateralization
Amount............................ The distribution of Accelerated Principal
Distribution Amounts, if any, to
Certificateholders may result in the Invested
Amount being greater than the Certificate
Principal Balance, thereby creating the
Overcollateralization Amount. The
Overcollateralization Amount, if any, will be
available to absorb any Investor Loss Amount
not covered by Investor Interest Collections.
Payments of Accelerated Principal
Distribution Amounts are not covered by the
Policy. Any Investor Loss Amounts not covered
by such overcollateralization, amounts on
deposit in the Spread Account
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or Investor Interest Collections will be
covered by draws on the Policy to the extent
provided therein.
Record Date....................... The last day preceding a Distribution Date
or, if the Certificates are no longer
Book-Entry Certificates, the last day of the
month preceding a Distribution Date.
Servicing......................... The Master Servicer will be responsible for
servicing, managing and making collections on
the Mortgage Loans. The Master Servicer will
deposit all collections in respect of the
Mortgage Loans into the Collection Account as
described herein. On the third Business Day
prior to each Distribution Date (the
"Determination Date"), the Master Servicer
will calculate, and instruct the Trustee
regarding the amounts to be paid, as
described herein, to the Certificateholders
on such Distribution Date. See "Description
of the Certificates--Distributions on the
Certificates" herein. With respect to each
Collection Period, the Master Servicer will
receive from collections in respect of
interest on the Mortgage Loans, on behalf of
itself, a portion of such collections as a
monthly servicing fee (the "Servicing Fee")
in the amount of approximately ____% per
annum (the "Servicing Fee Rate") on the
aggregate Principal Balances of the Mortgage
Loans as of the first day of each such
Collection Period. See "Description of the
Certificates--Servicing Compensation and
Payment of Expenses" herein. In certain
limited circumstances, the Master Servicer
may resign or be removed, in which event
either the Trustee or a third-party servicer
will be appointed as a successor Master
Servicer. See "Description of the
Certificates--Certain Matters Regarding the
Master Servicer and the Transferor" herein.
Final Payment of
Principal; Termination............ The Trust will terminate on the Distribution
Date following the later of (A) payment in
full of all amounts owing to the Certificate
Insurer and (B) the earliest of (i) the
Distribution Date on which the Certificate
Principal Balance has been reduced to zero,
(ii) the final payment or other liquidation
of the last Mortgage Loan in the Trust, (iii)
the optional retransfer to the Transferor of
the Certificates, as described below and (iv)
the Distribution Date in ______________,
20__. The Certificates will be subject to
optional retransfer to the Transferor on any
Distribution Date after the Certificate
Principal Balance is reduced to an amount
less than or equal to $________________ (__%
of the Original Certificate Principal
Balance) and all amounts due and owing to the
Certificate Insurer and unreimbursed draws on
the Policy, together with interest thereon,
as provided under the Insurance Agreement,
have been paid. The retransfer price will be
equal to the sum of the outstanding
Certificate Principal Balance and accrued and
unpaid interest thereon at the Certificate
Rate through the day preceding the final
Distribution Date. See "Description Of
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The Certificates--Termination; Retirement of
the Certificates" herein and "The
Agreements--Termination"; Optional
Termination in the Prospectus.
In addition, the Trust may be liquidated as a
result of certain events of bankruptcy,
insolvency or receivership relating to the
Transferor. See "Description of the
Certificates--Rapid Amortization Events"
herein.
Trustee........................... [ ], a ____________________________ (the
"Trustee") will act as Trustee on behalf of
the Certificateholders.
Mandatory Retransfer of
Certain Mortgage Loans............ The Seller will make certain representations
and warranties in the Agreement with respect
to the Mortgage Loans. If the Seller breaches
certain of its representations and warranties
with respect to any Mortgage Loan and such
breach materially and adversely affects the
interests of the Certificateholders or the
Certificate Insurer and is not cured within
the specified period, the Mortgage Loan will
be removed from the Trust upon the expiration
of a specified period from the date on which
the Seller becomes aware or receives notice
of such breach and will be reassigned to the
Seller. See "Description of the
Certificates--Assignment of Mortgage Loans"
herein.
Federal Income Tax
Consequences...................... Subject to the qualifications set forth in
"Certain Federal Income Tax Consequences"
herein, special tax counsel to the Depositor
is of the opinion that, under existing law, a
Certificate will be treated as a debt
instrument for Federal income tax purposes as
of the Closing Date. Under the Agreement, the
Transferor, the Depositor and the
Certificateholders will agree to treat the
Certificates as indebtedness for Federal
income tax purposes. See "Certain Federal
Income Tax Consequences" herein and in the
Prospectus for additional information
concerning the application of Federal income
tax laws.
ERISA Considerations.............. The acquisition of a Certificate by a pension
or other employee benefit plan (a "Plan")
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
could, in some instances, result in a
"prohibited transaction" or other violation
of the fiduciary responsibility provisions of
ERISA and Code Section 4975. Certain
exemptions from the prohibited transaction
rules could be applicable to the acquisition
of the Certificates. Any Plan fiduciary
considering whether to purchase any
Certificate on behalf of a Plan should
consult with its counsel regarding the
applicability of the provisions of ERISA and
the Code. See "ERISA Considerations" herein
and in the Prospectus.
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Legal Investment
Considerations.................... The Certificates will not constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA"), because not all of the
Mortgages securing the Mortgage Loans are
first mortgages. Accordingly, many
institutions with legal authority to invest
in comparably rated securities based solely
on first mortgages may not be legally
authorized to invest in the Certificates. See
"Legal Investment Considerations" herein and
"Legal Investment" in the Prospectus.
Certificate Rating................ It is a condition to the issuance of the
Certificates that they be rated "___" by
_____ and "___" by _________ (each a "Rating
Agency"). In general, ratings address credit
risk and do not address the likelihood of
prepayments. See "Ratings" herein and "Risk
Factors--Rating of the Securities" in the
Prospectus.
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RISK FACTORS
Book-Entry Certificates. Issuance of the 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. See "Description of the Certificates--Book-Entry
Certificates" herein and "Risk Factors-Book-Entry Registration" in the
Prospectus.
Since transactions in the Certificates can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner to pledge a Certificate to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system or
otherwise to take actions in respect of such Certificates, may be limited due to
lack of a physical certificate representing the Certificates. See "Description
of the Certificates--Book-Entry Certificates" herein and "Risk
Factors-Book-Entry Registration" in the Prospectus.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the 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 Certificate Owners either directly or
indirectly through indirect participants. See "Description of the
Certificates--Book-Entry Certificates" herein and "Risk Factors-Book-Entry
Registration" in the Prospectus.
Cash Flow Considerations. Minimum monthly payments on the Mortgage Loans
will at least equal and may exceed accrued interest. Even assuming that the
Mortgaged Properties provide adequate security for the Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
Mortgage Loans that are delinquent and resulting shortfalls in distributions to
Certificateholders could occur if the Certificate Insurer were unable to perform
on its obligations under the Policy. Further, liquidation expenses (such as
legal fees, real estate taxes, and maintenance and preservation expenses) will
reduce the proceeds payable to Certificateholders and thereby reduce the
security for the Mortgage Loans. In the event any of the Mortgaged Properties
fail to provide adequate security for the related Mortgage Loans,
Certificateholders could experience a loss if the Certificate Insurer were
unable to perform its obligations under the Policy.
Prepayment Considerations. Substantially all of the Mortgage Loans may be
prepaid in whole or in part at any time without penalty. Home equity loans, such
as the Mortgage Loans, have been originated in significant volume only during
the past few years and neither the Depositor nor the Master Servicer is aware of
any publicly available studies or statistics on the rate of prepayment of such
loans. Generally, home equity loans are not viewed by borrowers as permanent
financing. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional loans. The Trust's prepayment experience may be
affected by a wide variety of factors, including general economic conditions,
interest rates, the availability of alternative financing and homeowner
mobility. In addition, substantially all of the Mortgage Loans contain
due-on-sale provisions and the Master Servicer intends to enforce such
provisions unless (i) such enforcement is not permitted by applicable law or
(ii) the Master Servicer, in a manner consistent with reasonable commercial
practice, permits the purchaser of the related Mortgaged Property to assume the
Mortgage Loan. To the extent permitted by applicable law, such assumption will
not release the original borrower from its obligation under any such Mortgage
Loan. See "Description of the Certificates" herein and "Certain Legal Aspects of
Loans--Due-on-Sale Clauses" in the Prospectus for a description of certain
provisions of the Credit Line Agreements that may affect the prepayment
experience on the Mortgage Loans.
Certificate Rating. The rating of the Certificates will depend primarily on
an assessment by the Rating Agencies of the Mortgage Loans and upon the
claims-paying ability of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
rating initially given to the Certificates may result in a reduction in the
rating of the Certificates. The rating by the Rating Agencies of the
Certificates is not a recommendation to purchase, hold or sell the Certificates,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain in
place for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. In general, the ratings address credit risk
and do not address the likelihood of prepayments. The ratings of the
Certificates do not address the possibility of the imposition of United States
withholding tax with respect to non-U.S. persons.
Legal Considerations. The Mortgage Loans are secured by mortgages (which
generally are second mortgages). With respect to Mortgage Loans that are secured
by first mortgages, the Master Servicer has the power under
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certain circumstances to consent to a new mortgage lien on the Mortgaged
Property having priority over such Mortgage Loan. Mortgage Loans secured by
second mortgages are entitled to proceeds that remain from the sale of the
related Mortgaged Property after any related senior mortgage loan and prior
statutory liens have been satisfied. 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 Policy, the
Certificateholders will 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 cannot be obtained or is not realized upon. See
"Certain Legal Aspects of Loans" in the Prospectus.
Under the terms of the Agreement, so long as [Countrywide's] long-term
senior unsecured debt is rated at least "____" by ___ and "____" by _______, the
Master Servicer will be entitled to maintain possession of the documentation
relating to each Mortgage Loan sold by it, including the Credit Line Agreements
and the Related Documents or other evidence of indebtedness signed by the
borrower, and the assignments of the related mortgages to the Trust will not be
required to be recorded. Failure to deliver the Related Documents to the Trustee
will have the result in most (if not all) of the states in which the Related
Documents will be held, and failure to record the assignments of the related
mortgages to the Trustee will have the result in certain states in which the
Mortgaged Properties are located, of making the sale of the Cut-off Date
Principal Balances, Additional Balances and Related Documents potentially
ineffective against (i) any creditors of [Countrywide], who may have been
fraudulently or inadvertently induced to rely on the Mortgage Loans as assets of
[Countrywide], or (ii) any purchaser of a Mortgage Loan who had no notice of the
prior conveyance to the Trust if such purchaser perfects his interest in the
Mortgage Loan by taking possession of the Related Documents or other evidence of
indebtedness or otherwise.
The sale of the Mortgage Loans from [Countrywide] to the Depositor pursuant
to the Purchase Agreement will be treated as a sale of the Mortgage Loans.
However, in the event of an insolvency of [Countrywide], the receiver of
[Countrywide] may attempt to recharacterize the sale of the Mortgage Loans as a
borrowing by [Countrywide], secured by a pledge of the applicable Mortgage
Loans. If the receiver decided to challenge such transfer, (i) if the Mortgage
Loans have not been delivered to the Trustee, the interest of the Trust in the
Mortgage Loans will be that of an unperfected security interest and (ii) even if
the Mortgage Loans have been delivered to the Trustee, delays in payments of the
Certificates and reductions in the amounts thereof could occur. The Depositor
will warrant in the Agreement that the transfer of the Mortgage Loans by it to
the Trust is either a valid transfer and assignment of such Mortgage Loans to
the Trust or the grant to the Trust of a security interest in such Mortgage
Loans.
If a conservator, receiver or trustee were appointed for the Transferor, or
if certain other events relating to the bankruptcy or insolvency of the
Transferor were to occur, Additional Balances would not be sold to the Trust. In
such an event, the Rapid Amortization Period would commence and the Trustee
would attempt to sell the Mortgage Loans (unless Certificateholders holding
Certificates evidencing undivided interests aggregating at least 51% of the
Certificate Principal Balance instruct otherwise), thereby causing early payment
of the Certificate Principal Balance. The net proceeds of such sale will first
be paid to the Certificate Insurer to the extent of unreimbursed draws under the
Policy and other amounts owing to the Certificate Insurer pursuant to the
Insurance Agreement. The Investor Fixed Allocation Percentage of remaining
amounts will be distributed to the Certificateholders and the Policy will cover
any amount by which such remaining net proceeds are insufficient to pay the
Certificate Principal Balance in full.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or the
Certificateholders from appointing a successor Master Servicer.
[Geographic Concentration. As of the Cut-off Date, approximately _____% (by
Cut-off Date Principal Balance) of the Mortgaged Properties are located in the
State of __________. An overall decline in the __________ residential real
estate market could adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans such that the Principal Balances of the related
Mortgage Loans, together with any primary financing on such Mortgaged
Properties, could equal or exceed the value of such Mortgaged Properties. As the
residential real estate market is influenced by many factors, including the
general condition of the economy and interest rates, no assurances may be given
that the __________ residential real estate market will not weaken. If the
__________ residential real estate market should experience an overall decline
in property values after the dates of origination of the Mortgage Loans, the
rates of losses on the Mortgage Loans would be expected to increase, and could
increase substantially.]
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Master Servicer's Ability to Change the Terms of the Mortgage Loans. The
Master Servicer may agree to changes in the terms of a Credit Line Agreement,
provided that such changes (i) do not adversely affect the interest of the
Certificateholders or the Certificate Insurer, and (ii) are consistent with
prudent business practice. There can be no assurance that changes in applicable
law or the marketplace for home equity loans or prudent business practice will
not result in changes in the terms of the Mortgage Loans. In addition, the
Agreement permits the Master Servicer, within certain limitations described
therein, to increase the Credit Limit of the related Mortgage Loan or reduce the
Margin for such Mortgage Loan.
Delinquent Mortgage Loans. The Trust will include Mortgage Loans which are
89 or fewer days delinquent as of the Cut-off Date. The Cut-off Date Principal
Balance of Mortgage Loans which are between 30 days and 89 days delinquent as of
the Cut-off Date was $_________________. If there are not sufficient funds from
the Investor Interest Collections to cover the Investor Loss Amounts for any
Distribution Date, the Overcollateralization Amount and the amount on deposit in
the Spread Account have been reduced to zero, and the Certificate Insurer fails
to perform its obligations under the Policy, the aggregate amount of principal
returned to the Certificateholders may be less than the Certificate Principal
Balance on the day the Certificates are issued.
For a discussion of additional risks pertaining to the Certificates, see
"Risk Factors" in the Prospectus.
THE CERTIFICATE INSURER
The following information set forth in this section has been provided by
the Certificate Insurer. Accordingly, neither the Depositor nor the Master
Servicer makes any representation as to the accuracy and completeness of such
information.
[Description of Certificate Insurer]
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THE MASTER SERVICER
General
[The Master Servicer will service the Mortgage Loans in accordance with the
terms set forth in the Agreement. The Master Servicer may perform any of its
obligations under the Agreement through one or more subservicers.
Notwithstanding any such subservicing arrangement, the Master Servicer will
remain liable for its servicing duties and obligations under the Agreement as if
the Master Servicer alone were servicing the Mortgage Loans. As of the Closing
Date, the Master Servicer will service the Mortgage Loans without subservicing
arrangements.]
The Master Servicer
[Countrywide Home Loans, Inc. ("Countrywide"), a New York corporation and a
subsidiary of Countrywide Credit Industries, Inc., will act as Master Servicer
for the Mortgage Loans pursuant to the Agreement. Countrywide is engaged
primarily in the mortgage banking business, and as such, originates, purchases,
sells and services mortgage loans. Countrywide originates mortgage loans through
a retail branch system and through mortgage loan brokers and correspondents
nationwide. Countrywide's mortgage loans are principally first-lien, fixed or
adjustable rate mortgage loans secured by single-family residences. Countrywide
began servicing home equity lines of credit in ________________ 199_.
At ______________, 199_, Countrywide provided servicing for approximately
$____ billion aggregate principal amount of first-lien mortgage loans,
substantially all of which are being serviced for unaffiliated persons. At
___________, 199_, Countrywide provided servicing for approximately $___ million
aggregate principal amount of first and second lien mortgage loans originated
under home equity lines of credit.
The principal executive offices of Countrywide are located at 155 North
Lake Avenue, Pasadena, California 91101-7139. Its telephone number is (818)
304-8400. Countrywide conducts operations from its headquarters in Pasadena and
from offices located throughout the nation.]
THE HOME EQUITY LOAN PROGRAM
Underwriting Procedures Relating to Home Equity Loans
The following is a description of the underwriting procedures customarily
employed by the Seller with respect to home equity loans. The underwriting
process is intended to assess the applicant's credit standing and repayment
ability, and the value and adequacy of the real property security as collateral
for the proposed loan. Exceptions to the Seller's underwriting guidelines will
be made when compensating factors are present. Such factors include the
borrower's employment stability, credit history, disposable income, equity in
the related property and the nature of the underlying first mortgage loan.
Each applicant for a home equity loan is required to complete an
application which lists the applicant's assets, liabilities, income, credit and
employment history and other demographic and personal information. If
information in the loan application demonstrates that there is sufficient income
and equity in the real property to justify making a home equity loan, the Seller
will conduct a further credit investigation of the applicant. This investigation
includes obtaining and reviewing an independent credit bureau report on the
credit history of the applicant in order to evaluate the applicant's ability to
repay. The credit report typically contains information relating to such matters
as credit history with local merchants and lenders, installment debt payments
and any record of delinquencies, defaults, bankruptcy, collateral repossessions,
suits or judgments.
The Seller originates or acquires mortgage loans pursuant to alternative
sets of underwriting criteria under its Alternative Documentation Loan Program
(the "Alternative Documentation Program") and its Reduced Documentation Loan
Program (the "Reduced Documentation Program"). The Alternative Documentation
Program permits a borrower to provide W-2 forms instead of tax returns covering
the most recent two years, permits bank statements in lieu of verifications of
deposits and permits alternative methods of employment verification. Under the
Reduced Documentation Program, relatively more emphasis is placed on property
underwriting than on credit
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underwriting and certain credit underwriting documentation concerning income and
employment verification therefore is waived. Mortgage loans underwritten under
the Reduced Documentation Program generally are limited to self-employed
borrowers with credit histories that demonstrate an established ability to repay
indebtedness in a timely fashion.
Full appraisals are generally performed on all home equity loans which at
origination had a principal balance greater than $100,000. Such appraisals are
determined on the basis of a Seller-approved, independent third-party, fee-based
appraisal completed on forms approved by Federal National Mortgage Association
("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC"). For loans which
had at origination a principal balance equal to or less than $100,000, a
drive-by evaluation is generally completed by a state licensed, independent
third-party, professional appraiser on forms approved by either FNMA or FHLMC.
The drive-by evaluation is an exterior examination of the premises by the
appraiser to determine that the property is in good condition. The appraisal is
based on various factors, including the market value of comparable homes and the
cost of replacing the improvement and generally is required to have been made
not earlier than 150 days prior to the date of origination of the Mortgage Loan.
After obtaining all applicable employment, credit and property information,
the Seller uses a debt-to-income ratio to assist in determining whether the
prospective borrower has sufficient monthly income available to support the
payments of principal and interest on the home equity loan in addition to any
senior mortgage loan payments (including any escrows for property taxes and
hazard insurance premiums) and other monthly credit obligations. The
"debt-to-income ratio" is the ratio of the borrower's total monthly payments
(assumed to be based on the applicable fully indexed interest rate plus a margin
of 2%) to the borrower's gross monthly income. Based on the foregoing, for loans
with Combined Loan-to-Value Ratios of 90% or less, the maximum monthly
debt-to-income ratio is 45%. For loans with Combined Loan-to-Value Ratios
greater than 90%, the maximum monthly debt-toincome ratio is generally 38%.
Variations in the monthly debt-to-income ratios limits are permitted based on
compensating factors.
It is generally the Seller's policy to require a title search before it
makes a home equity loan for amounts less than or equal to $100,000. In
addition, if the home equity loan has an original principal balance of $100,000
or more, the Seller requires that the borrower obtain an American Land Title
Association ("ALTA") policy, or other assurance of title customary in the
relevant jurisdiction. In addition, ALTA title policies are generally obtained
in situations where the property is on leased land or there has been a change in
title or such home equity loan is in first lien position.
Servicing of the Mortgage Loans
The Master Servicer has established standard policies for the servicing and
collection of the home equity loans. Servicing includes, but is not limited to,
(i) the collection and aggregation of payments relating to the Mortgage Loans;
(ii) the supervision of delinquent Mortgage Loans, loss mitigation efforts,
foreclosure proceedings and, if applicable, the disposition of Mortgaged
Properties; and (iii) the preparation of tax related information in connection
with the Mortgage Loans.
Billing statements are mailed monthly by the Master Servicer. The statement
details all debits and credits and specifies the minimum payment due and the
available credit line. Notice of changes in the applicable loan rate are
provided by the Master Servicer to the Mortgagor with such statements. All
payments are due by the fifteenth day of the month.
With respect to Mortgage Loans, the general policy of the Master Servicer
is to initiate foreclosure in the underlying property (i) after such loan is 75
days or more delinquent and satisfactory arrangements cannot be made with the
Mortgagor; or (ii) if a notice of default on a senior lien is received by the
Master Servicer. Foreclosure proceedings may be terminated if the delinquency is
cured. Mortgage Loans to borrowers in bankruptcy proceedings may be restructured
in accordance with law and with a view to maximizing recovery of such loans,
including any deficiencies.
Once foreclosure is initiated by the Master Servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
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progressing within the time frame typical for the state in which the property is
located. During the foreclosure proceeding, the Master Servicer determines the
amount of the foreclosure bid and whether to liquidate the loan.
After foreclosure, if the home equity loan is secured by a first mortgage
lien, the Master Servicer may liquidate the Mortgaged Property and charge off
the home equity loan balance which was not recovered through liquidation
proceeds. If the Mortgaged Property was subject to a senior lien, the Master
Servicer will either directly manage the foreclosure sale of the property and
satisfy such lien at the time of sale or take other action as deemed necessary
to protect the interest in the Mortgaged Property. If in the judgment of the
Master Servicer, the cost of maintaining or purchasing the senior lien position
exceeds the economic benefit of such action, the Master Servicer will generally
charge off the entire home equity loan and may seek a money judgment against the
borrower.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the Master Servicer's business
judgment, changes in the portfolio and applicable laws and regulations.
Foreclosure and Delinquency Experience
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of home equity loans serviced by the
Master Servicer. Since [Countrywide] only began servicing home equity loans in
__________________ 199_, the delinquency and foreclosure percentages may be
affected by the size and relative lack of seasoning of the servicing portfolio
because many of such loans were not outstanding long enough to give rise to some
or all of the periods of delinquency indicated in the chart below. Accordingly,
the information should not be considered as a basis for assessing the
likelihood, amount or severity of delinquency or losses on the Mortgage Loans
and no assurances can be given that the foreclosure and delinquency experience
presented in the table below will be indicative of such experience on the
Mortgage Loans:
Delinquency Status As Of ___________, 199__*
Dollars Percent Units Percent
------------ -------- ----- --------
% %
Current........................... $
30-59 days........................
60-89 days........................
90+ days..........................
------------ -------- ----- --------
Total........................ $ 100.00% 100.00%
============ ======== ===== ========
- ---------------
* Delinquencies are reported on a contractual basis.
As of ___________, 199_, loans with an aggregate balance of $_______ are in
bankruptcy and ____ loans with an aggregate balance of $___________ are in
foreclosure. Of the loans in foreclosure, there will be a _______, 199_ charge
off of $_______. [In addition to this charge off, there is an anticipated charge
off of approximately $ which may also be realized in _______________.]
DESCRIPTION OF THE MORTGAGE LOANS
General
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, which are either first or second mortgages or deeds
of trust, on Mortgaged Properties located in ____ states. The Mortgaged
Properties securing the Mortgage Loans consist primarily of residential
properties that are one- to four-family properties. See "--Mortgage Loan Terms"
below.
The Cut-off Date Pool Balance is $______________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of the Cut-off Date. As of
the Cut-off Date, the Mortgage Loans were not more than 89 days delinquent. The
average Cut-off Date Principal Balance was approximately $__________ , the
minimum Cut-off Date
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Principal Balance was zero, the maximum Cut-off Date Principal Balance was
$_____ , the minimum Loan Rate and the maximum Loan Rate as of the Cut-off Date
were _____% and _____% per annum, respectively, and the weighted average Loan
Rate as of the Cut-off Date was approximately _____% per annum. As of the
Cut-off Date, the weighted average Credit Limit Utilization Rate was
approximately _____%, the minimum Credit Limit Utilization Rate was zero and the
maximum Credit Limit Utilization Rate was 100%. The "Credit Limit Utilization
Rate" is determined by dividing the Cut-off Date Principal Balance of a Mortgage
Loan by the Credit Limit of the related Credit Line Agreement. The remaining
term to scheduled maturity for the Mortgage Loans as of the Cut-off Date ranged
from _____ months to _____ months and the weighted average remaining term to
scheduled maturity was approximately _____ months. As of the Cut-off Date, the
Combined Loan-to-Value Ratio of the Mortgage Loans ranged from _____% to _____%
and the weighted average Combined Loan-to-Value Ratio was approximately _____%.
The Combined Loan-to-Value Ratio for a Mortgage Loan is the ratio (expressed as
a percentage) of (A) the sum of (i) the Credit Limit of the Mortgage Loan and
(ii) any outstanding principal balances of mortgage loans senior to such
Mortgage Loan (calculated at the date of origination of the Mortgage Loan) to
(B) the lesser of (i) the appraised value of the related Mortgaged Property as
set forth in the loan files at such date of origination or (ii) in the case of a
Mortgaged Property purchased within one year of the origination of the related
Mortgage Loan, the purchase price of such Mortgaged Property. Credit Limits
under the Mortgage Loans as of the Cut-off Date ranged from $_____ to $_____ and
averaged approximately $_____ . The weighted average second mortgage ratio
(which is the Credit Limit for the related Mortgage Loan, provided such Mortgage
Loan was in the second lien position, divided by the sum of such Credit Limit
and the outstanding principal balance of any mortgage loan senior to the related
Mortgage Loan) was approximately _____%. As of the Cut-off Date, approximately
_____% by Cut-off Date Principal Balance of the Mortgage Loans represented first
liens on the related Mortgaged Properties, while approximately _____% of the
Mortgage Loans represented second liens. As of the Cut-off Date, approximately
_____% of the Mortgage Loans are secured by Mortgaged Properties which are
single-family residences and _____% were owner-occupied. As of the Cut-off Date,
approximately _____%, _____%, _____%, _____%, _____% and _____% by Cut-off Date
Principal Balance are located in __________, ________, __________, _______,
______ and ________], respectively.
Mortgage Loan Terms
[A borrower may access a Mortgage Loan by writing a check in a minimum
amount of $250. The Mortgage Loans bear interest at a variable rate which
changes monthly on the first business day of the related month with changes in
the applicable Index Rate. The Mortgage Loans are subject to a maximum per annum
interest rate (the "Maximum Rate") ranging from [_____% to _____%] per annum and
subject to applicable usury limitations. As of the Cut-off Date, the weighted
average Maximum Rate was approximately _____%. See "Certain Legal Aspects of the
Loans--Applicability of Usury Laws" in the Prospectus. The daily periodic rate
on the Mortgage Loans (the "Loan Rate") is the sum of the Index Rate plus the
spread (the "Margin") which generally ranges between _____% and _____% and had a
weighted average, as of the Cut-off Date, of approximately _____%, divided by
365 days. The "Index Rate" is based on the highest "prime rate" published in the
'Money Rates' table of The Wall Street Journal as of the first business day of
each calendar month.]
[Countrywide] offers an introductory loan rate on home equity lines of
credit which are originated with Combined Loan-to-Value Ratios of 75% and 80%.
The introductory rate applies to any payments made during the first three months
after origination. After such three month period, the Loan Rate will adjust to
the Index plus the applicable Margin. As of the Cut-off Date, approximately
_____% of the Mortgage Loans by Cut-off Date Principal Balance were subject to
an introductory rate of ____% per annum.
In general, the home equity loans may be drawn upon for a period (the "Draw
Period") of either five years (which may be extendible for an additional five
years, upon [Countrywide's] approval) or three years. Home equity loans with an
initial Draw Period of five years, which constitute approximately _____% of the
Mortgage Loans by Cut-off Date Principal Balance, are subject to a fifteen year
repayment period (the "Repayment Period") following the end of the Draw Period
during which the outstanding principal balance of the loan will be repaid in
monthly installments equal to 1/180 of the outstanding principal balance as of
the end of the Draw Period. Mortgage Loans with a Draw Period of three years,
which constitute approximately _____% of the Mortgage Loans by Cut-off Date
Principal Balance, are subject to a ten year Repayment Period following the end
of the Draw Period during which the outstanding principal balance of the loan
will be paid in monthly installments equal to 1/120 of the outstanding principal
balance as of the end of the Draw Period.
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The minimum payment due during the Draw Period will be equal to the finance
charges accrued on the outstanding principal balance of the home equity loan
during the related billing period. The minimum payment due during the repayment
period will be equal to the sum of the finance charges accrued on the
outstanding principal balance of the Mortgage Loan during the related billing
period and the principal payment described above.
Set forth below is a description of certain characteristics of the Mortgage
Loans as of the Cut-off Date:
PRINCIPAL BALANCES
Number of Percent of Pool
Mortgage Cut-off Date by Cut-off Date
Range of Principal Balances Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
$_______ to $_________........... $ %
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ to $_________...........
$_______ and over................
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
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GEOGRAPHIC DISTRIBUTION(1)
Number of Percent of Pool
Mortgage Cut-off Date by Cut-off Date
State Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
$ %
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
- ----------
(1) Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loan.
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COMBINED LOAN-TO-VALUE RATIOS(1)
Number of Percent of Pool
Range of Combined Mortgage Cut-off Date by Cut-off Date
Loan-to-Value Ratios Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
_____% to ______%............... $ %
______% to ______%...............
______% to ______%...............
______% to ______%...............
______% to ______%...............
______% to ______%...............
______% to ______%...............
______% to ______%...............
______% to ______%...............
______% to ______%...............
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
- ----------
(1) The ratio (expressed as a percentage) of (A) the sum of (i) the Credit
Limit of the Mortgage Loans and (ii) any outstanding principal balances of
mortgage loans senior to the Mortgage Loans (calculated at the date of
origination of the Mortgage Loans) to (B) the lesser of (i) the appraised
value of the related Mortgaged Property as set forth in loan files at such
date of origination or (ii) in the case of a Mortgaged Property purchased
within one year of the origination of the related Mortgage Loan, the
purchase price of such Mortgaged Property.
PROPERTY TYPE
Number of Percent of Pool
Mortgage Cut-off Date by Cut-off Date
Property Type Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
Single Family.................... $ %
Two- to Four-Family..............
Condominium......................
PUD..............................
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
LIEN PRIORITY
Number of Percent of Pool
Mortgage Cut-off Date by Cut-off Date
Lien Priority Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
First Lien....................... $ %
Second Lien......................
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
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LOAN RATES(1)
Number of Percent of Pool
Range of Mortgage Cut-off Date by Cut-off Date
Loan Rates Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
_____% to _____%................. $ %
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
- ----------
(1) Approximately % of the Mortgage Loans by Cut-Off Date Principal Balance are
subject to an introductory rate of _____% per annum.
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MARGIN
Number of Percent of Pool
Range of Mortgage Cut-off Date by Cut-off Date
Margins Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
_____% to _____%................. $ %
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
CREDIT LIMIT UTILIZATION RATES
Number of Percent of Pool
Range of Credit Limit Mortgage Cut-off Date by Cut-off Date
Utilization Rates Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
_____% to _____%................. $ %
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
_____% to _____%.................
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
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CREDIT LIMITS
Number of Percent of Pool
Mortgage Cut-off Date by Cut-off Date
Range of Credit Limits Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
$__________to $_________......... $ %
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ to $_________.........
$_________ and over..............
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
MAXIMUM RATES
Number of Percent of Pool
Mortgage Cut-off Date by Cut-off Date
Maximum Rates Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
- -----%........................... $ %
- -----%...........................
- -----%...........................
- -----%...........................
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
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MONTHS REMAINING TO SCHEDULED MATURITY(1)
Number of Percent of Pool
Range of Months Mortgage Cut-off Date by Cut-off Date
Remaining to Scheduled Maturity Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
___ to ___....................... $ %
___ to ___.......................
___ to ___.......................
___ to ___.......................
___ to ___.......................
___ to ___.......................
___ to ___.......................
___ to ___.......................
___ to ___.......................
___ to ___.......................
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
- ----------
(1)Assumes that the Draw Period for Mortgage Loans with five year Draw Periods
will be extended for an additional five years.
ORIGINATION YEAR
Number of Percent of Pool
Mortgage Cut-off Date by Cut-off Date
Origination Year Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
____............................. $ %
____.............................
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
DELINQUENCY STATUS
Number of Percent of Pool
Mortgage Cut-off Date by Cut-off Date
Number of Days Delinquent Loans Principal Balance Principal Balance
- --------------------------------- ------- ----------------- -----------------
0 to 29......................... $ %
30 to 59.........................
------- ------------- -----------
60 to 89.........................
------- ------------- -----------
Total....................... $ 100.00%
======= ============= ===========
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreement, except as otherwise described herein, provides that the
Certificateholders will be entitled to receive on each Distribution Date
distributions of principal, in the amounts described herein, until the
Certificate Principal Balance is reduced to zero. During the Managed
Amortization Period, Certificateholders will receive amounts from Principal
Collections based upon their Fixed Allocation Percentage subject to reduction as
described below. During the Rapid Amortization Period, Certificateholders will
receive amounts from Principal Collections based solely upon their Fixed
Allocation Percentage. Because prior distributions of Principal Collections to
Certificateholders serve to reduce the Investor Floating Allocation Percentage
but do not change their Fixed Allocation Percentage, allocations of Principal
Collections based on the Fixed Allocation Percentage may result in distributions
of principal to the Certificateholders in amounts that are, in most cases,
greater relative to the declining
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balance of the Mortgage Loans than would be the case if the Investor Floating
Allocation Percentage were used to determine the percentage of Principal
Collections distributed to Certificateholders. This is especially true during
the Rapid Amortization Period when the Certificateholders are entitled to
receive Investor Principal Collections and not a lesser amount. In addition,
Investor Interest Collections may be distributed as principal to
Certificateholders in connection with the Accelerated Principal Distribution
Amount, if any. Moreover, to the extent of losses allocable to the
Certificateholders, Certificateholders may also receive as payment of principal
the amount of such losses either from Investor Interest Collections or, in some
instances, draws under the Policy. The level of losses may therefore affect the
rate of payment of principal on the Certificates.
To the extent obligors make more draws than principal payments, the
Transferor Interest may grow. Because during the Rapid Amortization Period the
Certificateholders share of Principal Collections is based upon its Fixed
Allocation Percentage (without reduction), an increase in the Transferor
Interest due to additional draws may also result in Certificateholders receiving
principal at a greater rate. The Agreement permits the Transferor, at its
option, but subject to the satisfaction of certain conditions specified in the
Agreement, including the conditions described below, to remove certain Mortgage
Loans from the Trust at any time during the life of the Trust, so long as the
Transferor Interest (after giving effect to such removal) is not less than the
Minimum Transferor Interest. Such removals may affect the rate at which
principal is distributed to Certificateholders by reducing the overall Pool
Balance and thus the amount of Principal Collections. See "Description of the
Certificates--Optional Retransfers of Mortgage Loans to the Transferor" herein.
All of the Mortgage Loans may be prepaid in full or in part at any time.
[However, Mortgage Loans secured by Mortgaged Properties in California are
subject to an account termination fee equal to the lesser of $350 and six months
interest on the amount prepaid, to the extent the prepaid amount exceeds 20% of
the unpaid principal balance, if the account is terminated on or before its
fifth year anniversary. In addition, Mortgage Loans secured by Mortgaged
Properties in other jurisdictions may be subject to account termination fees to
the extent permitted by law. In general, such account termination fees do not
exceed $350 and do not apply to accounts terminated subsequent to a date
designated in the related Mortgage Note which, depending on the jurisdiction,
ranges between six months and five years following origination.] The prepayment
experience with respect to the Mortgage Loans will affect the weighted average
life of the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted. Neither
the Depositor nor the Master Servicer is aware of any publicly available studies
or statistics on the rate of prepayment of such Mortgage Loans. Generally, home
equity revolving credit lines are not viewed by borrowers as permanent
financing. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional first mortgage loans. On the other hand, because the
Mortgage Loans amortize as described herein, rates of principal payment on the
Mortgage Loans will generally be slower than those of traditional
fully-amortizing first mortgages in the absence of prepayments on such Mortgage
Loans. The prepayment experience of the Trust with respect to the Mortgage Loans
may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility, the frequency and amount of any future draws on
the Credit Line Agreements and changes affecting the deductibility for Federal
income tax purposes of interest payments on home equity credit lines.
Substantially all of the Mortgage Loans contain "due-on-sale" provisions, and,
with respect to the Mortgage Loans, the Master Servicer intends to enforce such
provisions, unless such enforcement is not permitted by applicable law. The
enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related Mortgage Loan. See "Certain Legal Aspects of The
Loans--Due-on-Sale Clauses" in the Prospectus.
The yield to an investor who purchases the Certificates in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Mortgage Loans is actually different than the rate
anticipated by such investor at the time such Certificates were purchased.
Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the Mortgage Loans
may vary due to seasonal purchasing and payment habits of borrowers.
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No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of borrowers will
not prepay their Mortgage Loans to any significant degree. See "Yield and
Prepayment Considerations" in the Prospectus.
POOL FACTOR AND TRADING INFORMATION
The "Pool Factor" is a seven-digit decimal which the Master Servicer will
compute monthly expressing the Certificate Principal Balance of the Certificates
as of each Distribution Date (after giving effect to any distribution of
principal on such Distribution Date) as a proportion of the Original Certificate
Principal Balance. On the Closing Date, the Pool Factor will be 1.0000000. See
"Description of the Certificates--Distributions on the Certificates" herein.
Thereafter, the Pool Factor will decline to reflect reductions in the related
Certificate Principal Balance resulting from distributions of principal to the
Certificates and the Invested Amount of any unreimbursed Liquidation Loss
Amounts.
Pursuant to the Agreement, monthly reports concerning the Invested Amount,
the Pool Factor and various other items of information will be made available to
the Certificateholders. In addition, within 60 days after the end of each
calendar year, beginning with the 199_ calendar year, information for tax
reporting purposes will be made available to each person who has been a
Certificateholder of record at any time during the preceding calendar year. See
"Description of the Certificates--Book-Entry Certificates" and "--Reports to
Certificateholders" herein.
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. The following summaries
describe certain provisions of the Agreement. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Agreement. Wherever particular sections or
defined terms of the Agreement are referred to, such sections or defined terms
are hereby incorporated herein by reference.
General
The Certificates will be issued in denominations of $1,000 and multiples of
$1 in excess thereof and will evidence specified undivided interests in the
Trust. The property of the Trust will consist of, to the extent provided in the
Agreement: (i) each of the Mortgage Loans that from time to time are subject to
the Agreement; (ii) collections on the Mortgage Loans received after the Cut-off
Date (exclusive of payments in respect of accrued interest due on or prior to
the Cut-off Date or due in the month of _____ ); (iii) Mortgaged Properties
relating to the Mortgage Loans that are acquired by foreclosure or deed in lieu
of foreclosure; (iv) the Collection Account and the Distribution Account
(excluding net earnings thereon); (v) the Policy; (vi) the Spread Account (for
the benefit of the Certificate Insurer and the Certificateholders); and (vii) an
assignment of the Depositor's rights under the Purchase Agreement. Definitive
Certificates (as defined below), if issued, will be transferable and
exchangeable at the corporate trust office of the Trustee, which will initially
act as Certificate Registrar. See "--Book-Entry Certificates" below. No service
charge will be made for any registration of exchange or transfer of
Certificates, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge.
The aggregate undivided interest in the Trust represented by the
Certificates as of the Closing Date will equal $ _____ (the "Original Invested
Amount"), which represents __% of the Cut-off Date Pool Balance. The "Original
Certificate Principal Balance" will equal $ _____ . Following the Closing Date,
the "Invested Amount" with respect to any Distribution Date will be an amount
equal to the Original Invested Amount minus (i) the amount of Investor Principal
Collections previously distributed to Certificateholders, and minus (ii) an
amount equal to the product of the Investor Floating Allocation Percentage and
the Liquidation Loss Amounts (each as defined herein). The principal amount of
the outstanding Certificates (the "Certificate Principal Balance") on any
Distribution Date is equal to the Original Certificate Principal Balance minus
the aggregate of amounts actually distributed as principal to the
Certificateholders. See "--Distributions on the Certificates" below. Each
Certificate represents the right to receive payments of interest at the
Certificate Rate and payments of principal as described below.
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The Transferor will own the remaining undivided interest in the Mortgage
Loans (the "Transferor Interest"), which is equal to the Pool Balance less the
Invested Amount. The Transferor Interest will initially equal $ , which
represents _% of the Cut-off Date Pool Balance. The Transferor as of any date is
the owner of the Transferor Interest which initially will be the Seller. In
general, the Pool Balance will vary each day as principal is paid on the
Mortgage Loans, liquidation losses are incurred, Additional Balances are drawn
down by borrowers and Mortgage Loans are transferred to the Trust.
The Transferor has the right to sell or pledge the Transferor Interest at
any time, provided (i) the Rating Agencies (as defined herein) have notified the
Transferor and the Trustee in writing that such action will not result in the
reduction or withdrawal of the ratings assigned to the Certificates, and (ii)
certain other conditions specified in the Agreement are satisfied.
Book-Entry Certificates
The Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Certificates ("Certificate Owners") may elect to hold their Certificates through
the Depository Trust Company ("DTC") in the United States, or CEDEL or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The BookEntry Certificates
will be issued in one or more certificates which equal the aggregate principal
balance of the Certificates and will initially be registered in the name of Cede
& Co., 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 Chase will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the BookEntry
Certificates in minimum denominations representing Certificate Principal
Balances of $1,000 and in multiples of $1 in excess thereof. Except as described
below, no person acquiring a Book-Entry Certificate (each, a "beneficial owner")
will be entitled to receive a physical certificate representing such Certificate
(a "Definitive Certificate"). Unless and until Definitive Certificates are
issued, it is anticipated that the only "Certificateholder" of the Certificates
will be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Agreement. Certificate Owners are
only permitted to exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC participants.
While the Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants and indirect participants with whom
Certificate Owners have accounts with respect to Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of Certificates only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures,
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transfers of ownership of Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Certificate Owners.
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 or, CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as, a result of sales of securities by or through a CEDEL Participant
(as defined, below) or Euroclear Participant (as defined below) to a DTC
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--Foreign Investors" and "--Backup Withholding" herein
and "Global, Clearance, Settlement And Tax Documentation Procedures--Certain
U.S. Federal, Income Tax Documentation Requirements" in Annex I hereto.
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, 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 DTC 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
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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 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 DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial 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. See "Certain Federal Income Tax
Consequences--Foreign Investors" and "--Backup Withholding" herein. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry 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.
Monthly and annual reports on the Trust provided by the Master Servicer to
CEDE, as nominee of DTC, may be made available to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Transferor 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 Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial 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.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Transferor advises the Trustee in writing that DTC is no longer willing,
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qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Transferor or the
Trustee is unable to locate a qualified successor, (b) the Transferor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Servicing Termination (as defined herein),
beneficial owners having Percentage Interests aggregating not less than 51% of
the Certificate Principal Balance of the Book-Entry Certificates advise the
Trustee and DTC through the Financial Intermediaries and the DTC participants in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
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.
Assignment of Mortgage Loans
At the time of issuance of the Certificates, the Depositor will transfer to
the Trust all of its right, title and interest in and to each Mortgage Loan
(including any Additional Balances arising in the future), related Credit Line
Agreements, mortgages and other related documents (collectively, the "Related
Documents"), including all collections received on or with respect to each such
Mortgage Loan after the Cut-off Date (exclusive of payments in respect of
accrued interest due on or prior to the Cut-off Date or due in the month of
_____ ). The Trustee, concurrently with such transfer, will deliver the
Certificates to the Depositor and the Transferor Certificate (as defined in the
Agreement) to the Transferor. Each Mortgage Loan transferred to the Trust will
be identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee pursuant to the Agreement. Such schedule will include information as to
the Cut-off Date Principal Balance of each Mortgage Loan, as well as information
with respect to the Loan Rate.
The Agreement will permit the Seller to maintain possession of the Related
Documents and certain other documents relating to the Mortgage Loans (the
"Mortgage Files") and assignments of the Mortgage Loans to the Trustee will not
be required to be recorded for so long as the long-term senior unsecured debt of
[Countrywide] is rated at least " _____ " by ___ and " _____ " by _______. In
the event that [Countrywide's] long-term senior unsecured debt rating does not
satisfy the above-described standards (an "Assignment Event"), [Countrywide]
will have 90 days to record assignments of the mortgages for each such Mortgage
Loan in favor of the Trustee and 60 days to deliver the Mortgage Files
pertaining to each such Mortgage Loan to the Trustee (unless opinions of counsel
satisfactory to the Rating Agencies and the Certificate Insurer to the effect
that recordation of such assignments or delivery of such documentation is not
required in the relevant jurisdiction to protect the interest of [Countrywide]
and the Trustee in the Mortgage Loans). In lieu of delivery of original
documentation, [Countrywide] may deliver documents which have been imaged
optically upon delivery of an opinion of counsel that such documents do not
impair the enforceability of the transfer to the Trust of the Mortgage Loans.
Within 90 days of an Assignment Event, the Trustee will review the Mortgage
Loans and the Related Documents and if any Mortgage Loan or Related Document is
found to be defective in any material respect and such defect is not cured
within 90 days following notification thereof to the Seller and the Depositor by
the Trustee, the Seller will be obligated to accept the transfer of such
Mortgage Loan from the Trust. Upon such transfer, the Principal Balance of such
Mortgage Loan will be deducted from the Pool Balance, thus reducing the amount
of the Transferor Interest. If the deduction would cause the Transferor Interest
to become less than the Minimum Transferor Interest at such time (a "Transfer
Deficiency"), the Seller will be obligated to either substitute an Eligible
Substitute Mortgage Loan or make a deposit into the Collection Account in the
amount (the "Transfer Deposit Amount") equal to the amount by which the
Transferor Interest would be reduced to less than the Minimum Transferor
Interest at such time. Any such deduction, substitution or deposit, will be
considered a payment in full of such Mortgage Loan. Any Transfer Deposit Amount
will be treated as a Principal Collection. Notwithstanding the foregoing,
however, prior to all required deposits to the Collection Account being made no
such transfer shall be considered to have occurred unless such deposit is
actually made. The obligation of the Seller to accept a
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transfer of a Defective Mortgage Loan is the sole remedy regarding any defects
in the Mortgage Loans and Related Documents available to the Trustee or the
Certificateholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the Depositor for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not __% more or less than the Transfer Deficiency
relating to such Defective Mortgage Loan; (ii) have a Loan Rate not less than
the Loan Rate of the Defective Mortgage Loan and not more than _% in excess of
the Loan Rate of such Defective Mortgage Loan; (iii) have a Loan Rate based on
the same Index with adjustments to such Loan Rate made on the same Interest Rate
Adjustment Date as that of the Defective Mortgage Loan; (iv) have a Margin that
is not less than the Margin of the Defective Mortgage Loan and not more than ___
basis points higher than the Margin for the Defective Mortgage Loan; (v) have a
mortgage of the same or higher level of priority as the mortgage relating to the
Defective Mortgage Loan; (vi) have a remaining term to maturity not more than
___ months earlier and not more than __ months later than the remaining term to
maturity of the Defective Mortgage Loan; (vii) comply with each representation
and warranty as to the Mortgage Loans set forth in the Agreement (deemed to be
made as of the date of substitution); (viii) in general, have an original
Combined Loan-to-Value Ratio not greater than that of the Defective Mortgage
Loan; and (ix) satisfy certain other conditions specified in the Agreement. To
the extent the Principal Balance of an Eligible Substitute Mortgage Loan is less
than the Principal Balance of the related Defective Mortgage Loan and to the
extent that the Transferor Interest would be reduced below the Minimum
Transferor Interest, the Seller will be required to make a deposit to the
Collection Account equal to such difference.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant on the
Closing Date that at the time of transfer to the Depositor, the Seller has
transferred or assigned all of its rights, title and interest in each Mortgage
Loan and the Related Documents, free of any lien (subject to certain
exceptions). Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the interests of the Certificateholders
or the Certificate Insurer in the related Mortgage Loan and Related Documents,
the Seller will have a period of 90 days after discovery or notice of the breach
to effect a cure. If the breach cannot be cured within the 90-day period, the
Seller will be obligated to accept a transfer of the Defective Mortgage Loan
from the Trust. The same procedure and limitations that are set forth in the
second preceding paragraph for the transfer of Defective Mortgage Loans will
apply to the transfer of a Mortgage Loan that is required to be transferred
because of such breach of a representation or warranty in the Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Agreement, the Master Servicer will service and administer
the Mortgage Loans as more fully set forth above.
Amendments to Credit Line Agreements
Subject to applicable law, the Master Servicer may change the terms of the
Credit Line Agreements at any time provided that such changes (i) do not
adversely affect the interest of the Certificateholders or the Certificate
Insurer, and (ii) are consistent with prudent business practice. In addition,
the Agreement permits the Master Servicer, within certain limitations described
therein, to increase the Credit Limit of the related Mortgage Loan or reduce the
Margin for such Mortgage Loan.
Optional Transfers of Mortgage Loans to the Transferor
Subject to the conditions specified in the Agreement, on any Distribution
Date the Transferor may, but shall not be obligated to, remove on such
Distribution Date (the "Transfer Date") from the Trust, certain Mortgage Loans
without notice to the Certificateholders. The Transferor is permitted to
designate the Mortgage Loans to be removed. Mortgage Loans so designated will
only be removed upon satisfaction of certain conditions specified in the
Agreement, including: (i) the Transferor Interest as of such Transfer Date
(after giving effect to such removal)
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exceeds the Minimum Transferor Interest; (ii) the Transferor shall have
delivered to the Trustee a "Mortgage Loan Schedule" containing a list of all
Mortgage Loans remaining in the Trust after such removal; (iii) the Transferor
shall represent and warrant that no selection procedures which the Transferor
reasonably believes are adverse to the interests of the Certificateholders or
the Certificate Insurer were used by the Transferor in selecting such Mortgage
Loans; (iv) in connection with the first such retransfer of Mortgage Loans, the
Rating Agencies shall have been notified of the proposed transfer and prior to
the Transfer Date shall not have notified the Transferor in writing that such
transfer would result in a reduction or withdrawal of the ratings assigned to
the Certificates without regard to the Policy; and (v) the Transferor shall have
delivered to the Trustee and the Certificate Insurer an officer's certificate
confirming the conditions set forth in clauses (i) through (iii) above.
As of any date of determination, the "Minimum Transferor Interest" is an
amount equal to the lesser of (a) _% of the Pool Balance on such date and (b)
the Transferor Interest as of the Closing Date.
Payments on Mortgage Loans; Deposits to Collection Account
The Trustee shall establish and maintain on behalf of the Master Servicer
an account (the "Collection Account") for the benefit of the Certificateholders
and the Transferor, as their interests may appear. The Collection Account will
be an Eligible Account (as defined herein). Subject to the investment provision
described in the following paragraphs, within two days of receipt by the Master
Servicer of amounts in respect of the Mortgage Loans (excluding amounts
representing administrative charges, annual fees, taxes, assessments, credit
insurance charges, insurance proceeds to be applied to the restoration or repair
of a Mortgaged Property or similar items), the Master Servicer will deposit such
amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Agreement) maturing no later than one
Business Day prior to the date on which the amount on deposit therein is
required to be deposited in the Collection Account or on such Distribution Date
if approved by the Rating Agencies and the Certificate Insurer. Not later than
the third Business Day prior to each Distribution Date (the "Determination
Date"), the Master Servicer will notify the Trustee of the amount of such
deposit to be included in funds available for the related Distribution Date.
An "Eligible Account" is (i) an account that is maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies, (ii) one or more
accounts with a depository institution having a minimum long-term unsecured debt
rating of "____" by _______ and "____" by ___, which accounts are fully insured
by either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation established by such
fund, (iii) a segregated trust account maintained with the Trustee or an
Affiliate of the Trustee in its fiduciary capacity or (iv) otherwise acceptable
to each Rating Agency and the Certificate Insurer as evidenced by a letter from
each Rating Agency and the Certificate Insurer to the Trustee, without reduction
or withdrawal of their then current ratings of the Certificates.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then current ratings of the Certificates.
Allocations and Collections
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in respect
of interest and amounts collected in respect of principal. As to any
Distribution Date, "Interest Collections" will be equal to the amounts collected
during the related Collection Period, including such portion of Net Liquidation
Proceeds allocated to interest pursuant to the terms of the Credit Line
Agreements less Servicing Fees for the related Collection Period.
As to any Distribution Date, "Principal Collections" will be equal to the
sum of (i) the amounts collected during the related Collection Period, including
such portion of Net Liquidation Proceeds allocated to principal pursuant to the
terms of the Credit Line Agreements and (ii) any Transfer Deposit Amounts. "Net
Liquidation Proceeds" with respect to a Mortgage Loan are equal to the
Liquidation Proceeds, reduced by related expenses, but not including the
portion, if any, of such amount that exceeds the Principal Balance of the
Mortgage Loan plus accrued and unpaid interest thereon to the end of the
Collection Period during which such Mortgage Loan became a Liquidated Mortgage
Loan. "Liquidation Proceeds" are the proceeds (excluding any amounts drawn on
the Policy) received
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in connection with the liquidation of any Mortgage Loan, whether through
trustee's sale, foreclosure sale or otherwise.
With respect to any Distribution Date, the portion of Interest Collections
allocable to the Certificates ("Investor Interest Collections") will equal the
product of (a) Interest Collections for such Distribution Date and (b) the
Investor Floating Allocation Percentage. With respect to any Distribution Date,
the "Investor Floating Allocation Percentage" is the percentage equivalent of a
fraction determined by dividing the Invested Amount at the close of business on
the preceding Distribution Date (or the Closing Date in the case of the first
Distribution Date) by the Pool Balance at the beginning of the related
Collection Period. The remaining amount of Interest Collections will be
allocated to the Transferor Interest.
Principal Collections will be allocated between the Certificateholders and
the Transferor ("Investor Principal Collections" and "Transferor Principal
Collections", respectively) as described herein.
The Trustee will deposit any amounts drawn under the Policy into the
Collection Account.
With respect to any date, the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as of such date. The Principal
Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day is
equal to the Cut-off Date Principal Balance thereof, plus (i) any Additional
Balances in respect of such Mortgage Loan minus (ii) all collections credited
against the Principal Balance of such Mortgage Loan in accordance with the
related Credit Line Agreement prior to such day. The Principal Balance of a
Liquidated Mortgage Loan after final recovery of related Liquidation Proceeds
shall be zero.
Distributions on the Certificates
Beginning with the first Distribution Date (which will occur on __________,
199_), distributions on the Certificates will be made by the Trustee or the
Paying Agent on each Distribution Date to the persons in whose names such
Certificates are registered at the close of business on the day prior to each
Distribution Date or, if the Certificates are no longer Book-Entry Certificates,
at the close of business on the last day of the month preceding such
Distribution Date (the "Record Date"). The term "Distribution Date" means the
fifteenth day of each month or, if such day is not a Business Day, then the next
succeeding Business Day. Distributions will be made by check or money order
mailed (or upon the request of a Certificateholder owning Certificates having
denominations aggregating at least $_________, by wire transfer or otherwise) to
the address of the person entitled thereto (which, in the case of Book-Entry
Certificates, will be DTC or its nominee) as it appears on the Certificate
Register in amounts calculated as described herein on the Determination Date.
However, the final distribution in respect of the Certificates will be made only
upon presentation and surrender thereof at the office or the agency of the
Trustee specified in the notice to Certificateholders of such final
distribution. For purposes of the Agreement, a "Business Day" is any day other
than (i) a Saturday or Sunday or (ii) a day on which banking institutions in New
York State are required or authorized by law to be closed.
Application of Interest Collections. On each Distribution Date, the Trustee
or the Paying Agent will apply the Investor Interest Collections in the
following manner and order of priority:
(i) as payment to the Trustee for its fee for services rendered
pursuant to the Agreement;
(ii) as payment for the premium for the Policy;
(iii) as payment for the accrued interest due and any overdue accrued
interest (with interest thereon to the extent permitted by law) on the
Certificate Principal Balance of the Certificates;
(iv) to pay Certificateholders the Investor Loss Amount for such
Distribution Date;
(v) as payment for any Investor Loss Amount for a previous
Distribution Date that was not previously (a) funded by Investor Interest
Collections, (b) absorbed by the Overcollateralization Amount, (c) funded
by amounts on deposit in the Spread Account or (d) funded by draws on the
Policy;
(vi) to reimburse prior draws made from the Policy (with interest
thereon);
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(vii) to pay principal on the Certificates until the Invested Amount
exceeds the Certificate Principal Balance by the Required
Overcollateralization Amount (such amount so paid, the "Accelerated
Principal Distribution Amount");
(viii) any other amounts required to be deposited in an account for
the benefit of the Certificate Insurer and the Certificateholders or owed
to the Certificate Insurer pursuant to the Insurance Agreement;
(ix) certain amounts that may be required to be paid to the Master
Servicer pursuant to the Agreement; and
(x) to the Transferor to the extent permitted as described herein.
Payments to Certificateholders pursuant to clause (iii) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to clauses
(iv), (v) and (vii) will be principal payments on the Certificates and will
therefore reduce the Certificate Principal Balance, however, payments pursuant
to clause (vii) will not reduce the Invested Amount. The Accelerated Principal
Distribution Amount is not guaranteed by the Policy.
To the extent that Investor Interest Collections are applied to pay the
interest on the Certificates, Investor Interest Collections may be insufficient
to cover Investor Loss Amounts. If such insufficiency results in the Certificate
Principal Balance exceeding the Invested Amount, a draw will be made on the
Policy in accordance with the terms of the Policy.
The "Required Overcollateralization Amount" shall be an amount set forth in
the Agreement. "Liquidation Loss Amount" means with respect to any Liquidated
Mortgage Loan, the unrecovered Principal Balance thereof during the Collection
Period in which such Mortgage Loan became a Liquidated Mortgage Loan, after
giving effect to the Net Liquidation Proceeds in connection therewith. The
"Investor Loss Amount" shall be the product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amount for such Distribution Date.
A "Liquidated Mortgage Loan" means, as to any Distribution Date, any
Mortgage Loan in respect of which the Master Servicer has determined, based on
the servicing procedures specified in the Agreement, as of the end of the
preceding Collection Period that all Liquidation Proceeds which it expects to
recover with respect to the disposition of the related Mortgaged Property have
been recovered. The Investor Loss Amount will be allocated to the
Certificateholders.
As to any Distribution Date other than the first Distribution Date, the
"Collection Period" is the calendar month preceding each Distribution Date. As
to the first Distribution Date, the "Collection Period" is the period beginning
after the Cut-off Date and ending on the last day of _______________ 199_.
Interest will be distributed on each Distribution Date at the Certificate
Rate for the related Interest Period (as defined below). The "Certificate Rate"
for a Distribution Date will generally equal the sum of [(a) LIBOR, determined
as specified herein, as of the second LIBOR Business Day prior to the
immediately preceding Distribution Date (or as of two LIBOR Business Days prior
to the Closing Date, in the case of the first Distribution Date) plus (b) ____%
per annum.] Notwithstanding the foregoing, in no event will the amount of
interest required to be distributed in respect of the Certificates on any
Distribution Date exceed a rate equal to the weighted average of the Loan Rates
(net of the Servicing Fee Rate, the fee payable to the Trustee and the rate at
which the premium payable to the Certificate Insurer is calculated) weighted on
the basis of the daily balance of each Mortgage Loan during the related billing
cycle prior to the Collection Period relating to such Distribution Date.
Interest on the Certificates in respect of any Distribution Date will
accrue on the Certificate Principal Balance from the preceding Distribution Date
(or in the case of the first Distribution Date, from the date of the initial
issuance of the Certificates (the "Closing Date")) through the day preceding
such Distribution Date (each such period, an "Interest Period") on the basis of
the actual number of days in the Interest Period and a 360-day year. Interest
payments on the Certificates will be funded from Investor Interest Collections
and, if necessary, from draws on the Policy.
[Calculation of the LIBOR Rate. On each Distribution Date, LIBOR shall be
established by the Trustee and as to any Interest Period, LIBOR will equal the
rate for United States dollar deposits for one month which appears
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on the Telerate Screen Page 3750 as of 11:00 A.M., London time, on the second
LIBOR Business Day prior to the first day of such Interest Period. "Telerate
Screen Page 3750" means the display designated as page 3750 on the Telerate
Service (or such other page as may replace page 3750 on that service for the
purpose of displaying London interbank offered rates of major banks). If such
rate does not appear on such page (or such other page as may replace that page
on that service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Depositor after
consultation with the Trustee), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Depositor after consultation with the Trustee) as of
11:00 A.M., London time, on the day that is two LIBOR Business Days prior to the
immediately preceding Distribution Date to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the principal
amount of the Certificates then outstanding. The Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Depositor after
consultation with the Trustee, as of 11:00 A.M., New York City time, on such
date for loans in U.S. Dollars to leading European banks for a period of one
month in amounts approximately equal to the principal amount of the Certificates
then outstanding. If no such quotations can be obtained, the rate will be LIBOR
for the prior Distribution Date. "LIBOR Business Day" means any day other than
(i) a Saturday or a Sunday or (ii) a day on which banking institutions in the
State of New York or in the city of London, England are required or authorized
by law to be closed.]
Transferor Collections. Collections allocable to the Transferor Interest
that are not distributed to Certificateholders will be distributed to the
Transferor only to the extent that such distribution will not reduce the amount
of the Transferor Interest as of the related Distribution Date below the Minimum
Transferor Interest. Amounts not distributed to the Transferor because of such
limitations will be retained in the Collection Account until the Transferor
Interest exceeds the Minimum Transferor Interest, at which time such excess
shall be released to the Transferor. If any such amounts are still retained in
the Collection Account upon the commencement of the Rapid Amortization Period,
such amounts will be paid to the Certificateholders as a reduction of the
Certificate Principal Balance.
Overcollateralization. The distribution of the aggregate Accelerated
Principal Distribution Amount, if any, to Certificateholders may result in the
Invested Amount being greater than the Certificate Principal Balance, thereby
creating overcollateralization. The Overcollateralization Amount, if any, will
be available to absorb any Investor Loss Amount that is not covered by Investor
Interest Collections.
Distributions of Principal Collections. For the period beginning on the
first Distribution Date and, unless a Rapid Amortization Event shall have
earlier occurred, ending on the Distribution Date in ______________ 20__ (the
"Managed Amortization Period"), the amount of Principal Collections payable to
Certificateholders as of each Distribution Date during the Managed Amortization
Period will equal, to the extent funds are available therefor, the Scheduled
Principal Collections Distribution Amount for such Distribution Date. On any
Distribution Date during the Managed Amortization Period, the "Scheduled
Principal Collections Distribution Amount" shall equal the lesser of (i) the
Maximum Principal Payment (as defined herein) and (ii) the Alternative Principal
Payment (as defined herein). With respect to any Distribution Date, the "Maximum
Principal Payment" will equal the product of the Investor Fixed Allocation
Percentage and Principal Collections for such Distribution Date. With respect to
any Distribution Date, the "Alternative Principal Payment" will equal the
greater of (x) 0___% of the Certificate Principal Balance immediately prior to
such Distribution Date and (y) the amount, but not less than zero, of Principal
Collections for such Distribution Date less the aggregate of Additional Balances
created during the related Collection Period.
Beginning with the first Distribution Date following the end of the Managed
Amortization Period, the amount of Principal Collections payable to
Certificateholders on each Distribution Date will be equal to the Maximum
Principal Payment.
The amount of Principal Collections to be distributed to Certificateholders
on the first Distribution Date will reflect Principal Collections and Additional
Balances during the first Collection Period which is the period beginning after
the Cut-off Date through the last day of __________ 199_.
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Distributions of Principal Collections based upon the Investor Fixed
Allocation Percentage may result in distributions of principal to
Certificateholders in amounts that are greater relative to the declining Pool
Balance than would be the case if the Investor Floating Allocation Percentage
were used to determine the percentage of Principal Collections distributed in
respect of the Invested Amount. Principal Collections not allocated to the
Certificateholders will be allocated to the Transferor Interest. The aggregate
distributions of principal to the Certificateholders will not exceed the
Original Certificate Principal Balance.
In addition, to the extent of funds available therefor (including funds
available under the Policy), on the Distribution Date in ____________ 20__,
Certificateholders will be entitled to receive as a payment of principal an
amount equal to the outstanding Certificate Principal Balance.
The Paying Agent. The Paying Agent shall initially be the Trustee, together
with any successor thereto in such capacity (the "Paying Agent"). The Paying
Agent shall have the revocable power to withdraw funds from the Collection
Account for the purpose of making distributions to the Certificateholders.
Rapid Amortization Events
As described above, the Managed Amortization Period will continue through
the Distribution Date in 20 , unless a Rapid Amortization Event occurs prior to
such date in which case the Rapid Amortization Period will commence prior to
such date. "Rapid Amortization Event" refers to any of the following events:
(a) failure on the part of the Seller (i) to make a payment or deposit
required under the Agreement within three Business Days after the date such
payment or deposit is required to be made or (ii) to observe or perform in
any material respect any other covenants or agreements of the Seller set
forth in the Agreement, which failure continues unremedied for a period of
60 days after written notice;
(b) any representation or warranty made by the Seller in the Agreement
proves to have been incorrect in any material respect when made and
continues to be incorrect in any material respect for a period of 60 days
after written notice and as a result of which the interests of the
Certificateholders are materially and adversely affected; provided,
however, that a Rapid Amortization Event shall not be deemed to occur if
the Seller has purchased or made a substitution for the related Mortgage
Loan or Mortgage Loans if applicable during such period (or within an
additional 60 days with the consent of the Trustee) in accordance with the
provisions of the Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Transferor; or
(d) the Trust becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act of 1940, as amended.
In the case of any event described in clause (a) or (b), a Rapid
Amortization Event will be deemed to have occurred only if, after the applicable
grace period, if any, described in such clauses, either the Trustee or
Certificateholders holding Certificates evidencing more than 51% of the
Percentage Interests or the Certificate Insurer (so long as there is no default
by the Certificate Insurer in the performance of its obligations under the
Policy), by written notice to the Depositor and the Master Servicer (and to the
Trustee, if given by the Certificateholders) declare that a Rapid Amortization
Event has occurred as of the date of such notice. In the case of any event
described in clause (c) or (d), a Rapid Amortization Event will be deemed to
have occurred without any notice or other action on the part of the Trustee or
the Certificateholders immediately upon the occurrence of such event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the Transferor voluntarily files a bankruptcy petition or goes into
liquidation or any person is appointed a receiver or bankruptcy trustee of the
Transferor, on the day of any such filing or appointment no further Additional
Balances will be transferred to the Trust, the Transferor will immediately cease
to transfer Additional Balances to the Trust and the Transferor will promptly
give notice to the Trustee of any such filing or appointment. Within 15 days,
the Trustee will publish a notice of the liquidation or the filing or
appointment stating that the Trustee intends to sell, dispose of or otherwise
liquidate the Mortgage Loans in a commercially reasonable manner and to the best
of its ability. Unless otherwise
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instructed within a specified period by Certificateholders representing
undivided interests aggregating more than 51% of the aggregate principal amount
of the Certificates, the Trustee will sell, dispose of or otherwise liquidate
the Mortgage Loans in a commercially reasonable manner and on commercially
reasonable terms. Any proceeds will be treated as collections allocable to the
Certificateholders and the Investor Fixed Allocation Percentage of such
remaining proceeds and will be distributed to the Certificateholders on the date
such proceeds are received (the "Dissolution Distribution Date"). If the portion
of such proceeds allocable to the Certificateholders are not sufficient to pay
in full the remaining amount due on the Certificates, the Policy will cover such
shortfall.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Transferor and no Rapid Amortization
Event exists other than such conservatorship, receivership or insolvency of the
Transferor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period or the sale
of Mortgage Loans described above.
The Policy
[On or before the Closing Date, the Policy will be issued by the
Certificate Insurer pursuant to the provisions of the Agreement and the
Insurance and Indemnity Agreement (the "Insurance Agreement") to be dated as of
____________, 199_, among the Seller, the Depositor, the Master Servicer and the
Certificate Insurer.
The Policy will irrevocably and unconditionally guarantee payment on each
Distribution Date to the Trustee for the benefit of the Certificateholders the
full and complete payment of (i) the Guaranteed Principal Distribution Amount
(as defined herein) with respect to the Certificates for such Distribution Date
and (ii) accrued and unpaid interest due on the Certificates (together, the
"Guaranteed Distributions"), with such Guaranteed Distributions having been
calculated in accordance with the original terms of the Certificates or the
Agreement except for amendments or modifications to which the Certificate
Insurer has given its prior written consent. The effect of the Policy is to
guarantee the timely payment of interest on, and the ultimate payment of the
principal amount of, all of the Certificates.
The "Guaranteed Principal Distribution Amount" shall be the amount, if any,
by which the Certificate Principal Balance (after giving effect to all other
amounts distributable and allocable to principal on the Certificates) exceeds
the Invested Amount as of such Distribution Date (after giving effect to all
other amounts distributable and allocable to principal on the Certificates for
such Distribution Date). In addition, the Policy will guarantee the payment of
the outstanding Certificate Principal Balance on the Distribution Date in
______________ 20__ (after giving effect to all other amounts distributable and
allocable to principal on such Distribution Date).
In accordance with the Agreement, the Trustee will be required to establish
and maintain an account (the "Spread Account") for the benefit of the
Certificate Insurer and the Certificateholders. The Trustee shall deposit the
amounts into the Spread Account as required by the Agreement.
Payment of claims on the Policy will be made by the Certificate Insurer
following Receipt by the Certificate Insurer of the appropriate notice for
payment on the later to occur of (i) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment and (ii) 12:00
noon, New York City time, on the relevant Distribution Date.
If payment of any amount guaranteed by the Certificate Insurer pursuant to
the Policy is avoided as a preference payment under applicable bankruptcy,
insolvency, receivership or similar law, the Certificate Insurer will pay such
amount out of the funds of the Certificate Insurer on the later of (a) the date
when due to be paid pursuant to the Order referred to below or (b) the first to
occur of (i) the fourth Business Day following Receipt by the Certificate
Insurer from the Trustee of (A) a certified copy of the order (the "Order") of
the court or other governmental body which exercised jurisdiction to the effect
that the Certificateholder is required to return the amount of any Guaranteed
Distributions distributed with respect to the Certificates during the term of
the related Policy because such distributions were avoidable preference payments
under applicable bankruptcy law, (B) a certificate of the Certificateholder that
the Order has been entered and is not subject to any stay and (C) an assignment
duly executed and delivered by the Certificateholder, in such form as is
reasonably required by the Certificate Insurer and provided to the
Certificateholder by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Certificateholder relating to
or arising under the Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment, or (ii) the date
of Receipt by the
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Certificate Insurer from the Trustee of the items referred to in clauses (A),
(B) and (C) above if, at least four Business Days prior to such date of Receipt,
the Certificate Insurer shall have Received written notice from the Trustee that
such items were to be delivered on such date and such date was specified in such
notice. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Trustee or any Certificateholder directly (unless a Certificateholder has
previously paid such amount to the receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Order in which case such payment shall be
disbursed to the Trustee for distribution to such Certificateholder upon proof
of such payment reasonably satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received", with respect to the Policy, mean actual
delivery to the Certificate Insurer and to its fiscal agent appointed by the
Certificate Insurer at its option, if any, prior to 12:00 noon, New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 12:00 noon, New York City time, shall be deemed to be Receipt on the next
succeeding Business Day. If any notice or certificate given under the Policy by
the Trustee is not in proper form or is not properly completed, executed or
delivered it shall be deemed not to have been Received, and the Certificate
Insurer or the fiscal agent shall promptly so advise the Trustee and the Trustee
may submit an amended notice.
Under the Policy, "Business Day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in The City of New York, New
York are authorized or obligated by law or executive order to be closed.
The Certificate Insurer's obligations under the Policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are transferred
to the Trustee as provided in the Policy, whether or not such funds are properly
applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, as applicable,
with respect to distributions on the Certificates to the extent of any payment
by the Certificate Insurer under the Policy. To the extent the Certificate
Insurer makes Guaranteed Distributions, either directly or indirectly (as by
paying through the Trustee), to the Certificateholders, the Certificate Insurer
will be subrogated to the rights of the Certificateholders, as applicable, with
respect to such Guaranteed Distributions, shall be deemed to the extent of the
payments so made to be a registered Certificateholder for purposes of payment
and shall receive all future Guaranteed Distributions until all such Guaranteed
Distributions by the Certificate Insurer have been fully reimbursed, provided
that the Certificateholders have received the full amount of the Guaranteed
Distributions.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution of
the Seller. The Policy by its terms may not be cancelled or revoked. The Policy
is governed by the laws of the State of ________.
The Policy is not covered by the Property/Casualty Insurance Security fund
specified in Article 76 of the New York Insurance Law. The Policy is not covered
by the Florida Insurance Guaranty Association created under Part II of Chapter
631 of the Florida Insurance Code. In the event the Certificate Insurer were to
become insolvent, any claims arising under the Policy are excluded from coverage
by the California Insurance Guaranty Association, established pursuant to
Article 14.2 of Chapter 1 of part 2 of Division 1 of the California Insurance
Code.
Pursuant to the terms of the Agreement, unless a Certificate Insurer
default exists, the Certificate Insurer shall be deemed to be the Holder of the
Certificates for certain purposes (other than with respect to payment on the
Certificates), will be entitled to exercise all rights of the Certificateholders
thereunder, without the consent of such Holders and the Holders of the
Certificates may exercise such rights only with the prior written consent of the
Certificate Insurer. In addition, the Certificate Insurer will have certain
additional rights as third party beneficiary to the Agreement.
In the absence of payments under the Policy, Certificateholders will bear
directly the credit and other risks associated with their undivided interest in
the Trust.]
Reports to Certificateholders
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Concurrently with each distribution to the Certificateholders, the Master
Servicer will forward to the Trustee for mailing to such Certificateholder a
statement setting forth among other items:
(i) the Investor Floating Allocation Percentage for the preceding
Collection Period;
(ii) the amount being distributed to Certificateholders;
(iii) the amount of interest included in such distribution and the
related Certificate Rate;
(iv) the amount, if any, of overdue accrued interest included in such
distribution (and the amount of interest thereon);
(v) the amount, if any, of the remaining overdue accrued interest
after giving effect to such distribution;
(vi) the amount, if any, of principal included in such distribution;
(vii) the amount, if any, of the reimbursement of previous Liquidation
Loss Amounts included in such distribution;
(viii) the amount, if any, of the aggregate unreimbursed Liquidation
Loss Amounts after giving effect to such distribution;
(ix) the Servicing Fee for such Distribution Date;
(x) the Invested Amount and the Certificate Principal Balance, each
after giving effect to such distribution;
(xi) the Pool Balance as of the end of the preceding Collection
Period;
(xii) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for 30-59 days,
60-89 days and 90 or more days, respectively, as of the end of the
preceding Collection Period;
(xiii) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure; and
(xiv) the amount of any draws on the Policy.
In the case of information furnished pursuant to clauses (iii), (iv), (v),
(vi), (vii) and (viii) above, the amounts shall be expressed as a dollar amount
per Certificate with a $1,000 denomination.
Within 60 days after the end of each calendar year commencing in 1996, the
Master Servicer will be required to forward to the Trustee a statement
containing the information set forth in clauses (iii) and (vi) above aggregated
for such calendar year.
Collection and Other Servicing Procedures on Mortgage Loans
The Master Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the Agreement,
follow such collection procedures as it follows from time to time with respect
to the home equity loans in its servicing portfolio comparable to the Mortgage
Loans. Consistent with the above, the Master Servicer may in its discretion
waive any late payment charge or any assumption or other fee or charge that may
be collected in the ordinary course of servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Master Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Master Servicer's
policies with respect to the home equity mortgage loans it owns or services. In
accordance with the terms of the Agreement, the Master Servicer may consent
under certain circumstances to the placing of a subsequent senior lien in
respect of a Mortgage Loan.
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Hazard Insurance
The Agreement provides that the Master Servicer maintain certain hazard
insurance on the Mortgaged Properties relating to the Mortgage Loans. While the
terms of the related Credit Line Agreements generally require borrowers to
maintain certain hazard insurance, the Master Servicer will not monitor the
maintenance of such insurance.
The Agreement requires the Master Servicer to maintain for any Mortgaged
Property relating to a Mortgage Loan acquired upon foreclosure of a Mortgage
Loan, or by deed in lieu of such foreclosure, hazard insurance with extended
coverage in an amount equal to the lesser of (a) the maximum insurable value of
such Mortgaged Property or (b) the outstanding balance of such Mortgage Loan
plus the outstanding balance on any mortgage loan senior to such Mortgage Loan
at the time of foreclosure or deed in lieu of foreclosure, plus accrued interest
and the Master Servicer's good faith estimate of the related liquidation
expenses to be incurred in connection therewith. The Agreement provides that the
Master Servicer may satisfy its obligation to cause hazard policies to be
maintained by maintaining a blanket policy insuring against losses on such
Mortgaged Properties. If such blanket policy contains a deductible clause, the
Master Servicer will be obligated to deposit in the Collection Account the sums
which would have been deposited therein but for such clause. The Master Servicer
will initially satisfy these requirements by maintaining a blanket policy. As
set forth above, all amounts collected by the Master Servicer (net of any
reimbursements to the Master Servicer) under any hazard policy (except for
amounts to be applied to the restoration or repair of the Mortgaged Property)
will ultimately be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws and most of such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive or an
exact description of the insurance policies relating to the Mortgaged
Properties.
Realization Upon Defaulted Mortgage Loans
The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage servicing
activities, provided the Master Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Certificateholders or the Transferor.
Optional Purchase of Defaulted Loan
The Master Servicer may, at its option, purchase from the Trust any
Mortgage Loan which is delinquent in payment by 91 days or more. Any such
purchase shall be at a price equal to 100% of the Principal Balance of such
Mortgage Loan plus accrued interest thereon at the applicable Loan Rate from the
date through which interest was last paid by the related mortgagor to the first
day of the month in which such amount is to be distributed to
Certificateholders.
Servicing Compensation and Payment of Expenses
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With respect to each Collection Period, the Master Servicer will receive
from interest collections in respect of the Mortgage Loans a portion of such
interest collections as a monthly Servicing Fee in the amount equal to
approximately 0.50% per annum ("Servicing Fee Rate") on the aggregate Principal
Balances of the Mortgage Loans as of the first day of the related Collection
Period (or at the Cut-off Date for the first Collection Period). All assumption
fees, late payment charges and other fees and charges, to the extent collected
from borrowers, will be retained by the Master Servicer as additional servicing
compensation.
The Master Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Agreement. In addition, the Master Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with defaulted Mortgage Loans
and in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Net Liquidation Proceeds.
Evidence as to Compliance
The Agreement provides for delivery on or before ___________ in each year,
beginning in ___________, 199_, to the Trustee of an annual statement signed by
an officer of the Master Servicer to the effect that the Master Servicer has
fulfilled its material obligations under the Agreement throughout the preceding
fiscal year, except as specified in such statement.
On or before _____________ of each year, beginning ___________, 199_, the
Master Servicer will furnish a report prepared by a firm of nationally
recognized independent public accountants (who may also render other services to
the Master Servicer or the Transferor) to the Trustee, the Certificate Insurer
and the Rating Agencies to the effect that such firm has examined certain
documents and the records relating to servicing of the Mortgage Loans under the
Agreement and that, on the basis of such examination, such firm believes that
such servicing was conducted in compliance with the Agreement except for (a)
such exceptions as such firm believes to be immaterial and (b) such other
exceptions as shall be set forth in such report.
Certain Matters Regarding the Master Servicer and the Transferor
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Trustee in writing and such proposed successor servicer is reasonably acceptable
to the Trustee; (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Master Servicer will not
result in the reduction or withdrawal of the then current rating of the
Certificates; and (c) such proposed successor servicer is reasonably acceptable
to the Certificate Insurer. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement.
The Master Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Master Servicer. Notwithstanding any such arrangement, the Master
Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Master Servicer itself were performing such duties and obligations.
The Agreement provides that the Master Servicer will indemnify the Trust
and the Trustee from and against any loss, liability, expense, damage or injury
suffered or sustained as a result of the Master Servicer's actions or omissions
in connection with the servicing and administration of the Mortgage Loans which
are not in accordance with the provisions of the Agreement. Under the Agreement,
the Transferor will indemnify an injured party for the entire amount of any
losses, claims, damages or liabilities arising out of or based on the Agreement
(other than losses resulting from defaults under the Mortgage Loans). In the
event of an Event of Servicing Termination (as defined below) resulting in the
assumption of servicing obligations by a successor Master Servicer, the
successor Master Servicer will indemnify the Transferor for any losses, claims,
damages and liabilities of the Transferor as described in this paragraph arising
from the successor Master Servicer's actions or omissions. The Agreement
provides that neither the Depositor, the Transferor nor the Master Servicer nor
their directors, officers, employees
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or agents will be under any other liability to the Trust, the Trustee, the
Certificateholders or any other person for any action taken or for refraining
from taking any action pursuant to the Agreement. However, neither the
Depositor, the Transferor nor the Master Servicer will be protected against any
liability which would otherwise be imposed by reason of willful misconduct, bad
faith or gross negligence of the Depositor, the Transferor or the Master
Servicer in the performance of its duties under the Agreement or by reason of
reckless disregard of its obligations thereunder. In addition, the Agreement
provides that the Master Servicer will not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its servicing
responsibilities under the Agreement and which in its opinion may expose it to
any expense or liability. The Master Servicer may, in its sole discretion,
undertake any such legal action which it may deem necessary or desirable with
respect to the Agreement and the rights and duties of the parties thereto and
the interest of the Certificateholders thereunder.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything in the Agreement
to the contrary notwithstanding.
Events of Servicing Termination
"Events of Servicing Termination" will consist of: (i) any failure by the
Master Servicer to deposit in the Collection Account any deposit required to be
made under the Agreement, which failure continues unremedied for five business
days after the giving of written notice of such failure to the Master Servicer
by the Trustee, or to the Master Servicer and the Trustee by the Certificate
Insurer or Certificateholders evidencing an aggregate, undivided interest in the
Trust of at least 25% of the Certificate Principal Balance; (ii) any failure by
the Master Servicer duly to observe or perform in any material respect any other
of its covenants or agreements in the Agreement which, in each case, materially
and adversely affects the interests of the Certificateholders or the Certificate
Insurer and continues unremedied for 60 days after the giving of written notice
of such failure to the Master Servicer by the Trustee, or to the Master Servicer
and the Trustee by the Certificate Insurer or Certificateholders evidencing an
aggregate, undivided interest in the Trust of at least 25% of the Certificate
Principal Balance; or (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating to the
Master Servicer and certain actions by the Master Servicer indicating
insolvency, reorganization or inability to pay its obligations. Under certain
other circumstances, the Certificate Insurer with the consent of holders of
Investor Certificates evidencing an aggregate, undivided interest in the Trust
of at least 51% of the Certificate Principal Balance may deliver written notice
to the Master Servicer terminating all the rights and obligations of the Master
Servicer under the Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten Business Days or referred
to under clause (ii) above for a period of 60 Business Days, shall not
constitute an Event of Servicing Termination if such delay or failure could not
be prevented by the exercise of reasonable diligence by the Master Servicer and
such delay or failure was caused by an act of God or other similar occurrence.
Upon the occurrence of any such event the Master Servicer shall not be relieved
from using its best efforts to perform its obligations in a timely manner in
accordance with the terms of the Agreement and the Master Servicer shall provide
the Trustee, the Depositor, the Transferor, the Certificate Insurer and the
Certificateholders prompt notice of such failure or delay by it, together with a
description of its efforts to so perform its obligations.
Rights Upon an Event of Servicing Termination
So long as an Event of Servicing Termination remains unremedied, either the
Trustee, or Certificateholders evidencing an aggregate, undivided interest in
the Trust of at least 51% of the Certificate Principal Balance or the
Certificate Insurer, may terminate all of the rights and obligations of the
Master Servicer under the Agreement and in and to the Mortgage Loans, whereupon
the Trustee will succeed to all the responsibilities, duties and liabilities of
the Master Servicer under the Agreement and will be entitled to similar
compensation arrangements. In the event that the Trustee would be obligated to
succeed the Master Servicer but is unwilling or unable so to act, it may
appoint, or petition a court of competent jurisdiction for the appointment of, a
housing and home finance institution or other mortgage loan or home equity loan
servicer with all licenses and permits required to perform its obligations under
the Agreement and having a net worth of at least $__________ and acceptable to
the Certificate Insurer to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee will be
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obligated to act in such capacity unless prohibited by law. Such successor will
be entitled to receive the same compensation that the Master Servicer would
otherwise have received (or such lesser compensation as the Trustee and such
successor may agree). A receiver or conservator for the Master Servicer may be
empowered to prevent the termination and replacement of the Master Servicer
where the only Event of Servicing Termination that has occurred is an Insolvency
Event.
Amendment
The Agreement may be amended from time to time by the Seller, the Master
Servicer, the Depositor and the Trustee and with the consent of the Certificate
Insurer, but without the consent of the Certificateholders, to cure any
ambiguity, to correct or supplement any provisions therein which may be
inconsistent with any other provisions of the Agreement, to add to the duties of
the Depositor, the Seller, the Transferor or the Master Servicer or to add or
amend any provisions of the Agreement as required by the Rating Agencies in
order to maintain or improve any rating of the Certificates (it being understood
that, after obtaining the ratings in effect on the Closing Date, neither the
Transferor, the Trustee nor the Master Servicer is obligated to obtain,
maintain, or improve any such rating) or to add any other provisions with
respect to matters or questions arising under the Agreement which shall not be
inconsistent with the provisions of the Agreement, provided that such action
will not, as evidenced by an opinion of counsel, materially and adversely affect
the interests of any Certificateholder or the Certificate Insurer; provided,
that any such amendment will not be deemed to materially and adversely affect
the Certificateholders and no such opinion will be required to be delivered if
the person requesting such amendment obtains a letter from the Rating Agencies
stating that such amendment would not result in a downgrading of the then
current rating of the Certificates. The Agreement may also be amended from time
to time by the Seller, the Master Servicer, the Depositor, and the Trustee, with
the consent of Certificateholders evidencing an aggregate, undivided interest in
the Trust of at least 51% of the Certificate Principal Balance and the
Certificate Insurer for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Agreement or of modifying
in any manner the rights of the Certificateholders, provided that no such
amendment will (i) reduce in any manner the amount of, or delay the timing of,
collections of payments on the Certificates or distributions or payments under
the Policy which are required to be made on any Certificate without the consent
of the holder of such Certificate or (ii) reduce the aforesaid percentage
required to consent to any such amendment, without the consent of the holders of
all Certificates then outstanding.
Termination; Retirement of the Certificates
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer and (B) the
earliest of (i) the Distribution Date on which the Certificate Principal Balance
has been reduced to zero, (ii) the final payment or other liquidation of the
last Mortgage Loan in the Trust, (iii) the optional transfer to the Transferor
of the Certificates, as described below and (iv) the Distribution Date in
____________ 20__.
The Certificates will be subject to optional transfer to the Transferor on
any Distribution Date after the Certificate Principal Balance is reduced to an
amount less than or equal to __% of the Original Certificate Principal Balance
and all amounts due and owing to the Certificate Insurer and unreimbursed draws
on the Policy, together with interest thereon, as provided under the Insurance
Agreement, have been paid. The transfer price will be equal to the sum of the
outstanding Certificate Principal Balance and accrued and unpaid interest
thereon at the Certificate Rate through the day preceding the final Distribution
Date. In no event, however, will the Trust created by the Agreement continue for
more than 21 years after the death of certain individuals named in the
Agreement. Written notice of termination of the Agreement will be given to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency appointed by the
Trustee which will be specified in the notice of termination.
In addition, the Trust may be liquidated as a result of certain events of
bankruptcy, insolvency or receivership relating to the Transferor. See "--Rapid
Amortization Events" herein.
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The Trustee
[ ], a ______________________ with its principal place of business in
________, has been named Trustee pursuant to the Agreement.
The commercial bank or trust company serving as Trustee may own
Certificates and have normal banking relationships with the Depositor, the
Master Servicer, the Seller and the Certificate Insurer and/or their affiliates.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Depositor may also remove the Trustee if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the Trust of
at least 51% of the Certificate Principal Balance have made written requests
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity and the Trustee
for 60 days has neglected or refused to institute any such proceeding. The
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred therein or thereby.
Certain Activities
The Trust will not: (i) borrow money; (ii) make loans; (iii) invest in
securities for the purpose of exercising control; (iv) underwrite securities;
(v) except as provided in the Agreement, engage in the purchase and sale (or
turnover) of investments; (vi) offer securities in exchange for property (except
Certificates for the Mortgage Loans); or (vii) repurchase or otherwise reacquire
its securities. See "--Evidence as to Compliance" above for information
regarding reports as to the compliance by the Master Servicer with the terms of
the Agreement.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will be
purchased by the Depositor from [Countrywide] pursuant to the Purchase Agreement
to be entered into between the Depositor, as purchaser of the Mortgage Loans,
and [Countrywide], as Seller of the Mortgage Loans. Under the Purchase
Agreement, the Seller will agree to transfer the Mortgage Loans and related
Additional Balances to the Depositor. Pursuant to the Agreement, the Mortgage
Loans will be immediately transferred by the Depositor to the Trust, and the
Depositor will assign its rights in, to and under the Purchase Agreement to the
Trust. The following summary describes certain terms of the form of the Purchase
Agreement and is qualified in its entirety by reference to the Purchase
Agreement.
Transfers of Mortgage Loans
Pursuant to the Purchase Agreement, the Seller will transfer and assign to
the Depositor, all of its right, title and interest in and to the Mortgage Loans
and all of the Additional Balances thereafter created. The purchase price of the
Mortgage Loans is a specified percentage of the face amount thereof as of the
time of transfer and is payable by the Depositor in cash. The purchase price of
each Additional Balance comprising the Principal Balance of a Mortgage Loan is
the amount of the related new advance.
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Representations and Warranties
The Seller will represent and warrant to the Depositor that, among other
things, as of the Closing Date, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Purchase Agreement. The Seller will also represent and warrant to the Depositor
that, among other things, immediately prior to the sale of the Mortgage Loans to
the Depositor, the Seller was the sole owner and holder of the Mortgage Loans
free and clear of any and all liens and security interests. The Seller will make
similar representations and warranties in the Agreement. The Seller will also
represent and warrant to the Depositor that, among other things, as of the
Closing Date, (a) the Purchase Agreement constitutes a legal, valid and binding
obligation of the Seller and (b) the Purchase Agreement constitutes a valid sale
to the Depositor of all right, title and interest of the Seller in and to the
Mortgage Loans and the proceeds thereof.
Assignment to Trust
The Seller expressly acknowledges and consents to the Depositor's transfer
of its rights relating to the Mortgage Loans under the Agreement to the Trust.
The Seller also agrees to perform its obligations under the Purchase Agreement
for the benefit of the Trust.
Termination
The Purchase Agreement will terminate upon the termination of the Trust.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following discussion, which summarizes certain U.S. federal income tax
aspects of the purchase, ownership and disposition of the Certificates, is based
on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
the Treasury Regulations thereunder, and published rulings and court decisions
in effect as of the date hereof, all of which are subject to change, possibly
retroactively. This discussion does not address every aspect of the U.S. federal
income tax laws which may be relevant to Certificate Owners in light of their
personal investment circumstances or to certain types of Certificate Owners
subject to special treatment under the U.S. federal income tax laws (for
example, banks and life insurance companies). Accordingly, investors should
consult their tax advisors regarding U.S. federal, state, local, foreign and any
other tax consequences to them of investing in the Certificates.
Characterization of the Certificates as Indebtedness
Based on the application of existing law to the facts as set forth in the
Agreement and other relevant documents and assuming compliance with the terms of
the Agreement as in effect on the date of issuance of the Certificates, Brown &
Wood LLP, special tax counsel to the Depositor ("Tax Counsel"), is of the
opinion that the Certificates will be treated as debt instruments for Federal
income tax purposes as of such date. Accordingly, upon issuance, the
Certificates will be treated as "Debt Securities" as described in the
Prospectus. See "Certain Federal Income Tax Consequences" in the Prospectus.
The Transferor and the Certificateholders express in the Agreement their
intent that, for applicable tax purposes, the Certificates will be indebtedness
secured by the Mortgage Loans. The Transferor, the Depositor and the
Certificateholders, by accepting the Certificates, and each Certificate Owner by
its acquisition of a beneficial interest in a Certificate, have agreed to treat
the Certificates as indebtedness for U.S. federal income tax purposes. However,
because different criteria are used to determine the non-tax accounting
characterization of the transaction,
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the Transferor intends to treat this transaction as a sale of an interest in the
Asset Balances of the Mortgage Loans for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the "IRS") and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by the
Transferor and has not been transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
Taxation of Interest Income of Certificate Owners
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal income tax purposes, the Certificates generally will be taxable as
Debt Securities. See "Certain Federal Income Tax Consequences" in the
Prospectus.
While it is not anticipated that the Certificates will be issued at a
greater than de minimis discount, under Treasury regulations (the "OID
Regulations") it is possible that the Certificates could nevertheless be deemed
to have been issued with original issue discount ("OID") if the interest were
not treated as "unconditionally payable" under the OID Regulations. If such
regulations were to apply, all of the taxable income to be recognized with
respect to the Certificates would be includible in income of Certificate Owners
as OID, but would not be includible again when the interest is actually
received. See "Certain Federal Income Tax Consequences--Taxation of Debt
Securities; Interest and Acquisition Discount" in the Prospectus for a
discussion of the application of the OID rules if the Certificates are in fact
issued at a greater than de minimis discount or are treated as having been
issued with OID under the OID Regulations. For purposes of calculating OID, it
is likely that the Certificates will be treated as Pay-Through Securities.
Possible Classification of the Certificates as a Partnership or Association
Taxable as a Corporation
The opinion of Tax Counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus with respect to the Certificates
constitutes a sale of the Mortgage Loans (or an interest therein) to the
Certificate Owners and that the proper classification of the legal relationship
between the Transferor and the Certificate Owners resulting from this
transaction is that of a partnership, a publicly traded partnership treated as a
corporation, or an association taxable as a corporation. Since Tax Counsel has
advised that the Certificates will be treated as indebtedness in the hands of
the Certificateholders for U.S. federal income tax purposes, the Transferor will
not attempt to comply with U.S. federal income tax reporting requirements
applicable to partnerships or corporations as such requirements would apply if
the Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust would be subject to U.S. federal income tax at corporate
income tax rates on the income it derives from the Mortgage Loans, which would
reduce the amounts available for distribution to the Certificate Owners. Cash
distributions to the Certificate Owners generally would be treated as dividends
for tax purposes to the extent of such corporation's earnings and profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Transferor
and each Certificate Owner would be taxed
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individually on their respective distributive shares of the partnership's
income, gain, loss, deductions and credits. The amount and timing of items of
income and deductions of the Certificate Owner could differ if the Certificates
were held to constitute partnership interests rather than indebtedness.
Possible Classification as a Taxable Mortgage Pool
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a "taxable mortgage pool" will be classified as
a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Subject to a grandfather
provision for existing entities, any entity (or a portion of any entity) will be
a taxable mortgage pool if (i) substantially all of its assets consist of debt
instruments, more than 50% of which are real estate mortgages, (ii) the entity
is the obligor under debt obligations with two or more maturities, and (iii)
under the terms of the entity's debt obligations (or an underlying arrangement),
payments on such debt obligations bear a relationship to the debt instruments
held by the entity.
Assuming that all of the provisions of the Agreement, as in effect on the
date of issuance, are complied with, Tax Counsel is of the opinion that the
arrangement created by the Agreement will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one class of indebtedness secured by
the Mortgage Loans is being issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificate Owners. The amount of such a
tax would depend upon whether distributions to Certificate Owners would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
Foreign Investors
In general, subject to certain exceptions, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Certificate Owner provides the required
foreign person information certification. See "Certain Federal Income Tax
Consequences--Tax Treatment of Foreign Investors" in the Prospectus.
If the interests of the Certificate Owners were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of "effectively connected" income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
Backup Withholding
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance, fail to supply the Trustee or his broker with his
taxpayer identification number, furnish an incorrect taxpayer identification
number, fail to report interest, dividends, or other "reportable payments" (as
defined in the Code) properly, or, under certain circumstances, fail to provide
the Trustee or his broker with a certified statement, under penalty of perjury,
that he is not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations,
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certain tax-exempt organizations or nonresident aliens who provide certification
as to their status as nonresidents). As long as the only "Certificateholder" of
record is Cede, as nominee for DTC, Certificate Owners and the IRS will receive
tax and other information including the amount of interest paid on the
Certificates owned from Participants and Indirect Participants rather than from
the Trustee. (The Trustee, however, will respond to requests for necessary
information to enable Participants, Indirect Participants and certain other
persons to complete their reports.) Each non-exempt Certificate Owner will be
required to provide, under penalty of perjury, a certificate on IRS Form W-9
containing his or her name, address, correct Federal taxpayer identification
number and a statement that he or she is not subject to backup withholding.
Should a nonexempt Certificate Owner fail to provide the required certification,
the Participants or Indirect Participants (or the Paying Agent) will be required
to withhold 31% of the interest (and principal) otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
Federal income tax liability.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Certificates under the tax laws of any
state. Investors considering an investment in the Certificates should consult
their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the Federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Certificates.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Certificates should consult with its counsel with respect to the potential
consequences under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the Code, of the Plans acquisition and ownership of such
Certificates. See "ERISA Considerations" in the Prospectus.
The U.S. Department of Labor has granted to _________________
("Underwriter") Prohibited Transaction Exemption _____ (the "Exemption") which
exempts from the application of the prohibited transaction rules transactions
relating to (1) the acquisition, sale and holding by Plans of certain
certificates representing an undivided interest in certain asset-backed
pass-through trusts, with respect to which Underwriter or any of its affiliates
is the sole underwriter or the manager or co-manager of the underwriting
syndicate; and (2) the servicing, operation and management of such asset-backed
pass-through trusts, provided that the general conditions and certain other
conditions set forth in the Exemption are satisfied. The Exemption will apply to
the acquisition, holding and resale of the Certificates by a Plan provided that
certain conditions are met.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations" in the
Prospectus.
The Underwriter believes that the Exemption will apply to the acquisition
and holding of the Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met.
Any Plan fiduciary considering whether to purchase any Certificates on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Certificates, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be rated
in the highest rating category of the Rating Agencies, the Certificates will not
constitute "mortgage related securities" for purposes of the Secondary
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Mortgage Market Enhancement Act of 1984 ("SMMEA"), because not all of the
Mortgages securing the Mortgage Loans are first mortgages. Accordingly, many
institutions with legal authority to invest in comparably rated securities based
on first mortgage loans may not be legally authorized to invest in the
Certificates, which because they evidence interests in a pool that includes
junior mortgage loans are not "mortgage related securities" under SMMEA. See
"Legal Investment" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated ___________, 199_ (the "Underwriting Agreement"), among the
Depositor and [Underwriter] (the "Underwriter"), the Depositor has agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase from the
Depositor all the Certificates.
In the Underwriting Agreement, the Underwriter has agreed, subject to the
terms and conditions set forth therein, to purchase all the Certificates offered
hereby if any of the Certificates are purchased.
The Depositor has been advised by the Underwriter that it proposes
initially to offer the Certificates to the public in Europe and the United
States at the offering price set forth herein and to certain dealers at such
price less a discount not in excess of ____% of the Certificate denominations.
The Underwriter may allow and such dealers may reallow a discount not in excess
of _____% of the Certificate denominations to certain other dealers. After the
initial public offering, the public offering price, such concessions and such
discounts may be changed.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
for the Depositor by Brown & Wood LLP, New York, New York and for the
Underwriter by Strook & Strook & Lavan, New York, New York.
EXPERTS
The consolidated balance sheets of [Insurer] and Subsidiaries as of
___________, 199_ and 199_ 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 ___________, 199_, incorporated by reference in this Prospectus
Supplement, have been incorporated herein in reliance on the report of
________________________, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that the Certificates be rated "___" by _____
and "___" by _________.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Certificates. The ratings on the
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Mortgage Loans or the possibility that
Certificateholders might realize a lower than anticipated yield.
The ratings assigned to the Certificates will depend primarily upon the
creditworthiness of the Certificate Insurer. Any reduction in a rating assigned
to the claims-paying ability of the Certificate Insurer below the ratings
initially assigned to the Certificates may result in a reduction of one or more
of the ratings assigned to the Certificates.
A securities 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 securities rating should be evaluated independently of
similar ratings on different securities.
S-54
<PAGE>
<PAGE>
The Depositor has not requested a rating of the Certificates by any rating
agency other than the Rating Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Certificates or, if it does, what
rating would be assigned by such other rating agency. The rating assigned by
such other rating agency to the Certificates could be lower than the respective
ratings assigned by the Rating Agencies.
S-55
<PAGE>
<PAGE>
INDEX OF DEFINED TERMS
Page
----
1934 Act...................................................................S-2
Accelerated Principal Distribution Amount............................S-8, S-40
Additional Balances........................................................S-3
Agreement..................................................................S-3
ALTA ....................................................................S-21
Alternative Documentation Program.........................................S-20
Alternative Principal Payment.......................................S-11, S-41
Assignment Event..........................................................S-36
BIF ....................................................................S-38
Book-Entry Certificates...................................................S-32
Business Day........................................................S-39, S-44
Cede .....................................................................S-7
CEDEL .....................................................................S-6
CEDEL Participants........................................................S-34
Certificate Insurer.......................................................S-11
Certificate Owners...................................................S-6, S-33
Certificate Principal Balance........................................S-4, S-32
Certificate Rate...............................................S-4, S-10, S-40
Certificateholder...................................................S-33, S-54
Certificates..........................................................S-1, S-4
CGC ....................................................................S-17
CGIC ....................................................................S-17
Citibank...................................................................S-7
Closing Date...................................................S-1, S-10, S-40
Code ....................................................................S-51
Collection Account...................................................S-9, S-38
Collection Period...................................................S-10, S-40
Combined Loan-to-Value Ratio...............................................S-5
Cooperative...............................................................S-35
[Countrywide]...................................................S-1, S-3, S-20
Credit Limit...............................................................S-5
Credit Limit Utilization Rate.............................................S-23
Credit Line Agreements...............................................S-3, S-22
Cut-off Date..........................................................S-1, S-3
Cut-off Date Pool Balance..................................................S-3
Cut-off Date Principal Balance.............................................S-3
Debt Securities...........................................................S-51
debt-to-income ratio......................................................S-21
Defective Mortgage Loans..................................................S-37
Definitive Certificate....................................................S-33
Depositor..................................................................S-3
Determination Date..................................................S-13, S-38
Dissolution Distribution Date.............................................S-43
Distribution Date..............................................S-1, S-10, S-39
Draw Period...............................................................S-23
DTC .........................................................S-6, S-33, S-60
Due Date...................................................................S-6
Eligible Account..........................................................S-37
Eligible Substitute Mortgage Loan.........................................S-36
ERISA ..............................................................S-14, S-54
Euroclear..................................................................S-6
Euroclear Operator........................................................S-34
Euroclear Participants....................................................S-34
S-56
<PAGE>
<PAGE>
Page
----
European Depositaries................................................S-7, S-33
Events of Servicing Termination...........................................S-48
Exemption.................................................................S-54
FHLMC ....................................................................S-19
Financial Intermediary....................................................S-33
Fixed Allocation Percentage................................................S-9
FNMA ....................................................................S-21
Fund American.............................................................S-16
Guaranteed Distributions............................................S-12, S-43
Guaranteed Principal Distribution Amount............................S-12, S-43
Index Rate................................................................S-23
Insurance Agreement.................................................S-11, S-43
Interest Collections.................................................S-7, S-38
Interest Period.....................................................S-10, S-40
Invested Amount......................................................S-4, S-32
Investor Fixed Allocation Percentage.......................................S-9
Investor Floating Allocation Percentage..............................S-8, S-39
Investor Interest Collections........................................S-8, S-39
Investor Loss Amount.................................................S-9, S-40
Investor Principal Collections.......................................S-9, S-39
IRS ....................................................................S-52
LIBOR ....................................................................S-10
LIBOR Business Day........................................................S-40
Liquidated Mortgage Loan..................................................S-40
Liquidation Loss Amount..............................................S-9, S-40
Liquidation Proceeds......................................................S-38
Loan Rate............................................................S-6, S-23
Managed Amortization Period.........................................S-10, S-41
Margin....................................................................S-23
Maximum Principal Payment...........................................S-11, S-41
Maximum Rate..............................................................S-23
Minimum Transferor Interest..........................................S-5, S-38
Money Rates................................................................S-6
Mortgage Files............................................................S-36
Mortgage Loan Schedule.........................................S-4, S-36, S-38
Mortgage Loans........................................................S-1, S-3
Mortgaged Properties.......................................................S-3
Net Liquidation Proceeds.............................................S-8, S-38
OID ....................................................................S-52
OID Regulations...........................................................S-52
Order ....................................................................S-43
Original Certificate Principal Balance...............................S-4, S-32
Original Invested Amount.............................................S-4, S-32
Overcollateralization Amount...............................................S-9
Paying Agent..............................................................S-42
Percentage Interest........................................................S-6
Plan ....................................................................S-14
Policy................................................................S-1, S-3
Pool Balance.........................................................S-3, S-39
Pool Factor...............................................................S-32
Principal Balance..........................................................S-3
Principal Collections................................................S-8, S-38
Purchase Agreement.........................................................S-5
Rapid Amortization Event..................................................S-42
S-57
<PAGE>
<PAGE>
Page
----
Rating Agency.............................................................S-15
Receipt...................................................................S-44
Received..................................................................S-44
Record Date...............................................................S-39
Reduced Documentation Program.............................................S-20
Reference Bank Rate.......................................................S-41
Related Documents.........................................................S-36
Relevant Depositary.......................................................S-33
Repayment Period..........................................................S-23
Required Overcollateralization Amount.....................................S-40
Restricted Group..........................................................S-55
Rules ....................................................................S-33
SAIF ....................................................................S-38
Scheduled Principal Collections Distribution Amount.................S-11, S-41
Seller.....................................................................S-3
Master Servicer............................................................S-3
Servicing Fee.............................................................S-13
Servicing Fee Rate..................................................S-13, S-47
SMMEA ..............................................................S-15, S-55
Spread Account......................................................S-12, S-43
Tax Counsel...............................................................S-51
Telerate Screen Page 3750.................................................S-41
Terms and Conditions......................................................S-35
Transfer Date.............................................................S-37
Transfer Deficiency.......................................................S-36
Transfer Deposit Amount...................................................S-36
Transferor.................................................................S-4
Transferor Interest.............................................S-1, S-4, S-33
Transferor Principal Collections.....................................S-9, S-39
Trust ................................................................S-1, S-3
Trustee..............................................................S-3, S-14
U S WEST..................................................................S-16
Underwriter.........................................................S-54, S-55
Underwriting Agreement....................................................S-55
S-58
<PAGE>
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset Backed Certificates, Series 199_-_ (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of The Depository Trust Company ("DTC"),
CEDEL or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset Backed
Certificates issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset Backed
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset Backed Certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
S-59
<PAGE>
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
S-60
<PAGE>
<PAGE>
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
S-61
<PAGE>
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Company
or [Underwriter]. This Prospectus Supplement and the Prospectus do not
constitute an offer of any securities other than those to which they relate or
an offer to sell, or a solicitation of an offer to buy, to any person in any
jurisdiction where such an offer or solicitation would be unlawful. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to their
respective dates.
---------------
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Incorporation of Certain Documents by
Reference................................................................S-2
Summary....................................................................S-3
Risk Factors..............................................................S-12
The Certificate Insurer...................................................S-14
The Master Servicer.......................................................S-16
The Home Equity Loan Program..............................................S-17
Description of the Mortgage Loans.........................................S-19
Maturity and Prepayment Considerations....................................S-26
Pool Factor and Trading Information.......................................S-27
Description of the Certificates...........................................S-28
Description of the Purchase Agreement.....................................S-45
Use of Proceeds...........................................................S-46
Certain Federal Income Tax Consequences...................................S-46
State Taxes...............................................................S-49
ERISA Considerations......................................................S-49
Legal Investment Considerations...........................................S-50
Underwriting..............................................................S-50
Legal Matters.............................................................S-51
Experts...................................................................S-51
Ratings...................................................................S-51
Index of Defined Terms....................................................S-52
Annex I...................................................................S-56
Prospectus
Prospectus Supplement........................................................2
Available Information........................................................2
Reports to Holders...........................................................2
Summary of Terms.............................................................3
Risk Factors................................................................11
Description of the Securities...............................................14
The Trust Funds.............................................................17
Enhancement.................................................................22
Servicing of Loans..........................................................24
The Agreements..............................................................30
Certain Legal Aspects of Loans..............................................38
The Depositor...............................................................46
Use of Proceeds.............................................................46
Certain Federal Income Tax
Consequences..............................................................47
State Tax Considerations....................................................64
ERISA Considerations........................................................65
Legal Investment............................................................67
Plan of Distribution........................................................67
Legal Matters...............................................................67
Experts.....................................................................67
Additional Information......................................................67
Glossary of Terms...........................................................68
================================================================================
[COUNTRYWIDE] HOME
EQUITY LOAN TRUST 199_-_
$___________
(Approximate)
Home Equity Loan
Asset Backed Certificates
Series 199_-_
CWABS, Inc.
Depositor
[Countrywide Home Loans, Inc.]
Seller and Master Servicer
- --------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
__________, 199_
- --------------------------------------------------------------------------------
[UNDERWRITER]
================================================================================
<PAGE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 29, 1996
PROSPECTUS SUPPLEMENT
(To Prospectus dated __________, 1996)
$___________
(Approximate)
CWABS, Inc.
Depositor
[Countrywide Home Loans, Inc.]
Seller and Master Servicer
Mortgage Pass-Through Certificates, Series 19__-__ Distributions payable on
the ____the day of each month, commencing in _____ 19__
-------------------
The Mortgage Pass-Through Certificates, Series 199__-__ (collectively, the
"Certificates") will represent the entire beneficial interest in a Trust Fund
consisting primarily of a pool (the "Mortgage Pool") of [fixed-rate] Mortgage
Loans secured by first liens on one- to four-family residential properties. Only
the Classes identified in the table below (collectively, the "Offered
Certificates") are offered hereby.
-------------------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SELLER, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, THE DEPOSITOR, THE SELLER, THE
MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR AFFILIATES OR ANY OTHER PERSON.
DISTRIBUTIONS ON THE CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS
TRANSFERRED TO THE TRUST FUND FOR THE BENEFIT OF CERTIFICATEHOLDERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL
OFFENSE.
==============================================================================
Initial Class
Certificate
Balance (1) Pass-Through Rate
- ------------------------------------------------------------------------------
Class A- $ %
- ------------------------------------------------------------------------------
Class $ %
- ------------------------------------------------------------------------------
Class PO $ (2)
- ------------------------------------------------------------------------------
Class X (3) (4)
- ------------------------------------------------------------------------------
Class A-R $ %
- ------------------------------------------------------------------------------
Class B- $ %
- ------------------------------------------------------------------------------
Class $ %
- ------------------------------------------------------------------------------
Class $ %
==============================================================================
(1) Subject to the permitted variance described herein.
(2) The Class PO Certificates will be Principal Only Certificates and will not
bear interest.
(3) The Class X Certificates will be Notional Amount Certificates, will have no
principal balance and will bear interest on their Notional Amount (initially
expected to be approximately $ ).
(4) The Pass-Through Rate for the Class X Certificates for any Distribution Date
will be equal to the excess of (a) the weighted average of the Net Mortgage
Rates of the Non-Discount Mortgage Loans over (b) % per annum. The
Pass-Through Rate for the Class X Certificates for the first Distribution
Date is expected to be approximately % per annum.
The Senior Certificates, other than the Class PO and Class X Certificates
(the "Underwritten Senior Certificates"), will be purchased by _______ and the
Class ____ Certificates (together with the Underwritten Senior Certificates, the
"Underwritten Certificates") offered hereby will be purchased by ______ (each,
an "Underwriter") from the Depositor and will be offered by the Underwriters
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Depositor from the sale of
the Underwritten Certificates are expected to be approximately $_______ , plus
accrued interest, before deducting issuance expenses payable by the Depositor.
The Class , Class PO and Class X Certificates will be issued to the Depositor on
or about _________, 19__ as partial consideration for the sale of the Mortgage
Loans to the Trust Fund.
The Underwritten Certificates are offered by the respective Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to their right to reject orders in whole or in part. It
is expected that delivery of the Underwritten Senior Certificates, other than
the Class A-R Certificates, will be made in book-entry form only through the
facilities of The Depository Trust Company, that the Class A-R Certificates will
be delivered at the offices of _________________ in New York, New York and that
the Class Certificates will be delivered at the offices of_______________
<PAGE>
in New York, New York, in each case on or about _________, 19__.
[Underwriters]
<PAGE>
<PAGE>
The Mortgage Loans will be sold to the Depositor by [Countrywide Home Loans,
Inc. ("Countrywide")].
An election will be made to treat the Trust Fund as a "real estate mortgage
investment conduit" (the "REMIC") for federal income tax purposes. As described
more fully herein and in the Prospectus, the Offered Certificates, other than
the Class A-R Certificates, will constitute "regular interests" in the REMIC.
The Class A-R Certificates will constitute the sole class of "residual interest"
in the REMIC. Prospective investors are cautioned that a Class A-R
Certificateholder's REMIC taxable income and the tax liability thereon will
exceed cash distributions in certain periods, in which event such holder must
have sufficient alternative sources of funds to pay such tax liability. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
The Class A-R Certificates will be subject to certain transfer restrictions.
See "Description of the Certificates -- Restrictions on Transfer of the Class
A-R Certificates" herein.
The yield to investors on each Class of Offered Certificates will be
sensitive in varying degrees to, among other things, the rate and timing of
principal payments (including prepayments) of the Mortgage Loans, which may vary
significantly over time. The yield to maturity of a Class of Offered
Certificates purchased at a discount or premium will be more sensitive to the
rate and timing of payments thereon. Holders of the Offered Certificates should
consider, in the case of any such Certificates purchased at a discount, and
particularly the Principal Only Certificates, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans could result in an
actual yield that is lower than the anticipated yield and, in the case of any
Offered Certificates purchased at a premium and particularly the Interest Only
Certificates, the risk that a faster than anticipated rate of principal payments
on the Mortgage Loans could result in an actual yield that is lower than the
anticipated yield. Holders of the Interest Only Certificates should carefully
consider the risk that a rapid rate of principal payments on the Mortgage Loans
could result in the failure of such holders to recover their initial
investments. The yield to investors in the Offered Certificates, and
particularly the Class ____ Certificates, also will be adversely affected by Net
Interest Shortfalls and by Realized Losses. No representation is made as to the
anticipated rate of prepayments on the Mortgage Loans, the amount and timing of
Net Interest Shortfalls or Realized Losses, or as to the resulting yield to
maturity of any Class of Certificates.
Each Underwriter intends to make a secondary market in the Classes of
Underwritten Certificates being purchased by it, but no Underwriter has an
obligation to do so. There is currently no secondary market for the Offered
Certificates and there can be no assurance that such a market will develop or,
if it does develop, that it will continue or that it will provide
Certificateholders with a sufficient level of liquidity of investment.
-------------------
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in the
Prospectus of the Depositor dated , 1996 (the "Prospectus") and purchasers are
urged to read both this Prospectus Supplement and the Prospectus in full. Sales
of the Offered 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 Offered Certificates, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and the
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus Supplement and the Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
S-2
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SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
Title of Certificates........ Mortgage Pass-Through Certificates, Series
199__-__ (the "Certificates").
Offered Certificates......... Class A-____, Class ____, Class PO, Class X,
Class A-R, Class B-___ and Class ____
Certificates. Only the Offered Certificates are
offered hereby. The aggregate initial Class
Certificate Balances of the Certificates will be
subject to a permitted variance in the aggregate
of plus or minus __%. Variances in the Class
Certificate Balances may result in variances in
the Notional Amount of the Class of Notional
Amount Certificates.
The Notional Amount of the Class X Certificates
for any Distribution Date will be equal to the
aggregate of the Stated Principal Balances of the
Non-Discount Mortgage Loans with respect to such
Distribution Date. The initial Notional Amount of
the Class X Certificates will be equal to the
aggregate of the Stated Principal Balances of the
Non-Discount Mortgage Loans as of the Cut-off
Date.
Certificates other than the
Offered Certificates........ In addition to the Offered Certificates, the
following Classes of Certificates will be issued
in the indicated approximate initial Class
Certificate Balances and will bear interest at
the indicated Pass-Through Rates, but are not
offered hereby:
Initial Class
Certificate Pass-Through
Balance Rate
---------- ---------------
Class (1)....... $ %
Class (1)....... $ %
Class (1)....... $ %
----------
(1) The Class ____, Class_______ and Class ____
Certificates will provide limited credit
support to the Senior Certificates and the other
Subordinated Certificates, as described herein.
Any information contained herein with respect to
the Class ___ , Class ____ and Class _____
Certificates is provided only to permit a better
understanding of the Offered Certificates.
- --------------------------------------------------------------------------------
S-3
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Designations
Regular Certificates........ All Classes of Certificates other than the Class
A-R Certificates.
Residual Certificates....... Class A-R Certificates.
Senior Certificates......... Class A- , Class_____, Class PO, Class X and
Class A-R Certificates.
Subordinated Certificates... Class B- , Class_____, and Class____Certificates.
Principal Only Certificates. Class PO Certificates.
Interest Only Certificates.. Class X Certificates.
Notional Amount
Certificates............... Class X Certificates.
Fixed Rate Certificates..... All Classes of Certificates other than the Class
PO and Class X Certificates.
Variable Rate Certificates.. Class X Certificates.
Physical Certificates....... Class PO, Class X and Class A-R Certificates and
the Subordinated Certificates.
Book-Entry Certificates..... All Classes of Certificates other than the
Physical Certificates.
Trust Fund.................... The Certificates will represent the entire
beneficial ownership interest in the Trust Fund,
which will consist primarily of the Mortgage
Pool.
Pooling and Servicing
Agreement................... The Certificates will be issued pursuant to a
Pooling and Servicing Agreement dated as of ____,
19__ (the "Agreement"), among the Depositor,
the Seller, the Master Servicer and the Trustee.
Depositor..................... CWABS, Inc. (the "Depositor"), a Delaware
corporation and a limited purpose finance
subsidiary of Countrywide Credit Industries, Inc.
See "The Depositor" in the Prospectus.
Seller and Master Servicer.... [Countrywide Home Loans, Inc. ("Countrywide"] or
the "Seller" and, in its capacity as master
servicer of the Mortgage Loans, the "Master
Servicer"). See "Servicing of Mortgage Loans --
The Master Servicer" herein. The Mortgage Loans
were originated or acquired in the normal course
of its business by the Seller and will be
acquired by the Depositor in a privately
negotiated transaction. The Master Servicer will
be
- --------------------------------------------------------------------------------
S-4
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<PAGE>
- --------------------------------------------------------------------------------
responsible for the servicing of the Mortgage
Loans and will receive the Master Servicing Fee
from interest collected on the Mortgage Loans.
See "Servicing of Mortgage Loans -Servicing
Compensation and Payment of Expenses" herein.
Trustee....................... __________________, a _____________________
organized under the laws of _____________________
(the "Trustee").
Cut-off Date.................. _________, 19__.
Closing Date.................. On or about ____________, 19__.
Determination Date............ The ______day of each month or, if such day is
not a business day, the preceding business day;
provided that the Determination Date in each
month will be at least two business days prior to
the related Distribution Date.
Mortgage Loans................ The Mortgage Pool will consist primarily of
30-year conventional [fixed-rate] mortgage loans
secured by first liens on one- to four-family
residential properties. Distributions of
principal and interest on the Certificates will
be based solely on payments received on the
Mortgage Loans, as described herein. See "The
Mortgage Pool" herein.
Distribution Date............. The ____ day of each month or, if such day is not
a business day, on the first business day
thereafter, commencing in ___________ 19 (each, a
"Distribution Date"). Distributions on each
Distribution Date will be made to
Certificateholders of record as of the related
Record Date, except that the final distribution
on the Certificates will be made only upon
presentment and surrender of the Certificates at
the Corporate Trust Office of the Trustee.
Record Date................... The Record Date for each Distribution Date will
be the last business day of the month preceding
the month of such Distribution Date.
Priority of Distributions..... Distributions will be made on each Distribution
Date from Available Funds in the following order
of priority: (i) to interest on each interest
bearing Class of Senior Certificates; (ii) to
principal on the Classes of Senior Certificates
then entitled to receive distributions of
principal, in the order and subject to the
priorities set forth herein under "Description of
the Certificates -- Principal," in each case in
an aggregate amount up to the maximum amount of
principal to be distributed on such Classes on
such Distribution Date; (iii) to any Class PO
Deferred Amounts with respect to the Class PO
Certificates, but only from amounts that would
otherwise be distributable on such Distribution
Date as principal of the Subordinated
Certificates; and (iv) to interest on and then
principal of each Class of
- --------------------------------------------------------------------------------
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Subordinated Certificates, in the order of their
numerical Class designations, beginning with the
Class __ Certificates, in each case subject to
the limitations set forth herein under
"Description of the Certificates -- Principal."
Under certain circumstances described herein,
distributions from Available Funds for a
Distribution Date that would otherwise be made on
the Subordinated Certificates may be distributed
instead on the Senior Certificates. See
"Description of the Certificates -- Allocation of
Losses" herein.
Distributions of Interest..... To the extent funds are available therefor, each
interest bearing Class of Certificates will be
entitled to receive interest in the amount of the
Interest Distribution Amount for such Class. The
Class PO Certificates are Principal Only
Certificates and will not bear interest. See
"Description of the Certificates -- Interest"
herein.
A. Interest Distribution
Amount..................... For each interest bearing Class of Certificates,
the amount of interest accrued during the related
Interest Accrual Period at the applicable
Pass-Through Rate on the related Class
Certificate Balance or Notional Amount, as the
case may be.
B. Pass-Through Rate........ The Pass-Through Rate for each interest bearing
Class of Offered Certificates for each
Distribution Date will be as set forth or
described on the cover page hereof.
The Pass-Through Rate for the Class X
Certificates for any Distribution Date will be
equal to the excess of (a) the weighted average
of the Net Mortgage Rates of the Non-Discount
Mortgage Loans over (b)____ % per annum. The
Pass-Through Rate for the Class X Certificates
for the first Distribution Date is expected to be
approximately ___% per annum.
With respect to each Distribution Date, the
"Interest Accrual Period" for each interest
bearing Class of Certificates will be the
calendar month preceding the month of such
Distribution Date.
Distributions of Principal.... On each Distribution Date, to the extent funds
are available therefor, principal distributions
in reduction of the Class Certificate Balances of
each Class of Certificates (other than the
Notional Amount Certificates) will be made in the
order and subject to the priorities set forth
herein under "Description of the Certificates --
Principal" in an aggregate amount equal to such
Class' allocable portion of the Senior Principal
Distribution Amount, the Class PO Principal
Distribution Amount or the Subordinated Principal
Distribution Amount, as applicable. The Notional
Amount Certificates do not have principal
balances and
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S-6
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- --------------------------------------------------------------------------------
are not entitled to any distributions in respect
of principal of the Mortgage Loans. See
"Description of the Certificates -- Principal"
herein.
Credit Enhancement -- General. Credit enhancement for the Senior Certificates
will be provided by the Subordinated Certificates
and credit enhancement for each Class of
Subordinated Certificates will be provided by the
Class or Classes of Subordinated Certificates
with higher numerical Class designations, as
described below. The aggregate of the initial
Class Certificate Balances of the Class ___ ,
Class _____ and Class ___ Certificates, which are
the only Certificates supporting the Class
Certificates, is expected to be approximately
$_______ .
Subordination................. The rights of holders of the Subordinated
Certificates to receive distributions with
respect to the Mortgage Loans in the Trust Fund
will be subordinated to such rights of holders of
the Senior Certificates, and the rights of the
holders of each Class of Subordinated
Certificates (other than the Class ______
Certificates) to receive such distributions will
be further subordinated to such rights of the
Class or Classes of Subordinated Certificates
with lower numerical Class designations, in each
case only to the extent described herein.
The subordination of the Subordinated
Certificates to the Senior Certificates, and the
further subordination within the Subordinated
Certificates, is intended to increase the
likelihood of timely receipt by the holders of
Certificates with higher relative payment
priority of the maximum amount to which they are
entitled on any Distribution Date and to provide
such holders protection against losses on the
Mortgage Loans to the extent described herein.
The Subordinated Certificates also provide
protection, to a lesser extent, against Special
Hazard Losses, Bankruptcy Losses and Fraud
Losses. However, in certain circumstances the
amount of available subordination (including the
limited subordination provided for certain types
of losses) may be exhausted and shortfalls in
distributions on the Certificates could result.
Holders of the Senior Certificates will bear
their proportionate share of any losses realized
on the Mortgage Loans in excess of the available
subordination amount. See "Description of the
Certificates -- Priority of Distributions Among
Certificates," " -- Allocation of Losses," and
"Credit Enhancement -- Subordination of Certain
Classes" herein.
Advances...................... The Master Servicer is obligated to make cash
advances ("Advances") with respect to delinquent
payments of principal of and interest on any
Mortgage Loan to the extent described herein. The
Trustee will be obligated to make any such
Advance if the Master Servicer fails in its
obligation to do so, to the
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
extent provided in the Agreement. See "Servicing
of Mortgage Loans -- Advances" herein.
Prepayment Considerations and
Risks; Reinvestment Risk.... The rate of principal payments on the Offered
Certificates, the aggregate amount of
distributions on the Offered Certificates and the
yield to maturity of the Offered Certificates
will be related to the rate and timing of
payments of principal on the Mortgage Loans.
Since the rate of payment of principal on the
Mortgage Loans will depend on future events and a
variety of factors, no assurance can be given as
to such rate or the rate of principal
prepayments. The extent to which the yield to
maturity of a Class of Offered Certificates may
vary from the anticipated yield may depend upon
the degree to which it is purchased at a discount
or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments,
liquidations and purchases of the Mortgage Loans.
Further, an investor should consider the risk
that, in the case of the Principal Only
Certificates and any other Offered Certificate
purchased at a discount, a slower than
anticipated rate of principal payments (including
prepayments) on the Mortgage Loans could result
in an actual yield to such investor that is lower
than the anticipated yield and, in the case of
the Interest Only Certificates and any other
Offered Certificate purchased at a premium, a
faster than anticipated rate of principal
payments could result in an actual yield to such
investor that is lower than the anticipated
yield. Investors in the Interest Only
Certificates should carefully consider the risk
that a rapid rate of principal payments on the
Mortgage Loans could result in the failure of
such investors to recover their initial
investments.
Because the Mortgage Loans may be prepaid at any
time, it is not possible to predict the rate at
which distributions of principal of the Offered
Certificates will be received. Since prevailing
interest rates are subject to fluctuation, there
can be no assurance that investors in the Offered
Certificates will be able to reinvest the
distributions thereon at yields equaling or
exceeding the yields on such Offered
Certificates. It is possible that yields on any
such reinvestments will be lower, and may be
significantly lower, than the yields on the
Offered Certificates. See "Yield, Prepayment and
Maturity Considerations" herein.
Optional Termination.......... On any Distribution Date on which the Pool
Principal Balance is less than 10% of the Cut-off
Date Pool Principal Balance, the Master Servicer
will have the option to purchase, in whole, the
Mortgage Loans and the REO Property, if any,
remaining in the Trust Fund. See "Description of
the Certificates -- Optional Termination" herein.
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S-8
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Federal Income Tax
Consequences................ An election will be made to treat the Trust Fund
as a "real estate mortgage investment conduit"
("REMIC") for federal income tax purposes. The
Regular Certificates will constitute "regular
interests" in the REMIC and the Residual
Certificates will constitute the sole class of
"residual interest" in the REMIC. The Class A-_,
Class PO and Class X Certificates will, and
depending on their respective issue prices
certain other Classes of Offered Certificates
may, be issued with original issue discount
("OID") for federal income tax purposes. See
"Certain Federal Income Tax Consequences" herein
and in the Prospectus.
The holders of the Class A-R Certificates will be
subject to special federal income tax rules that
may significantly reduce the after-tax yield of
such Certificates. Further, significant
restrictions apply to the transfer of the Class
A-R Certificates. See "Description of the
Certificates--Restrictions on Transfer of the
Class A-R Certificates" herein.
The Interest Only Certificates and the Principal
Only Certificates will, and certain other Classes
of Offered Certificates may, be issued with
original issue discount for federal income tax
purposes. See "Certain Federal Income Tax
Consequences" herein and "Certain Federal Income
Tax Consequences" in the Prospectus.
ERISA Considerations.......... The acquisition of an Offered Certificate by a
pension or other employee benefit plan (a "Plan")
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
could, in some instances, result in a prohibited
transaction or other violation of the fiduciary
responsibility provisions of ERISA and Section
4975 of the Internal Revenue Code of 1986, as
amended (the "Code").
Subject to the considerations and conditions
described under "ERISA Considerations" herein, it
is expected that the Senior Certificates (other
than the Class PO, Class X and Class A-R
Certificates) may be purchased by a Plan.
Any Plan fiduciary considering whether to
purchase any Offered Certificates on behalf of a
Plan should consult with its counsel regarding
the applicability of the provisions of ERISA and
the Code. See "ERISA Considerations" herein.
Legal Investment.............. The Senior Certificates and the Class ____
Certificates will constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
so long as they are rated in one of the two
highest rating categories by at least one
nationally recognized statistical
- --------------------------------------------------------------------------------
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<PAGE>
- --------------------------------------------------------------------------------
rating organization and, as such, are legal
investments for certain entities to the extent
provided for in SMMEA.
It is anticipated that the Class ____ and Class
____ Certificates will not be rated in one of the
two highest rating categories by a nationally
recognized statistical rating organization and,
therefore, will not constitute "mortgage related
securities" for purposes of SMMEA.
Institutions whose investment activities are
subject to review by federal or state regulatory
authorities should consult with their counsel or
the applicable authorities to determine whether
an investment in the Offered Certificates
complies with applicable guidelines, policy
statements or restrictions. See "Legal
Investment" in the Prospectus.
Ratings....................... It is a condition to the issuance of the Senior
Certificates that they be rated _____ by
("________") and _______ by ("_______" and,
together with _____, the "Rating Agencies"). See
"Ratings" herein. It is a condition to the
issuance of the Class _____ , Class ______ and
Class _____ Certificates that they be rated at
least _____ ,_____ and ______ , respectively, by
______. The ratings of the Offered Certificates
of any Class should be evaluated independently
from similar ratings on other types of
securities. A rating is not a recommendation to
buy, sell or hold securities and may be subject
to revision or withdrawal at any time by either
of the Rating Agencies. See "Ratings" herein.
- --------------------------------------------------------------------------------
S-10
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<PAGE>
THE MORTGAGE POOL
General
The Depositor will purchase the Mortgage Loans from [Countrywide] pursuant
to the Pooling and Servicing Agreement dated as of the Cut-off Date among
[Countrywide], as Seller and Master Servicer, the Depositor and the Trustee (the
"Agreement") and will cause the Mortgage Loans to be assigned to the Trustee for
the benefit of the holders of the Certificates (the "Certificateholders").
Under the Agreement, the Seller will make certain representations,
warranties and covenants to the Depositor relating to, among other things, the
due execution and enforceability of the Agreement and certain characteristics of
the Mortgage Loans and, subject to the limitations described below under " --
Assignment of the Mortgage Loans," will be obligated to repurchase or substitute
a similar mortgage loan for any Mortgage Loan as to which there exists deficient
documentation or an uncured material breach of any such representation, warranty
or covenant. The Seller will represent and warrant to the Depositor in the
Agreement that the Mortgage Loans were selected from among the outstanding one-
to four-family mortgage loans in the Seller's portfolio as to which the
representations and warranties set forth in the Agreement can be made and that
such selection was not made in a manner that would adversely affect the
interests of the Certificateholders. See "Loan Program -- Representations by
Sellers; Repurchases" in the Prospectus. Under the Agreement, the Depositor will
assign all its right, title and interest in and to such representations,
warranties and covenants (including the Seller's repurchase obligation) to the
Trustee for the benefit of Certificateholders. The Depositor will make no
representations or warranties with respect to the Mortgage Loans and will have
no obligation to repurchase or substitute Mortgage Loans with deficient
documentation or which are otherwise defective. [Countrywide] is selling the
Mortgage Loans without recourse and will have no obligation with respect to the
Certificates in its capacity as Seller other than the repurchase obligation
described above. The obligations of [Countrywide], as Master Servicer, with
respect to the Certificates are limited to the Master Servicer's contractual
servicing obligations under the Agreement.
Certain information with respect to the Mortgage Loans expected to be
included in the Mortgage Pool is set forth below. Prior to the Closing Date,
Mortgage Loans may be removed from the Mortgage Pool and other Mortgage Loans
may be substituted therefor. The Depositor believes that the information set
forth herein with respect to the Mortgage Pool as presently constituted is
representative of the characteristics of the Mortgage Pool as it will be
constituted at the Closing Date, although certain characteristics of the
Mortgage Loans in the Mortgage Pool may vary. Unless otherwise indicated,
information presented herein expressed as a percentage (other than rates of
interest) are approximate percentages based on the Stated Principal Balances of
the Mortgage Loans as of the Cut-off Date.
As of the Cut-off Date, the aggregate of the Stated Principal Balances of
the Mortgage Loans is expected to be approximately $_______ (the "Cut-off Date
Pool Principal Balance"). The Mortgage Loans provide for the amortization of the
amount financed over a series of substantially equal monthly payments. All the
Mortgage Loans provide for payments due as of the first day of each month (the
"Due Date"). At origination, substantially all of the Mortgage Loans had stated
terms to maturity of 30 years. The Mortgage Loans to be included in the Mortgage
Pool were originated or purchased by [Countrywide] and were originated
substantially in accordance with [Countrywide's] underwriting criteria for
sub-prime ("B&C") quality mortgage loans described herein. Sub-prime mortgage
loans are generally first mortgage loans made to borrowers with prior credit
difficulties.
Scheduled monthly payments made by the Mortgagors on the Mortgage Loans
("Scheduled Payments") either earlier or later than the scheduled Due Dates
thereof will not affect the amortization schedule or the relative application of
such payments to principal and interest. [All of the Mortgage Notes provide for
a ________ (__) day grace period for monthly payments. Any Mortgage Loan may be
prepaid in full or in part
S-11
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at any time; however, approximately ____% of the Mortgage Loans provide for the
payment by the borrower of a prepayment charge in limited circumstances on full
prepayments made within ____ years from the date of execution of the related
Mortgage Note. In general, the Mortgage Note provides that a prepayment charge
will apply if, during the first ____ years from the date of origination of such
Mortgage Loan, the borrower prepays such Mortgage Loan in full. The amount of
the prepayment charge will generally be equal to ____ months' advance interest
calculated on the basis of the rate in effect at the time of such prepayment on
the amount prepaid in excess of __% of the original balance of such Mortgage
Loan.]
Each Mortgage Loan was originated after ____________.
The latest stated maturity date of any Mortgage Loan is _________. The
earliest stated maturity date of any Mortgage Loan is ___________.
As of the Cut-off Date, no Mortgage Loan was delinquent more than 30 days.
[No] Mortgage Loan will be subject to a buydown agreement. [No] Mortgage
Loan provides for deferred interest or negative amortization.
[No Mortgage Loan had a Loan-to-Value Ratio at origination of more than 95%.
Each Mortgage Loan with a Loan-to-Value Ratio at origination of greater than 80%
is covered by a primary mortgage guaranty insurance policy issued by a mortgage
insurance company acceptable to FNMA or FHLMC, which policy provides coverage in
an amount equal to the excess of the original principal balance of the related
Mortgage Loan over 75% of the value of the related Mortgaged Property, plus
accrued interest thereon and related foreclosure expenses.
The Loan-to-Value Ratio of a Mortgage Loan is equal to (i) the principal
balance of such Mortgage Loan at the date of origination, divided by (ii) the
Collateral Value of the related Mortgaged Property. The Collateral Value of a
Mortgaged Property is the lesser of (x) the appraised value based on an
appraisal made for [Countrywide] by an independent fee appraiser at the time of
the origination of the related Mortgage Loan, and (y) the sales price of such
Mortgaged Property at such time of origination. With respect to a Mortgage Loan
the proceeds of which were used to refinance an existing mortgage loan, the
Collateral Value is the appraised value of the Mortgaged Property based upon the
appraisal obtained at the time of refinancing. No assurance can be given that
the values of the Mortgaged Properties have remained or will remain at their
levels as of the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of the Mortgage Loans become equal to
or greater than the value of the Mortgaged Properties, actual losses on the
Mortgage Loans could be higher than losses now generally experienced in the
mortgage lending industry.
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Mortgage Loans. Other than with respect to
rates of interest, percentages (approximate) are stated by Stated Principal
Balance of the Mortgage Loans as of the Cut-off Date and have been rounded in
order to total 100%.
S-12
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Mortgage Rates(1)
----------------------
Number of Mortgage Aggregate Principal Percent of
Mortgage Rates (%) Loans Balance Outstanding Mortgage Pool
- --------------------------------------------------------------------------------
6.250.............. $ %
6.750..............
6.875..............
7.000..............
7.125..............
7.250..............
7.375..............
7.500..............
7.625..............
7.750..............
7.875..............
8.000..............
8.125..............
8.250..............
8.375..............
8.500..............
8.625..............
8.750..............
8.875..............
9.000..............
9.125..............
9.250..............
9.375..............
9.500..............
9.875..............
10.000..............
-- ----------- ------------
Totals.............. $ 100.00%
-- ----------- ------------
-- ----------- ------------
- ---------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans (as so adjusted) is expected to be approximately _____%. Without
such adjustment, the weighted average Mortgage Rate of the Mortgage Loans
is expected to be approximately ______% per annum.
S-13
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<PAGE>
Original Loan-to-Value Ratios(1)
-------------------------------------
Original Loan-to-Value Number of Aggregate Principal Percent of
Rates (%) Mortgage Loans Balance Outstanding Mortgage Pool
- --------------------------------------------------------------------------------
50.00 and below..... $ %
50.01 to 55.00......
55.01 to 60.00......
60.01 to 65.00......
65.01 to 70.00......
70.01 to 75.00......
75.01 to 80.00......
80.01 to 85.00......
85.01 to 90.00......
90.01 to 95.00......
-- ----------- ------------
Totals.............. $ 100.00%
-- ----------- ------------
-- ----------- ------------
- ---------
(1) The weighted average original Loan-to-Value Ratio of the Mortgage Loans is
expected to be approximately _______%.
Current Mortgage Loan Principal Balances(1)
-----------------------------------------------
Current Mortgage Loan Number of Aggregate Principal Percent of
Amounts Mortgage Loans Balance Outstanding Mortgage Pool
- --------------------------------------------------------------------------------
$ 0 - $ 50,000... $ %
$ 50,001 - $ 100,000...
$100,001 - $ 150,000...
$150,001 - $ 200,000...
$200,001 - $ 250,000...
$250,001 - $ 300,000...
$300,001 - $ 350,000...
$350,001 - $ 400,000...
$400,001 - $ 450,000...
$450,001 - $ 500,000...
$500,001 - $ 550,000...
$550,001 - $ 600,000...
$600,001 - $ 650,000...
$650,001 - $ 750,000...
$750,001 - $1,000,000..
-- ----------- ------------
Totals................. $ 100.00%
-- ----------- ------------
-- ----------- ------------
- ---------
(1) As of the Cut-off Date, the average current Mortgage Loan principal
balance is expected to be approximately $_______ .
S-14
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Documentation Program for Mortgage Loans
---------------------------------------------
Type of Program Number of Mortgage Aggregate Principal Percent of
Loans Balance Outstanding Mortgage Pool
- --------------------------------------------------------------------------------
Full................ $ %
Alternative.........
Reduced.............
Streamlined.........
-- ----------- ------------
Totals.............. $ 100.00%
-- ----------- ------------
-- ----------- ------------
Type of Mortgaged Properties
--------------------------------
Property Type Number of Mortgage Aggregate Principal Percent of
Loans Balance Outstanding Mortgage Pool
- ------------------------------------------------------------------------------
Single Family........... $ %
Condominium.............
Two- to Four- Family
Planned Unit Development
-- ----------- ------------
Totals.................. $ 100.00%
-- ----------- ------------
-- ----------- ------------
Occupancy Types(1)
----------------------
Occupancy Type Number of Mortgage Aggregate Principal Percent of
Loans Balance Outstanding Mortgage Pool
- --------------------------------------------------------------------------------
Primary Residence... $ %
Investor Property...
Second Residence....
-- ----------- ------------
Totals.............. $ 100.00%
-- ----------- ------------
-- ----------- ------------
- ---------
(1) Based upon representations of the related mortgagors at the time of
origination.
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<PAGE>
State Distribution of Mortgaged Properties(1)
-------------------------------------------------
State Number of Mortgage Aggregate Principal Percent of
Loans Balance Outstanding Mortgage Pool
- --------------------------------------------------------------------------------
$ %
Other (less than [2]%)
-- ----------- ------------
Totals.............. $ 100.00%
-- ----------- ------------
-- ----------- ------------
- ---------
(1) Other includes other states with under [2]% concentrations individually.
No more than approximately % of the Mortgage Loans will be secured by
Mortgaged Properties located in any one postal zip code area.
Purpose of Mortgage Loans
-----------------------------
Loan Purpose Number of Mortgage Aggregate Principal Percent of
Loans Balance Outstanding Mortgage Pool
- --------------------------------------------------------------------------------
Purchase............... $ %
Refinance (rate/term)..
Refinance (cash out)...
-- ----------- ------------
Totals................. $ 100.00%
-- ----------- ------------
-- ----------- ------------
S-16
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<PAGE>
Remaining Terms to Maturity(1)
----------------------------------
Remaining Term to Number of Aggregate Principal Percent of
Maturity (Months) Mortgage Loans Balance Outstanding Mortgage Pool
- --------------------------------------------------------------------------------
360.................
359.................
358.................
357.................
356.................
355.................
354.................
353.................
352.................
351.................
349.................
348.................
347.................
345.................
344.................
343.................
342.................
341.................
338.................
335.................
334.................
333.................
332.................
328.................
326.................
325.................
321.................
320.................
319.................
318.................
314.................
297.................
293.................
259.................
240.................
238.................
237.................
-- ----------- ------------
Totals.............. $ 100.00%
-- ----------- ------------
-- ----------- ------------
- ---------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Mortgage Loans is expected to be approximately months.
S-17
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<PAGE>
Assignment of the Mortgage Loans
Pursuant to the Agreement, the Depositor on the Closing Date will sell,
transfer, assign, set over and otherwise convey without recourse to the Trustee
in trust for the benefit of the Certificateholders all right, title and interest
of the Depositor in and to each Mortgage Loan and all right, title and interest
in and to all other assets included in the Trust Fund, including all principal
and interest received on or with respect to the Mortgage Loans, exclusive of
principal and interest due on or prior to the Cut-off Date.
In connection with such transfer and assignment, the Depositor will deliver
or cause to be delivered to the Trustee, or a custodian for the Trustee, among
other things, the original promissory note (the "Mortgage Note") (and any
modification or amendment thereto) endorsed in blank without recourse, the
original instrument creating a first lien on the related Mortgaged Property (the
"Mortgage") with evidence of recording indicated thereon, an assignment in
recordable form of the Mortgage, the title policy with respect to the related
Mortgaged Property and, if applicable, all recorded intervening assignments of
the Mortgage and any riders or modifications to such Mortgage Note and Mortgage
(except for any such documents not returned from the public recording office,
which will be delivered to the Trustee as soon as the same is available to the
Depositor) (collectively, the "Mortgage File"). Assignments of the Mortgage
Loans to the Trustee (or its nominee) will be recorded in the appropriate public
office for real property records, except in states such as California where in
the opinion of counsel such recording is not required to protect the Trustee's
interests in the Mortgage Loan against the claim of any subsequent transferee or
any successor to or creditor of the Depositor or the Seller.
The Trustee will review each Mortgage File within 90 days of the Closing
Date (or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) and if any document in a Mortgage File is
found to be missing or defective in a material respect and the Seller does not
cure such defect within 90 days of notice thereof from the Trustee (or within
such longer period not to exceed ___ days after the Closing Date as provided in
the Agreement in the case of missing documents not returned from the public
recording office), the Seller will be obligated to repurchase the related
Mortgage Loan from the Trust Fund. Rather than repurchase the Mortgage Loan as
provided above, the Seller may remove such Mortgage Loan (a "Deleted Mortgage
Loan") from the Trust Fund and substitute in its place another mortgage loan (a
"Replacement Mortgage Loan"); however, such substitution is permitted only
within two years of the Closing Date and may not be made unless an opinion of
counsel is provided to the Trustee to the effect that such substitution will not
disqualify the REMIC or result in a prohibited transaction tax under the Code.
Any Replacement Mortgage Loan generally will, on the date of substitution, among
other characteristics set forth in the Agreement, (i) have a principal balance,
after deduction of all Scheduled Payments due in the month of substitution, not
in excess of, and not more than 10% less than, the Stated Principal Balance of
the Deleted Mortgage Loan (the amount of any shortfall to be deposited by the
Seller in the Certificate Account and held for distribution to the
Certificateholders on the related Distribution Date (a "Substitution Adjustment
Amount")), (ii) have a Mortgage Rate not lower than, and not more than 1% per
annum higher than, that of the Deleted Mortgage Loan, (iii) have a Loan-to-Value
Ratio not higher than that of the Deleted Mortgage Loan, (iv) have a remaining
term to maturity not greater than (and not more than one year less than) that of
the Deleted Mortgage Loan, and (v) comply with all of the representations and
warranties set forth in the Agreement as of the date of substitution. This cure,
repurchase or substitution obligation constitutes the sole remedy available to
Certificateholders or the Trustee for omission of, or a material defect in, a
Mortgage Loan document.
S-18
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<PAGE>
Underwriting Standards
The following is a description of the underwriting procedures customarily
employed by [Countrywide] with respect to B&C quality mortgage loans.
Countrywide produces its B&C quality mortgage loans through its Wholesale
Lending Division, which works with mortgage brokers and other entities located
throughout the United States. Prior to the funding of any B&C quality mortgage
loan, Countrywide underwrites the related mortgage loan in accordance with the
underwriting standards established by Countrywide. The mortgage loans are
underwritten centrally by a specialized group of underwriters who are familiar
with the unique characteristics of B&C mortgage loans. As a matter of policy,
Countrywide does not purchase any B&C quality mortgage loan that it has not
itself underwritten.
Countrywide's underwriting standards are primarily intended to evaluate the
value and adequacy of the mortgaged property as collateral for the proposed
mortgage loan but also take into consideration the borrower's credit standing
and repayment ability. On a case by case basis, Countrywide may determine that,
based upon compensating factors, a prospective borrower not strictly qualifying
under the underwriting risk category guidelines described below warrants an
underwriting exception. Compensating factors may include, low loan-to-value
ratio, low debt-to-income ratio, stable employment, and time in the same
residence. It is expected that a substantial number of the Mortgage Loans to be
included in the Mortgage Pool will have been originated based on such
underwriting exceptions.
Each prospective borrower completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. As part
of its quality control system, Countrywide reverifies information with respect
to the foregoing matters that has been provided by the mortgage brokerage
company prior to funding a loan and periodically audits files based on a random
sample of closed loans. If the loan-to-value ratio is greater than 70%,
Countrywide generally verifies the source funds for the down-payment;
Countrywide does not verify the source of such funds if the loan-to-value ratio
is 70% or less. Countrywide requires an independent credit bureau report on the
credit history of each applicant in order to evaluate the applicant's ability to
repay. 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, bankruptcy, repossession, suits or
judgments.
Countrywide's underwriting standards require an independent appraisal of the
mortgaged property which conforms to Federal Home Loan Mortgage Corporation
("FHLMC") and Federal National Mortgage Corporation ("FNMA") standards. Each
appraisal includes a market data analysis based on recent sales of comparable
homes in the area and, where deemed appropriate, replacement cost analysis based
on the current cost of constructing a similar home and generally is required to
have been made not earlier than 180 days prior to the date of origination of the
mortgage loan. Every independent appraisal is reviewed by a Countrywide
representative before the loan is funded, and an additional drive-by appraisal
is generally performed in connection with loan amounts over $350,000 with 80% or
higher loan-to-value ratios. A drive-by appraisal is an exterior examination of
the premises by the appraiser to determine that the property is in good
condition. In most cases, properties that are not in good condition (including
properties requiring major deferred maintenance) are not acceptable as
collateral for a B&C loan.
Countrywide's underwriting standards permit loans with loan-to-value ratios
at origination of up to 85% depending on the program, type and use of the
property, creditworthiness of the borrower and debt-to-income ratio. The maximum
combined loan-to-value ratio for purchase money mortgage loans, including any
second deeds of trust subordinate to Countrywide's first deed of trust, is 90%.
S-19
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<PAGE>
Countrywide requires title insurance on all B&C quality mortgage loans.
Countrywide also requires that fire and extended coverage casualty insurance be
maintained on the mortgaged property in an amount at least equal to the
principal balance or the replacement cost of the mortgaged property, whichever
is less.
Countrywide's B&C mortgage loan underwriting standards are less stringent
than the standards generally acceptable to FNMA and FHLMC with regard to the
borrower's credit standing and repayment ability because the standards focus
more on the value of the mortgaged property. Borrowers who qualify generally
have payment histories and debt-to-income ratios which would not satisfy FNMA
and FHLMC underwriting guidelines and may have a record of major derogatory
credit items such as outstanding judgments or prior bankruptcies. Countrywide's
B&C mortgage loan underwriting guidelines establish the maximum permitted
loan-to-value ratio for each loan type based upon these and other risk factors
with more risk factors resulting in lower loan-to-value ratios.
Countrywide underwrites or originates B&C quality mortgage loans pursuant to
alternative sets of underwriting criteria under its Full Documentation Loan
Program (the "Full Doc Program"), Simple Documentation Loan Program (the "Simple
Doc Program") and Stated Income Loan Program (the "Stated Income Program").
Under each of the underwriting programs, Countrywide verifies the loan
applicant's sources of income (except under the Stated Income Program),
calculates the amount of income from all sources indicated on the loan
application, reviews the credit history of the applicant, calculates the
debt-to-income ratio to determine the applicant's ability to repay the loan, and
reviews the appraisal of the mortgaged property for compliance with
Countrywide's underwriting standards.
The Simple Doc Program is an alternative documentation program whereby
income is verified using methods other than those employed by FNMA and FHLMC.
Under the Simple Doc Program, acceptable documentation of income consists of six
months' bank statements. In the case of self-employed individuals, acceptable
alternative documentation consists of a profit and loss statement supported by a
record of bank statements. Maximum loan-to-value ratios and maximum loan amounts
are generally lower than those permitted under the Full Doc Program.
Under the Stated Income Program, the borrower's employment and income
sources must be stated on the borrower's application. The borrower's income as
stated must be reasonable for the related occupation and such determination as
to reasonableness is subject to the loan underwriter's discretion. However, the
borrower's income as stated on the application is not independently verified.
Maximum loan-to-value ratios are generally lower than those permitted under the
Full Doc Program. Except as otherwise stated above, the same mortgage credit,
consumer credit and collateral related underwriting guidelines apply.
Under the Full Doc, Simple Doc, and Stated Income Programs, various risk
categories are used to grade the likelihood that the mortgagor will satisfy the
repayment conditions of the mortgage loan. These risk categories establish the
maximum permitted loan-to-value ratio and loan amount, given the occupancy
status of the mortgaged property and the borrower's credit history and
debt-to-income ratio. In general, higher debt-to-income ratios and more (or more
recent) major derogatory credit items such as outstanding judgments or prior
bankruptcies result in a loan being graded in a higher credit risk category.
SERVICING OF MORTGAGE LOANS
General
The Master Servicer will service the Mortgage Loans in accordance with the
terms set forth in the Pooling and Servicing Agreement. The Master Servicer may
perform any of its obligations under the Pooling and Servicing Agreement through
one or more subservicers. Notwithstanding any such subservicing arrangement, the
Master Servicer will remain liable for its servicing duties and obligations
under the Pooling
S-20
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<PAGE>
and Servicing Agreement as if the Master Servicer alone were servicing the
Mortgage Loans. [As of the Closing Date, the Master Servicer will service the
Mortgage Loans without subservicing arrangements.]
The information set forth in the following section through and including the
section captioned "Delinquency Status as of _____________, 199_" has been
provided by [Countrywide]. No representation is made by the Depositor or any of
its affiliates as to the accuracy or completeness of any such information.
The Master Servicer
[Countrywide Home Loans, Inc. ("Countrywide"), a New York corporation and a
subsidiary of Countrywide Credit Industries, Inc., will act as the Master
Servicer of the Mortgage Loans pursuant to the Pooling and Servicing Agreement.
Countrywide is engaged primarily in the mortgage banking business, and as such,
originates, purchases, sells and services mortgage loans. Countrywide originates
mortgage loans through a retail branch system and through mortgage loan brokers
and correspondents nationwide. Countrywide's mortgage loans are principally
first-lien, fixed or adjustable rate mortgage loans secured by single-family
residences.
As of __________, 199_, Countrywide provided servicing for approximately
$__________ million in B&C quality mortgages. As of ___________, 199_,
Countrywide also provided servicing for prime quality mortgage loans with an
aggregate principal balance of approximately $__________ billion, substantially
all of which are being serviced for unaffiliated persons.
The principal executive offices of Countrywide are located at 155 North Lake
Avenue, Pasadena, California 91101-7139. Its telephone number is (818) 304-8400.
Countrywide conducts operations from its headquarters in Pasadena and from
offices throughout the nation.]
Loan Servicing
Countrywide services substantially all of the mortgage loans it originates
or acquires. Countrywide has established standard policies for the servicing and
collection of B&C quality mortgage loans. Servicing includes, but is not limited
to, collecting and remitting mortgage loan payments, accounting for principal
and interest, holding escrow (impound) funds for payment of taxes and insurance,
making inspections as required of the mortgaged properties, preparation of tax
related information in connection with the mortgage loans, supervision of
delinquent mortgage loans, loss mitigation efforts, foreclosure proceedings and,
if applicable, the disposition of mortgaged properties, and generally
administering the mortgage loans, for which it receives servicing fees.
Billing statements with respect to B&C mortgage loans are mailed monthly by
Countrywide. The statement details all debits and credits and specifies the
payment due. Notice of changes in the applicable loan rate are provided by
Countrywide to the mortgagor with such statements. All payments are due by the
first day of the month.
Collection Procedures
When a mortgagor fails to make a payment on a mortgage loan, Countrywide
attempts to cause the deficiency to be cured by corresponding with the
mortgagor. In most cases, deficiencies are cured promptly. Pursuant to
Countrywide's B&C servicing procedures, Countrywide generally mails to the
mortgagor a notice of intent to foreclose after the loan becomes 31 days past
due (two payments due but not received) and, within 60 days thereafter, if the
loan remains delinquent, institutes appropriate legal action to foreclose on the
mortgaged property. Foreclosure proceedings may be terminated if the delinquency
is cured. Mortgage loans to borrowers in bankruptcy proceedings may be
restructured in accordance with law and with a view to maximizing recovery of
such loans, including any deficiencies.
S-21
<PAGE>
<PAGE>
Once foreclosure is initiated by Countrywide, a foreclosure tracking system
is used to monitor the progress of the proceedings. The system includes state
specific parameters to monitor whether proceedings are progressing within the
time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, Countrywide determines the amount of the
foreclosure bid and whether to liquidate the mortgage loan.
After foreclosure, Countrywide may liquidate the mortgaged property and
charge-off the loan balance which was not recovered through liquidation
proceeds. If foreclosed, the mortgaged property is sold at a public or private
sale and may be purchased by Countrywide.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, Countrywide's business judgment,
changes in the servicing portfolio and applicable laws and regulations.
Foreclosure and Delinquency Experience
The following table summarizes the delinquency experience of Countrywide's
B&C quality mortgage loans as of _________, 199_. A mortgage loan is
characterized as delinquent if the borrower has not paid the minimum payment due
by the due date. The table below excludes mortgage loans where the mortgage loan
is in foreclosure or the borrower has filed for bankruptcy. Since Countrywide
only began servicing B&C quality mortgage loans in August 1995, the delinquency
percentages may be affected by the size and relative lack of seasoning of the
servicing portfolio because many of such loans were not outstanding long enough
to give rise to some or all of the periods of delinquency indicated in the chart
below. Accordingly, the information should not be considered as a basis for
assessing the likelihood, amount, or severity of delinquency or losses on the
Mortgage Loans, and no assurances can be given that the foreclosure experience
presented in the second paragraph below the table will be indicative of such
experience on the Mortgage Loans.
Delinquency Status as of __________, 199_
Dollars Percent Units Percent
Current $__________ _____% ____ _____%
30-59 Days $__________ _____% ____ _____%
60-89 Days $__________ _____% ____ _____%
90+ Days $__________ _____% ____ _____%
Total $__________ 100.00% ____ 100.00%
[This table does not include ________ mortgage loans with principal balances
aggregating $_____________ that were sold, but were being serviced on an interim
basis pending transfer of servicing, as of ___________, 199_. As of the date
hereof, servicing with respect to such mortgage loans has been transferred.]
Delinquencies are reported on a contractual basis. As of _____________,
199_, __________ mortgage loans with an aggregate principal balance of
$______________ were in foreclosure and, there were ___________ loans in
bankruptcy with a combined loan balance of $______________.
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on B&C quality
mortgage loans. There can be no assurance that factors beyond
S-22
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<PAGE>
Countrywide's control, such as national or local economic conditions or downturn
in the real estate markets of its lending areas, will not result in increased
rates of delinquencies and foreclosure losses in the future.
[Over the last several years, there has been a general deterioration of the
real estate market and weakening economy in many regions of the country,
including __________. The general deterioration of the real estate market has
been reflected in increases in delinquencies of loans secured by real estate,
slower absorption rates of real estate into the market and lower sales prices
for real estate. The general weakening of the economy has been reflected in
decreases in the financial strength of borrowers and decreases in the value of
collateral serving as security for loans. If the real estate market and economy
continue to decline, Countrywide may experience an increase in delinquencies on
the loans it services and higher net losses on liquidated B&C loans.]
Servicing Compensation and Payment of Expenses
[The Master Servicer will be paid a monthly fee from interest collected with
respect to each Mortgage Loan (as well as from any liquidation proceeds from a
Liquidated Mortgage Loan that are applied to accrued and unpaid interest) equal
to one-twelfth of the Stated Principal Balance thereof multiplied by the
Servicing Fee Rate (such product, the "Servicing Fee"). The Servicing Fee Rate
for each Mortgage Loan will equal ________% per annum. The amount of the monthly
Servicing Fee is subject to adjustment with respect to prepaid Mortgage Loans,
as described herein under "--Adjustment to Master Servicing Fee in Connection
with Certain Prepaid Mortgage Loans." The Master Servicer is also entitled to
receive, as additional servicing compensation, amounts in respect of interest
paid on Principal Prepayments (as defined below) received from the 2nd day
through the 15th day of a month ("Prepayment Interest Excess"), all late payment
fees, assumption fees, prepayment penalties and other similar charges and all
reinvestment income earned on amounts on deposit in the Certificate Account and
Distribution Account. The Master Servicer is obligated to pay certain ongoing
expenses associated with the Mortgage Loans and incurred by the Trustee in
connection with its responsibilities under the Pooling and Servicing Agreement.]
Adjustment to Master Servicing Fee in Connection with Certain Prepaid
Mortgage Loans
When a borrower prepays a Mortgage Loan between Due Dates, the borrower is
required to pay interest on the amount prepaid only to the date of prepayment
and not thereafter. Except with respect to the month of the Cut-off Date,
principal prepayments by borrowers received by the Master Servicer from the
first day through the fifteenth day of a calendar month will be distributed to
Certificateholders on the Distribution Date in the same month in which such
prepayments are received and, accordingly, no shortfall in the amount of
interest to be distributed to Certificateholders with respect to the prepaid
Mortgage Loans results. Conversely, principal prepayments by borrowers received
by the Master Servicer from the sixteenth day (or, in the case of the first
Distribution Date, from the Cut-off Date) through the last day of a calendar
month will be distributed to Certificateholders on the Distribution Date in the
month following the month of receipt and, accordingly, a shortfall in the amount
of interest to be distributed to Certificateholders with respect to such prepaid
Mortgage Loans would result. Pursuant to the Agreement, the Master Servicing Fee
for any month will be reduced, but not by more than [one-half] of such Master
Servicing Fee, by an amount sufficient to pass through to Certificateholders the
full amount of interest to which they would be entitled in respect of each such
prepaid Mortgage Loan on the related Distribution Date. If shortfalls in
interest as a result of prepayments in any Prepayment Period exceed an amount
equal to one-half of the Master Servicing Fee otherwise payable on the related
Distribution Date, the amount of interest available to be distributed to
Certificateholders will be reduced by the amount of such excess. See
"Description of the Certificates -- Interest" herein.
S-23
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Advances
Subject to the following limitations, the Master Servicer will be required
to advance prior to each Distribution Date, from its own funds or funds in the
Certificate Account that do not constitute Available Funds for such Distribution
Date, an amount equal to the aggregate of payments of principal and interest on
the Mortgage Loans (net of the Master Servicing Fee with respect to the related
Mortgage Loans) which were due on the related Due Date and which were delinquent
on the related Determination Date, together with an amount equivalent to
interest on each Mortgage Loan as to which the related Mortgaged Property has
been acquired by the Trust Fund through foreclosure or deed-in-lieu of
foreclosure ("REO Property") (any such advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Master Servicer is obligated to make Advances with respect
to delinquent payments of principal of or interest on each Mortgage Loan to the
extent that such Advances are, in its reasonable judgment, recoverable from
future payments and collections or insurance payments or proceeds of liquidation
of the related Mortgage Loan. If the Master Servicer determines on any
Determination Date to make an Advance, such Advance will be included with the
distribution to Certificateholders on the related Distribution Date. Any failure
by the Master Servicer to make an Advance as required under the Agreement with
respect to the Certificates will constitute an Event of Default thereunder, in
which case the Trustee or the successor master servicer will be obligated to
make any such Advance, in accordance with the terms of the Agreement.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Agreement. Set forth below
are summaries of the specific terms and provisions pursuant to which the
Certificates will be issued. The following summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the Agreement. When particular provisions or terms used in
the Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
The Mortgage Pass-Through Certificates, Series 199_ - __ will consist of the
Class A- , Class ___ , Class PO, Class X and Class A-R Certificates
(collectively, the "Senior Certificates") and the Class B- , Class ___ and Class
____ Certificates (collectively, the "Subordinated Certificates"). The Senior
Certificates and Subordinated Certificates are collectively referred to herein
as the "Certificates." Only the Classes of Certificates listed on the cover page
hereof (collectively, the "Offered Certificates") are offered hereby. The
Classes of Offered Certificates will have the respective initial Class
Certificate Balances or initial Notional Amounts (subject to the permitted
variance) and Pass-Through Rates set forth or described on the cover hereof.
The Class Certificate Balance of any Class of Certificates as of any
Distribution Date is the initial Class Certificate Balance thereof (A) reduced
by the sum of (i) all amounts previously distributed to holders of Certificates
of such Class as payments of principal, (ii) the amount of Realized Losses
(including Excess Losses) allocated to such Class and (iii) in the case of any
Class of Subordinated Certificates, any amounts allocated to such Class in
reduction of its Class Certificate Balance in respect of payments of Class PO
Deferred Amounts, as described below under " -- Allocation of Losses". In
addition, the Class Certificate Balance of the Class of Subordinated
Certificates then outstanding with the highest numerical Class designation will
be reduced if and to the extent that the aggregate of the Class Certificate
Balances of all Classes of Certificates, following all distributions and the
allocation of Realized Losses on a Distribution
S-24
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<PAGE>
Date, exceeds the Pool Principal Balance as of the Due Date occurring in the
month of such Distribution Date. The Notional Amount Certificates do not have
principal balances and are not entitled to any distributions in respect of
principal of the Mortgage Loans.
The Notional Amount of the Class X Certificates for any Distribution Date
will be equal to the aggregate of the Stated Principal Balances of the
Non-Discount Mortgage Loans with respect to such Distribution Date. The initial
Notional Amount of the Class X Certificates will be equal to the aggregate of
the Stated Principal Balance of the Non-Discount Mortgage Loans as of the
Cut-off Date.
The Senior Certificates will have an initial aggregate principal balance of
approximately $_____ and will evidence in the aggregate an initial beneficial
ownership interest of approximately ____% in the Trust Fund. The Class B- ,
Class B- , Class B- , Class B- , Class B- and Class B- Certificates will each
evidence in the aggregate an initial beneficial ownership interest of
approximately ___%,___%,___%, ___%,___%, and ___%, respectively, in the Trust
Fund.
The Book-Entry Certificates will be issuable in book-entry form only. The
Physical Certificates will be issued in fully registered certificated form. The
Physical Certificates (other than Class A-R Certificates) offered hereby will be
issued in minimum dollar denominations of $25,000 and integral multiples of
$1,000 in excess thereof. A single Certificate of each such Class may be issued
in an amount different than described above. The Class A-R Certificates will be
issued as a single Certificate in a denomination of $1,000.
Book-Entry Certificates
Each Class of Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate initial Class Certificate Balance of each
such Class of Certificates and which will be held by a nominee of The Depository
Trust Company (together with any successor depository selected by the Depositor,
the "Depository"). Beneficial interests in the Book-Entry Certificates will be
held indirectly by investors through the book-entry facilities of the
Depository, as described herein. Investors may hold such beneficial interests in
the Book-Entry Certificates in minimum denominations representing an original
principal amount of $25,000 and integral multiples of $1,000 in excess thereof.
One investor of each Class of Book-Entry Certificates may hold a beneficial
interest therein that is not an integral multiple of $1,000. The Depositor has
been informed by the Depository that its nominee will be CEDE & Co. ("CEDE").
Accordingly, CEDE is expected to be the holder of record of the Book-Entry
Certificates. Except as described in the Prospectus under "Description of the
Certificates -- Book-Entry Certificates," no person acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate").
Unless and until Definitive Certificates are issued, it is anticipated that
the only "Certificateholder" of the Book-Entry Certificates will be CEDE, as
nominee of the Depository. Beneficial owners of the Book-Entry Certificates will
not be Certificateholders, as that term is used in the Agreement. Beneficial
owners are only permitted to exercise the rights of Certificateholders
indirectly through Financial Intermediaries and the Depository. Monthly and
annual reports on the Trust Fund provided to CEDE, as nominee of the Depository,
may be made available to beneficial owners upon request, in accordance with the
rules, regulations and procedures creating and affecting the Depository, and to
the Financial Intermediaries to whose Depository accounts the Book-Entry
Certificates of such beneficial owners are credited.
For a description of the procedures generally applicable to the Book-Entry
Certificates, see "Description of the Securities -- Book-Entry Registration of
Securities" in the Prospectus.
Payments on Mortgage Loans; Accounts
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On or prior to the Closing Date, the Master Servicer will establish an
account (the "Certificate Account"), which will be maintained in trust for the
benefit of the Certificateholders. Funds credited to the Certificate Account may
be invested for the benefit and at the risk of the Master Servicer in Permitted
Investments, as defined in the Agreement, that are scheduled to mature on or
prior to the business day preceding the next Distribution Date. On or prior to
the business day immediately preceding each Distribution Date, the Master
Servicer will withdraw from the Certificate Account the amount of Available
Funds and will deposit such Available Funds in an account established and
maintained with the Trustee on behalf of the Certificateholders (the
"Distribution Account").
Distributions
Distributions on the Certificates will be made by the Trustee on the __th
day of each month, or if such day is not a business day, on the first business
day thereafter, commencing in ____ 199_ (each, a "Distribution Date"), to the
persons in whose names such Certificates are registered at the close of business
on the last business day of the month preceding the month of such Distribution
Date (the "Record Date").
Distributions on each Distribution Date will be made by check mailed to the
address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a Certificateholder who holds 100% of a
Class of Certificates or who holds Certificates with an aggregate initial
Certificate Balance of $1,000,000 or more or who holds an Interest Only
Certificate and who has so notified the Trustee in writing in accordance with
the Agreement, by wire transfer in immediately available funds to the account of
such Certificateholder at a bank or other depository institution having
appropriate wire transfer facilities; provided, however, that the final
distribution in retirement of the Certificates will be made only upon
presentment and surrender of such Certificates at the Corporate Trust Office of
the Trustee.
Priority of Distributions Among Certificates
As more fully described herein, distributions will be made on each
Distribution Date from Available Funds in the following order of priority: (i)
to interest on each interest bearing Class of Senior Certificates; (ii) to
principal on the Classes of Senior Certificates then entitled to receive
distributions of principal, in the order and subject to the priorities set forth
herein under " -- Principal," in each case in an aggregate amount up to the
maximum amount of principal to be distributed on such Classes on such
Distribution Date; (iii) to any Class PO Deferred Amounts with respect to the
Class PO Certificates, but only from amounts that would otherwise be distributed
on such Distribution Date as principal of the Subordinated Certificates; and
(iv) to interest on and then principal of each Class of Subordinated
Certificates, in the order of their numerical Class designations, beginning with
the Class ____ Certificates, in each case subject to the limitations set forth
herein under "Description of the Certificates -- Principal."
"Available Funds" with respect to any Distribution Date will be equal to the
sum of (i) all scheduled installments of interest (net of the related Expense
Fees) and principal due on the Due Date in the month in which such Distribution
Date occurs and received prior to the related Determination Date, together with
any Advances in respect thereof; (ii) all proceeds of any primary mortgage
guaranty insurance policies and any other insurance policies with respect to the
Mortgage Loans, to the extent such proceeds are not applied to the restoration
of the related Mortgaged Property or released to the Mortgagor in accordance
with the Master Servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and all other cash amounts received and retained in connection with
the liquidation of defaulted Mortgage Loans, by foreclosure or otherwise
("Liquidation Proceeds") during the calendar month preceding the month of such
Distribution Date (in each case, net of unreimbursed expenses incurred in
connection with a liquidation or foreclosure and unreimbursed Advances, if any);
(iii) all partial or full prepayments received during the month preceding the
month of such Distribution Date; and (iv) amounts received with respect to such
Distribution Date as the Substitution Adjustment Amount or purchase price in
respect of a Deleted Mortgage Loan or a Mortgage Loan repurchased by the Seller
or the Master Servicer as of such Distribution Date, reduced by amounts in
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reimbursement for Advances previously made and other amounts as to which the
Master Servicer is entitled to be reimbursed from the Certificate Account
pursuant to the Agreement.
Interest
The Classes of Offered Certificates will have the respective Pass-Through
Rates set forth or described on the cover hereof.
The Pass-Through Rate for the Class X Certificates for any Distribution Date
will be equal to the excess of (a) the average of the Net Mortgage Rates of the
Non-Discount Mortgage Loans, weighted on the basis of the Stated Principal
Balances thereof, over (b)___% per annum. The Pass-Through Rate for the Class X
Certificates for the first Distribution Date is expected to be approximately
___% per annum. The Net Mortgage Rate for each Mortgage Loan is the Mortgage
Rate thereof less the Expense Fee Rate for such Mortgage Loan.
On each Distribution Date, to the extent of funds available therefor, each
interest bearing Class of Certificates will be entitled to receive an amount
allocable to interest (as to each such Class, the "Interest Distribution
Amount") with respect to the related Interest Accrual Period. The Interest
Distribution Amount for any interest bearing Class will be equal to the sum of
(i) interest at the applicable Pass-Through Rate on the related Class
Certificate Balance or Notional Amount, as the case may be, and (ii) the sum of
the amounts, if any, by which the amount described in clause (i) above on each
prior Distribution Date exceeded the amount actually distributed as interest on
such prior Distribution Dates and not subsequently distributed ("Unpaid Interest
Amounts"). The Class PO Certificates are Principal Only Certificates and will
not bear interest.
With respect to each Distribution Date, the "Interest Accrual Period" for
each interest bearing Class of Certificates will be the calendar month preceding
the month of such Distribution Date.
The interest entitlement described above for each Class of Certificates for
any Distribution Date will be reduced by the amount of "Net Interest Shortfalls"
for such Distribution Date. With respect to any Distribution Date, the "Net
Interest Shortfall" is equal to (i) the amount of interest that would otherwise
have been received with respect to any Mortgage Loan that was the subject of (x)
a Relief Act Reduction or (y) a Special Hazard Loss, Fraud Loss, Debt Service
Reduction or Deficient Valuation, after the exhaustion of the respective amounts
of coverage provided by the Subordinated Certificates for such types of losses
and (ii) any Net Prepayment Interest Shortfalls with respect to such
Distribution Date. A "Relief Act Reduction" is a reduction in the amount of
monthly interest payment on a Mortgage Loan pursuant to the Soldiers' and
Sailors' Civil Relief Act of 1940. See "Certain Legal Aspects of the Loans --
Soldiers' and Sailors' Civil Relief Act" in the Prospectus. With respect to any
Distribution Date, a "Net Prepayment Interest Shortfall" is the amount by which
the aggregate of Prepayment Interest Shortfalls during the calendar month
preceding the month of such Distribution Date exceeds the aggregate amount
payable on such Distribution Date by the Master Servicer as described under
"Servicing of Mortgage Loans -- Adjustment to Master Servicing Fee in Connection
with Certain Prepaid Mortgage Loans." A "Prepayment Interest Shortfall" is the
amount by which interest paid by a borrower in connection with a prepayment of
principal on a Mortgage Loan is less than one month's interest at the related
Mortgage Rate on the Stated Principal Balance of such Mortgage Loan. Each Class'
pro rata share of such Net Interest Shortfalls will be based on the amount of
interest such Class otherwise would have been entitled to receive on such
Distribution Date.
Accrued interest to be distributed on any Distribution Date will be
calculated, in the case of each interest bearing Class of Certificates, on the
basis of the related Class Certificate Balance or Notional Amount, as
applicable, immediately prior to such Distribution Date. Interest will be
calculated and payable on the basis of a 360-day year divided into twelve 30-day
months.
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In the event that, on a particular Distribution Date, Available Funds in the
Certificate Account applied in the order described above under " -- Priority of
Distributions Among Certificates" are not sufficient to make a full distribution
of the interest entitlement on the Certificates, interest will be distributed on
each Class of Certificates of equal priority based on the amount of interest
each such Class would otherwise have been entitled to receive in the absence of
such shortfall. Any Unpaid Interest Amount will be carried forward and added to
the amount holders of each such Class of Certificates will be entitled to
receive on the next Distribution Date. Such a shortfall could occur, for
example, if losses realized on the Mortgage Loans were exceptionally high or
were concentrated in a particular month. Any Unpaid Interest Amount so carried
forward will not bear interest.
Principal
General. All payments and other amounts received in respect of principal of
the Mortgage Loans will be allocated between (i) the Senior Certificates (other
than the Notional Amount Certificates and the Class PO Certificates) and the
Subordinated Certificates and (ii) the Class PO Certificates, in each case based
on the applicable Non-PO Percentage and the applicable PO Percentage,
respectively, of such amounts.
The Non-PO Percentage with respect to any Mortgage Loan with a Net Mortgage
Rate ("NMR") less than ___% (each such Mortgage Loan, a "Discount Mortgage
Loan") will be equal to NMR/___%. The Non-PO Percentage with respect to any
Mortgage Loan with a Net Mortgage Rate equal to or greater than ___% (each such
Mortgage Loan, a "Non-Discount Mortgage Loan") will be 100%. The PO Percentage
with respect to any Discount Mortgage Loan will be equal to (___% - NMR)/___%.
The PO Percentage with respect to any Non-Discount Mortgage Loan will be 0%.
Non-PO Formula Principal Amount. On each Distribution Date, the Non-PO
Formula Principal Amount will be distributed as principal of the Senior
Certificates (other than the Notional Amount Certificates and the Class PO
Certificates) and the Subordinated Certificates, to the extent of the amount
available from Available Funds for the distribution of principal on such
respective Classes, as described below.
The Non-PO Formula Principal Amount for any Distribution Date will equal the
sum of the applicable Non-PO Percentage of (a) all monthly payments of principal
due on each Mortgage Loan on the related Due Date, (b) the principal portion of
the purchase price of each Mortgage Loan that was repurchased by the Seller or
another person pursuant to the Agreement as of such Distribution Date, (c) the
Substitution Adjustment Amount in connection with any Deleted Mortgage Loan
received with respect to such Distribution Date, (d) any Insurance Proceeds or
Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that
are not yet Liquidated Mortgage Loans received during the calendar month
preceding the month of such Distribution Date, (e) with respect to each Mortgage
Loan that became a Liquidated Mortgage Loan during the calendar month preceding
the month of such Distribution Date, the amount of the Liquidation Proceeds
allocable to principal received with respect to such Mortgage Loan and (f) all
partial and full principal prepayments by borrowers received during the related
Prepayment Period.
Senior Principal Distribution Amount. On each Distribution Date prior to the
Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount, up to
the amount of the Senior Principal Distribution Amount for such Distribution
Date, will be distributed as principal of the following Classes of Senior
Certificates in the following order of priority:
(i) to the Class A-R Certificates until the Class Certificate Balance
thereof has been reduced to zero;
(ii) concurrently, to the Class ____ and Class _____ Certificates, pro
rata based on their respective Class Certificate Balances, until the Class
Certificate Balances thereof have been reduced to zero;
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(iii) sequentially, to the Class ___ and Class ____ Certificates, in that
order, until the respective Class Certificate Balances thereof have been
reduced to zero;
(iv) sequentially, to the Class ____ and Class ____ Certificates, in that
order, until the respective Class Certificate Balances thereof have been
reduced to zero; and
(v) to the Class ____ Certificates until the Class Certificate Balance
thereof has been reduced to zero.
Notwithstanding the foregoing, on each Distribution Date on and after the
Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount will
be distributed, concurrently as principal of the Classes of Senior Certificates
(other than the Notional Amount Certificates and the Class PO Certificates), pro
rata, in accordance with their respective Class Certificate Balances immediately
prior to such Distribution Date.
The Senior Credit Support Depletion Date is the date on which the Class
Certificate Balance of each Class of Subordinated Certificates has been reduced
to zero.
The Senior Principal Distribution Amount for any Distribution Date will
equal the sum of (i) the Senior Percentage of the applicable Non-PO Percentage
of all amounts described in clauses (a) through (d) of the definition of "Non-PO
Formula Principal Amount" for such Distribution Date, (ii) with respect to each
Mortgage Loan that became a Liquidated Mortgage Loan during the calendar month
preceding the month of such Distribution Date, the lesser of (x) the Senior
Percentage of the applicable Non-PO Percentage of the Stated Principal Balance
of such Mortgage Loan and (y) either (A) the Senior Prepayment Percentage or (B)
if an Excess Loss was sustained with respect to such Liquidated Mortgage Loan
during such preceding calendar month, the Senior Percentage of the applicable
Non-PO Percentage of the amount of the Liquidation Proceeds allocable to
principal received with respect to such Mortgage Loan, and (iii) the Senior
Prepayment Percentage of the applicable Non-PO Percentage of amounts described
in clause (f) of the definition of "Non-PO Formula Principal Amount" for such
Distribution Date; provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Mortgage Loan that is not a
Liquidated Mortgage Loan, the Senior Principal Distribution Amount will be
reduced on the related Distribution Date by the Senior Percentage of the
applicable Non-PO Percentage of the principal portion of such Bankruptcy Loss.
"Stated Principal Balance" means as to any Mortgage Loan and Due Date, the
unpaid principal balance of such Mortgage Loan as of such Due Date, as specified
in the amortization schedule at the time relating thereto (before any adjustment
to such amortization schedule by reason of any moratorium or similar waiver or
grace period), after giving effect to any previous partial prepayments and
Liquidation Proceeds received and to the payment of principal due on such Due
Date and irrespective of any delinquency in payment by the related Mortgagor.
The Pool Principal Balance with respect to any Distribution Date equals the
aggregate of the Stated Principal Balances of the Mortgage Loans outstanding on
the Due Date in the month preceding the month of such Distribution Date.
The Senior Percentage for any Distribution Date is the percentage equivalent
of a fraction the numerator of which is the aggregate of the Class Certificate
Balances of each Class of Senior Certificates (other than the Class PO
Certificates) immediately prior to such date and the denominator of which is the
aggregate of the Class Certificate Balances of all Classes of Certificates,
other than the Class PO Certificates, immediately prior to such date.
The Senior Prepayment Percentage for any Distribution Date occurring during
the ____ years beginning on the first Distribution Date will equal 100%.
Thereafter, the Senior Prepayment Percentage will, except as described below, be
subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of certain unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the Senior
Certificates which receive these unscheduled payments of principal
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(other than the Class PO Certificates) while, in the absence of Realized Losses,
increasing the interest in the Pool Principal Balance evidenced by the
Subordinated Certificates. Increasing the respective interest of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination provided by the
Subordinated Certificates.
The Senior Prepayment Percentage for any Distribution Date occurring on or
after the _____ anniversary of the first Distribution Date will be as follows:
for any Distribution Date in the _____ year thereafter, the Senior Percentage
plus __% of the Subordinated Percentage for such Distribution Date; for any
Distribution Date in the ______ year thereafter, the Senior Percentage plus __%
of the Subordinated Percentage for such Distribution Date; for any Distribution
Date in the _____ year thereafter, the Senior Percentage plus __% of the
Subordinated Percentage for such Distribution Date; for any Distribution Date in
the ______ year thereafter, the Senior Percentage plus __% of the Subordinated
Percentage for such Distribution Date; and for any Distribution Date thereafter,
the Senior Percentage for such Distribution Date (unless on any of the foregoing
Distribution Dates the Senior Percentage exceeds the initial Senior Percentage,
in which case the Senior Prepayment Percentage for such Distribution Date will
once again equal 100%). Notwithstanding the foregoing, no decrease in the Senior
Prepayment Percentage will occur if (i) the outstanding principal balance of all
Mortgage Loans delinquent __ days or more (averaged over the preceding _________
period), as a percentage of the aggregate principal balance of the Subordinated
Certificates (averaged over the preceding _________ period), is equal to or
greater than __%, or (ii) cumulative Realized Losses with respect to the
Mortgage Loans exceed (a) with respect to the Distribution Date on the _____
anniversary of the first Distribution Date, __% of the aggregate of the
principal balances of the Subordinated Certificates as of the Cut-off Date (the
"Original Subordinated Principal Balance"), (b) with respect to the Distribution
Date on the _____ anniversary of the first Distribution Date, __% of the
Original Subordinated Principal Balance, (c) with respect to the Distribution
Date on the _______ anniversary of the first Distribution Date, __% of the
Original Subordinated Principal Balance, (d) with respect to the Distribution
Date on the ______ anniversary of the first Distribution Date, __% of the
Original Subordinated Principal Balance, and (e) with respect to the
Distribution Date on the _____ anniversary of the first Distribution Date, __%
of the Original Subordinated Principal Balance. The Subordinated Prepayment
Percentage as of any Distribution Date will be calculated as the difference
between 100% and the Senior Prepayment Percentage for such date.
If on any Distribution Date the allocation to the Class of Senior
Certificates then entitled to distributions of principal of full and partial
principal prepayments and other amounts in the percentage required above would
reduce the outstanding Class Certificate Balance of such Class below zero, the
distribution to such Class of Certificates of the Senior Prepayment Percentage
of such amounts for such Distribution Date will be limited to the percentage
necessary to reduce the related Class Certificate Balance to zero.
Subordinated Principal Distribution Amount. On each Distribution Date, to
the extent of Available Funds therefor, the Non-PO Formula Principal Amount, up
to the amount of the Subordinated Principal Distribution Amount for such
Distribution Date, will be distributed as principal of the Subordinated
Certificates. Except as provided in the next paragraph, each Class of
Subordinated Certificates will be entitled to receive its pro rata share of the
Subordinated Principal Distribution Amount (based on its respective Class
Certificate Balance), in each case to the extent of the amount available from
Available Funds for distribution of principal. Distributions of principal of the
Subordinated Certificates will be made sequentially to the Classes of
Subordinated Certificates in the order of their numerical Class designations,
beginning with the Class ___ Certificates, until the respective Class
Certificate Balances thereof are reduced to zero. The Subordinated Percentage
for any Distribution Date will be calculated as the difference between 100% and
the Senior Percentage.
With respect to each Class of Subordinated Certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of such
Class and all Classes of Subordinated Certificates which have higher numerical
Class designations than such Class (the "Applicable Credit Support Percentage")
is less
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than the Applicable Credit Support Percentage for such Class on the date of
issuance of the Certificates (the "Original Applicable Credit Support
Percentage"), no distribution of partial principal prepayments and principal
prepayments in full will be made to any such Classes (the "Restricted Classes")
and the amount of partial principal prepayments and principal prepayments in
full otherwise distributable to the Restricted Classes will be allocated among
the remaining Classes of Subordinated Certificates, pro rata, based upon their
respective Class Certificate Balances, and distributed in the sequential order
described above.
The Class Subordination Percentage with respect to any Distribution Date and
each Class of Subordinated Certificates, will equal the fraction (expressed as a
percentage) the numerator of which is the Class Certificate Balance of such
Class of Subordinated Certificates immediately prior to such Distribution Date
and the denominator of which is the aggregate of the Class Certificate Balances
of all Classes of Certificates immediately prior to such Distribution Date.
The approximate Original Applicable Credit Support Percentages for the
Subordinated Certificates on the date of issuance of the Certificates are
expected to be as follows:
Class ........................................... %
Class ........................................... %
Class ........................................... %
Class ........................................... %
Class ........................................... %
Class ........................................... %
The Subordinated Principal Distribution Amount for any Distribution Date
will equal (A) the sum of (i) the Subordinated Percentage of the applicable
Non-PO Percentage of all amounts described in clauses (a) through (d) of the
definition of "Non-PO Formula Principal Amount" for such Distribution Date, (ii)
with respect to each Mortgage Loan that became a Liquidated Mortgage Loan during
the calendar month preceding the month of such Distribution Date, the applicable
Non-PO Percentage of the Liquidation Proceeds allocable to principal received
with respect to such Mortgage Loan, after application of such amounts pursuant
to clause (ii) of the definition of Senior Principal Distribution Amount, up to
the Subordinated Percentage of the applicable Non-PO Percentage of the Stated
Principal Balance of such Mortgage Loan and (iii) the Subordinated Prepayment
Percentage of the applicable Non-PO Percentage of the amounts described in
clause (f) of the definition of "Non-PO Formula Principal Amount" for such
Distribution Date reduced by (B) the amount of any payments in respect of Class
PO Deferred Amounts on the related Distribution Date.
Residual Certificates. The Class A-R Certificates will remain outstanding
for so long as the Trust Fund shall exist, whether or not they are receiving
current distributions of principal or interest. In addition to distributions of
interest and principal as described above, on each Distribution Date, the
holders of the Class A-R Certificates will be entitled to receive any Available
Funds remaining after payment of interest and principal on the Senior
Certificates and Class PO Deferred Amounts on the Class PO Certificates and
interest and principal on the Subordinated Certificates, as described above. It
is not anticipated that there will be any significant amounts remaining for any
such distribution.
Class PO Principal Distribution Amount. On each Distribution Date,
distributions of principal of the Class PO Certificates will be made in an
amount (the "Class PO Principal Distribution Amount") equal to the lesser of (x)
the PO Formula Principal Amount for such Distribution Date and (y) the product
of (i) Available Funds remaining after distribution of interest on the Senior
Certificates and (ii) a fraction, the numerator of which is the PO Formula
Principal Amount and the denominator of which is the sum of the PO Formula
Principal Amount and the Senior Principal Distribution Amount.
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If the Class PO Principal Distribution Amount on a Distribution Date is
calculated as provided in clause (y) above, principal distributions to holders
of the Senior Certificates (other than the Class PO Certificates) will be in an
amount equal to the product of (i) Available Funds remaining after distribution
of interest on the Senior Certificates and (ii) a fraction, the numerator of
which is the Senior Principal Distribution Amount and the denominator of which
is the sum of the Senior Principal Distribution Amount and the PO Formula
Principal Amount.
The PO Formula Principal Amount for any Distribution Date will equal the sum
of the applicable PO Percentage of (a) all monthly payments of principal due on
each Mortgage Loan on the related Due Date, (b) the principal portion of the
purchase price of each Mortgage Loan that was repurchased by the Seller or
another person pursuant to the Agreement as of such Distribution Date, (c) the
Substitution Adjustment Amount in connection with any Deleted Mortgage Loan
received with respect to such Distribution Date, (d) any Insurance Proceeds or
Liquidation Proceeds allocable to recoveries of principal of Mortgage Loans that
are not yet Liquidated Mortgage Loans received during the calendar month
preceding the month of such Distribution Date, (e) with respect to each Mortgage
Loan that became a Liquidated Mortgage Loan during the calendar month preceding
the month of such Distribution Date, the amount of Liquidation Proceeds
allocable to principal received with respect to such Mortgage Loan and (f) all
partial and full principal prepayments by borrowers received during the related
Prepayment Period; provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Discount Mortgage Loan that is not a
Liquidated Mortgage Loan, the PO Formula Principal Amount will be reduced on the
related Distribution Date by the applicable PO Percentage of the principal
portion of such Bankruptcy Loss.
Allocation of Losses
On each Distribution Date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount Mortgage Loan will be allocated
to the Class PO Certificates until the Class Certificate Balance thereof is
reduced to zero. The amount of any such Realized Loss, other than an Excess
Loss, allocated on or prior to the Senior Credit Support Depletion Date will be
treated as a Class PO Deferred Amount. To the extent funds are available on such
Distribution Date or on any future Distribution Date from amounts that would
otherwise be allocable to the Subordinated Principal Distribution Amount, Class
PO Deferred Amounts will be paid on the Class PO Certificates prior to
distributions of principal on the Subordinated Certificates. Any distribution of
Available Funds in respect of unpaid Class PO Deferred Amounts will not further
reduce the Class Certificate Balance of the Class PO Certificates. The Class PO
Deferred Amounts will not bear interest. The Class Certificate Balance of the
Class of Subordinated Certificates then outstanding with the highest numerical
Class designation will be reduced by the amount of any payments in respect of
Class PO Deferred Amounts. After the Senior Credit Support Depletion Date, no
new Class PO Deferred Amounts will be created.
On each Distribution Date, the applicable Non-PO Percentage of any Realized
Loss, other than any Excess Loss, will be allocated first to the Subordinated
Certificates, in the reverse order of their numerical Class designations
(beginning with the Class of Subordinated Certificates then outstanding with the
highest numerical Class designation), in each case until the Class Certificate
Balance of the respective Class of Certificates has been reduced to zero, and
then to the Senior Certificates (other than the Notional Amount Certificates and
the Class PO Certificates) pro rata, based upon their respective Class
Certificate Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess Losses
will be allocated pro rata among the Classes of Senior Certificates (other than
the Notional Amount Certificates and the Class PO Certificates) and the
Subordinated Certificates based upon their respective Class Certificate
Balances.
Because principal distributions are paid to certain Classes of Certificates
(other than the Class PO Certificates) before other Classes of Certificates,
holders of such Certificates that are entitled to receive
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principal later bear a greater risk of being allocated Realized Losses on the
Mortgage Loans than holders of Classes that are entitled to receive principal
earlier.
Realized Losses allocated to a Class of Certificates comprised of multiple
payment Components will be allocated pro rata among the Components of such Class
of Certificates based on their respective Component Balances.
In general, a "Realized Loss" means, with respect to a Liquidated Mortgage
Loan, the amount by which the remaining unpaid principal balance of the Mortgage
Loan exceeds the amount of Liquidation Proceeds applied to the principal balance
of the related Mortgage Loan. "Excess Losses" are (i) Special Hazard Losses in
excess of the Special Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in
excess of the Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess
of the Fraud Loss Coverage Amount. "Bankruptcy Losses" are losses that are
incurred as a result of Debt Service Reductions and Deficient Valuations.
"Special Hazard Losses" are Realized Losses in respect of Special Hazard
Mortgage Loans. "Fraud Losses" are losses sustained on a Liquidated Mortgage
Loan by reason of a default arising from fraud, dishonesty or misrepresentation.
See "Credit Enhancement -- Subordination of Certain Classes" herein.
A "Liquidated Mortgage Loan" is a defaulted Mortgage Loan as to which the
Master Servicer has determined that all recoverable liquidation and insurance
proceeds have been received. A "Special Hazard Mortgage Loan" is a Liquidated
Mortgage Loan as to which the ability to recover the full amount due thereunder
was substantially impaired by a hazard not insured against under a standard
hazard insurance policy of the type described in the Prospectus under "Credit
Enhancement -- Special Hazard Insurance Policies." See "Credit Enhancement --
Subordination of Certain Classes" herein.
Structuring Assumptions
Unless otherwise specified, the information in the tables in this Prospectus
Supplement has been prepared on the basis of the following assumed
characteristics of the Mortgage Loans and the following additional assumptions
(collectively, the "Structuring Assumptions"): (i) the Mortgage Pool consists of
Mortgage Loans with the following characteristics:
<TABLE>
<CAPTION>
Principal Mortgage Net Mortgage Original Term to Remaining Term to
Balance Rate Rate Maturity(in months) Maturity(in months) Loan Age
- ------------ -------- ------------ ------------------- ------------------- --------
<C> <C> <C> <S> <C> <C>
$ % %
$ % %
</TABLE>
(ii) the Mortgage Loans prepay at the specified constant percentages of SPA,
(iii) no defaults in the payment by Mortgagors of principal of and interest on
the Mortgage Loans are experienced, (iv) scheduled payments on the Mortgage
Loans are received on the first day of each month commencing in the calendar
month following the Closing Date and are computed prior to giving effect to
prepayments received on the last day of the prior month, (v) prepayments are
allocated as described herein without giving effect to loss and delinquency
tests, (vi) there are no Net Interest Shortfalls and prepayments represent
prepayments in full of individual Mortgage Loans and are received on the last
day of each month, commencing in the calendar month of the Closing Date, (vii)
the scheduled monthly payment for each Mortgage Loan has been calculated such
that each Mortgage Loan will amortize in amounts sufficient to repay the current
balance of such Mortgage Loan by its respective remaining term to maturity,
(viii) the initial Class Certificate Balance or Notional Amount, as applicable,
of each Class of Certificates is as set forth on the cover page hereof and under
"Summary of Terms -- Certificates other than the Offered Certificates", (ix)
interest accrues on each interest bearing Class of Certificates at the
applicable interest rate set forth or described on the cover hereof and as
described herein, (x) distributions in respect of the Certificates are received
in cash on the ____ day
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of each month commencing in the calendar month following the Closing Date, (xi)
the closing date of the sale of the Offered Certificates is the date set forth
under "Summary of Terms -- Closing Date," (xii) the Seller is not required to
repurchase or substitute for any Mortgage Loan, (xiii) the Master Servicer does
not exercise the option to repurchase the Mortgage Loans described herein under
" -- Optional Purchase of Defaulted Loans" and " -- Optional Termination" and
(xiv) no Class of Certificates becomes a Restricted Class. While it is assumed
that each of the Mortgage Loans prepays at the specified constant percentages of
SPA, this is not likely to be the case. Moreover, discrepancies may exist
between the characteristics of the actual Mortgage Loans which will be delivered
to the Trustee and characteristics of the Mortgage Loans used in preparing the
tables herein.
Prepayments of mortgage loans commonly are measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement is the Standard
Prepayment Assumption ("SPA"), which represents an assumed rate of prepayment
each month of the then outstanding principal balance of a pool of new mortgage
loans. SPA does not purport to be either a historical description of the
prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. 100% SPA assumes prepayment rates of 0.2% per annum of the then
unpaid principal balance of such pool of mortgage loans in the first month of
the life of such mortgage loans and an additional 0.2% per annum in each month
thereafter (for example, 0.4% per annum in the second month) until the 30th
month. Beginning in the 30th month and in each month thereafter during the life
of such mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per
annum. Multiples may be calculated from this prepayment rate sequence. For
example,___% SPA assumes prepayment rates will be___% per annum in month
one,___% per annum in month two, and increasing by ___% in each succeeding month
until reaching a rate of ___% per annum in month 30 and remaining constant at
%___ per annum thereafter. 0% SPA assumes no prepayments. There is no assurance
that prepayments will occur at any SPA rate or at any other constant rate.
Optional Purchase of Defaulted Loans
The Master Servicer may, at its option, purchase from the Trust Fund any
Mortgage Loan which is delinquent in payment by 91 days or more. Any such
purchase shall be at a price equal to 100% of the Stated Principal Balance of
such Mortgage Loan plus accrued interest thereon at the applicable Mortgage Rate
from the date through which interest was last paid by the related mortgagor or
advanced (and not reimbursed) to the first day of the month in which such amount
is to be distributed.
Optional Termination
The Master Servicer will have the right to repurchase all remaining Mortgage
Loans and REO Properties in the Mortgage Pool and thereby effect early
retirement of the Certificates, subject to the Pool Principal Balance of such
Mortgage Loans and REO Properties at the time of repurchase being less than or
equal to 10% of the Cut-off Date Pool Principal Balance. In the event the Master
Servicer exercises such option, the purchase price distributed with respect to
each Certificate will be 100% of its then outstanding principal balance plus any
Class PO Deferred Amounts in the case of the Class PO Certificates and, in the
case of an interest bearing Certificate, any unpaid accrued interest thereon at
the applicable Pass-Through Rate (in each case subject to reduction as provided
in the Agreement if the purchase price is based in part on the appraised value
of any REO Properties and such appraised value is less than the Stated Principal
Balance of the related Mortgage Loans). Distributions on the Certificates in
respect of any such optional termination will first be paid to the Senior
Certificates and then to the Subordinated Certificates. The proceeds from any
such distribution may not be sufficient to distribute the full amount to which
each Class of Certificates is entitled if the purchase price is based in part on
the appraised value of any REO Property and such appraised value is less than
the Stated Principal Balance of the related Mortgage Loan.
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The Trustee
______________________ will be the Trustee under the Agreement. The
Depositor and the Master Servicer may maintain other banking relationships in
the ordinary course of business with ___________________. Offered Certificates
may be surrendered at the Corporate Trust Office of the Trustee located at
_______________________________, Attention: _____________________ or at such
other addresses as the Trustee may designate from time to time.
Restrictions on Transfer of the Class A-R Certificates
The Class A-R Certificates will be subject to the restrictions on transfer
described in the Prospectus under "Certain Federal Income Tax Consequences --
REMIC Certificates -- Tax-Related Restrictions on Transfers of Residual
Certificates -- Disqualified Organizations," " -- Noneconomic Residual
Interests" and " -- Foreign Investors." The Agreement provides that the Class
A-R Certificates (in addition to certain other Classes of Certificates) may not
be acquired by an ERISA Plan. See "ERISA Considerations" herein. Each Class A-R
Certificate will contain a legend describing the foregoing restrictions.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The effective yield to the holders of the interest bearing Certificates will
be lower than the yield otherwise produced by the applicable rate at which
interest is passed through to such holders and the purchase price of such
Certificates because monthly distributions will not be payable to such holders
until the ____ day (or, if such day is not a business day, the following
business day) of the month following the month in which interest accrues on the
Mortgage Loans (without any additional distribution of interest or earnings
thereon in respect of such delay).
Delinquencies on the Mortgage Loans which are not advanced by or on behalf
of the Master Servicer (because amounts, if advanced, would be nonrecoverable),
will adversely affect the yield on the Certificates. Because of the priority of
distributions, shortfalls resulting from delinquencies not so advanced will be
borne first by the Subordinated Certificates, in the reverse order of their
numerical Class designations, and then by the Senior Certificates. If, as a
result of such shortfalls, the aggregate of the Class Certificate Balances of
all Classes of Certificates exceeds the Pool Principal Balance, the Class
Certificate Balance of the Class of Subordinated Certificates then outstanding
with the highest numerical Class designation will be reduced by the amount of
such excess.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, although all losses initially will be borne by the
Subordinated Certificates, in the reverse order of their numerical Class
designations (either directly or through distributions in respect of Class PO
Deferred Amounts on the Class PO Certificates), Excess Losses will be borne by
all Classes of Certificates (other than the Notional Amount Certificates) on a
pro rata basis. Moreover, since the Subordinated Principal Distribution Amount
for each Distribution Date will be reduced by the amount of any distributions on
such Distribution Date in respect of Class PO Deferred Amounts, the amount
distributable as principal on each such Distribution Date to each Class of
Subordinated Certificates then entitled to a distribution of principal will be
less than it otherwise would be in the absence of such Class PO Deferred
Amounts. As a result, the yields on the Offered Certificates will depend on the
rate and timing of Realized Losses, including Excess Losses. Excess Losses could
occur at a time when one or more Classes of Subordinated Certificates are still
outstanding and otherwise available to absorb other types of Realized Losses.
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Prepayment Considerations and Risks
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity of
the Offered Certificates will be related to the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans and by the rate of principal prepayments (including for this purpose
prepayments resulting from refinancing, liquidations of the Mortgage Loans due
to defaults, casualties, condemnations and repurchases by the Seller or Master
Servicer). The Mortgage Loans may be prepaid by the Mortgagors at any time
without a prepayment penalty. The Mortgage Loans are subject to the
"due-on-sale" provisions included therein. See "The Mortgage Pool" herein.
Prepayments, liquidations and purchases of the Mortgage Loans (including any
optional purchase by the Master Servicer of a defaulted Mortgage Loan and any
optional repurchase of the remaining Mortgage Loans in connection with the
termination of the Trust Fund, in each case as described herein) will result in
distributions on the Offered Certificates of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans. Since
the rate of payment of principal of the Mortgage Loans will depend on future
events and a variety of factors, no assurance can be given as to such rate or
the rate of principal prepayments. The extent to which the yield to maturity of
a Class of Offered Certificates may vary from the anticipated yield will depend
upon the degree to which such Offered Certificate is purchased at a discount or
premium, and the degree to which the timing of payments thereon is sensitive to
prepayments, liquidations and purchases of the Mortgage Loans. Further, an
investor should consider the risk that, in the case of the Principal Only
Certificates and any other Offered Certificate purchased at a discount, a slower
than anticipated rate of principal payments (including prepayments) on the
Mortgage Loans could result in an actual yield to such investor that is lower
than the anticipated yield and, in the case of the Interest Only Certificates
and any other Offered Certificate purchased at a premium, a faster than
anticipated rate of principal payments could result in an actual yield to such
investor that is lower than the anticipated yield. Investors in the Interest
Only Certificates should carefully consider the risk that a rapid rate of
principal payments on the Mortgage Loans could result in the failure of such
investors to recover their initial investments.
The rate of principal payments (including prepayments) on pools of mortgage
loans may vary significantly over time and may be influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. In general, if prevailing interest
rates were to fall significantly below the Mortgage Rates on the Mortgage Loans,
the Mortgage Loans could be subject to higher prepayment rates than if
prevailing interest rates were to remain at or above the Mortgage Rates on the
Mortgage Loans. Conversely, if prevailing interest rates were to rise
significantly, the rate of prepayments on the Mortgage Loans would generally be
expected to decrease. No assurances can be given as to the rate of prepayments
on the Mortgage Loans in stable or changing interest rate environments.
As described herein under "Description of the Certificates -- Principal,"
the Senior Prepayment Percentage of the applicable Non-PO Percentage of all
principal prepayments will be initially distributed to the Classes of Senior
Certificates (other than the Class PO Certificates) then entitled to receive
principal prepayment distributions. This may result in all (or a
disproportionate percentage) of such principal prepayments being distributed to
holders of such Classes of Senior Certificates and none (or less than their pro
rata share) of such principal prepayments being distributed to holders of the
Subordinated Certificates during the periods of time described in the definition
of "Senior Prepayment Percentage."
The timing of changes in the rate of prepayments on the Mortgage Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Mortgage Loans, the
greater the effect on an investor's yield to maturity. The effect on an
investor's yield as a result of principal
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payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during the period immediately following the issuance of the Offered
Certificates may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The tables below indicate the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of certain Classes of Certificates to various
constant percentages of SPA. The yields set forth in the tables were calculated
by determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the applicable Classes of Certificates,
would cause the discounted present value of such assumed streams of cash flows
to equal the assumed aggregate purchase prices of such Classes and converting
such monthly rates to corporate bond equivalent rates. Such calculations do not
take into account variations that may occur in the interest rates at which
investors may be able to reinvest funds received by them as distributions on
such Certificates and consequently do not purport to reflect the return on any
investment in any such Class of Certificate when such reinvestment rates are
considered.
Sensitivity of the Interest Only Certificates
As indicated in the table below, the yield to investors in the Class X
Certificates will be sensitive to the rate of principal payments (including
prepayments) of the Non-Discount Mortgage Loans (particularly those with high
Net Mortgage Rates), which generally can be prepaid at any time. On the basis of
the assumptions described below, the yield to maturity on the Class X
Certificates would be approximately 0% if prepayments were to occur at a
constant rate of approximately % SPA. If the actual prepayment rate of the
Non-Discount Mortgage Loans were to exceed the foregoing level for as little as
one month while equaling such level for the remaining months, the investors in
the Class X Certificates would not fully recoup their initial investments.
As described above under "Description of the Certificates -- General," the
Pass-Through Rate of the Class X Certificates in effect from time to time is
calculated by reference to the Net Mortgage Rates of the Non-Discount Mortgage
Loans. The Non-Discount Mortgage Loans will have higher Net Mortgage Rates (and
higher Mortgage Rates) than the other Mortgage Loans. In general, mortgage loans
with higher mortgage rates tend to prepay at higher rates than mortgage loans
with relatively lower mortgage rates in response to a given change in market
interest rates. As a result, the Non-Discount Mortgage Loans may prepay at
higher rates, thereby reducing the Pass-Through Rate and Notional Amount of the
Class X Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the purchase
price of the Class X Certificates (expressed as a percentage of initial Notional
Amount) is as follows:
Class Price*
------ --------
Class X................ %
- ---------
* The price does not include accrued interest. Accrued interest has been added
to such price in calculating the yields set forth in the table below.
Sensitivity of the Interest Only Certificates to Prepayments
(Pre-Tax Yields to Maturity)
SFA Prepayment/Assumption
------------------------------
Class 0% % % % % %
- ------------- --------- ---------- --------- ---------- ---------- ------
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Class X % % % % % %
It is unlikely that the Non-Discount Mortgage Loans will have the precise
characteristics described herein or that the Non-Discount Mortgage Loans will
all prepay at the same rate until maturity or that all of the Non-Discount
Mortgage Loans will prepay at the same rate or time. As a result of these
factors, the pre-tax yields on the Class X Certificates are likely to differ
from those shown in the table above, even if all of the Mortgage Loans prepay at
the indicated percentages of SPA. No representation is made as to the actual
rate of principal payments on the Mortgage Loans for any period or over the
lives of the Class X Certificates or as to the yield on the Class X
Certificates. Investors must make their own decisions as to the appropriate
prepayment assumptions to be used in deciding whether to purchase the Class X
Certificates.
Sensitivity of the Principal Only Certificates
The Class PO Certificates will be "principal only" certificates and will not
bear interest. As indicated in the table below, a lower than anticipated rate of
principal payments (including prepayments) on the Discount Mortgage Loans will
have a negative effect on the yield to investors in the Principal Only
Certificates.
As described above under "Description of the Certificates -- Principal," the
Class PO Principal Distribution Amount is calculated by reference to the
principal payments (including prepayments) on the Discount Mortgage Loans. The
Discount Mortgage Loans will have lower Net Mortgage Rates (and lower Mortgage
Rates) than the other Mortgage Loans. In general, mortgage loans with higher
mortgage rates tend to prepay at higher rates than mortgage loans with
relatively lower mortgage rates in response to a given change in market interest
rates. As a result, the Discount Mortgage Loans may prepay at lower rates,
thereby reducing the rate of payment of principal and the resulting yield of the
Class PO Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the aggregate
purchase price of the Principal Only Certificates (expressed as a percentage of
initial Class Certificate Balance) is as follows:
Class Price
------ --------
Class PO............. %
Sensitivity of the Principal Only Certificates to Prepayments
(Pre-Tax Yields to Maturity)
SFA Prepayment/Assumption
------------------------------
Class 0% % % % % %
- ------------- --------- ---------- --------- ---------- ---------- ------
Class PO % % % % % %
Class PO.......... % % % % % %
It is unlikely that the Discount Mortgage Loans will have the precise
characteristics described herein or that the Discount Mortgage Loans will all
prepay at the same rate until maturity or that all of such Discount Mortgage
Loans will prepay at the same rate or time. As a result of these factors, the
pre-tax yield on the Principal Only Certificates is likely to differ from those
shown in the table above, even if all of the Mortgage Loans prepay at the
indicated percentages of SPA. No representation is made as to the actual rate of
principal payments on the Mortgage Loans for any period or over the life of the
Principal Only Certificates or as to
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the yield on the Principal Only Certificates. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase the Principal Only Certificates.
Additional Information
The Depositor intends to file certain additional yield tables and other
computational materials with respect to one or more Classes of Underwritten
Certificates with the Commission in a report on Form 8-K to be dated_____, 19__.
Such tables and materials were prepared by each Underwriter at the request of
certain prospective investors, based on assumptions provided by, and satisfying
the special requirements of, such prospective investors. Such tables and
assumptions may be based on assumptions that differ from the Structuring
Assumptions. Accordingly, such tables and other materials may not be relevant to
or appropriate for investors other than those specifically requesting them.
Weighted Average Lives of the Offered Certificates
The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the net reduction, if any, of the Class Certificate
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results and
(c) dividing the sum by the aggregate amount of the net reductions in Class
Certificate Balance of such Certificate referred to in clause (a).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Mortgage Loans, see " -- Prepayment
Considerations and Risks" herein and "Yield and Prepayment Considerations" in
the Prospectus.
In general, the weighted average lives of the Offered Certificates will be
shortened if the level of prepayments of principal of the Mortgage Loans
increases. However, the weighted average lives of the Offered Certificates will
depend upon a variety of other factors, including the timing of changes in such
rate of principal payments and the priority sequence of distributions of
principal of the Classes of Certificates and the distribution of principal of
the Planned Principal Classes and the Targeted Principal Classes in accordance
with the Principal Balance Schedules herein. In particular, if the amount
available for distribution as principal of the Senior Certificates (other than
the Class PO Certificates) on any Distribution Date exceeds the amount required
to reduce the principal balances of the Planned Principal Classes and the
Targeted Principal Classes then entitled to receive a distribution of principal
to their respective scheduled balances as set forth in the Principal Balance
Schedules, such excess principal will be distributed on the remaining Classes of
Senior Certificates (other than the Class PO Certificates) on such Distribution
Date. Conversely, if the amount available for distribution of principal of the
Senior Certificates (other than the Class PO Certificates) on any Distribution
Date is less than the amount so required to reduce the Planned Principal Classes
and the Targeted Principal Classes then entitled to receive a distribution of
principal to their respective scheduled balances, no principal will be
distributed on such other Classes of Senior Certificates on such Distribution
Date. Accordingly, the rate of principal payments on the Mortgage Loans is
expected to have a greater effect on the weighted average life of the Support
Classes and under certain prepayment scenarios, the weighted average lives of
the Targeted Principal Classes, than on the weighted average lives of the
Planned Principal Classes.
The interaction of the foregoing factors may have different effects on
various Classes of Offered Certificates and the effects on any Class may vary at
different times during the life of such Class. Accordingly, no assurance can be
given as to the weighted average life of any Class of Offered Certificates.
Further, to the extent the prices of the Offered Certificates represent
discounts or premiums to their respective original Class Certificate Balances,
variability in the weighted average lives of such Classes of Offered
Certificates will result in variability in the related yields to maturity. For
an example of how the
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weighted average lives of the Classes of Offered Certificates may be affected at
various constant percentages of SPA, see the Decrement Tables below.
Decrement Tables
The following tables indicate the percentages of the initial Class
Certificate Balances of the Classes of Offered Certificates (other than the
Notional Amount Certificates) that would be outstanding after each of the dates
shown at various constant percentages of SPA and the corresponding weighted
average lives of such Classes. The tables have been prepared on the basis of the
Structuring Assumptions. It is not likely that (i) the Mortgage Loans will have
the precise characteristics described herein or (ii) all of the Mortgage Loans
will prepay at a constant percentage of SPA. Moreover, the diverse remaining
terms to maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the tables, which have been prepared using the
specified constant percentages of SPA, even if the remaining term to maturity of
the Mortgage Loans is consistent with the remaining terms to maturity of the
Mortgage Loans specified in the Structuring Assumptions.
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Percent of Initial Class Certificate
Balances Outstanding*
Class A-
------------
Distribution Date 0% % % % % % %
- ---------------------- -------- -------- -------- ------- ------- ------
Initial............... % % % % % %
19.................
19.................
19.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
-- -- -- -- -- --
Weighted Average
Life (in years)**..........
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Class
---------
Distribution Date 0% % % % % % %
- ---------------------- -------- -------- -------- ------- ------- ------
Initial............... % % % % % %
19.................
19.................
19.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
20.................
-- -- -- -- -- --
Weighted Average
Life (in years)**..........
- ---------
* Rounded to the nearest whole percentage.
** Determined as specified under "Weighted Average Lives of the Offered
Certificates" herein.
Last Scheduled Distribution Date
The Last Scheduled Distribution Date for each Class of Offered Certificates
is the Distribution Date in _____, 20__, which is the Distribution Date in the
____ month following the latest scheduled maturity date for any of the Mortgage
Loans. Since the rate of distributions in reduction of the Class Certificate
Balance or Notional Amount of each Class of Offered Certificates will depend on
the rate of payment (including
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prepayments) of the Mortgage Loans, the Class Certificate Balance or Notional
Amount of any such Class could be reduced to zero significantly earlier or later
than the Last Scheduled Distribution Date. The rate of payments on the Mortgage
Loans will depend on their particular characteristics, as well as on prevailing
interest rates from time to time and other economic factors, and no assurance
can be given as to the actual payment experience of the Mortgage Loans. See
"Yield, Prepayment and Maturity Considerations -Prepayment Considerations and
Risks" and " -- Weighted Average Lives of the Offered Certificates" herein and
"Yield and Prepayment Considerations" in the Prospectus.
The Subordinated Certificates
The weighted average life of, and the yield to maturity on, the Subordinated
Certificates, in increasing order of their numerical Class designation, will be
progressively more sensitive to the rate and timing of mortgagor defaults and
the severity of ensuing losses on the Mortgage Loans. If the actual rate and
severity of losses on the Mortgage Loans is higher than those assumed by a
holder of a Subordinated Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
assumption. The timing of losses on Mortgage Loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the Mortgage Pool are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized Losses on the Mortgage Loans will
reduce the Class Certificate Balances of the applicable Class of Subordinated
Certificates to the extent of any losses allocated thereto (as described under
"Description of the Certificates -- Allocation of Losses" herein), without the
receipt of cash attributable to such reduction. In addition, shortfalls in cash
available for distributions on the Subordinated Certificates will result in a
reduction in the Class Certificate Balance of the Class of Subordinated
Certificates then outstanding with the highest numerical Class designation if
and to the extent that the aggregate of the Class Certificate Balances of all
Classes of Certificates, following all distributions and the allocation of
Realized Losses on a Distribution Date, exceeds the Pool Principal Balance as of
the Due Date occurring in the month of such Distribution Date. As a result of
such reductions, less interest will accrue on such Class of Subordinated
Certificates than otherwise would be the case. The yield to maturity of the
Subordinated Certificates will also be affected by the disproportionate
allocation of principal prepayments to the Senior Certificates, Net Interest
Shortfalls, other cash shortfalls in Available Funds and distribution of funds
to Class PO Certificateholders otherwise available for distribution on the
Subordinated Certificates to the extent of reimbursement for Class PO Deferred
Amounts. See "Description of the Certificates -- Allocation of Losses" herein.
If on any Distribution Date, the Applicable Credit Support Percentage for
any Class of Subordinated Certificates is less than its Original Applicable
Credit Support Percentage, all partial principal prepayments and principal
prepayments in full available for distribution on the Subordinated Certificates
will be allocated solely to such Class and all other Classes of Subordinated
Certificates with lower numerical Class designations, thereby accelerating the
amortization thereof relative to that of the Restricted Classes and reducing the
weighted average lives of such Classes of Subordinated Certificates receiving
such distributions. Accelerating the amortization of the Classes of Subordinated
Certificates with lower numerical Class designations relative to the other
Classes of Subordinated Certificates is intended to preserve the availability of
the subordination provided by such other Classes.
CREDIT ENHANCEMENT
Subordination of Certain Classes
The rights of the holders of the Subordinated Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the holders of the Senior Certificates and the rights of the holders
of each Class of Subordinated Certificates (other than the Class B-1
Certificates) to receive
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such distributions will be further subordinated to such rights of the Class or
Classes of Subordinated Certificates with lower numerical Class designations, in
each case only to the extent described herein. The subordination of the
Subordinated Certificates to the Senior Certificates and the subordination of
the Classes of Subordinated Certificates with higher numerical Class
designations to those with lower numerical Class designations is intended to
increase the likelihood of receipt, respectively, by the Senior
Certificateholders and the holders of Subordinated Certificates with lower
numerical Class designations of the maximum amount to which they are entitled on
any Distribution Date and to provide such holders protection against Realized
Losses, other than Excess Losses. In addition, the Subordinated Certificates
will provide limited protection against Special Hazard Losses, Bankruptcy Losses
and Fraud Losses up to the Special Hazard Loss Coverage Amount, Bankruptcy Loss
Coverage Amount and Fraud Loss Coverage Amount, respectively, as described
below. The applicable Non-PO Percentage of Realized Losses, other than Excess
Losses, will be allocated to the Class of Subordinated Certificates then
outstanding with the highest numerical Class designation. In addition, the Class
Certificate Balance of such Class of Subordinated Certificates will be reduced
by the amount of distributions on the Class PO Certificates in reimbursement for
Class PO Deferred Amounts.
The Subordinated Certificates will provide limited protection to the Classes
of Certificates of higher relative priority against (i) Special Hazard Losses in
an initial amount expected to be up to approximately $____ (the "Special Hazard
Loss Coverage Amount"), (ii) Bankruptcy Losses in an initial amount expected to
be up to approximately $____ (the "Bankruptcy Loss Coverage Amount") and (iii)
Fraud Losses in an initial amount expected to be up to approximately $_____ (the
"Fraud Loss Coverage Amount").
The Special Hazard Loss Coverage Amount will be reduced, from time to time,
to be an amount equal on any Distribution Date to the lesser of (a) the greatest
of (i) __% of the aggregate of the principal balances of the Mortgage Loans,
(ii) _____ the principal balance of the largest Mortgage Loan and (iii) the
aggregate principal balances of the Mortgage Loans secured by Mortgaged
Properties located in the single California postal zip code area having the
highest aggregate principal balance of any such zip code area and (b) the
Special Hazard Loss Coverage Amount as of the Closing Date less the amount, if
any, of losses attributable to Special Hazard Mortgage Loans incurred since the
Closing Date. All principal balances for the purpose of this definition will be
calculated as of the first day of the month preceding such Distribution Date
after giving effect to scheduled installments of principal and interest on the
Mortgage Loans then due, whether or not paid.
The Fraud Loss Coverage Amount will be reduced, from time to time, by the
amount of Fraud Losses allocated to the Certificates. In addition, on each
anniversary of the Cut-off Date, the Fraud Loss Coverage Amount will be reduced
as follows: (a) on the _____, ______, _____ and ______ anniversaries of the
Cut-off Date, to an amount equal to the lesser of (i) __% of the then current
Pool Principal Balance and (ii) the excess of the Fraud Loss Coverage Amount as
of the preceding anniversary of the Cut-off Date over the cumulative amount of
Fraud Losses allocated to the Certificates since such preceding anniversary and
(b) on the _____ anniversary of the Cut-off Date, to zero.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the Certificates.
The amount of coverage provided by the Subordinated Certificates for Special
Hazard Losses, Bankruptcy Losses and Fraud Losses may be cancelled or reduced
from time to time for each of the risks covered, provided that the then current
ratings of the Certificates assigned by the Rating Agencies are not adversely
affected thereby without regard to the guaranty provided by the Policy. In
addition, a reserve fund or other form of credit enhancement may be substituted
for the protection provided by the Subordinated Certificates for Special Hazard
Losses, Bankruptcy Losses and Fraud Losses.
S-44
<PAGE>
<PAGE>
As used herein, a "Deficient Valuation" is a bankruptcy proceeding whereby
the bankruptcy court may establish the value of the Mortgaged Property at an
amount less than the then outstanding principal balance of the Mortgage Loan
secured by such Mortgaged Property or may reduce the outstanding principal
balance of a Mortgage Loan. In the case of a reduction in the value of the
related Mortgaged Property, the amount of the secured debt could be reduced to
such value, and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the Mortgaged Property by the bankruptcy court.
In addition, certain other modifications of the terms of a Mortgage Loan can
result from a bankruptcy proceeding, including the reduction (a "Debt Service
Reduction") of the amount of the monthly payment on the related Mortgage Loan.
Notwithstanding the foregoing, no such occurrence shall be considered a Debt
Service Reduction or Deficient Valuation so long as the Master Servicer is
pursuing any other remedies that may be available with respect to the related
Mortgage Loan and (i) such Mortgage Loan is not in default with respect to
payment due thereunder or (ii) scheduled monthly payments of principal and
interest are being advanced by the Master Servicer without giving effect to any
Debt Service Reduction or Deficient Valuation.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Certificates
against the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the Trust
Fund as a REMIC. The Regular Certificates will constitute the regular interests
in the REMIC. The Residual Certificates will constitute the sole class of
"residual interest" in the REMIC.
The Regular Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting.
The Principal Only Certificates will be treated for federal income tax
purposes as having been issued with an amount of Original Issue Discount ("OID")
equal to the difference between their principal balance and their issue price.
Although the tax treatment is not entirely certain, Notional Amount Certificates
will be treated as having been issued with OID for federal income tax purposes
equal to the excess of all expected payments of interest on such Certificates
over their issue price. Although unclear, a holder of a Notional Amount
Certificate may be entitled to deduct a loss to the extent that its remaining
basis exceeds the maximum amount of future payments to which such
Certificateholder would be entitled if there were no further prepayments of the
Mortgage Loans. The remaining Classes of Regular Certificates, depending on
their respective issue prices (as described in the Prospectus under "Certain
Federal Income Tax Consequences"), may be treated as having been issued with OID
for federal income tax purposes. For purposes of determining the amount and rate
of accrual of OID and market discount, the Trust Fund intends to assume that
there will be prepayments on the Mortgage Loans at a rate equal to___% SPA (the
"Prepayment Assumption"). No representation is made as to whether the Mortgage
Loans will prepay at the foregoing rate or any other rate. See "Yield,
Prepayment and Maturity Considerations" herein and "Certain Federal Income Tax
Consequences" in the Prospectus. Computing accruals of OID in the manner
described in the Prospectus may (depending on the actual rate of prepayments
during the accrual period) result in the accrual of negative amounts of OID on
the Certificates issued with OID in an accrual period. Holders will be entitled
to offset negative accruals of OID only against future OID accrual on such
Certificates.
S-45
<PAGE>
<PAGE>
If the holders of any Regular Certificates are treated as holding such
Certificates at a premium, such holders should consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
As is described more fully under "Certain Federal Income Tax Consequences"
in the Prospectus, the Offered Certificates will represent qualifying assets
under Sections 593(d), 856(c)(5)(A) and 7701(a)(19)(C) of the Code, and net
interest income attributable to the Offered Certificates will be "interest on
obligations secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, to the extent the assets of the Trust Fund are assets
described in such sections. The Regular Certificates will represent qualifying
assets under Section 860G(a)(3) if acquired by a REMIC within the prescribed
time periods of the Code.
The holders of the Residual Certificates must include the taxable income of
the REMIC in their federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to such holders during certain periods.
All or a portion of the taxable income from a Residual Certificate recognized by
a holder may be treated as "excess inclusion" income, which with limited
exceptions, is subject to U.S federal income tax.
Prospective purchasers of a Residual Certificate should consider carefully
the tax consequences of an investment in Residual Certificates discussed in the
Prospectus and should consult their own tax advisors with respect to those
consequences. See "Certain Federal Income Tax Consequences -- REMIC Certificates
- -b. Residual Certificates" in the Prospectus. Specifically, prospective holders
of Residual Certificates should consult their tax advisors regarding whether, at
the time of acquisition, a Residual Certificate will be treated as a
"noneconomic" residual interest, a "non-significant value" residual interest and
a "tax avoidance potential" residual interest. See "Certain Federal Income Tax
Consequences -- Tax-Related Restrictions on Transfer of Residual Certificates --
Noneconomic Residual Certificates -- Residual Certificates -- Mark to Market
Rules -- Residual Certificates -- Excess Inclusions and -- Tax-Related
Restrictions on Transfers of Residual Certificates -- Foreign Investors" in the
Prospectus. Additionally, for information regarding Prohibited Transactions and
Treatment of Realized Losses, see "Certain Federal Income Tax Consequences --
Prohibited Transactions and Other Taxes" and " -- REMIC Certificates -- a.
Regular Certificates -Treatment of Realized Losses" in the Prospectus.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan (as defined below) to
acquire any of the Offered Certificates should consult with its counsel with
respect to the potential consequences under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and/or the Code, of the Plan's
acquisition and ownership of such Certificates. See "ERISA Considerations" in
the Prospectus. Section 406 of ERISA prohibits "parties in interest" with
respect to an employee benefit plan subject to ERISA and/or the excise tax
provisions set forth under Section 4975 of the Code (a "Plan") from engaging in
certain transactions involving such Plan and its assets unless a statutory or
administrative exemption applies to the transaction. Section 4975 of the Code
imposes certain excise taxes on prohibited transactions involving Plans and
other arrangements (including, but not limited to, individual retirement
accounts) described under that Section; ERISA authorizes the imposition of civil
penalties for prohibited transactions involving Plans not subject to the
requirements of Section 4975 of the Code.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan that is
qualified and exempt from taxation under
S-46
<PAGE>
<PAGE>
Sections 401(a) and 501(a) of the Code may nonetheless be subject to the
prohibited transaction rules set forth in Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary that decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investment to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has granted an individual administrative
exemption to ____(Prohibited Transaction Exemption ____, Exemption Application
No. D-___ , Fed. Reg.____ (__)(___)(the "Exemption") 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 Exemption. The Exemption applies to mortgage
loans such as the Mortgage Loans in the Trust Fund.
For a general description of the Exemption and the conditions that must be
satisfied for the Exemption to apply, see "ERISA Considerations" in the
Prospectus.
It is expected that the Exemption will apply to the acquisition and holding
by Plans of the Senior Certificates (other than the Class , Class PO, Class X
and Class A-R Certificates) and that all conditions of the Exemption other than
those within the control of the investors will be met. In addition, as of the
date hereof, there is no single Mortgagor that is the obligor on five percent
(5%) of the Mortgage Loans included in the Trust Fund by aggregate unamortized
principal balance of the assets of the Trust Fund. Because the Class , Class PO
and Class X Certificates are not being purchased by either Underwriter, such
Classes of Certificates do not currently meet the requirements of the Exemption
or any comparable individual administrative exemption granted to either
Underwriter. Consequently, the sale or exchange of the Class , Class PO and
Class X Certificates may be made only under the conditions set forth for the
Class B- , Class B- and Class B- Certificates below.
Because the characteristics of the Class B- , Class B- , Class B- and Class
A-R Certificates may not meet the requirements of PTCE 83-1, the Exemption or
any other issued exemption under ERISA, the purchase and holding of the Class B-
, Class B- , Class B- and Class A-R Certificates by a Plan or by individual
retirement accounts or other plans subject to Section 4975 of the Code may
result in prohibited transactions or the imposition of excise taxes or civil
penalties. Consequently, transfers of the Class B- , Class B- , Class B- and
Class A-R Certificates will not be registered by the Trustee unless the Trustee
receives: (i) a representation from the transferee of such Certificate,
acceptable to and in form and substance satisfactory to the Trustee, to the
effect that such transferee is not an employee benefit plan subject to Section
406 of ERISA or a plan or arrangement subject to Section 4975 of the Code, nor a
person acting on behalf of any such plan or arrangement nor using the assets of
any such plan or arrangement to effect such transfer; (ii) if the purchaser is
an insurance company, a representation that the purchaser is an insurance
company which is purchasing such Certificates with funds contained in an
"insurance company general account" (as such term is defined in Section V(e) of
Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the
purchase and holding of such Certificates are covered under PTCE 95-60; or (iii)
an opinion of counsel satisfactory to the Trustee that the purchase or holding
of such Certificate by a Plan, any person acting on behalf of a Plan or using
such Plan's assets, will not result in the assets of the Trust Fund being deemed
to be "plan assets" and subject to the prohibited transaction requirements of
ERISA and the Code and will not subject the Trustee to any obligation in
addition to those undertaken in the Agreement. Such representation as described
above shall be deemed to have been made to the Trustee by the transferee's
S-47
<PAGE>
<PAGE>
acceptance of a Class B- , Class B- or Class B- Certificate. In the event that
such representation is violated, or any attempt to transfer to a plan or person
acting on behalf of a Plan or using such Plan's assets is attempted without such
opinion of counsel, such attempted transfer or acquisition shall be void and of
no effect.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1
described in the Prospectus and the Exemption, and the potential consequences in
their specific circumstances, prior to making an investment in any of the
Offered Certificates. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and
diversification, an investment in any of the Offered 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and the Underwriters, the Depositor has agreed to sell to
the Underwriters, and each Underwriter has agreed to purchase from the Depositor
the respective Classes of Underwritten Certificates indicated on the cover page
hereof to be purchased by it. Distribution of the Underwritten Certificates will
be made by the respective Underwriters in each case from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. In connection with the sale of the Underwritten Certificates, the
Underwriters may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
Each Underwriter intends to make a secondary market in the Classes of
Underwritten Certificates being purchased by it, but no Underwriter has any
obligation to do so. There can be no assurance that a secondary market for the
Offered Certificates will develop or, if it does develop, that it will continue
or that it will provide Certificateholders with a sufficient level of liquidity
of investment.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
The Class X and Class PO Certificates may be offered by the Depositor from
time to time directly or through underwriters or agents (either of which may
include Countrywide Securities Corporation, an affiliate of the Depositor and
the Master Servicer) in one or more negotiated transactions, or otherwise, at
varying prices to be determined at the time of sale, in one or more separate
transactions at prices to be negotiated at the time of each sale. Proceeds to
the Depositor from any sale of the Class X or Class PO Certificates will equal
the purchase price paid by the purchaser thereof, net of any expenses payable by
the Depositor and any compensation payable to any such underwriter or agent. Any
underwriters or agents that participate in the distribution of the Class X or
Class PO Certificates may be deemed to be "underwriters" within the meaning of
the Securities Act of 1933 and any profit on the sale of such Certificates by
them and any discounts, commissions, concessions or other compensation received
by any such underwriter or agent may be deemed to be underwriting discounts and
commissions under such Act.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Brown & Wood LLP, New York, New York. Strook & Strook & Lavan, New York, New
York, will pass upon certain legal matters on behalf of the Underwriters.
S-48
<PAGE>
<PAGE>
RATINGS
It is a condition to the issuance of the Senior Certificates that they be
rated ___ by ____ ("____") and, ____ by ____ ("____" and, together with ______,
the "Rating Agencies"). It is a condition to the issuance of the Class B- ,
Class B- and Class B- Certificates that they be rated at least ______, _____
and ____, respectively, by _____.
The ratings assigned by ____ to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by the
related certificateholders under the agreements pursuant to which such
certificates are issued. ____'s ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on the mortgage pool is adequate to make the
payments required by such certificates. ____ ratings on such certificates do
not, however, constitute a statement regarding frequency of payments of the
mortgage loans.
The ratings assigned by _____ to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by the
related certificateholders under the agreements pursuant to which such
certificates are issued. _____'s ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on such mortgage pool is adequate to make payments
required by such certificates. ____'s ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.
The ratings of the Rating Agencies do not address the possibility that, as a
result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. 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 Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-49
<PAGE>
<PAGE>
===========================================================
No person has been authorized to give any information
or to make any representations other than those contained in
this Prospectus Supplement or the Prospectus and, if given
or made, such information or representations must not be
relied upon. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell or a solicitation of an
offer to buy any of the securities offered hereby, nor an
offer of Offered Certificates in any state or jurisdiction
in which, or to any person to whom, such offer would be
unlawful. The delivery of this Prospectus Supplement or the
Prospectus at any time does not imply that the information
contained herein or therein is correct as of any time
subsequent to its date; however, if any material change
occurs while this Prospectus Supplement or Prospectus is
required by law to be delivered, this Prospectus Supplement
or the Prospectus will be amended or supplemented
accordingly.
---------------
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary of Terms .................................. S-3
The Mortgage Pool ................................. S-9
Servicing of Mortgage Loans ....................... S-10
Description of Certificates ....................... S-18
Yield, Prepayment and Maturity Considerations ..... S-28
Credit Enhancement ................................ S-35
Use of Proceeds ................................... S-36
Certain Federal Income Tax Consequences ........... S-36
ERISA Considerations .............................. S-37
Method of Distribution ............................ S-39
Legal Matters ..................................... S-39
Ratings ........................................... S-39
PROSPECTUS
Prospectus Supplement or Current Report on Form 8-K 2
Incorporation of Certain Document by Reference .... 2
Available Information ............................. 2
Reports to Securityholders ........................ 3
Summary of Terms .................................. 4
Risk Factors ...................................... 11
The Trust Fund .................................... 16
Use of Proceeds ................................... 20
The Depositor ..................................... 20
Loan Program ...................................... 21
Description of the Securities ..................... 23
Credit Enhancement ................................ 39
Yield and Prepayment Considerations ............... 43
The Agreements .................................... 45
Certain Legal Aspects of the Loans ................ 61
Certain Federal Income Tax Consequences ........... 75
State Tax Considerations .......................... 94
ERISA Considerations .............................. 94
Legal Investment .................................. 99
Method of Distribution ............................ 99
Legal Matters ..................................... 100
Financial Information ............................. 100
Rating ............................................ 100
===========================================================
$[_____________]
(Approximate)
CWABS, Inc.
Depositor
[Countrywide Home Loans, Inc.]
Seller and Master Servicer
Mortgage Pass-Through
Certificates,
Series 199_ - _
-------------------------
PROSPECTUS SUPPLEMENT
[_________, 199_]
-------------------------
===========================================================
S-50
<PAGE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 29, 1996
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________, 1996)
$___________
[COUNTRYWIDE] HOME EQUITY LOAN TRUST 199___
$___________ HOME EQUITY LOAN ASSET BACKED NOTES, SERIES 199_-_
$__________ HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 199_-_
The [Countrywide] Home Equity Loan Trust 199__ (the "Trust") will be formed
pursuant to a trust agreement to be dated as of ______, 199_ (the "Trust
Agreement") and entered into by CWABS, Inc. (the "Depositor"), ________________
and _____________, as owner trustee (the "Owner Trustee"). The Trust will issue
$___________ aggregate principal amount of Home Equity Loan Asset Backed Notes
(the "Notes"). The Notes will be issued pursuant to an indenture to be dated as
of __________ __, 199_ (the "Indenture"), between the Trust and ____________, as
indenture trustee (the "Indenture Trustee"). The Trust will also issue
$____________ aggregate principal amount of Home Equity Loan Asset Backed
Certificates, Series 199_-_ (the "Certificates" and, together with the Notes,
the "Securities").
The property of the Trust will include a pool of [adjustable rate] home
equity revolving credit line loans made or to be made in the future (the
"Mortgage Loans") under certain home equity revolving credit line loan
agreements. The Mortgage Loans are secured primarily by first and second deeds
of trust or mortgages on one- to four-family residential properties. [In
addition, the Securities will have the benefit of an irrevocable and
unconditional limited financial guaranty insurance policy (the "Policy") issued
by ______________ (the "Certificate Insurer") covering [describe].]
Distributions of principal and interest on the Notes will be made on the
_________ day of each month or, if such date is not a Business Day, then on the
succeeding Business Day (each a "Distribution Date"), commencing on ________,
199_ to the extent described herein. Interest will accrue on the Notes at a rate
(the "Note Rate") equal to ___% per annum from the Closing Date to the first
Distribution Date and at [a floating rate equal to [LIBOR] (as defined herein)
plus ___% per annum] [___% per annum] thereafter.
The Certificates will represent fractional undivided interests in the Trust.
Distribution of principal and interest on the Certificates will be made on each
Distribution Date to the extent described herein. Interest will accrue on the
Certificates at a rate (the "Pass-Through Rate") equal to ___% per annum from
the Closing Date to the first Distribution Date and at [a floating rate equal to
[LIBOR] plus ___% per annum] [___% per annum] thereafter.
Payments of interest and principal on the Notes will have equal priority
with payments of principal and interest (and will be made pro rata) on the
Certificates.
There is currently no market for the Securities offered hereby and there can
be no assurance that such a market will develop or if it does develop that it
will continue. See "Risk Factors" herein.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" ON PAGE S-10 HEREIN AND ON PAGE 11 IN THE
ACCOMPANYING PROSPECTUS.
--------------------
<PAGE>
<PAGE>
THE SECURITIES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
OWNER TRUSTEE, INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF,
EXCEPT TO THE EXTENT PROVIDED HEREIN. THE SECURITIES
ARE NOT INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
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. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Securities offered hereby will be purchased by [_____ ] (the
"Underwriter") from the Depositor and will, in each case, be offered by the
Underwriter from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. The aggregate
proceeds to the Depositor from the sale of the Notes are expected to be
$_____________ and from the sale of the Certificates are expected to be
$__________ before deducting expenses payable by the Depositor of $_______.
The Securities are offered subject to prior sale and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
the Notes will be delivered in book-entry form through the facilities of The
Depository Trust Company, [Cedel, S.A. and the Euroclear System] on or about
_______, 199_. The Securities will be offered in [Europe and] the United States
of America.
--------------------
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Securities, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and Prospectus
to investors. This is in addition to the obligation of dealers acting as
Underwriters to deliver a Prospectus Supplement and Prospectus with respect to
their unsold allotments or subscriptions.
--------------------
Each Series of Securities offered hereby constitute part of a separate
Series of Asset Backed Securities being offered by the Underwriter from time to
time pursuant to the Prospectus dated ____________, 199_. This Prospectus
Supplement does not contain complete information about the offering of the
Securities. Additional information is contained in the Prospectus and investors
are urged to read both this Prospectus Supplement and the Prospectus in full.
Sales of the Securities may not be consummated unless the purchaser has received
both this Prospectus Supplement and the Prospectus.
--------------------
[UNDERWRITER]
_______________, 199_
S-2
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus. Certain capitalized
terms used herein are defined elsewhere in the Prospectus Supplement or in the
Prospectus.
Title of Securities ............. Home Equity Loan Asset Backed Notes, Series
199__-__(the "Notes") and Home Equity Loan
Asset Backed Certificates, Series 199__-__
(the "Certificates" and, together with the
Notes, the "Securities").
Securities Offered .............. All of the Securities, including the Class
___, Class __ and Class __ Notes and the Class
__, Class __ and Class __ Certificates. Each
Security represents the right to receive
payments of interest at the variable rate
described below, payable monthly, and payments
of principal at such time and to the extent
provided below.
Trust........................... [Countrywide] Home Equity Loan Trust 199_-_
(the "Trust" or the "Issuer"), a Delaware
business trust established pursuant to the
Trust Agreement (as defined herein), dated as
of ___, 199_ (the "Cut-off Date"). The
property of the Trust will include: a pool of
[adjustable rate] home equity revolving credit
line loans made or to be made in the future
(the "Mortgage Loans"), under certain home
equity revolving credit line loan agreements
(the "Credit Line Agreements") and secured by
either first or second mortgages on
residential properties that are primarily one-
to four-family properties (the "Mortgaged
Properties"); the collections in respect of
the Mortgage Loans received after the Cut-off
Date (exclusive of payments in respect of
accrued interest due on or prior to the
Cut-off Date or due in the month of
_____________); property that secured a
Mortgage Loan which has been acquired by
foreclosure or deed in lieu of foreclosure;
[an irrevocable and unconditional limited
financial guaranty insurance policy (the
"Policy")]; an assignment of the Depositor's
rights under the Purchase Agreement (as
defined herein); rights under certain hazard
insurance policies covering the Mortgaged
Properties; and certain other property, as
described more fully herein.
The Trust will include the unpaid principal
balance of each Mortgage Loan as of the
Cut-off Date (the "Cut-off Date Principal
Balance") plus any additions thereto as a
result of new advances made pursuant to the
applicable Credit Line Agreement (the
"Additional Balances") during the life of the
Trust. With respect to any date, the "Pool
Balance" will be equal to the aggregate of the
Principal Balances of all Mortgage Loans as of
such date. The "Principal Balance" of a Loan
(other than a Liquidated Loan) on any day is
equal to
- --------------------------------------------------------------------------------
S-3
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
its Cut-off Date Principal Balance, plus (i)
any Additional Balances in respect of such
Mortgage Loan, minus (ii) all collections
credited against the Principal Balance of such
Mortgage Loan in accordance with the related
Credit Line Agreement prior to such day. The
Principal Balance of a Liquidated Loan after
the final recovery of related Liquidation
Proceeds shall be zero.
Indenture........................ The Notes will be issued pursuant to an
indenture dated as of _________, 199_ (the
"Indenture") between the Trust and the
Indenture Trustee. The Indenture Trustee will
allocate distributions of principal and
interest to holders of the Notes (the
"Noteholders") in accordance with the
Indenture.
Trust Agreement.................. Pursuant to a trust agreement dated as of
________ 1, 199_ (the "Trust Agreement"),
among the Depositor, ________ and the Owner
Trustee, the Trust will issue the Certificates
in an initial aggregate amount of $__________.
The Certificates will represent fractional
undivided interests in the Trust.
Depositor........................ CWABS, Inc. a Delaware corporation and a
limited purpose finance subsidiary of
Countrywide Credit Industries, Inc., a
Delaware corporation.
Master Servicer.................. [Countrywide Home Loans, Inc. ("Countrywide")
and, in its capacity as Master Servicer of the
Mortgage Loans, the "Master Servicer". The
Master Servicer will service the Mortgage
Loans pursuant to a Master Servicing Agreement
dated _________ 1, 199_ between the Issuer and
the Master Servicer.
Indenture Trustee................ _______________ (the "Indenture Trustee").
Owner Trustee.................... _______________ (the "Owner Trustee").
Cut-off Date..................... __________ 1, 199__.
Closing Date..................... On or about __________ __, 199__.
Determination Date............... The ___ business day, but no later than the
___ calendar day, of each month (the
"Determination Date").
The Mortgage Loans............... The Mortgage Loans are secured by first and
second mortgages on Mortgaged Properties. The
Mortgage Loans were originated or acquired in
the normal course of its business by
[Countrywide] (in such capacity, the
"Seller"). On the Closing Date, [Countrywide]
will sell the Mortgage Loans to the Depositor,
pursuant to a purchase agreement (the
"Purchase Agreement"). The aggregate Principal
Balance of
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the Mortgage loans as of the Cut-off Date is
$___________ (the "Cut-off Date Pool Principal
Balance").
The percentage of the Cut-off Date Principal
Balance of the Mortgage Loans secured
primarily by Mortgaged Properties located in
the states of [__________, _________,
_________, _______, ______ and ________] is
approximately ____%, ____%, ____%, ____%,
____% and ____%, respectively. The "Combined
Loan-to-Value Ratio" of each Mortgage Loan is
the ratio of (A) the sum of (i) the maximum
amount the borrower was permitted to draw down
under the related Credit Line Agreement (the
"Credit Limit") and (ii) the amounts of any
related senior mortgage loans (computed as of
the date of origination of each such Mortgage
Loans) to (B) the lesser of (i) the appraised
value of the Mortgaged Property or (ii) in the
case of a Mortgaged Property purchased within
one year of the origination of the related
Mortgage Loan, the purchase price of such
Mortgaged Property. As of the Cut- off Date
the Combined Loan-to-Value Ratios ranged from
____% to ______% and, as of the Cut-off Date,
the weighted average Combined Loan-to-Value
Ratio of the Mortgage Loans was approximately
____%.
Interest on each Mortgage Loan is payable
monthly and computed on the related daily
outstanding Principal Balance for each day in
the billing cycle at a variable rate per annum
(the "Loan Rate") equal at any time (subject
to maximum rates, as described herein under
"The Home Equity Lending Program--Mortgage
Loan Terms," and further subject to applicable
usury limitations) to the sum of [(i) the
highest prime rate published in the "Money
Rates" section of The Wall Street Journal] and
(ii) a Margin within the range of ___% to
____%. As of the Cut-off Date, the weighted
average Margin was approximately ___%. Loan
Rates are adjusted monthly on the first
business day of the calendar month preceding
the Due Date. As to each Mortgage Loan, the
"Due Date" is the ___ day of each month. The
Cut-off Date Principal Balances ranged from
zero to $____ and averaged approximately $___.
Credit Limits under the Mortgage Loans as of
the Cut-off Date ranged from $___ to $___ and
averaged approximately $___ . Each Mortgage
Loan was originated in the period from
__________ __, 19__ to __________ __, 19__. As
of the Cut-off Date, the maximum Credit Limit
Utilization Rate (as defined herein) was 100%
and the weighted average Credit Limit
Utilization Rate was approximately ____%. As
of the Cut-off Date, approximately ____% by
Cut-off Date Principal Balance of the Mortgage
Loans represented first liens on the related
Mortgaged Properties, while approximately
____% of the Mortgage Loans represented second
liens. As of the Cut-off
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Date, the Mortgage Loans had remaining terms
to scheduled maturity ranging from ___ months
to ____ months and had a weighted average of
approximately ___ months. See "The Home Equity
Lending Program" and "Description of the
Mortgage Loans" herein.
Distribution Date................ The ____ day of each month or, if such day is
not a Business Day, the next succeeding
Business Day, commencing with _______, 199_. A
"Business Day" is any day other than a
Saturday or Sunday or another day on which
banking institutions in New York, New York
[and ____________] are authorized or obligated
by law, regulations or executive order to be
closed.
Final Scheduled
Distribution Dates........... With respect to the Certificates,
___________________. To the extent not
previously paid, the Security Principal
Balance of the Notes will be due on the
Distribution Date in _______, 199_. Failure to
pay the full principal balance of Notes on or
before the applicable final scheduled payment
dates constitutes an Event of Default under
the Indenture.
Record Date...................... The last day preceding a Distribution Date or,
if the Securities are no longer Book-Entry
Securities, the last day of the month
preceding a Distribution Date.
Collections...................... All collections on the Mortgage Loans will be
allocated by the Master Servicer in accordance
with the Loan Agreements between amounts
collected in respect of interest ("Interest
Collections") and amounts collected in respect
of principal ("Principal Collections" and
collectively with Interest Collections, the
"Collections"). The Master Servicer will
generally deposit Collections distributable to
the Holders in an account established for such
purpose under the Servicing Agreement (the
"Collection Account"). See "Description of the
Master Servicing Agreement -- Allocations and
Collections" herein and "The Agreements --
Payments on Loans; Deposits to Security
Account" and "-- Collection Procedures" in the
Prospectus.
Description of the Securities....
A. Distributions............ On each Distribution Date, collections on the
Mortgage Loans will be applied in the
following order of priority:
(i) to the Master Servicer, the Servicing
Fee;
(ii) as payment for the accrued interest due
and any overdue accrued interest (with
interest thereon) on the
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respective Security Principal Balances
of the Notes and the Certificates;
(iii) as principal on the Securities, the
excess of Principal Collections over
Additional Balances created during the
preceding Collection Period, such
amount to be allocated between the
Notes and Certificates, pro rata, based
on their respective Security Principal
Balances;
(iv) as principal on the Securities, as
payment for any Liquidation Loss
Amounts on the Mortgage Loans;
(v) as payment for the premium on the
Policy;
(vi) to reimburse prior draws made on the
Policy; and
(vii) any remaining amounts to the Seller.
As to any Distribution Date, the "Collection
Period" is the calendar month preceding the
month of such Distribution Date.
"Liquidation Loss Amount" means with respect
to any Liquidated Mortgage Loan, the
unrecovered Principal Balance thereof at the
end of the related Collection Period in which
such Mortgage Loan became a Liquidated
Mortgage Loan after giving effect to the Net
Liquidation Proceeds in connection therewith.
B. Note Rate................ Interest will accrue on the unpaid Security
Principal Balance of the Notes at the per
annum rate (the "Note Rate") equal to ___% per
annum from the Closing Date to the first
Distribution Date and thereafter interest will
accrue on the Notes from and including the
preceding Distribution Date to but excluding
such current Distribution Date (each, an
"Interest Accrual Period") at [a floating rate
equal to LIBOR (as defined herein) plus ___%]
[___%]. [Interest will be calculated on the
basis of the actual number of days in each
Interest Accrual Period divided by 360.] A
failure to pay interest on any Notes on any
Distribution Date that continues for five days
constitutes an Event of Default under the
Indenture.
C. Pass-Through Rate........ Interest will accrue on the unpaid Principal
Balance of the Certificates at the per annum
rate (the "Pass-Through Rate") equal to ___%
per annum from the Closing Date to the first
Distribution Date and thereafter interest will
accrue on the Certificates for each Interest
Accrual Period at [a floating rate equal to
LIBOR (as defined herein) plus ___%] [___%].
[Interest will be calculated on the basis of
the actual number
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of days in each Interest Accrual Period
divided by 360.] A failure to pay interest on
any Certificates on any Distribution Date that
continues for five days constitutes an Event
of Default under the Trust Agreement.
D. Form and Registration.... The Securities will initially be delivered in
book-entry form ("Book-Entry Securities").
Holders of such Securities may elect to hold
their interests through The Depository Trust
Company ("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. So long as the Securities are
Book-Entry Securities, such Securities will be
evidenced by one or more securities registered
in the name of Cede & Co. ("Cede"), as the
nominee of DTC [or one of the relevant
depositaries (collectively, the "European
Depositaries")]. 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 The Chase Manhattan Bank
("Chase") the relevant depositaries of Cedel
and Euroclear, respectively, and each a
participating member of DTC. The Securities
will initially be registered in the name of
Cede. The interests of such Holders will be
represented by book entries on the records of
DTC and participating members thereof. No
Holder of a Security will be entitled to
receive a definitive note representing such
person's interest, except in the event that
Securities in fully registered, certificated
form ("Definitive Securities") are issued
under the limited circumstances described in
"Description of the Securities -- Book-Entry
Registration of Securities" in the Prospectus.
All references in this Prospectus Supplement
to Securities reflect the rights of Holders of
such Notes only as such rights may be
exercised through DTC and its participating
organizations for so long as such Securities
are held by DTC. See "Risk Factors --
Book-Entry Securities" herein.
E. Denominations............ The Securities will be issued in minimum
denominations of $[________] and integral
multiples thereof.
[Final Payment of Principal;
Termination.................. The Trust will terminate on the Distribution
Date following the earlier of (i)
_________________________ and (ii) the final
payment or other liquidation of the last
Mortgage Loan in the Trust. The Mortgage Loans
will be subject to optional repurchase by the
Master Servicer on any Distribution Date after
the Principal Balance is reduced to an amount
less than
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or equal to $_____ (____% of the initial
Principal Balance). The repurchase price will
be equal to the sum of the outstanding
Principal Balance and accrued and unpaid
interest thereon at the weighted average of
the Loan Rates through the day preceding the
final Distribution Date. See "Description of
the Securities -- Optional Termination" herein
and "The Agreements -- Termination; Optional
Termination" in the Prospectus.
[Letter of Credit]
[Surety Bond]
Issuer...................... _________________ (the "[Letter of Credit]
[Surety Bond] Issuer"). See "The [Letter of
Credit] [Surety Bond] Issuer" herein.
[Letter of Credit]
[Surety Bond]................ On the Closing Date, the [Letter of Credit]
[Surety Bond] Issuer will issue a [letter of
credit] [surety bond] (the "[Letter of Credit]
[Surety Bond]") in favor of the Owner Trustee
on behalf of the Trust. In the event that, on
any Distribution Date, available amounts on
deposit in the Collection Account with respect
to the preceding Collection Period are
insufficient to provide for the payment of the
amount required to be distributed to the
Holders and the Master Servicer on such
Distribution Date, the Trustee will draw on
the [Letter of Credit] [Surety Bond], to the
extent of the [Letter of Credit] [Surety Bond]
Amount for such Distribution Date, in an
amount equal to such deficiency. See
"Description of the Securities --
Distributions" herein and "Credit Enhancement"
in the Prospectus.
[[Letter of Credit]
[Surety Bond]
Amount...................... The amount available under the [Letter of
Credit] [Surety Bond] (the "[Letter of Credit]
[Surety Bond] Amount") for the initial
Distribution Date will be $______. For each
Distribution Date thereafter, the [Letter of
Credit] [Surety Bond] Amount will equal the
lesser of (i)___ % of the Pool Balance as of
the first day of the preceding Collection
Period (after giving effect to any amounts
distributed with respect to principal of the
Mortgage Loans on the Distribution Date
occurring in such preceding Collection Period)
and (ii) the [Letter of Credit] [Surety Bond]
Amount as of the first day of the preceding
Collection Period, minus any amounts drawn
under the [Letter of Credit] [Surety Bond]
during such preceding Collection Period, plus
any amounts paid to the [Letter of Credit]
[Surety Bond] Issuer on the Distribution Date
occurring in such preceding Collection Period
up to the amount of any previous draws on the
[Letter of Credit] [Surety Bond].]
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Certain Federal Income Tax
Consequences................. In the opinion of Tax Counsel (as defined
herein), for federal income tax purposes, the
Securities will be characterized as
indebtedness, and the Trust will not be
characterized as an association (or publicly
traded partnership) taxable as a corporation.
Each holder of a Security, by the acceptance
of a Security, will agree to treat the
Security as indebtedness for federal, state
and local income and franchise tax purposes.
See "Certain Federal Income Tax Consequences"
and "State Tax Consequences" herein and
"Certain Federal Income Tax Consequences" and
"State Tax Considerations" in the Prospectus
concerning the application of federal, state
and local tax laws.
ERISA Considerations............. Generally, plans that are subject to the
requirements of ERISA and the Code are
permitted to purchase instruments like the
Notes that are debt under applicable state law
and have no "substantial equity features"
without reference to the prohibited
transaction requirements of ERISA and the
Code. In the opinion of ERISA Counsel (as
defined herein), the Notes will be classified
as indebtedness without substantial equity
features for ERISA purposes. However, if the
Notes are deemed to be equity interests and no
statutory, regulatory or administrative
exemption applies, the Trust will hold plan
assets by reason of a Plan's investment in the
Notes. Accordingly, any Plan fiduciary
considering whether to purchase the Notes on
behalf of a Plan should consult with its
counsel regarding the applicability of the
provisions of ERISA and the Code and the
availability of any exemptions. Under current
law the purchase and holding of the
Certificates by or on behalf of any employee
benefit plan (a "Plan") subject to the
fiduciary responsibility provisions of the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), may result in a
"prohibited transaction" within the meaning of
ERISA and the Code or other violation of the
fiduciary responsibility provisions of ERISA
and Section 4975 of the Code. [Consequently,
Certificates may not be transferred to a
proposed transferee that is a Plan subject to
ERISA or that is described in Section
4975(e)(1) of the Code, or a person acting on
behalf of any such Plan or using the assets of
such plan unless the Owner Trustee and the
Depositor receive the opinion of counsel
reasonably satisfactory to the Owner Trustee
and the Depositor to the effect that the
purchase and holding of such Certificate will
not result in the assets of the Trust being
deemed to be "plan assets" for ERISA purposes
and will not be a prohibited transaction under
ERISA or Section 4975 of the Code.] See "ERISA
Considerations" herein and in the Prospectus.
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Legal Investment................. The Securities will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), because some of the Mortgages
securing the Mortgage Loans are not first
mortgages. Accordingly, many institutions with
legal authority to invest in comparably rated
securities based solely on first mortgages may
not be legally authorized to invest in the
Certificates. See "Legal Investment
Considerations" herein and "Legal Investment"
in the Prospectus.
Rating........................... It is a condition to the issuance of the
Securities that they be rated _________ by at
least ____ nationally recognized statistical
rating organizations (each a "Rating Agency").
In general, ratings address credit risk and do
not address the likelihood of prepayments. A
security rating is not a recommendation to
buy, sell or hold securities.
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RISK FACTORS
Book-Entry Securities. Issuance of the Securities in book-entry form may
reduce the liquidity of such Securities in the secondary trading market since
investors may be unwilling to purchase Securities for which they cannot obtain
physical securities. See "Description of the Securities--Book-Entry Securities"
herein and "Risk Factors--Book-Entry Registration" in the Prospectus.
Since transactions in the Securities can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Security Owner to pledge a Security to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system or
otherwise to take actions in respect of such Securities, may be limited due to
lack of a physical security representing the Securities. See "Description of the
Securities--Book-Entry Securities" herein and "Risk Factors--Book-Entry
Registration" in the Prospectus.
Security Owners may experience some delay in their receipt of distributions
of interest and principal on the Securities 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 Security Owners either directly or indirectly through
indirect participants. See "Description of the Securities--Book-Entry
Securities" herein and "Risk Factors--Book-Entry Registration" in the
Prospectus.
Cash Flow Considerations
Minimum monthly payments will at least equal and may exceed accrued
interest. Even assuming that the Mortgaged Properties provide adequate security
for the Mortgage Loans, substantial delay could be encountered in connection
with the liquidation of Mortgage Loans that are delinquent and corresponding
delays in the receipt of related proceeds by Holders could occur if the [Letter
of Credit] [Surety Bond] provider were unable to perform on its obligations
under the [Letter of Credit] [Surety Bond]. Further, liquidation expenses (such
as legal fees, real estate taxes, and maintenance and preservation expenses)
will reduce the proceeds payable to Holders and thereby reduce the security for
the Mortgage Loans. In the event any of the Mortgaged Properties fail to provide
adequate security for the related Mortgage Loans, Holders could experience a
loss if the [Letter of Credit] [Surety Bond] provider were unable to perform its
obligations under the [Letter of Credit] [Surety Bond].]
Prepayment Considerations
Substantially all of the Mortgage Loans may be prepaid in whole or in part
at any time without penalty. Home equity loans, such as the Mortgage Loans, have
been originated in significant volume only during the past few years and neither
the Depositor nor the Master Servicer is aware of any publicly available studies
or statistics on the rate of prepayment of such loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than traditional
loans. The Trust's prepayment experience may be affected by a wide variety of
factors, including general economic conditions, interest rates, the availability
of alternative financing and homeowner mobility. In addition, substantially all
of the Mortgage Loans contain due-on-sale provisions and the Master Servicer
intends to enforce such provisions unless (i) such enforcement is not permitted
by applicable law or (ii) the Master Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. To the extent permitted by applicable law,
such assumption will not release the original borrower from its obligation under
any such Mortgage Loan. See "Certain Legal Aspects of the Loans--Due-on-Sale
Clauses" in the Prospectus for a description of certain provisions of the Credit
Line Agreements that may affect the prepayment experience on the Mortgage Loans.
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Certificate Rating. The rating of the Securities will depend primarily on an
assessment by the Rating Agencies of the Loans and upon the claims-paying
ability [Letter of Credit] [Surety Bond] provider. Any reduction in a rating
assigned to the claims-paying ability of the [Letter of Credit][Surety Bond]
provider below the rating initially given to the Securities may result in a
reduction in the rating of the Securities. The rating by the Rating Agencies of
the Securities is not a recommendation to purchase, hold or sell the Securities,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain in
place for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. In general, the ratings address credit risk
and do not address the likelihood of prepayments. The ratings of the Securities
do not address the possibility of the imposition of United States withholding
tax with respect to non-U.S. persons.
Legal Considerations
The Mortgage Loans are secured by deeds of trust or mortgages (which
generally are second mortgages). With respect to Mortgage Loans that are secured
by first mortgages, the Master Servicer has the power under certain
circumstances to consent to a new mortgage lien on the Mortgaged Property having
priority over such Mortgage Loan. Mortgage Loans secured by second mortgages are
entitled to proceeds that remain from the sale of the related Mortgage Property
after any related senior mortgage loan and prior statutory liens have been
satisfied. In the event that such proceeds are insufficient to satisfy such
loans and prior liens in the aggregate [and the [Letter of Credit] [Surety Bond]
provider is unable to perform its obligations under the [Letter of Credit]
[Surety Bond] or if the coverage under the [Letter of Credit] [Surety Bond] is
exhausted] the Trust and, accordingly, the Holders, 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 cannot be obtained or is
not realized upon. See "Certain Legal Aspects of the Mortgage Loans" in the
Properties.
Under the terms of the Purchase Agreement, so long as [Countrywide's]
long-term senior unsecured debt is rated at least "____" by ____ and "________"
by ______, the Master Servicer will be entitled to maintain possession of the
documentation relating to each Mortgage Loan sold by it, including the Credit
Line Agreements and the Related Documents or other evidence of indebtedness
signed by the borrower, and the assignments of the related mortgages to the
Trust will not be required to be recorded. Failure to deliver the Related
Documents to the Owner Trustee will have the result in most (if not all) of the
states in which the Related Documents will be held, and failure to record the
assignments of the related mortgages to the Owner Trustee will have the result
in certain states in which the Mortgaged Properties are located, of making the
sale of the Cut-off Date Principal Balances, Additional Balances and Related
Documents potentially ineffective against (i) any creditors of [Countrywide],
who may have been fraudulently or inadvertently induced to rely on the Mortgage
Loans as assets of [Countrywide], or (ii) any purchaser of a Mortgage Loan who
had no notice of the prior conveyance to the Trust if such purchaser perfects
his interest in the Mortgage Loan by taking possession of the Related Documents
or other evidence of indebtedness or otherwise.
The sale of the Mortgage Loans from the Seller to the Depositor pursuant to
the Purchase Agreement will be treated as a sale of the Mortgage Loans. The
Seller will warrant that such transfer is either a sale of its interest in the
Mortgage Loans or a grant of a first priority perfected security interest
therein. In the event of an insolvency of the Seller, the receiver of the Seller
may attempt to recharacterize the sale of the Mortgage Loans as a borrowing by
the Seller secured by a pledge of the Mortgage Loans. If the receiver decided to
challenge such transfer, delays in payments of the Securities and possible
reductions in the amount thereof could occur. The Depositor will warrant in the
Trust Agreement that the transfer of its interest in the Mortgage Loans to the
Trust is a valid transfer and assignment of such interest.
If a conservator, receiver or trustee were appointed for the Seller, or if
certain other events relating to the bankruptcy or insolvency of the Seller were
to occur, Additional Balances would not be transferred by the Seller to the
Trust. In such an event, an Event of Default under the Pooling and Servicing
Agreement and
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Indenture would occur and the Owner Trustee would attempt to sell the Mortgage
Loans (unless Holders holding Securities evidencing undivided interests
aggregating at least 51% of each of the Security Principal Balance of the Notes
and the Certificates instruct otherwise), thereby causing early payment of the
Security Principal Balance of the Notes and the Certificates.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the applicable
Trustee or the Holders from appointing a successor Master Servicer.
[Geographic Concentration. As of the Cut-off Date, approximately _____% (by
Cut-off Date Principal Balance) of the Mortgaged Properties are located in the
State of __________. An overall decline in the __________ residential real
estate market could adversely affect the values of the Mortgaged Properties
securing such Mortgage Loans such that the Principal Balances of the related
Mortgage Loans, together with any primary financing on such Mortgaged
Properties, could equal or exceed the value of such Mortgaged Properties. As the
residential real estate market is influenced by many factors, including the
general condition of the economy and interest rates, no assurances may be given
that the __________ residential real estate market will not weaken. If the
__________ residential real estate market should experience an overall decline
in property values after the dates of origination of the Mortgage Loans, the
rates of losses on the Mortgage Loans would be expected to increase, and could
increase substantially.]
Master Servicer's Ability to Change the Terms of the Mortgage Loans
The Master Servicer may agree to changes in the terms of a Credit Line
Agreement, provided that such changes (i) do not adversely affect the interest
of the Holders or the [Letter of Credit] [Surety Bond] provider, and (ii) are
consistent with prudent business practice. There can be no assurance that
changes in applicable law or the marketplace for home equity loans or prudent
business practice will not result in changes in the terms of the Mortgage Loans.
In addition, the Master Servicing Agreement permits the Master Servicer, within
certain limitations described therein, to increase the Credit Limit of the
related Mortgage Loan or reduce the Margin for such Mortgage Loan.
Delinquent Mortgage Loans
The Trust will include Mortgage Loans which are __ or fewer days delinquent.
The Cut-off Date Principal Balance of such delinquent Mortgage Loans was
$______________.]
For a discussion of additional risks pertaining to the Securities, see "Risk
Factors" in the Prospectus.
THE TRUST
General
The Issuer, [Countrywide] Home Equity Loan Trust 199_, is a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement
for the transactions described in this Prospectus Supplement. The Trust
Agreement constitutes the "governing instrument" under the laws of the State of
Delaware relating to business trusts. After its formation, the Issuer will not
engage in any activity other than (i) acquiring, holding and managing the
Mortgage Loans and the other assets of the Trust and proceeds therefrom, (ii)
issuing the Notes and the Certificates, (iii) making payments on the Notes and
the Certificates and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
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The property of the Trust will consist of: (i) each of the Mortgage Loans
that are _________; (ii) collections on the Mortgage Loans received after the
Cut-off Date; (iii) Mortgaged Properties relating to the Mortgage Loans that are
acquired by foreclosure or deed in lieu of foreclosure; (iv) the Collection
Account and the Distribution Account (excluding net earnings thereon); (v) the
[Letter of Credit] [Surety Bond]; and (vi) an assignment of the Depositor's
rights under the Purchase Agreement, including all rights of the Depositor to
purchase Additional Balances.
The Trust's principal offices are in __________, Delaware, in care of
________________________, as Owner Trustee, at [__________].
THE [LETTER OF CREDIT][SURETY BOND] ISSUER
The following information with respect to _________ ("_______") has been
furnished by __________. Accordingly, none of the Issuer, the Depositor or the
Master Servicer makes any representation as to the accuracy and completeness of
such information.
[Description of Letter of Credit/Surety Issuer]
THE MASTER SERVICER
General
The Master Servicer will service the Mortgage Loans in accordance with the
terms set forth in the Master Servicing Agreement. The Master Servicer may
perform any of its obligations under the Master Servicing Agreement through one
or more subservicers. Notwithstanding any such subservicing arrangement, the
Master Servicer will remain liable for its servicing duties and obligations
under the Master Servicing Agreement as if the Master Servicer alone were
servicing the Mortgage Loans. As of the Closing Date, the Master Servicer will
service the Mortgage Loans without subservicing arrangements.
The Master Servicer
[Countrywide Home Loans, Inc. ("Countrywide"), a New York corporation and a
subsidiary of Countrywide Credit Industries, Inc., will act as Master Servicer
for the Mortgage Loans pursuant to the Master Servicing Agreement. Countrywide
is engaged primarily in the mortgage banking business, and as such, originates,
purchases, sells and services mortgage loans. Countrywide originates mortgage
loans through a retail branch system and through mortgage loan brokers and
correspondents nationwide. Countrywide's mortgage loans are principally
first-lien, fixed or adjustable rate mortgage loans secured by single-family
residences. Countrywide began servicing home equity lines of credit in _______
19__.
At ______________, 199_, Countrywide provided servicing for approximately
$______ billion aggregate principal amount of first-lien mortgage loans,
substantially all of which are being serviced for unaffiliated persons. At
_____________, 199_, Countrywide provided servicing for approximately $______
million aggregate principal amount of first and second lien mortgage loans
originated under home equity lines of credit.
The principal executive offices of Countrywide are located at 155 North Lake
Avenue, Pasadena, California 91101-7139. Its telephone number is (818) 304-8400.
Countrywide conducts operations from its headquarters in Pasadena and from
offices located through the nation.]
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THE HOME EQUITY LOAN PROGRAM
Underwriting Procedures Relating to Home Equity Loans
The following is a description of the underwriting procedures customarily
employed by the Seller with respect to home equity loans. The underwriting
process is intended to assess the applicant's credit standing and repayment
ability, and the value and adequacy of the real property security as collateral
for the proposed loan. Exceptions to the Seller's underwriting guidelines will
be made when compensating factors are present. Such factors include the
borrower's employment stability, credit history, disposable income, equity in
the related property and the nature of the underlying first mortgage loan.
Each applicant for a home equity loan is required to complete an application
which lists the applicant's assets, liabilities, income, credit and employment
history and other demographic and personal information. If information in the
loan application demonstrates that there is sufficient income and equity in the
real property to justify making a home equity loan, the Seller will conduct a
further credit investigation of the applicant. This investigation includes
obtaining and reviewing an independent credit bureau report on the credit
history of the applicant in order to evaluate the applicant's ability to repay.
The credit report typically contains information relating to such matters as
credit history with local merchants and lenders, installment debt payments and
any record of delinquencies, defaults, bankruptcy, collateral repossessions,
suits or judgments.
The Seller originates or acquires mortgage loans pursuant to alternative
sets of underwriting criteria under its Alternative Documentation Loan Program
(the "Alternative Documentation Program") and its Reduced Documentation Loan
Program (the "Reduced Documentation Program"). The Alternative Documentation
Program permits a borrower to provide W-2 forms instead of tax returns covering
the most recent two years, permits bank statements in lieu of verifications of
deposits and permits alternative methods of employment verification. Under the
Reduced Documentation Program, relatively more emphasis is placed on property
underwriting than on credit underwriting and certain credit underwriting
documentation concerning income and employment verification therefore is waived.
Mortgage loans underwritten under the Reduced Documentation Program generally
are limited to self-employed borrowers with credit histories that demonstrate an
established ability to repay indebtedness in a timely fashion.
Full appraisals are generally performed on all home equity loans which at
origination had a principal balance greater than $100,000. Such appraisals are
determined on the basis of a Seller-approved, independent third-party, fee-based
appraisal completed on forms approved by Federal National Mortgage Association
("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC"). For loans which
had at origination a principal balance equal to or less than $100,000, a
drive-by evaluation is generally completed by a state licensed, independent
third-party, professional appraiser on forms approved by either FNMA or FHLMC.
The drive-by evaluation is an exterior examination of the premises by the
appraiser to determine that the property is in good condition. The appraisal is
based on various factors, including the market value of comparable homes and the
cost of replacing the improvement and generally is required to have been made
not earlier than 150 days prior to the date of origination of the Mortgage Loan.
After obtaining all applicable employment, credit and property information,
the Seller uses a debt-to-income ratio to assist in determining whether the
prospective borrower has sufficient monthly income available to support the
payments of principal and interest on the home equity loan in addition to any
senior mortgage loan payments (including any escrows for property taxes and
hazard insurance premiums) and other monthly credit obligations. The
"debt-to-income ratio" is the ratio of the borrower's total monthly payments
(assumed to be based on the applicable fully indexed interest rate plus a margin
of 2%) to the borrower's gross monthly income. Based on the foregoing, for loans
with Combined Loan-to-Value Ratios of 90% or less, the maximum monthly
debt-to-income ratio is 45%. For loans with Combined Loan-to-Value Ratios
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greater than 90%, the maximum monthly debt-to-income ratio is generally 38%.
Variations in the monthly debt-to-income ratios limits are permitted based on
compensating factors.
It is generally the Seller's policy to require a title search before it
makes a home equity loan for amounts less than or equal to $100,000. In
addition, if the home equity loan has an original principal balance of $100,000
or more, the Seller requires that the borrower obtain an American Land Title
Association ("ALTA") policy, or other assurance of title customary in the
relevant jurisdiction. In addition, ALTA title policies are generally obtained
in situations where the property is on leased land or there has been a change in
title or such home equity loan is in first lien position.
Servicing of the Mortgage Loans
The Master Servicer has established standard policies for the servicing and
collection of the home equity loans. Servicing includes, but is not limited to,
(i) the collection and aggregation of payments relating to the Mortgage Loans;
(ii) the supervision of delinquent Mortgage Loans, loss mitigation efforts,
foreclosure proceedings and, if applicable, the disposition of Mortgaged
Properties; and (iii) the preparation of tax related information in connection
with the Mortgage Loans.
Billing statements are mailed monthly by the Master Servicer. The statement
details all debits and credits and specifies the minimum payment due and the
available credit line. Notice of changes in the applicable loan rate are
provided by the Master Servicer to the Mortgagor with such statements. All
payments are due by the fifteenth day of the month.
With respect to Mortgage Loans, the general policy of the Master Servicer is
to initiate foreclosure in the underlying property (i) after such loan is 75
days or more delinquent and satisfactory arrangements cannot be made with the
Mortgagor; or (ii) if a notice of default on a senior lien is received by the
Master Servicer. Foreclosure proceedings may be terminated if the delinquency is
cured. Mortgage Loans to borrowers in bankruptcy proceedings may be restructured
in accordance with law and with a view to maximizing recovery of such loans,
including any deficiencies.
Once foreclosure is initiated by the Master Servicer, a foreclosure tracking
system is used to monitor the progress of the proceedings. The system includes
state specific parameters to monitor whether proceedings are progressing within
the time frame typical for the state in which the property is located. During
the foreclosure proceeding, the Master Servicer determines the amount of the
foreclosure bid and whether to liquidate the loan.
After foreclosure, if the home equity loan is secured by a first mortgage
lien, the Master Servicer may liquidate the Mortgaged Property and charge off
the home equity loan balance which was not recovered through liquidation
proceeds. If the Mortgaged Property was subject to a senior lien, the Master
Servicer will either directly manage the foreclosure sale of the property and
satisfy such lien at the time of sale or take other action as deemed necessary
to protect the interest in the Mortgaged Property. If in the judgment of the
Master Servicer, the cost of maintaining or purchasing the senior lien position
exceeds the economic benefit of such action, the Master Servicer will generally
charge off the entire home equity loan and may seek a money judgment against the
borrower.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the Master Servicer's business
judgment, changes in the portfolio and applicable laws and regulations.
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Foreclosure and Delinquency Experience
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of home equity loans serviced by the
Master Servicer. Since [Countrywide] only began servicing home equity loans in
_______ 199_, the delinquency and foreclosure percentages may be affected by the
size and relative lack of seasoning of the servicing portfolio because many of
such loans were not outstanding long enough to give rise to some or all of the
periods of delinquency indicated in the chart below. Accordingly, the
information should not be considered as a basis for assessing the likelihood,
amount or severity of delinquency or losses on the Mortgage Loans and no
assurances can be given that the foreclosure and delinquency experience
presented in the table below will be indicative of such experience on the
Mortgage Loans:
Delinquency Status as of _____________, 199_*
Dollars Percent Units Percent
Current................. $____________ ______% _____ ______%
30-59 days.............. $____________ ______% _____ ______%
60-89 days.............. $____________ ______% _____ ______%
90+ days................ $____________ ______% _____ ______%
Total $ 100.00% 100.00%
============ ====== ===== ======
- ---------
* Delinquencies are reported on a contractual basis.
As of _____________, 199_, ______ loans with an aggregate balance of
$___________ are in bankruptcy and ________ loans with an aggregate balance of
$___________ are in foreclosure. Of the loans in foreclosure, there will be a
____________ 199_ charge off of $________. In addition to this charge off, there
is an anticipated charge off of approximately $_____________ which may also be
realized in _________.]
DESCRIPTION OF THE MORTGAGE LOANS
General
The Mortgage Loans were originated pursuant to loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, which are either first or second mortgages or deeds
of trust, on Mortgaged Properties located in [__] states. The Mortgaged
Properties securing the Mortgage Loans consist primarily of residential
properties that are one- to four-family properties. See "--Mortgage Loan Terms"
below.
The Cut-off Date Pool Balance is $______________, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of the Cut-off Date. As of
the Cut-off Date, the Mortgage Loans were not more than 89 days delinquent. The
average Cut-off Date Principal Balance was approximately $____ , the minimum
Cut-off Date Principal Balance was zero, the maximum Cut-off Date Principal
Balance was $______, the minimum Loan Rate and the maximum Loan Rate as of the
Cut-off Date were ____% and ____% per annum, respectively, and the weighted
average Loan Rate as of the Cut-off Date was approximately ___% per annum. As of
the Cut-off Date, the weighted average Credit Limit Utilization Rate was
approximately
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____%, the minimum Credit Limit Utilization Rate was zero and the maximum Credit
Limit Utilization Rate was 100%. The "Credit Limit Utilization Rate" is
determined by dividing the Cut-off Date Principal Balance of a Mortgage Loan by
the Credit Limit of the related Credit Line Agreement. The remaining term to
scheduled maturity for the Mortgage Loans as of the Cut-off Date ranged from
____ months to ____ months and the weighted average remaining term to scheduled
maturity was approximately _____ months. As of the Cut-off Date, the Combined
Loan-to-Value Ratio of the Mortgage Loans ranged from ____% to ______% and the
weighted average Combined Loan-to-Value Ratio was __%. The Combined
Loan-to-Value Ratio for a Mortgage Loan is the ratio (expressed as a percentage)
of (A) the sum of (i) the Credit Limit of the Mortgage Loan and (ii) any
outstanding principal balances of mortgage loans senior to such Mortgage Loan
(calculated at the date of origination of the Mortgage Loan) to (B) the lesser
of (i) the appraised value of the related Mortgaged Property as set forth in the
loan files at such date of origination or (ii) in the case of a Mortgaged
Property purchased within one year of the origination of the related Mortgage
Loan, the purchase price of such Mortgaged Property. Credit Limits under the
Mortgage Loans as of the Cut-off Date ranged from $______ to $____ and averaged
approximately $_____ . The weighted average second mortgage ratio (which is the
Credit Limit for the related Mortgage Loan, provided such Mortgage Loan was in
the second lien position, divided by the sum of such Credit Limit and the
outstanding principal balance of any mortgage loan senior to the related
Mortgage Loan) was approximately _____%. As of the Cut-off Date, approximately
_____% by Cut-off Date Principal Balance of the Mortgage Loans represented first
liens on the related Mortgaged Properties, while approximately ____% of the
Mortgage Loans represented second liens. As of the Cut-off Date, approximately
______% of the Mortgage Loans are secured by Mortgaged Properties which are
single-family residences and ___% were owner-occupied. As of the Cut-off Date,
approximately ____%, ____%,____%,______%,______% and ______% by Cut-off Date
Principal Balance are located in [__________, ________, __________, _______,
______ and ________], respectively.
Mortgage Loan Terms
[A borrower may access a Mortgage Loan by writing a check in a minimum
amount of $250. The Mortgage Loans bear interest at a variable rate which
changes monthly on the first business day of the related month with changes in
the applicable Index Rate. The Mortgage Loans are subject to a maximum per annum
interest rate (the "Maximum Rate") ranging from _____% to _____% per annum and
subject to applicable usury limitations. As of the Cut-off Date, the weighted
average Maximum Rate was approximately ______%. See "Certain Legal Aspects of
the Loans--Applicability of Usury Laws" in the Prospectus. The daily periodic
rate on the Mortgage Loans (the "Loan Rate") is the sum of the Index Rate plus
the spread (the "Margin") which generally ranges between ____% and ____% and had
a weighted average, as of the Cut-off Date, of approximately %, divided by 365
days. The "Index Rate" is based on the highest "prime rate" published in the
'Money Rates' table of The Wall Street Journal as of the first business day of
each calendar month.]
[Countrywide] offers an introductory loan rate on home equity lines of
credit which are originated with Combined Loan-to-Value Ratios of 75% and 80%.
The introductory rate applies to any payments made during the first three months
after origination. After such three month period, the Loan Rate will adjust to
the Index plus the applicable Margin. As of the Cut-off Date, approximately
____% of the Mortgage Loans by Cut-off Date Principal Balance were subject to an
introductory rate of ____% per annum.
In general, the home equity loans may be drawn upon for a period (the "Draw
Period") of either five years (which may be extendible for an additional five
years, upon [Countrywide's] approval) or three years. Home equity loans with an
initial Draw Period of five years, which constitute approximately ____% of the
Mortgage Loans by Cut-off Date Principal Balance, are subject to a fifteen year
repayment period (the "Repayment Period") following the end of the Draw Period
during which the outstanding principal balance of the loan will be repaid in
monthly installments equal to [1/180] of the outstanding principal balance as of
the end of the Draw Period. Mortgage Loans with a Draw Period of three years,
which constitute approximately ____% of the Mortgage Loans by Cut-off Date
Principal Balance, are subject to a ten year Repayment Period following the end
of the Draw Period during which the outstanding principal balance of
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the loan will be paid in monthly installments equal to [1/120] of the
outstanding principal balance as of the end of the Draw Period.
The minimum payment due during the Draw Period will be equal to the finance
charges accrued on the outstanding principal balance of the home equity loan
during the related billing period. The minimum payment due during the repayment
period will be equal to the sum of the finance charges accrued on the
outstanding principal balance of the Mortgage Loan during the related billing
period and the principal payment described above.
Set forth below is a description of certain characteristics of the Mortgage
Loans as of the Cut-off Date:
PRINCIPAL BALANCES
Number of Cut-off Percent of Pool
Mortgage Date Principal by Cut-off Date
Range of Principal Balances Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
$ ______ to $ ___________.......... $ %
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
$ ______ to $ ___________..........
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
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GEOGRAPHIC DISTRIBUTION(1)
Number of Cut-off Percent of Pool
Mortgage Date Principal by Cut-off Date
State Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
$ %
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
- ---------
(1) Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loan.
S-21
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COMBINED LOAN-TO-VALUE RATIOS(1)
Number of Cut-off Percent of Pool
Range of Combined Mortgage Date Principal by Cut-off Date
Loan-to-Value Ratios Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
____% to ________%.................
____% to ________%.................
____% to ________%.................
____% to ________%................. ____________________________________________
____% to ________%.................
____% to ________%.................
____% to ________%.................
____% to ________%.................
____% to ________%.................
____% to ________%.................
____% to ________%.................
____% to ________%.................
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
- ---------
(1) The ratio (expressed as a percentage) of (A) the sum of (i) the Credit
Limit of the Mortgage Loans and (ii) any outstanding principal balances of
mortgage loans senior to the Mortgage Loans (calculated at the date of
origination of the Mortgage Loans) to (B) the lesser of (i) the appraised
value of the related Mortgaged Property as set forth in loan files at such
date of origination or (ii) in the case of a Mortgaged Property purchased
within one year of the origination of the related Mortgage Loan, the
purchase price of such Mortgaged Property.
PROPERTY TYPE
Number of Cut-off Percent of Pool
Mortgage Date Principal by Cut-off Date
Property Type Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
Single Family...................... $ %
Two- to Four-Family................
Condominium........................
PUD................................
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
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LIEN PRIORITY
Number of Cut-off Percent of Pool
Mortgage Date Principal by Cut-off Date
Lien Priority Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
First Lien......................... $ %
Second Lien........................
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
LOAN RATES(1)
Number of Cut-off Percent of Pool
Range of Mortgage Date Principal by Cut-off Date
Loan Rates Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
______% to ________%............... $ %
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
______% to ________%...............
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
- ---------
(1) Approximately % of the Mortgage Loans by Cut-Of Date Principal Balance are
subject to an introductory rate of ____% per annum.
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MARGIN
Number of Cut-off Percent of Pool
Range of Mortgage Date Principal by Cut-off Date
Margins Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
____% to ______%................... $ %
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
____% to ______%...................
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
CREDIT LIMIT UTILIZATION RATES
Number of Cut-off Percent of Pool
Range of Credit Limit Mortgage Date Principal by Cut-off Date
Utilization Rates Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
____% to _____% ................... $ %
____% to _____% ...................
____% to _____% ...................
____% to _____% ...................
____% to _____% ...................
____% to _____% ...................
____% to _____% ...................
____% to _____% ...................
____% to _____% ...................
____% to _____% ...................
____% to _____% ...................
____% to _____% ...................
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
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CREDIT LIMITS
Number of Cut-off Percent of Pool
Mortgage Date Principal by Cut-off Date
Range of Credit Limits Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
$________ to $________ ............ $ %
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
$________ to $________ ............
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
MAXIMUM RATES
Number of Cut-off Percent of Pool
Mortgage Date Principal by Cut-off Date
Maximum Rates Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
_____%............................. $ %
_____%.............................
_____%.............................
_____%.............................
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
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MONTHS REMAINING TO SCHEDULED MATURITY(1)
Number of Cut-off Percent of Pool
Range of Months Mortgage Date Principal by Cut-off Date
Remaining to Scheduled Maturity Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
___ to _____ ...................... $ %
___ to _____ ......................
___ to _____ ......................
___ to _____ ......................
___ to _____ ......................
___ to _____ ......................
___ to _____ ......................
___ to _____ ......................
___ to _____ ......................
___ to _____ ......................
___ to _____ ......................
___ to _____ ......................
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
- ---------
(1) Assumes that the Draw Period for Mortgage Loans with five year Draw
Periods will be extended for an additional five years.
ORIGINATION YEAR
Number of Cut-off Percent of Pool
Mortgage Date Principal by Cut-off Date
Origination Year Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
$ %
____...............................
____...............................
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
DELINQUENCY STATUS
Number of Cut-off Percent of Pool
Mortgage Date Principal by Cut-off Date
Number of Days Delinquent Loans Balance Principal Balance
- ----------------------------------- ------- -------------- ----------------
$ %
0 to 29...........................
30 to 59...........................
------- -------------- ----------------
60 to 89...........................
------- -------------- ----------------
Total......................... $ 100.00%
======= ============== ================
Assignment of Mortgage Loans
At the time of issuance of the Securities, the Depositor will transfer to the
Trust all of its right, title and interest in and to each Mortgage Loan
(including its right to purchase any Additional Balances arising in the future),
related Credit Line Agreements, mortgages and other related documents
(collectively, the "Related
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Documents"), including all collections received on or with respect to each such
Mortgage Loan after the Cut-off Date (exclusive of payments in respect of
accrued interest due on or prior to the Cut-off Date or due in the month of
______). The Owner Trustee, concurrently with such transfer, will deliver the
Securities. Each Mortgage Loan transferred to the Owner Trust will be identified
on a schedule delivered to the Owner Trustee pursuant to the Purchase Agreement.
Such schedule will include information as to the Cut-off Date Principal Balance
of each Mortgage Loan, as well as information with respect to the Loan Rate.
The Purchase Agreement will permit the Seller to maintain possession of the
Related Documents and certain other documents relating to the Mortgage Loans
(the "Mortgage Files") and assignments of the Mortgage Loans to the Owner
Trustee will not be required to be recorded for so long as the long-term senior
unsecured debt of [Countrywide] is rated at least "___ " by ___ and "____ " by
_______. In the event that [Countrywide's] long-term senior unsecured debt
rating does not satisfy the above-described standards (an "Assignment Event"),
[Countrywide] will have 90 days to record assignments of the mortgages for each
such Mortgage Loan in favor of the Owner Trustee and 60 days to deliver the
Mortgage Files pertaining to each such Mortgage Loan to the Trustee (unless
opinions of counsel satisfactory to the Rating Agencies and the [Letter of
Credit][Surety Bond] provider to the effect that recordation of such assignments
or delivery of such documentation is not required in the relevant jurisdiction
to protect the interest of [Countrywide] and the Owner Trustee in the Mortgage
Loans). In lieu of delivery of original documentation, [Countrywide] may deliver
documents which have been imaged optically upon delivery of an opinion of
counsel that such documents do not impair the enforceability of the transfer to
the Trust of the Mortgage Loans.
Within 90 days of on Assignment Event the Owner Trustee will review the
Mortgage Loans and the Related Documents and if any Mortgage Loan or Related
Document is found to be defective in any material respect and such defect is not
cured within 90 days following notification thereof to the Seller and the
Depositor by the Owner Trustee, the Seller will be obligated to repurchase the
Mortgage Loan and to deposit the Repurchase Price into the Collection Account.
Upon such retransfer, the Principal Balance of such Mortgage Loan will be
deducted from the Pool Balance. In lieu of any such repurchase, the Seller may
substitute an Eligible Substitute Mortgage Loan. Any such repurchase or
substitution will be considered a payment in full of such Mortgage Loan. The
obligation of the Seller to accept a transfer of a Defective Mortgage Loan is
the sole remedy regarding any defects in the Mortgage Loans and Related
Documents available to the Owner Trustee or the Holders.
With respect to any Mortgage Loan, the "Repurchase Price" is equal to the
Principal Balance of such Mortgage Loan at the time of any transfer described
above plus accrued and unpaid interest thereon to the date of repurchase.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by the
Depositor for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not __% more or less than the Transfer Deficiency
relating to such Defective Mortgage Loan; (ii) have a Loan Rate not less than
the Loan Rate of the Defective Mortgage Loan and not more than 1% in excess of
the Loan Rate of such Defective Mortgage Loan; (iii) have a Loan Rate based on
the same Index with adjustments to such Loan Rate made on the same Interest Rate
Adjustment Date as that of the Defective Mortgage Loan; (iv) have a Margin that
is not less than the Margin of the Defective Mortgage Loan and not more than ___
basis points higher than the Margin for the Defective Mortgage Loan; (v) have a
mortgage of the same or higher level of priority as the mortgage relating to the
Defective Mortgage Loan; (vi) have a remaining term to maturity not more than
___ months earlier and not more than __ months later than the remaining term to
maturity of the Defective Mortgage Loan; (vii) comply with each representation
and warranty as to the Mortgage Loans set forth in the Purchase Agreement
(deemed to be made as of the date of substitution); (viii) in general, have an
original Combined Loan-to-Value Ratio not greater than that of the Defective
Mortgage Loans; and (ix) satisfy certain other conditions specified in the
Purchase Agreement. To the extent the Principal Balance of an Eligible
Substitute Mortgage Loan is less than the Principal Balance of
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the related Defective Mortgage Loan, the Seller will be required to make a
deposit to the Collection Account equal to such difference.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the Owner
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant on the
Closing Date that at the time of transfer to the Depositor, the Seller has
transferred or assigned all of its right, title and interest in each Mortgage
Loan and the Related Documents, free of any lien (subject to certain
exceptions). Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the interests of the Holders or the
[Letter of Credit][Surety Bond] provider in the Related Mortgage Loan and
Related Documents, the Seller will have a period of 90 days after discovery or
notice of the breach to effect a cure. If the breach cannot be cured within the
90-day period, the Seller will be obligated to repurchase or substitute the
Defective Mortgage Loan from the Trust. The same procedure and limitations that
are set forth above for the repurchase or substitution of Defective Mortgage
Loans will apply to the transfer of a Mortgage Loan that is required to be
repurchased or substituted because of a breach of a representation or warranty
in the Purchase Agreement that materially and adversely affects the interests of
the Holders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
MATURITY AND PREPAYMENT CONSIDERATIONS
[All of the Mortgage Loans may be prepaid in full or in part at any time.]
However, Mortgage Loans secured by Mortgaged Properties in California are
subject to an account termination fee equal to the lesser of $350 and six months
interest on the amount prepaid, to the extent the prepaid amount exceeds 20% of
the unpaid principal balance, if the account is terminated on or before its
fifth year anniversary. In addition, Mortgage Loans secured by Mortgaged
Properties in other jurisdictions may be subject to account termination fees to
the extent permitted by law. In general, such account termination fees do not
exceed $350 and do not apply to accounts terminated subsequent to a date
designated in the related Mortgage Note which, depending on the jurisdiction,
ranges between [six months and five years] following origination.] The
prepayment experience with respect to the Mortgage Loans will affect the
weighted average life of the Securities.
The rate of prepayment on the Mortgage Loans cannot be predicted. Neither
the Depositor nor the Master Servicer is aware of any publicly available studies
or statistics on the rate of prepayment of such Mortgage Loans. Generally, home
equity revolving credit lines are not viewed by borrowers as permanent
financing. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional first mortgage loans. On the other hand, because the
Mortgage Loans amortize as described herein, rates of principal payment on the
Mortgage Loans will generally be slower than those of traditional
fully-amortizing first mortgages in the absence of prepayments on such Mortgage
Loans. The prepayment experience of the Trust with respect to the Mortgage Loans
may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility, the frequency and amount of any future draws on
the Credit Line Agreements and changes affecting the deductibility for Federal
income tax purposes of interest payments on home equity credit lines.
Substantially all of the Mortgage Loans contain "due-on-sale" provisions, and,
with respect to the Mortgage Loans, the Master Servicer intends to enforce such
provisions, unless such enforcement is not permitted by applicable law. The
enforcement of a "due-on-sale" provision will have the same effect as a
prepayment of the related Mortgage Loan. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses" in the Prospectus.
The yield to an investor who purchases the Securities in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Mortgage Loans is actually different than the rate
anticipated by such investor at the time such Securities were purchased.
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Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the Mortgage Loans
may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of borrowers will
not prepay their Mortgage Loans to any significant degree. See "Yield and
Prepayment Considerations" in the Prospectus.
DESCRIPTION OF THE MASTER SERVICING AGREEMENT
The Master Servicer shall establish and maintain on behalf of the Owner
Trustee an account (the "Collection Account") for the benefit of the Holders.
The Collection Account will be an Eligible Account (as defined herein). Subject
to the investment provision described in the following paragraphs, upon receipt
by the Master Servicer of amounts in respect of the Mortgage Loans (excluding
amounts representing administrative charges, annual fees, taxes, assessments,
credit insurance charges, insurance proceeds to be applied to the restoration or
repair of a Mortgaged Property or similar items), the Master Servicer will
deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Eligible Investments (as described in the Servicing Agreement)
maturing no later than one Business Day prior to the date on which the amount on
deposit therein is required to be deposited in the Distribution Account or on
such Distribution Date if approved by the Rating Agencies. Not later than the
_____ Business Day prior to each Distribution Date (the "Determination Date"),
the Master Servicer will notify the Owner Trustee and the Indenture Trustee of
the amount of such deposit to be included in funds available for the related
Distribution Date.
The Owner Trustee and the Indenture Trustee will establish one or more
accounts (the "Security Account") into which will be deposited amounts withdrawn
from the Collection Account for distribution to Holders on a Distribution Date.
The Security Account will be an Eligible Account. Amounts on deposit therein
will be invested in Eligible Investments maturing on or before the Business Day
prior to the related Distribution Date.
An "Eligible Account" is (i) an account that is maintained with a depository
institution whose debt obligations at the time of any deposit therein have the
highest short-term debt rating by the Rating Agencies, (ii) one or more accounts
with a depository institution having a minimum long-term unsecured debt rating
of "____" by _____ and "____" by _____, which accounts are fully insured by
either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation established by such
fund, (iii) a segregated trust account maintained with the Owner Trustee or an
Affiliate of the Owner Trustee in its fiduciary capacity or (iv) otherwise
acceptable to each Rating Agency as evidenced by a letter from each Rating
Agency to the Owner Trustee, without reduction or withdrawal of their then
current ratings of the Securities.
Eligible Investments are specified in the Servicing Agreement and are
limited to investments which meet the criteria of the Rating Agencies from time
to time as being consistent with their then current ratings of the Securities.
Allocations and Collections
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in respect
of interest and amounts collected in respect of principal. As to any
Distribution Date, "Interest Collections" will be equal to the aggregate of the
amounts collected
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during the related Collection Period, including Net Liquidation Proceeds (as
defined below), allocated to interest pursuant to the terms of the Credit Line
Agreements.
As to any Distribution Date, "Principal Collections" will be equal to the
sum of (i) the amounts collected during the related Collection Period, including
Net Liquidation Proceeds, and allocated to principal pursuant to the terms of
the Credit Line Agreements and (ii) any Substitution Adjustment Amounts. "Net
Liquidation Proceeds" with respect to a Mortgage Loan are equal to the aggregate
of all amounts received upon liquidation of such Mortgage Loan, including,
without limitation, insurance proceeds, reduced by related expenses, but not
including the portion, if any, of such amount that exceeds the Principal Balance
of the Mortgage Loan at the end of the Collection Period immediately preceding
the Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan plus accrued and unpaid interest thereon through the date of liquidation.
With respect to any date, the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as of such date. The Principal
Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day is
equal to the Cut-off Date Principal Balance thereof, plus (i) any Additional
Balances in respect of such Mortgage Loan minus (ii) all collections credited
against the Principal Balance of such Mortgage Loan in accordance with the
related Credit Line Agreement prior to such day. The Principal Balance of a
Liquidated Mortgage Loan after final recovery of related Liquidation Proceeds
shall be zero.
Hazard Insurance
The Master Servicing Agreement provides that the Master Servicer maintain
certain hazard insurance on the Mortgaged Properties relating to the Mortgage
Loans. While the terms of the related Credit Line Agreements generally require
borrowers to maintain certain hazard insurance, the Master Servicer will not
monitor the maintenance of such insurance.
The Master Servicing Agreement requires the Master Servicer to maintain for
any Mortgaged Property relating to a Mortgage Loan acquired upon foreclosure of
a Mortgage Loan, or by deed in lieu of such foreclosure, hazard insurance with
extended coverage in an amount equal to the lesser of (a) the maximum insurable
value of such Mortgaged Property or (b) the outstanding balance of such Mortgage
Loan plus the outstanding balance on any mortgage loan senior to such Mortgage
Loan at the time of foreclosure or deed in lieu of foreclosure, plus accrued
interest and the Master Servicer's good faith estimate of the related
liquidation expenses to be incurred in connection therewith. The Master
Servicing Agreement provides that the Master Servicer may satisfy its obligation
to cause hazard policies to be maintained by maintaining a blanket policy
insuring against losses on such Mortgaged Properties. If such blanket policy
contains a deductible clause, the Master Servicer will be obligated to deposit
in the Collection Account the sums which would have been deposited therein but
for such clause. The Master Servicer will initially satisfy these requirements
by maintaining a blanket policy. As set forth above, all amounts collected by
the Master Servicer (net of any reimbursements to the Master Servicer) under any
hazard policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property) will ultimately be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws and most of such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases vandalism. The foregoing list is merely indicative of
certain kinds of uninsured
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risks and is not intended to be all-inclusive or an exact description of the
insurance policies relating to the Mortgaged Properties.
Realization Upon Defaulted Mortgage Loans
The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when in accordance with applicable servicing procedures under the Master
Servicing Agreement, no satisfactory arrangements can be made for the collection
of delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general subordinate mortgage servicing
activities, provided the Master Servicer will not be required to expend its own
funds in connection with foreclosure or other conversion, correction of default
on a related senior mortgage loan or restoration of any property unless, in its
sole judgment, such foreclosure, correction or restoration will increase net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Holders or the [Transferor][Seller].
"Net Liquidation Proceeds" with respect to a Mortgage Loan is the amount
received upon liquidation of such Mortgage Loan reduced by related expenses,
which may include the amount advanced in respect of a senior mortgage, up to the
unpaid Principal Balance of the Mortgage Loan plus accrued and unpaid interest
thereon.
Servicing Compensation and Payment of Expenses
With respect to each Collection Period, other than the first Collection
Period, the Master Servicer will retain from interest collections in respect of
the Mortgage Loan a portion of such interest collections as a monthly Servicing
Fee in the amount equal to ___% per annum ("Servicing Fee Rate") on the
aggregate Principal Balances of the Mortgage Loans as of the first day of each
such Collection Period. All assumption fees, late payment charges and other fees
and charges, to the extent collected from borrowers, will be retained by the
Master Servicer as additional servicing compensation.
The Master Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Servicing Agreement, including, without limitation, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Registrar and any paying agent. In addition, the Master Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
defaulted Mortgage Loans and in connection with the restoration of Mortgaged
Properties, such right of reimbursement being prior to the rights of Holders to
receive any related Net Liquidation Proceeds.
DESCRIPTION OF THE SECURITIES
General
The Notes will be issued pursuant to the Indenture dated as of ___________,
199_, between the Trust and _______________, as Indenture Trustee. The
Certificates will be issued pursuant to the Trust Agreement dated as of
______________, 199_, among the Depositor, __________, and ______________, as
Owner Trustee. The following summaries describe certain provisions of the
Securities, Indenture and Trust Agreement. The summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the applicable agreement. As used herein, "Agreement" shall
mean either the Trust Agreement or the Indenture, as the context requires.
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The Securities will be issued in fully registered, certificated form only.
The Securities will be freely transferrable and exchangeable at the corporate
trust office of the Owner Trustee, with respect to the Certificates or the
Indenture Trustee with respect to the Notes.
Book-Entry Securities
The Senior Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Senior
Certificates ("Certificate Owners") will hold their Certificates through the
Depository Trust Company ("DTC") in the United States[, or CEDEL or Euroclear
(in Europe)] if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Certificates and will initially be registered
in the name of Cede & Co., 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 N.A. will act
as depositary for CEDEL and Chase will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries").] Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing Certificate
Principal Balances of $1,000 and in integral multiples in excess thereof. Except
as described below, no person acquiring a Book-Entry Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Certificates will be Cede & Co., as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
Pooling and Servicing Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through Participants and DTC.
Distributions
On each Distribution Date, collections on the Mortgage Loans will be applied
in the following order of priority:
(i) to the Master Servicer, the Servicing Fee;
(ii) as payment for the accrued interest due and any overdue accrued
interest on the respective Security Principal Balance of the Notes and the
Certificates;
(iii) as principal on the Securities, the excess of Principal Collections
over Additional Balances created during the preceding Collection Period,
such amount to be allocated between the Notes and Certificates pro rata,
based on their respective Security Principal Balances;
(iv) as principal on the Securities, as payment for any Liquidation Loss
Amounts on the Mortgage Loans;
(v) as payment for the premium for the [Letter of Credit][Surety Bond];
(vi) to reimburse prior draws made on the [Letter of Credit][Surety
Bond]; and
(vii) any remaining amounts to the Seller.
As to any Distribution Date, the "Collection Period" is the calendar month
preceding the month of such Distribution Date.
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"Liquidation Loss Amount" means with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the Collection
Period in which such Mortgage Loan became a Liquidated Mortgage Loan after
giving effect to the Net Liquidation Proceeds in connection therewith.
Interest
Note Rate. Interest will accrue on the unpaid Security Principal Balance of
the Notes at the per annum rate (the "Note Rate") equal to __% per annum from
the Closing Date to the first Distribution Date and thereafter interest will
accrue on the Notes from and including the preceding Distribution Date to but
excluding such current Distribution Date (each, an "Interest Accrual Period") at
[a floating rate equal to LIBOR (as defined herein) plus __%] [__%]. [Interest
will be calculated on the basis of the actual number of days in each Interest
Accrual Period by 360.] A failure to pay interest on any Notes on any
Distribution Date that continues for five days constitutes an Event of Default
under the Indenture.
Pass-Through Rate. Interest will accrue on the unpaid Security Principal
Balance of the Certificates at the per annum rate (the "Pass-Through Rate")
equal to __% per annum from the Closing Date to the first Distribution Date and
thereafter interest will accrue on the Certificates for each Interest Accrual
Period at [a floating rate equal to LIBOR (as defined herein) plus __%] [__%].
[Interest will be calculated on the basis of the actual number of days in each
Interest Accrual Period divided by 360.] A failure to pay interest on any
Certificates on any Distribution Date that continues for five days constitutes
an Event of Default under the Trust Agreement.
Optional Termination
The Trust will terminate on the Distribution Date following the earlier of
(i) _________________________ and (ii) the final payment or other liquidation of
the last Mortgage Loan in the Trust. The Mortgage Loans will be subject to
optional repurchase by the Master Servicer on any Distribution Date after the
Principal Balance is reduced to an amount less than or equal to $_____ (__% of
the initial Principal Balance). The repurchase price will be equal to the sum of
the outstanding Principal Balance and accrued and unpaid interest thereon at the
weighted average of the Loan Rates through the day preceding the final
Distribution Date.
THE DEPOSITOR
CWABS, Inc. the Depositor, is a Delaware corporation organized on August __,
1996 for the limited purpose of acquiring, owning and transferring Mortgage
Assets and selling interests therein or bonds secured thereby. It is a limited
purpose finance subsidiary of Countrywide Credit Industries, Inc., a Delaware
corporation. The Depositor maintains its principal office at 155 North Lake
Avenue, Pasadena, California 91101-7139. Its telephone number is (818) 584-2212.
THE INDENTURE
The following summary describes certain terms of the Indenture. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the Indenture. Whenever particular sections
or defined terms of the Indenture are referred to, such sections or defined
terms are thereby incorporated herein by reference. See "Description of the
Securities" herein for a summary of certain additional terms of the Indenture.
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Reports to Noteholders
The Indenture Trustee will mail to each Noteholder, at such Noteholder's
request, at its address listed on the Note Register maintained with the
Indenture Trustee a report setting forth certain amounts relating to the Notes.
Events of Default; Rights Upon Event of Default
With respect to the Notes, "Events of Default" under the Indenture will
consist of: (i) a default for five days or more in the payment of any interest
on any Note; (ii) a default in the payment of the principal of or any
installment of the principal of any Note when the same becomes due and payable;
(iii) a default in the observance or performance of any covenant or agreement of
the Trust made in the Indenture and the continuation of any such default for a
period of 30 days after notice thereof is given to the Trust by the Indenture
Trustee or to the Trust and the Indenture Trustee by the holders of at least 25%
in principal amount of the Notes then outstanding; (iv) any representation or
warranty made by the Trust in the Indenture or in any certificate delivered
pursuant thereto or in connection therewith having been incorrect in a material
respect as of the time made, and such breach not having been cured within 30
days after notice thereof is given to the Trust by the Indenture Trustee or to
the Trust and the Indenture Trustee by the holders of at least 25% in principal
amount of Notes then outstanding; or (v) certain events of bankruptcy,
insolvency, receivership or liquidation of the Trust. [The amount of principal
required to be paid to Noteholders under the Indenture will generally be limited
to amounts available to be deposited in the Collection Account. Therefore, the
failure to pay principal on the Notes generally will not result in the
occurrence of an Event of Default until the final scheduled Distribution Date
for such Notes.] If there is an Event of Default with respect to a Note due to
late payment or nonpayment of interest due on a Note, additional interest will
accrue on such unpaid interest at the interest rate on the Note (to the extent
lawful) until such interest is paid. Such additional interest on unpaid interest
shall be due at the time such interest is paid. If there is an Event of Default
due to late payment or nonpayment of principal on a Note, interest will continue
to accrue on such principal at the interest rate on the Note until such
principal is paid. If an Event of Default should occur and be continuing with
respect to the Notes, the Indenture Trustee or holders of a majority in
principal amount of Notes then outstanding may declare the principal of such
Notes to be immediately due and payable. Such declaration may, under certain
circumstances, be rescinded by the holders of a majority in principal amount of
the Notes then outstanding. If the Notes are due and payable following an Event
of Default with respect thereto, the Indenture Trustee may institute proceedings
to collect amounts due or foreclose on Trust property or exercise remedies as a
secured party. If an Event of Default occurs and is continuing with respect to
the Notes, the Indenture Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the holders of the Notes, if the Indenture Trustee reasonably believes it will
not be adequately indemnified against the costs, expenses and liabilities which
might be incurred by it in complying with such request. Subject to the
provisions for indemnification and certain limitations contained in the
Indenture, the holders of a majority in principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding or any remedy available to the Indenture Trustee, and the holders of
a majority in principal amount of the Notes then outstanding may, in certain
cases, waive any default with respect thereto, except a default in the payment
of principal or interest or a default in respect of a covenant or provision of
the Indenture that cannot be modified without the waiver or consent of all the
holders of the outstanding Notes. No holder of a Note will have the right to
institute any proceeding with respect to the Indenture, unless (i) such holder
previously has given the Indenture Trustee written notice of a continuing Event
of Default, (ii) the holders of not less than 25% in principal amount of the
outstanding Notes have made written request to the Indenture Trustee to
institute such proceeding in its own name as Indenture Trustee, (iii) such
holder or holders have offered the Indenture Trustee reasonable indemnity, (iv)
the Indenture Trustee has for 60 days failed to institute such proceeding and
(v) no direction inconsistent with such written request has been given to the
Indenture Trustee during the 60-day period by the holders of a majority in
principal amount of the Notes. In addition, the Indenture Trustee and the
Noteholders, by accepting the Notes, will covenant that they will not at any
time institute against the Trust
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any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law. With respect to the Trust, neither the Indenture
Trustee nor the Owner Trustee in its individual capacity, nor any holder of a
Certificate representing an ownership interest in the Trust nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
affiliates, successors or assigns will, in the absence of an express agreement
to the contrary, be personally liable for the payment of the principal of or
interest on the Notes or for the agreements of the Trust contained in the
Indenture.
Certain Covenants
The Indenture will provide that the Trust may not consolidate with or merge
into any other entity, unless (i) the entity formed by or surviving such
consolidation or merger is organized under the laws of the United States, any
state or the District of Columbia, (ii) such entity expressly assumes the
Trust's obligation to make due and punctual payments upon the Notes and the
performance or observance of any agreement and covenant of the Trust under the
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) the Trust has been advised
that the ratings of the Securities then in effect would not be reduced or
withdrawn by any Rating Agency as a result of such merger or consolidation and
(v) the Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Trust or to any Noteholder or Certificateholder. The Trust will not, among other
things, (i) except as expressly permitted by the Indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the Trust, (ii) claim any
credit on or make any deduction from the principal and interest payable in
respect of the Notes (other than amounts withheld under the Code or applicable
state law) or assert any claim against any present or former holder of Notes
because of the payment of taxes levied or assessed upon the Trust, (iii)
dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the Indenture to be impaired or permit any person to be
released from any covenants or obligations with respect to the Notes under the
Indenture except as may be expressly permitted thereby or (v) permit any lien,
charge excise, claim, security interest, mortgage or other encumbrance to be
created on or extend to or otherwise arise upon or burden the assets of the
Trust or any part thereof, or any interest therein or the proceeds thereof. The
Trust may not engage in any activity other than as specified under "The Trust"
herein. The Trust will not incur, assume or guarantee any indebtedness other
than indebtedness incurred pursuant to the Notes and the Indenture.
Annual Compliance Statement
The Trust will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of its obligations under the Indenture.
Indenture Trustee's Annual Report
The Indenture Trustee will be required to mail each year to all Noteholders
a report relating to any change in its eligibility and qualification to continue
as Indenture Trustee under the Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of any indebtedness owing
by the Trust to the Indenture Trustee in its individual capacity, any change in
the property and funds physically held by the Indenture Trustee as such and any
action taken by it that materially affects the Notes and that has not been
previously reported, but if no such changes have occurred, then no report shall
be required.
Satisfaction and Discharge of Indenture
The Indenture will be discharged with respect to the collateral securing the
Notes upon the delivery to the Indenture Trustee for cancellation of all the
Notes or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all the Notes.
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Modification of Indenture
With the consent of the holders of a majority in principal amount of the
Notes then outstanding, the Trust and the Indenture Trustee may execute a
supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify (except as provided below) in any
manner the rights of the Noteholders. Without the consent of the holder of each
outstanding Note affected thereby, however, no supplemental indenture will: (i)
change the due date of any installment of principal of or interest on any Note
or reduce the principal amount thereof, the interest rate specified thereon or
the redemption price with respect thereto or change any place of payment where
or the coin or currency in which any Note or any interest thereon is payable;
(ii) impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment; (iii) reduce the percentage of
the aggregate amount of the outstanding Notes, the consent of the holders of
which is required for any supplemental indenture or the consent of the holders
of which is required for any waiver of compliance with certain provisions of the
Indenture or of certain defaults thereunder and their consequences as provided
for in the Indenture; (iv) modify or alter the provisions of the Indenture
regarding the voting of Notes held by the Trust, the Depositor or an affiliate
of any of them; (v) decrease the percentage of the aggregate principal amount of
Notes required to amend the sections of the Indenture which specify the
applicable percentage of aggregate principal amount of the Notes necessary to
amend the Indenture or certain other related agreements; or (vi) permit the
creation of any lien ranking prior to or on a parity with the lien of the
Indenture with respect to any of the collateral for the Notes or, except as
otherwise permitted or contemplated in the Indenture, terminate the lien of the
Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of the Indenture. The Trust and the Indenture
Trustee may also enter into supplemental indentures, without obtaining the
consent of the Noteholders, for the purpose of, among other things, adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or of modifying in any manner the rights of the Noteholders;
provided that such action will not materially and adversely affect the interest
of any Noteholder.
Voting Rights
At all times, the voting rights of Noteholders under the Indenture will be
allocated among the Notes pro rata in accordance with their outstanding
principal balances.
Certain Matters Regarding the Indenture Trustee and the Depositor
Neither the Depositor, the Indenture Trustee nor any director, officer or
employee of the Depositor or the Indenture Trustee will be under any liability
to the Trust or the related Noteholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Indenture or for
errors in judgment; provided, however, that none of the Indenture Trustee, the
Depositor and any director, officer or employee thereof will be protected
against any liability which would otherwise be imposed by reason of willful
malfeasance, bad faith or gross negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the Indenture.
Subject to certain limitations set forth in the Indenture, the Indenture Trustee
and any director, officer, employee or agent of the Indenture Trustee shall be
indemnified by the Trust and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or gross negligence in the performance of its duties
under such Indenture or by reason of reckless disregard of its obligations and
duties under the Indenture. Any such indemnification by the Trust will reduce
the amount distributable to the Noteholders. All persons into which the
Indenture Trustee may be merged or with which it may be consolidated or any
person resulting from such merger or consolidation shall be the successor of the
Indenture Trustee under each Indenture.
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<PAGE>
THE TRUST AGREEMENT
The following summary describes certain terms of the Trust Agreement. The
summary does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the provisions of the Trust Agreement. Whenever
particular sections or defined terms of the Trust Agreement are referred to,
such sections or defined terms are thereby incorporated herein by reference. See
"Description of the Securities" herein for a summary of certain additional terms
of the Trust Agreement.
Amendment
The Trust Agreement may be amended by the Depositor and the Owner Trustee,
without consent of the Holders, to cure any ambiguity, to correct or supplement
any provision or for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions thereof or of modifying in any
manner the rights of such Holders; provided, however, that such action will not,
as evidenced by an opinion of counsel satisfactory to the Owner Trustee,
adversely affect in any material respect the interests of any Holders. The Trust
Agreement may also be amended by the Depositor and the Owner Trustee with the
consent of the holders of Certificates evidencing at least a majority in
principal amount of then outstanding Certificates and Holders owning Voting
Interests (as herein defined) aggregating not less than a majority of the
aggregate Voting Interests for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Trust
Agreement or modifying in any manner the rights of the Holders.
Insolvency Event
"Insolvency Event" means, with respect to any Person, any of the following
events or actions; certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings with respect to
such Person and certain actions by such Person indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations. Upon termination of the Trust, the Owner Trustee shall direct the
Indenture Trustee promptly to sell the assets of the Trust (other than the
Collection Account) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation of
the Mortgage Loans will be treated as collections on the Mortgage Loans and
deposited in the Collection Account. The Trust Agreement will provide that the
Owner Trustee does not have the power to commence a voluntary proceeding in
bankruptcy with respect to the Trust without the unanimous prior approval of all
Holders (including the Depositor) of the Trust and the delivery to the Owner
Trustee by each Holder (including the Depositor) of a certificate certifying
that the Holder reasonably believes that the Trust is insolvent.
Liability of the Depositor
Under the Trust Agreement, the Depositor will agree to be liable directly to
an injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a Noteholder or a Holder in the
capacity of an investor with respect to the Trust) arising out of or based on
the arrangement created by the Trust Agreement.
Voting Interests
As of any date, the aggregate principal balance of all Certificates
outstanding will constitute the voting interest of the Issuer (the "Voting
Interests"), except that, for purposes of determining Voting Interests,
Certificates owned by the Issuer or its affiliates (other than the Depositor)
will be disregarded and deemed not to be outstanding, and except that, in
determining whether the Owner Trustee is protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Certificates that the Owner Trustee knows to be so owned will be so disregarded.
Certificates so owned that have been pledged in good
S-37
<PAGE>
<PAGE>
faith may be regarded as outstanding if the pledgee establishes to the
satisfaction of the Owner Trustee the pledgor's right so to act with respect to
such Certificates and that the pledgee is not the Issuer or its affiliates.
Certain Matters Regarding the Owner Trustee and the Depositor
Neither the Depositor, the Owner Trustee nor any director, officer or
employee of the Depositor or the Owner Trustee will be under any liability to
the Trust or the related Holders for any action taken or for refraining from the
taking of any action in good faith pursuant to the Trust Agreement or for errors
in judgment; provided, however, that none of the Owner Trustee, the Depositor
and any director, officer or employee thereof will be protected against any
liability which would otherwise be imposed by reason of willful malfeasance, bad
faith or gross negligence in the performance of duties or by reason of reckless
disregard of obligations and duties under the Trust Agreement. Subject to
certain limitations set forth in the Trust Agreement, the Owner Trustee and any
director, officer, employee or agent of the Owner Trustee shall be indemnified
by the Trust and held harmless against any loss, liability or expense incurred
in connection with investigating, preparing to defend or defending any legal
action, commenced or threatened, relating to the Trust Agreement other than any
loss, liability or expense incurred by reason of willful malfeasance, bad faith
or gross negligence in the performance of its duties under such Trust Agreement
or by reason of reckless disregard of its obligations and duties under the Trust
Agreement. Any such indemnification by the Trust will reduce the amount
distributable to the Holders. All persons into which the Owner Trustee may be
merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the Owner Trustee under each
Trust Agreement.
ADMINISTRATION AGREEMENT
The _________________, in its capacity as Administrator, will enter into the
Administration Agreement with the Trust and the Owner Trustee pursuant to which
the Administrator will agree, to the extent provided in such Administration
Agreement, to provide notices and perform other administrative obligations
required by the Indenture and the Trust Agreement.
THE INDENTURE TRUSTEE
[ ] is the Indenture Trustee under the Indenture. The mailing address of the
Indenture Trustee is [ ], Attention: Corporate Trust Department.
THE OWNER TRUSTEE
[ ] is the Owner Trustee under the Trust Agreement. The mailing address of
the Owner Trustee is [ ], Attention: Corporate Trust Administration.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be applied by the
Depositor towards the purchase price of the Mortgage Loans.
S-38
<PAGE>
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
On January 27, 1994, the Internal Revenue Service issued final regulations
("final OID regulations") relating to original issue discount ("OID"). The
discussion under "Certain Federal Income Tax Consequences -- Taxation of Debt
Securities" in the Prospectus applies with respect to the final OID regulations.
Prospective purchasers should see "Certain Federal Income Tax Consequences"
in the Prospectus for a discussion of the application of certain federal income
and state tax laws to the Trust Fund and the Securities.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences" herein, potential investors should consider the
state income tax consequences of the acquisition, ownership, and disposition of
the Securities offered hereunder. State income tax law may differ substantially
from the corresponding federal tax law, and this discussion does not purport to
describe any aspect of the income tax laws of any state. Therefore, potential
investors should consult their own tax advisors with respect to the various tax
consequences of investments in the Securities offered hereunder.
ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and Section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or arrangements subject to Section 4975 of the
Code ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Securities without
regard to the ERISA considerations described below, subject to other applicable
federal and state law. However, any such governmental or church plan which is
qualified under section 401(a) of the Code and exempt from taxation under
section 501(a) of the Code is subject to the prohibited transaction rules set
forth in section 503 of the Code. Any Plan fiduciary which proposes to cause a
Plan to acquire any of the Securities should consult with its counsel with
respect to the potential consequences under ERISA, and the Code, of the Plan's
acquisition and ownership of the Securities. See "ERISA Considerations" in the
Prospectus. Investments by Plans are also subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Prohibited Transactions
General
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions (including loans) involving a Plan and its
assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
parties in interest which engage in non-exempt prohibited transactions.
S-39
<PAGE>
<PAGE>
Plan Asset Regulation
The United States Department of Labor ("Labor") has issued final regulations
concerning the definition of what constitutes the assets of a Plan for purposes
of ERISA and the prohibited transaction provisions of the Code (the "Plan Asset
Regulation"). The Plan Asset Regulation describes the circumstances under which
the assets of an entity in which a Plan invests will be considered to be "plan
assets" such that any person who exercises control over such assets would be
subject to ERISA's fiduciary standards. Under the Plan Asset Regulation,
generally when a Plan invests in another entity, the Plan's assets do not
include, solely by reason of such investment, any of the underlying assets of
the entity. However, the Plan Asset Regulation provides that, if a Plan acquires
an "equity interest" in an entity that is neither a "publicly-offered security"
(as defined therein) nor a security issued by an investment company registered
under the Investment Company Act of 1940, the assets of the entity will be
treated as assets of the Plan investor unless certain exceptions apply. If the
[Notes/Certificates] were deemed to be equity interests and no statutory,
regulatory or administrative exemption applies, the Trust could be considered to
hold plan assets by reason of a Plan's investment in the Notes. Such plan assets
would include an undivided interest in any assets held by the Trust. In such an
event, the Trustee and other persons, in providing services with respect to the
Trust's assets, may be parties in interest with respect to such Plans, subject
to the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA, and Section 4975 of
the Code with respect to transactions involving the Trust's assets. Under the
Plan Asset Regulation, the term "equity interest" is defined as any interest in
an entity other than an instrument that is treated as indebtedness under
"applicable local law" and which has no "substantial equity features." Although
the Plan Assets Regulation is silent with respect to the question of which law
constitutes "applicable local law" for this purpose, Labor has stated that these
determinations should be made under the state law governing interpretation of
the instrument in question. In the preamble to the Plan Assets Regulation, Labor
declined to provide a precise definition of what features are equity features or
the circumstances under which such features would be considered "substantial,"
noting that the question of whether a plan's interest has substantial equity
features is an inherently factual one, but that in making a determination it
would be appropriate to take into account whether the equity features are such
that a Plan's investment would be a practical vehicle for the indirect provision
of investment management services. Brown & Wood LLP ("ERISA Counsel") has
rendered its opinion that the Notes will be classified as indebtedness without
substantial equity features for ERISA purposes. ERISA Counsel's opinion is based
upon the terms of the Notes, the opinion of Tax Counsel that the Notes will be
classified as debt instruments for federal income tax purposes and the ratings
which have been assigned to the Notes. However, if contrary to ERISA Counsel's
opinion the Notes are deemed to be equity interests in the Trust and no
statutory, regulatory or administrative exemption applies, the Trust could be
considered to hold plan assets by reason of a Plan's investment in the Notes.
The Underwriter's Exemption
Labor has granted to [_______ ] (the "Underwriter") an administrative
exemption (Prohibited Transaction Exemption _____ (the "Exemption")) which
exempts from the application of the prohibited transaction rules of ERISA and
the related excise tax provisions of Section 4975 of the Code transactions
relating to: (i) the acquisition, sale and holding by Plans of certificates
representing an undivided interest in certain asset backed pass-through trusts
with respect to which the Underwriter or any of its affiliates is the sole
underwriter or the manager or co-manager of the underwriting syndicate; and (ii)
the servicing, operation and management of such asset backed pass-through
trusts, provided that the general conditions and certain other conditions set
forth in the Exemption are satisfied. The Exemption will apply to the
acquisition, holding and resale of the Certificates by a Plan provided that
certain conditions (some of which are described below) are met.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
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<PAGE>
<PAGE>
(1) the acquisition of the Certificates by a Plan is on terms (including
the price for the 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 interest evidenced by the Certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
Certificates of the trust;
(3) the 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 Standard & Poor's Corporation, Moody's Investors
Service, Inc, Duff & Phelps Inc. or Fitch Investors Service, Inc.;
(4) the trustee must not be an affiliate of the Underwriter, the Trustee,
any Master Servicer, any obligor with respect to assets held in the Trust
Fund constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust;
(5) the sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting the Certificates; the sum of
all payments made to and retain by the Issuer 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 servicer represents not more than reasonable compensation
for such person's services under a pooling and servicing agreement and
reimbursements of such person's reasonable expenses in connection therewith;
and
(6) the Plan investing in the 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 Underwriter believes that the Exemption will apply to the acquisition
and holding of the Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met.
Review by Plan Fiduciaries
Any Plan fiduciary considering whether to purchase any [Notes/Certificates]
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment. Among other things, before purchasing any
[Notes/Certificates], a fiduciary of a Plan should make its own determination as
to whether the Trust, as obligor on the [Notes/Certificates], is a party in
interest with respect to the Plan, the availability of the exemptive relief
provided in the Plan Asset Regulations and the availability of any other
prohibited transaction exemptions. Purchasers should analyze whether the
decision may have an impact with respect to purchases of the
[Notes/Certificates].
LEGAL INVESTMENT CONSIDERATIONS
The appropriate characterization of the Securities under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Securities, may be subject to significant interpretive
uncertainties. All investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether, and
to what extent, the Securities will constitute legal investments for them. The
Depositor makes no representation as to the proper characterization of the
Securities for legal investment or financial institution regulatory purposes, or
as to the ability of particular investors to purchase Securities under
applicable legal investment restrictions. The uncertainties described above (and
any
S-41
<PAGE>
<PAGE>
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Securities) may adversely affect
the liquidity of the Securities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Depositor has agreed to sell to [____] (the "Underwriter"), and the
Underwriter has agreed to purchase from the Depositor, the Securities. The
Underwriter is obligated to purchase all the Securities offered hereby if any
are purchased. Distribution of the Securities will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Depositor are expected to be
$________________ from the sale of the Notes and $___________ from the sale of
the Certificates, before deducting expenses payable by the Depositor of
$_________. In connection with the purchase and sale of the Securities, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts, concessions or commissions.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute payments the Underwriter may be required
to make in respect thereof. The Depositor is an affiliate of the Underwriter.
The Underwriter is an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters with respect to the Securities will be passed upon for
the Depositor by Brown & Wood LLP, New York, New York and for the Underwriter by
_____________________________.
RATINGS
It is a condition to issuance that each Class of the Notes be rated be rated
not lower than "_________" by [ ] and _______ by [ ]. It is a condition to
issuance that the Certificates be rated at least "___" by [ ] and "___" by [ ].
A securities rating addresses the likelihood of the receipt by
Certificateholders and Noteholders of distributions on the Mortgage Loans. The
rating takes into consideration the structural, legal and tax aspects associated
with the Certificates and Notes. The ratings on the Securities do not, however,
constitute statements regarding the possibility that Certificateholders or
Noteholders might realize a lower than anticipated yield. A securities 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
securities rating should be evaluated independently of similar ratings on
different securities.
[The ratings assigned by Duff & Phelps Credit Rating Co. ("DCR") to
securities address the likelihood of the receipt by the holders of such
securities of all distributions to which they are entitled under the transaction
structure. DCR's ratings reflect its analysis of the riskiness of the mortgages
and its analysis of the structure of the transaction as set forth in the
operative documents. DCR's ratings do not address the effect on yield on the
securities attributable to prepayments or recoveries on the underlying assets.]
[The ratings assigned by Fitch Investors Service, L.P. ("Fitch") to
securities address the likelihood of the receipt of all distributions on the
assets by the related holders of securities under the agreements pursuant to
which such securities are issued. Fitch's ratings take into consideration the
credit quality of the related pool, including any credit support providers,
structural and legal aspects associated with such securities, and the extent to
which the payment stream on the pool is adequate to make the payments required
by such securities.
S-42
<PAGE>
<PAGE>
Fitch ratings on such securities do not, however, constitute a statement
regarding frequency of prepayments of the assets.]
[The ratings assigned by Moody's Investors Service, Inc. ("Moody's") to
securities address the likelihood of the receipt by holders of securities of all
distributions to which such holders of securities are entitled. Moody's ratings
on securities do not represent any assessment of the likelihood or rate of
principal prepayments. The ratings do not address the possibility that holders
of securities might suffer a lower than anticipated yield as a result of
prepayments.]
[The ratings assigned by Standard & Poor's Ratings Group, a Division of The
McGraw-Hill Companies ("Standard & Poor's"), to securities address the
likelihood of the receipt of all distributions on the assets by the related
holders of securities under the agreements pursuant to which such securities are
issued. Standard & Poor's ratings take into consideration the credit quality of
the related pool, including any credit support providers, structural and legal
aspects associated with such securities, and the extent to which the payment
stream on such pool is adequate to make payments required by such securities.
Standard & Poor's ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments on the related assets. The letter
"r" attached to a Standard & Poor's rating highlights derivative, hybrid and
certain other types of securities that Standard & Poor's believes may experience
high volatility or high variability in expected returns due to non-credit risks.
The absence of an "r" symbol in the rating of a class of securities should not
be taken as an indication that such securities will exhibit no volatility or
variability in total return.]
The Depositor has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-43
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<PAGE>
===========================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH THEY RELATE OR AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THEIR RESPECTIVE DATES.
------------------
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary of Terms .................................. S-3
Risk Factors ...................................... S-11
The Trust ......................................... S-13
The [Letter of Credit][Surety Bond] Issuer ........ S-14
The Master Servicer ............................... S-14
The Home Equity Loan Program ...................... S-15
Description of the Mortgage Loans ................. S-17
Maturity and Prepayment Considerations ............ S-27
Description of the Master Servicing Agreent ....... S-28
Description of the Securities ..................... S-30
The Depositor ..................................... S-32
The Indenture ..................................... S-32
The Trust Agreement ............................... S-35
Administration Agreement .......................... S-37
The Indenture Trustee ............................. S-37
The Owner Trustee ................................. S-37
Use of Proceeds ................................... S-37
Certain Federal Income Tax Consequences ........... S-37
State Tax Consequences ............................ S-38
ERISA Considerations .............................. S-38
Legal Investment Considerations ................... S-40
Underwriting ...................................... S-40
Legal Matters ..................................... S-41
Ratings ........................................... S-41
PROSPECTUS
Prospectus Supplement or Current Report on Form 8-K 2
Incorporation of Certain Documents by Reference ... 2
Available Information ............................. 2
Reports to Securityholders ........................ 3
Summary of Terms .................................. 4
Risk Factors ...................................... 11
The Trust Fund .................................... 16
Use of Proceeds ................................... 20
The Depositor ..................................... 20
Loan Program ...................................... 21
Description of the Securities ..................... 23
===========================================================
$______________
[COUNTRYWIDE] HOME EQUITY LOAN
TRUST 199___
$______ [FIXED] [FLOATING] RATE
ASSET BACKED NOTES
$______ [FIXED] [FLOATING] RATE
ASSET BACKED CERTIFICATES,
CWABS, Inc.
(Depositor)
---------------------------
PROSPECTUS SUPPLEMENT
[ , 199 ]
---------------------------
[UNDERWRITER]
===========================================================
<PAGE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 29, 1996
PROSPECTUS
CWABS, Inc.
Depositor
Asset Backed Securities
(Issuable in Series)
------------
This Prospectus relates to the issuance of Asset Backed Certificates (the
"Certificates") and Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which may be sold from time to time in one or
more series (each, a "Series") by CWABS, Inc. (the "Depositor") or by a Trust
Fund (as defined below) on terms determined at the time of sale and described in
this Prospectus and the related Prospectus Supplement. The Securities of a
Series will consist of Certificates which evidence beneficial ownership of a
trust established by the Depositor (each, a "Trust Fund"), and/or Notes secured
by the assets of a Trust Fund. As specified in the related Prospectus
Supplement, the Trust Fund for a Series of Securities will include certain
assets (the "Trust Fund Assets") which will primarily consist of various types
of single family mortgage loans (the "Loans"), including (i) mortgage loans
secured by first and/or subordinate liens on one- to four-family residential
properties, (ii) closed-end and/or revolving home equity loans (the "Home Equity
Loans") secured primarily by subordinate liens on one- to four-family
residential properties and (iii) home improvement installment sale contracts
and installment loan agreements (the "Home Improvement Contracts") that are
either unsecured or secured primarily by subordinate liens on one- to
four-family residential properties, or by purchase money security interests in
the home improvements financed thereby (the "Home Improvements"). The Trust Fund
Assets will be acquired by the Depositor, either directly or indirectly, from
one or more institutions (each, a "Seller"), which may be affiliates of the
Depositor, and conveyed by the Depositor to the related Trust Fund. A Trust Fund
also may include insurance policies, cash accounts, reinvestment income,
guaranties, letters of credit or other assets to the extent described in the
related Prospectus Supplement.
Each Series of Securities will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on the related Trust Fund Assets. Each class of Notes of a Series will be
secured by the related Trust Fund Assets or, if so specified in the related
Prospectus Supplement, a portion thereof. A Series of Securities may include one
or more classes that are senior in right of payment to one or more other classes
of Securities of such Series. One or more classes of Securities of a Series may
be entitled to receive distributions of principal, interest or any combination
thereof prior to one or more other classes of Securities of such Series or after
the occurrence of specified events, in each case as specified in the related
Prospectus Supplement.
Distributions to Securityholders will be made monthly, quarterly,
semi-annually or at such other intervals and on the dates specified in the
related Prospectus Supplement. Distributions on the Securities of a Series will
be made from the related Trust Fund Assets or other assets pledged for the
benefit of the Securityholders as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will describe any insurance or guarantee
provided with respect to the related Series of Securities including, without
limitation, any insurance or guarantee provided by the Department of Housing and
Urban Development, the United States Department of Veterans' Affairs or any
private insurer or guarantor. Unless otherwise specified in the related
Prospectus Supplement, the only obligations of the Depositor with respect to a
Series of Securities will be to obtain certain representations and warranties
from each Seller and to assign to the Trustee for the related Series of
Securities the Depositor's rights with respect to such representations and
warranties. The principal obligations of the Master Servicer named in the
related Prospectus Supplement with respect to the related Series of Securities
will be limited to obligations pursuant to certain representations and
warranties and to its contractual servicing obligations, including any
obligation it may have to advance delinquent payments on the related Trust Fund
Assets.
The yield on each class of Securities of a Series will be affected by,
among other things, the rate of payments of principal (including prepayments) on
the related Trust Fund Assets and the timing of receipt of such payments as
described herein and in the related Prospectus Supplement. A Trust Fund may be
subject to early termination under the circumstances described herein and in the
related Prospectus Supplement.
If specified in the related Prospectus Supplement, one or more elections
may be made to treat a Trust Fund or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
See "Certain Federal Income Tax Consequences."
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FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 11.
THE CERTIFICATES OF A GIVEN SERIES WILL REPRESENT BENEFICIAL INTERESTS IN, AND
THE NOTES OF A GIVEN SERIES WILL REPRESENT OBLIGATIONS OF, THE RELATED
TRUST FUND ONLY AND WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS
OF THE DEPOSITOR, THE MASTER SERVICER, ANY SELLER OR ANY
AFFILIATES THEREOF, EXCEPT TO THE EXTENT DESCRIBED IN
THE RELATED PROSPECTUS SUPPLEMENT. THE SECURITIES
AND THE LOANS WILL NOT BE INSURED OR GUARANTEED
BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE DEPOSITOR OR ANY OTHER PERSON OR
ENTITY, EXCEPT IN EACH CASE TO THE
EXTENT DESCRIBED IN THE RELATED
PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Prior to issuance there will have been no market for the Securities of any
Series and there can be no assurance that a secondary market for any Securities
will develop, or if it does develop, that it will continue or provide
Securityholders with a sufficient level of liquidity of investment. This
Prospectus may not be used to consummate sales of Securities of any Series
unless accompanied by a Prospectus Supplement. Offers of the Securities may be
made through one or more different methods, including offerings through
underwriters, as more fully described under "Method of Distribution" herein and
in the related Prospectus Supplement.
________________, 1996
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Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) the aggregate
principal amount, interest rate and authorized denominations of each class of
such Series of Securities; (ii) information as to the assets comprising the
Trust Fund, including the general characteristics of the related Trust Fund
Assets included therein and, if applicable, the insurance policies, surety
bonds, guaranties, letters of credit or other instruments or agreements included
in the Trust Fund or otherwise, and the amount and source of any reserve account
or other cash account; (iii) the circumstances, if any, under which the Trust
Fund may be subject to early termination; (iv) the circumstances, if any, under
which the Notes of such Series are subject to redemption; (v) the method used to
calculate the amount of principal to be distributed or paid with respect to each
class of Securities; (vi) the order of application of distributions or payments
to each of the classes within such Series, whether sequential, pro rata, or
otherwise; (vii) the Distribution Dates with respect to such Series; (viii)
additional information with respect to the method of distribution of such
Securities; (ix) whether one or more REMIC elections will be made with respect
to the Trust Fund and, if so, the designation of the regular interests and the
residual interests; (x) the aggregate original percentage ownership interest in
the Trust Fund to be evidenced by each class of Certificates; (xi) the stated
maturity of each class of Notes of such Series; (xii) information as to the
nature and extent of subordination with respect to any class of Securities that
is subordinate in right of payment to any other class; and (xiii) information as
to the Seller, the Master Servicer and the Trustee.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661; and Northeast Regional Office, Seven World Trade Center, Suite 1300, New
York, New York 10048. The Commission also maintains a Web site at
http://www.sec.gov from which such Registration Statement and exhibits may be
obtained.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to the
termination of any offering of the Securities issued by such Trust Fund shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes of this
Prospectus to the extent that a statement contained herein (or
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in the accompanying Prospectus Supplement) or in any other subsequently filed
document which also is or is deemed to be incorporated by reference modifies or
replaces such statement. Any such statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Trustee on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee specified in the accompanying Prospectus Supplement.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities will be forwarded to Securityholders. However, such reports will
neither be examined nor reported on by an independent public accountant. See
"Description of the Securities--Reports to Securityholders".
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SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the related Prospectus
Supplement with respect to the Series of Securities offered thereby and to the
related Agreement (as such term is defined below) which will be prepared in
connection with each Series of Securities. The Prospectus Supplement for each
Series of Securities will specify the extent (if any) to which the terms of such
Securities or the related Trust Fund vary from the description of the Securities
and Trust Funds in general that is contained in this Prospectus. Unless
otherwise specified, capitalized terms used and not defined in this Summary of
Terms have the meanings given to them in this Prospectus and in the related
Prospectus Supplement.
Title of Securities... Asset Backed Certificates (the "Certificates") and Asset
Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which are issuable in
Series.
Depositor............. CWABS, Inc., a Delaware corporation.
Trustee............... The trustee(s) (the "Trustee") for each Series of
Securities will be specified in the related Prospectus
Supplement. See "The Agreements" herein for a
description of the Trustee's rights and obligations.
Master Servicer....... The entity or entities named as Master Servicer (the
"Master Servicer") in the related Prospectus Supplement,
which may be an affiliate of the Depositor. See "The
Agreements--Certain Matters Regarding the Master
Servicer and the Depositor".
Trust Fund Assets..... Assets of the Trust Fund for a Series of Securities will
include certain assets (the "Trust Fund Assets") which
will primarily consist of the Loans, together with
payments in respect of such Trust Fund Assets and
certain other accounts, obligations or agreements, in
each case as specified in the related Prospectus
Supplement. The Loans will be collected in a pool (each,
a "Pool") as of the first day of the month of the
issuance of the related Series of Securities or such
other date specified in the related Prospectus
Supplement (the "Cut-off Date"). Trust Fund Assets also
may include insurance policies, cash accounts,
reinvestment income, guaranties, letters of credit or
other assets to the extent described in the related
Prospectus Supplement. See "Credit Enhancement". In
addition, if the related Prospectus Supplement so
provides, the related Trust Funds Asset will include the
funds on deposit in an account (a "Pre-Funding Account")
which will be used to purchase additional Loans during
the period specified in such Prospectus Supplement. See
"The Agreements--Pre-Funding Account".
Loans................. The Loans will consist of (i) mortgage loans secured by
first and/or subordinate liens on one- to four-family
residential properties or security interests in shares
issued by cooperative housing corporations (each, a
"Mortgage Loan"), (ii) closed-end loans (the "Closed-End
Loans") and/or revolving home equity loans or certain
balances thereof (the "Revolving Credit Line Loans",
together with the Closed-End
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Loans, the "Home Equity Loans"), and (iii) home
improvement installment sales contracts and installment
loan agreements (the "Home Improvement Contracts"). All
Loans will have been purchased by the Depositor, either
directly or through an affiliate, from one or more
Sellers.
As specified in the related Prospectus Supplement, the
Home Equity Loans will, and the Home Improvement
Contracts may, be secured by mortgages or deeds of trust
or other similar security instruments creating a lien on
a Mortgaged Property, which may be subordinated to one
or more senior liens on the Mortgaged Property, as
described in the related Prospectus Supplement. As
specified in the related Prospectus Supplement, Home
Improvement Contracts may be unsecured or secured by
purchase money security interests in the Home
Improvements financed thereby. The Mortgaged Properties
and the Home Improvements are collectively referred to
herein as the "Properties".
Description of
the Securities...... Each Security will represent a beneficial ownership
interest in, or be secured by the assets of, a Trust
Fund created by the Depositor pursuant to an Agreement
among the Depositor, the Master Servicer and the Trustee
for the related Series. The Securities of any Series may
be issued in one or more classes as specified in the
related Prospectus Supplement. A Series of Securities
may include one or more classes of senior Securities
(collectively, the "Senior Securities") and one or more
classes of subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or classes of
Securities may be covered by insurance policies or other
forms of credit enhancement, in each case as described
herein and in the related Prospectus Supplement.
One or more classes of Securities of each Series (i) may
be entitled to receive distributions allocable only to
principal, only to interest or to any combination
thereof; (ii) may be entitled to receive distributions
only of prepayments of principal throughout the lives of
the Securities or during specified periods; (iii) may be
subordinated in the right to receive distributions of
scheduled payments of principal, prepayments of
principal, interest or any combination thereof to one or
more other classes of Securities of such Series
throughout the lives of the Securities or during
specified periods; (iv) may be entitled to receive such
distributions only after the occurrence of events
specified in the related Prospectus Supplement; (v) may
be entitled to receive distributions in accordance with
a schedule or formula or on the basis of collections
from designated portions of the related Trust Fund
Assets; (vi) as to Securities entitled to distributions
allocable to interest, may be entitled to receive
interest at a fixed rate or a rate that is subject to
change from time to time; and (vii) as to Securities
entitled to distributions allocable to interest, may be
entitled to distributions allocable to interest only
after the occurrence of events specified in the related
Prospectus Supplement and may accrue interest until such
events occur, in each
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case as specified in the related Prospectus Supplement.
The timing and amounts of such distributions may vary
among classes, over time, or otherwise as specified in
the related Prospectus Supplement.
Distributions on
the Securities...... Distributions on the Securities entitled thereto will be
made monthly, quarterly, semi-annually or at such other
intervals and on the dates specified in the related
Prospectus Supplement (each, a "Distribution Date") out
of the payments received in respect of the assets of the
related Trust Fund or Funds or other assets pledged for
the benefit of the Securities as specified in the
related Prospectus Supplement. The amount allocable to
payments of principal and interest on any Distribution
Date will be determined as specified in the related
Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, all distributions will be
made pro rata to Securityholders of the class entitled
thereto.
Unless otherwise specified in the related Prospectus
Supplement, the aggregate original principal balance of
the Securities will not exceed the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. If specified in
the related Prospectus Supplement, the Securities will
have an aggregate original principal balance equal to
the aggregate unpaid principal balance of the Trust Fund
Assets as of the related Cut-off Date and will bear
interest in the aggregate at a rate equal to the
interest rate borne by the underlying Loans (the "Loan
Rate") net of the aggregate servicing fees and any other
amounts specified in the related Prospectus Supplement
(the "Pass-Through Rate") or at such other interest rate
as may be specified in such Prospectus Supplement. If
specified in the related Prospectus Supplement, the
aggregate original principal balance of the Securities
and interest rates on the classes of Securities will be
determined based on the cash flow on the Trust Fund
Assets.
The rate at which interest will be passed through or
paid to holders of each class of Securities entitled
thereto may be a fixed rate or a rate that is subject to
change from time to time from the time and for the
periods, in each case, as specified in the related
Prospectus Supplement. Any such rate may be calculated
on a loan-by-loan, weighted average, notional amount or
other basis, in each case as described in the related
Prospectus Supplement.
Credit Enhancement.... The assets in a Trust Fund or the Securities of one or
more classes in the related Series may have the benefit
of one or more types of credit enhancement as described
in the related Prospectus Supplement. The protection
against losses afforded by any such credit support may
be limited. The type, characteristics and amount of
credit enhancement will be determined based on the
characteristics of the Loans comprising the Trust Fund
Assets and other factors and will be established on the
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basis of requirements of each Rating Agency rating the
Securities of such Series. See "Credit Enhancement."
A. Subordination...... A Series of Securities may consist of one or more
classes of Senior Securities and one or more classes of
Subordinated Securities. The rights of the holders of
the Subordinated Securities of a Series to receive
distributions with respect to the assets in the related
Trust Fund will be subordinated to such rights of the
holders of the Senior Securities of the same Series to
the extent described in the related Prospectus
Supplement. This subordination is intended to enhance
the likelihood of regular receipt by holders of Senior
Securities of the full amount of monthly payments of
principal and interest due them. The protection afforded
to the holders of Senior Securities of a Series by means
of the subordination feature will be accomplished by (i)
the preferential right of such holders to receive, prior
to any distribution being made in respect of the related
Subordinated Securities, the amounts of interest and/or
principal due them on each Distribution Date out of the
funds available for distribution on such date in the
related Security Account and, to the extent described in
the related Prospectus Supplement, by the right of such
holders to receive future distributions on the assets in
the related Trust Fund that would otherwise have been
payable to the holders of Subordinated Securities; (ii)
reducing the ownership interest (if applicable) of the
related Subordinated Securities; (iii) a combination of
clauses (i) and (ii) above; or (iv) as otherwise
described in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement,
subordination may apply only in the event of certain
types of losses not covered by other forms of credit
support, such as hazard losses not covered by standard
hazard insurance policies or losses due to the
bankruptcy or fraud of the borrower. The related
Prospectus Supplement will set forth information
concerning, among other things, the amount of
subordination of a class or classes of Subordinated
Securities in a Series, the circumstances in which such
subordination will be applicable, and the manner, if
any, in which the amount of subordination will decrease
over time.
B. Reserve Account.... One or more reserve accounts or other cash accounts
(each, a "Reserve Account") may be established and
maintained for each Series of Securities. The related
Prospectus Supplement will specify whether or not such
Reserve Accounts will be included in the corpus of the
Trust Fund for such Series and will also specify the
manner of funding such Reserve Accounts and the
conditions under which the amounts in any such Reserve
Accounts will be used to make distributions to holders
of Securities of a particular class or released from
such Reserve Accounts.
C. Letter of Credit... If so specified in the related Prospectus Supplement,
credit support may be provided by one or more letters of
credit. A letter of credit may provide limited
protection against certain losses in addition to or in
lieu of other credit support, such as losses resulting
from delinquent payments on the Loans in the related
Trust Fund, losses from risks not
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covered by standard hazard insurance policies, losses
due to bankruptcy of a borrower and application of
certain provisions of the federal Bankruptcy Code, and
losses due to denial of insurance coverage due to
misrepresentations made in connection with the
origination or sale of a Loan. The issuer of the letter
of credit (the "L/C Bank") will be obligated to honor
demands with respect to such letter of credit, to the
extent of the amount available thereunder to provide
funds under the circumstances and subject to such
conditions as are specified in the related Prospectus
Supplement. The liability of the L/C Bank under its
letter of credit will be reduced by the amount of
unreimbursed payments thereunder.
The maximum liability of a L/C Bank under its letter of
credit will be an amount equal to a percentage specified
in the related Prospectus Supplement of the initial
aggregate outstanding principal balance of the Loans in
the related Trust Fund or one or more Classes of
Securities of the related Series (the "L/C Percentage").
The maximum amount available at any time to be paid
under a letter of credit will be determined in the
manner specified therein and in the related Prospectus
Supplement.
D. Insurance Policies
and Surety Bonds... If so specified in the related Prospectus Supplement,
credit support for a Series may be provided by an
insurance policy and/or a surety bond issued by one or
more insurance companies or sureties. Such certificate
guarantee insurance or surety bond will guarantee timely
distributions of interest and/or full distributions of
principal on the basis of a schedule of principal
distributions set forth in or determined in the manner
specified in the related Prospectus Supplement.
E. Over-
Collateralization . If so provided in the Prospectus Supplement for a Series
of Securities, a portion of the interest payment on each
Loan may be applied as an additional distribution in
respect of principal to reduce the principal balance of
a certain class or classes of Securities and, thus,
accelerate the rate of payment of principal on such
class or classes of Securities.
F. Loan Pool
Insurance Policy... A mortgage pool insurance policy or policies may be
obtained and maintained for Loans relating to any Series
of Securities, which shall be limited in scope, covering
defaults on the related Loans in an initial amount equal
to a specified percentage of the aggregate principal
balance of all Loans included in the Pool as of the
related Cut-off Date.
G. FHA Insurance...... If specified in the related Prospectus Supplement, all
or a portion of the Loans in a Pool may be (i) insured
by the Federal Housing Administra- tion (the "FHA")
and/or (ii) partially guaranteed by the Department of
Veterans' Affairs (the "VA"). See "Certain Legal Aspects
of the Loans--The Title I Program".
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H. Cross-Support...... If specified in the related Prospectus Supplement,
separate classes of a Series of Securities may evidence
the beneficial ownership of, or be secured by, separate
groups of assets included in a Trust Fund. In such case,
credit support may be provided by a cross-support
feature which requires that distributions be made with
respect to Securities evidencing a beneficial ownership
interest in, or secured by, one or more asset groups
prior to distributions to Subordinated Securities
evidencing a beneficial ownership interest in, or
secured by, other asset groups within the same Trust
Fund.
If specified in the related Prospectus Supplement, the
coverage provided by one or more forms of credit support
may apply concurrently to two or more separate Trust
Funds. If applicable, the related Prospectus Supplement
will identify the Trust Funds to which such credit
support relates and the manner of determining the amount
of the coverage provided thereby and of the application
of such coverage to the identified Trust Funds.
I. Other Arrangements Other arrangements as described in the related
Prospectus Supplement including, but not limited to, one
or more bankruptcy bonds, special hazard insurance
policies, other insurance or third-party guarantees may
be used to provide coverage for certain risks of
defaults or various types of losses.
Advances.............. The Master Servicer and, if applicable, each mortgage
servicing institution that services a Loan in a Pool on
behalf of the Master Servicer (each, a "Sub-Servicer")
may be obligated to advance amounts (each, an "Advance")
corresponding to delinquent interest and/or principal
payments on such Loan (including, in the case of
Cooperative Loans, unpaid maintenance fees or other
charges under the related proprietary lease) until the
date, as specified in the related Prospectus Supplement,
following the date on which the related Property is sold
at a foreclosure sale or the related Loan is otherwise
liquidated. Any obligation to make Advances may be
subject to limitations as specified in the related
Prospectus Supplement. If so specified in the related
Prospectus Supplement, Advances may be drawn from a cash
account available for such purpose as described in such
Prospectus Supplement. Advances will be reimbursable to
the extent described herein and in the related
Prospectus Supplement.
In the event the Master Servicer or Sub-Servicer fails
to make a required Advance, the Trustee may be obligated
to advance such amounts otherwise required to be
advanced by the Master Servicer or Sub-Servicer. See
"Description of the Securities--Advances."
Optional ............. Termination.. The Master Servicer or the party specified
in the related Prospectus Supplement, including the
holder of the residual interest in a REMIC, may have the
option to effect early retirement of a Series of
Securities through the purchase of the Trust Fund Assets
under the circumstances
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and in the manner described in "The
Agreements--Termination; Optional Termination" herein
and in the related Prospectus Supplement.
Legal Investment...... The Prospectus Supplement for each series of Securities
will specify which, if any, of the classes of Securities
offered thereby constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of Securities
that qualify as "mortgage related securities" will be
legal investments for certain types of institutional
investors to the extent provided in SMMEA, subject, in
any case, to any other regulations which may govern
investments by such institutional investors.
Institutions whose investment activities are subject to
review by federal or state authorities should consult
with their counsel or the applicable authorities to
determine whether an investment in a particular class of
Securities (whether or not such class constitutes a
"mortgage related security") complies with applicable
guidelines, policy statements or restrictions. See
"Legal Investment."
Certain Federal
Income Tax
Consequences........ The federal income tax consequences to Securityholders
will vary depending on whether one or more elections are
made to treat the Trust Fund or specified portions
thereof as a REMIC under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"). The
Prospectus Supplement for each Series of Securities will
specify whether such an election will be made. See
"Certain Federal Income Tax Consequences".
ERISA Considerations.. A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully review with its
legal advisors whether the purchase or holding of
Securities could give rise to a transaction prohibited
or not otherwise permissible under ERISA or the Code.
See "ERISA Considerations". Certain classes of
Securities may not be transferred unless the Trustee and
the Depositor are furnished with a letter of
representation or an opinion of counsel to the effect
that such transfer will not result in a violation of the
prohibited transaction provisions of ERISA and the Code
and will not subject the Trustee, the Depositor or the
Master Servicer to additional obligations. See
"Description of the Securities-General" and "ERISA
Considerations".
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of such
Series.
Limited Assets
The Depositor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the Trust
Fund for any other Series. There will be no recourse to the Depositor or any
other person for any failure to receive distributions on the Securities.
Further, at the times set forth in the related Prospectus Supplement, certain
Trust Fund Assets and/or any balance remaining in the Security Account
immediately after making all payments due on the Securities of such Series,
after making adequate provision for future payments on certain classes of
Securities and after making any other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Master Servicer, any credit enhancement provider or any other person
entitled thereto and will no longer be available for making payments to
Securityholders. Consequently, holders of Securities of each Series must rely
solely upon payments with respect to the Trust Fund Assets and the other assets
constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer, any Seller or any of their respective
affiliates. The only obligations, if any, of the Depositor with respect to the
Trust Fund Assets or the Securities of any Series will be pursuant to certain
representations and warranties. The Depositor does not have, and is not expected
in the future to have, any significant assets with which to meet any obligation
to repurchase Trust Fund Assets with respect to which there has been a breach of
any representation or warranty. If, for example, the Depositor were required to
repurchase a Loan, its only sources of funds to make such repurchase would be
from funds obtained (i) from the enforcement of a corresponding obligation, if
any, on the part of the related Seller or originator of such Loan, or (ii) to
the extent provided in the related Prospectus Supplement, from a Reserve Account
or similar credit enhancement established to provide funds for such repurchases.
The Master Servicer's servicing obligations under the related Agreement may
include its limited obligation to make certain advances in the event of
delinquencies on the Loans, but only to the extent deemed recoverable. To the
extent described in the related Prospectus Supplement, the Depositor or Master
Servicer will be obligated under certain limited circumstances to purchase or
act as a remarketing agent with respect to a convertible Loan upon conversion to
a fixed rate.
Credit Enhancement
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such credit enhancement will be limited, as set forth in the related
Prospectus Supplement, and may be subject to periodic reduction in accordance
with a schedule or formula or otherwise decline, and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Securityholders of the related Series may suffer
losses. Moreover, such credit enhancement may not cover all potential losses or
risks. For example, credit enhancement may or may not cover fraud or negligence
by a loan originator or other parties. In addition, the Trustee will generally
be permitted to reduce, terminate or substitute all or a portion of the credit
enhancement for any Series of Securities, provided the
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applicable Rating Agency indicates that the then-current rating of the
Securities of such Series will not be adversely affected. See "Credit
Enhancement".
Prepayment and Yield Considerations
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments (including for this purpose prepayments resulting from refinancing
or liquidations of the Loans due to defaults, casualties, condemnations and
repurchases by the Depositor or the Master Servicer) of the Loans comprising the
Trust Fund, which prepayments may be influenced by a variety of factors, (ii)
the manner of allocating principal and/or payments among the classes of
Securities of a Series as specified in the related Prospectus Supplement, (iii)
the exercise by the party entitled thereto of any right of optional termination
and (iv) the rate and timing of payment defaults and losses incurred with
respect to the Trust Fund Assets. The repurchase of Loans by the Depositor or
the Master Servicer may result from repurchases of Trust Fund Assets due to
material breaches of the Depositor's or the Master Servicer's representations
and warranties, as applicable. The yields to maturity and weighted average lives
of the Securities will be affected primarily by the rate and timing of
prepayment of the Loans comprising the Trust Fund Assets. See "Yield and
Prepayment Considerations".
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Securities were to accrue through the day immediately preceding
each Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate. See "Description of the Securities -
Distributions on Securities - Distributions of Interest".
Balloon Payments
Certain of the Loans as of the related Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., balloon payments) at their stated maturity. Loans with
balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability either
to timely refinance the loan or to timely sell the related Property. The ability
of a borrower to accomplish either of these goals will be affected by a number
of factors, including the level of available mortgage rates at the time of sale
or refinancing, the borrower's equity in the related Property, the financial
condition of the borrower and tax laws.
Nature of Mortgages
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Loans, together with
any senior financing on the Properties, if applicable, would equal or exceed the
value of the Properties. Among the factors that could adversely affect the value
of the Properties are an overall decline in the residential real estate market
in the areas in which the Properties are located or a decline in the general
condition of the Properties as a result of failure of borrowers to maintain
adequately the Properties or of natural disasters that are not necessarily
covered by insurance, such as earthquakes and floods. In the case of Home Equity
Loans, such decline could extinguish the value of the interest of a junior
mortgagee in the Property before having any effect on the interest of the
related senior mortgagee. If such a decline occurs, the actual rates of
delinquencies, foreclosures and losses on all Loans could be higher than those
currently experienced in the mortgage lending industry in general.
Even assuming that the Properties provide adequate security for the Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Loans and corresponding delays in the receipt of related proceeds by
Securityholders could occur. An action to foreclose on a Property securing a
Loan is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims
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are interposed, sometimes requiring several years to complete. Furthermore, in
some states an action to obtain a deficiency judgment is not permitted following
a nonjudicial sale of a Property. In the event of a default by a borrower, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Property or to obtain liquidation proceeds
sufficient to repay all amounts due on the related Loan. In addition, the Master
Servicer will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due on defaulted
Loans and not yet repaid, including payments to senior lienholders, legal fees
and costs of legal action, real estate taxes and maintenance and preservation
expenses.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a large remaining principal balance, the amount
realized after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the small loan than would be the case with the
defaulted loan having a large remaining principal balance. Since the mortgages
and deeds of trust securing the Home Equity Loans will be primarily junior liens
subordinate to the rights of the mortgagee under the related senior mortgage(s)
or deed(s) of trust, the proceeds from any liquidation, insurance or
condemnation proceeds will be available to satisfy the outstanding balance of
such junior lien only to the extent that the claims of such senior mortgagees
have been satisfied in full, including any related foreclosure costs. In
addition, a junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to any senior mortgage, in which case it
must either pay the entire amount due on any senior mortgage to the related
senior mortgagee at or prior to the foreclosure sale or undertake the obligation
to make payments on any such senior mortgage in the event the mortgagor is in
default thereunder. The Trust Fund will not have any source of funds to satisfy
any senior mortgages or make payments due to any senior mortgagees.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of Loans. In addition, most states have other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the Loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Master Servicer to collect
all or part of the principal of or interest on the Loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the Master Servicer to damages and administrative sanctions. See "Certain Legal
Aspects of the Loans".
Environmental Risks
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over the lien of an existing
mortgage against such property. In addition under the laws of some states and
under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), a lender may be liable, as an "owner" or
"operator", for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether the environmental damage or threat was caused by a prior
owner. A lender also risks such liability on foreclosure of the related
property. See "Certain Legal Aspects of the Loans--Environmental Risks".
Certain Other Legal Considerations Regarding the Loans
The Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
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(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for Loans that were originated or closed after November 7, 1989,
the Home Equity Loan Consumer Protection Act of 1988, which requires
additional application disclosures, limits changes that may be made to the
loan documents without the borrower's consent and restricts a lender's
ability to declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
The Riegle Act. Certain mortgage loans may be subject to the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "Riegle Act")
which incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. See "Certain Legal Aspects of the Loans".
Rating of the Securities
It will be a condition to the issuance of a class of Securities offered
hereby that they be rated in one of the four highest rating categories by the
Rating Agency identified in the related Prospectus Supplement. Any such rating
would be based on, among other things, the adequacy of the value of the related
Trust Fund Assets and any credit enhancement with respect to such class and will
represent such Rating Agency's assessment solely of the likelihood that holders
of such class of Securities will receive payments to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating shall not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
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There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series of Securities, such rating might also be lowered or
withdrawn because of, among other reasons, an adverse change in the financial or
other condition of a credit enhancement provider or a change in the rating of
such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a class of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of similar loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of similar loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Loans. No assurance can be given that the values of any Properties have
remained or will remain at their levels on the respective dates of origination
of the related Loans. If the residential real estate markets should experience
an overall decline in property values such that the outstanding principal
balances of the Loans in a particular Trust Fund and any secondary financing on
the related Properties become equal to or greater than the value of the
Properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To the
extent that such losses are not covered by credit enhancement, such losses will
be borne, at least in part, by the holders of one or more classes of Securities
of the related Series. See "Rating".
Book-Entry Registration
If issued in book-entry form, such registration may reduce the liquidity of
the Securities in the secondary trading market since investors may be unwilling
to purchase Securities for which they cannot obtain physical certificates. Since
transactions in book-entry Securities can be effected only through the
Depository Trust Company ("DTC"), participating organizations, Financial
Intermediaries and certain banks, the ability of a Securityholder to pledge a
book-entry Security to persons or entities that do not participate in the DTC
system, or otherwise to take actions in respect of such Securities, may be
limited due to lack of a physical certificate representing such Securities.
In addition, Securityholders may experience some delay in their receipt of
distributions of interest and principal on book-entry Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of Depository
participants which thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through Financial Intermediaries.
See "Description of the Securities--Book-Entry Registration of Securities".
Pre-Funding Accounts
If so provided in the related Prospectus Supplement, on the related Closing
Date the Depositor will deposit an amount (the "Pre-Funded Amount") specified in
such Prospectus Supplement into an account (the "Pre-Funding Account"). In no
event shall the Pre-Funded Amount exceed 25% of the initial aggregate principal
amount of the Certificates and/or Notes of the related Series of Securities. The
Pre-Funded Amount will be used to purchase Loans ("Subsequent Loans") in a
period from the related Closing Date to a date not more than three months after
such Closing Date (such period, the "Funding Period") from the Depositor (which,
in turn, will acquire such Subsequent Loans from the Seller or Sellers specified
in the related Prospectus Supplement). To the extent that the entire Pre-Funded
Amount has not been applied to the purchase of Subsequent Loans by the end of
the related Funding Period, any amounts remaining in the Pre-Funding Account
will be distributed as a prepayment of principal
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to Certificateholders and/or Noteholders on the Distribution Date immediately
following the end of the Funding Period, in the amounts and pursuant to the
priorities set forth in the related Prospectus Supplement.
Other Considerations
There is no assurance that the market value of the Trust Fund Assets or any
other assets relating to a Series of Securities will at any time be equal to or
greater than the principal amount of the Securities of such Series then
outstanding, plus accrued interest thereon. Moreover, upon an event of default
under the Agreement for a Series of Securities and a sale of the related Trust
Fund Assets or upon a sale of the assets of a Trust Fund for a Series of
Securities, the Trustee, the Master Servicer, the credit enhancer, if any, and
any other service provider specified in the related Prospectus Supplement
generally will be entitled to receive the proceeds of any such sale to the
extent of unpaid fees and other amounts owing to such persons under the related
Agreement prior to distributions to Securityholders. Upon any such sale, the
proceeds thereof may be insufficient to pay in full the principal of and
interest on the Securities of such Series.
THE TRUST FUND
The Securities of each Series will represent interests in the assets of the
related Trust Fund, and the Notes of each Series will be secured by the pledge
of the assets of the related Trust Fund. The Trust Fund for each Series will be
held by the Trustee for the benefit of the related Securityholders. Each Trust
Fund will consist of certain assets (the "Trust Fund Assets") consisting of a
pool (each, a "Pool") comprised of Loans as specified in the related Prospectus
Supplement, together with payments in respect of such Loans and certain other
accounts, obligations or agreements, in each case as specified in the related
Prospectus Supplement.* The Pool will be created on the first day of the month
of the issuance of the related Series of Securities or such other date specified
in the related Prospectus Supplement (the "Cut-off Date"). The Securities will
be entitled to payment from the assets of the related Trust Fund or Funds or
other assets pledged for the benefit of the Securityholders as specified in the
related Prospectus Supplement and will not be entitled to payments in respect of
the assets of any other trust fund established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either directly or
through affiliates, from originators or sellers which may be affiliates of the
Depositor (the "Sellers"), and conveyed by the Depositor to the related Trust
Fund. Loans acquired by the Depositor will have been originated in accordance
with the underwriting criteria specified below under "Loan Program-Underwriting
Standards" or as otherwise described in the related Prospectus Supplement. See
"Loan Program--Underwriting Standards".
The Depositor will cause the Trust Fund Assets to be assigned to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Master Servicer named in
the related Prospectus Supplement will service the Trust Fund Assets, either
directly or through other servicing institutions ("Sub-Servicers"), pursuant to
a Pooling and Servicing Agreement among the Depositor, the Master Servicer and
the Trustee with respect to a Series consisting of Certificates, or a master
servicing agreement (each, a "Master Servicing Agreement") between the Trustee
and the Master Servicer with respect to a Series consisting of Certificates and
Notes, and will receive a fee for such services. See "Loan Program" and "The
Agreements". With respect to Loans serviced by the Master Servicer through a
Sub-Servicer, the Master Servicer
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* Whenever the terms "Pool", "Certificates", "Notes" and "Securities" are used
in this Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool and the Securities of one Series
including the Certificates representing certain undivided interests in, and/or
Notes secured by the assets of, a single Trust Fund consisting primarily of the
Loans in such Pool. Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the Certificates and the term "interest rate" will
refer to the interest rate borne by the Notes of one specific Series, as
applicable, and the term "Trust Fund" will refer to one specific Trust Fund.
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will remain liable for its servicing obligations under the related Agreement as
if the Master Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series consisting of
Certificates, the Pooling and Servicing Agreement, and with respect to a Series
consisting of Certificates and Notes, the Trust Agreement, the Indenture and the
Master Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding of the related Trust Fund Assets and other assets
contemplated herein and in the related Prospectus Supplement and the proceeds
thereof, issuing Securities and making payments and distributions thereon and
certain related activities. No Trust Fund is expected to have any source of
capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Securities will be to
obtain certain representations and warranties from the Sellers and to assign to
the Trustee for such Series of Securities the Depositor's rights with respect to
such representations and warranties. See "The Agreements--Assignment of the
Trust Fund Assets". The obligations of the Master Servicer with respect to the
Loans will consist principally of its contractual servicing obligations under
the related Agreement (including its obligation to enforce the obligations of
the Sub-Servicers or Sellers, or both, as more fully described herein under
"Loan Program--Representations by Sellers; Repurchases" and "The
Agreements--Sub-Servicing By Sellers" and "--Assignment of the Trust Fund
Assets") and its obligation, if any, to make certain cash advances in the event
of delinquencies in payments on or with respect to the Loans in the amounts
described herein under "Description of the Securities--Advances". The
obligations of the Master Servicer to make advances may be subject to
limitations, to the extent provided herein and in the related Prospectus
Supplement.
The following is a brief description of the assets expected to be included
in the Trust Funds. If specific information respecting the Trust Fund Assets is
not known at the time the related Series of Securities initially is offered,
more general information of the nature described below will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Securities (the "Detailed
Description"). A copy of the Agreement with respect to each Series of Securities
will be attached to the Form 8-K and will be available for inspection at the
corporate trust office of the Trustee specified in the related Prospectus
Supplement. A schedule of the Loans relating to such Series will be attached to
the Agreement delivered to the Trustee upon delivery of the Securities.
The Loans
General. Unless otherwise specified in the related Prospectus Supplement,
Loans will consist of mortgage loans or deeds of trust secured by first or
subordinated liens on one- to four-family residential properties, Home Equity
Loans or Home Improvement Contracts. For purposes hereof, "Home Equity Loans"
includes "Closed-End Loans" and "Revolving Credit Line Loans". If so specified,
the Loans may include cooperative apartment loans ("Cooperative Loans") secured
by security interests in shares issued by private, non-profit, cooperative
housing corporations ("Cooperatives") and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings. As more fully described in the related
Prospectus Supplement, the Loans may be "conventional" loans or loans that are
insured or guaranteed by a governmental agency such as the FHA or VA.
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Unless otherwise specified in the related Prospectus Supplement, all of the
Loans in a Pool will have monthly payments due on the first day of each month.
The payment terms of the Loans to be included in a Trust Fund will be described
in the related Prospectus Supplement and may include any of the following
features (or combination thereof) or other features, all as described below or
in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a Loan for such periods and under such circumstances as
may be specified in the related Prospectus Supplement. Loans may provide
for the payment of interest at a rate lower than the specified interest
rate borne by such Loan (the "Loan Rate") for a period of time or for the
life of the Loan, and the amount of any difference may be contributed from
funds supplied by the seller of the Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from the
Loan Rate or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due
on maturity ("balloon payment"). Principal may include interest that has
been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Loan or may decline over time, and may be
prohibited for the life of the Loan or for certain periods ("lockout
periods"). Certain Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any such subsequent prepayment. Other Loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The Loans may include "due on sale" clauses which
permit the mortgagee to demand payment of the entire Loan in connection
with the sale or certain transfers of the related Property. Other Loans may
be assumable by persons meeting the then applicable underwriting standards
of the related Seller.
A Trust Fund may contain certain Loans ("Buydown Loans") that include
provisions whereby a third party partially subsidizes the monthly payments of
the borrowers on such Loans during the early years of such Loans, the difference
to be made up from a fund (a "Buydown Fund") contributed by such third party at
the time of origination of the Loan. A Buydown Fund will be in an amount equal
either to the discounted value or full aggregate amount of future payment
subsidies. The underlying assumption of buydown plans is that the income of the
borrower will increase during the buydown period as a result of normal increases
in compensation and inflation, so that the borrower will be able to meet the
full loan payments at the end of the buydown period. To the extent that this
assumption as to increased income is not fulfilled, the possibility of defaults
on Buydown Loans is increased. The related Prospectus Supplement will contain
information with respect to any Buydown Loan concerning limitations on the
interest rate paid by the borrower initially, on annual increases in the
interest rate and on the length of the buydown period.
The real property which secures repayment of the Loans is referred to as
the "Mortgaged Properties". Home Improvement Contracts may, and the other Loans
will, be secured by mortgages or deeds of trust or other
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similar security instruments creating a lien on a Mortgaged Property. In the
case of Home Equity Loans, such liens generally will be subordinated to one or
more senior liens on the related Mortgaged Properties as described in the
related Prospectus Supplement. As specified in the related Prospectus
Supplement, Home Improvement Contracts may be unsecured or secured by purchase
money security interests in the Home Improvements financed thereby. The
Mortgaged Properties and the Home Improvements are collectively referred to
herein as the "Properties". The Properties relating to Loans will consist
primarily of detached or semi-detached one- to four-family dwelling units,
townhouses, rowhouses, individual condominium units, individual units in planned
unit developments, and certain other dwelling units ("Single Family Properties")
or mixed-used properties which consist of structures of not more than three
stories which include one- to four-family residential dwelling units and space
used for retail, professional or other commercial uses. Such Properties may
include vacation and second homes, investment properties and leasehold
interests. In the case of leasehold interests, the term of the leasehold will
exceed the scheduled maturity of the Loan by at least five years, unless
otherwise specified in the related Prospectus Supplement. The Properties may be
located in any one of the fifty states, the District of Columbia, Guam, Puerto
Rico or any other territory of the United States.
Loans with certain Loan-to-Value Ratios and/or certain principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies (each, a "Primary Mortgage Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
The aggregate principal balance of Loans secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans is secured by Single Family
Properties that are owner-occupied will be either (i) the making of a
representation by the borrower at origination of the Loan either that the
underlying Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Property as a primary
residence or (ii) a finding that the address of the underlying Property is the
borrower's mailing address.
Home Equity Loans. As more fully described in the related Prospectus
Supplement, interest on each Revolving Credit Line Loan, excluding introduction
rates offered from time to time during promotional periods, is computed and
payable monthly on the average daily outstanding principal balance of such Loan.
Principal amounts on a Revolving Credit Line Loan may be drawn down (up to a
maximum amount as set forth in the related Prospectus Supplement) or repaid
under each Revolving Credit Line Loan from time to time, but may be subject to a
minimum periodic payment. Except to the extent provided in the related
Prospectus Supplement, the Trust Fund will not include any amounts borrowed
under a Revolving Credit Line Loan after the Cut-off Date. The full amount of a
Closed-End Loan is advanced at the inception of the Loan and generally is
repayable in equal (or substantially equal) installments of an amount to fully
amortize such Loan at its stated maturity. Except to the extent provided in the
related Prospectus Supplement, the original terms to stated maturity of
Closed-End Loans will not exceed 360 months. Under certain circumstances, under
either a Revolving Credit Line Loan or a Closed-End Loan, a borrower may choose
an interest only payment option and is obligated to pay only the amount of
interest which accrues on the Loan during the billing cycle. An interest only
payment option may be available for a specified period before the borrower must
begin paying at least the minimum monthly payment of a specified percentage of
the average outstanding balance of the Loan.
Home Improvement Contracts. The Trust Fund Assets for a Series of
Securities may consist, in whole or in part, of Home Improvement Contracts
originated by a home improvement contractor, a thrift or a commercial mortgage
banker in the ordinary course of business. Except as otherwise specified in the
related Prospectus Supplement, the Home Improvements securing the Home
Improvement Contracts will include, but are not limited to, replacement windows,
house siding, new roofs, swimming pools, satellite dishes, kitchen and bathroom
remodeling goods and solar heating panels. As specified in the related
Prospectus Supplement, the Home Improvement Contracts will either be unsecured
or secured by mortgages primarily on Single Family Properties which are
generally subordinate to other mortgages on the same Property, or secured by
purchase money security interests in the Home Improvements financed thereby.
Except as otherwise specified in the related Prospectus
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Supplement, the Home Improvement Contracts will be fully amortizing and may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below and in the related Prospectus
Supplement. The initial Loan-to-Value Ratio of a Home Improvement Contract is
computed in the manner described in the related Prospectus Supplement.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Loans contained in the
related Pool, including (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Loan (e.g., single family
residences, individual units in condominium apartment buildings, two- to
four-family dwelling units, other real property or Home Improvements), (iii) the
original terms to maturity of the Loans, (iv) the largest principal balance and
the smallest principal balance of any of the Loans, (v) the earliest origination
date and latest maturity date of any of the Loans, (vi) the Loan-to-Value Ratios
or Combined Loan-to-Value Ratios, as applicable, of the Loans, (vii) the Loan
Rates or annual percentage rates ("APR") or range of Loan Rates or APR's borne
by the Loans, (viii) the maximum and minimum per annum Loan Rates, and (ix) the
geographical location of the Loans. If specific information respecting the Loans
is not known to the Depositor at the time the related Securities are initially
offered, more general information of the nature described above will be provided
in the related Prospectus Supplement, and specific information will be set forth
in the Detailed Description.
The "Loan-to-Value Ratio" of a Loan at any given time is the fraction,
expressed as a percentage, the numerator of which is the original principal
balance of the related Loan and the denominator of which is the Collateral Value
of the related Property. Except as otherwise specified in the related Prospectus
Supplement, the "Combined Loan-to-Value Ratio" of a Loan at any given time is
the ratio, expressed as a percentage, of (i) the sum of (a) the original
principal balance of the Loan (or, in the case of a Revolving Credit Line Loan,
the maximum amount thereof available) and (b) the outstanding principal balance
at the date of origination of the Loan of any senior mortgage loan(s) or, in the
case of any open-ended senior mortgage loan, the maximum available line of
credit with respect to such mortgage loan, regardless of any lesser amount
actually outstanding at the date of origination of the Loan, to (ii) the
Collateral Value of the related Property. Except as otherwise specified in the
related Prospectus Supplement, the "Collateral Value" of the Property, other
than with respect to certain Loans the proceeds of which were used to refinance
an existing mortgage loan (each, a "Refinance Loan"), is the lesser of (a) the
appraised value determined in an appraisal obtained by the originator at
origination of such Loan and (b) the sales price for such Property. In the case
of Refinance Loans, the "Collateral Value" of the related Property is the
appraised value thereof determined in an appraisal obtained at the time of
refinancing.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related Loans. If
the residential real estate market should experience an overall decline in
property values such that the sum of the outstanding principal balances of the
Loans and any primary or secondary financing on the Properties, as applicable,
in a particular Pool become equal to or greater than the value of the
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any Pool.
To the extent that such losses are not covered by subordination provisions or
alternative arrangements, such losses will be borne, at least in part, by the
holders of the Securities of the related Series.
Substitution of Trust Fund Assets
Substitution of Trust Fund Assets will be permitted in the event of
breaches of representations and warranties with respect to any original Trust
Fund Asset or in the event the documentation with respect to any Trust Fund
Asset is determined by the Trustee to be incomplete. The period during which
such substitution will be permitted generally will be indicated in the related
Prospectus Supplement. The related Prospectus Supplement will
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describe any other conditions upon which Trust Fund Assets may be substituted
for Trust Fund Assets initially included in the Trust Fund.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Trust Fund Assets or will be used by
the Depositor for general corporate purposes. The Depositor expects to sell
Securities in Series from time to time, but the timing and amount of offerings
of Securities will depend on a number of factors, including the volume of Trust
Fund Assets acquired by the Depositor, prevailing interest rates, availability
of funds and general market conditions.
THE DEPOSITOR
CWABS, Inc., a Delaware corporation (the "Depositor"), was incorporated in
August 1996 for the limited purpose of acquiring, owning and transferring Trust
Fund Assets and selling interests therein or bonds secured thereby. The
Depositor is a subsidiary of Countrywide Credit Industries, Inc., a Delaware
corporation. The Depositor maintains its principal office at 155 North Lake
Avenue, Pasadena, California 91101-7139. Its telephone number is (818) 584-2212.
Neither the Depositor nor any of the Depositor's affiliates will insure or
guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so acquired by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards".
Underwriting Standards
Unless otherwise specified in the related Prospectus Supplement, each
Seller will represent and warrant that all Loans originated and/or sold by it to
the Depositor or one of its affiliates will have been underwritten in accordance
with standards consistent with those utilized by mortgage lenders generally
during the period of origination for similar types of loans. As to any Loan
insured by the FHA or partially guaranteed by the VA, the Seller will represent
that it has complied with underwriting policies of the FHA or the VA, as the
case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Property as collateral. In general, a prospective borrower
applying for a Loan is required to fill out a detailed application designed to
provide to the underwriting officer pertinent credit information, including the
principal balance and payment history with respect to any senior mortgage, if
any, which, unless otherwise specified in the related Prospectus Supplement,
will be verified by the related Seller. As part of the description of the
borrower's financial condition, the borrower generally is required to provide a
current list of assets and liabilities and a statement of income and expenses,
as well as an authorization to apply for a credit report which summarizes the
borrower's credit history with local merchants and lenders and any record of
bankruptcy. In most cases, an employment verification is obtained from an
independent source (typically the borrower's employer) which verification
reports, among other things, the length of employment with that organization and
the borrower's current salary. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has demand or savings accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing. The
appraiser is generally required to inspect the property, issue a report
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on its condition and, if applicable, verify construction, if new, has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. The value of the property being financed, as indicated by
the appraisal, must be such that it currently supports, and is anticipated to
support in the future, the outstanding loan balance.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligations on the proposed mortgage loan (generally determined on the
basis of the monthly payments due in the year of origination) and other expenses
related to the property (such as property taxes and hazard insurance) and (ii)
to meet other financial obligations and monthly living expenses. The
underwriting standards applied by Sellers, particularly with respect to the
level of loan documentation and the borrower's income and credit history, may be
varied in appropriate cases where factors such as low Combined Loan-to-Value
Ratios or other favorable credit exist.
In the case of a Loan secured by a leasehold interest in real property, the
title to which is held by a third party lessor, the related Seller will, unless
otherwise specified in the related Prospectus Supplement, represent and warrant,
among other things, that the remaining term of the lease and any sublease is at
least five years longer than the remaining term on the Loan.
Certain of the types of Loans that may be included in a Trust Fund are
recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Loans may provide for
escalating or variable payments by the borrower. These types of Loans are
underwritten on the basis of a judgment that the borrowers have the ability to
make the monthly payments required initially. In some instances, a borrower's
income may not be sufficient to permit continued loan payments as such payments
increase. These types of Loans may also be underwritten primarily upon the basis
of Loan-to-Value Ratios or other favorable credit factors.
Qualifications of Sellers
Unless otherwise specified in the related Prospectus Supplement, each
Seller will be required to satisfy the qualifications set forth herein. Each
Seller must be an institution experienced in originating and servicing loans of
the type contained in the related Pool in accordance with accepted practices and
prudent guidelines, and must maintain satisfactory facilities to originate and
service those loans. Each Seller must be a seller/servicer approved by either
the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"). Each Seller must be a mortgagee approved by the
FHA or an institution the deposit accounts in which are insured by the Federal
Deposit Insurance Corporation (the "FDIC").
Representations by Sellers; Repurchases
Each Seller will have made representations and warranties in respect of the
Loans sold by such Seller and evidenced by all, or a part, of a Series of
Securities. Except as otherwise specified in the related Prospectus Supplement,
such representations and warranties include, among other things: (i) that title
insurance (or in the case of Properties located in areas where such policies are
generally not available, an attorney's certificate of title) and any required
hazard insurance policy were effective at origination of each Loan, other than a
Cooperative Loan, and that each policy (or certificate of title as applicable)
remained in effect on the date of purchase of the Loan from the Seller by or on
behalf of the Depositor; (ii) that the Seller had good title to each such Loan
and such Loan was subject to no offsets, defenses, counterclaims or rights of
rescission except to the extent that any buydown agreement described herein may
forgive certain indebtedness of a borrower; (iii) that each Loan constituted a
valid lien on, or a perfected security interest with respect to, the Property
(subject only to permissible liens disclosed, if applicable, title insurance
exceptions, if applicable, and certain other exceptions described in the
Agreement) and that the Property was free from damage and was in acceptable
condition; (iv) that there were no delinquent tax or assessment liens against
the Property; (v) that no required payment on a Loan was delinquent more than
the number
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of days specified in the related Prospectus Supplement; and (vi) that each Loan
was made in compliance with, and is enforceable under, all applicable local,
state and federal laws and regulations in all material respects.
If so specified in the related Prospectus Supplement, the representations
and warranties of a Seller in respect of a Loan will be made not as of the
Cut-off Date but as of the date on which such Seller sold the Loan to the
Depositor or one of its affiliates. Under such circumstances, a substantial
period of time may have elapsed between the sale date and the date of initial
issuance of the Series of Securities evidencing an interest in such Loan. Since
the representations and warranties of a Seller do not address events that may
occur following the sale of a Loan by such Seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a Loan occurs after the date of
sale of such Loan by such Seller to the Depositor or its affiliates. However,
the Depositor will not include any Loan in the Trust Fund for any Series of
Securities if anything has come to the Depositor's attention that would cause it
to believe that the representations and warranties of a Seller will not be
accurate and complete in all material respects in respect of such Loan as of the
date of initial issuance of the related Series of Securities. If the Master
Servicer is also a Seller of Loans with respect to a particular Series of
Securities, such representations will be in addition to the representations and
warranties made by the Master Servicer in its capacity as a Master Servicer.
The Master Servicer or the Trustee, if the Master Servicer is the Seller,
will promptly notify the relevant Seller of any breach of any representation or
warranty made by it in respect of a Loan which materially and adversely affects
the interests of the Securityholders in such Loan. Unless otherwise specified in
the related Prospectus Supplement, if such Seller cannot cure such breach within
90 days following notice from the Master Servicer or the Trustee, as the case
may be, then such Seller will be obligated either (i) to repurchase such Loan
from the Trust Fund at a price (the "Purchase Price") equal to 100% of the
unpaid principal balance thereof as of the date of the repurchase plus accrued
interest thereon to the first day of the month following the month of repurchase
at the Loan Rate (less any Advances or amount payable as related servicing
compensation if the Seller is the Master Servicer) or (ii) substitute for such
Loan a replacement loan that satisfies the criteria specified in the related
Prospectus Supplement. If a REMIC election is to be made with respect to a Trust
Fund, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or a holder of the related residual certificate generally will
be obligated to pay any prohibited transaction tax which may arise in connection
with any such repurchase or substitution and the Trustee must have received a
satisfactory opinion of counsel that such repurchase or substitution will not
cause the Trust Fund to lose its status as a REMIC or otherwise subject the
Trust Fund to a prohibited transaction tax. The Master Servicer may be entitled
to reimbursement for any such payment from the assets of the related Trust Fund
or from any holder of the related residual certificate. See "Description of the
Securities--General". Except in those cases in which the Master Servicer is the
Seller, the Master Servicer will be required under the applicable Agreement to
enforce this obligation for the benefit of the Trustee and the holders of the
Securities, following the practices it would employ in its good faith business
judgment were it the owner of such Loan. This repurchase or substitution
obligation will constitute the sole remedy available to holders of Securities or
the Trustee for a breach of representation by a Seller.
Neither the Depositor nor the Master Servicer (unless the Master Servicer
is the Seller) will be obligated to purchase or substitute a Loan if a Seller
defaults on its obligation to do so, and no assurance can be given that Sellers
will carry out their respective repurchase or substitution obligations with
respect to Loans. However, to the extent that a breach of a representation and
warranty of a Seller may also constitute a breach of a representation made by
the Master Servicer, the Master Servicer may have a repurchase or substitution
obligation as described below under "The Agreements--Assignment of Trust Fund
Assets".
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued pursuant to separate agreements
(each, a "Pooling and Servicing Agreement" or a "Trust Agreement") among the
Depositor, the Master Servicer and the Trustee. A form of Pooling and Servicing
Agreement and Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Each Series of Notes will be
issued pursuant to an indenture (the "Indenture") between
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the related Trust Fund and the entity named in the related Prospectus Supplement
as trustee (the "Trustee") with respect to such Series, and the related Loans
will be serviced by the Master Servicer pursuant to a Master Servicing
Agreement. A form of Indenture and Master Servicing Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
A Series of Securities may consist of both Notes and Certificates. Each
Agreement, dated as of the related Cut-off Date, will be among the Depositor,
the Master Servicer and the Trustee for the benefit of the holders of the
Securities of such Series. The provisions of each Agreement will vary depending
upon the nature of the Securities to be issued thereunder and the nature of the
related Trust Fund. The following summaries describe certain provisions which
may appear in each Agreement. The Prospectus Supplement for a Series of
Securities will describe any provision of the Agreement relating to such Series
that mainly differs from the description thereof contained in this Prospectus.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Agreement for each Series of Securities and the applicable Prospectus
Supplement. The Depositor will provide a copy of the Agreement (without
exhibits) relating to any Series without charge upon written request of a holder
of record of a Security of such Series addressed to CWABS, Inc., 155 North Lake
Avenue, Pasadena, California 91101-7139, Attention: Secretary.
General
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each Series will be issued in book-entry or fully registered form,
in the authorized denominations specified in the related Prospectus Supplement,
will, in the case of Certificates, evidence specified beneficial ownership
interests in, and in the case of Notes, be secured by, the assets of the related
Trust Fund created pursuant to each Agreement and will not be entitled to
payments in respect of the assets included in any other Trust Fund established
by the Depositor. Unless otherwise specified in the related Prospectus
Supplement, the Securities will not represent obligations of the Depositor or
any affiliate of the Depositor. Certain of the Loans may be guaranteed or
insured as set forth in the related Prospectus Supplement. Each Trust Fund will
consist of, to the extent provided in the related Agreement, (i) the Trust Fund
Assets, as from time to time are subject to the related Agreement (exclusive of
any amounts specified in the related Prospectus Supplement ("Retained
Interest")), including all payments of interest and principal received with
respect to the Loans after the Cut-off Date (to the extent not applied in
computing the principal balance of such Loans as of the Cut-off Date (the
"Cut-off Date Principal Balance")); (ii) such assets as from time to time are
required to be deposited in the related Security Account, as described below
under "The Agreements--Payments on Loans; Deposits to Security Account"; (iii)
property which secured a Loan and which is acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure and (iv) any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, a Trust Fund may also include one or more of the
following: reinvestment income on payments received on the Trust Fund Assets, a
Reserve Account, a mortgage pool insurance policy, a special hazard insurance
policy, a bankruptcy bond, one or more letters of credit, a surety bond,
guaranties or similar instruments or other agreements.
Each Series of Securities will be issued in one or more classes. Each class
of Certificates of a Series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on, and each class of Notes of a Series will be secured by, the related Trust
Fund Assets. A Series of Securities may include one or more classes that are
senior in right to payment to one or more other classes of Securities of such
Series. Certain Series or classes of Securities may be covered by insurance
policies, surety bonds or other forms of credit enhancement, in each case as
described herein and in the related Prospectus Supplement. One or more classes
of Securities of a Series may be entitled to receive distributions of principal,
interest or any combination thereof. Distributions on one or more classes of a
Series of Securities may be made prior to one or more other classes, after the
occurrence of specified events, in accordance with a schedule or formula, on the
basis of collections from designated portions of the related Trust Fund Assets
or on a different basis, in each case as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among classes
or over time as specified in the related Prospectus Supplement.
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Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Securities will be made by the Trustee on each
Distribution Date (i.e., monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the related Prospectus
Supplement) in proportion to the percentages specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Securities are registered at the close of business on the dates specified in the
related Prospectus Supplement (each, a "Record Date"). Distributions will be
made in the manner specified in the related Prospectus Supplement to the persons
entitled thereto at the address appearing in the register maintained for holders
of Securities (the "Security Register"); provided, however, that the final
distribution in retirement of the Securities will be made only upon presentation
and surrender of the Securities at the office or agency of the Trustee or other
person specified in the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series, but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of either interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which such plans,
accounts or arrangements are invested) subject to provisions of ERISA or the
Code, may result in prohibited transactions, within the meaning of ERISA and the
Code. See "ERISA Considerations". Unless otherwise specified in the related
Prospectus Supplement, the transfer of Securities of such a class will not be
registered unless the transferee (i) represents that it is not, and is not
purchasing on behalf of, any such plan, account or arrangement or (ii) provides
an opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of Securities of such a class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the
Trustee, the Master Servicer or the Depositor to any obligation or liability in
addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as a "real estate mortgage investment conduit" or
"REMIC" as defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series may provide that a REMIC election may be made at the discretion of the
Depositor or the Master Servicer and may only be made if certain conditions are
satisfied. As to any such Series, the terms and provisions applicable to the
making of a REMIC election, as well as any material federal income tax
consequences to Securityholders not otherwise described herein, will be set
forth in the related Prospectus Supplement. If such an election is made with
respect to a Series, one of the classes will be designated as evidencing the
sole class of "residual interests" in the related REMIC, as defined in the Code.
All other classes of Securities in such a Series will constitute "regular
interests" in the related REMIC, as defined in the Code. As to each Series with
respect to which a REMIC election is to be made, the Master Servicer or a holder
of the related residual certificate will be obligated to take all actions
required in order to comply with applicable laws and regulations and will be
obligated to pay any prohibited transaction taxes. The Master Servicer, unless
otherwise provided in the related Prospectus Supplement, will be entitled to
reimbursement for any such payment from the assets of the Trust Fund or from any
holder of the related residual certificate.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit support,
if any, that is used with respect to such Series. See "Credit Enhancement". Set
forth below are descriptions of various methods that may be used to determine
the amount of
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distributions on the Securities of a particular Series. The Prospectus
Supplement for each Series of Securities will describe the method to be used in
determining the amount of distributions on the Securities of such Series.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any Reserve Account (a
"Reserve Account"). As between Securities of different classes and as between
distributions of principal (and, if applicable, between distributions of
Principal Prepayments, as defined below, and scheduled payments of principal)
and interest, distributions made on any Distribution Date will be applied as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the distributions to any class of Securities
of a Series will be made pro rata to all Securityholders of that class.
Available Funds. All distributions on the Securities of each Series on each
Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "Available Funds" for each Distribution Date will generally equal
the amount on deposit in the related Security Account on such Distribution Date
(net of related fees and expenses payable by the related Trust Fund) other than
amounts to be held therein for distribution on future Distribution Dates.
Distributions of Interest. Unless otherwise specified in the related
Prospectus Supplement, interest will accrue on the aggregate principal balance
of the Securities (or, in the case of Securities entitled only to distributions
allocable to interest, the aggregate notional amount) of each class of
Securities (the "Class Security Balance") entitled to interest from the date, at
the Pass-Through Rate or interest rate, as applicable (which in either case may
be a fixed rate or rate adjustable as specified in such Prospectus Supplement),
and for the periods specified in such Prospectus Supplement. To the extent funds
are available therefor, interest accrued during each such specified period on
each class of Securities entitled to interest (other than a class of Securities
that provides for interest that accrues, but is not currently payable, referred
to hereafter as "Accrual Securities") will be distributable on the Distribution
Dates specified in the related Prospectus Supplement until the aggregate Class
Security Balance of the Securities of such class has been distributed in full
or, in the case of Securities entitled only to distributions allocable to
interest, until the aggregate notional amount of such Securities is reduced to
zero or for the period of time designated in the related Prospectus Supplement.
The original Class Security Balance of each Security will equal the aggregate
distributions allocable to principal to which such Security is entitled. Unless
otherwise specified in the related Prospectus Supplement, distributions
allocable to interest on each Security that is not entitled to distributions
allocable to principal will be calculated based on the notional amount of such
Security. The notional amount of a Security will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Security were to accrue through the day immediately preceding
such Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Class Security Balance
of such class of Securities on that Distribution Date. Unless otherwise
specified in the related Prospectus Supplement, distributions of interest on any
class of Accrual Securities will commence only after the occurrence of the
events specified in such Prospectus Supplement. Prior to such time, the
beneficial ownership interest in the Trust Fund or the principal balance, as
applicable, of such class of Accrued Securities, as reflected in the aggregate
Class Security Balance of such class of Accrual Securities, will increase on
each Distribution Date by the amount of interest that accrued on such class of
Accrual Securities during the preceding interest accrual period but that was
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not required to be distributed to such class on such Distribution Date. Any such
class of Accrual Securities will thereafter accrue interest on its outstanding
Class Security Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the Securities
on each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Securities entitled to distributions of
principal. The aggregate Class Security Balance of any class of Securities
entitled to distributions of principal generally will be the aggregate original
Class Security Balance of such class of Securities specified in such Prospectus
Supplement, reduced by all distributions reported to the holders of such
Securities as allocable to principal and, (i) in the case of Accrual Securities,
unless otherwise specified in the related Prospectus Supplement, increased by
all interest accrued but not then distributable on such Accrual Securities and
(ii) in the case of adjustable rate Securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes of
Securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of such payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in such
Prospectus Supplement. Any such allocation of Principal Prepayments to such
class or classes of Securities will have the effect of accelerating the
amortization of such Securities while increasing the interests evidenced by one
or more other classes of Securities in the Trust Fund. Increasing the interests
of the other classes of Securities relative to that of certain Securities is
intended to preserve the availability of the subordination provided by such
other Securities. See "Credit Enhancement-Subordination".
Unscheduled Distributions. If specified in the related Prospectus
Supplement, the Securities will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in such Prospectus Supplement. If applicable, the Trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the related Prospectus Supplement if, due to substantial
payments of principal (including Principal Prepayments) on the Trust Fund
Assets, the Trustee or the Master Servicer determines that the funds available
or anticipated to be available from the Security Account and, if applicable, any
Reserve Account, may be insufficient to make required distributions on the
Securities on such Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) or interest rate (if any) on the amount of
the unscheduled distribution allocable to principal for the period and to the
date specified in such Prospectus Supplement.
Advances
To the extent provided in the related Prospectus Supplement, the Master
Servicer will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or funds held in the Security
Account for future distributions to the holders of Securities of the related
Series), an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related Determination Date (as such term
is defined in the related Prospectus Supplement) and were not advanced by any
Sub-Servicer, subject to the Master Servicer's determination that such advances
may be recoverable out of late payments by borrowers, Liquidation Proceeds,
Insurance Proceeds or otherwise. In the case of Cooperative Loans, the Master
Servicer also may be required to advance any unpaid maintenance fees and other
charges under the related proprietary leases as specified in the related
Prospectus Supplement. In addition, to the extent provided in the related
Prospectus Supplement, a cash account may be established to provide for Advances
to be made in the event of certain Trust Fund Assets payment defaults or
collection shortfalls.
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In making Advances, the Master Servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to holders of the Securities,
rather than to guarantee or insure against losses. If Advances are made by the
Master Servicer from cash being held for future distribution to Securityholders,
the Master Servicer will replace such funds on or before any future Distribution
Date to the extent that funds in the applicable Security Account on such
Distribution Date would be less than the amount required to be available for
distributions to Securityholders on such date. Any Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Loans with respect to which such Advances were made (e.g., late
payments made by the related borrower, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Loan purchased by the Depositor, a
Sub-Servicer or a Seller pursuant to the related Agreement). Advances by the
Master Servicer (and any advances by a Sub-Servicer) also will be reimbursable
to the Master Servicer (or Sub-Servicer) from cash otherwise distributable to
Securityholders (including the holders of Senior Securities) to the extent that
the Master Servicer determines that any such Advances previously made are not
ultimately recoverable as described above. To the extent provided in the related
Prospectus Supplement, the Master Servicer also will be obligated to make
Advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance premiums not
paid by borrowers on a timely basis. Funds so advanced are reimbursable to the
Master Servicer to the extent permitted by the related Agreement. The
obligations of the Master Servicer to make advances may be supported by a cash
advance reserve fund, a surety bond or other arrangement, in each case as
described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Master Servicer or a Sub-Servicer fails to make a required Advance,
the Trustee will be obligated to make such Advance in its capacity as successor
servicer. If the Trustee makes such an Advance, it will be entitled to be
reimbursed for such Advance to the same extent and degree as the Master Servicer
or a Sub-Servicer is entitled to be reimbursed for Advances. See "Description of
the Securities--Distributions on Securities".
Reports to Securityholders
Prior to or concurrently with each distribution on a Distribution Date and
except as otherwise set forth in the related Prospectus Supplement, the Master
Servicer or the Trustee will furnish to each Securityholder of record of the
related Series a statement setting forth, to the extent applicable to such
Series of Securities, among other things:
(i) the amount of such distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if so
specified in the related Prospectus Supplement, any applicable prepayment
penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on such Distribution Date, and (b) withdrawn from the
Reserve Account, if any, that is included in the amounts distributed to the
Senior Securityholders;
(v) the outstanding principal balance or notional amount of each class
of the related Series after giving effect to the distribution of principal
on such Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
prepayments), if any, which each such class will be entitled to receive on
the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if any,
which each such class will be entitled to receive on the following
Distribution Date;
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(viii) the related amount of the servicing compensation retained or
withdrawn from the Security Account by the Master Servicer, and the amount
of additional servicing compensation received by the Master Servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 1 to 30 days, (2) 31 to
60 days, (3) 61 to 90 days and (4) 91 or more days and (B) in foreclosure
and delinquent (1) 1 to 30 days, (2) 31 to 60 days, (3) 61 to 90 days and
(4) 91 or more days, as of the close of business on the last day of the
calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
(xi) the Pass-Through Rate or interest rate, as applicable, if
adjusted from the date of the last statement, of any such class expected to
be applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account at
the close of business on the Distribution Date;
(xiii) the Pass-Through Rate or interest rate, as applicable, as of
the day prior to the immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool policies or
other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant class having the Percentage Interest
specified in the related Prospectus Supplement. The report to Securityholders
for any Series of Securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a Securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
Categories of Classes of Securities
The Securities of any Series may be comprised of one or more classes. Such
classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
Prospectus Supplement for a series of Securities may identify the classes which
comprise such Series by reference to the following categories.
Categories of Classes Definition
PRINCIPAL TYPES
Accretion Directed................. A class that receives principal payments
from the accreted interest from specified
Accrual classes. An Accretion Directed
class also may receive principal payments
from
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Categories of Classes Definition
principal paid on the underlying Trust
Fund Assets for the related Series.
Component Securities............... A class consisting of "Components." The
Components of a class of Component
Securities may have different principal
and/or interest payment characteristics
but together constitute a single class.
Each Component of a class of Component
Securities may be identified as falling
into one or more of the categories in
this chart.
Notional Amount
Securities....................... A class having no principal balance and
bearing interest on the related notional
amount. The notional amount is used for
purposes of the determination of interest
distributions.
Planned Principal Class
(also sometimes
referred to as "PACs")........... A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming two constant prepayment rates
for the underlying Trust Fund Assets.
These two rates are the endpoints for the
"structuring range" for the Planned
Principal Class. The Planned Principal
Classes in any Series of Securities may
be subdivided into different categories
(e.g., Primary Planned Principal Classes,
Secondary Planned Principal Classes and
so forth) having different effective
structuring ranges and different
principal payment priorities. The
structuring range for the Secondary
Planned Principal Class of a Series of
Securities will be narrower than that for
the Primary Planned Principal Class of
such Series.
Scheduled Principal Class.......... A class that is designed to receive
principal payments using a predetermined
principal balance schedule but is not
designated as a Planned Principal Class
or Targeted Principal class. In may
cases, the schedule is derived by
assuming two constant prepayment rates
for the underlying Trust Fund Assets.
These two rates are the endpoints for the
"structuring range" for the Scheduled
Principal Class.
Sequential Pay..................... Classes that receive principal payments
in a prescribed sequence, that do not
have predetermined principal balance
schedules and that under all
circumstances receive payments of
principal continuously from the first
Distribution Date on which they receive
principal until they are retired. A
single class that receives principal
payments before or after all other
classes in the same Series of Securities
may be identified as a Sequential Pay
class.
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Categories of Classes Definition
Strip.............................. A class that receives a constant
proportion, or "strip," of the principal
payments on the underlying Trust Fund
Assets or other assets of the Trust Fund.
Support Class (also
sometimes referred to
as "companion classes").......... A class that receives principal payments
on any Distribution Date only if
scheduled payments have been made on
specified Planned Principal Classes,
Targeted Principal Classes and/or
Scheduled Principal Classes.
Targeted Principal Class
(also sometimes
referred to as "TACs")........... A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming a single constant prepayment
rate for the underlying Trust Fund
Assets.
INTEREST TYPES
Fixed Rate......................... A class with an interest rate that is
fixed throughout the life of the class.
Floating Rate...................... A class with an interest rate that resets
periodically based upon a designated
index and that varies directly with
changes in such index.
Inverse Floating Rate.............. A class with an interest rate that resets
periodically based upon a designated
index and that varies inversely with
changes in such index.
Variable Rate...................... A class with an interest rate that resets
periodically and is calculated by
reference to the rate or rates of
interest applicable to specified assets
or instruments (e.g., the Loan Rates
borne by the underlying Loans).
Interest Only...................... A class that receives some or all of the
interest payments made on the underlying
Trust Fund Assets or other assets of the
Trust Fund and little or no principal.
Interest Only classes have either a
nominal principal balance or a notional
amount. A nominal principal balance
represents actual principal that will be
paid on the class. It is referred to as
nominal since it is extremely small
compared to other classes. A notional
amount is the amount used as a reference
to calculate the amount of interest due
on an Interest Only class that is not
entitled to any distributions in respect
of principal.
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Categories of Classes Definition
Principal Only..................... A class that does not bear interest and
is entitled to receive only distributions
in respect of principal.
Partial Accrual.................... A class that accretes a portion of the
amount of accrued interest thereon, which
amount will be added to the principal
balance of such class on each applicable
Distribution Date, with the remainder of
such accrued interest to be distributed
currently as interest on such class. Such
accretion may continue until a specified
event has occurred or until such Partial
Accrual class is retired.
Accrual............................ A class that accretes the amount of
accrued interest otherwise distributable
on such class, which amount will be added
as principal to the principal balance of
such class on each applicable
Distribution Date. Such accretion may
continue until some specified event has
occurred or until such Accrual class is
retired.
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
LIBOR
Unless otherwise specified in the related Prospectus Supplement, on the
LIBOR Determination Date (as such term is defined in the related Prospectus
Supplement) for each class of Securities of a Series as to which the applicable
interest rate is determined by reference to an index denominated as LIBOR, the
Person designated in the related Agreement (the "Calculation Agent") will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page (as defined in the International Swap Dealers Association, Inc.
Code of Standard Wording, Assumptions and Provisions for Swaps, 1986 Edition),
offered by the principal London office of each of the designated reference banks
meeting the criteria set forth herein (the "Reference Banks") for making
one-month United States dollar deposits in leading banks in the London Interbank
market, as of 11:00 a.m. (London time) on such LIBOR Determination Date. In lieu
of relying on the quotations for those Reference Banks that appear at such time
on the Reuters Screen LIBO Page, the Calculation Agent will request each of the
Reference Banks to provide such offered quotations at such time.
LIBOR will be established by the Calculation Agent on each LIBOR
Determination Date as follows:
(a) If on any LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual Period
shall be the arithmetic mean of such offered quotations (rounded upwards if
necessary to the nearest whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
Interest Accrual Period (as such term is defined in the related Prospectus
Supplement) shall be whichever is the higher of (i) LIBOR as determined on
the previous LIBOR Determination Date or (ii) the Reserve Interest Rate.
The "Reserve Interest Rate" shall be the rate per annum which the
Calculation Agent determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 1/32%) of the
one-month United States dollar lending rates that New York City banks
selected by the Calculation Agent are quoting, on the relevant LIBOR
Determination Date, to the principal London offices of at least two of the
Reference Banks to which such quotations are, in the opinion of the
Calculation Agent being so made, or (ii) in the event that the Calculation
Agent can
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determine no such arithmetic mean, the lowest one-month United States
dollar lending rate which New York City banks selected by the Calculation
Agent are quoting on such LIBOR Determination Date to leading European
banks.
(c) If on any LIBOR Determination Date for a class specified in the
related Prospectus Supplement, the Calculation Agent is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (b) above, LIBOR for the next Interest Accrual Period shall be
LIBOR as determined on the preceding LIBOR Determination Date, or, in the
case of the first LIBOR Determination Date, LIBOR shall be deemed to be the
per annum rate specified as such in the related Prospectus Supplement.
Each Reference Bank (i) shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; (ii) shall not
control, be controlled by, or be under common control with the Calculation
Agent; and (iii) shall have an established place of business in London. If any
such Reference Bank should be unwilling or unable to act as such or if
appointment of any such Reference Bank is terminated, another leading bank
meeting the criteria specified above will be appointed.
The establishment of LIBOR on each LIBOR Determination Date by the
Calculation Agent and its calculation of the rate of interest for the applicable
classes for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal Home
Loan Bank District (the "Eleventh District"). The Eleventh District Cost of
Funds Index for a particular month reflects the interest costs paid on all types
of funds held by Eleventh District member institutions and is calculated by
dividing the cost of funds by the average of the total amount of those funds
outstanding at the end of that month and of the prior month and annualizing and
adjusting the result to reflect the actual number of days in the particular
month. If necessary, before these calculations are made, the component figures
are adjusted by the Federal Home Loan Bank of San Francisco ("FHLBSF") to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are: (i) savings deposits, (ii)
time deposits, (iii) FHLBSF advances, (iv) repurchase agreements and (v) all
other borrowings. Because the component funds represent a variety of maturities
whose costs may react in different ways to changing conditions, the Eleventh
District Cost of Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District Cost of
Funds Index, which may cause it to move in a manner different from indices tied
to specific interest rates, such as United States Treasury bills or LIBOR.
Because the liabilities upon which the Eleventh District Cost of Funds Index is
based were issued at various times under various market conditions and with
various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month prior to the month in which it its
due to be published. Additionally, the Eleventh District Cost of Funds Index may
not necessarily move in the same direction as market interest rates at all
times, since as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, the Eleventh District Cost of Funds Index is
influenced by the differential between the prior and the new rates on those
deposits or borrowings. In addition, movements of the Eleventh District Cost of
Funds Index, as compared to other indices tied to specific interest rates, may
be affected by changes instituted by the FHLBSF in the method used to calculate
the Eleventh District Cost of Funds Index.
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The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by mail
of Information Bulletins by writing the Federal Home Loan Bank of San Francisco,
P.O. Box 7948, 600 California Street, San Francisco, California 94120, or by
calling (415) 616-1000. The Eleventh District Cost of Funds Index may also be
obtained by calling the FHLBSF at (415) 616-2600.
The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month "will be announced on or near the last
working day" of the following month and also has stated that it "cannot
guarantee the announcement" of such index on an exact date. So long as such
index for a month is announced on or before the tenth day of the second
following month, the interest rate for each class of Securities of a Series as
to which the applicable interest rate is determined by reference to an index
denominated as COFI (each, a class of "COFI Securities") for the Interest
Accrual Period commencing in such second following month will be based on the
Eleventh District Cost of Funds Index for the second preceding month. If
publication is delayed beyond such tenth day, such interest rate will be based
on the Eleventh District Cost of Funds Index for the third preceding month.
Unless otherwise specified in the related Prospectus Supplement, if on the
tenth day of the month in which any Interest Accrual Period commences for a
class of COFI Securities the most recently published Eleventh District Cost of
Funds Index relates to a month prior to the third preceding month, the index for
such current Interest Accrual Period and for each succeeding Interest Accrual
Period will, except as described in the next to last sentence of this paragraph,
be based on the National Monthly Median Cost of Funds Ratio to SAIF-Insured
Institutions (the "National Cost of Funds Index") published by the Office of
Thrift Supervision (the "OTS") for the third preceding month (or the fourth
preceding month if the National Cost of Funds Index for the third preceding
month has not been published on such tenth day of an Interest Accrual Period).
Information on the National Cost of Funds Index may be obtained by writing the
OTS at 1700 G Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677,
and the current National Cost of Funds Index may be obtained by calling (202)
906-6988. If on any such tenth day of the month in which an Interest Accrual
Period commences the most recently published National Cost of Funds Index
relates to a month prior to the fourth preceding month, the applicable index for
such Interest Accrual Period and each succeeding Interest Accrual Period will be
based on LIBOR, as determined by the Calculation Agent in accordance with the
Agreement relating to such Series of Securities. A change of index from the
Eleventh District Cost of Funds Index to an alternative index will result in a
change in the index level, and, particularly if LIBOR is the alternative index,
could increase its volatility.
The establishment of COFI by the Calculation Agent and its calculation of
the rates of interest for the applicable classes for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Treasury Index
Unless otherwise specified in the related Prospectus Supplement, on the
Treasury Index Determination Date (as such term is defined in the related
Prospectus Supplement) for each class of Securities of a Series as to which the
applicable interest rate is determined by reference to an index denominated as a
Treasury Index, the Calculation Agent will ascertain the Treasury Index for
Treasury securities of the maturity and for the period (or, if applicable, date)
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Treasury Index for any period means the
average of the yield for each business day during the period specified therein
(and for any date means the yield for such date), expressed as a per annum
percentage rate, on (i) U.S Treasury securities adjusted to the "constant
maturity" (as further described below) specified in such Prospectus Supplement
or (ii) if no "constant maturity" is so specified, U.S. Treasury securities
trading on the secondary market having the maturity specified in such Prospectus
Supplement, in each case as published by the Federal Reserve Board in its
Statistical Release No. H.15(519). Statistical Release No. H.15(519) is
published on Monday or Tuesday of each week and may be obtained by writing or
calling the Publications Department at the Board of Governors of the Federal
Reserve System, 21st and C Streets, Washington, D.C. 20551 (202) 452-3244.
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If the Calculation Agent has not yet received Statistical Release No. H.15(519)
for such week, then it will use such Statistical Release from the immediately
preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market. These market
yields are calculated from composites of quotations reported by five leading
U.S. Government securities dealers to the Federal Reserve Bank of New York. This
method provides a yield for a given maturity even if no security with that exact
maturity is outstanding. In the event that the Treasury Index is no longer
published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular Series of
Securities. The Calculation Agent's determination of the Treasury Index, and its
calculation of the rates of interest for the applicable classes for the related
Interest Accrual Period shall (in the absence of manifest error) be final and
binding.
Prime Rate
Unless otherwise specified in the related Prospectus Supplement, on the
Prime Rate Determination Date (as such term is defined in the related Prospectus
Supplement) for each class of Securities of a Series as to which the applicable
interest rate is determined by reference to an index denominated as the Prime
Rate, the Calculation Agent will ascertain the Prime Rate for the related
Interest Accrual Period. Unless otherwise specified in the related Prospectus
Supplement, the Prime Rate for an Interest Accrual Period will be the "Prime
Rate" as published in the "Money Rates" section of The Wall Street Journal (or
if not so published, the "Prime Rate" as published in a newspaper of general
circulation selected by the Calculation Agent in its sole discretion) on the
related Prime Rate Determination Date. If a prime rate range is given, then the
average of such range will be used. In the event that the Prime Rate is no
longer published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular Series of
Securities. The Calculation Agent's determination of the Prime Rate and its
calculation of the rates of interest for the related Interest Accrual Period
shall (in the absence of manifest error) be final and binding.
Book-Entry Registration of Securities
As described in the related Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
certificates (the "Book-Entry Securities"). Persons acquiring beneficial
ownership interests in the Securities ("Security Owners") will hold their
Securities through the Depository Trust Company ("DTC") in the United States, or
CEDEL or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Securities will be issued in one or more certificates which equal the
aggregate principal balance of the Securities and will initially be registered
in the name of Cede & Co., 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, N.A., will
act as depositary for CEDEL and The Chase Manhattan Bank will act as depositary
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Except as described below, no person
acquiring a Book-Entry Security (each, a "beneficial owner") will be entitled to
receive a physical certificate representing such Security (a "Definitive
Security"). Unless and until Definitive Securities are issued, it is anticipated
that the only "Securityholders" of the Securities will be Cede & Co., as nominee
of DTC. Security Owners are only permitted to exercise their rights indirectly
through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Security will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Security will be recorded on the
records of DTC (or of a participating firm that acts as agent for the
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Financial Intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner's Financial Intermediary is not a DTC
participant, and on the records of CEDEL or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and DTC participants.
While the Securities are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to Securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Securities, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
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 or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
herein) or Euroclear Participant (as defined herein) to a DTC 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.
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, 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.
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
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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 its participants
("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 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
Guarantee Trust Company of New York ("Morgan" and in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Belgian Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian 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.
Morgan 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 Morgan 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 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.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede & Co., as nominee of DTC. Distributions with
respect to Securities 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. See "Certain
Federal Income Tax Consequences -Tax Treatment of Foreign Investors" and "--Tax
Consequences to Holders of the Notes--Backup Withholding" herein. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Securities to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Securities, may be limited due to the lack of physical
certificates for such Book-Entry Securities. In addition, issuance of the
Book-Entry Securities in book-entry form may reduce the liquidity of such
Securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and
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procedures creating and affecting the Depository, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Securities of such
beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Securities under the applicable Agreement only at the direction of
one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Securities are credited, to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Book-Entry Securities.
CEDEL or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Securityholder 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 Securities which
conflict with actions taken with respect to other Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities 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.
None of the Master Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes of a
Series of Securities or with respect to the related Trust Fund Assets. Credit
enhancement may be in the form of a limited financial guaranty policy issued by
an entity named in the related Prospectus Supplement, the subordination of one
or more classes of the Securities of such Series, the establishment of one or
more Reserve Accounts, the use of a cross-support feature, use of a mortgage
pool insurance policy, FHA Insurance, VA Guarantee, bankruptcy bond, special
hazard insurance policy, surety bond, letter of credit, guaranteed investment
contract, overcollateralization, or another method of credit enhancement
described in the related Prospectus Supplement, or any combination of the
foregoing. Unless otherwise specified in the related Prospectus Supplement,
credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the Securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, Securityholders
will bear their allocable share of any deficiencies.
Subordination
If so specified in the related Prospectus Supplement, protection afforded
to holders of one or more classes of Securities of a Series by means of the
subordination feature may be accomplished by the preferential right of holders
of one or more other classes of such Series (the "Senior Securities") to
distributions in respect of scheduled principal, Principal Prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
Subordinated Securities under the circumstances and to the extent specified in
the related Prospectus Supplement. Protection may also be afforded to the
holders of Senior Securities of a Series by: (i) reducing the
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ownership interest (if applicable) of the related Subordinated Securities; (ii)
a combination of the immediately preceding sentence and clause (i) above; or
(iii) as otherwise described in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, delays in receipt of scheduled
payments on the Loans and losses on defaulted Loans may be borne first by the
various classes of Subordinated Securities and thereafter by the various classes
of Senior Securities, in each case under the circumstances and subject to the
limitations specified in such Prospectus Supplement. The aggregate distributions
in respect of delinquent payments on the Loans over the lives of the Securities
or at any time, the aggregate losses in respect of defaulted Loans which must be
borne by the Subordinated Securities by virtue of subordination and the amount
of the distributions otherwise distributable to the Subordinated Securityholders
that will be distributable to Senior Securityholders on any Distribution Date
may be limited as specified in the related Prospectus Supplement. If aggregate
distributions in respect of delinquent payments on the Loans or aggregate losses
in respect of such Loans were to exceed an amount specified in the related
Prospectus Supplement, holders of Senior Securities would experience losses on
the Securities.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Securities on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee or
distributed to holders of Senior Securities. Such deposits may be made on each
Distribution Date, for specified periods or until the balance in the Reserve
Account has reached a specified amount and, following payments from the Reserve
Account to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Account to required levels, in
each case as specified in the related Prospectus Supplement. Amounts on deposit
in the Reserve Account may be released to the holders of certain classes of
Securities at the times and under the circumstances specified in such Prospectus
Supplement.
If specified in the related Prospectus Supplement, various classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between classes of Subordinated Securities, payments to holders of Senior
Securities on account of delinquencies or losses and payments to any Reserve
Account will be allocated as specified in the related Prospectus Supplement.
Letter of Credit
The letter of credit, if any, with respect to a Series of Securities will
be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank
will be obligated to honor drawings thereunder in an aggregate fixed dollar
amount, net of unreimbursed payments thereunder, equal to the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Loans on the related Cut-off Date or of one or more Classes of
Securities (the "L/C Percentage"). If so specified in the related Prospectus
Supplement, the letter of credit may permit drawings in the event of losses not
covered by insurance policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of certain provisions of
the federal Bankruptcy Code, or losses resulting from denial of insurance
coverage due to misrepresentations in connection with the origination of a Loan.
The amount available under the letter of credit will, in all cases, be reduced
to the extent of the unreimbursed payments thereunder. The obligations of the
L/C Bank under the letter of credit for each Series of Securities will expire at
the earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund. See "The Agreements--Termination: Optional
Termination." A copy of the letter of credit for a Series, if any, will be filed
with the Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days of issuance of the Securities of the related Series.
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Insurance Policies and Surety Bonds
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. A copy of any such instrument
for a series will be filed with the Commission as an exhibit to a Current Report
on Form 8-K to be filed with the Commission within 15 days of issuance of the
Securities of the related series.
Over-Collateralization
If so provided in the Prospectus Supplement for a Series of Securities, a
portion of the interest payment on each Loan may be applied as an additional
distribution in respect of principal to reduce the principal balance of a
certain class or classes of Securities and, thus, accelerate the rate of payment
of principal on such class or classes of Securities.
Reserve Accounts
If specified in the related Prospectus Supplement, credit support with
respect to a Series of Securities will be provided by the establishment and
maintenance with the Trustee for such Series of Securities, in trust, of one or
more Reserve Accounts for such Series. The related Prospectus Supplement will
specify whether or not any such Reserve Accounts will be included in the Trust
Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit therein
of cash, United States Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the related Prospectus Supplement, (ii) by the deposit therein from
time to time of certain amounts, as specified in the related Prospectus
Supplement to which the Subordinate Securityholders, if any, would otherwise be
entitled or (iii) in such other manner as may be specified in the related
Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in "Permitted
Investments" which, unless otherwise provided in the related Prospectus
Supplement, may include obligations of the United States and certain agencies
thereof, certificates of deposit, certain commercial paper, time deposits and
bankers acceptances sold by eligible commercial banks and certain repurchase
agreements of United States government securities with eligible commercial
banks. If a letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Unless otherwise specified in the related Prospectus
Supplement, any instrument deposited therein will name the Trustee, in its
capacity as trustee for the holders of the Securities, as beneficiary and will
be issued by an entity acceptable to each Rating Agency that rates the
Securities of the related Series. Additional information with respect to such
instruments deposited in the Reserve Accounts will be set forth in the related
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Securities of the related Series for the purposes, in the manner and
at the times specified in the related Prospectus Supplement.
Pool Insurance Policies
If specified in the related Prospectus Supplement, a separate pool
insurance policy ("Pool Insurance Policy") will be obtained for the Pool and
issued by the insurer (the "Pool Insurer") named in such Prospectus Supplement.
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Each Pool Insurance Policy will, subject to the limitations described below,
cover loss by reason of default in payment on Loans in the Pool in an amount
equal to a percentage specified in such Prospectus Supplement of the aggregate
principal balance of such Loans on the Cut-off Date which are not covered as to
their entire outstanding principal balances by Primary Mortgage Insurance
Policies. As more fully described below, the Master Servicer will present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the holders
of the Securities of the related Series. The Pool Insurance Policies, however,
are not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Loans and only upon satisfaction of certain
conditions precedent described below. Unless otherwise specified in the related
Prospectus Supplement, the Pool Insurance Policies will not cover losses due to
a failure to pay or denial of a claim under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will provide that no claims may be validly presented unless (i)
any required Primary Mortgage Insurance Policy is in effect for the defaulted
Loan and a claim thereunder has been submitted and settled; (ii) hazard
insurance on the related Property has been kept in force and real estate taxes
and other protection and preservation expenses have been paid; (iii) if there
has been physical loss or damage to the Property, it has been restored to its
physical condition (reasonable wear and tear excepted) at the time of issuance
of the policy; and (iv) the insured has acquired good and merchantable title to
the Property free and clear of liens except certain permitted encumbrances. Upon
satisfaction of these conditions, the Pool Insurer will have the option either
(a) to purchase the property securing the defaulted Loan at a price equal to the
principal balance thereof plus accrued and unpaid interest at the Loan Rate to
the date of such purchase and certain expenses incurred by the Master Servicer
on behalf of the Trustee and Securityholders, or (b) to pay the amount by which
the sum of the principal balance of the defaulted Loan plus accrued and unpaid
interest at the Loan Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Property, in either case net of certain amounts paid or assumed to have been
paid under the related Primary Mortgage Insurance Policy. If any Property
securing a defaulted Loan is damaged and proceeds, if any, from the related
hazard insurance policy or the applicable special hazard insurance policy are
insufficient to restore the damaged Property to a condition sufficient to permit
recovery under the Pool Insurance Policy, the Master Servicer will not be
required to expend its own funds to restore the damaged Property unless it
determines that (i) such restoration will increase the proceeds to
Securityholders on liquidation of the Loan after reimbursement of the Master
Servicer for its expenses and (ii) such expenses will be recoverable by it
through proceeds of the sale of the Property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will not insure (and many Primary Mortgage Insurance Policies
do not insure) against loss sustained by reason of a default arising from, among
other things, (i) fraud or negligence in the origination or servicing of a Loan,
including misrepresentation by the borrower, the originator or persons involved
in the origination thereof, or (ii) failure to construct a Property in
accordance with plans and specifications. A failure of coverage attributable to
one of the foregoing events might result in a breach of the related Seller's
representations described above, and, in such events might give rise to an
obligation on the part of such Seller to repurchase the defaulted Loan if the
breach cannot be cured by such Seller. No Pool Insurance Policy will cover (and
many Primary Mortgage Insurance Policies do not cover) a claim in respect of a
defaulted Loan occurring when the servicer of such Loan, at the time of default
or thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the Pool Insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
certain expenses incurred by the Master Servicer as well as accrued interest on
delinquent Loans to the date of payment of the claim, unless otherwise specified
in the related Prospectus Supplement. Accordingly, if aggregate net claims paid
under any Pool Insurance Policy reach the original policy limit, coverage under
that Pool Insurance Policy will be exhausted and any further losses will be
borne by the related Securityholders.
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Cross-Support
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust Fund may be evidenced by
separate classes of the related Series of Securities. In such case, credit
support may be provided by a cross-support feature which requires that
distributions be made with respect to Securities evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The
Prospectus Supplement for a Series which includes a cross-support feature will
describe the manner and conditions for applying such cross-support feature.
If specified in the related Prospectus Supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related Trust Funds. If applicable, the related Prospectus Supplement will
identify the Trust Funds to which such credit support relates and the manner of
determining the amount of the coverage provided thereby and of the application
of such coverage to the identified Trust Funds.
Other Insurance, Surety Bonds, Guaranties, Letters of Credit and Similar
Instruments or Agreements
If specified in the relate Prospectus Supplement, a Trust Fund may also
include bankruptcy bonds, special hazard insurance policies, other insurance,
guaranties, or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust Fund, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in respect of such
assets or principal payment rate on such assets. Such arrangements may include
agreements under which Securityholders are entitled to receive amounts deposited
in various accounts held by the Trustee upon the terms specified in such
Prospectus Supplement.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will be
affected primarily by the amount and timing of principal payments received on or
in respect of the Trust Fund Assets included in the related Trust Fund. The
original terms to maturity of the Loans in a given Pool will vary depending upon
the type of Loans included therein. Each Prospectus Supplement will contain
information with respect to the type and maturities of the Loans in the related
Pool. The related Prospectus Supplement will specify the circumstances, if any,
under which the related Loans will be subject to prepayment penalties. The
prepayment experience on the Loans in a Pool will affect the weighted average
life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. Home equity loans
and home improvement contracts have been originated in significant volume only
during the past few years and the Depositor is not aware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity loans and home improvement contracts are not viewed by
borrowers as permanent financing. Accordingly, the Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because home equity loans such as the Revolving Credit Line Loans generally are
not fully amortizing, the absence of voluntary borrower prepayments could cause
rates of principal payments lower than, or similar to, those of traditional
fully-amortizing first mortgage loans. The prepayment experience of the related
Trust Fund may be affected by a wide variety of factors, including general
economic conditions, prevailing interest rate levels, the availability of
alternative financing, homeowner mobility and the frequency and amount of any
future draws on any Revolving Credit Line Loans. Other factors that might be
expected to affect the prepayment rate of a pool of home equity mortgage loans
or home improvement contracts include the amounts of, and interest rates on, the
underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and subordinate mortgage loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles.
Accordingly, the Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations on
the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
Loans. The enforcement of a "due-on-sale" provision (as described below) will
have the same
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effect as a prepayment of the related Loan. See "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses". The yield to an investor who purchases Securities
in the secondary market at a price other than par will vary from the anticipated
yield if the rate of prepayment on the Loans is actually different than the rate
anticipated by such investor at the time such Securities were purchased.
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the minimum
monthly payment for such month or, during the interest-only period for certain
Revolving Credit Line Loans and, in more limited circumstances, Closed-End
Loans, with respect to which an interest-only payment option has been selected,
the interest and the fees and charges for such month or (ii) make payments as
high as the entire outstanding principal balance plus accrued interest and the
fees and charges thereon. It is possible that borrowers may fail to make the
required periodic payments. In addition, collections on the Loans may vary due
to seasonal purchasing and the payment habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, all
conventional Loans will contain due-on-sale provisions permitting the mortgagee
to accelerate the maturity of the loan upon sale or certain transfers by the
borrower of the related Property. Loans insured by the FHA, and Single Family
Loans partially guaranteed by the VA, are assumable with the consent of the FHA
and the VA, respectively. Thus, the rate of prepayments on such Loans may be
lower than that of conventional Loans bearing comparable interest rates. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
generally will enforce any due-on-sale or due-on-encumbrance clause, to the
extent it has knowledge of the conveyance or further encumbrance or the proposed
conveyance or proposed further encumbrance of the Property and reasonably
believes that it is entitled to do so under applicable law; provided, however,
that the Master Servicer will not take any enforcement action that would impair
or threaten to impair any recovery under any related insurance policy. See "The
Agreements-Collection Procedures" and "Certain Legal Aspects of the Loans" for a
description of certain provisions of each Agreement and certain legal
developments that may affect the prepayment experience on the Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Loan Rates. Conversely, if prevailing interest
rates rise appreciably above the Loan Rates borne by the Loans, such Loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below such Loan Rates. However, there can be no assurance that such
will be the case.
When a full prepayment is made on a Loan, the borrower is charged interest
on the principal amount of the Loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. Unless otherwise provided in the related Prospectus Supplement, the
effect of prepayments in full will be to reduce the amount of interest passed
through or paid in the following month to holders of Securities because interest
on the principal amount of any Loan so prepaid will be paid only to the date of
prepayment. Partial prepayments in a given month may be applied to the
outstanding principal balances of the Loans so prepaid on the first day of the
month of receipt or the month following receipt. In the latter case, partial
prepayments will not reduce the amount of interest passed through or paid in
such month. Unless otherwise specified in the related Prospectus Supplement,
neither full nor partial prepayments will be passed through or paid until the
month following receipt.
Even assuming that the Properties provide adequate security for the Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Loans and corresponding delays in the receipt of related proceeds by
Securityholders could occur. An action to foreclose on a Property securing a
Loan is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a property. In the event of a default by a borrower, these
restrictions among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Property or to obtain liquidation proceeds
sufficient to repay all amounts due on the related Loan. In
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addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted Loans and not yet repaid, including payments to senior
lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the other defaulted mortgage loan having a
large remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of Loans. In addition, most have other laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the Loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Master Servicer to collect
all or part of the principal of or interest on the Loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the Master Servicer to damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to Securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price, because while interest will accrue on
each Loan from the first day of the month (unless otherwise specified in the
related Prospectus Supplement), the distribution of such interest will not be
made earlier than the month following the month of accrual.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or any person specified in the related Prospectus
Supplement may have the option to purchase the assets of a Trust Fund thereby
effecting earlier retirement of the related Series of Securities. See "The
Agreements--Termination; Optional Termination".
Factors other than those identified herein and in the related Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Securities. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Trust Fund Assets at any time or
over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
the provisions of each Agreement. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
Agreements.
Assignment of the Trust Fund Assets
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Assignment of the Loans. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund to
be assigned to the Trustee, together with all principal and interest received by
or on behalf of the Depositor on or with respect to such Loans after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date and
other than any Retained Interest specified in the related Prospectus Supplement.
The Trustee will, concurrently with such assignment, deliver such Securities to
the Depositor in exchange for the Loans. Each Loan will be identified in a
schedule appearing as an exhibit to the related Agreement. Such schedule will
include information as to the outstanding principal balance of each Loan after
application of payments due on or before the Cut-off Date, as well as
information regarding the Loan Rate or APR, the maturity of the Loan, the
Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable, at
origination and certain other information.
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Mortgage Loan or Home Equity Loan,
among other things, (i) the mortgage note or contract endorsed without recourse
in blank or to the order of the Trustee, (ii) the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, in which
case the Depositor will deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was delivered to
such recording office), (iii) an assignment of the Mortgage to the Trustee,
which assignment will be in recordable form in the case of a Mortgage
assignment, and (iv) such other security documents, including those relating to
any senior interests in the Property, as may be specified in the related
Prospectus Supplement or the related Agreement. Unless otherwise specified in
the related Prospectus Supplement, the Depositor will promptly cause the
assignments of the related Loans to be recorded in the appropriate public office
for real property records, except in states in which, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in such Loans against the claim of any subsequent transferee
or any successor to or creditor of the Depositor or the originator of such
Loans.
With respect to any Loans that are Cooperative Loans, the Depositor will
cause to be delivered to the Trustee the related original cooperative note
endorsed without recourse in blank or to the order of the Trustee, the original
security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate, related blank stock powers and any other document specified in the
related Prospectus Supplement. The Depositor will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee the original Home Improvement Contract and copies of
documents and instruments related to each Home Improvement Contract and, other
than in the case of unsecured Home Improvement Contracts, the security interest
in the Property securing such Home Improvement Contract. In order to give notice
of the right, title and interest of Securityholders to the Home Improvement
Contracts, the Depositor will cause a UCC-1 financing statement to be executed
by the Depositor or the Seller identifying the Trustee as the secured party and
identifying all Home Improvement Contracts as collateral. Unless otherwise
specified in the related Prospectus Supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment to the
Trustee. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of such assignment, the interest of Securityholders in
the Home Improvement Contracts could be defeated. See "Certain Legal Aspects of
the Loans--The Home Improvement Contracts."
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the related Securityholders. Unless otherwise specified
in the related Prospectus Supplement, if any such document is found to be
missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Depositor, and the Master Servicer will
notify the related Seller.
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If such Seller cannot cure the omission or defect within the time period
specified in the related Prospectus Supplement after receipt of such notice,
such Seller will be obligated to either (i) purchase the related Loan from the
Trust Fund at the Purchase Price or (ii) if so specified in the related
Prospectus Supplement, remove such Loan from the Trust Fund and substitute in
its place one or more other Loans that meets certain requirements set forth
therein. There can be no assurance that a Seller will fulfill this purchase or
substitution obligation. Although the Master Servicer may be obligated to
enforce such obligation to the extent described above under "Loan
Program-Representations by Sellers; Repurchases", neither the Master Servicer
nor the Depositor will be obligated to purchase or replace such Loan if the
Seller defaults on its obligation, unless such breach also constitutes a breach
of the representations or warranties of the Master Servicer or the Depositor, as
the case may be. Unless otherwise specified in the related Prospectus
Supplement, this obligation to cure, purchase or substitute constitutes the sole
remedy available to the Securityholders or the Trustee for omission of, or a
material defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Loans as agent of the Trustee.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Securityholders in a Loan, the Master Servicer will be obligated either to cure
the breach in all material respects or to purchase (at the Purchase Price) or if
so specified in the related Prospectus Supplement, replace the Loan. Unless
otherwise specified in the related Prospectus Supplement, this obligation to
cure, purchase or substitute constitutes the sole remedy available to the
Securityholders or the Trustee for such a breach of representation by the Master
Servicer.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, no purchase or substitution of a Loan will
be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
Payments on Loans; Deposits to Security Account
The Master Servicer will establish and maintain or cause to be established
and maintained with respect to the related Trust Fund a separate account or
accounts for the collection of payments on the related Trust Fund Assets in the
Trust Fund (the "Security Account") which, unless otherwise specified in the
related Prospectus Supplement, must be either (i) maintained with a depository
institution the debt obligations of which (or in the case of a depository
institution that is the principal subsidiary of a holding company, the
obligations of which) are rated in one of the two highest rating categories by
the Rating Agency or Rating Agencies that rated one or more classes of the
related Series of Securities, (ii) an account or accounts the deposits in which
are fully insured by either the Bank Insurance Fund (the "BIF") of the FDIC or
the Savings Association Insurance Fund (as successor to the Federal Savings and
Loan Insurance Corporation ("SAIF")), (iii) an account or accounts the deposits
in which are insured by the BIF or SAIF (to the limits established by the FDIC),
and the uninsured deposits in which are otherwise secured such that, as
evidenced by an opinion of counsel, the Securityholders have a claim with
respect to the funds in the Security Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained, or (iv) an account or
accounts otherwise acceptable to each Rating Agency. The collateral eligible to
secure amounts in the Security Account is limited to Permitted Investments. A
Security Account may be maintained as an interest bearing account or the funds
held therein may be invested pending each succeeding Distribution Date in
Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer or its designee will be entitled to receive any
such interest or other income earned on funds in the Security Account as
additional compensation and will be obligated to deposit in the Security Account
the amount of any loss immediately as realized. The Security Account may be
maintained with the Master Servicer or with a depository institution that is an
affiliate of the Master Servicer, provided it meets the standards set forth
above.
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The Master Servicer will deposit or cause to be deposited in the Security
Account for each Trust Fund, to the extent applicable and unless otherwise
specified in the related Prospectus Supplement and provided in the Agreement,
the following payments and collections received or advances made by or on behalf
of it subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date and exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, any
applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed Advances made, by the Master Servicer, if any) of the hazard
insurance policies and any Primary Mortgage Insurance Policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other
cash amounts (net of unreimbursed expenses incurred in connection with
liquidation or foreclosure ("Liquidation Expenses") and unreimbursed
Advances made, by the Master Servicer, if any) received and retained in
connection with the liquidation of defaulted Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received
on a monthly basis with respect to any properties acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Loan or property in respect thereof purchased
by the Master Servicer, the Depositor or any Seller as described under
"Loan Program-Representations by Sellers; Repurchases" or "-Assignment of
Trust Fund Assets" above and all proceeds of any Loan repurchased as
described under "-Termination; Optional Termination" below;
(v) all payments required to be deposited in the Security Account with
respect to any deductible clause in any blanket insurance policy described
under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments for the benefit of the
Master Servicer of funds held in the Security Account and, to the extent
specified in the related Prospectus Supplement, any payments required to be
made by the Master Servicer in connection with prepayment interest
shortfalls; and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
The Master Servicer (or the Depositor, as applicable) may from time to time
direct the institution that maintains the Security Account to withdraw funds
from the Security Account for the following purposes:
(i) to pay to the Master Servicer the servicing fees described in the
related Prospectus Supplement, the master servicing fees (subject to
reduction) and, as additional servicing compensation, earnings on or
investment income with respect to funds in the amounts in the Security
Account credited thereto;
(ii) to reimburse the Master Servicer for Advances, such right of
reimbursement with respect to any Loan being limited to amounts received
that represent late recoveries of payments of principal and/or interest on
such Loan (or Insurance Proceeds or Liquidation Proceeds with respect
thereto) with respect to which such Advance was made;
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(iii) to reimburse the Master Servicer for any Advances previously
made which the Master Servicer has determined to be nonrecoverable;
(iv) to reimburse the Master Servicer from Insurance Proceeds for
expenses incurred by the Master Servicer and covered by the related
insurance policies;
(v) to reimburse the Master Servicer for unpaid master servicing fees
and unreimbursed out-of-pocket costs and expenses incurred by the Master
Servicer in the performance of its servicing obligations, such right of
reimbursement being limited to amounts received representing late
recoveries of the payments for which such advances were made;
(vi) to pay to the Master Servicer, with respect to each Loan or
property acquired in respect thereof that has been purchased by the Master
Servicer pursuant to the Agreement, all amounts received thereon and not
taken into account in determining the principal balance of such repurchased
Loan;
(vii) to reimburse the Master Servicer or the Depositor for expenses
incurred and reimbursable pursuant to the Agreement;
(viii) to withdraw any amount deposited in the Security Account and
not required to be deposited therein; and
(ix) to clear and terminate the Security Account upon termination of
the Agreement.
In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the business day immediately preceding each
Distribution Date, the Master Servicer shall withdraw from the Security Account
the amount of Available Funds, to the extent on deposit, for deposit in an
account maintained by the Trustee for the related Series of Securities.
Pre-Funding Account
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a PreFunding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor will
deposit the Pre-Funded Amount on the related Closing Date. The Pre-Funded Amount
will not exceed 25% of the initial aggregate principal amount of the
Certificates and Notes of the related Series. The Pre-Funded Amount will be used
by the related Trustee to purchase Subsequent Loans from the Depositor from time
to time during the Funding Period. The Funding Period, if any, for a Trust Fund
will begin on the related Closing Date and will end on the date specified in the
related Prospectus Supplement, which in no event will be later than the date
that is three months after the related Closing Date. Any amounts remaining in
the Pre-Funding Account at the end of the Funding Period will be distributed to
the related Securityholders in the manner and priority specified in the related
Prospectus Supplement, as a prepayment of principal of the related Securities.
Sub-Servicing by Sellers
Each Seller of a Loan or any other servicing entity may act as the
Sub-Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the Sub-Servicer, the Agreement pursuant to which a
Series of Securities is issued will provide that, if for any reason the Master
Servicer for such Series of Securities is no longer the Master Servicer of the
related Loans, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
Notwithstanding any such subservicing arrangement, unless otherwise provided in
the related Prospectus Supplement, the Master Servicer will remain liable for
its servicing duties and obligations under the Master Servicing Agreement as if
the Master Servicer alone were servicing the Loans.
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Collection Procedures
The Master Servicer, directly or through one or more Sub-Servicers, will
make reasonable efforts to collect all payments called for under the Loans and
will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond or
alternative arrangements, follow such collection procedures as are customary
with respect to loans that are comparable to the Loans. Consistent with the
above, the Master Servicer may, in its discretion, (i) waive any assumption fee,
late payment or other charge in connection with a Loan and (ii) to the extent
not inconsistent with the coverage of such Loan by a Pool Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond
or alternative arrangements, if applicable, arrange with a borrower a schedule
for the liquidation of delinquencies running for no more than 125 days after the
applicable due date for each payment. To the extent the Master Servicer is
obligated to make or cause to be made Advances, such obligation will remain
during any period of such an arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a Loan has been, or is about to be, conveyed by
the mortgagor or obligor, the Master Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law and will not impair or threaten to impair any
recovery under any Primary Mortgage Insurance Policy. If these conditions are
not met or if the Master Servicer reasonably believes it is unable under
applicable law to enforce such due-on-sale clause or if such Loan is a mortgage
loan insured by the FHA or partially guaranteed by the VA, the Master Servicer
will enter into or cause to be entered into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable for repayment of the Loan
and, to the extent permitted by applicable law, the mortgagor remains liable
thereon. Any fee collected by or on behalf of the Master Servicer for entering
into an assumption agreement will be retained by or on behalf of the Master
Servicer as additional servicing compensation. See "Certain Legal Aspects of the
Loans-Due-on-Sale Clauses". In connection with any such assumption, the terms of
the related Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Loans". This approval is usually based on the purchaser's income and net worth
and numerous other factors. Although the Cooperative's approval is unlikely to
be unreasonably withheld or delayed, the necessity of acquiring such approval
could limit the number of potential purchasers for those shares and otherwise
limit the Trust Fund's ability to sell and realize the value of those shares.
In general a "tenant-stockholder" (as defined in Code Section 216(b)(2) of
a corporation that qualifies as a "cooperative housing corporation" within the
meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders
(as defined in Code Section 216(b)(2)). By virtue of this requirement, the
status of a corporation for purposes of Code Section 216(b)(1) must be
determined on a year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under such Section
for any particular year. In the event that such a Cooperative fails to qualify
for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
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Hazard Insurance
Except as otherwise specified in the related Prospectus Supplement, the
Master Servicer will require the mortgagor or obligor on each Loan to maintain a
hazard insurance policy providing for no less than the coverage of the standard
form of fire insurance policy with extended coverage customary for the type of
Property in the state in which such Property is located. Such coverage will be
in an amount that is at least equal to the lesser of (i) the maximum insurable
value of the improvements securing such Loan or (ii) the greater of (y) the
outstanding principal balance of the Loan and (z) an amount such that the
proceeds of such policy shall be sufficient to prevent the mortgagor and/or the
mortgagee from becoming a co-insurer. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Property or released to the mortgagor or obligor in
accordance with the Master Servicer's normal servicing procedures) will be
deposited in the related Security Account. In the event that the Master Servicer
maintains a blanket policy insuring against hazard losses on all the Loans
comprising part of a Trust Fund, it will conclusively be deemed to have
satisfied its obligation relating to the maintenance of hazard insurance. Such
blanket policy may contain a deductible clause, in which case the Master
Servicer will be required to deposit from its own funds into the related
Security Account the amounts which would have been deposited therein but for
such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all inclusive. If
the Property securing a Loan is located in a federally designated special flood
area at the time of origination, the Master Servicer will require the mortgagor
or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of a specified percentage (generally
80% to 90%) of the full replacement value of the insured property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, then the insurer's liability in the event of
partial loss will not exceed the larger of (i) the actual cash value (generally
defined as replacement cost at the time and place of loss, less physical
depreciation) of the improvements damaged or destroyed or (ii) such proportion
of the loss as the amount of insurance carried bears to the specified percentage
of the full replacement cost of such improvements. Since the amount of hazard
insurance the Master Servicer may cause to be maintained on the improvements
securing the Loans declines as the principal balances owing thereon decrease,
and since improved real estate generally has appreciated in value over time in
the past, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damaged
property. If specified in the related Prospectus Supplement, a special hazard
insurance policy will be obtained to insure against certain of the uninsured
risks described above. See "Credit Enhancement".
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
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If the Property securing a defaulted Loan is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the damaged
Property, the Master Servicer is not required to expend its own funds to restore
the damaged Property unless it determines (i) that such restoration will
increase the proceeds to Securityholders on liquidation of the Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Loan under any related Insurance Policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an Insurance Policy, the Master Servicer will
be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Loan. If the proceeds of any liquidation of the Property securing the defaulted
Loan are less than the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Trust Fund will realize a loss
in the amount of such difference plus the aggregate of expenses incurred by the
Master Servicer in connection with such proceedings and which are reimbursable
under the Agreement. In the unlikely event that any such proceedings result in a
total recovery which is, after reimbursement to the Master Servicer of its
expenses, in excess of the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Master Servicer will be entitled
to withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
Unless otherwise specified in the related Prospectus Supplement, if the
Master Servicer or its designee recovers Insurance Proceeds which, when added to
any related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the principal balance of such Loan
plus interest accrued thereon that is payable to Securityholders, the Master
Servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to such
Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Property and such funds have not been reimbursed under the
related hazard insurance policy, it will be entitled to withdraw from the
Security Account out of related Liquidation Proceeds or Insurance Proceeds an
amount equal to such expenses incurred by it, in which event the Trust Fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the Master Servicer,
no such payment or recovery will result in a recovery to the Trust Fund which
exceeds the principal balance of the defaulted Loan together with accrued
interest thereon. See "Credit Enhancement".
Unless otherwise specified in the related Prospectus Supplement or the
related Agreement, the proceeds from any liquidation of a Loan will be applied
in the following order of priority: first, to reimburse the Master Servicer for
any unreimbursed expenses incurred by it to restore the related Property and any
unreimbursed servicing compensation payable to the Master Servicer with respect
to such Loan; second, to reimburse the Master Servicer for any unreimbursed
Advances with respect to such Loan; third, to accrued and unpaid interest (to
the extent no Advance has been made for such amount) on such Loan; and fourth,
as a recovery of principal of such Loan.
Realization Upon Defaulted Loans
Primary Mortgage Insurance Policies. If so specified in the related
Prospectus Supplement, the Master Servicer will maintain or cause to be
maintained, as the case may be, in full force and effect, a Primary Mortgage
Insurance Policy with regard to each Loan for which such coverage is required.
Primary Mortgage Insurance Policies reimburse certain losses sustained by reason
of defaults in payments by borrowers. The Master Servicer will not cancel or
refuse to renew any such Primary Mortgage Insurance Policy in effect at the time
of the initial issuance of a Series of Securities that is required to be kept in
force under the applicable Agreement unless the replacement Primary Mortgage
Insurance Policy for such cancelled or nonrenewed policy is maintained with an
insurer whose claims-paying ability is sufficient to maintain the current rating
of the classes of Securities of such Series that have been rated.
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FHA Insurance; VA Guaranties. Loans designated in the related Prospectus
Supplement as insured by the FHA will be insured by the FHA as authorized under
the United States Housing Act of 1937, as amended. In addition to the Title I
Program of the FHA, see "Certain Legal Aspects of the Loans -- Title I Program",
certain Loans will be insured under various FHA programs including the standard
FHA 203(b) program to finance the acquisition of one- to four-family housing
units and the FHA 245 graduated payment mortgage program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
Loans relating to a Series may have an interest rate or original principal
amount exceeding the applicable FHA limits at the time of origination of such
loan.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (a "VA Guaranty"). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guaranty of mortgage loans of up
to 30 years' duration. However, no Loan guaranteed by the VA will have an
original principal amount greater than five times the partial VA guaranty for
such Loan. The maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a), as
amended.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each Series of Securities will be
equal to the percentage per annum described in the related Prospectus Supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each Loan, and such compensation will be retained by it from
collections of interest on such Loan in the related Trust Fund (the "Master
Servicing Fee"). Unless otherwise specified in the related Prospectus
Supplement, as compensation for its servicing duties, a Sub-Servicer or, if
there is no Sub-Servicer, the Master Servicer will be entitled to a monthly
servicing fee as described in the related Prospectus Supplement. In addition,
the Master Servicer or Sub-Servicer will retain all prepayment charges,
assumption fees and late payment charges, to the extent collected from
borrowers, and any benefit that may accrue as a result of the investment of
funds in the applicable Security Account (unless otherwise specified in the
related Prospectus Supplement).
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
Sub-Servicers and Sellers. The Master Servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under certain limited circumstances.
Evidence as to Compliance
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC, the servicing by or on behalf of the Master Servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Attestation
Program for Mortgage Bankers, it is required to report. In
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rendering its statement such firm may rely, as to matters relating to the direct
servicing of Loans by Sub-Servicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC (rendered within one year of such statement) of firms of independent
public accountants with respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by two officers of
the Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Master Servicer may be obtained by Securityholders of the related Series
without charge upon written request to the Master Servicer at the address set
forth in the related Prospectus Supplement.
Certain Matters Regarding the Master Servicer and the Depositor
The Master Servicer under each Pooling and Servicing Agreement or Master
Servicing Agreement, as applicable, will be named in the related Prospectus
Supplement. The entity serving as Master Servicer may have normal business
relationships with the Depositor or the Depositor's affiliates.
Each Agreement will provide that the Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination that
its duties thereunder are no longer permissible under applicable law. The Master
Servicer may, however, be removed from its obligations and duties as set forth
in the Agreement. No such resignation will become effective until the Trustee or
a successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Each Agreement will further provide that neither the Master Servicer, the
Depositor nor any director, officer, employee, or agent of the Master Servicer
or the Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Master Servicer, the Depositor nor any such
person will be protected against any liability which would otherwise be imposed
by reason of wilful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. Each Agreement will further provide that the
Master Servicer, the Depositor and any director, officer, employee or agent of
the Master Servicer or the Depositor will be entitled to indemnification by the
related Trust Fund and will be held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Agreement
or the Securities, other than any loss, liability or expense related to any
specific Loan or Loans (except any such loss, liability or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide that
neither the Master Servicer nor the Depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Depositor
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the Agreement and the rights and duties
of the parties thereto and the interests of the Securityholders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust Fund
and the Master Servicer or the Depositor, as the case may be, will be entitled
to be reimbursed therefor out of funds otherwise distributable to
Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Master Servicer may be merged or consolidated, or any
person resulting from any merger or consolidation to which the Master Servicer
is a party, or any person succeeding to the business of the Master Servicer,
will be the successor of the Master Servicer under each Agreement, provided that
such person is qualified to sell mortgage loans to, and
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service mortgage loans on behalf of, FNMA or FHLMC and further provided that
such merger, consolidation or succession does not adversely affect the then
current rating or ratings of the class or classes of Securities of such Series
that have been rated.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Master Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, Events of Default
under each Agreement will consist of (i) any failure by the Master Servicer to
distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
days after the giving of written notice of such failure to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Securities of such class evidencing not less than
25% of the total distributions allocated to such class ("Percentage Interests");
(ii) any failure by the Master Servicer to make an Advance as required under the
Agreement, unless cured as specified therein; (iii) any failure by the Master
Servicer duly to observe or perform in any material respect any of its other
covenants or agreements in the Agreement which continues unremedied for thirty
days after the giving of written notice of such failure to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Securities of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class; and (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding and certain actions by or on behalf of the
Master Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund in the event that payments in respect thereto are insufficient to
make payments required in the Agreement. The assets of the Trust Fund will be
sold only under the circumstances and in the manner specified in the related
Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, so long as
an Event of Default under an Agreement remains unremedied, the Depositor or the
Trustee may, and at the direction of holders of Securities of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class and under such other circumstances as may be specified in such
Agreement, the Trustee shall terminate all of the rights and obligations of the
Master Servicer under the Agreement relating to such Trust Fund and in and to
the related Trust Fund Assets, whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make Advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a mortgage loan servicing institution with a net worth of a least
$10,000,000 to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity. The
Trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
Master Servicer under the Agreement.
Unless otherwise provided in the related Prospectus Supplement, no
Securityholder, solely by virtue of such holder's status as a Securityholder,
will have any right under any Agreement to institute any proceeding with respect
to such Agreement, unless such holder previously has given to the Trustee
written notice of default and unless the holders of Securities of any class of
such Series evidencing not less than 25% of the aggregate Percentage Interests
constituting such class have made written request upon the Trustee to institute
such proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity, and the Trustee for 60 days has neglected or
refused to institute any such proceeding.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default in the payment of any principal of or interest on any
Note of such Series which continues unremedied for five days after the giving of
written notice of such default is given as specified in the related Prospectus
Supplement; (ii) failure to perform in any material respect any other
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covenant of the Depositor or the Trust Fund in the Indenture which continues for
a period of thirty (30) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iii) certain
events of bankruptcy, insolvency, receivership or liquidation of the Depositor
or the Trust Fund; or (iv) any other Event of Default provided with respect to
Notes of that Series including but not limited to certain defaults on the part
of the issuer, if any, of a credit enhancement instrument supporting such Notes.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series have an
interest rate of 0%, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of
more than 50% of the Percentage Interests of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, other than a default in the payment of
any principal or interest on any Note of such Series for five days or more,
unless (a) the holders of 100% of the Percentage Interests of the Notes of such
Series consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full the principal of and accrued interest, due and unpaid,
on the outstanding Notes of such Series at the date of such sale or (c) the
Trustee determines that such collateral would not be sufficient on an ongoing
basis to make all payments on such Notes as such payments would have become due
if such Notes had not been declared due and payable, and the Trustee obtains the
consent of the holders of 662/3% of the Percentage Interests of the Notes of
such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for five days or more in the payment of
principal of or interest on the Notes of a Series, the Indenture provides that
the Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for distribution to the Noteholders would be less
than would otherwise be the case. However, the Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of Notes of such Series, unless such holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default
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in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
Amendment
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Master Servicer and the Trustee,
without the consent of any of the Securityholders, (i) to cure any ambiguity;
(ii) to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement which
are not inconsistent with the provisions thereof, provided that such action will
not adversely affect in any material respect the interests of any
Securityholder. An amendment will be deemed not to adversely affect in any
material respect the interests of the Securityholders if the person requesting
such amendment obtains a letter from each Rating Agency requested to rate the
class or classes of Securities of such Series stating that such amendment will
not result in the downgrading or withdrawal of the respective ratings then
assigned to such Securities. In addition, to the extent provided in the related
Agreement, an Agreement may be amended without the consent of any of the
Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any of
its provisions to such extent as may be necessary to maintain the qualification
of the related Trust Fund as a REMIC, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification. Except as otherwise specified in the related
Prospectus Supplement, each Agreement may also be amended by the Depositor, the
Master Servicer and the Trustee with consent of holders of Securities of such
Series evidencing not less than 66% of the aggregate Percentage Interests of
each class affected thereby for the purpose of adding any provisions to or
changing in an manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of the holders of the related Securities;
provided, however, that no such amendment may (i) reduce in any manner the
amount of or delay the timing of, payments received on Loans which are required
to be distributed on any Security without the consent of the holder of such
Security, or (ii) reduce the aforesaid percentage of Securities of any class the
holders of which are required to consent to any such amendment without the
consent of the holders of all Securities of such class covered by such Agreement
then outstanding. If a REMIC election is made with respect to a Trust Fund, the
Trustee will not be entitled to consent to an amendment to the related Agreement
without having first received an opinion of counsel to the effect that such
amendment will not cause such Trust Fund to fail to qualify as a REMIC.
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Securities will
terminate upon the payment to the related Securityholders of all amounts held in
the Security Account or by the Master Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment of or
other liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets remaining in the Trust Fund and (ii) the purchase by the Master Servicer
or, if REMIC treatment has been elected and if specified in the related
Prospectus Supplement, by the holder of the residual interest in the REMIC (see
"Certain Federal Income Tax Consequences" below), from the related Trust Fund of
all of the remaining Trust Fund Assets and all property acquired in respect of
such Trust Fund Assets.
Unless otherwise specified by the related Prospectus Supplement, any such
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a Series of Securities will be made at the option of the
Master Servicer or, if applicable, such holder of the REMIC residual interest,
at a price, and in accordance with the procedures, specified in the related
Prospectus Supplement. The exercise of such right will effect early
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retirement of the Securities of that Series, but the right of the Master
Servicer or, if applicable, such holder of the REMIC residual interest, to so
purchase is subject to the principal balance of the related Trust Fund Assets
being less than the percentage specified in the related Prospectus Supplement of
the aggregate principal balance of the Trust Fund Assets at the Cut-off Date for
the Series. The foregoing is subject to the provision that if a REMIC election
is made with respect to a Trust Fund, any repurchase pursuant to clause (ii)
above will be made only in connection with a "qualified liquidation" of the
REMIC within the meaning of Section 860F(g)(4) of the Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the last scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
The Trustee
The Trustee under each Agreement will be named in the applicable Prospectus
Supplement. The commercial bank or trust company serving as Trustee may have
normal banking relationships with the Depositor, the Master Servicer and any of
their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Loans. Because such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal laws and the appropriate laws of
the states in which Loans may be originated.
General
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. Deeds of
trust are used almost exclusively in California instead of mortgages. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust,
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the borrower grants the property, irrevocably until the debt is paid, in trust,
generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Cooperatives. Certain of Loans may be Cooperative Loans. The Cooperative
owns all the real property that comprises the project, including the land,
separate dwelling units and all common areas. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupant under proprietary leases or occupancy
agreements to which that Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of Cooperative shares or, in the case of a Trust Fund
including Cooperative Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
Foreclosure/Repossession
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property at public auction upon any default
by the borrower under the terms of the note or deed of trust. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In addition to any notice requirements
contained in a deed of trust, in some states (such as California), the trustee
must record a notice of default and send a copy to the borrower-trustor, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. In some
states (including California), the borrower-trustor has the right to reinstate
the loan at any time following default until shortly before the trustee's sale.
In general, the borrower,
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or any other person having a junior encumbrance on the real estate, may, during
a statutorily prescribed reinstatement period, cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. After the reinstatement period has expired without the
default having been cured, the borrower or junior lienholder no longer has the
right to reinstate the loan and must pay the loan in full to prevent the
scheduled foreclosure sale. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public place and,
in most states (including California), published for a specific period of time
in one or more newspapers. In addition, some state laws require that a copy of
the notice of sale be posted on the property and sent to all parties having an
interest of record in the real property. In California, the entire process from
recording a notice of default to a non-judicial sale usually takes four to five
months.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making such repairs at its own expense
as are necessary to render the property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "Junior Mortgages; Rights of Senior Mortgagees" below.
Cooperative Loans. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's certificate of incorporation and
bylaws, as well as the proprietary lease or occupancy agreement, and may be
cancelled by the Cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by such tenant-
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stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the Cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds form the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give risks to a lien on the property to assure the payment of the
costs of clean-up. In several states such a lien has priority over the lien of
an existing mortgage against such property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property
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where EPA has incurred clean-up costs. However, a CERCLA lien is subordinate to
pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for such costs on any and
all "responsible parties," including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who holds
indicia of ownership primarily to protect its security interest (the "secured
creditor exclusion") but without "participating in the management" of the
Property. Thus, if a lender's activities begin to encroach on the actual
management of a contaminated facility or property, the lender may incur
liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or property as an investment (including leasing
the facility or property to third party), or fails to market the property in a
timely fashion.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
CERCLA's secured creditor exclusion. The Court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility, or
participated in decisions related to hazardous waste to be held liable under
CERCLA; rather, liability could attach to a lender if its involvement with the
management of the facility is broad enough to support the inference that the
lender had the capacity to influence the borrower's hazardous waste management
practices. The court added that a lender's capacity to influence such decisions
could be inferred from the extent of its involvement in the facility's financial
management. In January 1991, the Supreme Court denied certiorari in the Fleet
Factors case, thereby letting the Court of Appeals decision stand. In response
to the Fleet Factors decision, on April 29, 1992, EPA issued regulations
interpreting and delineating CERCLA's secured creditor exclusion and the range
of permissible actions that may be undertaken by a holder of a security interest
in a contaminated property without exceeding the bounds of the secured creditor
exclusion. However, on February 4, 1994, the United States Court of Appeals for
the District of Columbia Circuit issued a decision in Kelley v. EPA invalidating
the EPA regulations. Further, in January 1995, the Supreme Court denied
certiorari in the Kelley case, thereby letting the Court of Appeals decision
stand. In September 1995, EPA and the U.S. Department of Justice issued a
guidance document stating that the two agencies, respectively, would apply the
1992 regulations in prosecuting enforcement and cost recovery actions, and in
otherwise addressing lender liability under CERCLA. However, this guidance
document is not binding on any parties other than the federal government, and
need not be applied by the courts in adjudicating CERCLA cost recovery or
contribution actions brought by states, municipalities or private parties.
As a result of the Kelley decision, the state of the law with respect to
the secured creditor exclusion remains unclear. Proposed amendments to CERCLA
that would clarify the range of actions a secured creditor may take without
losing the benefit of the exclusion have been introduced in Congress, but have
not been enacted. However, even if CERCLA were to be amended, such amendments
would not affect the potential for liability under other federal or state laws
which impose liability on "owners or operators" but do not provide any
protection for secured creditors.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that such costs arising from the
circumstances set forth above would result in a loss to Certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating
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oil tanks). The EPA has adopted a lender liability rule for underground storage
tanks under Subtitle I of RCRA. Under such rule, a holder of a security interest
in an underground storage tank or real property containing an underground
storage tank is not considered an operator of the underground storage tank as
long as petroleum is not added to, stored in or dispensed from the tank. It
should be noted, however, that liability for cleanup of petroleum contamination
may be governed by state law, which may not provide for any specific protection
for secured creditors.
Except as otherwise specified in the related Prospectus Supplement, at the
time the Loans were originated, no environmental assessment or a very limited
environmental assessment of the Properties was conducted.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In certain
other states (including California), this right of redemption applies only to
sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem property after a trustee's sale under a deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, including California, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against borrowers financing the
purchase of their residence or following sale under a deed of trust or certain
other foreclosure proceedings. A deficiency judgment is a personal judgment
against the borrower equal in most cases to the difference between the amount
due to the lender and the fair market value of the real property at the time of
the foreclosure sale. As a result of these prohibitions, it is anticipated that
in most instances the Master Servicer will utilize the non-judicial foreclosure
remedy and will not seek deficiency judgments against defaulting borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. In some states, exceptions to the anti-deficiency
statutes are provided for in certain instances where the value of the lender's
security has been impaired by acts or omissions of the borrower, for example, in
the event of waste of the property. Finally, other statutory provisions limit
any deficiency judgment against the former borrower following a foreclosure sale
to the excess of the outstanding debt over the fair market value of the property
at the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon
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its security. For example, in a proceeding under the federal Bankruptcy Code, a
lender may not foreclose on a mortgaged property without the permission of the
bankruptcy court. The rehabilitation plan proposed by the debtor may provide, if
the mortgaged property is not the debtor's principal residence and the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Loans underlying a Series of Securities and possible
reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. Numerous federal and state consumer protection laws
impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of loans secured by Single Family
Properties. These laws include the federal Truth-in-Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes and regulations. These
federal and state laws impose specific statutory liabilities upon lenders who
fail to comply with the provisions of the law. In some cases, this liability may
affect assignees of the loans or contracts.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Due-on-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will generally provide
that if the mortgagor or obligor sells, transfers or conveys the Property, the
loan or contract may be accelerated by the mortgagee or secured party. Court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce such clauses in many states. For instance, the
California Supreme Court in August 1978 held that due-on-sale clauses were
generally unenforceable. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn-St Germain Act"), subject to certain exceptions, preempts
state constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Act may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Loans and the number of Loans which may extend to maturity.
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In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Under certain state laws, prepayment charges may not be imposed
after a certain period of time following the origination of mortgage loans with
respect to prepayments on loans secured by liens encumbering owner-occupied
residential properties. Since many of the Properties will be owner-occupied, it
is anticipated that prepayment charges may not be imposed with respect to many
of the Loans. The absence of such a restraint on prepayment, particularly with
respect to fixed rate Loans having higher Loan Rates, may increase the
likelihood of refinancing or other early retirement of such loans or contracts.
Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition, even
where Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V. Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
The Home Improvement Contracts
General. The Home Improvement Contracts, other than those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts are hereinafter referred to in this section as
"contracts") generally are "chattel paper" or constitute "purchase money
security interests" each as defined in the UCC. Pursuant to the UCC, the sale of
chattel paper is treated in a manner similar to perfection of a security
interest in chattel paper. Under the related Agreement, the Depositor will
transfer physical possession of the contracts to the Trustee or a designated
custodian or may retain possession of the contracts as custodian for the
Trustee. In addition, the Depositor will make an appropriate filing of a UCC-1
financing statement in the appropriate states to, among other things, give
notice of the Trust Fund's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the Trust Fund's interest in the contracts could be
defeated.
Security Interests in Home Improvements. The contracts that are secured by
the Home Improvements financed thereby grant to the originator of such contracts
a purchase money security interest in such Home Improvements to secure all or
part of the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase money security
interests are assignable. In general, a purchase money security interest grants
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to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of such collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in such Home Improvement must generally be perfected by a timely fixture filing.
In general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home Improvement
Contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose such characterization upon incorporation
of such materials into the related property, will not be secured by a purchase
money security interest in the Home Improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the Home
Improvement has not become subject to the real estate law, a creditor can
repossess a Home Improvement securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"), provides
that, subject to the following conditions, state usury limitations shall not
apply to any contract which is secured by a first lien on certain kinds of
consumer goods. The contracts would be covered if they satisfy certain
conditions governing, among other things, the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any
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state is authorized by the law to adopt a provision limiting discount points or
other charges on loans covered by Title V.
Installment Contracts
The Loans may also consist of installment contracts. Under an installment
contract ("Installment Contract") the seller (hereinafter referred to in this
section as the "lender") retains legal title to the property and enters into an
agreement with the purchaser hereinafter referred to in this section as the
"borrower") for the payment of the purchase price, plus interest, over the term
of such contract. Only after full performance by the borrower of the contract is
the lender obligated to convey title to the property to the purchaser. As with
mortgage or deed of trust financing, during the effective period of the
Installment Contract, the borrower is generally responsible for maintaining the
property in good condition and for paying real estate taxes, assessments and
hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the Installment Contract may be reinstated upon full payment of the default
amount and the borrower may have a post-foreclosure statutory redemption right.
In other states, courts in equity may permit a borrower with significant
investment in the property under an Installment Contract for the sale of real
estate to share in the proceeds of sale of the property after the indebtedness
is repaid or may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lender's procedures for obtaining
possession and clear title under an Installment Contract in a given state are
simpler and less time-consuming and costly than are the procedures for
foreclosing and obtaining clear title to a property subject to one or more
liens.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Loan (including a borrower who is a
member of the National Guard or is in reserve status at the time of the
origination of the Loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Loans. Unless otherwise provided in
the related Prospectus Supplement, any shortfall in interest collections
resulting from the application of the Relief Act could result in losses to
Securityholders. The Relief Act also imposes limitations which would impair the
ability of the Master Servicer to foreclose on an affected Loan during the
borrower's period of active duty status. Moreover, the Relief Act permits the
extension of a Loan's maturity and the re-adjustment of its payment schedule
beyond the completion of military service. Thus, in the event that such a Loan
goes into default, there may be delays and losses occasioned by the inability to
realize upon the Property in a timely fashion.
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Junior Mortgages; Rights of Senior Mortgagees
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the Trust Fund (and therefore the
Securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the Loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure a default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under senior mortgages will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgages. Proceeds in excess of the amount
of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make Revolving Credit Line Loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
Cut-off Date with respect to any Mortgage will not be included in the Trust
Fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of such intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans of the type which
includes home equity credit lines applies retroactively to the date of the
original recording of the trust deed or mortgage, provided that the total amount
of advances under the home equity credit line does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
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The Title I Program
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I Program").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Program include property improvement loans ("Property Improvement Loans"
or "Title I Loans"). A Property Improvement Loan or Title I Loan means a loan
made to finance actions or items that substantially protect or improve the basic
livability or utility of a property and includes single family improvement
loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan". With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from lender and the lender may distribute proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties. With
respect to a dealer Title I Loan, a dealer may include a seller, a contractor or
supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
may be established by the lender and must be fixed for the term of the loan and
recited in the note. Interest on an insured loan must accrue from the date of
the loan and be calculated according to the actuarial method. The lender must
assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In such case, provided that the validity of any lien on the property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
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Requirements for Title I Loans. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single property, in each
case as long as the total outstanding balance of all Title I Loans in the same
property does not exceed the maximum loan amount for the type of Title I Loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if such loan amount
exceeds $15,000. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than six months after disbursement of the loan proceeds with one six month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan where
the borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account is
10% of the amount disbursed, advanced or expended by the lender in originating
or purchasing eligible loans registered with FHA for Title I insurance, with
certain adjustments. The balance in the insurance coverage reserve account is
the maximum amount of insurance claims the FHA is required to pay. Loans to be
insured under the Title I Program will be registered for insurance by the FHA
and the insurance coverage attributable to such loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. The FHA charges a fee of
0.50% per annum of the net proceeds (the original balance) of any eligible loan
so reported and acknowledged for insurance by the originating lender. The FHA
bills the lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured loan
is prepaid during the year, FHA will not refund or abate the insurance premium.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to such insured loans and
(ii) the amount of insurance coverage attributable to insured loans sold by the
lender, and such insurance coverage may be reduced for any FHA insurance claims
rejected by the FHA. The balance of the lender's FHA insurance coverage reserve
account will be further adjusted as required under Title I or by the FHA, and
the insurance coverage therein may be earmarked with respect to each or any
eligible loans insured thereunder, if a determination is made by the Secretary
of HUD that it is in its interest to do so. Originations and acquisitions of new
eligible loans will continue to increase a lender's insurance coverage reserve
account balance by 10% of the amount disbursed, advanced or expended in
originating or acquiring such eligible loans registered with the FHA for
insurance under the Title I
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Program. The Secretary of HUD may transfer insurance coverage between insurance
coverage reserve accounts with earmarking with respect to a particular insured
loan or group of insured loans when a determination is made that it is in the
Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide transaction)
insured loans and loans reported for insurance only to another qualified lender
under a valid Title I contract of insurance. Unless an insured loan is
transferred with recourse or with a guaranty or repurchase agreement, the FHA,
upon receipt of written notification of the transfer of such loan in accordance
with the Title I regulations, will transfer from the transferor's insurance
coverage reserve account to the transferee's insurance coverage reserve account
an amount, if available, equal to 10% of the actual purchase price or the net
unpaid principal balance of such loan (whichever is less). However, under the
Title I Program not more than $5,000 in insurance coverage shall be transferred
to or from a lender's insurance coverage reserve account during any October 1 to
September 30 period without the prior approval of the Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender chooses
to proceed against the property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the property), the lender may file an
insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be filed
with the FHA no later than nine months after the date of default of such loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lieu of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If either such defect is discovered after the FHA has paid a
claim, the FHA may require the lender to repurchase the paid claim and to accept
a reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. The FHA may contest any
insurance claim and make a demand for repurchase of the loan at any time up to
two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the purposes
hereof, the "Claimable Amount" means an amount equal to 90% of the sum of: (a)
the unpaid loan obligation (net unpaid principal and the uncollected interest
earned to the date of default) with adjustments thereto if the lender has
proceeded against property securing such loan; (b) the interest on the unpaid
amount of the loan
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obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days (but not to exceed 9 months from
the date of default), calculated at the rate of 7% per annum; (c) the
uncollected court costs; (d) the attorney's fees not to exceed $500; and (e) the
expenses for recording the assignment of the security to the United States.
Other Legal Considerations
The Loans are also subject to federal laws, including: (i) Regulation Z,
which requires certain disclosures to the borrowers regarding the terms of the
Loans; (ii) the Equal Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act, in the extension of credit;
and (iii) the Fair Credit Reporting Act, which regulates the use and reporting
of information related to the borrower's credit experience. Violations of
certain provisions of these federal laws may limit the ability of the Sellers to
collect all or part of the principal of or interest on the Loans and in addition
could subject the Sellers to damages and administrative enforcement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of certain anticipated federal income tax
consequences of the purchase, ownership, and disposition of the Securities and
is based on advice of Brown & Wood LLP, special counsel to the Depositor. The
summary is based upon the provisions of the Code, the regulations promulgated
thereunder, including, where applicable, proposed regulations, and the judicial
and administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold Securities as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective Investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended (the "Code"); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series; or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership. The Prospectus
Supplement for each Series of Securities will specify how the Securities will be
treated for federal income tax purposes and will discuss whether a REMIC
election, if any, will be made with respect to such Series.
Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise provided in
the related Prospectus Supplement, Brown & Wood LLP will have advised the
Depositor that: (i) Securities held by a mutual savings bank or domestic
building and loan association will represent interests in "qualifying real
property loans" within the meaning of Code section 593(d); (ii) Securities held
by a domestic building and loan association will constitute "loans... secured by
an interest in real property" within the meaning of Code section
7701(a)(19)(C)(v); and (iii)
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Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code section 856(c)(5)(A) and interest on
Securities will be considered "interest on obligations secured by mortgages on
real property or on interests in real property" within the meaning of Code
section 856(c)(3)(B).
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount" ("OID").
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994 (the "OID Regulations"). A Holder should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, OID must be included in income in advance of the
receipt of the cash representing that income. The amount of OID on a Debt
Security will be considered to be zero if it is less than a de minimis amount
determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the related Closing Date, the issue price for such class will be
treated as the fair market value of such class on such Closing Date. The issue
price of a Debt Security also includes the amount paid by an initial Debt
Security holder for accrued interest that relates to a period prior to the issue
date of the Debt Security. The stated redemption price at maturity of a Debt
Security includes the original principal amount of the Debt Security, but
generally will not include distributions of interest if such distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price
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at maturity and the Debt Security will generally have OID. Holders of Debt
Securities should consult their own tax advisors to determine the issue price
and stated redemption price at maturity of a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities
(as defined herein), and certain of the other Debt Securities, none of the
payments under the instrument will be considered qualified stated interest, and
thus the aggregate amount of all payments will be included in the stated
redemption price.
The Internal Revenue Services (the "IRS") recently issued final regulations
(the "Contingent Regulations") governing the calculation of OID on instruments
having contingent interest payments. The Contingent Regulations specifically do
not apply for purposes of calculating OID on debt instruments subject to Code
Section 1272(a)(6), such as the Debt Security. Additionally, the OID Regulations
do not contain provisions specifically interpreting Code Section 1272(a)(6).
Until the Treasury issues guidance to the contrary, the Trustee intends to base
its computation on Code Section 1272(a)(6) and the OID Regulations as described
in this Prospectus. However, because no regulatory guidance currently exists
under Code Section 1272(a)(6), there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals or OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security,
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over the adjusted issue price of the Pay-Through Security at the beginning of
the accrual period. The present value of the remaining payments is to be
determined on the basis of three factors: (i) the original yield to maturity of
the Pay-Through Security (determined on the basis of compounding at the end of
each accrual period and properly adjusted for the length of the accrual period),
(ii) events which have occurred before the end of the accrual period and (iii)
the assumption that the remaining payments will be made in accordance with the
original Prepayment Assumption. The effect of this method is to increase the
portions of OID required to be included in income by a Holder to take into
account prepayments with respect to the Loans at a rate that exceeds the
Prepayment Assumption, and to decrease (but not below zero for any period) the
portions of original issue discount required to be included in income by a
Holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to Holders of Pay-Through Securities
based on the Prepayment Assumption, no representation is made to Holders that
Loans will be prepaid at that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the IRS were to require
that OID be accrued without such adjustments, the rate of accrual of OID for a
Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Loans, except possibly to the extent that it can
be established that such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a holder of such a Security in any period
could significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is deduced as a result of a Loan default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, holders of Securities should consult their own tax
advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under "--Tax Status as a Grantor Trust; General" herein) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified mortgages held by the REMIC or on Loans underlying Pass-Through
Securities ("Interest Weighted Securities"). The Issuer intends to take the
position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. However, in the case of Interest Weighted Securities that are
entitled to some payments of principal and that are Regular Interest Securities
the Internal Revenue Service could assert that income derived from an Interest
Weighted Security should be calculated as if the Security were a security
purchased at a premium equal to the excess of the price paid by such holder for
such Security over its stated principal amount, if any. Under this approach, a
holder would be entitled to amortize such premium only if it has in effect an
election under Section 171 of the Code with respect to all taxable debt
instruments held by such holder, as described below. Alternatively, the Internal
Revenue Service could assert that an Interest Weighted Security should be
taxable under the rules governing bonds issued with contingent payments. Such
treatment may be more likely in the case of
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Interest Weighted Securities that are Stripped Securities as described below.
See "--Tax Status as a Grantor Trust--Discount or Premium on Pass-Through
Securities."
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security (as defined herein), as
set forth below, the Loans underlying such Security) not originally issued with
original issue discount, stated interest payable in the relevant period to total
stated interest remaining to be paid at the beginning of the period or (b) in
the case of Securities (or, in the case of a Pass-Through Security, as described
below, the Loans underlying such Security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Security, as described below, the underlying Loans)
with market discount over interest received on such Security is allowed as a
current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a holder makes an election
to amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such holder, and will be irrevocable without the consent of the IRS. Purchasers
who pay a premium for the Securities should consult their tax advisers regarding
the election to amortize premium and the method to be employed.
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On June 27, 1996 the IRS issued proposed regulations (the "Amortizable Bond
Premium Regulations") dealing with amortizable bond premium. These regulations
specifically do not apply to prepayable debt instruments subject to Code Section
1272(a)(6) such as the Securities. Absent further guidance from the IRS, the
Trustee intends to account for amortizable bond premium in the manner described
above. Prospective purchasers of the Securities should consult their tax
advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
Taxation of the REMIC and its Holders
General. In the opinion of Brown & Wood LLP, special counsel to the
Depositor, if a REMIC election is made with respect to a Series of Securities,
then the arrangement by which the Securities of that Series are issued will be
treated as a REMIC as long as all of the provisions of the applicable Agreement
are complied with and the statutory and regulatory requirements are satisfied.
Securities will be designated as "Regular Interests" or "Residual Interests" in
a REMIC, as specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a mutual savings bank or domestic building and loan association will
represent interests in "qualifying real property loans" within the meaning of
Code Section 593(d) (assuming that at least 95% of the REMIC's assets are
"qualifying real property loans"); (ii) Securities held by a domestic building
and loan association will constitute "a regular or a residual interest in a
REMIC" within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at
least 95% of the REMIC's assets consist of cash, government securities, "loans
secured by an interest in real property," and other types of assets described in
Code Section 7701(a)(19)(C)); and (iii) Securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(6)(B), and income with respect to the Securities will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (i), (ii) or (iii) above, then a Security will qualify for the tax
treatment described in (i), (ii) or (iii) in the proportion that such REMIC
assets are qualifying assets.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities (as defined herein) on a daily basis
in proportion to the relative amounts of income accruing to each Holder on that
day. In the case of a holder of a Regular Interest Security who is an individual
or a "pass-through interest holder" (including certain pass-through entities but
not including real estate investment trusts), such expenses will be deductible
only to the extent that such expenses, plus other "miscellaneous itemized
deductions" of the Holder, exceed 2% of such Holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted
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gross income exceeds the applicable amount (which amount will be adjusted for
inflation for taxable years beginning after 1990) will be reduced by the lesser
of (i) 3% of the excess of adjusted gross income over the applicable amount, or
(ii) 80% of the amount of itemized deductions otherwise allowable for such
taxable year. The reduction or disallowance of this deduction may have a
significant impact on the yield of the Regular Interest Security to such a
Holder. In general terms, a single class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the single
class REMIC rules. Unless otherwise specified in the related Prospectus
Supplement, the expenses of the REMIC will be allocated to holders of the
related residual interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a "pass-through interest holder" (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See "Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
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Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include: (i) subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC; (ii) subject to a limited
exception, the sale or other disposition of a cash flow investment; (iii) the
receipt of any income from assets not permitted to be held by the REMIC pursuant
to the Code; or (iv) the receipt of any fees or other compensation for services
rendered by the REMIC. It is anticipated that a REMIC will not engage in any
prohibited transactions in which it would recognize a material amount of net
income. In addition, subject to a number of exceptions, a tax is imposed at the
rate of 100% on amounts contributed to a REMIC after the close of the
three-month period beginning on the Startup Day. The holders of Residual
Interest Securities will generally be responsible for the payment of any such
taxes imposed on the REMIC. To the extent not paid by such holders or otherwise,
however, such taxes will be paid out of the Trust Fund and will be allocated pro
rata to all outstanding classes of Securities of such REMIC.
Taxation of Holders of Residual Interest Securities
The holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
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Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of a
Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on such
holder's federal income tax return. An exception applies to organizations to
which Code Section 593 applies (generally, certain thrift institutions);
however, such exception will not apply if the aggregate value of the Residual
Interest Securities is not considered to be "significant," as described below.
Further, if the holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code Section 511,
such holder's excess inclusion income will be treated as unrelated business
taxable income of such holder. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust fund, or certain cooperatives were to own a Residual Interest
Security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Security is owned by a foreign person excess inclusion
income is subject to tax at a rate of 30% which may not be reduced by treaty, is
not eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. See "Tax Treatment of Foreign Investors." Regulations
provide that a Residual Interest Security has significant value only if (i) the
aggregate issue price of the Residual Interest Security is at least 2% of the
aggregate of the issue prices of all Regular Interest Securities and Residual
Interest Securities in the REMIC and (ii) the anticipated weighted average life
of the Residual Interest Securities is at least 20% of the weighted average life
of the REMIC.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Day multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a manner analogous to the determination of the issue price of a
Regular Interest), increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased (but not below zero) by the amount of loss
allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified
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Organizations from owning a Residual Interest Security. In addition, no transfer
of a Residual Interest Security will be permitted unless the proposed transferee
shall have furnished to the Trustee an affidavit representing and warranting
that it is neither a Disqualified Organization nor an agent or nominee acting on
behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any Federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the IRS recently released proposed regulations
(the "Proposed Mark-to-Market Regulations") which provide that a REMIC Residual
Interest Security acquired after January 3, 1995 cannot be marked-to-market. The
Proposed Mark-to-Market Regulations replace the temporary regulations which
allowed a REMIC Residual Interest Security to be marked-to-market provided that
it was not a negative value residual interest and did not have the same economic
effect as a negative value residual interest. The IRS could issue subsequent
regulations, which could apply retroactively, providing additional or different
requirements with respect to such deemed negative value residual interests.
Prospective purchasers of a REMIC Residual Interest Security should consult
their tax advisors regarding the possible application of the Proposed
Mark-to-Market Regulations.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
Tax Status as a Grantor Trust
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Brown & Wood LLP, special
counsel to the Depositor, the Trust Fund relating to a Series of Securities will
be classified for federal income tax purposes as a grantor trust under Subpart
E, Part I of Subchapter J of the Code and not as an association taxable as a
corporation (the Securities of such Series, "Pass-Through Securities"). In some
Series there will be no separation of the principal and interest payments on the
Loans. In such circumstances, a Holder will be considered to have purchased a
pro rata undivided interest in each
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of the Loans. In other cases ("Stripped Securities"), sale of the Securities
will produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Loans (not reduced by the amount payable as fees
to the Trustee and the Servicer and similar fees (collectively, the "Servicing
Fee")), at the same time and in the same manner as such items would have been
reported under the Holder's tax accounting method had it held its interest in
the Loans directly, received directly its share of the amounts received with
respect to the Loans, and paid directly its share of the Servicing Fees. In the
case of Pass-Through Securities other than Stripped Securities, such income will
consist of a pro rata share of all of the income derived from all of the Loans
and, in the case of Stripped Securities, such income will consist of a pro rata
share of the income derived from each stripped bond or stripped coupon in which
the Holder owns an interest. The holder of a Security will generally be entitled
to deduct such Servicing Fees under Section 162 or Section 212 of the Code to
the extent that such Servicing Fees represent "reasonable" compensation for the
services rendered by the Trustee and the Servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing
such holder's regular tax liability only to the extent that such fees, when
added to other miscellaneous itemized deductions, exceed 2% of adjusted gross
income and may not be deductible to any extent in computing such holder's
alternative minimum tax liability. In addition, for taxable years beginning
after December 31, 1990, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable years
beginning after 1990) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. The holder's purchase price
of a Pass-Through Security is to be allocated among the Loans in proportion to
their fair market values, determined as of the time of purchase of the
Securities. In the typical case, the Trustee (to the extent necessary to fulfill
its reporting obligations) will treat each Loan as having a fair market value
proportional to the share of the aggregate principal balances of all of the
Loans that it represents, since the Securities, unless otherwise specified in
the related Prospectus Supplement, will have a relatively uniform interest rate
and other common characteristics. To the extent that the portion of the purchase
price of a Pass-Through Security allocated to a Loan (other than to a right to
receive any accrued interest thereon and any undistributed principal payments)
is less than or greater than the portion of the principal balance of the Loan
allocable to the Security, the interest in the Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Loans underlying the Certificate, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities; Market Discount"
and "--Premium" above.
In the case of market discount on a Pass-Through Security attributable to
Loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Loan and to include the discount allocable
to each principal payment in
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ordinary income at the time such principal payment is made. Such treatment would
generally result in discount being included in income at a slower rate than
discount would be required to be included in income using the method described
in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ("Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each Loan. Pursuant to Section 1286 of the Code, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from ownership of the right to receive some or all of the principal
payments results in the creation of "stripped bonds" with respect to principal
payments and "stripped coupons" with respect to interest payments. Section 1286
of the Code applies the OID rules to stripped bonds and stripped coupons. For
purposes of computing original issue discount, a stripped bond or a stripped
coupon is treated as a debt instrument issued on the date that such stripped
interest is purchased with an issue price equal to its purchase price or, if
more than one stripped interest is purchased, the ratable share of the purchase
price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Loan principal balance) or
the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a Loan by
Loan basis, which could result in some Loans being treated as having more than
100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Securities, the Trustee will treat all payments to
be received by a holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that (i) in certain Series, each non-Interest Weighted Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the non-Interest
Weighted Securities are subject to the contingent payment provisions of the
Contingent Regulations; or (iii) each Interest Weighted Stripped Security is
composed of an unstripped undivided ownership interest in Loans and an
installment obligation consisting of stripped interest payments.
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Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there is
no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans character is not carried over to the
Securities in such circumstances. Pass-Through Securities will be, and, although
the matter is not free from doubt, Stripped Securities should be considered to
represent "qualifying real property loans" within the meaning of Section 593(d)
of the Code, "real estate assets" within the meaning of Section 856(c)(6)(B) of
the Code, and "loans secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code; and interest income attributable to
the Securities should be considered to represent "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code. Reserves or funds underlying
the Securities may cause a proportionate reduction in the above-described
qualifying status categories of Securities.
Sale or Exchange
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security. For taxable years beginning after December 31, 1993, the maximum tax
rate on ordinary income for individual taxpayers is 39.6% and the maximum tax
rate on long-term capital gains reported after December 31, 1990 for such
taxpayers is 28%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ("TIN"); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
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Tax Treatment of Foreign Investors
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
("Nonresidents"), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from such interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the Loans
were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as "portfolio
interest." It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See "--Excess Inclusions."
Tax Characterization of the Trust as a Partnership
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Securities has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
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If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for "qualified stated
interest" under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will
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be capital gain or loss if the Note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who is
a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Seller (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding agent;
in that case, however, the signed statement must be accompanied by a Form W-8 or
substitute form provided by the foreign person that owns the Note. If such
interest is not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, unless reduced or
eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust Fund will be required to withhold
31 percent of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Company, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the Trust Fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the
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assets of the partnership being the assets held by the Trust Fund, the partners
of the partnership being the Certificateholders, and the Notes being debt of the
partnership. However, the proper characterization of the arrangement involving
the Trust Fund, the Certificates, the Notes, the Trust Fund and the Servicer is
not clear because there is no authority on transactions closely comparable to
that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the Certificates are denominated in U.S. dollars, none of the Certificates
are Indexed Securities or Strip Certificates, and that a Series of Securities
includes a single class of Certificates. If these conditions are not satisfied
with respect to any given Series of Certificates, additional tax considerations
with respect to such Certificates will be disclosed in the applicable Prospectus
Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price (iii) prepayment premium payable to the Certificateholders for such month;
and (iv) any other amounts of income payable to the Certificateholders for such
month. Such allocation will be reduced by any amortization by the Trust Fund of
premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Company. Based on the economic arrangement
of the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
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An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Loans may be greater or less than the
remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, the Trust Fund will be considered
to distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
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Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-l information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies .
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment
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to the items of the Trust Fund. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local income tax consequences of the acquisition, ownership, and disposition
of the Securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into subclasses.
If Securities are divided into subclasses the related Prospectus Supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds
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and separate accounts in which such plans, accounts or arrangements are
invested) (collectively "Plans") subject to ERISA and on persons who are
fiduciaries with respect to such Plans. Generally, ERISA applies to investments
made by Plans. Among other things, ERISA requires that the assets of Plans be
held in trust and that the trustee, or other duly authorized fiduciary, have
exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control respecting
the management or disposition of the assets of a Plan is considered to be a
fiduciary of such Plan (subject to certain exceptions not here relevant).
Certain employee benefit plans, such as governmental plans (as defined in ERISA
Section 3(32)) and, if no election has been made under Section 410(d) of the
Code, church plans (as defined in ERISA Section 3(33)), are not subject to ERISA
requirements. Accordingly, assets of such plans may be invested in Securities
without regard to the ERISA considerations described above and below, subject to
the provisions of applicable state law. Any such plan which is qualified and
exempt from taxation under Code Sections 401(a) and 501(a), however, is subject
to the prohibited transaction rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a Plan makes an "equity" investment could be deemed for
purposes of ERISA to be assets of the investing Plan in certain circumstances.
However, the regulation provides that, generally, the assets of a corporation or
partnership in which a Plan invests will not be deemed for purposes of ERISA to
be assets of such Plan if the equity interest acquired by the investing Plan is
a publicly-offered security. A publicly-offered security, as defined in the
Labor Reg. Section 2510.3-101, is a security that is widely held, freely
transferable and registered under the Securities Exchange Act of 1934, as
amended.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. Because the Loans
may be deemed Plan assets of each Plan that purchases Securities, an investment
in the Securities by a Plan might be a prohibited transaction under ERISA
Sections 406 and 407 and subject to an excise tax under Code Section 4975 unless
a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions which might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions (discussed below) of PTE
83-1 are satisfied, investments by a Plan in Securities that represent interests
in a Pool consisting of Loans ("Single Family Securities") will be exempt from
the prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinate Securities.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinate Security or a Security which is not a Single Family
Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTE 83-1,
the term "mortgage pass-through certificate" would include: (i)
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Securities issued in a Series consisting of only a single class of Securities;
and (ii) Securities issued in a Series in which there is only one class of Trust
Securities; provided that the Securities in the case of clause (i), or the
Securities in the case of clause (ii), evidence the beneficial ownership of both
a specified percentage of future interest payments (greater than 0%) and a
specified percentage (greater than 0%) of future principal payments on the
Loans. It is not clear whether a class of Securities that evidences the
beneficial ownership in a Trust Fund divided into Loan groups, beneficial
ownership of a specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or interest payments, or
a class of Securities entitled to receive payments of interest and principal on
the Loans only after payments to other classes or after the occurrence of
certain specified events would be a "mortgage pass-through certificate" for
purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Securityholders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor to
the Pool. The Depositor believes that the first general condition referred to
above will be satisfied with respect to the Securities in a Series issued
without a subordination feature, or the Securities only in a Series issued with
a subordination feature, provided that the subordination and Reserve Account,
subordination by shifting of interests, the pool insurance or other form of
credit enhancement described herein (such subordination, pool insurance or other
form of credit enhancement being the system of insurance or other protection
referred to above) with respect to a Series of Securities is maintained in an
amount not less than the greater of one percent of the aggregate principal
balance of the Loans or the principal balance of the largest Loan. See
"Description of the Securities" herein. In the absence of a ruling that the
system of insurance or other protection with respect to a Series of Securities
satisfies the first general condition referred to above, there can be no
assurance that these features will be so viewed by the DOL. The Trustee will not
be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Securities is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
The DOL has granted to certain underwriters individual administrative
exemptions (the "Underwriter 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 Underwriter Exemptions.
While each underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the 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 interest evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund;
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(3) the certificates required by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's Ratings Group, a Division of The
McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's"),
Duff & Phelps Credit Rating Co. ("DCR") or Fitch Investors Service, Inc.
("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 certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the seller pursuant to the assignment
of the loans to the trust fund represents not more than the fair market
value of such loans; the sum of all payments made to and retained by the
servicer and any other servicer represents not more than reasonable
compensation for such person's services under the agreement pursuant to
which the loans are pooled and reimbursements of such person's reasonable
expenses in connection therewith; and
(6) the Plan investing in the 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 as amended.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the type
that have been included in other investment pools;
(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 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 certificates.
Moreover, the Underwriter Exemptions generally 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 as to 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
(50%) 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 (5%) 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
(25%) 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 (25%) of the assets of the Plan with respect to which such
person is a fiduciary is invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Underwriter Exemptions do not apply to Plans sponsored by the Seller, the
related Underwriter, the Trustee, the Master Servicer, any insurer with respect
to the Loans, any obligor with respect to Loans included in the Trust Fund
constituting more than five percent (5%) of the aggregate unamortized principal
balance of the assets in the Trust Fund, or any affiliate of such parties (the
"Restricted Group").
The Prospectus Supplement for each Series of Securities will indicate the
classes of Securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
The Underwriter Exemption contains several requirements, some of which
differ from those in PTE 83-l. The Underwriter Exemption contains an expanded
definition of "certificate" which includes an interest which entitles
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the holder to pass-through payments of principal, interest and/or other
payments. The Underwriter Exemption contains an expanded definition of "trust"
which permits the trust corpus to consist of secured consumer receivables. The
definition of "trust", however, does not include any investment pool unless,
inter alia, (i) the investment pool consists only of assets of the type which
have been included in other investment pools, (ii) certificates evidencing
interests in such other investment pools have been purchased by investors other
than Plans for at least one year prior to the Plan's acquisition of certificates
pursuant to the Underwriter Exemption, and (iii) certificates in such other
investment pools have been rated in one of the three highest generic rating
categories of the four credit rating agencies noted below. Generally, the
Underwriter Exemption holds that the acquisition of the certificates by a Plan
must be on terms (including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction with an
unrelated party. The Underwriter Exemption requires that the rights and
interests evidenced by the certificates not be "subordinated" to the rights and
interests evidenced by other certificates of the same trust. The Underwriter
Exemption requires that certificates acquired by a Plan have received a rating
at the time of their acquisition that is in one of the three highest generic
rating categories of S&P, Moody's, Fitch or DCR. The Underwriter Exemption
specifies that the pool trustee must not be an affiliate of the pool sponsor,
nor an affiliate of the Underwriter, the pool servicer, any obligor with respect
to mortgage loans included in the trust constituting more than five percent of
the aggregate unamortized principal balance of the assets in the trust, or any
affiliate of such entities. Finally, the Underwriter Exemption stipulates that
any Plan investing in the certificates must be an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTE 83-1 and the Underwriter Exemption, and the potential
consequences in their specific circumstances, prior to making such investment.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL INVESTMENT
The Prospectus Supplement for each series of Securities will specify which,
if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of Securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any such entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities",
securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of any such legislation affect the
validity of any contractual commitment to purchase, hold or invest in
securities, or require the sale or other disposition of securities, so long as
such contractual commitment was made or such securities were acquired prior to
the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as
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modified by Letter to Credit Unions No. 108, which includes guidelines to assist
federal credit unions in making investment decisions for mortgage related
securities and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), which sets forth certain restrictions on investment by federal
credit unions in mortgage related securities (in each case whether or not the
class of Securities under consideration for purchase constituted a "mortgage
related security").
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities", which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement, such "high-risk mortgage securities" include securities
such as Securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security", and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying".
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
METHOD OF DISTRIBUTION
Securities are being offered hereby in Series from time to time (each
Series evidencing or relating to a separate Trust Fund) through any of the
following methods:
1. By negotiated firm commitment underwriting and public reoffering by
underwriters;
2. By agency placements through one or more placement agents primarily
with institutional investors and dealers; and
3. By placement directly by the Depositor with institutional
investors.
A Prospectus Supplement will be prepared for each Series which will
describe the method of offering being used for that Series and will set forth
the identity of any underwriters thereof and either the price at which such
Series is being offered, the nature and amount of any underwriting discounts or
additional compensation to such underwriters and the proceeds of the offering to
the Depositor, or the method by which the price at which the underwriters will
sell the Securities will be determined. Each Prospectus Supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material relationship between the Depositor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the Securities so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the Securities of such Series if any such Securities are purchased. Securities
may be acquired by the underwriters for
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their own accounts and may be resold from time to time in one or more
transactions, including negotiated transactions, at a fixed public offering
price or at varying prices determined at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the Depositor to indemnification by the Depositor against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribution with respect to payments which such underwriters or agents
may be required to make in respect thereof.
If a Series is offered other than through underwriters, the Prospectus
Supplement relating thereto will contain information regarding the nature of
such offering and any agreements to be entered into between the Depositor and
purchasers of Securities of such Series.
LEGAL MATTERS
The validity of the Securities of each Series, including certain federal
income tax consequences with respect thereto, will be passed upon for the
Depositor by Brown & Wood LLP, One World Trade Center, New York, New York 10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the Prospectus Supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund Assets and any credit enhancement with respect to such
class and will reflect such Rating Agency's assessment solely of the likelihood
that holders of a class of Securities of such class will receive payments to
which such Securityholders are entitled under the related Agreement. Such rating
will not constitute an assessment of the likelihood that principal prepayments
on the related Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional termination of the Series of Securities. Such rating should not
be deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. Each
security rating should be evaluated independently of any other security rating.
Such rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
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The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of mortgage loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Loans. No assurance can be given that values of any Properties have remained
or will remain at their levels on the respective dates of origination of the
related Loans. If the residential real estate markets should experience an
overall decline in property values such that the outstanding principal balances
of the Loans in a particular Trust Fund and any secondary financing on the
related Properties become equal to or greater than the value of the Properties,
the rates of delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry. In additional,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by mortgagors of scheduled payments of principal
and interest on the Loans and, accordingly, the rates of delinquencies,
foreclosures and losses with respect to any Trust Fund. To the extent that such
losses are not covered by credit enhancement, such losses will be borne, at
least in part, by the holders of one or more classes of the Securities of the
related Series.
97
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INDEX OF DEFINED TERMS
Term Page
- ---- ----
Accretion Directed..........................................................30
Accrual ....................................................................32
Accrual Securities..........................................................26
Advance .....................................................................9
Amortizable Bond Premium Regulations........................................82
APR ........................................................................20
balloon payment.............................................................18
Belgian Cooperative.........................................................38
beneficial owner............................................................37
BIF ........................................................................48
Book-Entry Securities.......................................................37
Borrower ................................................................72
Buydown Fund................................................................18
Buydown Loans...............................................................18
Calculation Agent...........................................................32
Cash Flow Bond Method.......................................................88
CEDEL Participants..........................................................38
CERCLA .................................................................13, 66
Certificateholder...........................................................37
Certificates..............................................................1, 4
Class Security Balance......................................................26
Closed-End Loans.............................................................4
Code ...................................................................10, 77
COFI Securities.............................................................35
Commission ..................................................................2
companion classes...........................................................31
Component Securities........................................................30
Contingent Regulations......................................................79
Contracts ..................................................................70
Cooperative Loans........................................................5, 17
Cooperatives.............................................................5, 17
Cut-off Date.............................................................4, 16
Cut-off Date Principal Balance..............................................24
DCR ........................................................................99
Debt Securities.............................................................78
Definitive Certificate......................................................37
Depositor ...............................................................1, 21
Detailed Description........................................................17
Distribution Date............................................................6
DOL ........................................................................97
DTC ....................................................................15, 37
Eleventh District...........................................................33
EPA ........................................................................66
ERISA ......................................................................10
Euroclear Operator..........................................................38
Euroclear Participants......................................................38
European Depositaries.......................................................37
excess servicing............................................................88
98
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<PAGE>
Exchange Act.................................................................2
FDIC .......................................................................22
FHA .........................................................................8
FHLBSF .....................................................................33
FHLMC ......................................................................22
Financial Intermediary......................................................37
Fitch ......................................................................99
Fixed Rate .................................................................31
Floating Rate...............................................................31
FNMA .......................................................................22
Foreign person..............................................................92
Funding Period..............................................................15
Garn-St Germain Act.........................................................69
Holder in Due Course Rules..................................................14
Home Equity Loans.........................................................1, 5
Home Improvement Contracts............................................1, 5, 19
Home Improvements............................................................1
HUD ........................................................................56
Indenture ..................................................................24
Installment Contract........................................................72
Insurance Proceeds..........................................................49
Insured Expenses............................................................49
Interest Only...............................................................31
Interest Weighted Securities................................................80
Inverse Floating Rate.......................................................31
IRS ........................................................................79
Lender .....................................................................72
Liquidation Expenses........................................................49
Liquidation Proceeds........................................................49
Loan Rate ...............................................................6, 18
Loans .......................................................................1
Lockout periods.............................................................18
Master Servicer..............................................................4
Master Servicing Agreement..................................................16
Master Servicing Fee........................................................58
Moody's ....................................................................99
Morgan .....................................................................37
Mortgage ...................................................................47
Mortgaged Properties........................................................18
National Cost of Funds Index................................................35
NCUA ......................................................................100
Nonresidents................................................................90
Notes ....................................................................1, 4
Notional Amount Securities..................................................30
OID ........................................................................78
OID Regulations.............................................................78
OTS ........................................................................35
PACs .......................................................................30
Partial Accrual.............................................................32
Parties in Interest.........................................................97
Pass-Through Rate............................................................6
Pay-Through Security........................................................79
Percentage Interests........................................................60
99
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<PAGE>
Permitted Investments.......................................................42
Planned Principal Class.....................................................30
Plans ......................................................................97
Policy Statement...........................................................101
Pool ....................................................................4, 16
Pool Insurance Policy.......................................................43
Pool Insurer................................................................43
Pooling and Servicing Agreement.............................................23
Pre-Funded Amount...........................................................15
Pre-Funding Account..........................................................4
Prepayment Assumption.......................................................79
Primary Insurer.............................................................55
Primary Mortgage Insurance Policy...........................................19
Principal Only..............................................................32
Principal Prepayments.......................................................27
Properties ................................................................19
Property Improvement Loans..................................................74
Proposed Mark-to-Market Regulations.........................................86
PTE 83-1 ...................................................................97
Purchase Price..............................................................23
Rating Agency..............................................................102
Ratio Strip Securities......................................................88
RCRA .......................................................................67
Record Date ................................................................25
Reference Banks.............................................................32
Refinance Loan..............................................................20
Regular Interest Securities.................................................78
Relevant Depositary.........................................................37
Relief Act .................................................................72
REMIC ...............................................................1, 25, 77
Reserve Account..........................................................7, 26
Residual Interest Security..................................................84
Restricted Group............................................................99
Retained Interest...........................................................24
Revolving Credit Line Loans..................................................4
Riegle Act .................................................................14
Rules ......................................................................37
S&P ........................................................................99
SAIF .......................................................................48
Scheduled Principal Class...................................................30
Securities ...............................................................1, 4
Security Owners.............................................................37
Security Register...........................................................25
Seller ......................................................................1
Sellers ....................................................................16
Senior Securities........................................................5, 40
Sequential Pay..............................................................30
Series ......................................................................1
Servicing Fee...............................................................87
Short-Term Note.............................................................91
Single Family Properties....................................................19
Single Family Securities....................................................97
100
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SMMEA ..................................................................9, 100
Strip ......................................................................31
Stripped Securities.........................................................87
Sub-Servicer.................................................................9
Sub-Servicers...............................................................16
Sub-Servicing Account.......................................................48
Sub-Servicing Agreement.....................................................51
Subordinated Securities......................................................5
Subsequent Loans............................................................15
Support Class...............................................................31
TACs .......................................................................31
Targeted Principal Class....................................................31
Terms and Conditions........................................................39
TIN ........................................................................89
Title I Loans...............................................................74
Title I Program.............................................................74
Title V ................................................................70, 71
Trust Agreement.........................................................17, 23
Trust Fund ..................................................................1
Trust Fund Assets.....................................................1, 4, 16
Trustee .................................................................4, 24
UCC ........................................................................66
Underwriter Exemptions......................................................98
VA ..........................................................................8
VA Guaranty ................................................................57
Variable Rate...............................................................31
101
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution*
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Securities being registered under this
Registration Statement, other than underwriting discounts and commissions:
SEC Registration Fee............................................... $ 344.83
Printing and Engraving Expenses ................................... $ 35,000.00
Legal Fees and Expenses............................................ $ 65,000.00
Trustee Fees and Expenses.......................................... $ 15,000.00
Accounting Fees and Expenses....................................... $ 25,000.00
Blue Sky Fees and Expenses......................................... $ 5,000.00
Rating Agency Fees................................................. $125,000.00
Miscellaneous...................................................... $ 5,000.00
===========
Total.............................................................. $275,344.83
===========
- ------------
* All amounts except the SEC Registration Fee are estimates of expenses
incurred in connection with the issuance and distribution of a Series of
Securities in an aggregate principal amount assumed for these purposes to be
equal to $250,000,000 of Securities registered hereby.
Item 15. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that he or she is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person indemnified acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his or her conduct was unlawful. In the case
of an action by or in the right of the corporation, no indemnification may be
made in respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of a corporation has
been successful in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, he or she shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith.
The Certificate of Incorporation and Bylaws of the Registrant provide, in
effect, that, to the extent and under the circumstances permitted by Section 145
of the General Corporation Law of Delaware, the Registrant
II-1
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<PAGE>
shall indemnify any person who was or is a party or is threatened to be made a
party to any action, suit or proceeding of the type described above by reason of
the fact that he or she is or was a director, officer, employee or agent of the
Registrant.
Item 16. Exhibits.
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Registrant.
3.2 By-laws of the Registrant.
4.1 Form of Pooling and Servicing Agreement.*
4.2 Form of Trust Agreement.*
4.3 Form of Indenture.*
4.4 Form of Master Servicing Agreement.*
5.1 Opinion of Brown & Wood LLP as to legality of the Securities.*
8.1 Opinion of Brown & Wood LLP as to certain tax matters.*
10.1 Form of Loan Purchase Agreement.*
23.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and 8.1 hereof).*
24.1 Power of Attorney (included on signature page).
- ----------
*To be filed by amendment.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i)To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii)To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement;
(iii)To include any material information with respect to the plan
of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this Registration
Statement.
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<PAGE>
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of a Trust Fund's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939 in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Trust Indenture Act of 1939.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that (i) it reasonably believes that the security rating
requirement of Transaction Requirement B.5 of Form S-3 will be met by the time
of sale of each Series of Securities to which this Registration Statement
relates and (ii) it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Pasadena, California on the 29th day of August, 1996.
CWABS, Inc.
By /s/ Stanford L. Kurland
------------------------------
Name: Stanford L. Kurland
Title: Chairman of the Board,
President and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stanford L. Kurland, Carlos M. Garcia, Kevin W.
Bartlett and Thomas H. Boone, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him in his name, place and stead, in any and all capacities,
to sign any or all amendments (including post-effective amendments) to the
Registration Statement, and to file the same, with all exhibits thereto, and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the foregoing, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ STANFORD L. KURLAND
- -------------------------- Chairman of the Board, August 29, 1996
Stanford L. Kurland President (Principal
Executive Officer) and
Director
/s/ CARLOS M. GARCIA
- -------------------------- Executive Vice President August 29, 1996
Carlos M. Garcia and Chief Financial Officer
(Principal Accounting
Officer) and Director
/s/ KEVIN W. BARTLETT
- -------------------------- Director August 29, 1996
Kevin W. Bartlett
/s/ THOMAS H. BOONE
- -------------------------- Director August 29, 1996
Thomas H. Boone
/s/ JEFFREY P. GROGIN
- -------------------------- Director August 29, 1996
Jeffrey P. Grogin
II-4
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<PAGE>
EXHIBIT INDEX
Sequential
Exhibit Page
No. Description of Exhibit Number
- ------- ---------------------- ------
1.1 -- Form of Underwriting Agreement.*
3.1 -- Certificate of Incorporation of the Registrant.
3.2 -- By-laws of the Registrant.
4.1 -- Form of Pooling and Servicing Agreement.*
4.2 -- Form of Trust Agreement.*
4.3 -- Form of Indenture.*
4.4 -- Form of Master Servicing Agreement.*
5.1 -- Opinion of Brown & Wood LLP as to legality of
the Securities.*
8.1 -- Opinion of Brown & Wood LLP as to certain tax
matters.*
10.1 -- Form of Loan Purchase Agreement.*
23.1 -- Consent of Brown & Wood LLP (included in
Exhibits 5.1 and 8.1).*
24.1 -- Power of Attorney (included on signature page).
- --------
*To be filed by amendment.
<PAGE>
<PAGE>
CERTIFICATE OF INCORPORATION
OF
CWABS, Inc.
The undersigned, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the General Corporation Law of the
State of Delaware (the "GCL"), does hereby certify as follows:
FIRST: The name of the corporation is CWABS, Inc. (the "Corporation").
SECOND: The address of the Corporation's registered office in the
State of Delaware is 1013 Centre Road, in the City of Wilmington, County of
New Castle. The name of the corporation's registered agent at such address
is The Prentice-Hall Corporation System, Inc.
THIRD: The nature of business or purposes to be conducted or promoted
by the Corporation is to engage solely in the following activities:
a. To acquire, own, hold, sell, transfer, pledge or otherwise
dispose of:
(1) interests in (A) loan agreements, promissory notes or
other evidences of indebtedness (the "Mortgage Loans") secured by
mortgages, deeds of trust, pledge agreements or other security
devices creating first and/or subordinate liens on one- to
four-family residential properties, detached or semi-detached
one-to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit
developments, and certain other dwelling units (the "Single
Family Properties") or mixed use properties which consist of
structures of not more than three stories which include one- to
four-family residential dwelling units and space used for retail,
professional or other commercial uses (together with the Single
Family Properties, the "Properties"), (B) closed-end and/or
revolving home equity loans (the "Home Equity Loans") secured by
first and/or subordinate liens on Single Family Properties and/or
(C) home improvement sale contracts and installment sale
agreements (the "Home Improvement Contracts" and, together with
the Home Equity Loans and the Mortgage Loans, the "Loans") that
are either
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<PAGE>
unsecured or secured primarily by subordinate liens on Single
Family Properties or by purchase money security interests in the
home improvements financed thereby; such Loans may include
cooperative apartment loans secured by shares issued by private,
nonprofit, cooperative housing corporations ("Cooperatives") and
the related proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units in such
Cooperative buildings;
(2) mortgage-backed securities insured and/or guaranteed as
to timely payment of interest and/or principal by the Government
National Mortgage Association, Federal National Mortgage
Association or Federal Home Loan Mortgage Corporation; and
(3) mortgage pass-through certificates and other
collateralized mortgage obligations issued by a financial
institution or other entity engaged generally in the business of
mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation
engaged in the business of establishing trusts and acquiring and
selling residential loans to such trusts and selling beneficial
interests in such trusts.
b. To act as settlor or depositor of trusts formed under a trust
agreement, pooling and servicing agreement or other agreement to issue one
or more series (any of which series may be issued in one or more classes)
of trust certificates ("Certificates") representing interests in Loans
and/or to issue pursuant to an indenture or other agreement one or more
series (any of which series may be issued in one or more classes) of bonds,
notes or other evidences of indebtedness ("Debt Obligations")
collateralized by Loans and/or other property and to enter into any other
agreement in connection with the authorization, issuance, sale and delivery
of Certificates and/or Debt Obligations ("Securities").
c. To hold, pledge, transfer or otherwise deal with Securities,
including Securities representing a senior interest in Loans ("Senior
Interests"), representing a subordinated interest in Loans ("Subordinated
Interests") or a residual interest in Loans ("Residual Interests").
2
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<PAGE>
d. To loan or invest or otherwise apply proceeds from Loans, funds
received in respect of Securities, Senior Interests, Subordinated Interests
or Residual Interests and any other income, as determined by the
Corporation's Board of Directors.
e. To engage in any lawful act or activity to exercise any powers
permitted to corporations organized under the GCL that are incidental to
and necessary or convenient for the accomplishment of the foregoing
purposes.
FOURTH: The total number of shares of all classes of capital stock
that the Corporation shall have authority to issue is 1,000 shares of
common stock, and the par value of such shares shall be $0.01 per share.
FIFTH: The name and mailing address of the sole incorporator is as
follows:
Name Mailing Address
---- ---------------
Joshua G. Grunat c/o Brown & Wood LLP
One World Trade Center
New York, NY 10048
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: The following provisions are inserted for the management of
the business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:
1. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors.
2. In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors shall have concurrent power with
the stockholders to make, alter, amend, change, add to or repeal the
bylaws of the Corporation.
3. The number of directors of the Corporation shall initially be
five and thereafter shall be as from time to time fixed by, or in the
manner provided in, the bylaws of the Corporation. Election of
directors
3
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<PAGE>
need not be by written ballot unless the bylaws so provide.
4. At least one director of the Corporation will not be a
director, officer or employee of any direct or indirect parent of the
Corporation or of any affiliate of such parent (other than CWMBS,
Inc., a Delaware corporation, or any successor thereto).
5. In addition to the powers and authority hereinabove or by
statute expressly conferred upon them, the directors are hereby
empowered to exercise all such powers and do all such acts and things
as may be exercised or done by the Corporation, subject nevertheless
to the provisions of the GCL, this Certificate of Incorporation and
the bylaws of the Corporation; provided, however, that no bylaw
hereafter adopted by the stockholders shall invalidate any prior act
of the directors that would have been valid if such bylaw had not been
adopted. The Corporation's Board of Directors will duly authorize all
of the Corporation's actions.
6. The Corporation's funds and other assets will not be
commingled with those of any of its stockholders or of any direct or
indirect parent of the Corporation or of any affiliate of any such
parent.
7. The Corporation will maintain separate corporate records and
books of account from those of any of its stockholders or of any
direct or indirect parent of the Corporation or of any affiliate of
any such parent.
EIGHTH: The Corporation shall not issue, assume or guarantee any debt
securities unless such debt securities are acceptable to the rating
agencies that have rated any outstanding Securities and such issuance,
assumption or guarantee will not result in the downgrade or withdrawal of
the rating then assigned to any outstanding Securities then rated by such
rating agency.
NINTH: A director of the Corporation shall not in the absence of fraud
be disqualified by his office from dealing or contracting with the
Corporation either as a vendor, purchaser or otherwise, nor in the absence
of fraud shall a director of the Corporation be liable to account to the
Corporation for any profit realized by him from or through any transaction
or contract of the Corporation by reason of the fact that he, or any firm
of which he is a
4
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<PAGE>
member, or any corporation of which he is an officer, director or
stockholder, was interested in such transaction or contract if such
transaction or contract has been authorized, approved or ratified in the
manner provided in the GCL for authorization, approval or ratification of
transactions or contracts between the Corporation and one or more of its
directors or officers, or between the Corporation and any other
corporation, partnership, association or other organization in which one or
more of its directors or officers are directors or officers or have a
financial interest.
TENTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application
in a summary way of the Corporation or of any creditor or stockholder
thereof or on the application of any receiver or receivers appointed for
the Corporation under the provisions of Section 291 of the GCL or on the
application of trustees in dissolution or of any receiver or receivers
appointed for the Corporation under the provisions of Section 279 of the
GCL, order a meeting of the creditors or class of creditors and/or of the
stockholders or class of stockholders of the Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority
in number representing three-fourths in value of the creditors or class of
creditors and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement and
to any reorganization of the Corporation as a consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said
application has been made, be binding on all the creditors or class of
creditors and/or on all the stockholders or class of stockholders of the
Corporation, as the case may be, and also on the Corporation.
ELEVENTH: No director shall be personally liable to the Corporation or
any of its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the GCL or (iv)
for any transaction from which the director derived an improper personal
benefit. Any repeal or modification of this
5
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<PAGE>
Article ELEVENTH by the stockholders of the Corporation shall not adversely
affect any right of protection of a director of the Corporation existing at
the time of such repeal or modification with respect to acts or omissions
occurring prior to such repeal or modification.
TWELFTH: Notwithstanding any other provision of this Certificate of
Incorporation and any provision of law that otherwise so empowers the
Corporation, the Corporation, for so long as any rated Securities remain
outstanding, shall not:
(i) engage in any business or activity other than those set forth
in Article THIRD;
(ii) dissolve or liquidate, in whole or in part; consolidate or
merge with or into any other entity or convey or transfer its
properties and assets substantially as an entirety to any entity,
unless:
(A) the entity (if other than the Corporation) formed or
surviving the consolidation or merger or which acquires the
properties and assets of the Corporation, is organized and
existing under the laws of the State of Delaware, expressly
assumes the due and punctual payment of, and all obligations of
the Corporation, and has a Certificate of Incorporation
containing provisions identical to the provisions of Articles
THIRD, SEVENTH, EIGHTH, TWELFTH and SIXTEENTH of this Certificate
of Incorporation;
(B) immediately after giving effect to the transaction, no
default or event of default has occurred and is continuing under
any indebtedness of the Corporation or any agreements relating to
such indebtedness; and
(C) the Corporation receives written confirmation from each
rating agency then rating any outstanding Securities that such
merger or consolidation will not result in the downgrade or
withdrawal of the rating then assigned to any Securities then
rated by such rating agency; and
(iii) without the affirmative vote of 100% of the members of the
Board of Directors of the Corporation, institute proceedings to be
adjudicated bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against it, or
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file a petition seeking or consent to reorganization or relief under
any applicable federal or state law relating to bankruptcy, or consent
to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Corporation or a
substantial part of its property, or make any assignment for the
benefit of creditors, or admit in writing its inability to pay its
debts generally as they become due, or dissolve, liquidate,
consolidate, merge or sell all or substantially all of the assets of
the Corporation.
THIRTEENTH: The Board of Directors, by the affirmative vote of a
majority of the whole Board, and irrespective of any personal interest of
its members, shall have authority to provide reasonable compensation of all
directors for services, ordinary or extraordinary, to the Corporation as
directors, officers or otherwise.
FOURTEENTH: Meetings of stockholders and directors may be held within
or without the State of Delaware, as the bylaws of the Corporation may
provide. The books and records of the Corporation may be kept (subject to
any provision contained in the GCL) outside the State of Delaware.
FIFTEENTH: Each person who is or was a director or officer of the
Corporation, and each person who serves or served at the request of the
Corporation as a director or officer (or its equivalent) of another
enterprise, shall be indemnified by the Corporation to the fullest extent
authorized by the GCL as it may be in effect from time to time, except as
to any action, suit or proceeding brought by or on behalf of a director or
officer without prior approval of the Board of Directors.
SIXTEENTH: The Corporation reserves the right to amend, alter, change
or repeal any provisions contained in this Certificate of Incorporation, in
the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation; provided
that no such amendment of Articles THIRD, SEVENTH, EIGHTH, TWELFTH or
SIXTEENTH shall be effective without the Corporation having received
confirmation from each rating agency rating any outstanding Securities that
such amendment shall not result in the termination or lowering of the
rating of such Securities.
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IN WITNESS WHEREOF, I the undersigned, being the sole incorporator
hereinbefore named, do hereby execute this Certificate of Incorporation this
26th day of August, 1996.
/s/ Joshua G. Grunat
------------------------------
Joshua G. Grunat
Sole Incorporator
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BYLAWS
OF
CWABS, Inc.
(a Delaware corporation)
ARTICLE I
Stockholders
SECTION 1. Annual Meetings. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year at such date and time,
within or without the State of Delaware, as the Board of Directors shall
determine.
SECTION 2. Special Meetings. Special meetings of stockholders for the
transaction of such business as may properly come before the meeting may be
called by order of the Board of Directors or by stockholders holding together at
least a majority of all the shares of the Corporation entitled to vote at the
meeting, and shall be held at such date and time, within or without the State of
Delaware, as may be specified by such order. Whenever the directors shall fail
to fix such place, the meeting shall be held at the principal executive office
of the Corporation.
SECTION 3. Notice of Meetings. Written notice of all meetings of the
stockholders shall be mailed or delivered to each stockholder not less than 10
nor more than 60 days prior to the meeting. Notice of any special meeting shall
state in general terms the purpose or purposes for which the meeting is to be
held.
SECTION 4. Stockholder Lists. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least 10 days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, either at a place within the city where the meeting is
to be held, which place shall be specified in the notice of the meeting, or, if
not so specified, at the place where the meeting is to be held. The list shall
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
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The stock ledger shall be the only evidence as to who are the stockholders
entitled to examine the stock ledger, the list required by this section or the
books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 5. Quorum. Except as otherwise provided by law or the corporation's
Certificate of Incorporation, a quorum for the transaction of business at any
meeting of stockholders shall consist of the holders of record of a majority of
the issued and outstanding shares of the capital stock of the Corporation
entitled to vote at the meeting, present in person or by proxy. At all meetings
of the stockholders at which a quorum is present, all matters, except as
otherwise provided by law or the Certificate of Incorporation, shall be decided
by the vote of the holders of a majority of the shares entitled to vote thereat
present in person or by proxy. If there be no such quorum, the holders of a
majority of such shares so present or represented may adjourn the meeting from
time to time, without further notice, until a quorum shall have been obtained.
When a quorum is once present it is not broken by the subsequent withdrawal of
any stockholder.
SECTION 6. Organization. Meetings of stockholders shall be presided over by
the Chairman, if any, or if none or in the Chairman's absence the Vice Chairman,
if any, or if none or in the Vice Chairman's absence the President, if any, or
if none or in the President's absence a Vice President, or, if none of the
foregoing is present, by a chairman to be chosen by the stockholders entitled to
vote who are present in person or by proxy at the meeting. The Secretary of the
Corporation, or in the Secretary's absence an Assistant Secretary, shall act as
secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present, the presiding officer of the meeting shall appoint any
person present to act as secretary of the meeting.
SECTION 7. Voting; Proxies; Required Vote. (a) At each meeting of
stockholders, every stockholder shall be entitled to vote in person or by proxy
appointed by instrument in writing, subscribed by much stockholder or by such
stockholder's duly authorized attorney-in-fact (but no such proxy shall be voted
or acted upon after three years from its date, unless the proxy provides for a
longer period), and, unless the Certificate of Incorporation provides otherwise,
shall have one vote for each share of stock entitled to vote registered in the
name of such stockholder on the books of the Corporation on the applicable
record date fixed pursuant to these Bylaws. At all elections of directors the
voting may but need not be by ballot and a plurality of the votes cast there
shall elect. Except as otherwise required by law or the Certificate of
Incorporation, any other action shall be authorized by a majority of the votes
cast.
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(b) Any action required or permitted to be taken at any meeting of
stockholders may, except as otherwise required by law or the Certificate of
Incorporation, be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of record of the issued and outstanding capital stock of
the Corporation having a majority of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted, and the writing or writings are filed with the permanent
records of the Corporation. Prompt notice of the taking of corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
(c) Where a separate vote by a class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to vote on that matter,
the affirmative vote of the majority of shares of such class or classes present
in person or represented by proxy at the meeting shall be the act of such class,
unless otherwise provided in the Corporation's Certificate of Incorporation.
SECTION 8. Inspectors. The Board of Directors, in advance of any meeting,
may, but need not, appoint one or more inspectors of election to act at the
meeting or any adjournment thereof. If an inspector or inspectors are not so
appointed, the person presiding at the meeting may, but need not, appoint one or
more inspectors. In case any person who may be appointed as an inspector fails
to appear or act, the vacancy may be filled by appointment made by the directors
in advance of the meeting or at the meeting by the person presiding thereat.
Each inspector, if any, before entering upon the discharge of his or her duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his or her
ability. The inspectors, if any, shall determine the number of shares of stock
outstanding and the voting power of each, the shares of stock represented at the
meeting, the existence of a quorum, and the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors, if any, shall
make a report in writing of any challenge, question or matter determined by such
inspector or inspectors and execute a certificate of any fact found by such
inspector or inspectors.
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ARTICLE II
Board of Directors
SECTION 1. General Powers. The business, property and affairs of the
Corporation shall be managed by, or under the direction of, the Board of
Directors.
SECTION 2. Qualification; Number; Term; Remuneration. (a) Each director
shall be at least 18 years of age. A director need not be a stockholder, a
citizen of the United States or a resident of the State of Delaware. The number
of directors constituting the entire Board shall initially be five, or such
other number as may be fixed from time to time by action of the stockholders or
Board of Directors, one of whom may be selected by the Board of Directors to be
its chairman. The use of the phrase "entire Board" herein refers to the total
number of directors which the Corporation would have if there were no vacancies.
(b) Directors who are elected at an annual meeting of stockholders, and
directors who are elected in the interim to fill vacancies and newly created
directorships, shall hold office until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
resignation or removal.
(c) Directors may be paid their expenses, if any, of attendance at each
meeting of the Board of Directors and may be paid a fixed sum for attendance at
each meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
SECTION 3. Quorum and Manner of Voting. Except as otherwise provided by
law, a majority of the entire Board shall constitute a quorum. A majority of the
directors present, whether or not a quorum is present, may adjourn a meeting
from time to time to another time and place without notice. The vote of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
SECTION 4. Places of Meetings. Meetings of the Board of Directors may be
held at any place within or without the State of Delaware, as may from time to
time be fixed by resolution of the Board of Directors or as may be specified in
the notice of meeting.
SECTION 5. Annual Meeting. Following the annual meeting of stockholders,
the newly elected Board of Directors shall meet for
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the purpose of the election of officers and the transaction of such other
business as may properly come before the meeting. Such meeting may be held
without notice immediately after the annual meeting of stockholders at the same
place at which such stockholders' meeting is held.
SECTION 6. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as the Board of Directors shall from time
to time by resolution determine. Notice need not be given of regular meetings of
the Board of Directors held at times and places fixed by resolution of the Board
of Directors.
SECTION 7. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board, Chief Executive
Officer, President, or by a majority of the directors then in office.
SECTION 8. Notice of Meetings. A notice of the place, date and time and the
purpose or purposes of each meeting of the Board of Directors, other than
regular meetings held at times and places fixed by resolution of the Board of
Directors, shall be given to each director by mailing the same at least two days
before the meeting, or by telegraphing or telephoning the same or by delivering
the same personally not later than the day before the day of the meeting.
SECTION 9. Organization. At all meetings of the Board of Directors, the
Chairman, if any, or if none or in the Chairman's absence or inability to act
the President, or in the President's absence or inability to act any Vice
President who is a member of the Board of Directors, or in such Vice President's
absence or inability to act a chairman chosen by the directors, shall preside.
The Secretary of the Corporation shall act as secretary at all meetings of the
Board of Directors when present, and, in the Secretary's absence, the presiding
officer may appoint any person to act as Secretary.
SECTION 10. Resignation. Any director may resign at any time upon written
notice to the Corporation and such resignation shall take effect upon receipt
thereof by the President or Secretary, unless otherwise specified in the
resignation. Any or all of the directors may be removed, with or without cause,
by the holders of a majority of the shares of stock outstanding and entitled to
vote for the election of directors.
SECTION 11. Vacancies. Unless otherwise provided in these Bylaws, vacancies
on the Board of Directors, whether caused by resignation, death,
disqualification, removal, an increase in the authorized number of directors or
otherwise, may be filled by the affirmative vote of a majority of the remaining
directors, although less than a quorum, or by a sole remaining director, or
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at a special meeting of the stockholders, by the holders of shares entitled to
vote for the election of directors.
SECTION 12. Action by Written Consent; Telephonic Meetings. Any action
required or permitted to be taken at any meeting of the Board of Directors may
be taken without a meeting if all the directors consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors. Subject to applicable notice provisions, members of the Board of
Directors may participate in and hold meetings by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in such meeting shall be
deemed presence in person at such meeting, except where a person's participation
is for the express purpose of objecting to the transaction of any business on
the ground that the meeting is not lawfully called or convened.
ARTICLE III
Committees
SECTION 1. Appointment. From time to time the Board of Directors by a
resolution adopted by a majority of the entire Board may appoint any committee
or committees for any purpose or purposes, to the extent lawful, which shall
have powers as shall be determined and specified by the Board of Directors in
the resolution of appointment.
SECTION 2. Procedures, Quorum and Manner of Acting. Each committee shall
fix its own rules of procedure, and shall meet where and as provided by such
rules or by resolution of the Board of Directors. Except as otherwise provided
by law, the presence of a majority of the then appointed members of a committee
shall constitute a quorum for the transaction of business by that committee, and
in every case where a quorum is present the affirmative vote of a majority of
the members of the committee present shall be the act of the committee. Each
committee shall keep minutes of its proceedings, and actions taken by a
committee shall be reported to the Board of Directors.
SECTION 3. Acting by Written Consent; Telephonic Meetings. Any action
required or permitted to be taken at any meeting of any committee of the Board
of Directors may be taken without a meeting if all the members of the committee
consent thereto in writing, and the writing or writings are filed with the
minutes or proceedings of the committee. Subject to applicable notice
provisions, members of any committee of the Board of Directors may participate
in and hold meetings by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and
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participation in such meeting shall be deemed presence in person at such
meeting, except where a person's participation is for the express purpose of
objecting to the transaction of any business on the ground that the meeting is
not lawfully called or convened.
SECTION 4. Terms; Termination. In the event any person shall cease to be a
director of the Corporation, such person shall simultaneously therewith cease to
be a member of any committee appointed by the Board of Directors.
ARTICLE IV
Officers
SECTION 1. Election and Qualifications. The Board of Directors shall elect
the officers of the Corporation, which shall include a President and a
Secretary, and may include, by election or appointment, one or more Vice
Presidents (any one or more of whom may be given an additional designation of
rank or function), a Treasurer and such assistant secretaries, such assistant
treasurers and such other officers as the Board may from time to time deem
proper. Each officer shall have such powers and duties as may be prescribed by
these Bylaws and as may be assigned by the Board of Directors or the President.
Any two or more offices may be held by the same person except the offices of
President and Secretary.
SECTION 2. Term of Office and Remuneration. The term of office of all
officers shall be one year or until their respective successors have been
elected and qualified, but any officer may be removed from office, either with
or without cause, at any time by the Board of Directors. Any vacancy in any
office arising from any cause may be filled for the unexpired portion of the
term by the Board of Directors. The remuneration of all officers of the
Corporation may be fixed by the Board of Directors or in such manner as the
Board of Directors shall provide.
SECTION 3. Resignation; Removal. Any officer may resign at any time upon
written notice to the Corporation and such resignation shall take effect upon
receipt thereof by the President or Secretary, unless otherwise specified in the
resignation. Any officer shall be subject to removal, with or without cause, at
any time by vote of a majority of the entire Board.
SECTION 4. Chairman of the Board. The Chairman of the Board of Directors,
if there be one, shall preside at all meetings of the Board of Directors and
shall have such other
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powers and duties as may from time to time be assigned by the Board of
Directors.
SECTION 5. President and Chief Executive Officer. The President shall be
the chief executive officer of the Corporation and shall have such duties as
customarily pertain to that office. The President also shall be a director of
the Corporation. If, at any time and for any reason, the President's term of
office as a director of the Corporation terminates or is terminated, then his
term of office as President of the Corporation shall also be automatically
terminated. The President shall have general management and supervision of the
property, business and affairs of the Corporation and over its other officers;
may appoint and remove assistant officers and other agents and employees, other
than officers referred to in Section 1 of this Article IV; and may execute and
deliver in the name of the Corporation powers of attorney, contracts, bonds and
other obligations and instruments.
SECTION 6. Vice President. A Vice President may execute and deliver in the
name of the Corporation contracts and other obligations and instruments
pertaining to the regular course of the duties of said office, and shall have
such other authority as from time to time may be assigned by the Board of
Directors or the President.
SECTION 7. Treasurer. The Treasurer shall in general have all duties
incident to the position of Treasurer and such other duties as may be assigned
by the Board of Directors or the President.
SECTION 8. Secretary. The Secretary shall in general have all the duties
incident to the office of Secretary and such other duties as may be assigned by
the Board of Directors or the President.
SECTION 9. Assistant Officers. Any assistant officer shall have such powers
and duties of the officer such assistant officer assists as such officer or the
Board of Directors shall from time to time prescribe.
ARTICLE V
Books and Records
SECTION 1. Location. The books and records of the Corporation may be kept
at such place or places within or outside the State of Delaware as the Board of
Directors or the respective officers in charge thereof may from time to time
determine. The record books containing the names and addresses of all
stockholders, the number and class of shares of stock held by each and the dates
when they respectively became the owners of
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record thereof shall be kept by the Secretary as prescribed in the Bylaws and by
such officer or agent as shall be designated by the Board of Directors.
SECTION 2. Addresses of Stockholders. Notices of meetings and all other
corporate notices may be delivered personally or mailed to each stockholder at
the stockholder's address as it appears on the records of the Corporation.
SECTION 3. Fixing Date for Determination of Stockholders of Record. (a) In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, the Board
of Directors may fix a record date, which record date shall not be more than 60
nor less than 10 days before the date of such meeting. If no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date which date shall not be more than 10 days after
the date upon which the resolution fixing the record date is adopted by the
Board of Directors. If no record date has been fixed by the Board of Directors,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in this State, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
this chapter, the record date for determining Stockholders entitled to consent
to corporate action in writing without a meeting shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action.
(c) In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other
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distribution or allotment of any rights or the Stockholder entitled to exercise
any rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix a record date
which record date shall be not more than 60 days prior to such action. If no
record date is fixed, the record date for determining stockholders for any such
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
ARTICLE VI
Certificates Representing Stock
SECTION 1. Certificate; Signatures. The shares of the Corporation shall be
represented by certificates, provided that the Board of Directors of the
Corporation may provide by resolution or resolutions that some or all of any or
all classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until such
certificate is surrendered to the Corporation. Notwithstanding the adoption of
such a resolution by the Board of Directors, every holder of stock represented
by certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate, signed by or in the name of the Corporation by
the Chairman or Vice Chairman of the Board of Directors, or the President or
Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Corporation, representing the number of shares
registered in certificate form. Any and all signatures on any such certificate
may be facsimiles. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he or she were such officer, transfer agent or registrar at the date of
issue. The name of the holder of record of the shares represented thereby, with
the number of such shares and the date of issue, shall be entered on the books
of the Corporation.
SECTION 2. Transfers of Stock. Upon compliance with provisions restricting
the transfer or registration of transfer of shares of stock, if any, shares of
capital stock shall be transferable on the books of the Corporation only by the
holder of record thereof in person, or by duly authorized attorney, upon
surrender and cancellation of certificates for a like number of shares, properly
endorsed, and the payment of all taxes due thereon.
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SECTION 3. Fractional Shares. The Corporation may, but shall not be
required to, issue certificates for fractions of a share where necessary to
effect authorized transactions, or the Corporation may pay in cash the fair
value of fractions of a share as of the time when those entitled to receive such
fractions are determined, or it may issue scrip in registered or bearer form
over the manual or facsimile signature of an officer of the Corporation or of
its agent, exchangeable as therein provided for full shares, but such scrip
shall not entitle the holder to any rights of a stockholder except as therein
provided.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer
and registration of certificates representing shares of the Corporation.
SECTION 4. Lost, Stolen or Destroyed Certificates. The Corporation may
issue a new certificate of stock in place of any certificate, theretofore issued
by it, alleged to have been lost, stolen or destroyed, and the Board of
Directors may require the owner of any lost, stolen or destroyed certificate, or
his legal representative, to give the Corporation a bond sufficient to indemnify
the Corporation against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
any such new certificate.
ARTICLE VII
Dividends
Subject always to the provisions of law and the Certificate of
Incorporation, the Board of Directors shall have full power to determine whether
any, and, if any, what part of any, funds legally available for the payment of
dividends shall be declared as dividends and paid to stockholders; the division
of the whole or any part of such funds of the Corporation shall rest wholly
within the lawful discretion of the Board of Directors, and it shall not be
required at any time, against such discretion, to divide or pay any part of such
funds among or to the stockholders as dividends or otherwise; and before payment
of any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion, thinks proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the Board of Directors
shall think conducive to the interest of the Corporation, and the Board of
Directors may modify or abolish any such reserve in the manner in which it was
created.
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ARTICLE VIII
Ratification
Any transaction, questioned in any law suit on the ground of lack of
authority, defective or irregular execution, adverse interest of director,
officer or stockholder, non-disclosure, miscomputation, or the application of
improper principles or practices of accounting, may be ratified before or after
judgment, by the Board of Directors or by the stockholders, and if so ratified
shall have the same force and effect as if the questioned transaction had been
originally duly authorized. Such ratification shall be binding upon the
Corporation and its stockholders and shall constitute a bar to any claim or
execution of any judgment in respect of such questioned transaction.
ARTICLE IX
Corporate Seal
The corporate seal shall have inscribed thereon the name of the Corporation
and the year of its incorporation, and shall be in such form and contain such
other words and/or figures as the Board of Directors shall determine. The
corporate seal may be used by printing, engraving, lithographing, stamping or
otherwise making, placing or affixing, or causing to be printed, engraved,
lithographed, stamped or otherwise made, placed or affixed, upon any paper or
document, by any process whatsoever, an impression, facsimile or other
reproduction of said corporate seal.
ARTICLE X
Fiscal Year
The fiscal year of the Corporation shall be fixed, and shall be subject to
change, by the Board of Directors. Unless otherwise fixed by the Board of
Directors, the fiscal year of the Corporation shall end on the last day of
February.
ARTICLE XI
Waiver of Notice
Whenever notice is required to be given by these Bylaws or by the
Certificate of Incorporation or by law, a written waiver thereof, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to notice.
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ARTICLE XII
Bank Accounts, Drafts, Contracts, Etc.
SECTION 1. Bank Accounts and Drafts. In addition to such bank accounts as
may be authorized by the Board of Directors, the primary financial officer or
any person designated by said primary financial officer, whether or not an
employee of the Corporation, may authorize such bank accounts to be opened or
maintained in the name and on behalf of the Corporation as he or she may deem
necessary or appropriate, and payments from such bank accounts may be made upon
and according to the check of the Corporation in accordance with the written
instructions of said primary financial officer, or other person so designated by
the Treasurer.
SECTION 2. Contracts. The Board of Directors may authorize any person or
persons, in the name and on behalf of the Corporation, to enter into or execute
and deliver any and all deeds, bonds, mortgages, contracts and other obligations
or instruments, and such authority may be general or confined to specific
instances.
SECTION 3. Proxies; Powers of Attorney; Other Instruments. The Chairman,
the President or any other person designated by either of them shall have the
power and authority to execute and deliver proxies, powers of attorney and other
instruments on behalf of the Corporation in connection with the rights and
powers incident to the ownership of stock by the Corporation. The Chairman, the
President or any other person authorized by proxy or power of attorney executed
and delivered by either of them on behalf of the Corporation may attend and vote
at any meeting of stockholders of any company in which the Corporation may hold
stock, and may exercise on behalf of the Corporation any and all of the rights
and powers incident to the ownership of such stock at any such meeting, or
otherwise as specified in the proxy or power of attorney so authorizing any such
person. The Board of Directors, from time to time, may confer like powers upon
any other person.
SECTION 4. Financial Reports. The Board of Directors may appoint the
primary financial officer or other fiscal officer or any other officer to cause
to be prepared and furnished to stockholders entitled thereto any special
financial notice and/or financial statement, as the case may be, which may be
required by any provision of law.
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ARTICLE XIII
Amendments
The Board of Directors shall have power to adopt, amend or repeal Bylaws.
Bylaws adopted by the Board of Directors may be repealed or changed, and new
Bylaws made, by the stockholders, and the stockholders may prescribe that any
Bylaw made by them shall not be altered, amended or repealed by the Board of
Directors.
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