<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-38686
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 27, 2000)
$340,000,000
(APPROXIMATE)
CWABS MASTER TRUST
(FOR THE SERIES 2000-D SUBTRUST)
ISSUER
REVOLVING HOME EQUITY LOAN ASSET BACKED NOTES, SERIES 2000-D
CWABS, INC.
DEPOSITOR
COUNTRYWIDE HOME LOANS LOGO
SPONSOR AND MASTER SERVICER
THE NOTES
The notes have an original principal balance of
$340,000,000 subject to a permitted variance of plus or
minus 10%.
<TABLE>
<CAPTION>
PER $1,000
OF NOTES TOTAL
---------- ------------
<S> <C> <C>
Price to Public.......................... $1,000.00 $340,000,000
Underwriting Discount.................... $ 2.50 $ 850,000
Proceeds, before expenses, to the $ 997.50 $339,150,000
Depositor.............................
</TABLE>
THE TRUST ESTATE
The notes will be secured by the trust estate consisting
primarily of a pool of home equity revolving credit line
loans made or to be made in the future under certain home
equity revolving credit line loan agreements. The loans
will be secured by first or second deeds of trust or
mortgages on one- to four-family residential properties
and will bear interest at rates that adjust based on the
prime rate. The trust estate will also initially include
funds that are expected to be used to acquire additional
home equity revolving credit line loans not included in
the cut-off date pool.
THE POLICY
Financial Guaranty Insurance Company will issue an
irrevocable and unconditional note guaranty insurance
policy which will guarantee certain payments to
noteholders.
CONSIDER CAREFULLY THE
RISK FACTORS BEGINNING
ON PAGE S-10 IN THIS
PROSPECTUS SUPPLEMENT
AND ON PAGE 4 IN THE
PROSPECTUS.
The notes represent
obligations of the CWABS
Master Trust for the
Series 2000-D Subtrust
only and not of any
other series trust of
the CWABS Master Trust
and do not represent an
interest in or
obligation of CWABS,
Inc., Countrywide Home
Loans, Inc., or any of
their affiliates.
This prospectus
supplement may be used
to offer and sell the
notes only if
accompanied by the
prospectus.
[FGIC LOGO]
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE NOTES
OFFERED BY THIS PROSPECTUS SUPPLEMENT OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Countrywide Securities Corporation will offer the notes subject to prior sale
and subject to its right to reject orders in whole or in part. The notes will be
issued in book-entry form on or about November 30, 2000 and will be offered in
the United States and Europe.
[CSC LOGO]
November 27, 2000
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TABLE OF CONTENTS
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PROSPECTUS SUPPLEMENT PROSPECTUS
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PAGE
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Summary....................... S-3
Risk Factors.................. S-10
The Issuer.................... S-18
The Note Insurer.............. S-19
The Master Servicer........... S-22
The Home Equity Loan Program.. S-22
Description of the Mortgage
Loans...................... S-25
Maturity and Prepayment
Considerations............. S-37
Pool Factor................... S-39
Description of the Notes...... S-39
Description of the
Indenture.................. S-50
Description of the Sale and
Servicing Agreement........ S-56
Description of the Purchase
Agreement.................. S-66
Use of Proceeds............... S-67
Material Federal Income Tax
Consequences............... S-67
State Taxes................... S-71
ERISA Considerations.......... S-71
Legal Investment
Considerations............. S-72
Legal Matters................. S-73
Experts....................... S-73
Ratings....................... S-73
Index of Defined Terms........ S-75
Annex I....................... A-I-1
</TABLE>
<TABLE>
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PAGE
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Important Notice About
Information in This Private
Placement Memorandum and
Each Accompanying Private
Placement Memorandum
Supplement................. 3
Risk Factors.................. 4
The Trust Estate.............. 15
Use of Proceeds............... 21
The Depositor................. 21
Loan Program.................. 21
Description of the
Securities................. 24
Credit Enhancement............ 39
Yield and Prepayment
Considerations............. 44
The Agreements................ 46
Certain Legal Aspects of the
Loans...................... 60
Material Federal Income Tax
Consequences............... 73
State Tax Considerations...... 95
ERISA Considerations.......... 95
Legal Investment.............. 100
Method of Distribution........ 101
Legal Matters................. 102
Financial Information......... 102
Rating........................ 102
Index to Defined Terms........ 104
</TABLE>
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES NOT
CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF AN OFFERING OF THE NOTES,
READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING PROSPECTUS.
ISSUER
The issuer will be CWABS Master Trust, a Delaware business trust. CWABS Master
Trust will issue Revolving Home Equity Loan Asset Backed Notes, Series 2000-D
and a transferor's interest out of the Series 2000-D Subtrust, which will be a
subtrust created under the CWABS Master Trust.
TRUST ESTATE
The trust estate will consist of a pool of home equity revolving credit line
loans made or to be made in the future under certain home equity revolving
credit line loan agreements. The loans will be secured by first or second deeds
of trust or mortgages on one- to four-family residential properties and will
bear interest at rates that adjust based on the prime rate. We sometimes refer
to these loans as home equity loans or mortgage loans. The original principal
balance of the notes will exceed the sum of the aggregate cut-off date principal
balances of the home equity loans initially transferred to the issuer and the
funds deposited into an additional loan account (which is part of the trust
estate) to be used to acquire additional home equity loans that are not included
in the cut-off date pool. This excess represents an undercollateralization of
approximately 0.5% of the original principal balance of the notes.
DEPOSITOR
CWABS, Inc., a limited purpose finance subsidiary of Countrywide Credit
Industries, Inc. Its address is 4500 Park Granada, Calabasas, California 91302,
and its telephone number is (818) 225-3000.
See "The Depositor" in the prospectus.
SPONSOR AND MASTER SERVICER
Countrywide Home Loans, Inc., a New York corporation and a subsidiary of
Countrywide Credit Industries, Inc.
See "The Master Servicer" in this prospectus supplement.
INDENTURE TRUSTEE
Bank One, National Association, a national banking association.
OWNER TRUSTEE
Wilmington Trust Company, a Delaware banking corporation.
NOTE INSURER
Financial Guaranty Insurance Company will insure the notes as described in this
prospectus supplement.
See "The Note Insurer" in this prospectus supplement.
INDENTURE
The notes will be issued pursuant to an indenture between the issuer and the
indenture trustee.
CUT-OFF DATE
November 28, 2000.
CLOSING DATE
On or about November 30, 2000.
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PAYMENT DATES
The indenture trustee will make payments on the 15th day of each calendar month
beginning in January 2001. If the 15th day of a month is not a business day,
then payments will be made on the next business day after the 15th day of the
month.
RECORD DATE
The day before a payment date or, if the notes are no longer book-entry notes,
the last day of the month preceding a payment date.
DENOMINATIONS
The notes will be issued in minimum denominations of $1,000,000 and multiples of
$1,000 in excess of that amount.
FORM OF NOTES
The notes will initially be issued in book-entry form. Persons acquiring
beneficial ownership interests in the notes may elect to hold their beneficial
interests through The Depository Trust Company in the United States or
Clearstream, Luxembourg or the Euroclear System in Europe.
See "Description of Notes -- Book-Entry Notes" in this prospectus supplement.
THE MORTGAGE LOANS
General
The mortgage loans are revolving lines of credit. During the applicable draw
period, each borrower may borrow additional amounts from time to time up to the
maximum amount of that borrower's line of credit. If borrowed amounts are
repaid, they may again be borrowed during the applicable draw period.
The loan pool balance equals the aggregate of the principal balances of all
mortgage loans. 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
- any additional borrowings on that mortgage loan,
minus
- all collections credited against the principal balance of that mortgage loan
before that day.
Once a mortgage loan is finally liquidated, its principal balance is zero.
Loan Rate
Interest on each mortgage loan is payable monthly and computed on the related
daily outstanding principal balance for each day in the billing cycle. The loan
rate is a variable rate per annum equal to the sum of
- 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
and
- a margin.
The loan rate is subject to applicable usury limits and certain maximum rates.
Loan rates are adjusted monthly on the first business day of the calendar month
preceding the due date. The due date for each mortgage loan is the fifteenth day
of each month.
Principal Payments
Each home equity loan features a draw period during which the loan may be drawn
on, immediately followed by a repayment period during which the loan must be
repaid. In general, home equity loans with 5-year draw periods have 15-year
repayment periods. These 5-year
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draw periods are generally extendible for an additional 5 years with the
approval of the master servicer.
Statistics
The statistical information presented in this prospectus supplement concerning
the pool of mortgage loans does not reflect all of the mortgage loans that will
be included in the pool on the closing date or on any subsequent closing date.
Instead, this statistical information relates to statistical calculation pool
that includes the number and principal balances only of mortgage loans
originated by the sponsor through the statistic calculation date. The aggregate
principal balance of the statistic calculation pool as of the statistic
calculation date is the statistic calculation pool balance. The statistic
calculation date is November 17, 2000.
Unless otherwise noted, all statistical percentages in this prospectus
supplement are measured by the aggregate principal balance of the applicable
statistic calculation pool on the statistic calculation date.
See "Description of the Mortgage Loans" in this prospectus supplement for
additional information concerning the statistic calculation pool and the
mortgage loans in general.
SUMMARY OF LOANS IN STATISTIC CALCULATION POOL (AS OF STATISTIC CALCULATION
DATE)
<TABLE>
<S> <C>
Statistic Calculation Date
Balance................. $219,902,105.85
Weighted Average Combined
Loan-to-Value Ratio..... 80.92%
Weighted Average Margin... 1.966%
Range of Principal
Balances................ $0 to
$1,500,000.00
Average Principal
Balance................. $28,850.97
Range of Credit Limits.... $5,200.00 to
$1,500,000.00
Average Credit Limit...... $42,229.60
Origination Period........ November 9, 1998
through
November 17,
2000
Range of Loan Rates....... 5.990% to
15.875%
Weighted Average Loan
Rate.................... 8.803%
Weighted Average Maximum
Loan Rate............... 17.889%
Weighted Average Minimum
Loan Rate............... 8.802%
Maximum Credit Utilization
Rate.................... 100%
Average Credit Utilization
Rate.................... 69.93%
Weighted Average Credit
Utilization Rate........ 68.32%
Percentage of Pool Secured
by 1st liens............ 1.96%
Percentage of Pool Secured
by 2nd liens............ 98.04%
Weighted Average Second
Mortgage Ratio.......... 28.77%
Percentage with Mortgaged
Properties in:
California........... 37.33%
Michigan............. 5.75%
Colorado............. 5.20%
Illinois............. 3.72%
Florida.............. 3.44%
Range of Remaining Term to
Scheduled Maturity...... 119 months to
302 months
Weighted Average Remaining
Term to Scheduled
Maturity................ 298 months
Percentage Single Family
Residences.............. 77.97%
Percent Owner Occupied.... 97.51%
</TABLE>
THE NOTES
Note Rate
The note rate on the notes may change from payment date to payment date. On any
payment date the note rate for the notes will equal the least of:
- LIBOR plus 0.23% per annum,
- the weighted average of the loan rates on the mortgage loans minus certain
fees, expenses, and minimum spread requirements, and
- 16.00% per annum.
However, on any payment date for which the note rate has been determined pursu-
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ant to the weighted average of the net loan rates on the mortgage loans, the
excess of the lesser of
A. 16.00% per annum and
B. LIBOR + 0.23% per annum
over the note rate will be paid (with interest at the rate of LIBOR + 0.23% per
annum, but not at a rate in excess of 16.00% per annum) on the notes on
subsequent payment dates to the extent that funds are available in the priority
described in this prospectus supplement. This excess amount carried forward is
the basis risk carryforward.
See "Description of the Notes -- Payments on the Notes -- Application of
Interest Collections" in this prospectus supplement.
Interest Period
For each payment date, the period beginning on the prior payment date (or in the
case of the first payment date, beginning on the closing date) and ending on the
day before the applicable payment date. The indenture trustee will calculate
interest based on the actual number of days in the interest period and a year
assumed to consist of 360 days.
Note Principal Balance
The original principal balance of the notes may be reduced or increased by not
more than 10% depending on the aggregate principal balance of the mortgage loans
actually delivered on the closing date and the amount delivered to the
additional loan account on that date.
Principal
The amount of principal paid on the notes on a payment date will depend on
whether the payment date occurs during the managed amortization period or the
rapid amortization period.
The managed amortization period begins on the closing date and ends on the
earlier of
- the payment date in December 2005 and
- the existence of a rapid amortization event.
The rapid amortization period begins on the first payment date after the end of
the managed amortization period.
See "Description of Notes -- Payments on the Notes -- Distributions of Principal
Collections" in this prospectus supplement.
ADDITIONAL LOAN ACCOUNT
On the closing date approximately $55,000,000 will be deposited into an
additional loan account held with the indenture trustee. These funds are
expected to be used through December 15, 2000 to acquire additional home equity
loans that are not included in the cut-off date pool. Any additional home equity
loans acquired by the issuer and pledged as part of the trust estate after the
cut-off date will have been underwritten using generally the same guidelines as
were used to select the initial mortgage loans in the trust estate, and will be
covered by substantially the same representations and warranties as those
covering the initial mortgage loans in the trust estate. The sponsor and master
servicer will not exercise any discretion in the selection of the additional
home equity loans to be acquired by the issuer. The selection will be made by a
mechanical procedure on a first-in, first-out basis. The purchase of these
additional home equity loans is in addition to the ongoing purchase of
additional balances during the managed amor-
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tization period with the proceeds of principal repayments received on the
mortgage loans in the pool. Any funds remaining in the additional loan account
on December 15, 2000 will be used to prepay the notes on the first payment date.
MATURITY DATE; OPTIONAL TERMINATION
If not sooner paid, principal on the notes will be due and payable on the
payment date in January 2027. The notes may be retired as a result of the owner
of the transferor interest's purchasing all of the mortgage loans then included
in the trust estate on any payment date on or after which the aggregate
principal balance of the notes is less than or equal to 10% of the aggregate
original principal balance of the notes.
See "Description of the Indenture -- Redemption of the Notes" in this prospectus
supplement and "The Agreements -- Termination; Optional Termination" in the
prospectus.
CREDIT ENHANCEMENT
General
This transaction includes various mechanisms that are intended to protect
noteholders against losses on the mortgage loans.
Excess Interest
The indenture trustee will distribute certain interest collections on the
mortgage loans to cover losses that would otherwise be allocated to the notes.
Limited Subordination of Transferor Interest
The transferor interest is the undivided interest of the transferor in the
Series 2000-D Subtrust. The transferor interest is expected to grow as interest
collections in excess of amounts due to the noteholders as interest, amount due
to the note insurer and certain loss amounts due on the notes are applied as
principal payments on the notes, thereby creating overcollateralization of the
notes. The transferor interest is also expected to grow as the principal amounts
of the mortgage loans change due to new borrowings and repayments. In certain
circumstances, amounts that would be paid on the transferor interest will
instead be paid on the notes. Countrywide Home Loans, Inc. (or one of its
affiliates) will be the owner of the transferor interest on the closing date.
See "Description of the Notes -- Limited Subordination of Transferor Interest"
in this prospectus supplement.
Policy
The policy will irrevocably and unconditionally guarantee on each payment date
to the indenture trustee for the benefit of the noteholders the full and
complete payment of the guaranteed distribution consisting of
- the guaranteed principal distribution amount with respect to the notes for the
payment date, and
- accrued and unpaid interest due on the notes.
The effect of the policy is to guarantee the timely payment of interest on, and
the ultimate payment of the principal amount of, the notes. The policy does not
cover payment of basis risk carryforward.
In addition, the policy will guarantee the payment of the outstanding note
principal balance on the payment date in January 2027 (after giving effect to
all other amounts payable and allocable to principal on that payment date).
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In the absence of payments under the policy, noteholders will directly bear the
credit and other risks associated with their notes.
See "Description of the Notes -- The Policy" in this prospectus supplement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Subject to the qualifications described under "Material Federal Income Tax
Consequences" in this prospectus supplement, Brown & Wood LLP, special tax
counsel to the depositor, is of the opinion that, under existing law, a note
will be treated as a debt instrument for federal income tax purposes as of the
closing date. Furthermore, special tax counsel to the depositor is of the
opinion that neither the trust estate nor any portion of the trust estate will
be treated as either an association or a publicly traded partnership taxable as
a corporation or as a taxable mortgage pool.
See "Material Federal Income Tax Consequences" in this prospectus supplement and
in the prospectus for additional information concerning the application of
federal income tax laws.
ERISA CONSIDERATIONS
Generally, the notes may be purchased by a pension, employee benefit or other
plan subject to the Employee Retirement Income Security Act of 1974 or Section
4975 of the Internal Revenue Code of 1986, or by an entity investing the assets
of such a plan, so long as certain conditions are met. A fiduciary of an
employee benefit plan or an individual retirement account must determine that
the purchase of a note is consistent with its fiduciary duties under applicable
law and does not result in a nonexempt prohibited transaction under applicable
law.
See "ERISA Considerations" in this prospectus supplement and in the prospectus.
LEGAL INVESTMENT CONSIDERATIONS
The notes will not constitute mortgage related securities for purposes of the
Secondary Mortgage Market Enhancement Act of 1984, because not all of the
mortgages securing the 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 notes.
See "Legal Investment" in the prospectus.
NOTE RATING
The notes will not be offered unless they are rated "AAA" by Standard & Poor's,
a division of The McGraw Hill Companies, Inc. and "Aaa" by Moody's Investors
Service, Inc. A rating is not a recommendation to buy, sell or hold securities.
These ratings may be lowered or withdrawn at any time by either of the rating
agencies.
See "Ratings" in this prospectus supplement and "Risk Factors -- Rating of
Securities" in the prospectus.
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SOME STATEMENTS CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS CONSIST OF FORWARD-LOOKING
STATEMENTS RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER
FINANCIAL ITEMS. THESE STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "BELIEVES,"
"ANTICIPATES," "ESTIMATES," OR OTHER COMPARABLE WORDS. FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER FROM THE PROJECTED RESULTS. THOSE RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS CONDITIONS,
REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, CUSTOMER
PREFERENCES AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND OUR CONTROL.
BECAUSE WE CANNOT PREDICT THE FUTURE, WHAT ACTUALLY HAPPENS MAY BE VERY
DIFFERENT FROM WHAT WE PREDICT IN OUR FORWARD-LOOKING STATEMENTS.
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RISK FACTORS
The following information, which you should carefully consider, identifies
certain significant sources of risk associated with an investment in the notes.
You should also carefully consider the information under "Risk Factors" in the
prospectus.
YOU MAY HAVE DIFFICULTY SELLING
YOUR NOTES................... The underwriter intends to make a secondary
market in the notes purchased by it, but has
no obligation to do so. We cannot assure you
that a secondary market will develop or, if
it develops, that it will continue.
Consequently, you may not be able to sell
your notes readily or at prices that will
enable you to realize your desired yield. The
market values of the notes are likely to
fluctuate; these fluctuations may be
significant and could result in significant
losses to you.
The secondary markets for asset backed
securities have experienced periods of
illiquidity and can be expected to do so in
the future. Illiquidity can have a severely
adverse effect on the prices of securities
that are especially sensitive to prepayment,
credit, or interest rate risk, or that have
been structured to meet the investment
requirements of limited categories of
investors.
CASH FLOW DISRUPTIONS COULD
CAUSE PAYMENT DELAYS AND
LOSSES....................... Substantial delays could result while
liquidating delinquent mortgage loans.
Resulting shortfalls in payments to
noteholders could occur if the note insurer
were unable to perform its obligations under
the policy. Further, liquidation expenses
(such as legal fees, real estate taxes, and
maintenance and preservation expenses) will
reduce the security for the related mortgage
loans and in turn reduce the proceeds payable
to noteholders. If any of the mortgaged
properties fail to provide adequate security
for the related mortgage loans, you could
experience a loss if the note insurer were
unable to perform its obligations under the
policy.
YIELD AND REINVESTMENT MAY BE
ADVERSELY AFFECTED BY
UNPREDICTABILITY OF
PREPAYMENTS.................. During the period that a borrower may borrow
money under the borrower's line of credit,
the borrower may make monthly payments only
for the accrued interest or may also repay
some or all of the amount previously
borrowed. In addition, bor-
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rowers may borrow additional amounts up to
the maximum amounts of their lines of credit.
As a result, the amount the master servicer
receives in any month (and in turn the amount
paid to the noteholders) may change
significantly. Even during the repayment
period, borrowers generally may prepay their
mortgage loans at any time without penalty.
However, prepayments on loans secured by
property in California and certain other
jurisdictions may be subject to account
termination fees during the first five years
after origination of the loan. Generally,
revolving home equity loans are not viewed by
borrowers as permanent financing. The
mortgage loans may be repaid at faster rates
than traditional mortgage loans. The
prepayment experience on the notes 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
those provisions unless doing so is not
permitted by applicable law or the master
servicer permits the purchaser of the
mortgaged property in question to assume the
mortgage loan in a manner consistent with
reasonable commercial practice. See
"Description of the Notes" in this prospectus
supplement and "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.
The yield to maturity and weighted average
life of your notes will be affected primarily
by
- the rate and timing of repayments and
prepayments on the mortgage loans as
compared with the creation and amount of
additional balances and
- the realization of liquidation loss
amounts.
You bear the reinvestment risks resulting
from a faster or slower rate of principal
payments than you
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expected. You also bear the reinvestment risk
if by December 15, 2000 all of the funds in
the additional loan account have not been
used to acquire additional home equity loans,
which would result in a prepayment of the
notes in an amount equal to the amount
remaining in the additional loan account on
that date. See "Maturity and Prepayment
Considerations" in this prospectus supplement
and "Yield and Prepayment Considerations" in
the prospectus.
WITHDRAWAL OR DOWNGRADING OF
INITIAL RATINGS WILL AFFECT
THE VALUE OF THE NOTES....... The rating of the notes will depend primarily
on an assessment by the rating agencies of
the mortgage loans and on the financial
strength of the note insurer. Any reduction
in a rating assigned to the financial
strength of the note insurer may result in a
reduction in the rating of the notes. A
reduction in the rating assigned to the notes
probably would reduce the market value of the
notes and may affect your ability to sell
them.
The rating by each of the rating agencies of
the notes is not a recommendation to
purchase, hold, or sell the notes since that
rating does not address the market price or
suitability for a particular investor. The
rating agencies may reduce or withdraw the
ratings on the notes at any time they deem
appropriate. In general, the ratings address
credit risk and do not address the likelihood
of prepayments.
JUNIOR LIEN PRIORITY COULD
RESULT IN PAYMENT DELAY OR
LOSS......................... The mortgage loans are secured by mortgages
that generally are second mortgages. The
master servicer may under certain
circumstances consent to a new mortgage lien
on the mortgaged property having priority
over the mortgage loan in the trust estate.
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. If the
remaining proceeds are insufficient to
satisfy the mortgage loans secured by second
mortgages and prior liens in the aggregate
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and the note insurer is unable to perform its
obligations under the policy, you will bear
- the risk of delay in payments while any
deficiency judgment against the borrower is
sought and
- the risk of loss if the deficiency judgment
cannot be obtained or is not realized on.
See "Certain Legal Aspects of the Loans" in
the prospectus.
ISSUER MAY BE UNSECURED CREDITOR
UNDER CERTAIN MORTGAGE LOANS
SINCE MORTGAGE LOAN
ASSIGNMENTS NOT RECORDED..... Although the mortgage notes relating to the
mortgage loans will be delivered to the indenture trustee, as designee of the
issuer, within 30 days of the closing date
(or within 30 days after the subsequent
closing date, with respect to the additional
home equity loans), assignments of mortgage
loans to the indenture trustee will not be
recorded unless the rating of the long-term
senior unsecured debt obligations of
Countrywide Home Loans falls below a rating
of "BBB" by Standard & Poor's, a division of
The McGraw-Hill Companies, Inc., or "Baa2" by
Moody's Investors Service, Inc. In addition,
assignments of mortgage loans will not be
required to be recorded if the master
servicer delivers to the indenture trustee an
opinion of counsel reasonably acceptable to
each rating agency and the note insurer to
the effect that recording is not required
- to protect the indenture trustee's interest
in the related mortgage loan or
- to perfect a first priority security
interest in favor of the indenture trustee,
as designee of the issuer, in the related
mortgage loan if a court were to
recharacterize the sale of the mortgage
loans to the issuer as a financing.
In certain states in which the mortgaged
properties are located, failure to record the
assignments of the related mortgages to the
indenture trustee, as designee of the issuer,
will have the result of
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making the sale of the mortgage loans to the
issuer potentially ineffective against
- any creditors of Countrywide Home Loans who
may have been fraudulently or inadvertently
induced to rely on the mortgage loans as
assets of Countrywide Home Loans, or
- any purchaser of a mortgage loan who had no
notice of the prior conveyance to the
issuer if the purchaser perfects his
interest in the mortgage loan by taking
possession of the related documents or
other evidence of indebtedness or
otherwise.
In those events, the issuer would be an
unsecured creditor of Countrywide Home Loans.
PAYMENTS TO AND RIGHTS OF
INVESTORS COULD BE ADVERSELY
AFFECTED BY THE BANKRUPTCY OR
INSOLVENCY OF CERTAIN
PARTIES...................... Countrywide Home Loans will treat its sale of
the mortgage loans to the depositor as a sale
of the mortgage loans. However, if
Countrywide Home Loans becomes bankrupt, the
trustee in bankruptcy of Countrywide Home
Loans may argue that the mortgage loans were
not sold but were only pledged to secure a
loan to Countrywide Home Loans. If that
argument is made you could experience delays
or reductions in payments on the notes. The
depositor will warrant in the sale and
servicing agreement that the transfer of the
mortgage loans by it to the issuer is either
a valid transfer and assignment of the
mortgage loans to the issuer or the grant to
the issuer of a security interest in the
mortgage loans.
If certain events relating to the bankruptcy
or insolvency of the transferor were to
occur, no further additional home equity
loans would be acquired with any funds
remaining in the additional loan account;
additional balances would not be sold to the
depositor, transferred by the depositor to
the issuer, and pledged by the issuer to the
indenture trustee; and the rapid amortization
period would commence.
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<PAGE> 15
If the master servicer becomes bankrupt, the
bankruptcy trustee or receiver may have the
power to prevent the appointment of a
successor master servicer.
DEVELOPMENTS IN CALIFORNIA COULD
HAVE DISPROPORTIONATE EFFECT
ON THE POOL OF MORTGAGE LOANS
DUE TO GEOGRAPHIC
CONCENTRATION OF MORTGAGED
PROPERTIES................... Approximately 37.33% of the mortgage loans in
the statistic calculation pool are secured by
mortgaged properties located in the State of
California. After the statistic calculation
date, the geographic concentration could
change because of the addition or removal of
mortgage loans, prepayments, or the creation
of additional balances. Property in
California may be more susceptible than homes
located in other parts of the country to
certain types of uninsurable hazards, such as
earthquakes, floods, mudslides, and other
natural disasters. In addition:
- economic conditions in California (which
may or may not affect real property values)
may affect the ability of borrowers to
repay their loans on time;
- declines in the California residential real
estate market may reduce the values of
properties located in California, which
would result in an increase in the
loan-to-value ratios; and
- any increase in the market value of
properties located in California would
reduce the loan-to-value ratios and could,
therefore, make alternative sources of
financing available to the borrowers at
lower interest rates, which could result in
an increased rate of prepayment of the
mortgage loans.
MASTER SERVICER HAS ABILITY TO
CHANGE THE TERMS OF THE
MORTGAGE LOANS............... The master servicer may agree to changes in
the terms of a credit line agreement if the
changes
- do not materially and adversely affect the
interest of the noteholders or the note
insurer, and
- are consistent with prudent business
practice.
In addition, the master servicer, within
certain limitations, may increase the credit
limit related to
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<PAGE> 16
a mortgage loan or reduce the loan rate for a
mortgage loan. Any increase in the credit
limit related to a mortgage loan would
increase the combined loan-to-value ratio of
that mortgage loan and, accordingly, may
increase the likelihood and would increase
the severity of loss in the event of a
default under the mortgage loan. In addition,
any reduction in the loan rate of a mortgage
loan would reduce the excess cash flow
available to absorb losses.
YOUR RETURN COULD BE ADVERSELY
AFFECTED BY DELINQUENT
MORTGAGE LOANS............... The trust estate may include mortgage loans
that are 59 or fewer days delinquent as of
November 28, 2000 (the cut-off date for the
pool of mortgage loans). We expect that the
principal balance of mortgage loans that are
between 30 days and 59 days delinquent as of
the cut-off date will not exceed
approximately $2,979,000. Mortgage loans that
are already delinquent may increase the risk
that you will experience a loss if
- the investor interest collections are not
sufficient to cover the investor loss
amounts for any payment date,
- amounts intended to provide protection for
the notes that are otherwise payable to the
owner of the transferor interest have been
exhausted, and
- the note insurer fails to perform its
obligations under the policy.
EFFECT OF LOAN RATES ON THE
NOTES........................... The notes accrue interest at a rate based on
the one-month LIBOR index plus a specified
margin, but are subject to a cap based in
part on the interest rates on the mortgage
loans.
The mortgage loans have interest rates that
are based on the prime rate, and have
periodic and maximum limitations on
adjustments to the loan rate. As a result,
the notes may accrue less interest than they
would accrue if the note rate were based
solely on the LIBOR index plus the specified
margin.
A variety of factors could limit the note
rate. Some of these factors are described
below:
- Each note rate adjusts monthly while the
loan rates on the mortgage loans may adjust
less
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<PAGE> 17
frequently. Consequently, the loan rates
may limit increases in the note rate for
extended periods in a rising interest rate
environment.
- The prime rate may respond to different
economic and market factors than LIBOR and
thus may change in a direction different
from LIBOR and may increase or decrease at
different rates or times. As a result, the
loan rates could decline while LIBOR is
stable or rising. And although both the
loan rates and LIBOR may either decline or
increase during the same period, the loan
rates could decline more rapidly or
increase more slowly than LIBOR.
These factors may adversely affect the yield
to maturity on the notes. Any basis risk
carryforward will be paid on the notes only
to the extent of available funds as described
in this prospectus supplement. We cannot
assure you that all basis risk carryforward
will be paid. In addition, the policy does
not cover, and the ratings of the notes do
not address the likelihood of the, payment of
basis risk carryforward.
EVENT OF DEFAULT UNDER THE
INDENTURE.................... So long as the note insurer is not in default
with respect to its obligations under the
policy, neither the indenture trustee nor the
noteholders may declare an event of default
under the indenture and accelerate the
maturity of the notes without the consent of
the note insurer. If an event of default
under the indenture occurs, the note insurer
will have the right, but not the obligation,
to cause the liquidation, in whole or in
part, of the trust estate, which will result
in redemption, in whole or in part, of the
notes. The note insurer's decisions with
respect to defaults may have a significant
impact on the weighted average life of the
notes. See "Description of the Indenture --
Remedies on Event of Default Under the
Indenture" in this prospectus supplement.
For a discussion of additional risks
pertaining to the notes, see "Risk Factors"
in the prospectus.
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<PAGE> 18
THE ISSUER
GENERAL
The Issuer will be CWABS Master Trust (the "Trust"), which will be a
business trust formed under the laws of the State of Delaware pursuant to the
master trust agreement, dated as of August 28, 2000, between CWABS, Inc., as
depositor, and Wilmington Trust Company, as owner trustee. After its formation,
the Trust will not engage in any activity other than
- to (i) issue notes in one or more series pursuant to indentures, (ii)
issue transferor interests in one or more series pursuant to the trust
agreement, and (iii) grant series assets to an indenture trustee pursuant
to an indenture;
- to distribute to the owner of the transferor interest ("the transferor")
pursuant to the trust agreement and other transaction documents any
portion of the related series assets released from the lien of the
related indenture and any other amounts provided for in the related sale
and servicing agreement;
- to engage in those activities that are appropriate to accomplish any of
the foregoing or are incidental to them; and
- to engage in any other activities appropriate to conserve the series
assets of any subtrust and make payments to any transferor and the
noteholders.
The Series 2000-D Subtrust will be a subtrust of the Trust created by the
Series 2000-D Trust Supplement (together with the master trust agreement, the
"trust agreement") dated as of November 28, 2000 between the depositor and the
owner trustee. The Notes will be limited recourse obligations of the Trust,
secured by and payable solely out of the assets of the Series 2000-D Subtrust,
and noteholders will have no right against the assets of the Trust generally or
the assets of any other series.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as owner trustee, at its address below.
TRUST ESTATE
The property of the Series 2000-D Subtrust pledged to the indenture trustee
(the "trust estate") will generally consist of:
- the principal balance of each mortgage loan as of the cut-off date
(referred to as the cut-off date principal balance), plus any new
advances made on it under the applicable credit line agreement
("Additional Balances");
- collections on the mortgage loans received after the cut-off date
(exclusive of payments of accrued interest due on or before the cut-off
date);
- the related mortgage files;
- properties securing the mortgage loans that are acquired by foreclosure
or deed in lieu of foreclosure;
- the collection account for the Notes (excluding its net earnings);
- the Additional Loan Account and any additional loans purchased with their
proceeds;
- the Policy;
- the Trust's rights under hazard insurance policies; and
- the interest of the Trust in the sale and servicing agreement and the
purchase agreement.
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<PAGE> 19
A substantial portion of the economic interest in the mortgage loans is
pledged to the repayment of the Notes and subject to the lien of the indenture.
All of the remaining interest in the assets of the Series 2000-D Subtrust will
be represented by a single transferor interest that will be owned by the
transferor.
The transferor has the right to sell or pledge the transferor interest at
any time, if
- the Rating Agencies have notified the Issuer and the indenture trustee in
writing that the action will not result in the reduction or withdrawal of
the ratings assigned to the Notes, and
- certain other conditions specified in the trust agreement are satisfied.
THE OWNER TRUSTEE
Wilmington Trust Company will act as the owner trustee under the trust
agreement. Wilmington Trust Company is a Delaware banking corporation and its
principal officers are located at Rodney Square North, 1100 North Market Street,
Wilmington, Delaware.
The owner trustee may hold Notes in its own name or as pledgee. To meet the
legal requirements of certain jurisdictions, the owner trustee and the
administrator (appointed pursuant to an administration agreement among the
Trust, Countrywide, as administrator, and the indenture trustee) may appoint co-
trustees or separate trustees of any part of the trust estate under the trust
agreement. All rights and obligations conferred or imposed on the owner trustee
by the sale and servicing agreement and the trust agreement will be conferred or
imposed on any separate trustee or co-trustee. In any jurisdiction in which the
owner trustee is incompetent or unqualified to perform any act, the separate
trustee or co-trustee will perform the act solely at the direction of the owner
trustee.
The owner trustee may resign at any time, in which event the administrator
must appoint a successor. The administrator may also remove the owner trustee if
it becomes legally unable to act or becomes insolvent. Any resignation or
removal of the owner trustee and appointment of a successor will not become
effective until acceptance of the appointment by the successor.
The owner trustee has no duty to manage, make any payment on, register,
record, sell, dispose of, or otherwise deal with the trust estate, or to
otherwise take or refrain from taking any action under any document contemplated
by the trust agreement, except as expressly provided by the trust agreement or
in instructions received by the owner trustee pursuant to the trust agreement.
The owner trustee will be required to perform only those duties specifically
required of it under the trust agreement. The owner trustee will disburse all
moneys actually received by it constituting part of the trust estate on the
terms of the transaction documents and it will not be accountable under the
trust agreement or any other transaction document except (i) for its own willful
misconduct or gross negligence or (ii) for the inaccuracy of certain
representation or warranty contained in the trust agreement.
TERMINATION
The Series 2000-D Subtrust will dissolve when it makes its final
distribution of all moneys or other property held for the Series 2000-D Subtrust
under the trust agreement.
THE NOTE INSURER
The following information in this section has been provided by Financial
Guaranty Insurance Company (the "Note Insurer"). Accordingly, none of the
depositor, the sponsor and master servicer, or Countrywide Securities
Corporation, as underwriter of the Notes, makes any representation as to the
accuracy and completeness of the information in this section.
Financial Guaranty Insurance Company, a New York stock insurance
corporation, is a monoline financial guaranty insurance company which, since
January 1984, has been a leading insurer of bonds issued by municipal
governmental subdivisions and their agencies. The Note Insurer also insures a
variety of non-municipal structured debt obligations and pass-through
securities. The Note Insurer is authorized to
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<PAGE> 20
write insurance in all 50 states and the District of Columbia and is also
authorized to carry on general insurance business in the United Kingdom and to
write credit and guaranty insurance in France.
The Note Insurer is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company. FGIC Corporation is a subsidiary of General Electric
Capital Corporation ("GE Capital"). Neither FGIC Corporation nor GE Capital is
obligated to pay the debts of or the claims of the Note Insurer.
The Note Insurer and its holding company, FGIC Corporation, are subject to
regulation by the State of New York Insurance Department and by each other
jurisdiction in which the Note Insurer is licensed to write insurance. These
regulations vary from jurisdiction to jurisdiction, but generally require
insurance holding companies and their insurance subsidiaries to register and
file certain reports, including information concerning their capital structure,
ownership, and financial condition and require prior approval by the insurance
department of their state of domicile of changes in control, of dividends and of
other intercorporate transfers of assets, and of transactions between insurance
companies, their parents, and affiliates. The Note Insurer is required to file
quarterly and annual statutory financial statements and is subject to statutory
restrictions concerning the types and quality of investments, the use of policy
forms, premium rates, and the size of risk that it may insure, subject to
reinsurance. Additionally, the Note Insurer is subject to triennial audits by
the State of New York Insurance Department.
As of September 30, 2000, December 31, 1999, and December 31, 1998 the
Certificate Insurer had written directly or assumed through reinsurance,
guaranties of approximately $318.9 billion, $298.9 billion, and $268.1 billion
par value of securities, respectively (of which approximately 86 percent, 86
percent, and 86 percent, respectively, constituted guaranties of municipal
bonds), for which it had collected gross premiums of approximately $2.44
billion, $2.37 billion, and $2.25 billion, respectively. As of September 30,
2000, the Certificate Insurer had reinsured approximately 20 percent of the
risks it had written, 32 percent through quota share reinsurance, 12 percent
through excess of loss reinsurance, and 56 percent through facultative
arrangements.
The following table sets forth the capitalization of the Certificate
Insurer as of December 31, 1998, December 31, 1999, and September 30, 2000,
respectively, on the basis of generally accepted accounting principles. No
material adverse change in the capitalization of the Certificate Insurer has
occurred since September 30, 2000.
FINANCIAL GUARANTY INSURANCE COMPANY
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
------------ ------------ -------------
<S> <C> <C> <C>
Unearned Premiums...................................... $ 610 $ 579 $ 581
Other Liabilities...................................... 302 180 270
Stockholder's Equity
Common Stock......................................... 15 15 15
Additional Paid-in Capital........................... 384 384 384
Accumulated Other Comprehensive Income (Loss)........ 92 (47) (21)
Retained Earnings.................................... 1,581 1,687 1,570
------ ------ ------
Total Stockholder's Equity............................. 2,072 2,039 1,948
------ ------ ------
Total Liabilities and Stockholder's Equity............. $2,984 $2,798 $2,799
====== ====== ======
</TABLE>
The audited financial statements of Financial Guaranty Insurance Company as
of December 31, 1999 and December 31, 1998 and for each of the years in the
three year period ended December 31, 1999 and the unaudited financial statements
of Financial Guaranty Insurance Company as of September 30, 2000 and for the
nine months ending September 30, 2000 and September 30, 1999 which are included
in a
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<PAGE> 21
Form 8-K filed in connection with the Registration Statement of which this
prospectus supplement is a part (filed with the Securities and Exchange
Commission on November 27, 2000, Commission File Number 333-38686) are hereby
incorporated in this prospectus supplement.
Copies of the Note Insurer's quarterly and annual statutory statements
filed by the Note Insurer with the State of New York Insurance Department are
available upon request to Financial Guaranty Insurance Company, 115 Broadway,
New York, New York 10006, Attention: Corporate Communications Department. The
Note Insurer's telephone number is (212) 312-3000.
The Note Insurer considers its role in providing insurance to be credit
enhancement rather than credit substitution. The Note Insurer only insures
securities that its considers to be of investment grade quality. With respect to
each category of obligations considered for insurance, the Note Insurer has
established and maintains its own underwriting standards that are based on those
aspects of credit quality that the Note Insurer deems important for the category
and that take into account criteria established for the category typically used
by rating agencies. Credit criteria for evaluating securities include economic
and social trends, debt management, financial management and legal and
administrative factors, the adequacy of anticipated cash flow, including the
historical and expected performance of assets pledged for payment of securities
under varying economic scenarios, underlying levels of protection such as
insurance or overcollateralization, and, particularly in the case of long-term
municipal securities, the importance of the project being financed.
The Note Insurer also reviews the security features and reserves created by
the financing documentation, as well as the financial and other covenants
imposed on the credit backing the issue. In connection with underwriting new
issues, the Note Insurer sometimes requires, as a condition to insuring an
issue, that collateral be pledged or, in some instances, that a third-party
guarantee be provided for a term of the insured obligation by a party of
acceptable credit quality obligated to make payment prior to any payment by the
Note Insurer.
Insurance written by the Note Insurer insures the full and timely payment
of interest and principal when due on insured debt securities and timely
interest and ultimate principal payments due in respect of pass-through
securities and mortgage-backed debt securities. If the issuer of a security
insured by the Note Insurer defaults on its obligations to pay such debt
service, or, in the case of a pass-through security, available funds are
insufficient to pay the insured amounts, the Note Insurer will make the
scheduled insured payments, without regard to any acceleration of the securities
which may have occurred, and will be subrogated to the rights of security
holders to the extent of its payments. The claims paying ability of the Note
Insurer is rated Aaa, AAA, and AAA by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's, a division of The McGraw-Hill Companies Inc.
("Standard & Poor's"), and Fitch IBCA, Inc., respectively.
In consideration for issuing its insurance, the Note Insurer receives a
premium which is generally paid in full upon issuance of the policy or on an
annual, semiannual, or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the Note
Insurer according to its internal credit rating system and the type of issue.
The Note Insurer makes no representation regarding the Notes or the
advisability of investing in the Notes. The Note Insurer does not accept any
responsibility for the accuracy or completeness of this prospectus supplement or
the related prospectus, or any information or disclosure contained herein or
therein, or omitted herefrom or therefrom, other than the information supplied
by the Note Insurer and presented under the headings "Description of the
Notes -- The Policy" and "The Note Insurer."
Each rating of the Note Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
financial strength of the Note Insurer. Any further explanation as to the
significance of the rating of the Note Insurer may be obtained only from the
applicable rating agency.
The above ratings are not recommendations to buy, sell, or hold the Notes,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above ratings
may have an adverse effect on the market price of the Notes. The Note
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<PAGE> 22
Insurer does not guaranty the market price of the Notes nor does it guaranty
that the ratings on the Notes will not be revised or withdrawn.
THE MASTER SERVICER
GENERAL
Countrywide Home Loans, Inc. ("Countrywide") will service the mortgage
loans consisting of adjustable rate home equity revolving credit line loans made
or to be made in the future in accordance with the sale and servicing agreement.
The mortgage loans will be secured by either first or second deeds of trust or
mortgages on the residential properties that are one- to four-family properties,
condominiums, and planned unit developments.
Countrywide may perform any of its obligations under the sale and servicing
agreement dated as of November 28, 2000 among CWABS, Inc., as depositor,
Countrywide, as sponsor and master servicer, the Trust, and Bank One, National
Association, as indenture trustee, through one or more subservicers.
Notwithstanding any subservicing arrangement, the master servicer will remain
liable for its servicing obligations under the sale 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 MASTER SERVICER
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 sale 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. Countrywide began
servicing home equity lines of credit in October 1994.
At September 30, 2000 Countrywide provided servicing for approximately
$273.9 billion aggregate principal amount of mortgage loans, substantially all
of which are being serviced for unaffiliated persons. At September 30, 2000
Countrywide provided servicing for approximately $3.4 billion aggregate
principal amount of first and second lien mortgage loans originated under its
home equity lines of credit program.
The principal executive offices of Countrywide are located at 4500 Park
Granada, Calabasas, California 91302. Its telephone number is (818) 225-3300.
Countrywide conducts operations from its headquarters in Calabasas 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 sponsor 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 sponsor's underwriting guidelines will
be made when compensating factors are present. These factors include the
borrower's employment stability, favorable credit history, equity in the related
property, and the nature of the underlying first mortgage loan.
Each applicant for a home equity loan must complete an application that
lists the applicant's assets, liabilities, income, employment history, and other
demographic and personal information. If information in the loan application
demonstrates that the applicant has sufficient income and there is sufficient
equity in the real property to justify making a home equity loan, the sponsor
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 to evaluate the applicant's ability and
willingness to repay. The credit report typically contains information relating
to such matters as credit history with local
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<PAGE> 23
merchants and lenders, installment and revolving debt payments, and any record
of delinquencies, defaults, bankruptcy, collateral repossessions, suits, or
judgments.
The sponsor originates or acquires mortgage loans pursuant to alternative
sets of underwriting criteria under its Alternative Documentation Loan Program,
its Reduced Documentation Loan Program, and its Streamlined Documentation Loan
Program. Generally the Alternative Documentation Program permits a borrower to
provide pay stubs and W-2 forms covering the most recent two years, in lieu of
providing a Verification of Employment. The Reduced Documentation Program places
more emphasis on property underwriting than on credit underwriting. Therefore
certain credit underwriting documentation concerning income and employment
verification is waived. The Reduced Documentation Program requires applicants to
list their assets and also permits bank statements in lieu of verifications of
deposits. Only self-employed borrowers with credit histories that demonstrate an
established ability to repay indebtedness in a timely fashion are eligible for
the Reduced Documentation Program. The Streamlined Documentation program is
available for first-lien borrowers in good standing with Countrywide. The
Streamlined Documentation Loan Program is available for borrowers who have
recently purchased or refinanced (rate/term) with the sponsor if they have not
been 30 days delinquent in payment during the previous twelve month period.
Under the Streamlined Documentation Program, the value used in conjunction with
obtaining the first lien from the sponsor is used in lieu of a new appraisal and
subsequently used to determine the combined loan-to-value ratios for the new
home equity line of credit. In most instances, the maximum loan amount is
limited to the lesser of 25% of the first lien balance or $50,000. In addition,
a credit review is conducted, however no debt ratio calculation, income
documentation, or asset verification is required. A telephonic verification of
employment is required before loan closing.
Full appraisals are generally performed on all home equity loans that at
origination had a credit limit greater than $100,000. These appraisals are
determined on the basis of a sponsor-approved, independent third-party,
fee-based appraisal completed on forms approved by Fannie Mae or Freddie Mac.
For certain home equity loans that had at origination a credit limit less than
or equal to $100,000, a drive-by evaluation is generally completed by a state
licensed, independent third-party, professional appraiser on forms approved by
either Fannie Mae or Freddie Mac. 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 improvements, and
generally must have been made not earlier than 180 days before the date of
origination of the mortgage loan. For certain home equity loans with credit
limits less than or equal to $100,000, Countrywide may have the related
mortgaged property appraised electronically. Electronic appraisals use
commercially-available home price indices and will only be completed on
mortgaged properties where Countrywide also services the first mortgage. The
minimum and maximum loan amounts for home equity loans are generally $7,500 and
$500,000, respectively. Borrowers may draw under the home equity loans in
minimum amounts of $250 and maximum amounts up to the remaining available
credit, in each case after giving effect to all prior draws and payments on the
credit line.
After obtaining all applicable income, liability, asset, employment,
credit, and property information, the sponsor generally uses a debt-to-income
ratio to assist in determining whether the prospective borrower has sufficient
monthly income available to support the payments 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 credit obligations (assuming the mortgage loan interest rate is based on
the applicable fully indexed interest rate) to the borrower's gross monthly
income. Based on this, the maximum monthly debt-to-income ratio is 45%.
Variations in the monthly debt-to-income ratios limits are permitted based on
compensating factors. The sponsor currently offers home equity loan products
that allow maximum combined loan-to-value ratios up to 100%.
It is generally the sponsor's policy to require a title search or limited
coverage policy before it makes a home equity loan for amounts less than or
equal to $100,000. In addition, if the home equity loan has a maximum draw
amount of more than $100,000, the sponsor requires that the borrower obtain an
ALTA policy, or other assurance of title customary in the relevant jurisdiction.
In addition, ALTA title policies
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<PAGE> 24
are generally obtained in situations where the property is on leased land or
there has been a change in title or the 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,
- the collection and aggregation of payments relating to the mortgage
loans;
- the supervision of delinquent mortgage loans, loss mitigation efforts,
foreclosure proceedings, and, if applicable, the disposition of the
mortgaged properties; and
- the preparation of tax related information in connection with the
mortgage loans.
Billing statements are mailed monthly by the master servicer. The
statements detail all debits and credits and specify 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 the monthly statements.
All payments are due by the fifteenth day of the month.
The general policy of the master servicer is to initiate foreclosure in the
underlying property for a mortgage loan
- after the loan is 60 days or more delinquent and satisfactory
arrangements cannot be made with the mortgagor; or
- 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 on the 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 that 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 the lien at the time of sale or take other action 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. The delinquency and foreclosure percentages may be affected by
the size and relative lack of seasoning of the servicing portfolio because many
of the 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 a basis for assessing the likelihood,
amount, or severity of delinquencies or losses on the mortgage loans. The
S-24
<PAGE> 25
foreclosure and delinquency experience presented in the table below may not be
indicative of the foreclosure and delinquency experience the mortgage loans will
experience.
For the purposes of the following table:
- The period of delinquency is based on the number of days payments are
contractually past due.
- Certain total percentages and dollar amounts may not equal the sum of the
percentages and dollar amounts indicated in the columns due to
differences in rounding.
- "Foreclosure Rate" is the dollar amount of mortgage loans in foreclosure
as a percentage of the total principal balance of mortgage loans
outstanding as of the date indicated.
- "Bankruptcy Rate" is the dollar amount of mortgage loans for which the
related borrower has declared bankruptcy as a percentage of the total
principal balance of mortgage loans outstanding as of the date indicated.
DELINQUENCY AND FORECLOSURE EXPERIENCE
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF DECEMBER 31, 1999 AS OF SEPTEMBER 30, 2000
------------------------------ ------------------------------ ------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
BALANCE PERCENTAGE BALANCE PERCENTAGE BALANCE PERCENTAGE
----------------- ---------- ----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Portfolio..................... $1,323,711,736.54 -- $2,412,534,167.47 -- $3,445,795,454.75 --
Delinquency percentage 30 - 59
Days........................ $ 4,483,412.01 0.34% $ 5,554,389.27 0.23% $ 11,522,574.53 0.33%
60 - 89 Days................ 747,337.11 0.06% 2,123,878.51 0.09% 4,167,012.88 0.02%
90+ Days.................... 2,439,328.76 0.18% 4,665,157.69 0.19% 9,097,002.44 0.26%
----------------- ------ ----------------- ------- ----------------- ------
Total................. $ 7,670,077.88 0.58% $ 12,343,425.47 0.51% $ 24,786,589.85 0.72%
Foreclosure Rate.............. $ 1,835,608.61 0.14% $ 646,956.56 0.03% $ 1,038,182.23 0.03%
Bankruptcy Rate............... $ 4,801,943.11 0.36% $ 7,706,013.75 0.32% $ 8,932,680.33 0.26%
</TABLE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
Certain statistical information concerning the pool of mortgage loans is
set forth below (the pool is referred to as the "Statistic Calculation Pool" and
each mortgage loan is referred to as a "Statistic Calculation Pool Mortgage
Loan"). A detailed description of the mortgage loans actually delivered (the
"Detailed Description") will be available to purchasers of the Notes at or
before, and will be filed on Form 8-K with the Securities and Exchange
Commission within fifteen days after, delivery of the Notes. The Detailed
Description will specify the aggregate of the principal balances of the mortgage
loans included in the trust estate as of the cut-off date and will also include,
among other things, the following information regarding the mortgage loans:
- the outstanding principal balances of the mortgage loans as of November
28, 2000 (the cut-off date),
- the lien priorities of the mortgage loans,
- the loan rates borne by the mortgage loans as of the cut-off date,
- the combined loan-to-value ratios of the mortgage loans,
- the remaining term to scheduled maturity of the mortgage loans,
- the type of properties securing the mortgage loans,
- the geographical distribution of the mortgage loans by state, and
- the credit limits and credit limit utilization rates of the mortgage
loans as of the cut-off date.
S-25
<PAGE> 26
The Detailed Description speaks as of the cut-off date and consequently does not
include any Additional Home Equity Loans purchased with the funds in the
Additional Loan Account. The mortgage loans will have been originated pursuant
to credit line agreements and will be secured by mortgages or deeds of trust.
The mortgages and deeds of trust are either first or second mortgages or deeds
of trust on mortgaged properties expected to be located in 49 states and the
District of Columbia. The mortgaged properties securing the mortgage loans will
consist of residential properties that are one- to four-family properties. See
"-- Mortgage Loan Terms" below.
Information regarding the Statistical Calculation Pool Mortgage Loans as of
November 17, 2000 (the "Statistic Calculation Date") can be found on the tables
on pages S-27 through S-34.
MORTGAGE LOAN TERMS
General. 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 that
changes monthly on the first business day of the related month with changes in
the applicable index rate. The Statistic Calculation Pool Mortgage Loans are
subject to a maximum per annum interest rate ranging from 13.50% to 22.20% per
annum, subject to applicable usury limitations. See "Certain Legal Aspects of
the Loans -- Applicability of Usury Laws" in the prospectus. The daily periodic
rate on the mortgage loans (i.e., the loan rate) is the sum of the index rate
plus the applicable margin, divided by 365 days. The margin generally ranges
between 0.00% and 8.50%. 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.
The second mortgage ratio for a mortgage loan in a second lien position is
the credit limit for the related mortgage loan divided by the sum of the credit
limit and the outstanding principal balance of any mortgage loan senior to the
related mortgage loan as of the date of related loan application. The weighted
average second mortgage loan ratio for the Statistic Calculation Pool Mortgage
Loans was approximately 28.77%.
Countrywide generally offers introductory loan rates on its home equity
lines of credit. The introductory rate applies to payments made during the first
three months or first six months after origination. After the introductory
period, the loan rate will adjust to the index rate plus the applicable margin.
In general, the home equity loans may be drawn on during a draw period of
five years. Home equity loans with a draw period of five years (which generally
may be extendible for an additional five years, with Countrywide's approval)
constitute approximately 97.69% of the Statistic Calculation Pool Mortgage Loans
by Statistic Calculation Date Principal Balance (which is approximately
$219,902,106). These loans are generally subject to a fifteen year repayment
period following the end of the draw period. During this repayment period, the
outstanding principal balance of the loan will be paid in monthly installments
equal to 1/180 of the outstanding principal balance at 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, any past due finance charges, and any other
charges owed. 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, any amounts past due,
any other charges owed, and the principal payment described above.
The principal balance of a mortgage loan (other than a Liquidated Mortgage
Loan) on any day is equal to
- its principal balance as of the cut-off date for the mortgage loans
purchased on the Closing Date and as of the relevant date for the
additional home equity loans, plus
- any Additional Balances for the mortgage loan, minus
S-26
<PAGE> 27
- all collections credited against the principal balance of the mortgage
loan in accordance with the related credit line agreement before the
relevant day.
The principal balance of a Liquidated Mortgage Loan after final recovery of
related liquidation proceeds is zero.
Difference between Statistic Calculation Pool and Cut-off Date Pool. The
statistical information presented in this prospectus supplement reflects the
mortgage loans originated by the sponsor through the Statistic Calculation Date,
and is based on the number and the principal balances of the mortgage loans as
of the Statistic Calculation Date. The issuer expects that the actual pool as of
the Closing Date will represent approximately $283,300,000 aggregate principal
balance of mortgage loans. The Trust also will include approximately $55,000,000
in the Additional Loan Account that may be applied to the purchase of additional
home equity loans as described below. The initial mortgage loans to be included
in the cut-off date pool will represent mortgage loans originated by the sponsor
on or before the cut-off date and sold by the sponsor to the depositor, and by
the depositor to the Trust, on the Closing Date. In addition, with respect to
the Statistic Calculation Pool Mortgage Loans, as to which statistical
information is presented in this prospectus supplement, some amortization will
occur and some Additional Balances may be created before the cut-off date.
Moreover, certain Statistic Calculation Pool Mortgage Loans may prepay in full
or may be determined not to meet the eligibility requirements for the final
cut-off date pool and as a result may not be included in the cut-off date pool.
As a result of the foregoing, the statistical distribution of characteristics as
of the cut-off date for the cut-off date mortgage loan pool can vary from the
statistical distribution of characteristics of the Statistic Calculation Pool as
presented in this prospectus supplement, although the variance will not be
material. If the sponsor does not, as of the cut-off date, have the full amount
of mortgage loans that the depositor expects to purchase from the sponsor and
sell to the Trust on the cut-off date (i.e., approximately $283,300,000
aggregate principal balance of mortgage loans), the depositor may reduce the
size of the offering. Likewise, if the sponsor has more mortgage loans than
anticipated, the depositor may increase the size of the offering. The original
principal amount of the Notes may not increase or decrease by more than 10%.
Initially, the original principal balance of the Notes will exceed (i) the
cut-off date principal balance and (ii) the funds to be deposited into an
additional loan account (the "Additional Loan Account") to be used to acquire
additional home equity loans not in the cut-off date pool (the "Additional Home
Equity Loans"). This excess represents an undercollateralization of
approximately 0.5% of the original principal balance of the Notes (the excess is
referred to as the "undercollateralization amount"). The statistical
distribution characteristics after the addition of Additional Home Equity Loans
can vary from that of both the cut-off date mortgage loan pool and the
Statistical Calculation Pool Mortgage Loans. Any funds remaining in the
Additional Loan Account on December 15, 2000 will be used to prepay the Notes on
the first payment date.
S-27
<PAGE> 28
The sum of the columns below may not equal the total indicated due to
rounding. The following tables describe the Statistic Calculation Pool Mortgage
Loans and the related mortgaged properties based upon the Statistic Calculation
Pool as of the close of business on the Statistic Calculation Date.
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
RANGE OF PRINCIPAL BALANCES LOANS BALANCE PRINCIPAL BALANCE
--------------------------- --------- ------------ ---------------------
<S> <C> <C> <C>
$ 0.00 to $ 10,000......................... 2,220 $ 10,127,450 4.61%
$ 10,000.01 to $ 20,000.......................... 1,886 29,284,139 13.32
$ 20,000.01 to $ 30,000.......................... 1,497 38,743,436 17.62
$ 30,000.01 to $ 40,000.......................... 637 22,441,360 10.21
$ 40,000.01 to $ 50,000.......................... 458 21,049,958 9.57
$ 50,000.01 to $ 60,000.......................... 215 11,959,124 5.44
$ 60,000.01 to $ 70,000.......................... 141 9,211,483 4.19
$ 70,000.01 to $ 80,000.......................... 116 8,765,886 3.99
$ 80,000.01 to $ 90,000.......................... 71 6,082,968 2.77
$ 90,000.01 to $100,000.......................... 120 11,758,346 5.35
$100,000.01 to $125,000.......................... 74 8,442,724 3.84
$125,000.01 to $150,000.......................... 81 11,462,623 5.21
$150,000.01 to $175,000.......................... 18 3,002,016 1.37
$175,000.01 to $200,000.......................... 23 4,403,596 2.00
$200,000.01 to $225,000.......................... 7 1,511,752 0.69
$225,000.01 to $250,000.......................... 13 3,200,575 1.46
$250,000.01 to $275,000.......................... 6 1,588,977 0.72
$275,000.01 to $300,000.......................... 14 4,132,759 1.88
$300,000.01 to $325,000.......................... 4 1,259,006 0.57
$325,000.01 to $350,000.......................... 6 2,039,500 0.93
$375,000.01 to $400,000.......................... 3 1,192,026 0.54
$450,000.01 to $475,000.......................... 1 470,000 0.21
$475,000.01 to $500,000.......................... 5 2,481,205 1.13
$500,000.01 to $525,000.......................... 1 512,870 0.23
$575,000.01 to $600,000.......................... 1 600,000 0.27
$675,000.01 to $700,000.......................... 1 678,326 0.31
Over $1,000,000.................................. 3 3,500,000 1.59
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
S-28
<PAGE> 29
COMBINED LOAN-TO-VALUE RATIOS
The combined loan-to-value ratio in the following table is a fraction whose
numerator is the sum of (i) the credit limit of the mortgage loans and (ii) any
outstanding principal balances of mortgage loans senior or of equal priority to
the mortgage loans (calculated generally at the date of origination of the
mortgage loans) and whose denominator is the lesser of (i) the appraised value
of the related mortgaged property as stated in loan files at the 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 the
mortgaged property.
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
RANGE OF COMBINED LOAN-TO-VALUE RATIOS LOANS BALANCE PRINCIPAL BALANCE
-------------------------------------- --------- ------------ ---------------------
<S> <C> <C> <C>
Less than 10.00%................................. 2 $ 35,400 0.02%
10.01-20.00 .................................... 23 784,245 0.36
20.01-30.00...................................... 48 1,193,784 0.54
30.01-40.00 .................................... 100 4,482,038 2.04
40.01-50.00...................................... 160 6,250,503 2.84
50.01-60.00...................................... 348 11,646,676 5.30
60.01-70.00...................................... 911 29,691,607 13.50
70.01-80.00...................................... 1,338 45,516,242 20.70
80.01-90.00...................................... 2,677 67,728,948 30.80
90.01-100.00..................................... 2,015 52,572,663 23.91
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
LOAN RATES
The loan rates in the following table reflect the fact that approximately
84.43% of the Statistic Calculation Pool Mortgage Loans by Statistic Calculation
Date Principal Balance are currently subject to an introductory rate of 8.50%
per annum.
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
RANGE OF LOAN RATES LOANS BALANCE PRINCIPAL BALANCE
------------------- --------- ------------ ---------------------
<S> <C> <C> <C>
5.501-6.000%..................................... 93 $ 5,081,496 2.31%
6.501-7.000...................................... 23 1,127,958 0.51
7.501-8.000...................................... 6 197,475 0.09
8.001-8.500...................................... 6,861 185,659,972 84.43
9.001-9.500...................................... 4 109,635 0.05
9.501-10.000..................................... 52 3,985,388 1.81
10.001-10.500.................................... 82 4,714,085 2.14
10.501-11.000.................................... 43 1,424,995 0.65
11.001-11.500.................................... 112 4,753,935 2.16
11.501-12.000.................................... 115 4,968,244 2.26
12.001-12.500.................................... 126 4,649,184 2.11
12.501-13.000.................................... 50 1,521,939 0.69
13.001-13.500.................................... 46 1,495,108 0.68
13.501-14.000.................................... 4 34,733 0.02
15.501-16.000.................................... 5 177,959 0.08
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
S-29
<PAGE> 30
GEOGRAPHIC DISTRIBUTION
The geographic location used for the following table is determined by the
address of the mortgaged property securing the related mortgage loan.
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
STATE LOANS BALANCE PRINCIPAL BALANCE
----- --------- ------------ ---------------------
<S> <C> <C> <C>
Alaska........................................... 31 $ 884,856 0.40%
Alabama.......................................... 230 5,060,064 2.30
Arizona.......................................... 259 5,921,596 2.69
California....................................... 1,758 82,086,287 37.33
Colorado......................................... 366.... 11,442,795 5.20
Connecticut...................................... 54 1,714,740 0.78
District of Columbia............................. 11 249,924 0.11
Delaware......................................... 11 189,550 0.09
Florida.......................................... 388 7,567,822 3.44
Georgia.......................................... 198 5,041,896 2.29
Hawaii........................................... 85 2,144,585 0.98
Iowa............................................. 18 242,918 0.11
Idaho............................................ 80 1,766,644 0.80
Illinois......................................... 352 8,175,181 3.72
Indiana.......................................... 118 1,861,071 0.85
Kansas........................................... 102 2,152,814 0.98
Kentucky......................................... 48 1,088,563 0.50
Louisiana........................................ 71 1,197,485 0.54
Massachusetts.................................... 201 5,911,249 2.69
Maryland......................................... 104 2,113,981 0.96
Maine............................................ 31 431,082 0.20
Michigan......................................... 468 12,634,433 5.75
Minnesota........................................ 85 1,930,978 0.88
Missouri......................................... 133 2,563,056 1.17
Mississippi...................................... 28 473,562 0.22
Montana.......................................... 29 754,482 0.34
North Carolina................................... 180 3,382,004 1.54
North Dakota..................................... 3 65,447 0.03
Nebraska......................................... 37 618,179 0.28
New Hampshire.................................... 49 951,752 0.43
New Jersey....................................... 252 7,062,418 3.21
New Mexico....................................... 42 1,514,047 0.69
Nevada........................................... 63 1,624,472 0.74
New York......................................... 168 4,462,323 2.03
Ohio............................................. 197 3,751,372 1.71
Oklahoma......................................... 95 2,093,187 0.95
Oregon........................................... 125 3,302,236 1.50
Pennsylvania..................................... 278 5,130,598 2.33
Rhode Island..................................... 23 640,870 0.29
South Carolina................................... 71 1,306,108 0.59
South Dakota..................................... 9 214,000 0.10
Tennessee........................................ 98 1,960,961 0.89
Texas............................................ 20 686,225 0.31
Utah............................................. 120 2,729,798 1.24
Virginia......................................... 131 3,350,545 1.52
Vermont.......................................... 5 40,000 0.02
Washington....................................... 274 7,122,598 3.24
Wisconsin........................................ 81 1,668,133 0.76
West Virginia.................................... 14 117,843 0.05
Wyoming.......................................... 28 505,374 0.23
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
S-30
<PAGE> 31
PROPERTY TYPE
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
PROPERTY TYPE LOANS BALANCE PRINCIPAL BALANCE
------------- --------- ------------ ---------------------
<S> <C> <C> <C>
2 - 4 Units...................................... 52 $ 1,581,184 0.72%
Lo Condo......................................... 508 11,967,171 5.44
PUD.............................................. 1,088 34,891,184 15.87
Single Family.................................... 5,974 171,462,567 77.97
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
LIEN PRIORITY
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
LIEN PRIORITY LOANS BALANCE PRINCIPAL BALANCE
------------- --------- ------------ ---------------------
<S> <C> <C> <C>
1st Liens........................................ 93 $ 4,312,498 1.96%
2nd Liens........................................ 7,529 215,589,608 98.04
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
S-31
<PAGE> 32
MARGINS
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
RANGE OF MARGINS LOANS BALANCE PRINCIPAL BALANCE
---------------- --------- ------------ ---------------------
<S> <C> <C> <C>
0.000%........................................... 532 $ 21,270,667 9.67%
0.001 - 0.250.................................... 105 5,744,387 2.61
0.251 - 0.500.................................... 599 25,518,357 11.60
0.501 - 0.750.................................... 28 1,350,743 0.61
0.751 - 1.000.................................... 577 18,048,040 8.21
1.001 - 1.250.................................... 247 6,452,159 2.93
1.251 - 1.500.................................... 488 13,836,658 6.29
1.501 - 1.750.................................... 130 4,417,261 2.01
1.751 - 2.000.................................... 1,071 21,828,980 9.93
2.001 - 2.250.................................... 476 12,003,114 5.46
2.251 - 2.500.................................... 624 20,569,523 9.35
2.501 - 2.750.................................... 134 4,936,839 2.25
2.751 - 3.000.................................... 575 14,459,855 6.58
3.001 - 3.250.................................... 236 5,483,778 2.49
3.251 - 3.500.................................... 806 20,353,719 9.26
3.501 - 3.750.................................... 139 3,070,875 1.40
3.751 - 4.000.................................... 199 5,569,773 2.53
4.001 - 4.250.................................... 52 828,913 0.38
4.251 - 4.500.................................... 423 10,628,911 4.83
4.501 - 4.750.................................... 103 1,958,461 0.89
4.751 - 5.000.................................... 6 156,967 0.07
5.001 - 5.250.................................... 20 202,232 0.09
5.251 - 5.500.................................... 36 810,370 0.37
5.501 - 5.750.................................... 6 170,500 0.08
6.001 - 6.250.................................... 6 178,432 0.08
6.251 - 6.500.................................... 4 52,591 0.02
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
S-32
<PAGE> 33
CREDIT LIMIT UTILIZATION RATES
The credit limit utilization rates in the following table are determined by
dividing the Statistic Calculation Date Balance for the particular grouping by
the aggregate of the credit limits of the related credit line agreements.
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
RANGE OF CREDIT MORTGAGE PRINCIPAL DATE AGGREGATE
LIMIT UTILIZATION RATES LOANS BALANCE PRINCIPAL BALANCE
----------------------- --------- ------------ ---------------------
<S> <C> <C> <C>
0.00%............................................ 888 $ 1 0.00%
0.01% - 10.00%................................... 139 618,368 0.28
10.01% - 20.00%.................................. 176 1,994,080 0.91
20.01% - 30.00%.................................. 248 3,461,207 1.57
30.01% - 40.00%.................................. 324 4,867,247 2.21
40.01% - 50.00%.................................. 489 8,142,373 3.70
50.01% - 60.00%.................................. 367 8,196,005 3.73
60.01% - 70.00%.................................. 384 9,800,049 4.46
70.01% - 80.00%.................................. 435 13,117,953 5.97
80.01% - 90.00%.................................. 359 11,727,596 5.33
90.01% - 100.00%................................. 3,813 157,977,226 71.84
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
MAXIMUM RATES
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
MAXIMUM RATES LOANS BALANCE PRINCIPAL BALANCE
------------- --------- ------------ ---------------------
<S> <C> <C> <C>
13.5%............................................ 97 $ 1,937,141 0.88%
15.5............................................. 18 452,825 0.21
16............................................... 182 3,396,056 1.54
17............................................... 408 8,342,947 3.79
18............................................... 6,911 205,594,666 93.49
21............................................... 5 177,959 0.08
22.2............................................. 1 513 0.00
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
RANGE OF MONTHS NUMBER OF UNPAID STATISTIC CALCULATION
REMAINING TO MORTGAGE PRINCIPAL DATE AGGREGATE
SCHEDULED MATURITY LOANS BALANCE PRINCIPAL BALANCE
------------------ --------- ------------ ---------------------
<S> <C> <C> <C>
109 - 120........................................ 14 $ 117,843 0.05%
145 - 156........................................ 1 74,049 0.03
169 - 180........................................ 33 1,318,829 0.60
229 - 240........................................ 98 1,960,961 0.89
265 - 276........................................ 1 8,302 0.00
289 - 300........................................ 7,126 208,404,489 94.77
301 - 312........................................ 349 8,017,633 3.65
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
The above table assumes that the draw period for Statistic Calculation Pool
Mortgage Loans with (a) five year draw periods and fifteen year repayment
periods will be extended for an additional five years and (b) five year draw
periods and ten year repayment periods will not be extended.
S-33
<PAGE> 34
ORIGINATION YEAR
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
ORIGINATION YEAR LOANS BALANCE PRINCIPAL BALANCE
---------------- --------- ------------ ---------------------
<S> <C> <C> <C>
1998............................................. 1 $ 8,302 0.00%
2000............................................. 7,621 219,893,804 100.00
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
DELINQUENCY STATUS
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
NUMBER OF DAYS DELINQUENT LOANS BALANCE PRINCIPAL BALANCE
------------------------- --------- ------------ ---------------------
<S> <C> <C> <C>
30-59 Days....................................... 4 $ 17,500 0.01%
Current.......................................... 7,618 219,884,606 99.99
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
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<PAGE> 35
CREDIT LIMITS
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
NUMBER OF UNPAID STATISTIC CALCULATION
MORTGAGE PRINCIPAL DATE AGGREGATE
RANGE OF CREDIT LIMITS LOANS BALANCE PRINCIPAL BALANCE
---------------------- --------- ------------ ---------------------
<S> <C> <C> <C>
$0.00 to $10,000................................. 272 $ 1,614,773 0.73%
$10,000.01 to $20,000............................ 2,195 24,240,307 11.02
$20,000.01 to $30,000............................ 2,111 40,175,004 18.27
$30,000.01 to $40,000............................ 860 22,696,144 10.32
$40,000.01 to $50,000............................ 706 21,036,611 9.57
$50,000.01 to $60,000............................ 309 12,557,407 5.71
$60,000.01 to $70,000............................ 200 9,564,816 4.35
$70,000.01 to $80,000............................ 166 8,533,431 3.88
$80,000.01 to $90,000............................ 114 7,185,478 3.27
$90,000.01 to $100,000........................... 281 15,920,976 7.24
$100,000.01 to $125,000.......................... 88 7,623,441 3.47
$125,000.01 to $150,000.......................... 136 13,723,754 6.24
$150,000.01 to $175,000.......................... 21 2,178,308 0.99
$175,000.01 to $200,000.......................... 50 6,271,325 2.85
$200,000.01 to $225,000.......................... 11 1,505,994 0.68
$225,000.01 to $250,000.......................... 22 3,875,241 1.76
$250,000.01 to $275,000.......................... 7 1,399,265 0.64
$275,000.01 to $300,000.......................... 27 5,502,740 2.50
$300,000.01 to $325,000.......................... 4 1,259,006 0.57
$325,000.01 to $350,000.......................... 7 1,630,623 0.74
$350,000.01 to $375,000.......................... 1 40,000 0.02
$375,000.01 to $400,000.......................... 4 890,000 0.40
$400,000.01 to $425,000.......................... 2 280,000 0.13
$425,000.01 to $450,000.......................... 3 354,887 0.16
$450,000.01 to $475,000.......................... 3 737,500 0.34
$475,000.01 to $500,000.......................... 11 2,831,006 1.29
$500,000.01 to $525,000.......................... 1 512,870 0.23
$525,000.01 to $550,000.......................... 1 98,646 0.04
$575,000.01 to $600,000.......................... 1 600,000 0.27
$625,000.01 to $650,000.......................... 1 486,205 0.22
$725,000.01 to $750,000.......................... 2 684,323 0.31
$775,000.01 to $800,000.......................... 1 392,026 0.18
$975,000.01 to $1,000,000........................ 2 2,000,000 0.91
Over $1,000,000.................................. 2 1,500,000 0.68
----- ------------ ------
Total............................................ 7,622 $219,902,106 100.00%
===== ============ ======
</TABLE>
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<PAGE> 36
CONVEYANCE OF MORTGAGE LOANS
The obligation of the Trust to purchase mortgage loans on the Closing Date
is subject to the following requirements, any of which requirements may be
waived or modified in any respect by the Note Insurer:
- the mortgage loan may not be 60 or more days delinquent as of the Closing
Date;
- the remaining term to stated maturity of the mortgage loan will not
exceed 302 months;
- the mortgage loan will be secured by a mortgage in a first or second lien
position;
- the mortgage loan will not have a loan rate less than 5.75%;
- the mortgage loan will be otherwise acceptable to the Note Insurer;
- following the purchase of the mortgage loan by the Trust, the mortgage
loans as of the Closing Date
(a) will have a weighted average loan rate of at least 6.00%;
(b) will have a weighted average remaining term to stated maturity of not
more than 302 months;
(c) will have a weighted average combined loan-to-value ratio of not more
than 85%;
(d) will have no mortgage loan with a principal balance in excess of
$1,500,000;
(e) will have a concentration in any one state not in excess of 48%; and
will have a concentration in any one zip code not in excess of 3.50%;
(f) will have not more than 3.00% in aggregate principal balance of
mortgage loans relating to non-owner occupied properties; and
(g) will not have more than 5.50% in aggregate principal balance of
mortgage loans that were appraised electronically;
- the mortgage loan will have a combined loan-to-value ratio not in excess
of 100%;
- the mortgage loan will have a credit limit between $6,000 and $1,500,000;
- the mortgage loan will have a margin between -1.75% and 8.875%; and
- the mortgage loan will comply with the representations and warranties in
the sale and servicing agreement.
The Trust may acquire Additional Home Equity Loans through December 15,
2000 so long as they conform to the criteria listed above. Each Additional Home
Equity Loan will have been underwritten substantially in accordance with the
criteria described under "The Home Equity Loan Program -- Underwriting
Procedures Relating to Home Equity Loans." Additional Home Equity Loans will be
purchased using amounts on deposit in the Additional Loan Account at a cash
purchase price of 100% of their principal balance on a designated cut-off date
before December 15, 2000. The amount paid from the Additional Loan Account for
Additional Home Equity Loans will not include accrued interest. Following each
purchase of Additional Home Equity Loans, the aggregate principal balance of the
pool will increase by an amount equal to the aggregate principal balance of the
Additional Home Equity Loans so acquired and the amount in the Additional Loan
Account will decrease accordingly. Additional Home Equity Loans acquired by the
Trust for the Series 2000-D Subtrust will be simultaneously pledged to the
indenture trustee as part of the trust estate.
Any conveyance of Additional Home Equity Loans is subject to various
conditions including:
- that they satisfy substantially the same loan representations and
warranties as the initial home equity loans;
- that they were identified by means of a selection process reasonably
believed not to be adverse to the interests of the holders of the Notes
and the Note Insurer;
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<PAGE> 37
- that the indenture trustee receive opinions of counsel acceptable to it
with respect to the validity of the conveyance of the Additional Home
Equity Loans; and
- that as of the related subsequent cut-off date, each Additional Home
Equity Loan satisfied the eligibility requirements that the mortgage
loans had to satisfy on the closing date.
No discretion will be exercised in the selection of the Additional Home
Equity Loans to be acquired by the Trust. The exact mortgage loans to be
acquired will be determined on a first-in, first-out basis. Mortgage loans
otherwise meeting the eligibility requirements will be aggregated by the date on
which they were funded, and all of these Additional Home Equity Loans will be
purchased in date order up through the day substantially all of the funds in the
Additional Loan Account are expended. On that last day, the Additional Home
Equity Loans will be ordered and acquired alphabetically by the last name of the
primary obligor. These acquisitions may occur in one or more closings after the
initial closing date.
THE ADDITIONAL LOAN ACCOUNT
The assets of the Trust will include the Additional Loan Account that will
contain approximately $55,000,000 on the closing date representing the excess of
the original principal balance of the Notes over the cut-off date principal
balance of the mortgage loans initially transferred to the Trust (and pledged to
the indenture trustee on the closing date) and the undercollateralization
amount. Monies in the Additional Loan Account are expected to be used to
purchase Additional Home Equity Loans through December 15, 2000. The Additional
Loan Account will be part of the Trust and pledged to the indenture trustee, but
will not be available to cover losses on the mortgage loans. Any funds remaining
on deposit in the Additional Loan Account on December 15, 2000 will be used to
prepay the Notes on the first payment date. Net income on investment of funds in
the Additional Loan Account will be paid to the master servicer, and will not be
available for payment on the Notes.
MATURITY AND PREPAYMENT CONSIDERATIONS
Noteholders will be entitled to receive on each payment date payments of
principal, in the amounts described under "Description of the Notes -- Payments
on the Notes," until the Note Principal Balance is reduced to zero. During the
Managed Amortization Period, noteholders will receive amounts from principal
collections based on the Investor Fixed Allocation Percentage, subject to
reduction as described below. In addition, the funds remaining in the Additional
Loan Account on December 15, 2000 after the purchase of any Additional Home
Equity Loans on that date will be used to prepay the Notes on the first payment
date.
Principal collections on the mortgage loans will be allocated between the
noteholders and the transferor based on the Investor Fixed Allocation
Percentage. Once the transferor interest at least equals the Required Transferor
Subordinated Amount, the Investor Fixed Allocation Percentage will be 99.25%.
The Required Transferor Subordinated Amount initially will be approximately
0.75% of the cut-off date principal balance and the amount originally deposited
in the Additional Loan Account. Allocations of principal collections from the
mortgage loans based on the Investor Fixed Allocation Percentage may result in
payments of principal to the noteholders in amounts that are, in most cases,
greater relative to the declining 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 from the mortgage loans paid to
noteholders. This is especially true during the Rapid Amortization Period when
the noteholders are entitled to receive Investor Principal Collections (less the
related Overcollateralization Reduction Amount) and not a lesser amount.
In addition, Investor Interest Collections may be paid as principal of the
Notes in connection with the Accelerated Principal Distribution Amount.
Moreover, to the extent of losses allocable to the Notes, noteholders may also
receive the amount of those losses as payment of principal from the Investor
Interest Collections, the Subordinated Transferor Collection, or, in some
instances, draws under the Policy. The level of losses may therefore affect the
rate of payment of principal on the Notes.
After the closing date, the transferor interest is expected to grow to the
extent obligors make more draws than principal payments on the mortgage loans.
An increase in the transferor interest due to
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<PAGE> 38
additional draws may also result in noteholders receiving principal at a greater
rate during the Rapid Amortization Period because the noteholders' share of
principal collections on the mortgage loans is based on the Investor Fixed
Allocation Percentage (without reduction). The sale and servicing agreement and
the indenture permit the transferor, at its option, but subject to the
satisfaction of certain conditions specified in the sale and servicing
agreement, including the conditions described below, to remove certain mortgage
loans and release them from the lien of the indenture at any time during the
life of the notes, so long as the transferor interest (after giving effect to
the removal) is not less than the Minimum Transferor Interest. See "Description
of the Sale and Servicing Agreement -- Optional Transfers of Mortgage Loans to
the Transferor."
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 or 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, account termination fees do not exceed
$350 and do not apply to accounts terminated after a date designated in the
related credit line agreement that, depending on the jurisdiction, ranges
between six months and five years following origination. The prepayment
experience of the mortgage loans will affect the weighted average life of the
Notes.
The rate of prepayment on the mortgage loans cannot be predicted.
Generally, it is assumed that 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 under
"Description of the Mortgage Loans -- Mortgage Loan Terms," rates of principal
payments on the mortgage loans will generally be slower than those of
traditional fully-amortizing first mortgages in the absence of prepayments on
the mortgage loans. The prepayment experience of 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 the master servicer
intends to enforce them unless
- enforcement is not permitted by applicable law or
- the master servicer permits the purchaser of the related mortgaged
property to assume the mortgage loan in a manner consistent with
reasonable commercial practice.
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 sponsor is not required to deliver certain documents relating to the
mortgage loans to the indenture trustee until 30 days after the Closing Date (or
in the case of the Additional Home Equity Loans, until 30 days after they are
acquired by the Trust). See "Description of the Sale and Servicing
Agreement -- Assignment of Mortgage Loans." Should the sponsor fail to deliver
all or a portion of the required documents for any mortgage loan to the
indenture trustee within the required period, the sponsor must accept the
transfer of the mortgage loan from the Trust. The principal balance of any
mortgage loan so transferred will be deducted from the loan 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 the
time, the sponsor must either substitute an Eligible Substitute Mortgage Loan or
make a deposit into the collection account equal to the amount by which the
transferor interest would be reduced to less than the Minimum Transferor
Interest at the time. Except to the extent substituted for by an Eligible
Substitute Mortgage Loan, the transfer of the mortgage loan out of the Trust
will be treated as a payment of principal of the mortgage loan.
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<PAGE> 39
The yield to an investor who purchases the Notes at a price other than par
will vary from the anticipated yield if the actual rate of prepayment on the
mortgage loans is different from the rate anticipated by the investor at the
time the Notes 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 the month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges on the mortgage loan. Borrowers
may fail to make scheduled payments. Collections on the mortgage loans may vary
due to seasonal purchasing and payment habits of borrowers.
We cannot predict the level of prepayments that will be experienced by the
Trust and investors may expect 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
The pool factor is a seven-digit decimal that the indenture trustee will
compute monthly expressing the Note Principal Balance as of each payment date
(after giving effect to any payment of principal of the Notes on the payment
date) as a proportion of the Original Note Principal Balance. On the Closing
Date, the pool factor for the Notes will be 1.0000000. See "Description of the
Notes -- Distributions on the Notes." Thereafter, the pool factor for the Notes
will decline to reflect reductions in the Note Principal Balance.
Pursuant to the sale and servicing agreement and the indenture, monthly
reports concerning the pool factor, and various other items of information for
the Notes will be made available to the noteholders. In addition, within 60 days
after the end of each calendar year, beginning with the 2001 calendar year,
information for tax reporting purposes will be made available to each person who
has been a noteholder of record at any time during the preceding calendar year.
See "Description of the Notes -- Book-Entry Notes" and "Description of the
Indenture -- Reports to Noteholders."
DESCRIPTION OF THE NOTES
GENERAL
The Revolving Home Equity Loan Asset Backed Notes, Series 2000-D (the
"Notes") will be issued pursuant to the indenture. The Notes will be issued in
denominations of $1,000,000 and multiples of $1,000 in excess of that amount.
The repayment of the Notes will be secured by a pledge of the mortgage loans to
the indenture trustee.
Definitive Notes, if issued, will be transferable and exchangeable at the
corporate trust office of the indenture trustee, which will initially maintain
the note register for the Notes. See "-- Book-Entry Notes" below. No service
charge will be made for any registration of exchange or transfer of Notes, but
the indenture trustee may require payment of a sum sufficient to cover any tax
or other governmental charge.
The "Original Note Principal Balance" is expected to equal approximately
$340,000,000. On the closing date, approximately $55,000,000 will be deposited
into the Additional Loan Account which may be used through December 15, 2000 to
purchase Additional Home Equity Loans.
The principal amount of the outstanding Notes ("Note Principal Balance") on
any payment date is equal to the Original Note Principal Balance minus the
aggregate of amounts actually paid as principal to the Notes. See "-- Payments
on the Notes" below. The primary source of payment on the Notes is the
collections on the mortgage loans. See "Description of the Sale and Servicing
Agreement -- Allocation and Collections." The portion of the interest
collections on the mortgage loans that are Investor Interest Collections will be
distributed in accordance with the indenture and the portion of the interest
collections that are not Investor Interest Collections will be distributed to
the transferor. Principal collections on the
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<PAGE> 40
mortgage loans will be allocated between the noteholders and the transferor; see
"Investor Principal Collections" and "Transferor Principal Collection" under
"Description of the Notes -- Glossary of Key Terms." Each Note represents the
right to receive payments of interest at the note rate and payments of principal
as described below.
The Required Transferor Subordinated Amount initially is approximately
$2,537,250, which will represent approximately 0.75% of the cut-off date loan
pool balance and the amount originally deposited in the Additional Loan Account,
but the indenture requires the Transferor Principal Balance (once it is fully
funded) to be at least equal to the Minimum Transferor Interest. The owner of
the transferor interest will initially be the sponsor (or one of its
affiliates). In general, the loan pool balance will vary each day as principal
is paid on the mortgage loans, liquidation losses are incurred, and Additional
Balances are drawn down by borrowers on mortgage loans and transferred to the
Trust.
The Note Insurer requires, based on the Insurance Agreement, that the
transferor interest be increased to, and thereafter maintained at, the Required
Transferor Subordinated Amount. The transferor interest as of the closing date
is less than the initial Required Transferor Subordinated Amount, thus requiring
an increase in the transferor interest on future payment dates until it equals
the Required Transferor Subordinated Amount.
Certain Investor Interest Collections for the Notes will be applied as a
payment of principal of the Notes on each payment date to decrease the Note
Principal Balance relative to the loan pool balance until such differential
equals an amount equal to the Required Transferor Subordinated Amount for the
payment date. The amount of the Investor Interest Collections so applied as a
payment of principal on a payment date is an "Accelerated Principal Payment
Amount." The requirement to increase the transferor interest to, and thereafter
maintain it at, the Required Transferor Subordinated Amount is not an obligation
of the sponsor, the master servicer, the indenture trustee, the Note Insurer, or
any other person.
The Note Insurer may permit the Required Transferor Subordinated Amount for
the Notes to decrease or "step down" over time, subject to certain floors and
triggers. The dollar amount of any decrease in the Required Transferor
Subordinated Amount is an "Overcollateralization Reduction Amount" which may
result in a release of cash from the trust estate in an amount up to the
Overcollateralization Reduction Amounts (net of any Reimbursement Amounts due to
the Note Insurer), or result in the removal of cash or mortgage loans from the
trust estate on payment dates occurring after the step-downs take effect. The
dollar amount of any Overcollateralization Reduction Amount will be released
from the monthly cashflow, thus reducing the transferor interest.
BOOK-ENTRY NOTES
The Notes will be book-entry notes. Persons acquiring beneficial ownership
interests in the Notes may elect to hold their Notes through the Depository
Trust Company in the United States, or Clearstream, Luxembourg or Euroclear in
Europe, if they are participants of those systems, or indirectly through
organizations that are participants in those systems. The book-entry notes will
be issued in one or more notes that equal the aggregate principal balance of the
Notes and will initially be registered in the name of Cede & Co., the nominee of
DTC. Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf
of their participants through customers' securities accounts in Clearstream,
Luxembourg's and Euroclear's names on the books of their respective
depositaries, which in turn will hold positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank N.A. will act
as depositary for Clearstream, Luxembourg and The Chase Manhattan Bank will act
as depositary for Euroclear. Investors may hold beneficial interests in the
book-entry notes in minimum denominations representing Note principal balances
of $1,000,000 and in multiples of $1,000 in excess of that. One investor in the
book-entry notes may hold a beneficial interest that is not an integral multiple
of $1,000. Except as described below, no person, acquiring a book-entry note
will be entitled to receive a definitive note representing the Note. Until
definitive notes are issued, Cede & Co., as nominee of DTC, is expected to be
the only "noteholder" of the Notes. Beneficial owners of the Notes will not be
noteholders as that term is used in the indenture. Beneficial owners of the
Notes are only permitted to exercise their rights
S-40
<PAGE> 41
indirectly through the participating organizations that use the services of DTC,
including securities brokers and dealers, banks and trust companies, clearing
corporations and certain other organizations, and DTC.
The beneficial owner's ownership of a book-entry note will be recorded on
the records of the brokerage firm, bank, thrift institution, or other financial
intermediary that maintains the beneficial owner's account for that purpose. In
turn, the financial intermediary's ownership of the book-entry note 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 Clearstream, Luxembourg or Euroclear, as
appropriate).
Beneficial owners of the Notes will receive all payments of principal of,
and interest on, the Notes from the indenture trustee through DTC and DTC
participants. While the Notes are outstanding (except under the circumstances
described below), under the rules, regulations, and procedures creating and
affecting DTC and its operations (the "Rules"), DTC must make book-entry
transfers among participants on whose behalf it acts with respect to the Notes
and must receive and transmit payments of principal of, and interest on, the
Notes. Participants and organizations that have indirect access to the DTC
system, such as banks, brokers, dealers, trust companies and other indirect
participants that clear through or maintain a custodial relationship with a
participant, either directly or indirectly, with whom beneficial owners of the
Notes have accounts for the Notes are similarly required to make book-entry
transfers and receive and transmit payments on behalf of their respective
beneficial owners of the Notes. Accordingly, although beneficial owners of the
Notes will not possess the Notes, the Rules provide a mechanism by which
beneficial owners of the Notes will receive payments and will be able to
transfer their interest.
Beneficial owners of the Notes will not receive or be entitled to receive
notes representing their respective interests in the Notes, except under the
limited circumstances described below. Until definitive notes are issued,
beneficial owners of the Notes who are not participants may transfer ownership
of the Notes only through participants and indirect participants by instructing
them to transfer the Notes, by book-entry transfer, through DTC for the account
of the purchasers of the Notes, which account is maintained with their
respective participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of the Notes 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 beneficial owners of the Notes.
Because of time zone differences, credits of securities received in
Clearstream, Luxembourg 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. Those credits or any
transactions in those securities will be reported to the relevant Euroclear or
Clearstream, Luxembourg participants on the business day following the DTC
settlement date. Cash received in Clearstream, Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream, Luxembourg
participant or Euroclear participant to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant
Clearstream, Luxembourg 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 Notes, see "Material 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 Clearstream, Luxembourg 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 Clearstream,
Luxembourg participants or Euroclear participants, on the other, will be
effected in DTC in accordance with DTC rules on behalf of the relevant European
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<PAGE> 42
international clearing system by the relevant depositary. However, these cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in relevant European
international clearing 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. Clearstream, Luxembourg
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 (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 notes, whether held for
its own account or as a nominee for another person. In general, beneficial
ownership of book-entry notes will be subject to the rules, regulations, and
procedures governing DTC and DTC participants as in effect from time to time.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A," a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On 10 January
2000, Cedelbank's parent company, Cedel International, societe anonyme merged
its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG. The merger involved the transfer by Cedel International of
substantially all of its assets and liabilities to a new Luxembourg company, New
Cedel International, societe anonyme, which is 50% owned by Cedel International
and 50% owned by Deutsche Borse Clearing AG's parent company Deutsche Borse AG.
The shareholders of these two entities are banks, securities dealers and
financial institutions. Cedel International currently has 92 shareholders,
including U.S. financial institutions or their subsidiaries. No single entity
may own more than 5 percent of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to re-name the companies in the group to give them a cohesive brand
name. The new brand name that was chosen is "Clearstream." With effect from 14
January 2000 New Cedel International has been renamed "Clearstream
International, societe anonyme." On 18 January 2000, Cedelbank was renamed
"Clearstream Banking, societe anonyme," and Cedel Global Services was renamed
"Clearstream Services, societe anonyme."
On 17 January 2000 Deutsche Borse Clearing AG was renamed "Clearstream
Banking AG." This means that there are now two entities in the corporate group
headed by Clearstream International which share the name "Clearstream Banking,"
the entity previously named "Cedelbank" and the entity previously named
"Deutsche Borse Clearing AG."
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg customers through electronic book-entry changes in accounts of
Clearstream, Luxembourg customers, thereby eliminating the need for physical
movement of notes. Transactions may be settled by Clearstream, Luxembourg in any
of 36 currencies, including United States Dollars. Clearstream, Luxembourg
provides to its customers, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Clearstream, Luxembourg also deals with
domestic securities markets in over 30 countries through established depository
and custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies,
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to banks and securities brokers and dealers. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and
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the United States. Indirect access to Clearstream, Luxembourg is available to
other institutions that clear through or maintain a custodial relationship with
an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
Euroclear was created in 1968 to hold securities for participants of
Euroclear 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 notes 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 under contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation. 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 Euroclear Clearance Systems S.C. Euroclear
Clearance Systems S.C. 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.
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 notes 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.
Payments on the book-entry notes will be made on each payment date by the
indenture trustee to DTC. DTC will be responsible for crediting the amount of
the payments to the accounts of the applicable DTC participants in accordance
with DTC's normal procedures. Each DTC participant will be responsible for
disbursing the payments to the beneficial owners of the book-entry notes that it
represents and to each financial intermediary for which it acts as agent. Each
financial intermediary will be responsible for disbursing funds to the
beneficial owners of the book-entry notes that it represents.
Under a book-entry format, beneficial owners of the book-entry notes may
experience some delay in their receipt of payments, since payments will be
forwarded by the indenture trustee to Cede & Co. Payments on the Notes held
through Clearstream, Luxembourg or Euroclear will be credited to the cash
accounts of Clearstream, Luxembourg participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the relevant depositary. The payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Material Federal Income Tax Consequences -- Foreign Investors" and
"-- Backup Withholding." Because DTC can only act on behalf of financial
intermediaries, the ability of a beneficial owner to pledge book-entry notes to
persons or entities that do not participate in the depository system, or
otherwise take actions in respect of book-entry notes, may be limited due to the
lack of physical notes for book-entry
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notes. In addition, issuance of the book-entry notes in book-entry form may
reduce the liquidity of the Notes in the secondary market since certain
potential investors may be unwilling to purchase the Notes for which they cannot
obtain definitive notes.
Monthly and annual reports on the trust estate provided by the master
servicer to Cede & Co., as nominee of DTC, may be made available to beneficial
owners upon request, in accordance with the rules, regulations, and procedures
creating and affecting DTC or the relevant depositary, and to the financial
intermediaries to whose DTC accounts the book-entry notes of the beneficial
owners are credited.
DTC has advised the transferor and the indenture trustee that, until
definitive notes are issued, DTC will take any action permitted to be taken by
the holders of the book-entry notes under the indenture only at the direction of
one or more financial intermediaries to whose DTC accounts the book-entry notes
are credited, to the extent that the actions are taken on behalf of financial
intermediaries whose holdings include the book-entry notes. Clearstream,
Luxembourg or the Euroclear operator, as the case may be, will take any other
action permitted to be taken by a noteholder under the indenture on behalf of a
Clearstream, Luxembourg participant or Euroclear participant only in accordance
with its relevant rules and procedures and subject to the ability of the
relevant depositary to effect the actions on its behalf through DTC. DTC may
take actions, at the direction of the related participants, for some of the
Notes that conflict with actions taken for other Notes.
Definitive notes will be issued to beneficial owners of the book-entry
notes, or their nominees, rather than to DTC, only if
- the Issuer advises the indenture trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities with respect
to the book-entry notes and the Issuer is unable to locate a qualified
successor,
- the Issuer, at its option, advises the indenture trustee in writing that
it elects to terminate a book-entry system through DTC, or
- after the occurrence of an Event of Default under the indenture,
beneficial owners having interests aggregating not less than 51% of the
outstanding Note Principal Balance of the book-entry notes advise DTC in
writing that the continuation of a book-entry system through DTC is no
longer in the best interests of beneficial owners.
When definitive notes become available, DTC will be required to notify all
beneficial owners of the occurrence of the event resulting in their availability
and the availability through DTC of definitive notes. Upon surrender by DTC of
the global notes representing the book-entry notes and instructions for re-
registration, the indenture trustee will issue definitive notes, and thereafter
the indenture trustee will recognize the holders of definitive notes as
noteholders under the indenture.
Although DTC, Euroclear, and Clearstream, Luxembourg have agreed to the
foregoing procedures to facilitate transfers of the Notes among participants of
DTC, Euroclear, and Clearstream, Luxembourg, they are under no obligation to
perform or continue to perform these procedures and these procedures may be
discontinued at any time.
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GLOSSARY OF KEY TERMS
- AVAILABLE TRANSFEROR SUBORDINATED AMOUNT -- for any payment date is the lesser
of the Transferor Principal Balance and the Required Transferor Subordinated
Amount for the payment date.
- COLLECTION PERIOD -- related to a payment date is the calendar month preceding
the payment date or, in the case of the first Collection Period, the period
beginning on the cut-off date and ending on the last day of December 2000.
- INVESTOR FIXED ALLOCATION PERCENTAGE -- (a) the greater of (i) 99.25% and (ii)
100% minus the percentage obtained by dividing the amount of the transferor
interest at the beginning of the relevant Collection Period by the loan pool
balance at the beginning of the Collection Period, plus the amount of funds in
the Additional Loan Account until the date on which the transferor interest
first equals the Required Transferor Subordinated Amount, and (b) 99.25%
afterwards.
- INVESTOR FLOATING ALLOCATION PERCENTAGE -- for any payment date is the lesser
of 100% and a fraction whose numerator is the Note Principal Balance and whose
denominator is the sum of the loan pool balance at the beginning of the
related Collection Period, plus the amount of funds in the Additional Loan
Account.
- INVESTOR INTEREST COLLECTIONS -- for any payment date, the product of (a) the
Interest Collections received during the related Collection Period and (b) the
Investor Floating Allocation Percentage for the payment date.
- INVESTOR LOSS AMOUNT -- for any payment date, the product of the Investor
Floating Allocation Percentage and the aggregate Liquidation Loss Amount on
the mortgage loans for the payment date.
- INVESTOR PRINCIPAL COLLECTIONS -- for any payment date is the related Investor
Fixed Allocation Percentage of principal collections on the mortgage loans for
the payment date.
- LIQUIDATED MORTGAGE LOAN -- for any payment date, any mortgage loan in respect
of which the master servicer has determined, based on the servicing procedures
specified in the sale and servicing agreement, as of the end of the preceding
Collection Period, that all liquidation proceeds that it expects to recover in
the disposition of the mortgage loan or the related mortgaged property have
been recovered.
- LIQUIDATION LOSS AMOUNT -- for any Liquidated Mortgage Loan is its unrecovered
principal balance at the end of the Collection Period in which the mortgage
loan became a Liquidated Mortgage Loan, after giving effect to its net
liquidation proceeds.
- LOAN POOL BALANCE -- for any date is the aggregate of the principal balances
of all mortgage loans as of the date. 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 (1) any Additional Balances for the mortgage loan
minus (2) all collections credited against the principal balance of the
mortgage loan in accordance with the related credit line agreement before the
day. The principal balance of a Liquidated Mortgage Loan after final recovery
of related liquidation proceeds is zero.
- REQUIRED TRANSFEROR SUBORDINATED AMOUNT -- see "Description of the
Notes -- General."
- TRANSFEROR PRINCIPAL BALANCE -- for any date is the loan pool balance at the
close of the prior day plus the funds in the Additional Loan Account minus the
Note Principal Balance reduced by the aggregate of amounts actually
distributed as principal on the Notes through the close of business on the
date of determination.
- TRANSFEROR PRINCIPAL COLLECTIONS -- for any payment date is principal
collections received during the related Collection Period minus the amount of
principal collections required to be distributed to noteholders under the
indenture.
PAYMENTS ON THE NOTES
Beginning with the first payment date (which will occur on January 15,
2001), payments on the Notes will be made by the indenture trustee or the paying
agent on each payment date to the persons in whose names the Notes are
registered at the close of business on the day before each payment date or, if
the Notes are no longer book-entry notes, at the close of business on the last
day of the month preceding
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the payment date. The term payment date means the fifteenth day of each month
or, if that day is not a business day, then the next business day. Generally,
payments on the Notes will be made by check or money order mailed to the address
of the person entitled to it (which, in the case of book-entry notes, will be
DTC or its nominee) as it appears on the note register on the record date. At
the request of a noteholder owning at least $1,000,000 principal amount of
Notes, payments will be made by wire transfer or as otherwise agreed between the
noteholder and the indenture trustee. However, the final payment on the Notes
upon redemption will be made only on their presentation and surrender at the
office or the agency of the indenture trustee specified in the notice to
noteholders of the final payment. A "business day" is any day other than a
Saturday or Sunday or a day on which banking institutions in the states of New
York, California or Illinois are required or authorized by law to be closed.
Application of Interest Collections. On each payment date, the indenture
trustee or a paying agent will apply the Investor Interest Collections in the
following order of priority:
(1) to pay the Note Insurer for the premium for the Policy;
(2) to pay noteholders the interest accrued at the note rate and any
overdue accrued interest (with interest on overdue interest to the extent
permitted by applicable law) on the principal balance of the Notes;
(3) to pay noteholders the Investor Loss Amount for the payment date;
(4) to pay noteholders any Investor Loss Amount for a previous payment date
that was not previously (a) funded by Investor Interest Collections, (b)
absorbed by a reduction in the transferor interest, (c) funded by Subordinated
Transferor Collections, or (d) funded by draws on the Policy;
(5) to reimburse the Note Insurer for prior draws made from the Policy
(with interest on the draws);
(6) to pay noteholders the Accelerated Principal Payment Amount;
(7) to pay any other amounts owed to the Note Insurer pursuant to the
Insurance Agreement;
(8) to pay the master servicer amounts required to be paid pursuant to the
sale and servicing agreement;
(9) to pay the noteholders any Basis Risk Carryforward of the Notes; and
(10) the remaining amounts to the transferor.
Payments to noteholders pursuant to clause (2) will be interest payments on
the Notes. Payments to noteholders pursuant to clauses (3), (4) and (6) will be
principal payments on the Notes and will therefore reduce the Note Principal
Balance. The Accelerated Principal Payment Amount and the Basis Risk
Carryforward are not guaranteed by the Policy.
Interest will be paid on each payment date at the applicable note rate for
the related Interest Period. The note rate for a payment date will generally
equal a per annum rate equal to the least of:
(a) the sum of
- the London Interbank offered rate for one-month United States dollar
deposits ("LIBOR"), plus
- 0.23%;
(b) a per annum rate equal to the weighted average of the loan rates
of the mortgage loans net of
- the servicing fee rate,
- the rate at which the fees payable to the indenture trustee and the
owner trustee are calculated,
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- the rate at which the premium payable to the Note Insurer is
calculated and,
- commencing with the payment date in January 2002, 0.50% per annum,
- weighted on the basis of the daily average balance of each mortgage
loan during the related billing cycle before the Collection Period
relating to the payment date, and
(c) 16.00%.
However, on any payment date for which the note rate has been determined
pursuant to clause (b) above, the excess of
- the amount of interest that would have accrued on those notes during the
Interest Period had interest been determined pursuant to clause (a) above
(but not at a rate in excess of 16.00% per annum) over
- the interest actually accrued on those notes during the Interest Period
(the excess is referred to as "Basis Risk Carryforward")
will accrue interest at the note rate calculated pursuant to clause (a) (as
adjusted from time to time), but not to exceed clause (c), and will be paid on
subsequent payment dates to the extent funds are available therefor.
Interest on the Notes for any payment date will accrue on the Note
Principal Balance from the preceding payment date (or in the case of the first
payment date, from the Closing Date) through the day preceding the payment date
(each period, an "Interest Period") on the basis of the actual number of days in
the Interest Period and a 360-day year.
Calculation of the LIBOR Rate. On each reset date, the indenture trustee
shall determine LIBOR for the Interest Period commencing on the related payment
date. The reset date for each Interest Period is the second LIBOR business day
before the payment date. LIBOR for the first Interest Period will be determined
on the second LIBOR business day before the Closing Date. As the first Interest
Period will be more than one month but less than two months in duration, LIBOR
for the first Interest Period will be determined by the method described below
but based on interpolation by reference to the one month rate and the two month
rate. LIBOR will equal the rate for United States dollar deposits for one month
that appears on the Telerate Screen Page 3750 as of 11:00 A.M., London time, on
the reset date for an Interest Period. Telerate Screen Page 3750 means the
display designated as page 3750 on the Bridge Telerate Service (or any page
replacing page 3750 on that service for the purpose of displaying London
interbank offered rates of major banks). If such rate does not appear on
Telerate Screen Page 3750 (or if that service is no longer offered, another
service for displaying LIBOR or comparable rates selected by the depositor after
consultation with the indenture 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 United States dollars are offered by the reference banks as of
11:00 A.M., London time, on the reset date for the Interest Period to prime
banks in the London interbank market for a period of one month in amounts
approximately equal to the principal amount of the Notes then outstanding. The
reference banks will be three major banks that are engaged in transactions in
the London interbank market selected by the depositor after consultation with
the indenture trustee. The indenture 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 the reset 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 indenture trustee, as of 11:00 A.M., New York City time, on the reset
date for loans in United States dollars to leading European banks for a period
of one month in amounts approximately equal to the principal amount of the Notes
then outstanding. If no such quotations can be obtained, the rate will be LIBOR
for the preceding Interest Period. LIBOR business day means any day other than a
Saturday or a Sunday or 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.
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Transferor Collections. Collections allocable to the transferor interest
will be paid to the transferor only to the extent that the payment will not
reduce the amount of the transferor interest as of the related payment date
below the Minimum Transferor Interest. Amounts not paid to the transferor
because of these limitations will be retained in the collection account until
the transferor interest exceeds the Minimum Transferor Interest, at which time
the excess shall be released to the transferor. Any of these amounts in the
collection account at the start of the Rapid Amortization Period will be paid to
the noteholders as a reduction of the Note Principal Balance.
Payments of Principal Collections. The period beginning on the Closing Date
and, unless a Rapid Amortization Event shall have earlier occurred, through and
including the payment date in December 2005 is the "Managed Amortization
Period." The amount of principal collections payable to noteholders for each
payment date during the Managed Amortization Period will equal, to the extent
funds are available therefor, the Scheduled Principal Collections Payment Amount
for that payment date. The Scheduled Principal Collections Payment Amount for
the first Collection Period is computed for the period beginning on the cut-off
date and ending on the last day of December 2000. On any payment date during the
Managed Amortization Period, the "Scheduled Principal Collections Payment
Amount" is the lesser of the Maximum Principal Payment and the Alternative
Principal Payment. For any payment date, the "Maximum Principal Payment" is the
product of the Investor Fixed Allocation Percentage and principal collections
for the payment date. For any payment date, the "Alternative Principal Payment"
is the amount of principal collections for the payment date minus the aggregate
of Additional Balances created on the mortgage loans during the Collection
Period, but not less than zero.
Beginning with the first payment date following the end of the Managed
Amortization Period (the "Rapid Amortization Period"), the amount of principal
collections payable to noteholders on each payment date will be equal to the
Maximum Principal Payment.
If on any payment date the Required Transferor Subordinated Amount is
reduced below the then existing Available Transferor Subordinated Amount, the
amount of principal collections from the mortgage loans payable to noteholders
on the payment date will be correspondingly reduced by the amount of the
reduction.
Payments of principal collections from the mortgage loans based on the
Investor Fixed Allocation Percentage may result in payments of principal to the
noteholders in amounts that are greater relative to the declining balance of the
loan pool than would be the case if the Investor Floating Allocation Percentage
were used to determine the percentage of principal collections paid to
noteholders. Principal collections from the mortgage loans not allocated to the
noteholders will be allocated to the transferor interest. The aggregate payments
of principal to the noteholders will not exceed the Original Note Principal
Balance.
In addition, to the extent of funds available therefor (including funds
available under the Policy), on the payment date in January 2027, noteholders
will be entitled to receive as a payment of principal an amount equal to the
outstanding Note Principal Balance.
The Paying Agent. The paying agent shall initially be the indenture
trustee. The paying agent shall have the revocable power to withdraw funds from
the collection account for the purpose of making payments to the noteholders.
LIMITED SUBORDINATION OF TRANSFEROR INTEREST
If Investor Interest Collections on any payment date are insufficient to
pay (i) accrued interest due and any overdue accrued interest (with interest on
overdue interest to the extent permitted by applicable law) on the Notes and
(ii) the applicable Investor Loss Amount on the payment date (the insufficiency
being the "Required Amount"), the interest collections from the mortgage loans
and principal collections allocable to the transferor interest (but not in
excess of the Available Transferor Subordinated Amount) (the "Subordinated
Transferor Collections") will be applied to cover the Required Amount. The
portion of the Required Amount in respect of clause (ii) above not covered by
the Subordinated Transferor
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Collections will be reallocated to the transferor interest, thereby reducing the
transferor interest (up to the remaining Available Transferor Subordinated
Amount and not in excess of the Investor Loss Amounts). If the Investor Interest
Collections and the amount of Subordinated Transferor Collections that have been
so applied to cover the Required Amount are together insufficient to pay the
amounts in item (i) of the definition of Required Amount, then a draw will be
made on the Policy to cover the amount of the shortfall. In addition, (a) on any
payment date on or before the Available Transferor Subordinated Amount first
increases to zero if the Available Transferor Subordinated Amount for that
payment date is less than the Available Transferor Subordinated Amount for the
immediately preceding payment date, or (b) on any payment date after the
Available Transferor Subordinated Amount has first increased to zero if the
Available Transferor Subordinated Amount is reduced to zero on the payment date,
then a draw will be made on the Policy in the amount equal to the Guaranteed
Principal Payment Amount. See "Description of the Notes -- The Policy."
THE POLICY
The Policy will be issued by the Note Insurer by the Closing Date pursuant
to the Insurance and Indemnity Agreement (the "Insurance Agreement") to be dated
as of the Closing Date, among the sponsor, the depositor, the master servicer,
the indenture trustee and the Note Insurer.
The Policy will irrevocably and unconditionally guarantee payment on each
payment date to the indenture trustee for the benefit of the holders of the of
Notes the full and complete payment of Insured Amounts with respect to the Notes
for the payment date. An "Insured Amount" for the Notes as of any payment date
is any shortfall in amounts available in the collection account to pay (a) (i)
the Guaranteed Principal Payment Amount for the Notes for the payment date and
(ii) the Guaranteed Payment for the Notes for the payment date and (b) any
Preference Amount that occurs before the determination date. 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 Notes. The Policy does not cover
any Basis Risk Carryforward.
The "Guaranteed Principal Payment Amount" (a) on the payment date in
January 2027 is the amount needed to pay the outstanding principal balance of
the Notes, (b) for any payment date on or before the Available Transferor
Subordinated Amount first increases to zero, if the Available Transferor
Subordinated Amount for that payment date is less than the highest Available
Transferor Subordinated Amount for any preceding payment date, is the amount of
the excess of the highest Available Transferor Subordinated Amount for any
preceding payment date over the Available Transferor Subordinated Amount for the
current payment date, (c) for any payment date after the Available Transferor
Subordinated Amount has first increased to zero, if the Available Transferor
Subordinated Amount has been reduced to zero or below, is the amount of the
excess of the Note Principal Balance (after giving effect to all allocations and
payments of principal to be made on the Notes on the payment date) over the loan
pool balance (at the end of the related Collection Period) plus any funds in the
Additional Loan Account on the payment date and (d) for any other payment date
means zero. All calculations under the Policy are after giving effect to all
other amounts distributable and allocable to principal on the Notes for the
payment date.
"Guaranteed Payments" are accrued and unpaid interest for a payment date
due on the Notes calculated in accordance with the original terms of the Notes,
the sale and servicing agreement and the indenture after giving effect to
amendments or modifications to which the Note Insurer has given its written
consent.
A "Preference Amount" means any amount previously paid to a noteholder that
is recoverable and recovered as a voidable preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy Code, as amended from time to time, in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Payment of claims on the Policy will be made by the Note Insurer following
receipt by the Note Insurer of the appropriate notice for payment (and any other
required documentation) on the later to occur of (i) 12:00 NOON, New York City
time, on the second Business Day following Receipt of the notice for payment and
(ii) 12:00 NOON, New York City time, on the relevant payment date.
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The terms "Receipt" and "Received", with respect to the Policy, means
actual delivery to the Note Insurer and occurs on the day delivered if delivered
before 10:00 a.m., New York City time, on a business day, or on the next
business day if delivered either on a day that is not a business day or after
10:00 a.m., New York City time. If any notice or note given under the Policy by
the indenture trustee is not in proper form or is not properly completed,
executed or delivered, it is not received, and the Note Insurer shall promptly
so advise the indenture trustee and the indenture trustee may submit an amended
notice.
Under the Policy, "business day" means any day other than a Saturday or
Sunday or a day on which banking institutions in the states of New York,
California or Illinois or the city in which the corporate trust office of the
indenture trustee or the Note Insurer is located are authorized or obligated by
law or executive order to be closed.
The Note Insurer's obligations under the Policy with respect to Insured
Amounts will be discharged to the extent funds are transferred to the indenture
trustee as provided in the Policy, whether or not the funds are properly applied
by the indenture trustee. The Note Insurer will be subrogated to the rights of
each noteholder to receive payments of principal and interest, as applicable, on
the Notes to the extent of any payment by the Note Insurer under the Policy. The
Policy cannot be modified, altered or affected by any other agreement or
instrument, or by the merger, consolidation or dissolution of the sponsor. The
Policy by its terms may not be cancelled or revoked. The Policy is governed by
the laws of the State of New York.
Insured Amounts will be paid only at the time stated in the Policy and no
accelerated Insured Amounts shall be paid regardless of any acceleration of the
Notes, unless the acceleration is at the sole option of the Note Insurer. The
Policy does not cover shortfalls attributable to the liability of the Trust or
the indenture trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
To the extent that Investor Interest Collections are applied to pay the
interest on the Notes, Investor Interest Collections may be insufficient to
cover Investor Loss Amounts. If this insufficiency exists under the
circumstances described in the definition of "Guaranteed Principal Payment
Amount" and results in the Note Principal Balance exceeding the aggregate of the
loan pool balance, the funds in the Additional Loan Account and the previous
highest Available Transferor Subordinated Amount (if applicable), a draw will be
made on the Policy in accordance with the Policy.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the indenture or the sale
and servicing agreement as of the date of execution of the Policy, without
giving effect to any subsequent amendment or modification to the indenture or
the sale and servicing agreement unless such amendment or modification has been
approved in writing by the Note Insurer.
Pursuant to the sale and servicing agreement and the indenture, unless a
Note Insurer default exists, the Note Insurer will be treated as a noteholder
for certain purposes, will be entitled to exercise all rights of the noteholders
under the indenture without the consent of the noteholders, and the noteholders
may exercise their rights under the indenture only with the written consent of
the Note Insurer. In addition, the Note Insurer will have certain additional
rights as a third party beneficiary to the sale and servicing agreement and the
indenture.
DESCRIPTION OF THE INDENTURE
The payment provisions in the indenture are described under "Description of
the Notes -- Payment on the Notes" above. The following is a description of the
material provisions of the indenture. Wherever particular defined terms of the
indenture are referred to, the defined terms are incorporated in this prospectus
supplement by this reference.
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RAPID AMORTIZATION EVENTS
The Managed Amortization Period will continue through and include the
payment date in December 2005, unless a Rapid Amortization Event occurs before
then. "Rapid Amortization Event" refers to any of the following events:
(a) the failure of the sponsor
- to make a payment or deposit required under the sale and servicing
agreement within three business days after the date the payment or
deposit must be made,
- to cause the depositor to observe or perform in any material respect
certain covenants of the depositor in the sale and servicing agreement,
or
- to observe or perform in any material respect any other covenants of the
sponsor in the sale and servicing agreement, which failure materially and
adversely affects the interests of the noteholders or the Note Insurer
and, with certain exceptions, continues unremedied for a period of 60
days after written notice;
(b) any representation or warranty made by the sponsor or the depositor in
the sale and servicing 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 noteholders or the Note Insurer are materially and adversely affected;
except that a Rapid Amortization Event will not occur if the sponsor has
purchased or made a substitution for the related mortgage loan or mortgage loans
if applicable during the period (or within an additional 60 days with the
consent of the indenture trustee) in accordance with the provisions of the sale
and servicing agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the transferor or the depositor;
(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; or
(e) the aggregate of all draws under the Policy incurred during the Managed
Amortization Period exceeds 1.00% of the Original Note Principal Balance.
If any event described in clause (a) or (b) occurs, a Rapid Amortization
Event will occur only if, after the applicable grace period, either the
indenture trustee, the Note Insurer, or the noteholders holding Notes evidencing
more than 51% of the aggregate principal amount of the Notes, by written notice
to the transferor, the depositor and the master servicer (and to the indenture
trustee, if given by the Note Insurer, or the noteholders) declare that a Rapid
Amortization Event has occurred. If any event described in clause (c), (d) or
(e) occurs, a Rapid Amortization Event will occur without any notice or other
action on the part of the indenture trustee, the Note Insurer or the noteholders
immediately on the occurrence of the event.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the transferor and no Rapid Amortization
Event exists other than the 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.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to the noteholders, the master servicer will
forward to the indenture trustee who will make available via its internet
website to each noteholder a statement setting forth among other items:
(i) the Investor Floating Allocation Percentage for the preceding
Collection Period;
(ii) the amount being paid to noteholders;
(iii) the amount of interest included in the payment and the related note
rate;
(iv) the amount of overdue accrued interest included in the payment (and
the amount of interest or overdue interest to the extent permitted by
applicable law);
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(v) the amount of the remaining overdue accrued interest after giving
effect to the payment;
(vi) the amount of principal included in the payment;
(vii) the amount of the reimbursement of previous Investor Loss Amounts
included in the payment;
(viii) the amount of Basis Risk Carryforward paid and the amount of Basis
Risk Carryforward accrued;
(ix) the amount of the aggregate unreimbursed Investor Loss Amounts after
giving effect to the payment;
(x) the servicing fee for the payment date;
(xi) the Note Principal Balance and the pool factor, each after giving
effect to the payment;
(xii) the loan pool balance as of the end of the preceding Collection
Period;
(xiii) 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;
(xiv) the book value of any real estate that is acquired by the trust
estate through foreclosure or grant of deed in lieu of foreclosure;
(xv) the amount of any draws on the Policy;
(xvi) with respect to the first and second payment dates, the number and
aggregate balance of any mortgage loans not delivered to the
indenture trustee within 30 days after the Closing Date.
The amounts in clauses (iii), (iv), (v), (vi), (vii) and (viii) above shall
be expressed as a dollar amount per $1,000 increment of Notes.
The indenture trustee will make such statement (and, at its option, any
additional files containing the same information in an alternative format)
available each month to noteholders via the indenture trustee's internet
website, which is presently located at www.abs.bankone.com.
If the such statement is not accessible on the indenture trustee's internet
website, the indenture trustee shall forward a hard copy of it to each
noteholder, the master servicer, the Note Insurer and the Rating Agencies
immediately after the indenture trustee becomes aware that it is not accessible
by any of them via the indenture trustee's internet website. Assistance in using
the indenture trustee's internet website may be obtained by calling the
indenture trustee's customer service desk at (800) 524-9472. The indenture
trustee shall notify each of the above in writing of any change in the address
or means of access to the internet website where such statement is accessible.
Within 60 days after the end of each calendar year commencing in 2001, the
master servicer will be required to forward to the indenture trustee a statement
containing the information in clauses (iii) and (vi) above aggregated for the
calendar year.
EVENTS OF DEFAULT UNDER THE INDENTURE
Events of Default under the indenture include:
(i) a default in the payment of any principal or interest when it becomes
due and continuance of the default for five days;
(ii) failure by the Trust to perform in any material respect any of its
obligations under the indenture (other than a covenant covered in
clause (i) hereof) or the breach of a representation or warranty of
the Trust under the indenture, that continues unremedied for sixty
days after notice of it is given; and
(iii) certain events of bankruptcy, insolvency, receivership, or
liquidation of the Issuer.
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REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
If an Event of Default under the indenture has occurred and is continuing
either the indenture trustee or noteholders representing not less than 51% of
the then outstanding principal amount of the Notes (in either case with the
consent of the Note Insurer) or the Note Insurer may declare the unpaid
principal amount of the Notes together with accrued interest through the date of
acceleration payable immediately. A declaration of acceleration may be rescinded
by noteholders representing not less than 51% of the then outstanding principal
amount of the Notes with the consent of the Note Insurer. Although a declaration
of acceleration has occurred, the indenture trustee may with the consent of the
Note Insurer elect not to liquidate the assets of the trust if the assets are
generating sufficient cash to pay interest and principal as it becomes due
without taking into account the declaration of acceleration.
The indenture trustee may not sell or otherwise liquidate the assets of the
trust following an event of default unless
- the holders of 100% of the then outstanding principal amount of the Notes
and the Note Insurer consent to the sale, or
- the proceeds of the sale or liquidation are sufficient to pay all amounts
due to the noteholders and the Note Insurer, or
- the indenture trustee determines that the trust estate would not be
sufficient on an ongoing basis to make all payments on the Notes as they
become due and the indenture trustee obtains the consent of a majority of
the aggregate outstanding principal balance of the Notes and the Note
Insurer.
No noteholder may institute any proceeding with respect to the indenture
unless the Note Insurer has consented in writing to the institution of the
proceeding and the holder has previously notified the indenture trustee of a
continuing event of default and unless noteholders representing not less than
51% of the aggregate outstanding principal balance of the Notes have requested
the indenture trustee to institute the proceeding and have offered the indenture
trustee reasonable indemnity, and the indenture trustee for 60 days has failed
to institute the proceeding.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE
The indenture trustee will not be liable for any error of judgment made in
good faith by its responsible officers unless it is proved that the indenture
trustee was negligent in ascertaining the pertinent facts. The indenture trustee
will not be liable for any action it takes or omits to take in good faith in
accordance with the direction of the Note Insurer or the direction received by
it from noteholders representing not less than 51% of the aggregate outstanding
note principal amount relating to the method and place of conducting any
proceeding for any remedy available to the indenture trustee with respect to the
Notes or exercising any right conferred on the indenture trustee under the
indenture or the sale and servicing agreement. However, the indenture trustee
generally may not be relieved from liability for its own negligent action, its
own negligent failure to act, or its own willful misconduct.
The indenture trustee and any of its affiliates may hold Notes in their own
names or as pledgees. To meet the legal requirements of certain jurisdictions,
the indenture trustee and the Issuer jointly may appoint co-trustees or separate
trustees approved by the master servicer and the Note Insurer of any part of the
trust estate under the indenture. All rights and obligations conferred or
imposed on the indenture trustee by the indenture will be conferred or imposed
on any separate trustee or co-trustee. In any jurisdiction in which the
indenture trustee is unable to perform certain acts, the separate trustee or co-
trustee will perform the acts solely at the direction of the indenture trustee.
DUTIES OF THE INDENTURE TRUSTEE
The indenture trustee will make no representations about the validity or
sufficiency of the indenture, the Notes (other than their execution and
authentication) or of any mortgage loans or related documents, and will not be
accountable for the use or application by the depositor or the master servicer
of any funds
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paid to the depositor or the master servicer on the mortgage loans, or the use
or investment of any monies by the master servicer before being deposited into a
collection account. So long as no Event of Default under the indenture has
occurred and is continuing, the indenture trustee will be required to perform
only those duties specifically required of it under the indenture and the sale
and servicing agreement. Generally, those duties will be limited to the receipt
of the various certificates, reports or other instruments required to be
furnished to the indenture trustee under the indenture, in which case it will
only be required to examine them to determine whether they conform to the
requirements of the indenture and the sale and servicing agreement. The
indenture trustee will not be charged with knowledge of the occurrence of any
occurrence that, with notice and/or lapse of time, would become an Event of
Default under the indenture, a Rapid Amortization Event or a failure by the
master servicer to perform its duties under the sale and servicing agreement
unless the indenture trustee has actual knowledge of the failure.
AMENDMENT
The indenture provides that, without the consent of any noteholder but with
the consent of the Note Insurer and notice to each Rating Agency, the Issuer and
the indenture trustee may enter into one or more supplemental indentures, in
form satisfactory to the indenture trustee, for any of the following purposes:
- to correct or amplify the description of any property at any time subject
to the lien of the indenture, or to confirm to the indenture trustee any
property subject or required to be subjected to the lien of the
indenture, or to subject additional property to the lien of the
indenture;
- to evidence the succession of another person to the Issuer pursuant to
the indenture and the assumption by the successor of the covenants of the
Issuer under the indenture and the Notes;
- to add to the covenants of the Issuer for the benefit of the noteholders
or the Note Insurer, or to surrender any right of the Issuer in the
indenture;
- to convey, transfer, assign, mortgage or pledge any property to the
indenture trustee;
- to cure any ambiguity, to correct or supplement any provision in the
indenture or in any supplemental indenture that may be inconsistent with
any other provision in the indenture or in any supplemental indenture or
other transaction documents;
- to modify, eliminate, or add to the provisions of this indenture (i) as
required by any Rating Agency to maintain or improve any rating of the
Notes, or (ii) to comply with any requirement imposed by the Code;
- to provide for the acceptance of the appointment of a successor trustee
under the indenture and to add to or change any of the provisions of the
indenture necessary to facilitate the administration of its trusts by
more than one trustee; or
- to modify, eliminate or add to the provisions of the indenture to the
extent necessary to effect the qualification of the indenture under the
Trust Indenture Act of 1939, as amended (the "TIA") or under any similar
federal statute enacted after the date of the indenture and to add to the
indenture other provisions required by the TIA.
The indenture also provides that without the consent of any noteholder but
with the consent of the Note Insurer, and provided that each Rating Agency has
been given 10 days notice and has notified the Issuer that the action will not
result in a reduction or withdrawal of its then current rating of the Notes, the
indenture trustee and the Issuer may enter into a supplemental indenture to
change in any manner the indenture or modify in any manner the rights of the
noteholders or the Note Insurer under the indenture, except that no supplemental
indenture may, without the consent of each noteholder affected thereby and
without the consent of the Note Insurer:
- change the date of payment of any installment of principal of or interest
on any Note, or reduce its principal amount, its interest rate, or its
redemption price, or change any place of payment where, or the coin or
currency in which, any Note or its interest is payable, or impair the
right to institute suit for the enforcement of the provisions of the
indenture requiring the application of funds
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available therefor to the payment of any such amount due on the Notes on
or after the respective dates they become due (or in the case of
redemption, after the redemption date);
- reduce the percentage of the outstanding principal balances of the Notes
the consent of the noteholders of which is required for any supplemental
indenture, or the consent of the noteholders of which is required for any
waiver of compliance with provisions of the indenture or defaults under
the indenture and their consequences or to direct the liquidation of the
trust estate;
- modify any provision of the amendment provisions of the indenture except
to increase any percentage specified in the indenture or to provide that
certain additional provisions of the indenture or the transaction
documents cannot be modified or waived without the consent of each
Noteholder affected thereby;
- modify any of the provisions of the indenture in such manner as to affect
the calculation of the amount of any payment of interest or principal due
on any Note on any payment date or affect the rights of the noteholders
to the benefit of any provisions for the mandatory redemption of the
Notes in the indenture; or
- permit the creation of any lien ranking before or on a parity with the
lien of the indenture on any part of the trust estate (except any change
in any mortgage's lien status in accordance with the sale and servicing
agreement) or, except as otherwise permitted or contemplated in the
indenture, terminate the lien of the indenture on any property at any
time subject thereto or deprive any noteholder of the security provided
by the lien of the indenture.
No supplemental indentures will be entered into unless the indenture
trustee shall have received an opinion of counsel to the effect that entering
into the supplemental indenture will not have any material adverse tax
consequences to the noteholders.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The indenture will cease to be of further effect (except for certain
exceptions specified in the indenture) and the indenture trustee, on demand of
and at the expense of the Issuer, will execute proper instruments acknowledging
satisfaction and discharge of the indenture, when:
(i) either:
(A) all Notes previously authenticated and delivered have been
delivered to the indenture trustee for cancellation (other than
Notes that have been destroyed, lost, stolen, replaced or paid as
provided in the indenture and Notes for whose payment money has
been deposited in trust or segregated and held in trust by the
indenture trustee and later repaid to the Issuer or discharged
from the trust as provided in the indenture); or
(B) all Notes not previously delivered to the indenture trustee for
cancellation have become payable, will become payable at their
scheduled maturity date within one year, or are to be called for
redemption within one year under arrangements satisfactory to the
indenture trustee for the giving of notice of redemption by the
indenture trustee in the name, and at the expense, of the Issuer,
and the Issuer has irrevocably deposited with the indenture
trustee sufficient cash or direct obligations of or obligations
guaranteed by the United States (which will mature before the date
the amounts are payable), in trust for these purposes;
(ii) the Issuer has paid all other sums payable under the indenture by the
Issuer; and
(iii) the Issuer has delivered to the indenture trustee an officer's
certificate, a counsel's opinion, and (if required by the TIA, the
indenture trustee or the Note Insurer) and independent accountant's
certificate each stating that all conditions precedent provided for
in the indenture relating to the satisfaction and discharge of the
indenture have been complied with.
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REDEMPTION OF THE NOTES
With the consent of the Note Insurer the transferor may purchase all the
mortgage loans then included in the trust estate on any payment date on or after
which the aggregate Note Principal Balance is less than or equal to 10% of the
aggregate Original Note Principal Balance. That purchase will result in the
redemption of the Notes in whole. The redemption price for the Notes will be the
Note Principal Balance plus accrued aggregate note interest through the day
before the redemption date plus interest accrued on the aggregate Unpaid
Investor Interest Shortfall, to the extent legally permissible. No premium or
penalty will be payable by the Issuer in any redemption of the Notes. "Unpaid
Investor Interest Shortfall" means the aggregate amount of note interest that
was accrued for a prior payment date and has not been paid to noteholders.
Payment on the Notes will only be made on presentation and surrender of the
Notes at the office or agency of the indenture trustee specified in the
redemption notice. If all of the noteholders do not surrender their Notes for
final payment and cancellation by the redemption date, the indenture trustee
will on that date cause the remaining amounts representing the redemption price
in the collection account not paid in redemption to noteholders to be withdrawn
and credited to the remaining noteholders by depositing the funds in a separate
escrow account for the benefit of the noteholders and the Issuer.
THE INDENTURE TRUSTEE
Bank One, National Association, a national banking association with its
principal place of business in Illinois, is the indenture trustee.
The commercial bank or trust company serving as indenture trustee may own
Notes and have normal banking relationships with the master servicer, the
transferor and the Note Insurer and their affiliates.
The indenture trustee may resign at any time, in which event the Issuer
must appoint a successor indenture trustee with the consent of the transferor
and the Note Insurer. The Note Insurer or noteholders representing not less than
51% of the aggregate outstanding note principal amount may remove the indenture
trustee at any time and the Issuer shall then appoint a successor indenture
trustee reasonably acceptable to the Note Insurer. The Issuer (or the transferor
if the Issuer fails to do so) shall remove the indenture trustee and appoint a
successor reasonably acceptable to the Note Insurer if the indenture trustee
ceases to be eligible to continue as such under the indenture, if the indenture
trustee becomes insolvent or if the indenture trustee otherwise becomes
incapable of acting. Any resignation or removal of the indenture trustee and
appointment of a successor indenture trustee will not become effective until
acceptance of the appointment by the successor indenture trustee.
DESCRIPTION OF THE SALE AND SERVICING AGREEMENT
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Notes, the depositor will transfer to the
indenture trustee, as designee of the Trust, the amounts to be deposited into
the Additional Loan Account and all of its interest in each mortgage loan
acquired on the closing date (including any Additional Balances arising in the
future), related credit line agreements, mortgages and certain other related
documents (collectively, the "Related Documents"), including all collections
received on each mortgage loan after the cut-off date (exclusive of payments of
accrued interest due on or before the cut-off date). The owner trustee,
concurrently with the transfer, will deliver the Notes to the depositor and the
transferor certificate to the transferor. Subsequent closings may occur for the
purchase of Additional Home Equity Loans on dates specified by the depositor
through December 15, 2000. On those closing dates the depositor will transfer to
the Trust all of its interest in the Additional Home Equity Loans being acquired
by the trust estate that day, the Related Documents and all collections received
on the Additional Home Equity Loans after a date designated in connection with
the transfer. Each mortgage loan transferred to the trust estate will be
identified on a mortgage loan schedule delivered to the indenture trustee
pursuant to the sale and servicing agreement.
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The mortgage loan 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 sale and servicing agreement will require that Countrywide deliver to
the depositor for delivery to the Trust, and the Trust will deliver to the
indenture trustee, the mortgage notes related to the mortgage loans endorsed in
blank and the Related Documents
- on the initial Closing Date, with respect to not less than 50% of the
mortgage loans transferred to the trust estate on that date;
- not later than the twenty-first day after the initial Closing Date, with
respect to not less than 40% of the initial mortgage loans transferred to
the trust estate on the initial Closing Date;
- not later than 30 days after the initial Closing Date, with respect to
the remaining initial mortgage loans;
- not later than the twenty-first day after the relevant closing date, with
respect to not less than 80% of the relevant Additional Home Equity
Loans; and
- not later than 30 days after the relevant closing date, with respect to
the remaining relevant Additional Home Equity Loans.
In lieu of delivery of original documentation, Countrywide may deliver
documents that have been imaged optically on delivery of an opinion of counsel
that the imaged documents are enforceable to the same extent as the originals
and do not impair the enforceability of the transfer to the trust estate of the
mortgage loans, provided the retention of the imaged documents in the delivered
format will not result in a reduction in the then current rating of the Notes
without regard to the Policy.
In addition, with respect to any of the mortgage loans, in lieu of
transferring the related mortgage to the indenture trustee as one of the Related
Documents, the depositor may at its discretion provide evidence that the related
mortgage is held through the MERS(R) System. In addition, the mortgage for some
or all of the mortgage loans in the Trust that are not already held in the
MERS(R) System may, at the discretion of the master servicer, in the future be
held through the MERS(R) System. For any mortgage held through the MERS(R)
System, the mortgage is recorded in the name of the Mortgage Electronic
Registration System, Inc. or MERS, as nominee for the owner of the mortgage
loan, and subsequent assignments of the mortgage were, or in the future may be,
at the discretion of the master servicer, registered electronically through the
MERS(R) System. For each of these mortgage loans, MERS serves as a mortgagee of
record on the mortgage solely as a nominee in an administrative capacity on
behalf of the owner trustee, and does not have any interest in that mortgage
loan.
The sale and servicing agreement will not require Countrywide to record
assignments of the mortgage loans to the owner trustee or the indenture trustee
so long as the rating of the long-term senior unsecured debt obligations of
Countrywide do not fall below a rating of "BBB" by Standard & Poor's or "Baa2"
by Moody's. If Countrywide's long-term senior unsecured debt obligations rating
does not satisfy the above-described standard (an "Assignment Event"),
Countrywide will have 90 days to record assignments of the mortgages for each
mortgage loan in favor of the indenture trustee (unless opinions of counsel
satisfactory to the Rating Agencies and the Note Insurer to the effect that
recordation of the assignments or delivery of the documentation is not required
in the relevant jurisdiction to protect the interest of the indenture trustee in
the mortgage loans).
In accordance with the sale and servicing agreement and a custodial
agreement dated as of November 28, 2000 among the Issuer, the indenture trustee
and other parties, within 180 days of the Closing Date with respect to the
mortgage loans acquired on the Closing Date and within 180 days of the relevant
closing date with respect to Additional Home Equity Loans, the indenture trustee
will review the mortgage loans and the Related Documents. If any mortgage loan
or Related Document is found to be defective in any material respect and the
defect is not cured within 90 days following notification of it to the sponsor
and the depositor by the indenture trustee, the sponsor must accept the transfer
of the mortgage loan from the trust estate. The principal balance of any
mortgage loan so transferred will be deducted from the loan 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 the
time (a
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"Transfer Deficiency"), the sponsor must either substitute an Eligible
Substitute Mortgage Loan or make a deposit into the collection account (the
"Transfer Deposit Amount") equal to the amount by which the transferor interest
would be reduced to less than the Minimum Transferor Interest at the time.
Except to the extent substituted for by an Eligible Substitute Mortgage Loan,
the transfer of the mortgage loan out of the trust estate will be treated under
the sale and servicing agreement as a payment in full of the mortgage loan. Any
Transfer Deposit Amount will be treated as a principal collection. No transfer
shall be considered to have occurred unless all required deposits to the
collection account are actually made. The obligation of the sponsor to accept a
transfer of a Defective Mortgage Loan and to make any required deposits are the
sole remedies for any defects in the mortgage loans and Related Documents
available to the owner trustee, the indenture trustee or the noteholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the sponsor for a defective mortgage loan that must, on the date of
substitution,
- have a principal balance (or in the case of a substitution of more than
one mortgage loan for a Defective Mortgage Loan, an aggregate principal
balance) outstanding that is not 10% more or less than the Transfer
Deficiency relating to the Defective Mortgage Loan;
- 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 the Defective
Mortgage Loan;
- have a loan rate based on the same index (prime rate) with adjustments to
the loan rate made on the same Interest Rate Adjustment Date as that of
the Defective Mortgage Loan;
- have a margin that is not less than the margin of the Defective Mortgage
Loan and not more than 100 basis points higher than the margin for the
Defective Mortgage Loan;
- have a mortgage of the same or higher level of priority as the mortgage
relating to the Defective Mortgage Loan;
- have a remaining term to maturity not more than six months earlier and
not more than 60 months later than the remaining term to maturity of the
Defective Mortgage Loan;
- comply with each representation and warranty regarding the mortgage loans
in the sale and servicing agreement (deemed to be made as of the date of
substitution);
- have an original combined loan-to-value ratio not greater than that of
the Defective Mortgage Loan; and
- satisfy certain other conditions specified in the sale and servicing
agreement.
The sponsor will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
indenture trustee, the Trust and the Note Insurer with respect to each mortgage
loan (e.g., cut-off date principal balance and loan rate). In addition, the
sponsor will represent and warrant on the Closing Date that at the time of
transfer to the depositor, the sponsor has transferred or assigned all of its
interest in each mortgage loan and the Related Documents, free of any lien, and
likewise represent and warrant on each relevant closing date with respect to
each Additional Home Equity Loan. Upon discovery of a breach of any
representation and warranty that materially and adversely affects the interests
of the Trust, the indenture trustee, the noteholders or the Note Insurer in the
related mortgage loan and Related Documents, the sponsor 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 sponsor must accept a transfer of
the Defective Mortgage Loan from the Trust. The same procedure and limitations
as in the second preceding paragraph for the transfer of Defective Mortgage
Loans will apply to the transfer of a mortgage loan that must be transferred
because of a breach of a representation or warranty in the sale and servicing
agreement that materially and adversely affects the interests of the
noteholders.
Mortgage loans required to be transferred to the sponsor as described in
the preceding paragraphs are referred to as "Defective Mortgage Loans."
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PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT
The master servicer will establish and maintain a collection account in
trust for the noteholders, the transferor and the Note Insurer, as their
interests may appear. The collection account will be an Eligible Account. Except
for 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 all amounts collected on the mortgage loans in the
collection account within two business days of receipt unless the master
servicer qualifies for monthly depositing. Mortgage loan collections may be
remitted to the collection account by the master servicer on a monthly basis not
later than the business day before the related payment date so long as
Countrywide is the master servicer, Countrywide's long-term senior unsecured
debt obligations are rated at least equal to "Baa2" by Moody's and "BBB" by
Standard & Poor's, and the Note Insurer's claims-paying ability is rated "Aaa"
by Moody's and "AAA" by Standard & Poor's.
Amounts deposited in the collection account may be invested in Eligible
Investments maturing no later than one business day before the next payment
date. Any income realized from these investments belong to the master servicer
and any losses incurred on these investments that reduce principal will be
deposited in the collection account by the master servicer out of its own funds.
Not later than the third business day before each payment date (the
"Determination Date"), the master servicer will notify the indenture trustee of
the amount of the deposit to be included in funds available for the related
payment date.
An "Eligible Account" is
- an account that is maintained with a depository institution whose debt
obligations throughout the time of any deposit in it have the highest
short-term debt rating by the Rating Agencies,
- an account with a depository institution having a minimum long-term
unsecured debt rating of "BBB" by Standard & Poor's and "Baa3" by
Moody's, which accounts are fully insured by either the Savings
Association Insurance Fund or the Bank Insurance Fund of the Federal
Deposit Insurance Corporation,
- a segregated trust account maintained with the indenture trustee or an
affiliate of the indenture trustee in its fiduciary capacity or
- an account otherwise acceptable to each Rating Agency and the Note
Insurer as evidenced by a letter from each Rating Agency and the Note
Insurer to the indenture trustee, without reduction or withdrawal of each
Rating Agency's then current ratings of the Notes without regard to the
Policy.
Eligible Investments are limited to:
- obligations of the United States;
- obligations of any agency of the United States the timely payment of
which are backed by the full faith and credit of the United States;
- general obligations of or obligations guaranteed by any state of the
United States or the District of Columbia receiving the highest long-term
debt rating of each Rating Agency, or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to
the Notes by each Rating Agency without regard to the Policy;
- commercial paper issued by Countrywide Home Loans, Inc. or any of its
affiliates that is rated no lower than "A-1" by Standard & Poor's and
"P-2" by Moody's if the long-term debt of Countrywide Home Loans, Inc. is
rated at least A3 by Moody's, or such lower ratings as will not result in
the downgrading or withdrawal of the rating then assigned to the Notes by
any Rating Agency without regard to the Policy;
- commercial or finance company paper that is then receiving the highest
commercial or finance company paper rating of each Rating Agency, or such
lower rating as will not result in the downgrading or withdrawal of the
ratings then assigned to the Notes by any Rating Agency without regard to
the Policy;
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- certificates of deposit, demand or time deposits, or bankers' acceptances
issued by any depository institution or trust company incorporated under
the laws of the United States or any of its states and subject to
supervision and examination by federal or state banking authorities, if
the commercial paper or long term unsecured debt obligations of the
depository institution or trust company (or in the case of the principal
depository institution in a holding company system, the commercial paper
or long-term unsecured debt obligations of the holding company, but only
if Moody's is not a Rating Agency) are then rated in one of the two
highest long-term and the highest short-term ratings of each Rating
Agency for the securities, or such lower ratings as will not result in
the downgrading or withdrawal of the rating then assigned to the Notes by
any Rating Agency without regard to the Policy;
- demand or time deposits or certificates of deposit issued by any bank or
trust company or savings institution to the extent that the deposits are
fully insured by the FDIC;
- guaranteed reinvestment agreements issued by any bank, insurance company
or other corporation containing, at the time of the issuance of the
agreements, such conditions as will not result in the downgrading or
withdrawal of the rating then assigned to the Notes by any Rating Agency
without regard to the Policy;
- repurchase obligations with respect to any security described in the
first and second bullet points, in either case entered into with a
depository institution or trust company (acting as principal) described
in the fifth bullet point;
- securities (other than stripped bonds, stripped coupons, or instruments
sold at a purchase price in excess of 115% of their face amount) bearing
interest or sold at a discount issued by any corporation incorporated
under the laws of the United States or any of its states that, at the
time of the investment, have one of the two highest ratings of each
Rating Agency (except if the Rating Agency is Moody's, the rating shall
be the highest commercial paper rating of Moody's for the securities), or
such lower rating as will not result in the downgrading or withdrawal of
the rating then assigned to the Notes by any Rating Agency without regard
to the Policy, as evidenced by a signed writing delivered by each Rating
Agency;
- interests in any money market fund that at the date of acquisition of the
interests in the fund and throughout the time the interests are held has
the highest applicable rating by each Rating Agency, or such lower rating
as will not result in the downgrading or withdrawal of the ratings then
assigned to the Notes by each Rating Agency without regard to the Policy;
- short term investment funds sponsored by any trust company or national
banking association incorporated under the laws of the United States or
any of its states that on the date of acquisition has been rated by each
Rating Agency in their respective highest applicable rating category, or
such lower rating as will not result in the downgrading or withdrawal of
the ratings then assigned to the Notes by each Rating Agency without
regard to the Policy; and
- any other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency that will
not result in the downgrading or withdrawal of the rating then assigned
to the Notes by any Rating Agency without regard to the Policy, as
evidenced by a signed writing delivered by each Rating Agency.
However, no instrument is an Eligible Investment if it evidences the right to
receive
- interest only payments on the obligations underlying it or
- both principal and interest payments derived from obligations underlying
the instrument and the interest and principal payments from the
instrument provide a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations.
No instrument otherwise described as an Eligible Investment may be purchased at
a price greater than par if it may be prepaid or called at a price less than its
purchase price before its stated maturity.
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ALLOCATIONS AND COLLECTIONS
All collections on the mortgage loans will generally be allocated in
accordance with the credit line agreements between interest and principal.
Interest collections for any payment date will be equal to the amounts collected
during the related Collection Period allocated to interest pursuant to the
credit line agreements, including portions of net liquidation proceeds,
insurance proceeds and optional advances made by the master servicer pursuant to
the sale and servicing agreement, less
- servicing fees for the related Collection Period and
- amounts payable to the master servicer pursuant to the sale and servicing
agreement as reimbursement of optional advances of the interest component
of any delinquent monthly payments on the mortgage loans.
Principal collections for any payment date will be equal to the sum of
- the amounts collected during the related Collection Period allocated to
principal pursuant to the credit line agreements, including portions of
net liquidation proceeds, and
- any Transfer Deposit Amounts.
The Transfer Deposit Amount refers to an amount which may be deposited by
the sponsor into the collection account equal to the amount by which the
transferor interest would be reduced to less than the Minimum Transferor
Interest under certain circumstances where the sponsor is required to accept the
transfer of defective mortgage loans from the trust estate. See "Description of
the Sale and Servicing Agreement -- Assignment of Mortgage Loans" in this
prospectus supplement.
Liquidation proceeds are the proceeds (excluding any amounts drawn on the
Policy) received in connection with the liquidation of any mortgage loan,
whether through trustee's sale, foreclosure sale or otherwise. Net liquidation
proceeds of a mortgage loan are the liquidation proceeds reduced by related
expenses, but not in excess of the principal balance of the mortgage loan plus
accrued and unpaid interest thereon to the end of the Collection Period during
which the mortgage loan became a Liquidated Mortgage Loan.
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law and to certain limitations described in the sale
and servicing agreement, the master servicer may change the terms of the credit
line agreements at any time provided that the changes
- do not materially and adversely affect the interest of the noteholders,
the transferor or the Note Insurer, and
- are consistent with prudent business practice.
In addition, the sale and servicing agreement permits the master servicer,
within certain limits, to increase the credit limit of the related mortgage loan
or reduce the margin for the mortgage loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
To permit the transferor to reduce the transferor interest any time the
transferor interest exceeds the level required by the Note Insurer and the
Rating Agencies, on any payment date the transferor may, but is not obligated
to, remove on the payment date (the "Transfer Date") certain mortgage loans
without notice to the noteholders. The transferor is permitted to designate the
mortgage loans to be removed. Mortgage loans so designated will only be removed
upon satisfaction of the following conditions:
- no Rapid Amortization Event has occurred;
- the transferor interest as of the Transfer Date (after giving effect to
the removal) exceeds the Minimum Transferor Interest;
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- the transfer of any mortgage loans on any Transfer Date during the
Managed Amortization Period will not, in the reasonable belief of the
transferor, cause a Rapid Amortization Event or an event that with notice
or lapse of time or both would constitute a Rapid Amortization Event to
occur;
- the transferor delivers to the indenture trustee a mortgage loan schedule
containing a list of all mortgage loans remaining in the loan pool after
the removal and the master servicer shall have marked the electronic
ledger to show that the transferred mortgage loans are no longer owned by
the Trust or included in the trust estate;
- the transferor represents and warrants that no selection procedures that
the transferor reasonably believes are adverse to the interests of the
noteholders or the Note Insurer were used by the transferor in selecting
the mortgage loans;
- in connection with each retransfer of mortgage loans, the Rating Agencies
and the Note Insurer shall have been notified of the proposed transfer
and before the Transfer Date each Rating Agency has notified the
transferor, the indenture trustee and the Note Insurer in writing that
the transfer would not result in a reduction or withdrawal of the ratings
assigned to the Notes without regard to the Policy; and
- the transferor shall have delivered to the owner trustee, the indenture
trustee and the Note Insurer an officer's certificate confirming the six
conditions preceding this one.
As of any date of determination within any Collection Period, the "Minimum
Transferor Interest" is an amount equal to the lesser of (a) 1.5% of the loan
balance at the beginning of the immediately preceding Collection Period and (b)
0.75% of the cut-off date loan pool balance plus the original balance of the
Additional Loan Account.
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 sale and
servicing agreement, follow collection procedures it follows servicing 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.
The master servicer may arrange with a borrower of a mortgage loan a
schedule for the payment of interest due and unpaid for a period so long as the
arrangement is consistent with the master servicer's policies with respect to
mortgage loans it owns or services. In accordance with the sale and servicing
agreement, the master servicer may consent under certain circumstances to the
placing of a subsequent senior lien ahead of a mortgage loan.
HAZARD INSURANCE
The sale and servicing agreement provides that the master servicer maintain
hazard insurance on the mortgaged properties relating to the mortgage loans.
While the related credit line agreements generally require borrowers to maintain
hazard insurance, the master servicer will not monitor the maintenance of hazard
insurance.
The sale and servicing agreement requires the master servicer to maintain
for any mortgaged property relating to a mortgage loan acquired in foreclosure
of a mortgage loan, or by deed in lieu of foreclosure, hazard insurance with
extended coverage in an amount equal to the lesser of
- the maximum insurable value of the mortgaged property or
- the outstanding balance of the mortgage loan plus the outstanding balance
on any mortgage loan senior to the 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.
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The sale and 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 the mortgaged properties. If the
blanket policy contains a deductible clause, the master servicer must deposit in
the collection account the sums that would have been deposited but for the
deductible. The master servicer will satisfy these requirements by maintaining a
blanket policy. As stated 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, their basic
terms are dictated by state laws and most of them typically do not cover any
physical damage resulting from 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 ON DEFAULTED MORTGAGE LOANS
The master servicer will foreclose on or otherwise comparably convert to
ownership mortgaged properties securing mortgage loans that come into default
when, in accordance with applicable servicing procedures under the sale and
servicing agreement, no satisfactory arrangements can be made for the collection
of delinquent payments. In connection with a foreclosure or other conversion,
the master servicer will follow practices it deems appropriate and in keeping
with its general mortgage servicing activities. The master servicer need not
expend its own funds in connection with any foreclosure or other conversion,
correction of default on a related senior mortgage loan, or restoration of any
property unless, in its sole judgment, the expenditure of funds in the
foreclosure, correction or restoration will increase net liquidation proceeds.
The master servicer will be reimbursed out of liquidation proceeds and, if
necessary, from other collections on the mortgage loans for advances of its own
funds as liquidation expenses before any net liquidation proceeds are paid to
noteholders or the transferor.
OPTIONAL PURCHASE OF DEFAULTED LOAN
The master servicer may, at its option, purchase from the Trust any
mortgage loan that is delinquent in payment for 91 days or more. Any purchase of
a delinquent mortgage loan will be at a price equal to 100% of the principal
balance of the mortgage loan plus accrued interest 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 the purchase proceeds are to be paid to
noteholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The master servicer will receive from interest received on the mortgage
loans for each Collection Period a portion of the interest collections as a
monthly servicing fee in the amount equal to 0.50% per annum on the aggregate
principal balances of the mortgage loans as of the first day of the related
Collection Period. All assumption fees, late payment charges, termination fees
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 estate and incurred by it in connection with its responsibilities under
the sale and servicing 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, its right of reimbursement
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being before the rights of noteholders to receive any related net liquidation
proceeds and, if necessary, other collections on the mortgage loans.
EVIDENCE AS TO COMPLIANCE
The sale and servicing agreement provides for delivery by the last day of
May in each year, beginning May 31, 2001, to the indenture trustee, the Note
Insurer and the Rating Agencies 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 sale and servicing agreement throughout the
preceding fiscal year, except as specified in the statement.
By the last day of May of each year, beginning May 31, 2001, 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 indenture trustee, the Note Insurer and the
Rating Agencies to the effect that it has examined certain documents and the
records relating to servicing of the mortgage loans under the sale and servicing
agreement and that, on the basis of its examination, the firm believes that such
servicing was conducted in compliance with the sale and servicing agreement
except for exceptions the firm believes to be immaterial and any other
exceptions specified in the report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The sale and servicing agreement provides that the master servicer may not
resign as master servicer, except in connection with a permitted transfer of
servicing, unless
(a) its obligations as master servicer 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
(b) on satisfaction of the following conditions:
- the master servicer has proposed a successor servicer to the indenture
trustee in writing and the proposed successor servicer is reasonably
acceptable to the indenture trustee;
- the Rating Agencies have confirmed to the indenture trustee that the
appointment of the proposed successor servicer as the master servicer
will not result in the reduction or withdrawal of the then current
rating of the Notes without regard to the Policy; and
- the proposed successor servicer is reasonably acceptable to the Note
Insurer.
No resignation of the master servicer will become effective until the indenture
trustee or a successor servicer has assumed the master servicer's duties under
the sale and servicing agreement.
The master servicer may perform any of its obligations under the sale and
servicing agreement through subservicers or delegates, which may be affiliates
of the master servicer. Notwithstanding any subservicing arrangement, the master
servicer will remain liable to the indenture trustee, the noteholders, the
transferor and the Note Insurer for the master servicer's obligations under the
sale and servicing agreement, without any diminution of its obligations and as
if the master servicer itself were performing the obligations.
The sale and servicing agreement provides that the master servicer will
indemnify the Trust and the indenture trustee against any loss, liability,
expense, damage or injury suffered as a result of the master servicer's actions
or omissions in connection with the servicing and administration of the mortgage
loans that are not in accordance with the sale and servicing agreement. The sale
and servicing agreement provides that other than the indemnification by the
master servicer neither the master servicer nor their directors, officers,
employees or agents will be liable to the trust estate, the owner trustee, the
transferor, the noteholders for any action taken or for refraining from taking
any action in good faith pursuant to the sale and servicing agreement. However,
neither the master servicer nor its directors, officers, employees or agents
will be protected against any liability that would otherwise be imposed for
misfeasance, bad faith or gross negligence of the master servicer in the
performance of its duties under the sale and servicing
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agreement or for reckless disregard of its obligations under the sale and
servicing agreement. In addition, the sale and servicing agreement provides that
the master servicer need not appear in, prosecute or defend any legal action
that is not incidental to its servicing responsibilities under the sale and
servicing agreement and that in its opinion may expose it to any expense or
liability. The master servicer may, in its sole discretion, undertake any legal
action that it deems appropriate with respect to the sale and servicing
agreement and the interests of the noteholders.
EVENTS OF SERVICING TERMINATION
The "Events of Servicing Termination" are:
(i) any failure by the master servicer to deposit in the collection
account any deposit required to be made under the sale and servicing
agreement, which failure continues unremedied either beyond the
relevant payment date or for five business days (or, if the master
servicer is permitted to remit collections on the mortgage loans to
the collection account on a monthly basis as described under
"-- Payments on Mortgage Loans; Deposits to Collection Account," three
business days) after the giving of written notice of the failure to
the master servicer by the indenture trustee, or to the master
servicer and the indenture trustee by the Note Insurer or noteholders
of at least 25% of the aggregate Note 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
Notes or the sale and servicing agreement that, in each case,
materially and adversely affects the interests of the noteholders or
the Note Insurer and continues unremedied for 60 days after the
giving of written notice of the failure to the master servicer by the
indenture trustee, or to the master servicer and the indenture
trustee by the Note Insurer or noteholders of at least 25% of the
aggregate Note Principal Balance; or
(iii) certain events of insolvency, liquidation, inability to pay its debts
or similar proceedings relating to the master servicer.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of five or more business days or
referred to under clause (ii) above for a period of 60 or more days, will not
constitute an Event of Servicing Termination if the delay or failure could not
be prevented by the exercise of reasonable diligence by the master servicer and
the delay or failure was caused by an act of God or other similar occurrence.
The master servicer shall not be relieved from using its best efforts to perform
its obligations in a timely manner in accordance with the sale and servicing
agreement by an act of God or other similar occurrence, and the master servicer
shall provide the indenture trustee, the depositor, the transferor, the Note
Insurer and the noteholders prompt notice of any failure or delay by it,
together with a description of its efforts to perform its obligations.
RIGHTS AFTER AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either the
indenture trustee, or noteholders of at least 51% of the aggregate Note
Principal Balance (with the consent of the Note Insurer) or the Note Insurer,
may terminate all of the rights and obligations of the master servicer under the
sale and servicing agreement, whereupon the indenture trustee will succeed to
all the obligations of the master servicer under the sale and servicing
agreement and will be entitled to similar compensation arrangements. If the
indenture 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 sale and servicing agreement and
having a net worth of at least $15,000,000 and acceptable to the Note Insurer to
act as successor to the master servicer under the sale and servicing agreement.
Pending such appointment, the indenture trustee must act as master servicer
unless prohibited by law. The successor master servicer will be entitled to
receive the same compensation that the master servicer would otherwise have
received (or such lesser compensation as the indenture trustee and the successor
may agree on). A trustee in bankruptcy or the master servicer as
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debtor in possession may be empowered to prevent the termination and replacement
of the master servicer where the Event of Servicing Termination that has
occurred is an insolvency event.
TERMINATION
The obligations and responsibilities of the sponsor, the master servicer,
the depositor, the Trust, and the indenture trustee under the sale and servicing
agreement (other than the obligation of the master servicer to send certain
notices) will terminate on the earlier of (i) the transfer of all the mortgage
loans as described below, (ii) the termination of the trust agreement or the
indenture, and (iii) the final payment or other liquidation of the last mortgage
loan remaining in the trust estate or the disposition of all property acquired
in foreclosure or by deed in lieu of foreclosure of any mortgage loan.
With the consent of the Note Insurer, the mortgage loans will be subject to
optional transfer to the transferor from the payment date immediately before
which the aggregate Note Principal Balance is reduced to an amount less than or
equal to 10% of the aggregate Original Note Principal Balance. The transfer
price will be equal to the sum of
- the Note Principal Balance of the Notes plus accrued interest at the
applicable note rate through the day preceding the final payment date and
- accrued interest on any aggregate Unpaid Investor Interest Shortfall, to
the extent legally permissible.
AMENDMENT
The sale and servicing agreement may be amended from time to time by the
sponsor, the master servicer, the depositor, the owner trustee and the indenture
trustee, with the consent of the Note Insurer, if the Rating Agencies have been
given 10 days notice and have notified the Trust that the amendment will not
result in a reduction or withdrawal of the then current rating of the Notes. The
sale and servicing agreement may also be amended from time to time by the
sponsor, the master servicer, the depositor, the Trust and the indenture
trustee, with the consent of the Note Insurer and of Holders of not less than
66 2/3% of the aggregate outstanding principal amounts of the Notes.
DESCRIPTION OF THE PURCHASE AGREEMENT
The mortgage loans to be transferred to the Trust by the depositor will be
purchased by the depositor from the sponsor pursuant to a purchase agreement to
be entered into between the depositor, as purchaser of the mortgage loans, and
the sponsor, as transferor of the mortgage loans. Under the purchase agreement,
the sponsor will agree to transfer the mortgage loans and related Additional
Balances to the depositor. Pursuant to the sale and servicing agreement, the
mortgage loans will be immediately transferred by the depositor to the Trust,
and the depositor will assign its rights under the purchase agreement to the
Trust. The following is a description of the material provisions of the purchase
agreement.
TRANSFERS OF MORTGAGE LOANS
Pursuant to the purchase agreement, the sponsor will transfer to the
depositor, all of its interest in the mortgage loans (including any Additional
Home Equity Loans) and all of the Additional Balances subsequently created. The
purchase price of the mortgage loans is a specified percentage of their face
amount 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 Additional Balance.
REPRESENTATIONS AND WARRANTIES
The sponsor will represent and warrant to the depositor that, among other
things, as of the Closing Date and each subsequent 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 sponsor will also
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represent and warrant to the depositor that, among other things, immediately
before the sale of the mortgage loans to the depositor, the sponsor was the sole
owner and holder of the mortgage loans free and clear of any liens and security
interests. The sponsor will make similar representations and warranties in the
sale and servicing agreement. The sponsor will also represent and warrant to the
depositor that, among other things, as of the Closing Date, the purchase
agreement constitutes a valid and legally binding obligation of the sponsor and
a valid sale to the depositor of all interest of the sponsor in the mortgage
loans and their proceeds.
ASSIGNMENT TO TRUST
The sponsor will expressly acknowledge and consent to the depositor's
transfer of its rights relating to the mortgage loans under the sale and
servicing agreement to the Trust and the security interest granted in those
rights under the indenture. The sponsor also will agree to perform its
obligations under the purchase agreement for the benefit of the Trust.
TERMINATION
The obligations of the depositor and the sponsor under the purchase
agreement will terminate on the termination of the indenture.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Notes will be applied
by the depositor towards the purchase of the initial mortgage loans and the
deposit to the Additional Loan Account.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes the material U.S. federal income
tax aspects of the purchase, ownership and disposition of the Notes, 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 beneficial owners of the Notes in light
of their personal investment circumstances or to certain types of beneficial
owners of the Notes 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 Notes.
CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the application of existing law to the facts established by the
indenture and other relevant documents and assuming compliance with the
indenture as in effect on the date of issuance of the Notes, Brown & Wood LLP,
special tax counsel to the depositor ("Tax Counsel"), is of the opinion that the
Notes will be treated as debt instruments for federal income tax purposes as of
such date. Accordingly, upon issuance, the Notes will be treated as "Debt
Securities" as described in the prospectus. Furthermore, special tax counsel to
the depositor is of the opinion that neither the Trust nor any portion of the
Trust will be treated as either an association or a publicly traded partnership
taxable as a corporation or as a taxable mortgage pool. See "Material Federal
Income Tax Consequences" in the prospectus.
THE TRANSFEROR AND THE NOTEHOLDERS EXPRESS IN THE INDENTURE THEIR INTENT
THAT, FOR APPLICABLE TAX PURPOSES, THE NOTES WILL BE INDEBTEDNESS SECURED BY THE
MORTGAGE LOANS. The transferor, the depositor and the noteholders, by accepting
the Notes, and each Note Owner by its acquisition of a beneficial interest in a
Note, have agreed to treat the Notes 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
principal balances of the mortgage loans for financial accounting 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 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 beneficial owners of the Notes.
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 Notes as debt or otherwise makes the
rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF BENEFICIAL OWNERS
Assuming that the beneficial owners of the Notes are holders of debt
obligations for U.S. federal income tax purposes, the Notes generally will be
taxable as Debt Securities. See "Material Federal Income Tax Consequences" in
the prospectus.
While it is not anticipated that the Notes will be issued at a greater than
de minimis discount, under Treasury regulations (the "OID Regulations") it is
possible that the Notes 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 Notes
would be includible in income of beneficial owners of the Notes as OID, but
would not be includible again when the interest is actually received. See
"Material 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 Notes 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 Notes will
be treated as Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE NOTES 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 the IRS could assert that, for purposes of the Code, the transaction
contemplated by this prospectus supplement and the accompanying prospectus with
respect to the Notes constitutes a sale of the mortgage loans (or an interest
therein) to the beneficial owners of the Notes and that the proper
classification of the legal relationship between the transferor and the
beneficial owners of the Notes 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
Notes will be treated as indebtedness in the hands of the noteholders 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.
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 estate 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 payment to the beneficial owners of
the Notes. Cash payments to the beneficial owners of the Notes generally would
be treated as dividends for tax purposes to the extent of such corporation's
earnings and profits.
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If the transaction were treated as creating a partnership between the
beneficial owners of the Notes 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 Note Owner would be taxed 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 Note Owner could
differ if the Notes were held to constitute partnership interests rather than
indebtedness. Assuming that all of the provisions of the trust agreement, as in
effect on the date of the issuance, are complied with, it is the opinion of Tax
Counsel that the trust estate will not be treated as either an association or a
partnership taxable as a corporation or as a taxable mortgage pool.
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. 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 entity's debt obligations (or an underlying
arrangement), payments on the debt obligations bear a relationship to the debt
instruments held by the entity.
Assuming that all of the provisions of the sale and servicing agreement and
the trust agreement, as in effect on the date of issuance, are complied with,
Tax Counsel is of the opinion that neither the trust estate nor any portion of
the trust estate will be a taxable mortgage pool under Section 7701(i) of the
Code because the Trust will issue only a single class of indebtedness.
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 sale and servicing agreement and the trust
agreement is a taxable mortgage pool, the arrangement would be subject to U.S.
federal corporate income tax on its taxable income generated by ownership of the
mortgage loans. That a tax might reduce amounts available for payments to
beneficial owners of the Notes. The amount of the tax would depend upon whether
payments to beneficial owners of the Notes 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 Note to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that the interest is not effectively connected with a trade or business of the
recipient in the United States and the Note Owner provides the required foreign
person information certification. See "Material Federal Income Tax
Consequences -- Tax Treatment of Foreign Investors" in the prospectus.
Interest paid (or accrued) to a noteholder who is a non-U.S. Person will be
considered "portfolio interest" and generally will not be subject to United
States federal income tax and withholding tax, provided, that (i) the interest
is not effectively connected with the conduct of a trade or business within the
United States by the non-U.S. Person, (ii) the non-U.S. Person provides the
trust estate or other person who is otherwise required to withhold U.S. tax with
respect to the Note with an appropriate statement (on Form W-8 or other similar
form), signed under penalties of perjury, certifying that the beneficial owner
of the Note is a foreign person and providing that non-U.S. 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 non-U.S. Person that owns that interest in the mortgage loan. If the
interest does not constitute portfolio interest, then it will be subject to U.S.
federal income and withholding tax at a rate of 30%, unless reduced or
eliminated pursuant to an applicable tax treaty and the non-U.S. Person provides
the trust estate, or an organization or financial institution described above,
with an appropriate statement (e.g., a Form 1001), signed under penalties of
perjury, to that effect.
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Final regulations dealing with backup withholding and information reporting
on income paid to foreign persons and related matters (the "New Withholding
Regulations") were published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transition rules. THE DISCUSSION ABOVE
DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S.
PERSONS WHO OWN INTERESTS IN MORTGAGE LOANS ARE STRONGLY URGED TO CONSULT THEIR
OWN TAX ADVISOR WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS.
If the interests of the beneficial owners of the Notes 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 the
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, a corporate 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 the foreign partner's U.S. income tax
liability.
In addition, the interest paid on Notes could be subject to a 30%
withholding tax (or lower treaty rate) either because the interest on the
mortgage loans does not appear to satisfy the requirements to be treated as
"portfolio interest" under the Code, or because, even if the mortgage loan
interest were to be treated as portfolio interest, interest payments on the
Notes could be treated as "guaranteed payments" within the meaning of the
partnership provisions of the Code.
If the trust estate were taxable as a corporation, payments to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless the rate were reduced by an applicable
tax treaty.
BACKUP WITHHOLDING
Certain beneficial owners of the Notes may be subject to backup withholding
at the rate of 31% with respect to interest paid on the Notes if the Note Owner,
upon issuance, fails to supply the indenture 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 indenture trustee or his broker with a certified statement, under penalty of
perjury, that he is not subject to backup withholding.
The indenture trustee will be required to report annually to the IRS, and
to each noteholder of record, the amount of interest paid (and OID accrued, if
any) on the Notes (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, certain tax-exempt organizations or nonresident
aliens who provide certification as to their status as nonresidents). As long as
the only "noteholder" of record is Cede & Co., as nominee for DTC, beneficial
owners of the Notes and the IRS will receive tax and other information including
the amount of interest paid on the Notes owned from participants and indirect
participants rather than from the indenture trustee. (The indenture 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 Note Owner will be required to provide, under penalty
of perjury, a note 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 Note 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.
As previously mentioned, the New Withholding Regulations were published in
the Federal Register on October 14, 1997 and generally will be effective for
payments made after December 31, 2000, subject to certain transition rules. THE
DISCUSSION ABOVE DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO
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<PAGE> 71
ACCOUNT. PROSPECTIVE NON-U.S. PERSONS WHO OWN REGULAR NOTES ARE STRONGLY URGED
TO CONSULT THEIR OWN TAX ADVISOR WITH RESPECT TO THE NEW WITHHOLDING
REGULATIONS.
STATE TAXES
The depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Notes under the tax laws of any state.
Investors considering an investment in the Notes 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 NOTES.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements that are subject to ERISA or corresponding provisions of the
Code, including individual retirement accounts and annuities, Keogh plans and
collective investment funds in which the plans, accounts, annuities or
arrangements are invested, persons acting on behalf of a plan, or persons using
the assets of a plan, should review carefully with their legal advisors whether
the purchase or holding of the Notes could either give rise to a transaction
that is prohibited under ERISA or the Code or cause the collateral securing the
Notes to be treated as plan assets for purposes of regulations of the Department
of Labor in 29 C.F.R. 2510.3-101 (the "Plan Asset Regulation").
PROHIBITED TRANSACTIONS
General. Section 406 of ERISA and Section 4975 of the Code prohibit parties
in interest or disqualified persons with respect to a plan from engaging in
certain transactions (including loans) involving the plan and its assets unless
a statutory, regulatory 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 or disqualified persons which engage in non-exempt prohibited
transactions.
Plan Asset Regulation and The Notes. The United States Department of Labor
has issued the Plan Asset Regulation 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 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 the 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 the 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, the assets of the entity will
be treated as assets of the plan investor unless certain exceptions not
applicable here apply.
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." If the Notes are not treated as equity interests in the issuer for
purposes of the Plan Asset Regulation, a plan's investment in the Notes would
not cause the assets of the issuer to be deemed plan assets. Based on the
features of the Notes, their ratings, and the opinion of Tax Counsel that they
will be treated as indebtedness for federal income tax purposes, the issuer
believes that the Notes will be treated as indebtedness without substantial
equity features for ERISA purposes. Nevertheless, the issuer, the master
servicer, a servicer, the indenture trustee and the underwriter may be the
sponsor of or investment advisor with respect to one or more plans. Because they
may receive certain benefits in connection with the sale of the Notes, the
purchase of Notes using plan assets over which any of them has investment
authority might be deemed to be a violation of the prohibited transaction rules
of ERISA and the Code for which no exemption may be available.
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<PAGE> 72
The Notes may not be purchased with the assets of a plan if the issuer, the
master servicer, a servicer, the indenture trustee, the underwriter or any of
their respective affiliates:
- has investment or administrative discretion with respect to the plan
assets;
- has authority or responsibility to give, or regularly gives, investment
advice with respect to the plan assets, for a fee and pursuant to an
agreement or understanding that the advice (i) will serve as a primary
basis for investment decisions with respect to the plan assets, and (ii)
will be based on the particular investment needs for the plan; or
- is an employer maintaining or contributing to the plan.
If the Notes are deemed to be equity interests in the issuer, the issuer
could be considered to hold plan assets because of a plan's investment in the
Notes. In that event, the master servicer and other persons exercising
management or discretionary control over the assets of the issuer may be deemed
to be fiduciaries with respect to investing plans and thus 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 issuer's assets. We cannot
assure you that any statutory, regulatory or administrative exemption will apply
to all prohibited transactions that might arise in connection with the purchase
or holding of a equity interest in the issuer by a plan.
Without regard to whether the Notes are considered to be equity interests
in the issuer, certain affiliates of the issuer might be considered or might
become parties in interest or disqualified persons with respect to a plan. In
this case, the acquisition or holding of Notes by or on behalf of the plan could
be considered to give rise to a prohibited transaction within the meaning of
ERISA and the Code, unless they were subject to one or more exemptions such as
Prohibited Transaction Class Exemption ("PTCE") 84-14, which exempts certain
transactions effected on behalf of a plan by a "qualified professional asset
manager"; PTCE 90-1, which exempts certain transactions involving insurance
company pooled separate accounts; PTCE-91-38, which exempts certain transactions
involving bank collective investment funds; PTCE 95-60, which exempts certain
transactions involving insurance company general accounts; or PTCE 96-23, which
exempts certain transactions effected on behalf of a plan by certain "in-house
asset managers." Each purchaser or transferee of a Note that is a plan investor
shall be deemed to have represented that the relevant conditions for exemptive
relief under at least one of the foregoing exemptions or a similar exemption
have been satisfied.
The sale of Notes to a plan is in no respect a representation by the issuer
or the underwriter that this investment meets all relevant legal requirements
with respect to investments by plans generally or any particular plan, or that
this investment is appropriate for plans generally or any particular plan.
ANY PLAN INVESTOR PROPOSING TO INVEST IN THE NOTES SHOULD CONSULT WITH ITS
COUNSEL TO CONFIRM THAT THE INVESTMENT WILL NOT RESULT IN A PROHIBITED
TRANSACTION THAT IS NOT SUBJECT TO AN EXEMPTION AND WILL SATISFY THE OTHER
REQUIREMENTS OF ERISA AND THE CODE APPLICABLE TO PLANS.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Notes will be rated in the
highest rating category of each of the Rating Agencies, the Notes will not
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, 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 Notes, 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.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement, dated November 27, 2000, between the depositor and Countrywide
Securities Corporation ("CSC", which is an affiliate of the depositor, the
sponsor and the master servicer), the depositor has agreed to sell to CSC, and
CSC has agreed to purchase from the depositor, the Notes.
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<PAGE> 73
In the underwriting agreement, CSC has agreed subject to the terms and
conditions set forth therein, to purchase all the Notes offered hereby if any of
the Notes are purchased.
The depositor has been advised by CSC that it proposes initially to offer
the Notes to the public in Europe and the United States at the offering price
set forth on the cover page hereof and to certain dealers at such price less a
discount not in excess of 0.15% of the Note denominations. CSC may allow and
such dealers may reallow a discount not in excess of 0.08% of the Note
denominations to certain other dealers. After the initial public offering, the
public offering price, such concessions and such discounts may be changed.
Until the distribution of the Notes is completed, rules of the Securities
and Exchange Commission may limit the ability of CSC and certain selling group
members to bid for and purchase the Notes. As an exception to these rules, CSC
is permitted to engage in certain transactions that stabilize the price of the
Notes. Such transactions consist of bids or purchases for the purposes of
pegging, fixing or maintaining the price of the Notes.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the depositor nor CSC makes any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the prices of the Notes. In addition, neither the depositor nor CSC
makes any representation that CSC will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
The underwriting agreement provides that the depositor will indemnify CSC
against certain civil liabilities, including liabilities under the Securities
Act of 1933.
LEGAL MATTERS
Certain legal matters with respect to the Notes will be passed on for the
depositor by Brown & Wood LLP, New York, New York. Stroock & Stroock & Lavan
LLP, will pass on certain legal matters on behalf of CSC.
EXPERTS
The financial statements of Financial Guaranty Insurance Company, as of
December 31, 1999 and 1998 and for each of the years in the three-year period
ended December 31, 1999 are incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference in this prospectus
supplement upon the authority of said firm as experts in accounting and
auditing.
RATINGS
It is a condition to the issuance of the Notes that they be rated "AAA" by
Standard & Poor's and "Aaa" by Moody's (each a "Rating Agency").
A securities rating addresses the likelihood of the receipt by noteholders
of payments on the mortgage loans. The rating takes into consideration the
characteristics of the mortgage loans and the structural and legal aspects
associated with the Notes. The ratings on the Notes do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the mortgage
loans or the possibility that noteholders might realize a lower than anticipated
yield. The ratings on the Notes do not address the likelihood of the receipt by
noteholders of Basis Risk Carryforward.
The ratings assigned to the Notes will depend primarily upon the financial
strength of the Note Insurer. Any reduction in a rating assigned to the
financial strength of the Note Insurer below the ratings initially assigned to
the Notes may result in a reduction of one or more of the ratings assigned to
the Notes.
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<PAGE> 74
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 depositor has not requested a rating of the Notes by any rating agency
other than the Rating Agencies; however, we cannot assure you that no other
rating agency will rate the Notes or, if it does, what rating would be assigned
by another rating agency. The rating assigned by another rating agency to the
Notes could be lower than the respective ratings assigned by the Rating
Agencies.
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<PAGE> 75
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Accelerated Principal Payment
Amount............................. S-40
Accumulated Other Comprehensive
Income............................. S-20
Additional Balances.................. S-18
Additional Home Equity Loans......... S-27
Additional Loan Account.............. S-27
Alternative Principal Payment........ S-48
Assignment Event..................... S-57
Available Transferor Subordinated
Amount............................. S-45
Bankruptcy Rate...................... S-25
Basis Risk Carryforward.............. S-47
Clearstream, Luxembourg.............. S-41
Code................................. S-67
Collection Period.................... S-45
Countrywide.......................... S-22
Debt Securities...................... S-68
Defective Mortgage Loans............. S-59
Detailed Description................. S-25
Determination Date................... S-59
DTC.................................. A-I-1
Eligible Account..................... S-59
Eligible Substitute Mortgage Loan.... S-58
Events of Servicing Termination...... S-65
Foreclosure Rate..................... S-25
GE Capital........................... S-20
Global Securities.................... A-I-1
Guaranteed Payments.................. S-49
Guaranteed Principal Payment
Amount............................. S-49
Insurance Agreement.................. S-49
Insured Amount....................... S-49
Interest Period...................... S-47
Investor Fixed Allocation
Percentage......................... S-45
Investor Floating Allocation
Percentage......................... S-45
Investor Interest Collections........ S-45
Investor Loss Amount................. S-45
Investor Principal Collections....... S-45
Issuer............................... S-18
LIBOR................................ S-46
Liquidated Mortgage Loan............. S-45
Liquidation Loss Amount.............. S-45
Loan Pool Balance.................... S-45
Managed Amortization Period.......... S-48
Maximum Principal Payment............ S-48
</TABLE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Minimum Transferor Interest.......... S-62
Moody's.............................. S-21
New Withholding Regulations.......... S-70
Note Principal Balance............... S-39
Note Insurer......................... S-19
Notes................................ S-39
OID.................................. S-68
OID Regulations...................... S-68
Original Note Principal Balance...... S-39
Overcollateralization Reduction
Amount............................. S-40
Plan Asset Regulation................ S-71
Preference Amount.................... S-49
PTCE................................. S-72
Rapid Amortization Event............. S-51
Rapid Amortization Period............ S-48
Rating Agency........................ S-74
Related Documents.................... S-56
Required Amount...................... S-48
Receipt.............................. S-49
Received............................. S-49
Required Transferor
Subordinated Amount.................. S-49
Rules................................ S-41
Scheduled Principal Collections
Payment Amount..................... S-48
Securities Act....................... S-73
Standard & Poor's.................... S-21
Statistic Calculation Date........... S-26
Statistic Calculation Pool........... S-25
Statistic Calculation Pool Mortgage
Loan............................... S-25
Subordinated Transferor
Collections........................ S-48
Tax Counsel.......................... S-68
TIA.................................. S-54
Transfer Date........................ S-62
Transfer Deficiency.................. S-58
Transfer Deposit Amount.............. S-58
Transferor........................... S-18
Transferor Principal Balance......... S-45
Transferor Principal Collections.....
Trust................................ S-18
Trust agreement...................... S-18
Trust estate......................... S-18
Undercollateralization Amount........ S-27
U.S. Person.......................... A-I-4
</TABLE>
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<PAGE> 76
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Revolving
Home Equity Loan Asset Backed Notes, Series 2000-D (the "Global Securities")
will be available only in book-entry form. Investors in the Global Securities
may hold them through any of The Depository Trust Company ("DTC"), Clearstream,
Luxembourg 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 interests in Global
Securities through Clearstream, Luxembourg and Euroclear will be conducted in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice. Secondary market trading between investors
holding interests in Global Securities through DTC will be conducted according
to the rules and procedures applicable to U.S. corporate debt obligations.
Secondary cross-market trading between investors holding interests in
Global Securities through Clearstream, Luxembourg or Euroclear and investors
holding interests in Global Securities through DTC participants will be effected
on a delivery-against-payment basis through the respective depositories of
Clearstream, Luxembourg and Euroclear (in that capacity) and other DTC
participants.
Although DTC, Euroclear and Clearstream, Luxembourg are expected to follow
the procedures described below to facilitate transfers of interests in the
Global Securities among participants of DTC, Euroclear and Clearstream,
Luxembourg, they are under no obligation to perform or continue to perform those
procedures, and those procedures may be discontinued at any time. Neither the
issuer nor the indenture trustee will have any responsibility for the
performance by DTC, Euroclear and Clearstream, Luxembourg or their respective
participants or indirect participants of their respective obligations under the
rules and procedures governing their obligations.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless the holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
The Global Securities will be registered in the name of Cede & Co. as
nominee of DTC. Investors' interests in the Global Securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. Clearstream, Luxembourg and Euroclear will hold
positions on behalf of their participants through their respective depositories,
which in turn will hold the positions in accounts as DTC participants.
Investors electing to hold interests in Global Securities through DTC
participants, rather than through Clearstream, Luxembourg or Euroclear accounts,
will be subject to the settlement practices applicable to similar issues of
pass-through notes. Investors' securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold interests in Global Securities through
Clearstream, Luxembourg 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. Interests in
Global Securities will be credited to the securities custody accounts on the
settlement date against payment in same-day funds.
A-I-1
<PAGE> 77
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Transfers between DTC Participants. Secondary market trading between DTC
participants will be settled using the DTC procedures applicable to similar
issues of pass-through notes in same-day funds.
Transfers between Clearstream, Luxembourg and/or Euroclear
Participants. Secondary market trading between Clearstream, Luxembourg
participants or Euroclear participants and/or investors holding interests in
Global Securities through them will be settled using the procedures applicable
to conventional eurobonds in same-day funds.
Transfers between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When interests in Global Securities are to be transferred on behalf
of a seller from the account of a DTC participant to the account of a
Clearstream, Luxembourg participant or a Euroclear participant or a purchaser,
the purchaser will send instructions to Clearstream, Luxembourg or Euroclear
through a Clearstream, Luxembourg participant or Euroclear participant at least
one business day before settlement. Clearstream, Luxembourg or the Euroclear
operator will instruct its respective depository to receive an interest in the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last payment date to but excluding the
settlement date. Payment will then be made by the respective depository to the
DTC participant's account against delivery of an interest in the Global
Securities. After settlement has been completed, the interest will be credited
to the respective clearing system, and by the clearing system, in accordance
with its usual procedures, to the Clearstream, Luxembourg participant's or
Euroclear participant's account. The credit of the interest will appear on the
next business day and the cash debit will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed through DTC on the intended value date (i.e., the trade fails), the
Clearstream, Luxembourg or Euroclear cash debit will be valued instead as of the
actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will need
to make available to the respective clearing system the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement from cash on hand, in which case the
Clearstream, Luxembourg participants or Euroclear participants will take on
credit exposure to Clearstream, Luxembourg or the Euroclear operator until
interests in the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or the Euroclear operator has
extended a line of credit to them, Clearstream, Luxembourg participants or
Euroclear participants can elect not to pre-position funds and allow that credit
line to be drawn upon. Under this procedure, Clearstream, Luxembourg
participants or Euroclear participants receiving interests in Global Securities
for purchasers would incur overdraft charges for one day, to the extent they
cleared the overdraft when interests in the Global Securities were credited to
their accounts. However, interest on the Global Securities would accrue from the
value date. Therefore, the investment income on the interest in the Global
Securities earned during that one-day period would tend to offset the amount of
the overdraft charges, although this result will depend on each Clearstream,
Luxembourg participant's or Euroclear participant's particular cost of funds.
Since the settlement through DTC will take place during New York business
hours, DTC participants are subject to DTC procedures for transferring interests
in Global Securities to the respective depository of Clearstream, Luxembourg or
Euroclear for the benefit of Clearstream, Luxembourg participants or Euroclear
participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the seller settling the sale through a DTC
participant, a cross-market transaction will settle no differently than a sale
to a purchaser settling through a DTC participant.
Finally, intra-day traders that use Clearstream, Luxembourg participants or
Euroclear participants to purchase interests in Global Securities from DTC
participants or sellers settling through them for delivery
A-I-2
<PAGE> 78
to Clearstream, Luxembourg participants or Euroclear participants should note
that these trades will automatically fail on the sale side unless affirmative
action is taken. At least three techniques should be available to eliminate this
potential condition:
(a) borrowing interests in Global Securities through Clearstream,
Luxembourg or Euroclear for one day (until the purchase side of the
intra-day trade is reflected in the relevant Clearstream, Luxembourg or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing interests in Global Securities in the United States from a
DTC participant no later than one day before settlement, which would
give sufficient time for the interests to be reflected in the relevant
Clearstream, Luxembourg or Euroclear accounts 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 before the value date for the sale to the Clearstream,
Luxembourg participant or Euroclear participant.
Transfers between Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which interests in Global Securities are to be transferred
by the respective clearing system, through the respective depository, to a DTC
participant. The seller will send instructions to Clearstream, Luxembourg or the
Euroclear operator through a Clearstream, Luxembourg participant or Euroclear
participant at least one business day before settlement. Clearstream, Luxembourg
or Euroclear will instruct its respective depository to credit an interest in
the Global Securities to the DTC participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last payment date to but excluding the settlement date. The payment will then be
reflected in the account of the Clearstream, Luxembourg participant or Euroclear
participant the following business day, and receipt of the cash proceeds in the
Clearstream, Luxembourg participant's or Euroclear participant's account would
be back-valued to the value date (which would be the preceding day, when
settlement occurred through DTC in New York). If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Clearstream, Luxembourg participant's or Euroclear participant's account
would instead be valued as of the actual settlement date.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A Beneficial Owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the United States) 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 the Beneficial Owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) the beneficial
owner takes one of the following steps to obtain an exemption or reduced tax
rate:
- Exemption for non-U.S. Persons (Form W-8 or W-8BEN). Beneficial Owners of
Notes that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Note of Foreign Status) or
Form W-8BEN (Note of Foreign Status of Beneficial Ownership for United
States Tax Withholding). If the information shown on Form W-8 changes a
new Form W-8 must be filed within 30 days of the change. As of December
31, 2000 only Form W-8BEN will be acceptable.
- Exemption for non-U.S. Persons with effectively connected income (Form
4224 or Form W-8ECI). A non-U.S. Person, 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
A-I-3
<PAGE> 79
can obtain an exemption from the withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with
the Conduct of a Trade or Business in the United States) or Form W-8ECI
(Note of Foreign Person's Claim for Exemption from Withholding or Income
Effectively Connected with the Conduct of a Trade or Business in the
United States). As of December 31, 2000, only Form W-8ECI will be
acceptable.
- Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001 or Form W-8BEN). Non-U.S. Persons that are
Beneficial 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 Note) or Form W-8BEN (Note of Foreign Status of Beneficial Ownership
for United States Tax Withholding). 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
Beneficial Owner or his agent. As of December 31, 2000 only Form W-8BEN
will be acceptable.
- Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
- U.S. Federal Income Tax Reporting Procedure. The Beneficial 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, Form 1001 and Form 4224 are effective until December 31, 2000.
Form W-8BEN and Form W-8ECI are effective until the third succeeding calendar
year from the date the form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership or other entity treated as a
corporation or partnership for federal income tax purposes created or organized
in or under the laws of the United States, any State thereof or the District of
Columbia or (iii) an estate the income of which is includable in gross income
for United States tax purposes, regardless of its source or (iv) a trust if a
court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. 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.
A-I-4
<PAGE> 80
PROSPECTUS
CWABS, INC.
DEPOSITOR
ASSET BACKED SECURITIES
(ISSUABLE IN SERIES)
PLEASE CAREFULLY
CONSIDER OUR
DISCUSSION OF SOME OF
THE RISKS OF
INVESTING IN THE
SECURITIES UNDER
"RISK FACTORS"
BEGINNING ON PAGE 4.
THE SECURITIES
CWABS, Inc. will sell either certificates or notes pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
its own distinct designation. Each series will be issued in one or more classes
and each class will evidence beneficial ownership of a specified portion of
future payments on the assets in the trust fund that the series relates to. A
prospectus supplement for a series will specify all of the terms of the series
and of each of the classes in the series.
OFFERS OF SECURITIES
The securities may be offered through several different methods, including
offerings through underwriters.
------------------------
THE SEC AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
November 27, 2000
THE TRUSTS
Each trust will be established to hold assets in its trust fund transferred to
it by CWABS, Inc. The assets in each trust fund will be
specified in the prospectus supplement for the particular
trust and will generally consist of:
- first lien mortgage loans secured by one- to four-family residential
properties,
- mortgage loans secured by first and/or subordinate liens on small multifamily
residential properties, such as rental apartment buildings or projects
containing five to fifty residential units,
- closed-end and/or revolving home equity loans, secured in whole or in part by
first and/or subordinate liens on one- to four-family residential properties,
or
- home improvement installment sale contracts and installment loan agreements
that are secured by first or subordinate liens on one- to four-family
residential properties.
<PAGE> 81
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Important Notice About Information
in this Prospectus and Each
Accompanying Prospectus
Supplement....................... 3
Risk Factors....................... 4
The Trust Fund..................... 15
General.......................... 15
The Loans........................ 16
Substitution of Trust Fund
Assets........................ 20
Available Information............ 20
Incorporation of Certain
Documents by Reference........ 20
Reports to Securityholders....... 21
Use of Proceeds.................... 21
The Depositor...................... 21
Loan Program....................... 21
Underwriting Standards........... 21
Qualifications of Sellers........ 23
Representations by Sellers;
Repurchases................... 23
Description of the Securities...... 24
General.......................... 25
Distributions on Securities...... 26
Advances......................... 28
Reports to Securityholders....... 29
Categories of Classes of
Securities.................... 30
Indices Applicable to Floating
Rate and Inverse Floating Rate
Classes....................... 32
Book-Entry Registration of
Securities.................... 35
Credit Enhancement................. 39
General.......................... 39
Subordination.................... 39
Letter of Credit................. 40
Insurance Policies, Surety Bonds
and Guaranties................ 40
Over-Collateralization........... 40
Reserve Accounts................. 41
Pool Insurance Policies.......... 42
Cross Support.................... 43
Yield and Prepayment
Considerations................... 44
The Agreements..................... 46
Assignment of the Trust Fund
Assets........................ 46
Payments on Loans; Deposits to
Security Account.............. 48
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pre-Funding Account.............. 50
Sub-Servicing by Sellers......... 50
Collection Procedures............ 50
Hazard Insurance................. 51
Realization Upon Defaulted
Loans......................... 53
Servicing and Other Compensation
and Payment of Expenses....... 54
Evidence as to Compliance........ 54
Certain Matters Regarding the
Master Servicer and the
Depositor..................... 55
Events of Default; Rights Upon
Event of Default.............. 56
Amendment........................ 58
Termination; Optional
Termination................... 59
The Trustee...................... 60
Certain Legal Aspects of the
Loans............................ 60
General.......................... 60
Foreclosure...................... 61
Environmental Risks.............. 63
Rights of Redemption............. 64
Anti-Deficiency Legislation and
Other Limitations on
Lenders....................... 65
Due-on-Sale Clauses.............. 66
Enforceability of Prepayment and
Late Payment Fees............. 66
Applicability of Usury Laws...... 66
Home Improvement Contracts....... 67
Installment Contracts............ 68
Soldiers' and Sailors' Civil
Relief Act.................... 69
Junior Mortgages and Rights of
Senior Mortgagees............. 69
The Title I Program.............. 70
Consumer Protection Laws......... 73
Material Federal Income Tax
Consequences..................... 73
State Tax Considerations........... 95
ERISA Considerations............... 95
Legal Investment................... 100
Method of Distribution............. 101
Legal Matters...................... 102
Financial Information.............. 102
Rating............................. 102
Index to Defined Terms............. 104
</TABLE>
2
<PAGE> 82
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH
ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
- this prospectus, which provides general information, some of which may
not apply to a particular series; and
- the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
The prospectus supplement will contain information about a particular series
that supplements the information contained in this prospectus, and you should
rely on that supplementary information in the prospectus supplement.
You should rely only on the information in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
------------------------
If you require additional information, the mailing address of our principal
executive offices is CWABS, Inc., 4500 Park Granada, Calabasas, California 91302
and the telephone number is (818) 225-3000. For other means of acquiring
additional information about us or a series of securities, see "The Trust
Fund -- Incorporation of Certain Documents by Reference" beginning on page 20.
3
<PAGE> 83
RISK FACTORS
You should carefully consider the following information since it identifies
significant risks associated with an investment in the securities.
LIMITED SOURCE OF PAYMENTS -- NO
RECOURSE TO SELLERS, DEPOSITOR
OR
SERVICER The applicable prospectus supplement may
provide that securities will be payable from
other trust funds in addition to their
associated trust fund, but if it does not,
they will be payable solely from their
associated trust fund. If the trust fund does
not have sufficient assets to distribute the
full amount due to you as a securityholder,
your yield will be impaired, and perhaps even
the return of your principal may be impaired,
without your having recourse to anyone else.
Furthermore, at the times specified in the
applicable prospectus supplement, certain
assets of the trust fund may be released and
paid out to other people, such as the
depositor, a servicer, a credit enhancement
provider, or any other person entitled to
payments from the trust fund. Those assets
will no longer be available to make payments
to you. Those payments are generally made
after other specified payments that may be
set forth in the applicable prospectus
supplement have been made.
You will not have any recourse against the
depositor or any servicer if you do not
receive a required distribution on the
securities. Nor will you have recourse
against the assets of the trust fund of any
other series of securities.
The securities will not represent an interest
in the depositor, any servicer, any seller to
the depositor, or anyone else except the
trust fund. The only obligation of the
depositor to a trust fund comes from certain
representations and warranties made by it
about assets transferred to the trust fund.
If these representations and warranties turn
out to be untrue, the depositor may be
required to repurchase some of the
transferred assets. CWABS, Inc., which is the
depositor, does not have significant assets
and is unlikely to have significant assets in
the future. So if the depositor were required
to repurchase a loan because of a breach of a
representation, its only sources of funds for
the repurchase would be:
- funds obtained from enforcing a
corresponding obligation of a seller or
originator of the loan, or
- funds from a reserve fund or similar
credit enhancement established to pay for
loan repurchases.
The only obligations of the master servicer
to a trust fund (other than its master
servicing obligations) comes
4
<PAGE> 84
from certain representations and warranties
made by it in connection with its loan
servicing activities. If these
representations and warranties turn out to be
untrue, the master servicer may be required
to repurchase or substitute for some of the
loans. However, the master servicer may not
have the financial ability to make the
required repurchase or substitution.
The only obligations to a trust fund of a
seller of loans to the depositor comes from
certain representations and warranties made
by it in connection with its sale of the
loans and certain document delivery
requirements. If these representations and
warranties turn out to be untrue, or the
seller fails to deliver required documents,
it may be required to repurchase or
substitute for some of the loans. However,
the seller may not have the financial ability
to make the required repurchase or
substitution.
CREDIT ENHANCEMENT MAY NOT BE
SUFFICIENT TO PROTECT YOU FROM
LOSSES Credit enhancement is intended to reduce the
effect of loan losses. But credit
enhancements may benefit only some classes of
a series of securities and the amount of any
credit enhancement will be limited as
described in the applicable prospectus
supplement. Furthermore, the amount of a
credit enhancement may decline over time
pursuant to a schedule or formula or
otherwise, and could be depleted from
payments or for other reasons before the
securities covered by the credit enhancement
are paid in full. In addition, a credit
enhancement may not cover all potential
sources of loss. For example, a credit
enhancement may or may not cover fraud or
negligence by a loan originator or other
parties. Also, the trustee may be permitted
to reduce, substitute for, or even eliminate
all or a portion of a credit enhancement so
long as the rating agencies that have rated
the securities at the request of the
depositor indicate that that would not cause
them to change adversely their rating of the
securities. Consequently, securityholders may
suffer losses even though a credit
enhancement exists and its provider does not
default.
NATURE OF MORTGAGES
Junior Status of Liens
Securing
Home Equity Loans Could
Adversely Affect You 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. Accordingly,
the proceeds from any liquidation, insurance
or condemnation proceeds will be available to
satisfy the outstanding balance of the junior
lien only to the extent that the claims of
the related senior mortgagees have been
satisfied in full, including any related
foreclosure costs.
5
<PAGE> 85
In addition, if a junior mortgagee forecloses
on the property securing a junior mortgage,
it forecloses subject to any senior mortgage
and must take one of the following steps to
protect its interest in the property:
- pay the senior mortgage in full at or
prior to the foreclosure sale, or
- assume the payments on the senior
mortgage in the event the mortgagor is in
default under the senior mortgage.
The trust fund may effectively be prevented
from foreclosing on the related property
since it will have no funds to satisfy any
senior mortgages or make payments due to any
senior mortgagees.
Some states have imposed legal limits on the
remedies of a secured lender in the event
that the proceeds of any sale under a deed of
trust or other foreclosure proceedings are
insufficient to pay amounts owed to that
secured lender. In some states, including
California, if a lender simultaneously
originates a loan secured by a senior lien on
a particular property and a loan secured by a
junior lien on the same property, that lender
as the holder of the junior lien may be
precluded from obtaining a deficiency
judgment with respect to the excess of:
- the aggregate amount owed under both the
senior and junior loans over
- the proceeds of any sale under a deed of
trust or other foreclosure proceedings.
See "Certain Legal Aspects of the
Loans -- Anti-Deficiency Legislation;
Bankruptcy Laws; Tax Liens."
Declines in Property Values
May
Adversely Affect You The value of the properties underlying the
loans held in the trust fund may decline over
time. 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
they are located,
- a decline in their general condition from
the failure of borrowers to maintain
their property adequately, and
- natural disasters that are not covered by
insurance, such as earthquakes and
floods.
In the case of home equity loans, declining
property values could diminish or extinguish
the value of a junior
6
<PAGE> 86
mortgage before reducing the value of a
senior mortgage on the same property.
If property values decline, the actual rates
of delinquencies, foreclosures, and losses on
all underlying loans could be higher than
those currently experienced in the mortgage
lending industry in general. These losses, to
the extent not otherwise covered by a credit
enhancement, will be borne by the holder of
one or more classes of securities.
Delays In Liquidation May
Adversely Affect You Even if the properties underlying the loans
held in the trust fund provide adequate
security for the loans, substantial delays
could occur before defaulted loans are
liquidated and their proceeds are forwarded
to investors. Property foreclosure actions
are regulated by state statutes and rules and
are subject to many of the delays and
expenses of other lawsuits if defenses or
counterclaims are made, sometimes requiring
several years to complete. Furthermore, in
some states if the proceeds of the
foreclosure are insufficient to repay the
loan, the borrower is not liable for the
deficit. Thus, if a borrower defaults, these
restrictions may impede the trust's ability
to dispose of the property and obtain
sufficient proceeds to repay the loan in
full. In addition, the servicer will be
entitled to deduct from liquidation proceeds
all expenses reasonably incurred in
attempting to recover on the defaulted loan,
including legal fees and costs, real estate
taxes, and property maintenance and
preservation expenses.
Disproportionate Effect of
Liquidation Expenses May
Adversely Affect You Liquidation expenses of defaulted loans
generally do not vary directly with the
outstanding principal balance of the loan at
the time of default. Therefore, if a servicer
takes the same steps for a defaulted loan
having a small remaining principal balance as
it does for a defaulted loan having a large
remaining principal balance, the amount
realized after expenses is smaller as a
percentage of the outstanding principal
balance of the small loan than it is for the
defaulted loan having a large remaining
principal balance.
Consumer Protection Laws May
Adversely Affect You State laws generally regulate interest rates
and other charges, require certain
disclosures, and require licensing of
mortgage loan originators and servicers. In
addition, most states have other laws and
public policies for the protection of
consumers that prohibit unfair and deceptive
practices in the origination, servicing, and
collection of mortgage loans. Depending on
the particular law and the specific facts
involved, violations may limit the ability to
collect all or part of the principal or
interest on
7
<PAGE> 87
the underlying loans held in the trust fund.
In some cases, the borrower may even be
entitled to a refund of amounts previously
paid.
The loans held in the trust fund may also be
subject to certain federal laws, including:
- the Federal Truth in Lending Act and its
regulations, which require disclosures to
the borrowers regarding the terms of any
mortgage loan;
- the Equal Credit Opportunity Act and its
regulations, which prohibit
discrimination in the extension of credit
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; and
- the Fair Credit Reporting Act, which
regulates the use and reporting of
information related to the borrower's
credit experience.
Home Equity Loan Consumer Protection Act. 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, known
as 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 the right to
rescind the mortgage loan.
Holder in Due Course Rules. The home
improvement contracts are also subject to the
so-called holder in due
8
<PAGE> 88
course rules which comprise the Preservation
of Consumers' Claims and Defenses regulations
of the Federal Trade Commission and other
similar federal and state statutes and
regulations. The holder in due course rules
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.
Some violations of these federal laws may
limit the ability to collect the principal or
interest on the loans held in the trust fund,
and in addition could subject the trust fund
to damages and administrative enforcement.
Losses on loans from the application of those
laws that are not otherwise covered by a
credit enhancement will be borne by the
holders of one or more classes of securities.
Losses on Balloon Payment
Mortgages Are Borne by You Some of the mortgage loans held in the trust
fund may not be fully amortizing over their
terms to maturity and, thus, will require
substantial principal payments (that is,
balloon payments) at their stated maturity.
Loans with balloon payments involve a greater
degree of risk than fully amortizing loans
because typically the borrower must be able
to refinance the loan or sell the property to
make the balloon payment at maturity. The
ability of a borrower to do this will depend
on such factors as mortgage rates at the time
of sale or refinancing, the borrower's equity
in the property, the relative strength of the
local housing market, the financial condition
of the borrower, and tax laws. Losses on
these loans that are not otherwise covered by
a credit enhancement will be borne by the
holders of one or more classes of
certificates.
YOUR RISK OF LOSS MAY BE HIGHER
THAN YOU EXPECT IF YOUR
SECURITIES
ARE BACKED BY MULTIFAMILY LOANS Multifamily lending may expose the lender to
a greater risk of loss than single family
residential lending. Owners of multifamily
residential properties rely on monthly lease
payments from tenants to
- pay for maintenance and other operating
expenses of those properties,
- fund capital improvements and
- service any mortgage loan and any other
debt that may be secured by those
properties.
9
<PAGE> 89
Various factors, many of which are beyond the
control of the owner or operator of a
multifamily property, may affect the economic
viability of that property.
Changes in payment patterns by tenants may
result from a variety of social, legal and
economic factors. Economic factors include
the rate of inflation, unemployment levels
and relative rates offered for various types
of housing. Shifts in economic factors may
trigger changes in payment patterns including
increased risks of defaults by tenants and
higher vacancy rates. Adverse economic
conditions, either local or national, may
limit the amount of rent that can be charged
and may result in a reduction in timely lease
payments or a reduction in occupancy levels.
Occupancy and rent levels may also be
affected by construction of additional
housing units, competition and local
politics, including rent stabilization or
rent control laws and policies. In addition,
the level of mortgage interest rates may
encourage tenants to purchase single family
housing. We are unable to determine and have
no basis to predict whether, or to what
extent, economic, legal or social factors
will affect future rental or payment
patterns.
The location and construction quality of a
particular building may affect the occupancy
level as well as the rents that may be
charged for individual units. The
characteristics of a neighborhood may change
over time or in relation to newer
developments. The effects of poor
construction quality will increase over time
in the form of increased maintenance and
capital improvements. Even good construction
will deteriorate over time if adequate
maintenance is not performed in a timely
fashion.
YOUR RISK OF LOSS MAY BE HIGHER
THAN YOU EXPECT IF YOUR
SECURITIES
ARE BACKED BY PARTIALLY
UNSECURED
HOME EQUITY LOANS The trust fund may also include home equity
loans that were originated with loan-to-value
ratios or combined loan-to-value ratios in
excess of the value of the related mortgaged
property. Under these circumstances, the
trust fund could be treated as a general
unsecured creditor as to any unsecured
portion of any related loan. In the event of
a default under a loan that is unsecured in
part, the trust fund will have recourse only
against the borrower's assets generally for
the unsecured portion of the loan, along with
all other general unsecured creditors of the
borrower.
YOU COULD BE ADVERSELY AFFECTED
BY
VIOLATIONS OF ENVIRONMENTAL LAWS Federal, state, and local laws and
regulations impose a wide range of
requirements on activities that may affect
the environment, health, and safety. In
certain circumstances, these laws and
regulations impose obligations on
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owners or operators of residential properties
such as those that secure the loans held in
the trust fund. Failure to comply with these
laws and regulations can result in fines and
penalties that could be assessed against the
trust as owner of the related property.
In some states, a lien on the property due to
contamination has priority over the lien of
an existing mortgage. Also, a mortgage lender
may be held liable as an "owner" or
"operator" for costs associated with the
release of petroleum from an underground
storage tank under certain circumstances. If
the trust is considered the owner or operator
of a property, it will suffer losses as a
result of any liability imposed for
environmental hazards on the property.
RATINGS OF THE SECURITIES DO NOT
ASSURE THEIR PAYMENT Any class of securities issued under this
prospectus and the accompanying prospectus
supplement may be rated by one or more
nationally recognized rating agencies. A
rating is based on the adequacy of the value
of the trust assets and any credit
enhancement for that class, and reflects the
rating agency's assessment of how likely it
is that holders of the class of securities
will receive the payments to which they are
entitled. A rating does not constitute an
assessment of how likely it is that principal
prepayments on the underlying loans will be
made, the degree to which the rate of
prepayments might differ from that originally
anticipated, or the likelihood that the
securities will be redeemed early. A rating
is not a recommendation to purchase, hold, or
sell securities because it does not address
the market price of the securities or the
suitability of the securities for any
particular investor.
A rating may not remain in effect for any
given period of time and the rating agency
could lower or withdraw the rating entirely
in the future. For example, the rating agency
could lower or withdraw its rating due to:
- a decrease in the adequacy of the value
of the trust assets or any related credit
enhancement,
- an adverse change in the financial or
other condition of a credit enhancement
provider, or
- a change in the rating of the credit
enhancement provider's long-term debt.
The amount, type, and nature of credit
enhancement established for a class of
securities will be determined on the basis of
criteria established by each rating agency
rating classes of the securities. These
criteria are
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sometimes based upon an actuarial analysis of
the behavior of similar loans in a larger
group. That analysis is often the basis upon
which each rating agency determines the
amount of credit enhancement required for a
class. The historical data supporting any
actuarial analysis may not accurately reflect
future experience, and the data derived from
a large pool of similar loans may not
accurately predict the delinquency,
foreclosure, or loss experience of any
particular pool of mortgage loans. Mortgaged
properties may not retain their values. If
residential real estate markets experience an
overall decline in property values such that
the outstanding principal balances of the
loans held in a particular trust fund and any
secondary financing on the related mortgaged
properties become equal to or greater than
the value of the mortgaged 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 may affect timely payment by
mortgagors on their loans whether or not the
conditions affect real property values and,
accordingly, the rates of delinquencies,
foreclosures, and losses in any trust fund.
Losses from this that are not covered by a
credit enhancement will be borne, at least in
part, by the holders of one or more classes
of securities.
BOOK-ENTRY REGISTRATION
Limit on Liquidity Securities issued in book-entry form may have
only limited liquidity in the resale market,
since investors may be unwilling to purchase
securities for which they cannot obtain
physical instruments.
Limit on Ability to Transfer
or
Pledge Transactions in book-entry securities can be
effected only through The Depository Trust
Company, its participating organizations, its
indirect participants, and certain banks.
Therefore, your ability to transfer or pledge
securities issued in book-entry form may be
limited.
Delays in Distributions You may experience some delay in the receipt
of distributions on book-entry securities
since the distributions will be forwarded by
the trustee to The Depository Trust Company
for it to credit the accounts of its
participants. In turn, these participants
will then credit the distributions to your
account either directly or indirectly through
indirect participants.
BANKRUPTCY OR INSOLVENCY MAY
AFFECT
THE TIMING AND AMOUNT OF
DISTRIBUTIONS ON THE SECURITIES The seller and the depositor will treat the
transfer of the loans held in the trust fund
by the seller to the depositor as a sale for
accounting purposes. The depositor and the
trust fund will treat the transfer of the
loans from the depositor to the trust fund as
a sale for accounting
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purposes. If these characterizations are
correct, then if the seller were to become
bankrupt, the loans would not be part of the
seller's bankruptcy estate and would not be
available to the seller's creditors. On the
other hand, if the seller becomes bankrupt,
its bankruptcy trustee or one of its
creditors may attempt to recharacterize the
sale of the loans as a borrowing by the
seller, secured by a pledge of the loans.
Presenting this position to a bankruptcy
court could prevent timely payments on the
securities and even reduce the payments on
the securities. Similarly, if the
characterizations of the transfers as sales
are correct, then if the depositor were to
become bankrupt, the loans would not be part
of the depositor's bankruptcy estate and
would not be available to the depositor's
creditors. On the other hand, if the
depositor becomes bankrupt, its bankruptcy
trustee or one of its creditors may attempt
to recharacterize the sale of the loans as a
borrowing by the depositor, secured by a
pledge of the loans. Presenting this position
to a bankruptcy court could prevent timely
payments on the securities and even reduce
the payments on the securities.
If the master servicer becomes bankrupt, the
bankruptcy trustee may have the power to
prevent the appointment of a successor master
servicer. The period during which cash
collections may be commingled with the master
servicer's own funds before each distribution
date for securities will be specified in the
applicable prospectus supplement. If the
master servicer becomes bankrupt and cash
collections have been commingled with the
master servicer's own funds for at least ten
days, the trust fund will likely not have a
perfected interest in those collections. In
this case the trust might be an unsecured
creditor of the master servicer as to the
commingled funds and could recover only its
share as a general creditor, which might be
nothing. Collections commingled less than ten
days but still in an account of the master
servicer might also be included in the
bankruptcy estate of the master servicer even
though the trust may have a perfected
security interest in them. Their inclusion in
the bankruptcy estate of the master servicer
may result in delays in payment and failure
to pay amounts due on the securities.
Federal and state statutory provisions
affording protection or relief to distressed
borrowers may affect the ability of the
secured mortgage lender to realize upon its
security in other situations as well. For
example, in a proceeding under the federal
Bankruptcy Code, a lender
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may not foreclose on a mortgaged property
without the permission of the bankruptcy
court. And in certain instances a bankruptcy
court may allow a borrower to reduce the
monthly payments, change the rate of
interest, and alter the mortgage loan
repayment schedule for under collateralized
mortgage loans. The effect of these types of
proceedings can be to cause delays in
receiving payments on the loans underlying
securities and even to reduce the aggregate
amount of payments on the loans underlying
securities.
THE PRINCIPAL AMOUNT OF
SECURITIES
MAY EXCEED THE MARKET VALUE OF
THE TRUST FUND ASSETS The market value of the assets relating to a
series of securities at any time may be less
than the principal amount of the securities
of that series then outstanding, plus accrued
interest. After an event of default and a
sale of the assets relating to 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 that sale
to the extent of unpaid fees and other
amounts owing to them under the related
transaction document prior to distributions
to securityholders. Upon any such sale, the
proceeds may be insufficient to pay in full
the principal of and interest on the
securities of the related series.
Certain capitalized terms are used in this
prospectus to assist you in understanding the
terms of the securities. The capitalized
terms used in this prospectus are defined on
the pages indicated under the caption "Index
to Defined Terms" beginning on page 127.
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THE TRUST FUND
GENERAL
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 the trust fund assets (the "Trust Fund Assets") consisting
of a pool comprised of loans as specified in the related prospectus supplement,
together with payments relating to those loans 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 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 without recourse 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 called 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 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 specified and in the related prospectus supplement and the
proceeds thereof, issuing securities and making
---------------
* Whenever the terms pool, certificates, notes and securities are used in this
prospectus, those terms will be considered to apply, unless the context
indicates otherwise, to one specific pool and the securities of one series
including the certificates representing undivided interests in, and/or notes
secured by the assets of, a single trust fund consisting primarily of the
loans in that 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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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.
The applicable prospectus supplement may provide for additional obligations
of the depositor, but if it does not, 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. Loans will consist of single family loans, multifamily loans, 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 Federal
Housing Administration (the "FHA") or the Department of Veterans' Affairs (the
"VA").
The applicable prospectus supplement may specify the day on which monthly
payments on the loans in a pool will be due, but if it does not, all of the
mortgage 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 described in the
related prospectus supplement:
- 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 the limitations. Accrued interest may be deferred and
added to the principal of a loan for the periods and under the
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
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the loan, and the amount of any difference may be contributed from funds
supplied by the seller of the Property or another source.
- 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, called balloon payments. Principal may include interest that
has been deferred and added to the principal balance of the loan.
- 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. The terms of a loan may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
- The loans generally may be prepaid at any time. 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, which are called 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 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 that
permit the mortgagee to demand payment of the entire loan in connection
with the sale or certain transfers of the related mortgaged property.
Other loans may be assumable by persons meeting the then applicable
underwriting standards of the seller.
A trust fund may contain buydown loans that include provisions whereby a
third party partially subsidizes the monthly payments of the obligors on the
loans during the early years of the loans, the difference to be made up from a
buydown fund contributed by the 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. Thereafter, buydown funds
are applied to the applicable loan upon receipt by the master servicer of the
mortgagor's portion of the monthly payment on the loan. The master servicer
administers the buydown fund to ensure that the monthly allocation from the
buydown fund combined with the monthly payment received from the mortgagor
equals the scheduled monthly payment on the applicable loan. The underlying
assumption of buydown plans is that the income of the mortgagor will increase
during the buydown period as a result of normal increases in compensation and
inflation, so that the mortgagor will be able to meet the full mortgage 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 mortgagor 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. The loans will be secured by mortgages or deeds of
trust or other 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. In addition to being secured by
mortgages on real estate the home improvement contracts may also be secured by
purchase money security interests in the home improvements financed thereby. If
so specified in the related prospectus supplement, the home equity loans may
include loans (primarily for home improvement or debt consolidation purposes)
that are in amounts in excess of the value of the related mortgaged properties
at the time of origination. The mortgaged properties and the home improvements
are collectively referred to herein as the "Properties." 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.
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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. The
applicable prospectus supplement may provide for the basis for representations
relating to Single Family Properties, but if it does not, 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.
Single Family Loans. The mortgaged properties relating to single family
loans will consist of detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments, manufactured housing that is permanently affixed and
treated as real property under local law, and certain other dwelling units
("Single Family Properties"). Single Family Properties may include vacation and
second homes, investment properties and leasehold interests. In the case of
leasehold interests, the applicable prospectus supplement may provide for the
leasehold term, but if it does not, the term of the leasehold will exceed the
scheduled maturity of the loan by at least five years.
Multifamily Loans. Mortgaged properties which secure multifamily loans may
include small multifamily residential properties such as rental apartment
buildings or projects containing five to fifty residential units, including
mid-rise and garden apartments. Certain of the multifamily loans may be secured
by apartment buildings owned by cooperatives. In such cases, the cooperative
owns all the apartment units in the building and all common areas. 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
apartments or 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 mortgage loan, real property
taxes, maintenance expenses and other capital or ordinary expenses. Those
payments are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans to the tenant-stockholder secured by
its shares in the cooperative. The cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. A cooperative's ability to meet debt service
obligations on a multifamily loan, as well as all other operating expenses, will
be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units the cooperative
might control. Unanticipated expenditures may in some cases have to be paid by
special assessments on the tenant-stockholders. No more than 5% of the aggregate
Trust Fund Assets for any series, as constituted at the time of the applicable
cut-off date (measured by principal balance), will be comprised of multifamily
loans.
Home Equity Loans. The mortgaged properties relating to home equity loans
will consist of Single Family Properties. As more fully described in the related
prospectus supplement, interest on each revolving credit line loan, excluding
introductory 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,
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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. The home improvements securing the
home improvement contracts may 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. The home improvement
contracts will be secured by mortgages on Single Family Properties which are
generally subordinate to other mortgages on the same Property. In general, 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 the prospectus supplement and to the extent then
specifically known to the depositor, with respect to the loans contained in the
related pool, including
- the aggregate outstanding principal balance and the average outstanding
principal balance of the loans as of the first day of the month of
issuance of the related series of certificates or another date specified
in the related prospectus supplement called a cut-off date,
- the type of property securing the loans (e.g., single-family residences,
individual units in condominium apartment buildings or in buildings owned
by cooperatives, small multifamily properties, other real property or
home improvements),
- the original terms to maturity of the loans,
- the largest principal balance and the smallest principal balance of any
of the loans,
- the earliest origination date and latest maturity date of any of the
loans,
- the Loan-to-Value Ratios or Combined Loan-to-Value Ratios, as applicable,
of the loans,
- the Loan Rates or annual percentage rates ("APR") or range of Loan Rates
or APR's borne by the loans,
- the maximum and minimum per annum Loan Rates and
- the geographical distribution 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 detailed description of
Trust Assets.
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. 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. 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
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Refinance Loans, the "Collateral Value" of the related Property is generally 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 outstanding principal balances of the loans, and
any secondary financing on the Properties, 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 the losses are not covered
by subordination provisions or alternative arrangements, the 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.
AVAILABLE INFORMATION
The depositor has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended, covering the securities. This prospectus,
which forms a part of the Registration Statement, and the prospectus supplement
relating to each series of certificates contain summaries of the material terms
of the documents referred to in this prospectus and in the prospectus
supplement, but do not contain all of the information in the Registration
Statement pursuant to the rules and regulations of the SEC. For further
information, reference is made to the Registration Statement and its exhibits.
The Registration Statement and exhibits can be inspected and copied at
prescribed rates at the public reference facilities maintained by the SEC at its
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its Regional Offices located as follows: Chicago Regional Office, 500 West
Madison Street, Chicago, Illinois 60661; and New York Regional Office, Seven
World Trade Center, New York, New York 10048. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains an Internet Web site that contains reports, information statements
and other information regarding the registrants that file electronically with
the SEC, including the depositor. The address of that Internet Web site is
http://www.sec.gov.
This prospectus and any applicable prospectus supplement do not constitute
an offer to sell or a solicitation of an offer to buy any securities other than
the securities offered by this prospectus and the prospectus supplement nor an
offer of the securities to any person in any state or other jurisdiction in
which the offer would be unlawful.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed for the trust fund referred to in the accompanying
prospectus supplement after the date of this prospectus and before the end of
the related offering with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended, are incorporated by
reference in this prospectus and are a part of this prospectus from the date of
their filing. Any statement contained in a document incorporated by reference in
this prospectus is modified or superseded for all purposes of this prospectus to
the extent that a statement contained in this prospectus (or in the accompanying
prospectus supplement) or in any other subsequently filed document that also is
incorporated by reference differs from that statement. Any statement so modified
or superseded shall not, except as so modified or superseded, constitute a part
of this prospectus. Neither the depositor nor the
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master servicer intends to file with the Securities and Exchange Commission
periodic reports with respect to the trust fund following completion of the
reporting period required by Rule 15d-1 or Regulation 15D under the Securities
Exchange Act of 1934.
The trustee on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, on the person's written or oral
request, 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 the exhibits are
specifically incorporated by reference into the information that this prospectus
incorporates). 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 trust fund 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."
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 limited purpose finance subsidiary of Countrywide Credit
Industries, Inc., a Delaware corporation. The depositor maintains its principal
office at 4500 Park Granada, Calabasas, California 91302. Its telephone number
is (818) 225-3000.
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. The applicable prospectus supplement may
provide for the underwriting criteria used in originating the loans, but if it
does not, the loans so acquired by the depositor will have been originated in
accordance with the underwriting criteria specified below under "Underwriting
Standards."
UNDERWRITING STANDARDS
The applicable prospectus supplement may provide for the seller's
representations and warranties relating to the loans, but if it does not, 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
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provide to the underwriting officer pertinent credit information, including the
principal balance and payment history with respect to any senior mortgage, if
any. The applicable prospectus supplement may specify whether that credit
information will be verified by the seller, but if it does not, the credit
information supplied by the borrower 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 on its
condition and, if applicable, verify construction, if new, has been completed.
The appraisal is generally 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.
The maximum loan amount will vary depending upon a borrower's credit grade
and loan program but will not generally exceed $1,000,000. Variations in maximum
loan amount limits will be permitted based on compensating factors. Compensating
factors may generally include, to the extent specified in the related prospectus
supplement, low loan-to-value ratio, low debt-to-income ratio, stable
employment, favorable credit history and the nature of the underlying first
mortgage loan, if applicable.
Each seller's underwriting standards will generally permit loans with
loan-to-value ratios at origination of up to 100% depending on the loan program,
type and use of the property, creditworthiness of the borrower and
debt-to-income ratio. If so specified in the related prospectus supplement, a
seller's underwriting criteria may permit loans with loan-to-value ratios at
origination in excess of 100%, such as for debt consolidation or home
improvement purposes. Loan-to-value ratios may not be evaluated in the case of
Title I loans.
After obtaining all applicable employment, credit and property information,
the related seller will use 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 mortgage loan in addition
to other monthly credit obligations. The "debt-to-income ratio" is the ratio of
the borrower's total monthly payments to the borrower's gross monthly income.
The maximum monthly debt-to-income ratio will vary depending upon a borrower's
credit grade and loan program but will not generally exceed 55%. Variations in
the monthly debt-to-income ratio limit will be permitted based on compensating
factors to the extent specified in the related prospectus supplement.
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 applicable prospectus
supplement may provide for the related representations and warranties of the
seller, but if it does not, the related seller will 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
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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
Each seller will be required to satisfy the following qualifications. 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
Fannie Mae or Freddie Mac. Each seller must be a mortgagee approved by the FHA
or an institution the deposit accounts of which are insured by 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. Such representations and warranties may include, among other things:
- 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 cooperative loans and certain home
equity loans, 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;
- 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 may forgive certain
indebtedness of a borrower;
- 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;
- that there were no delinquent tax or assessment liens against the
Property;
- that no required payment on a loan was delinquent more than the number of
days specified in the related prospectus supplement; and
- 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
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adversely affects the interests of the securityholders in such loan. If such
seller cannot cure such breach within 90 days following notice from the master
servicer or the trustee, as the case may be, the applicable prospectus
supplement may provide for the seller's obligations under those circumstances,
but if it does not, then such seller will be obligated either
- 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
- 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, the applicable
prospectus supplement may provide for the obligations of the master servicer or
residual certificateholder, but if it does not, 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 the related trust fund
and the entity named in the related prospectus supplement as 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 are
descriptions of the material provisions which may appear in each Agreement. The
descriptions 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
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security of such series addressed to CWABS, Inc., 4500 Park Granada, Calabasas,
California 91302, Attention: Secretary.
GENERAL
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. The applicable prospectus supplement may
provide for guarantees or insurance obtained from a governmental entity or other
person, but if it does not, the Trust Fund Assets will not be guaranteed or
insured by any governmental entity or other person. Each trust fund will consist
of, to the extent provided in the related Agreement,
- 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"));
- the assets required to be deposited in the related Security Account from
time to time;
- property which secured a loan and which is acquired on behalf of the
securityholders by foreclosure or deed in lieu of foreclosure and
- 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 fund, 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.
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 under "Credit Enhancement" 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 or on the basis of collections from
designated portions of the related Trust Fund Assets, 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.
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
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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 the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or the Internal
Revenue Code of 1986, as amended (the "Code"), may result in prohibited
transactions, within the meaning of ERISA and the Code. See "ERISA
Considerations." The applicable prospectus supplement may provide for the
conditions for transferring a security of that type of class, but if it does
not, 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 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 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 fund. 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
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related prospectus supplement. The prospectus supplement will also describe the
method for allocating distributions among securities of a particular 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. "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. 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) 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. 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. 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 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
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in such prospectus supplement, reduced by all distributions reported to the
holders of such securities as allocable to principal and,
- in the case of accrual securities, in general, increased by all interest
accrued but not then distributable on such accrual securities; and
- 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 the prospectus supplement. If applicable, the trustee
will be required to make 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 fund, may be insufficient to make required distributions on the
securities on that distribution date. The applicable prospectus supplement may
provide for limits on the amount of an unscheduled distribution, but if it does
not, the amount of any 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. The
applicable prospectus supplement may specify whether the unscheduled
distribution will include interest, but if it does not, 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 the
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 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
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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 of the type described herein under "Credit
Enhancement," in each case as described in the related prospectus supplement.
In the event the master servicer or a sub-servicer fails to make a required
advance, the applicable prospectus supplement may specify whether another party
will have advancing obligations, but if it does not, 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 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:
- 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;
- the amount of such distribution allocable to interest;
- the amount of any advance;
- the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on such distribution date, and (b) withdrawn from the
reserve fund, if any, that is included in the amounts distributed to the
Senior Securityholders;
- 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;
- 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;
- the percentage of Principal Prepayments on the loans, if any, which each
such class will be entitled to receive on the following distribution
date;
- 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;
- the number and aggregate principal balances of loans (A) delinquent
(exclusive of loans in foreclosure) 1 to 30 days, 31 to 60 days, 61 to 90
days and 91 or more days and (B) in foreclosure and delinquent 1 to 30
days, 31 to 60 days, 61 to 90 days and 91 or more days, as of the close
of business on the last day of the calendar month preceding such
distribution date;
- the book value of any real estate acquired through foreclosure or grant
of a deed in lieu of foreclosure;
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- 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;
- if applicable, the amount remaining in any reserve fund at the close of
business on the distribution date;
- the Pass-Through Rate or interest rate, as applicable, as of the day
prior to the immediately preceding distribution date; and
- 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 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 or
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 certificates 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
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planned principal class of a series of certificates
will be narrower than that for the primary planned
principal class of the 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
many 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.
Strip...................... A class that receives a constant proportion, or
"strip," of the principal payments on the
underlying Trust Fund Assets.
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 or
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
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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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
The applicable prospectus supplement may specify some other basis for
determining LIBOR, but if it does not, on the LIBOR determination date (as
defined in the related prospectus supplement) for each class of certificates of
a series for which the applicable interest rate is determined by reference to an
index denominated as LIBOR, the person designated in the related pooling and
servicing agreement as the calculation agent will determine LIBOR in accordance
with one of the two methods described below (which method will be specified in
the related prospectus supplement):
LIBO Method
If using this method to calculate LIBOR, the calculation agent will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page, offered by the principal London office of each of the
designated reference banks meeting the criteria set forth in this prospectus 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 the LIBOR determination
date. In lieu of relying on the quotations for those reference banks that appear
at the time on the Reuters Screen LIBO Page, the calculation agent will request
each of the reference banks to provide the offered quotations at the time.
Under this method 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 offered quotations, LIBOR for the next interest accrual period
shall be the arithmetic mean of the 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 offered quotations, LIBOR for the next interest
accrual period shall be whichever is the higher of
- LIBOR as determined on the previous LIBOR determination date or
- the reserve interest rate.
The reserve interest rate shall be the rate per annum which the calculation
agent determines to be either
- 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 the
quotations are, in the opinion of the calculation agent being so made,
or
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- if the calculation agent cannot determine the arithmetic mean, the
lowest one-month United States dollar lending rate which New York City
banks selected by the calculation agent are quoting on the 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 considered to be
the per annum rate specified as such in the related prospectus supplement.
Each reference bank shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; shall not control,
be controlled by, or be under common control with the calculation agent; and
shall have an established place of business in London. If a reference bank
should be unwilling or unable to act as such or if appointment of a reference
bank is terminated, another leading bank meeting the criteria specified above
will be appointed.
BBA Method
If using this method of determining LIBOR, the calculation agent will
determine LIBOR on the basis of the British Bankers' Association "Interest
Settlement Rate" for one-month deposits in United States dollars as found on
Telerate page 3750 as of 11:00 a.m. London time on each LIBOR determination
date. Interest Settlement Rates currently are based on rates quoted by eight
British Bankers' Association designated banks as being, in the view of the
banks, the offered rate at which deposits are being quoted to prime banks in the
London interbank market. The Interest Settlement Rates are calculated by
eliminating the two highest rates and the two lowest rates, averaging the four
remaining rates, carrying the result (expressed as a percentage) out to six
decimal places, and rounding to five decimal places.
If on any LIBOR determination date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described under "LIBO Method."
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: savings deposits, time
deposits, FHLBSF advances, repurchase agreements and 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.
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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.
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.
The applicable prospectus supplement may specify some other basis for
determining COFI, but if it does not, then if on the tenth day of the month in
which any interest accrual period commences for a class of COFI certificates the
most recently published Eleventh District Cost of Funds Index relates to a month
before the third preceding month, the index for the 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 the 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 the 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 before the fourth preceding
month, the applicable index for the 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 the series of certificates. 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 could increase its
volatility, particularly if LIBOR is the alternative index.
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.
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Treasury Index
The applicable prospectus supplement may specify some other basis for
determining and defining the Treasury index, but if it does not, on the Treasury
index determination date for each class of securities of a series for 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. The Treasury index for any
period means the average of the yield for each business day during the specified
period (and for any date means the yield for the date), expressed as a per annum
percentage rate, on U.S. Treasury securities adjusted to the "constant maturity"
specified in the prospectus supplement or if no "constant maturity" is so
specified, U.S. Treasury securities trading on the secondary market having the
maturity specified in the 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. If the calculation agent has not yet received Statistical
Release No. H.15 (519) for a week, then it will use the Statistical Release from
the 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
The applicable prospectus supplement may specify the party responsible for
determining the Prime Rate, but if it does not, 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. The applicable prospectus supplement may provide for the means of
determining the Prime Rate, but if it does not, 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. 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 Clearstream, Luxembourg 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.
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Clearstream, Luxembourg and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Clearstream,
Luxembourg'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 Clearstream, Luxembourg 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 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 Clearstream, Luxembourg 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
Clearstream, Luxembourg 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 Clearstream, Luxembourg Participants on such
business day. Cash received in Clearstream, Luxembourg or Euroclear as a result
of sales of securities by or through a Clearstream, Luxembourg 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 Clearstream, Luxembourg 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 Clearstream, Luxembourg Participants and Euroclear
Participants will occur in accordance with their respective rules and operating
procedures.
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Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg 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. Clearstream, Luxembourg Participants and Euroclear Participants may not
deliver instructions directly to the European Depositaries.
Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream, Luxembourg holds securities for its
participating organizations ("Clearstream, Luxembourg Participants") and
facilitates the clearance and settlement of securities transactions between
Clearstream, Luxembourg Participants through electronic book-entry changes in
accounts of Clearstream, Luxembourg Participants, thereby eliminating the need
for physical movement of certificates. Transactions may be settled in
Clearstream, Luxembourg in any of 28 currencies, including United States
dollars. Clearstream, Luxembourg provides to its Clearstream, Luxembourg
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg interfaces with domestic markets
in several countries. As a professional depository, Clearstream, Luxembourg is
subject to regulation by the Luxembourg Monetary Institute. Clearstream,
Luxembourg 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
Clearstream, Luxembourg is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Clearstream, Luxembourg 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
Guaranty 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
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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 Clearstream, Luxembourg or Euroclear will be
credited to the cash accounts of Clearstream, Luxembourg 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 "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 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 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.
Clearstream, Luxembourg 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 Clearstream, Luxembourg 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, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg 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.
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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 funds, the use of a cross-collateralization 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 contemplated herein and described in the related prospectus
supplement, or any combination of the foregoing. The applicable prospectus
supplement may provide for credit enhancement which covers all the classes of
securities, but if it does not, 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 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 funds 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
fund has reached a specified amount and, following payments from the reserve
fund to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the reserve fund to required levels, in each
case as specified in the related prospectus supplement. Amounts on deposit in
the reserve fund 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-collateralization
mechanism or otherwise.
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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
fund 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 Securities and Exchange Commission (the "SEC") 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.
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
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. In addition, if specified in the
related prospectus supplement, a trust fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties 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. A copy of any such instrument for a
series will be filed with the SEC as an exhibit to a Current Report on Form 8-K
to be filed with the SEC 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. Reducing the principal
balance of the securities without a corresponding reduction in the principal
balance of the underlying Trust Fund Assets will result in
over-collateralization.
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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 funds for such series. The related prospectus supplement will
specify whether or not any such reserve funds will be included in the trust fund
for such series.
The reserve fund 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 fund and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in "Permitted
Investments" which may include
(i) obligations of the United States or any agency thereof, provided
such obligations are backed by the full faith and credit of the United
States;
(ii) general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia receiving the highest
long-term debt rating of each Rating Agency rating the related series of
securities, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to such securities by each such
Rating Agency;
(iii) commercial paper issued by Countrywide Home Loans, Inc. or any
of its affiliates; provided that such commercial paper is rated no lower
than the rating specified in the related prospectus supplement;
(iv) commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each such Rating
Agency, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to such securities by each such
Rating Agency;
(v) certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company
incorporated under the laws of the United States or of any state thereof
and subject to supervision and examination by federal and/or state banking
authorities, provided that the commercial paper and/or long term unsecured
debt obligations of such depository institution or trust company (or in the
case of the principal depository institution in a holding company system,
the commercial paper or long-term unsecured debt obligations of such
holding company, but only if Moody's Investors Service, Inc. ("Moody's") is
not a Rating Agency) are then rated one of the two highest long-term and
the highest short-term ratings of each such Rating Agency for such
securities, or such lower ratings as will not result in the downgrading or
withdrawal of the rating then assigned to such securities by any such
Rating Agency;
(vi) demand or time deposits or certificates of deposit issued by any
bank or trust company or savings institution to the extent that such
deposits are fully insured by the FDIC;
(vii) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the issuance of
such agreements, such terms and conditions as will not result in the
downgrading or withdrawal of the rating then assigned to such securities by
any such Rating Agency;
(viii) repurchase obligations with respect to any security described
in clauses (i) and (ii) above, in either case entered into with a
depository institution or trust company (acting as principal) described in
clause (v) above;
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(ix) securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of the face amount
thereof) bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof
which, at the time of such investment, have one of the two highest ratings
of each Rating Agency (except if the Rating Agency is Moody's, such rating
shall be the highest commercial paper rating of Moody's for any such
securities), or such lower rating as will not result in the downgrading or
withdrawal of the rating then assigned to such securities by any such
Rating Agency, as evidenced by a signed writing delivered by each such
Rating Agency;
(x) interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time such
interests are held in such fund has the highest applicable rating by each
such Rating Agency or such lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to such securities
by each such Rating Agency;
(xi) short term investment funds sponsored by any trust company or
national banking association incorporated under the laws of the United
States or any state thereof which on the date of acquisition has been rated
by each such Rating Agency in their respective highest applicable rating
category or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to such securities by each such
Rating Agency; and
(xii) such other investments having a specified stated maturity and
bearing interest or sold at a discount acceptable to each Rating Agency as
will not result in the downgrading or withdrawal of the rating then
assigned to such securities by any such Rating Agency, as evidenced by a
signed writing delivered by each such Rating Agency; provided that no such
instrument shall be a Permitted Investment if such instrument evidences the
right to receive interest only payments with respect to the obligations
underlying such instrument; and provided, further, that no investment
specified in clause (x) or clause (xi) above shall be a Permitted
Investment for any pre-funding account or any related Capitalized Interest
Account.
If a letter of credit is deposited with the trustee, that letter of credit will
be irrevocable and 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 funds 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 fund 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.
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. The applicable prospectus supplement may
provide for the extent of coverage provided by the related Pool Insurance
Policy, but if it does not, 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.
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The applicable prospectus supplement may provide for the conditions for the
presentation of claims under a Pool Insurance Policy, but if it does not, 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.
The applicable prospectus supplement may provide for a Pool Insurance
Policy covering losses resulting from defaults, but if it does not, 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,
- 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
- 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.
The applicable prospectus supplement may provide for a Pool Insurance
Policy featuring a fixed amount of coverage over the life of the policy, but if
it does not, 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 applicable prospectus
supplement may provide for the exclusion of specified expenses from the coverage
of the Pool Insurance Policy, but if it does not, 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. 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.
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 that
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case, credit support may be provided by a cross support feature that requires
that distributions be made on securities evidencing a beneficial ownership
interest in other asset groups within the same trust fund. The related
prospectus supplement for a series that includes a cross support feature will
describe the manner and conditions for applying the 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 the credit support relates and the manner of
determining the amount of the coverage provided by it and of the application of
the coverage to the identified trust funds.
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, such 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, such 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 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
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required periodic payments. In addition, collections on the loans may vary due
to seasonal purchasing and the payment habits of borrowers.
Generally, 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. 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. 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 generally
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. The applicable prospectus supplement may specify when
prepayments are passed through to securityholders, but if it does not, 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 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 generally 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.
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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 generally
accrue on each loan from the first day of the month, 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".
The relative contribution of the various factors affecting prepayment may
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 description of the material provisions of each
Agreement which are not described elsewhere in this prospectus. The description
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
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, without recourse, 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.
In addition, the depositor will also deliver or cause to be delivered to
the trustee (or to the custodian) for each single family loan, multifamily loan
or home equity loan,
- the mortgage note or contract endorsed without recourse in blank or to
the order of the trustee,
- 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
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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),
- an assignment of the Mortgage to the trustee, which assignment will be in
recordable form in the case of a Mortgage assignment, and
- any 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.
The applicable prospectus supplement may provide other arrangements for assuring
the priority of assignments, but if it does not, 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.
The applicable prospectus supplement may provide for the depositor's
delivery obligations in connection with home improvement contracts, but if it
does not, 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 the security interest in the Property securing such home improvement
contract. In general, it is expected that 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) 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. Generally, if the document is found to be missing
or defective in any material respect, the trustee (or the custodian) will notify
the master servicer and the depositor, and the master servicer will notify the
related seller. If the seller cannot cure the omission or defect within the time
period specified in the related prospectus supplement after receipt of such
notice, the seller will be obligated to either purchase the related loan from
the trust fund at the Purchase Price or 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. The applicable prospectus supplement may provide other remedies,
but if it does not, 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.
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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. The
applicable prospectus supplement may provide other remedies, but if it does not,
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"). The applicable prospectus supplement may
provide for other requirements for the Security Account, but if it does not, the
Security Account 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. To
the extent provided 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.
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 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):
- all payments on account of principal, including Principal Prepayments
and, if specified in the related prospectus supplement, any applicable
prepayment penalties, on the loans;
- all payments on account of interest on the loans, net of applicable
servicing compensation;
- 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
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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;
- 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;
- 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;
- 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
- 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:
- 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;
- 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;
- to reimburse the master servicer for any advances previously made which
the master servicer has determined to be nonrecoverable;
- to reimburse the master servicer from Insurance Proceeds for expenses
incurred by the master servicer and covered by the related insurance
policies;
- 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;
- 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;
- to reimburse the master servicer or the depositor for expenses incurred
and reimbursable pursuant to the Agreement;
- to withdraw any amount deposited in the Security Account and not required
to be deposited therein; and
- to clear and terminate the Security Account upon termination of the
Agreement.
In addition, the Agreement will generally provide that, on or prior to the
business day immediately preceding each distribution date, the master servicer
shall withdraw from the Security Account the amount
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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 an account (the "Pre-Funding Account"), in the name
of the related trustee on behalf of the related securityholders, into which the
depositor will deposit cash in an amount specified in the prospectus supplement
(the "Pre-Funded Amount") on the related Closing Date. The Pre-Funding Account
will be maintained with the trustee for the related series of securities and is
designed solely to hold funds to be applied by such trustee during the period
from the closing date to a date not more than a year after such closing date
(the "Funding Period") to pay to the depositor the purchase price for loans
purchased during such Funding Period (the "Subsequent Loans"). Monies on deposit
in the Pre-Funding Account will not be available to cover losses on or in
respect of the related loans. The Pre-Funded Amount will not exceed 50% 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 one year after the related
Closing Date. Monies on deposit in the Pre-Funding Account may be invested in
Permitted Investments under the circumstances and in the manner described in the
related Agreement. Earnings on investment of funds in the Pre-Funding Account
will be deposited into the related Security Account or such other trust account
as is specified in the related prospectus supplement and losses will be charged
against the funds on deposit in the Pre-Funding Account. 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.
In addition, if so provided in the related prospectus supplement, on the
related Closing Date the depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related series of securities that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the trustee for the related series of
securities and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account will not be
available to cover losses on or in respect of the related loans. To the extent
that the entire amount on deposit in the Capitalized Interest Account has not
been applied to cover shortfalls in interest on the related series of securities
by the end of the Funding Period, any amounts remaining in the Capitalized
Interest Account will be paid to the depositor.
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 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.
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
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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, waive any assumption fee,
late payment or other charge in connection with a loan and 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.
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.
HAZARD INSURANCE
In general, 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
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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
- the maximum insurable value of the improvements securing such loan or
- the greater of
(1) the outstanding principal balance of the loan and
(2) 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 and hurricanes. 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
- 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
- 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
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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.
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 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.
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".
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
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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.
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"). 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,
generally, 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.
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
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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 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.
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In general, 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
- that person is qualified to sell mortgage loans to, and service mortgage
loans on behalf of, Fannie Mae or Freddie Mac and
- the related merger, consolidation or succession does not adversely affect
the then current rating or ratings of the class or classes of securities
of the related series that have been rated.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Master Servicing Agreement. The applicable
prospectus supplement may provide for other Events of Default under any Pooling
and Servicing Agreement or Master Servicing Agreement, but if it does not, the
Events of Default will consist of
- 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");
- any failure by the master servicer to make an advance as required under
the Agreement, unless cured as specified therein;
- 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
- 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 described under "Credit Enhancement" herein 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.
The applicable prospectus supplement may provide for steps required to be
taken if an Event of Default remains unremedied, but if it does not, 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 that appointment, the trustee is obligated to act in such capacity. The
trustee and any such successor may
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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. The applicable prospectus supplement may provide for other
Events of Default, but if it does not, the Events of Default under each
Indenture will consist of:
- 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;
- failure to perform in any material respect any other 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;
- certain events of bankruptcy, insolvency, receivership or liquidation of
the depositor or the trust fund; or
- 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
- the holders of 100% of the percentage interests of the notes of such
series consent to such sale,
- 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
- the trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such notes as such payments would
have become due if such notes had not been declared due and payable, and
the trustee obtains the consent of the holders of 66 2/3% of the
percentage interests of the notes of such series.
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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.
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 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
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, each Agreement may be amended by the depositor,
the master servicer and the trustee, without the consent of any of the
securityholders,
(a) to cure any ambiguity;
(b) to correct any defective provision in the Agreement or to
supplement any provision in the Agreement that may be inconsistent with any
other provision in it; or
(c) to make any other revisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the provisions
in it,
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. Moreover, the related
Agreement may be amended to modify, eliminate or add to any of its provisions to
the extent necessary to maintain the qualification of the related trust fund as
a REMIC or to avoid or minimize the risk of imposition of any tax on the REMIC,
if a REMIC election is made with respect to the trust fund, or to comply with
any other requirements of the Code, if the trustee has received an opinion of
counsel to the effect that the
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action is necessary or helpful to maintain the qualification, avoid or minimize
that risk or comply with those requirements, as applicable.
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, 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
- 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
- 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. The applicable prospectus
supplement may provide for the timing by which the Agreement terminates, but if
it does not, 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 "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.
Any 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 the party specified in the related prospectus
supplement, including the holder of the REMIC residual interest, at a price
specified in the related prospectus supplement. The exercise of such right will
effect early retirement of the securities of that series, but the right of the
master servicer, or the other party or, if applicable, the 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
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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 descriptions do not, except as expressly provided below,
reflect the laws of any particular state, nor encompass the laws of all states
in which the security for the loans is situated. The descriptions 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, 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 the 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
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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
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, 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.
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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-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
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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 rise 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 EPA may impose a lien on property 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
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(including leasing the facility or property to third party), or fails to market
the property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. This
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes day-to-day management of all operational functions of the
mortgaged property.
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 oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under that 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. Moreover, under the Asset Conservation Act, the protections accorded
to lenders under CERCLA are also accorded to holders of security interests in
underground petroleum storage tanks. 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.
In general, 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
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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 and judicial 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 and case law 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. In certain states, including
California, if a lender simultaneously originates a loan secured by a senior
lien on a particular property and a loan secured by a junior lien on the same
property, such a lender as the holder of the junior lien may be precluded from
obtaining a deficiency judgment with respect to the excess of the aggregate
amount owed under both such loans over the proceeds of any sale under a deed of
trust or other foreclosure proceedings. 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.
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.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon 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.
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DUE-ON-SALE CLAUSES
Generally, 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.
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
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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.
HOME IMPROVEMENT CONTRACTS
General. Some home improvement contracts may in addition to being secured
by mortgages on real estate, also be secured by purchase money security
interests in home improvements financed thereby (such home improvement contracts
are hereinafter referred to in this section as "contracts"). These 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. In general, 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
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.
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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 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 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
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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.
JUNIOR MORTGAGES AND 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
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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.
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
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installment payment, and the first scheduled 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 on a simple interest basis. 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.
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 borrower
is required to submit to the lender, 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 or its agent 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.
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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 the insurance premium, but will
abate any insurance charges falling due after such prepayment.
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. 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
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 loan
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.
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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 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.
CONSUMER PROTECTION LAWS
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 and Regulation Z promulgated thereunder, Real
Estate Settlement Procedures Act and Regulation B promulgated thereunder, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes and regulations. In particular, Regulation Z, requires certain
disclosures to the borrowers regarding the terms of the loans; the Equal Credit
Opportunity Act and Regulation B promulgated thereunder 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; the Fair Credit
Reporting Act regulates the use and reporting of information related to the
borrower's credit experience. Certain provisions of these laws impose specific
statutory liabilities upon lenders who fail to comply therewith. In addition,
violations of such laws may limit the ability of the sellers to collect all or
part of the principal of or interest on the loans and could subject the sellers
and in some cases their assignees to damages and administrative enforcement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the anticipated material 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
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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
- the securities of a series are classified as indebtedness;
- 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");
- the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series; or
- 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.
Prior to issuance of each series of securities, the depositor shall file with
the SEC a Form 8-K on behalf of the related trust fund containing an opinion of
Brown & Wood LLP with respect to the validity of the information set forth under
"Federal Income Tax Consequences" herein and in the related prospectus
supplement.
TAXATION OF DEBT SECURITIES
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, as amended on June 11, 1996, (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.
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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 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,
- such interest is unconditionally payable at least annually,
- the issue price of the debt instrument does not exceed the total
noncontingent principal payments and
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- 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") issued final regulations in June
1996 (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 of 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, 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
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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 deducted 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 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
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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.
On December 30, 1997 the IRS issued final regulations (the "Final 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 Final 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
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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 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 (ii)
securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(5)(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) or (ii) 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.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
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 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
- 3% of the excess of adjusted gross income over the applicable amount, or
- 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
- 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
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- is similar to such a trust and which is structured with the principal
purpose of avoiding the single class REMIC rules.
The applicable prospectus supplement may provide for the allocation of REMIC
expenses, but if it does not, 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
- 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
- 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.
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
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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:
- subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
- subject to a limited exception, the sale or other disposition of a cash
flow investment;
- the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
- 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
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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
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. 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." The Small Business Job Protection Act of 1996 has
eliminated the special rule permitting Section 593 institutions ("thrift
institutions") to use net operating losses and other allowable deductions to
offset their excess inclusion income from REMIC residual certificates that have
"significant value" within the meaning of the REMIC Regulations, effective for
taxable years beginning after December 31, 1995, except with respect to residual
certificates continuously held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
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.
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Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest 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 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 can 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.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will apply to
an "electing large partnership". If an electing large partnership holds a
Residual Interest Security, all interests in the electing large partnership are
treated as held by disqualified organizations for purposes of the tax imposed
upon a pass-through entity under section 860E(e) of the Code. An exception to
this tax, otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity and that does not know
such affidavits are false, is not available to an electing large partnership.
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
- 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
- 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.
The REMIC Regulations presume that the transferor of a REMIC residual
interest did not have impeding the assessment or collection of tax as a
significant purpose of the transfer if it: (i) conducts a reasonable
investigation of the transferee's financial condition and concludes that the
transferee has historically paid its debts as they come due and finds no
significant evidence indicating that the transferee will not continue to pay its
debts as they come due in the future, and (ii) receives a representation from
the transferee that the transferee understands the tax obligations associated
with holding a residual interest and intends to pay those taxes as they come
due.
Proposed Treasury regulations issued on February 4, 2000 (the "New Proposed
Regulations") would modify the safe harbor under which transfers of noneconomic
residual interests are treated as not disregarded for federal income tax
purposes. Under the New Proposed Regulations, a transfer of a noneconomic
residual interest will not qualify under this safe harbor unless the present
value of the
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anticipated tax liabilities associated with holding the residual interest does
not exceed the sum of the present value of the sum of (i) any consideration
given to the transferee to acquire the interest, (ii) future distributions on
the interest, and (iii) any anticipated tax savings associated with holding the
interest as the REMIC generates losses. For purposes of this calculation, the
present value is calculated using a discount rate equal to applicable federal
rate. The New Proposed Regulations have a proposed effective date of February 4,
2000.
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 a REMIC Residual Interest Security acquired after
January 3, 1995 cannot be marked-to-market.
In addition, President Clinton's Fiscal Year 2001 Budget Proposal contains
a provision under which a REMIC would be secondarily liable for the tax
liability of its residual interest. The proposal states that it would be
effective for REMICs created after the date of enactment. It is unknown whether
this provision will be included in any bill introduced to Congress this year or
if introduced whether it will be enacted. Prospective investors in REMIC
residual interests should consult their tax advisors regarding the New Proposed
Regulations and the Fiscal Year 2001 Budget Proposals.
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 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
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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, generally, 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 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
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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. For tax years beginning after
August 5, 1997 the Taxpayer Relief Act of 1997 may allow use of the Cash Flow
Bond Method with respect to Stripped Securities and other Pass-Through
Securities because it provides that such method applies to any pool of debt
instruments the yield on which may be affected by prepayments. 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; provided that the applicable prospectus supplement may provide for the
reporting of OID on an alternative basis. 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
- 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;
- the non-Interest Weighted Securities are subject to the contingent
payment provisions of the Contingent Regulations; or
- each Interest Weighted Stripped security is composed of an unstripped
undivided ownership interest in loans and an installment obligation
consisting of stripped interest payments.
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
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in such circumstances. Pass-Through Securities will be, and, although the matter
is not free from doubt, Stripped Securities should be considered to represent
"real estate assets" within the meaning of Section 856(c)(5)(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. In general, the maximum tax rate on ordinary income for individual
taxpayers is 39.6% and the maximum tax rate on long-term capital gains for such
taxpayers is 20%. 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
- fails to furnish the trustee with its taxpayer identification number
("TIN");
- furnishes the trustee an incorrect TIN;
- fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
- 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 the recipient is a holder, directly or by attribution, of 10% or
more of the capital or profits interest in the issuer, or 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 FUND 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 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
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respect to such note. Any such gain or loss will 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
- is not actually or constructively a "10 percent shareholder" of the trust
fund or the seller (including a holder of 10% of the outstanding
certificates) or a "controlled foreign corporation" with respect to which
the trust fund or the seller is a "related person" within the meaning of
the Code and
- 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 such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and 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.
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TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The trust fund and the master
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 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.
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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.
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 fund 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. Pursuant to final regulations issued on May 9,
1997 under Code Section 708, a sale or exchange of 50% or more of the capital
and profits in a partnership would cause a deemed contribution of assets of the
partnership (the "old partnership") to a new partnership (the "new partnership")
in exchange for interests in the new partnership. Such interests would be deemed
distributed to the partners of the old partnership in liquidation thereof, which
would not constitute a sale or exchange. Accordingly under these new
regulations, if the trust fund were characterized as a partnership and a sale of
certificates terminated the partnership under Code Section 708, the purchaser's
basis in its ownership interest would not change.
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 loans 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 fund 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 Securities Exchange Act of 1934, as amended
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
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from separately litigating a proposed adjustment 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, as calculated for this purpose which may exceed the distributions to
certificateholders, 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 fund 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.
The term "U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity treated as a corporation or partnership
for federal income tax purposes created or organized in or under the laws of the
United States, any state thereof or the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), or an estate whose income is subject to U.S. federal
income tax regardless of its source of income, or a trust if a court within the
United States is able to exercise primary supervision of the administration of
the trust and one or more United States persons have the authority to control
all substantial decisions of the trust. Notwithstanding the preceding sentence,
to the extent provided in regulations, certain trusts in existence on August 20,
1996 and treated as United States persons prior to such date that elect to
continue to be so treated also shall be considered U.S. Persons.
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 fund 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.
NEW WITHHOLDING REGULATIONS
Final regulations dealing with withholding tax on income paid to foreign
persons, backup withholding and related matters (the "New Withholding
Regulations") were issued by the Treasury Department on October 6, 1997. The New
Withholding Regulations generally attempt to unify certification requirements
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and modify reliance standards. In particular, the New Withholding Regulations
replace the current IRS Form W-8, Form 4224 and Form 1001 with various revised
IRS Forms W-8 and provide that the current Form W-8, Form 4224 and Form 1001
will be invalid after December 31, 2000. Therefore, the holder of securities
will be required to file the appropriate revised Form W-8 before December 31,
2000. The New Withholding Regulations generally will be effective for payments
made after December 31, 2000, subject to certain transition rules. Prospective
investors are strongly urged to consult their own tax advisors with respect to
the New Withholding Regulations.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "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 and Section 4975 of the Code impose requirements on employee benefit
plans (and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities and Keogh plans as well as
collective investment funds and separate accounts in which such plans, accounts
or arrangements are invested) (collectively, "Plans") subject to ERISA or to
Section 4975 of the Code 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 requirements imposed by ERISA and Section
4975 of the Code. Accordingly, assets of such plans may be invested in
securities without regard to the 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 generally provides that, in addition to certain other
technical exceptions, 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.
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In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and Section 4975 of the Code prohibit a
broad range of transactions involving Plan assets and persons ("Parties in
Interest") having certain specified relationships to a Plan and impose
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 equity securities, an investment in equity 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, regulatory or
administrative exemption applies.
Depending on the relevant facts and circumstances, certain prohibited
transaction exemptions may apply to the purchase or holding of the
securities -- for example, Prohibited Transaction Class Exemption ("PTCE")
96-23, which exempts certain transactions effected on behalf of a Plan by an
"in-house asset manager"; PTCE 95-60, which exempts certain transactions by
insurance company general accounts; PTCE 91-38, which exempts certain
transactions by bank collective investment funds; PTCE 90-1, which exempts
certain transactions by insurance company pooled separate accounts; or PTCE
84-14, which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager". There can be no assurance that any of
these exemptions will apply with respect to any Plan's investment in securities,
or that such an exemption, if it did apply, would apply to all prohibited
transactions that may occur in connection with such investment. Furthermore,
these exemptions would not apply to transactions involved in operation of the
trust if, as described above, the assets of the trust were considered to include
Plan assets.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), 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) securities
issued in a series consisting of only a single class of securities; and (ii)
senior securities issued in a series in which there is only one class of senior
securities; provided that the securities in the case of clause (i), or the
senior securities in the case of clause (ii), evidence the beneficial ownership
of both a specified percentage (greater than 0%) of future interest payments 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 beneficial
ownership of a specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or interest payments
would be a "mortgage pass-through certificate" for purposes of PTE 83-1.
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PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption:
- 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;
- the existence of a pool trustee who is not an affiliate of the pool
sponsor; and
- 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 senior securities only in a series issued with a
subordination feature, provided that the subordination and Reserve Account,
subordination by shifting of interests, pool insurance or other form of credit
enhancement described under "Credit Enhancement" 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. In any event, 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.
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 securities, including certificates issued by entities holding
investment pools that consist of only certain receivables, loans and other
obligation (an "issuer") and the servicing, operation and management of such
entities, provided the conditions and requirements of the Underwriter Exemptions
are met.
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 identical, and include the
following:
(1) the acquisition of the securities by a Plan is on terms (including
the price for the securities that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party;
(2) the rights and interests evidenced by the securities acquired by
the Plan are not subordinated to the rights and interests evidenced by
other securities of the issuer, unless the investment pool contains certain
types of collateral, such as mortgages or real property (a "Designated
Transaction");
(3) the securities acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories (four, in a Designated Transaction) from Standard & Poor's
Ratings Group, a Division of The McGraw-Hill Companies ("S&P"), Moody's
Investors Service, Inc. ("Moody's") or Fitch, Incorporated ("Fitch");
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(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 securities represents not more
than reasonable compensation for underwriting the securities; the sum of
all payments made to and retained by the seller pursuant to the assignment
of the loans to the issuer 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 securities 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.
(7) for certain types of issuers, the documents establishing the
issuer and governing the transaction must contain certain provisions
intended to protect the assets of the issuer from creditors of the sponsor.
The issuer must also meet the following requirements:
(i) the investment pool must consist solely of assets of the type that
have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest rating categories (four, in a Designated
Transaction) of S&P, Moody's, or Fitch for at least one year prior to the
Plan's acquisition of securities; and
(iii) securities 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 securities.
Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
Plan fiduciary causes the Plan to acquire securities of an issuer holding
receivables as to which the fiduciary (or its affiliate) is an obligor, provided
that, among other requirements:
- in the case of an acquisition in connection with the initial issuance of
securities, at least fifty percent (50%) of each class of securities in
which Plans have invested is acquired by persons independent of the
Restricted Group;
- 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 investment pool;
- the Plan's investment in securities of any class does not exceed
twenty-five percent (25%) of all of the securities of that class
outstanding at the time of the acquisition; and
- immediately after the acquisition, no more than twenty-five percent (25%)
of the assets of any Plan with respect to which such person is a
fiduciary is invested in securities representing an interest in one or
more issuers containing assets sold or serviced by the same entity.
The Underwriter Exemptions generally 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
investment pool, constituting more than five percent (5%) of the aggregate
unamortized principal balance of the assets in the investment pool, or any
affiliate of such parties (the "Restricted Group").
The Underwriter Exemptions provide exemptive relief to certain
mortgage-backed and asset-backed securities transactions that otherwise satisfy
the requirements of the Underwriter Exemption, and that use pre-funding
accounts. Mortgage loans or other secured receivables (the "Obligations")
supporting payments to certificateholders, and having a value equal to no more
than twenty-five percent (25%) of the total principal amount of the securities
being offered by the issuer, may be transferred to the issuer within
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a 90-day or three-month period following the closing date (the "Pre-Funding
Period"), instead of being either identified or transferred on or before the
Closing Date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to
the total principal amount of the securities being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the Closing Date (the
"Additional Obligations") must meet the same terms and conditions for
eligibility as the original Obligations used to create the issuer, which
terms and conditions have been approved by a Rating Agency.
(3) The transfer of such Additional Obligations to the issuer during
the Pre-Funding Period must not result in the securities to be covered by
the Exemption receiving a lower credit rating from a Rating Agency upon
termination of the Pre-Funding Period than the rating that was obtained at
the time of the initial issuance of the securities by the issuer.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the Obligations in the issuer at
the end of the Pre-Funding Period must not be more than 100 basis points
lower than the average interest rate for the Obligations transferred to the
issuer on the Closing Date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations which
were transferred to the investment pool:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to each Rating
Agency rating the certificates, the related underwriter and the related
trustee) stating whether or not the characteristics of the Additional
Obligations conform to the characteristics described in the related
prospectus or prospectus supplement and/or pooling and servicing
agreement. In preparing such letter, the independent accountant must use
the same type of procedures as were applicable to the Obligations
transferred to the issuer as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the pooling
and servicing agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be invested
only in certain permitted investments.
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding Limit
for the issuer; and
(iv) that the amounts remaining in the pre-funding account at the
end of the Pre-Funding Period will be remitted to securityholders as
repayments of principal.
(9) The related pooling and servicing agreement must describe the
investments permitted for the pre-funding account and/or capitalized
interest account and, if not disclosed in the related prospectus or
prospectus supplement, the terms and conditions for eligibility of
Additional Obligations.
The rating of a security may change. If the rating of a security declines
below the lowest permitted rating, the security will no longer be eligible for
exemptive relief under the Underwriter Exemptions, and consequently may not be
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purchased by or sold to a Plan (although a Plan that had purchased the security
when it had a permitted rating would not be required by the Underwriter
Exemptions to dispose of it).
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.
Any Plan fiduciary which proposes to cause a Plan to purchase securities
should consult with its counsel concerning the impact of ERISA and the Code, the
applicability of PTE 83-1 and the Underwriter Exemptions, 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 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.
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 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"). The NCUA issued final regulations effective December 2, 1991
that restrict and in some instances prohibit the investment by Federal Credit
Unions in certain types of mortgage related securities.
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
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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, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities which are issued in book-entry
form.
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:
- by negotiated firm commitment underwriting and public reoffering by
underwriters;
- by agency placements through one or more placement agents primarily with
institutional investors and dealers; and
- 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 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.
This prospectus, together with the related prospectus supplement, may be
used by Countrywide Securities Corporation, an affiliate of CWABS, Inc. and
Countrywide Home Loans, Inc., in connection with offers and sales related to
market making transactions in the securities in which Countrywide Securities
Corporation acts as principal. Countrywide Securities Corporation may also act
as agent in such transactions. Sales in such transactions will be made at prices
related to prevailing prices 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.
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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.
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
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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.
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<PAGE> 183
INDEX TO DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Accretion Directed................. 36
Accrual............................ 38
Additional Obligations............. 121
Agreement.......................... 17
APR................................ 22
Available Funds.................... 31
Belgian Cooperative................ 45
BIF................................ 58
Capitalized Interest Account....... 60
Cash Flow Bond Method.............. 106
CERCLA............................. 77
Certain Investments................ 122
Claimable Amount................... 89
Class Security Balance............. 32
Clearstream, Luxembourg
Participants..................... 44
Code............................... 30, 91
COFI Securities.................... 41
Collateral Value................... 23
Combined Loan-to-Value Ratio....... 23
Component Securities............... 36
Contingent Regulations............. 93
cooperative loans.................. 18
cooperatives....................... 18
Cut-off Date Principal Balance..... 29
DCR................................ 120
Debt Securities.................... 92
Definitive Security................ 43
Detailed Description............... 18
DOL................................ 117
DTC................................ 42
Eleventh District.................. 40
ERISA.............................. 30
Euroclear Operator................. 45
Euroclear Participants............. 44
European Depositaries.............. 43
FHA................................ 19
FHLBSF............................. 40
Final Bond Premium Regulations..... 97
Financial Intermediary............. 43
Fitch.............................. 120
Fixed Rate......................... 37
Floating Rate...................... 37
foreign person..................... 110
Funding Period..................... 60
Garn-St Germain Act................ 80
Indenture.......................... 29
Insurance Proceeds................. 59
Insured Expenses................... 58
Interest Only...................... 37
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Interest Weighted Securities....... 95
Inverse Floating Rate.............. 37
IRS................................ 93
L/C Bank........................... 48
L/C Percentage..................... 48
Liquidation Expenses............... 59
Liquidation Proceeds............... 59
Loan Rate.......................... 19
Loan-to-Value Ratio................ 22
Lockout periods.................... 19
Master Servicing Agreement......... 17
Master Servicing Fee............... 66
Moody's............................ 50, 120
Morgan............................. 45
Mortgage........................... 56
mortgaged properties............... 26
National Cost of Funds Index....... 41
NCUA............................... 123
New Proposed Regulations........... 103
New Withholding Regulations........ 116
Nonresidents....................... 108
Notional Amount Securities......... 36
Obligations........................ 121
OID................................ 92
OID Regulations.................... 92
OTS................................ 41
PACs............................... 36
Partial Accrual.................... 37
Parties in Interest................ 118
Pass-Through Rate.................. 17
Pass-Through Securities............ 104
Pay-Through Security............... 94
Percentage Interests............... 68
Permitted Investments.............. 49
Planned Principal Class............ 36
Plans.............................. 117
Policy Statement................... 123
Pool Insurance Policy.............. 51
Pool Insurer....................... 51
Pooling and Servicing Agreement.... 29
Pre-Funded Amount.................. 60
Pre-Funding Account................ 60
Pre-Funding Limit.................. 121
Pre-Funding Period................. 121
Prepayment Assumption.............. 94
Primary Mortgage Insurance
Policy........................... 20
Prime Rate......................... 42
Principal Only..................... 37
Principal Prepayments.............. 33
</TABLE>
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<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Properties......................... 20
Property Improvement Loans......... 86
PTE 83-1........................... 118
Purchase Price..................... 28
Rating Agency...................... 125
Ratio Strip Securities............. 105
RCRA............................... 78
Record Date........................ 30
Refinance Loan..................... 23
Regular Interest Securities........ 91
Relevant Depositary................ 43
Relief Act......................... 84
REMIC.............................. 91
reserve interest rate.............. 38
Residual Interest Security......... 100
Restricted Group................... 121
Retained Interest.................. 29
Rules.............................. 43
S&P................................ 120
SAIF............................... 58
Scheduled Principal Class.......... 36
SEC................................ 48
Security Account................... 58
Security Owners.................... 42
Security Register.................. 30
Sellers............................ 17
</TABLE>
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Senior Securities.................. 47
Sequential Pay..................... 36
Servicing Fee...................... 104
Short-Term Note.................... 110
Single Family Properties........... 21
Single Family Securities........... 118
SMMEA.............................. 123
Strip.............................. 37
Stripped Securities................ 104
Subsequent Loans................... 60
Support Class...................... 37
TACs............................... 37
Targeted Principal Class........... 37
Terms and Conditions............... 45
TIN................................ 107
Title I Loans...................... 86
Title I Program.................... 85
Title V............................ 81, 83
Trust Agreement.................... 18, 29
Trust Fund Assets.................. 17
UCC................................ 76
Underwriter Exemptions............. 119
U.S. Person........................ 116
VA................................. 19
VA Guaranty........................ 65
Variable Rate...................... 37
</TABLE>
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$340,000,000
(APPROXIMATE)
CWABS MASTER TRUST
(FOR THE SERIES 2000-D SUBTRUST)
ISSUER
CWABS, INC.
DEPOSITOR
COUNTRYWIDE HOME LOANS LOGO
SPONSOR AND MASTER SERVICER
REVOLVING HOME EQUITY LOAN
ASSET BACKED NOTES, SERIES 2000-D
------------------------
PROSPECTUS SUPPLEMENT
------------------------
[CSC LOGO]
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the Series 2000-D Revolving Home Equity Loan Asset
Backed Notes in any state where the offer is not permitted.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Series 2000-D Revolving Home Equity Loan Asset Backed Notes
and with respect to their unsold allotments or subscriptions. In addition, all
dealers selling the Series 2000-D Revolving Home Equity Loan Asset Backed Notes
will be required to deliver a prospectus supplement and prospectus until
February 28, 2001.
November 27, 2000
