<PAGE>
As filed with the Securities and Exchange Commission on October 11, 1996
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
BLOCK MORTGAGE FINANCE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 43-1758633
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Main Plaza Building
4435 Main Street, Suite 500
Kansas City, Missouri 64111
(816) 751-6090
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
Bret Wilson
Block Financial Corporation
One Main Plaza
4435 Main Street, Suite 500
Kansas City, Missouri 64111
(816) 751-6021
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Paul M. Hoffmann, Esq. Daniel M. Rossner, Esq.
Morrison & Hecker L.L.P. Brown & Wood LLP
2600 Grand Avenue One World Trade Center
Kansas City, Missouri 64108 New York, New York 10048
--------------------
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration
Statement as determined by market conditions.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please
check the following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, check the
following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier registration statement for the same
offering. |_|
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
<S> <C> <C> <C> <C>
Title of Securities Amount to Be Proposed Maximum Proposed Maximum Amount of
to Be Registered Registered Offering Price Per Unit <F1> Aggregate Offering Price(1) Registration Fee
- ---------------------------------------------------------------------------------------------------------------------------------
Asset Backed Certificates $1,000,000 100% $1,000,000 $303.03
=================================================================================================================================
<FN>
<F1>(1) Estimated solely for the purpose of calculating the registration fee.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment that specifically states
that this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933, as
amended, or until this Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 11, 1996
Prospectus Supplement
(To Prospectus dated ______________, 199__)
BLOCK MORTGAGE FINANCE, INC.
Depositor
$-----------------------
Asset Backed Certificates
Block Financial Corporation
Master Servicer
Companion Mortgage Corporation
Seller
The Block Mortgage Finance Asset Backed Certificates, Series 199__-__
(the "Certificates"), will consist of ________ classes of Certificates
designated as the Class A-____ and Class A-___ Certificates (collectively, the
"Class A Certificates"), the Class B-___ and Class B-___ Certificates
(collectively, the "Class B Certificates") and Class R Certificates (the "Class
R Certificates," and together with the Class A Certificates and Class B
Certificates, the "Certificates"). Only the Class A and Class B-__ Certificates
(collectively, the "Offered Certificates") are offered hereby. The Certificates
represent fractional undivided interests in a trust fund to be designated as
Block Mortgage Finance Asset Backed Trust 199__-__ (the "Trust" or the "Trust
Fund"), consisting primarily of (i) a pool (the "Mortgage Pool") of
[fixed-rate][adjustable rate], closed-end, [simple interest,] mortgage loans
(each, (continues on following page)
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE DEPOSITOR, THE SELLER, THE MASTER SERVICER OR ANY OF THEIR AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR,
THE SELLER, THE MASTER SERVICER OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH UNDER "RISK FACTORS" IN THIS PROSPECTUS SUPPLEMENT COMMENCING ON PAGE
S-__ HEREIN AND IN THE PROSPECTUS COMMENCING ON PAGE ___ THEREIN.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Initial Class
Certificate Price to Underwriting Proceeds to
Balance Public <F1> Discount Depositor <F1><F2>
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Class A-__ Certificate
- ----------------------------------------------------------------------------------------------------------------
Per Class A-__ Certificate
- ----------------------------------------------------------------------------------------------------------------
Per Class B-__ Certificate
- ----------------------------------------------------------------------------------------------------------------
Total
- ----------------------------------------------------------------------------------------------------------------
<FN>
<F1> (1) Plus accrued interest, if any, from ________, 19__.
<F2> (2) Before deducting expenses payable by the Depositor, estimated to
be $__________.
</FN>
</TABLE>
be $______.
The Offered Certificates are offered by Morgan Stanley & Co. Incorporated
(the "Underwriter") subject to prior sale, when, as and if issued and accepted
by the Underwriter and subject to the Underwriter's right to reject orders in
whole or in part and to approval of certain legal matters by its counsel. It
is expected that the Offered Certificates will be delivered in book-entry form
through the facilities of The Depository Trust Company ("DTC") against payment
therefor in immediately available funds on or about _________, 199__.
MORGAN STANLEY & CO.
INCORPORATED
______________, 199__
<PAGE>
(continuation of cover page)
a "Mortgage Loan") secured by mortgages, deeds of trust or other instruments
(each, a "Mortgage") creating a first or junior lien on one- to four-family
dwellings (each, a "Mortgaged Property") to be deposited into the Trust Fund by
Block Mortgage Finance, Inc. (the "Depositor") for the benefit of the holders of
the Certificates (the "Certificateholders"), (ii) all monies due on the
Mortgage Loans after the Cut-off Date, (iii) amounts on deposit in the
Collection Account, [the Reserve Account] [, the Spread Account] and [the
Yield Supplement Account] and (iv) certain other property. The Mortgage Loans
were purchased by the Depositor from Companion Mortgage Corporation (the
"Seller") and will be master serviced by Block Financial Corporation (in its
capacity as master servicer, the "Master Servicer"). [The Trust also will
include $ on deposit in the Prefunding Account which will be used to
purchase additional Mortgage Loans for the Trust prior to , 199
as described herein.]
Distributions on the Certificates will be made, to the extent of funds
available therefor, on the ____ day of each month, or, if such day is not a
business day, then on the next business day, commencing on _________________,
199__ (each, a "Distribution Date").
There is currently no secondary market for the Offered Certificates.
The Underwriter intends to make a secondary market in the Offered Certificates,
but has no obligation to do so. There can be no assurance that a secondary
market for the Offered Certificates will develop or, if one does develop, that
it will continue. The Offered Certificates will not be listed on any
securities exchange.
As described herein [an election][two separate elections] will be made
to treat the Trust Fund [(exclusive of the Yield Maintenance Account)] as [a]
"real estate mortgage investment conduit[s]" ([each,] a "REMIC") for federal
income tax purposes. The Offered Certificates will constitute "regular
interests" in a REMIC [and an interest in the Yield Supplement Account] as
described herein. For a description of certain tax consequences of owning the
Offered Certificates, including, without limitation, original issue discount,
see "Certain Federal Income Tax Consequences" herein and in the Prospectus.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT
THE OFFERED CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE PROSPECTUS
DATED ______________, 1996, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND
WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. PURCHASERS ARE URGED TO READ BOTH
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
No dealer, salesperson or other individual has been authorized to give
any information or to make any representations not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or the Underwriter. This Prospectus Supplement and the Prospectus do
not constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby by anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement or the Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that the information herein is
correct as of any date since the date of this Prospectus Supplement.
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver a Prospectus and a Prospectus
Supplement. This delivery requirement is in addition to the obligation of
dealers to deliver a Prospectus and a Prospectus Supplement when acting as
Underwriter and with respect to their unsold allotments or subscriptions.
ii
<PAGE>
SUMMARY OF TERMS
The following Summary of Terms is qualified in its entirety by
reference to the detailed information appearing elsewhere in this Prospectus
Supplement and in the Prospectus. Capitalized terms used but not otherwise
defined shall have the meanings ascribed to such terms in the Prospectus.
Title of Certificates...... Block Mortgage Finance Asset Backed Certificates,
issuable in series (the "Certificates").
Certificates Issued........ The Certificates are to be issued in the following
Classes (each, a "Class"):
Initial Class Pass-Through
Certificate Balance Rate Class
------------------- ------------ -----
A-__
A-__
B-__
B-__
Only the Class A Certificates and Class B-__
Certificates (the "Offered Certificates") are
offered hereby.
Depositor.................. Block Mortgage Finance, Inc., a Delaware
corporation (the "Depositor") and a wholly-owned,
limited purpose subsidiary of the Seller.
Seller..................... Companion Mortgage Corporation, a Delaware
corporation (the "Seller") and a wholly-owned
subsidiary of Block Financial Corporation.
Master Servicer............ Block Financial Corporation (in its capacity as
servicer, the "Master Servicer").
Trustee.................... _________________, a national banking association
having its principal place of business in the
___________________ (the "Trustee"). See "The
Trustee" herein.
Cut-off Date............... ___________, 199__ (the "Cut-off
Date").
Closing Date............... On or about ___________, 199__ (the "Closing
Date").
Distribution Date.......... The _____ calendar day of each month or, if such
day is not a business day, the first business
day following such ____ calendar day, commencing
on __________, 199__ (each, a "Distribution
Date").
Record Date................ The calendar day immediately preceding each
Distribution Date (or, if Definitive Certificates
are issued, the first calendar day of the month
in which each such Distribution Date occurs)
(each, a "Record Date").
The Mortgage Pool.......... The Certificates represent interests in a trust
fund to be designated as Block Mortgage Finance
Asset Backed Trust 199__-__ (the "Trust" or the
"Trust Fund"), consisting primarily of (i) a
pool (the "Mortgage Pool") of [fixed-rate,]
[adjustable rate,] closed-end, [simple interest,]
mortgage loans originated or purchased by the
Seller for sale to the Depositor, and evidenced
by promissory notes or other evidence of
indebtedness (the "Mortgage Loans") secured by
mortgages, deeds of trust or other instruments
(each, a "Mortgage") creating a first or more
junior lien on one- to four- family dwellings
(each, a "Mortgaged Property"), with an
aggregate principal balance of $_________________
as of the Cut-off Date, after giving effect to
S-1
<PAGE>
payments due on or prior to the Cut-off Date (the
"Original Pool Principal Balance"), (ii) all
monies due with respect to the Mortgage Loans
after the Cut-off Date, (iii) amounts on deposit
in the Collection Account, [the Reserve Account]
[, the Spread Account] [and] [the Yield
Supplement Account] and (iv) certain other
property. [The Trust also will include
$__________ on deposit in the Prefunding Account
which will be used to purchase additional
Mortgage Loans for the Trust prior to __________,
199_, as described herein.]
All of the Mortgage Loans were purchased by the
Seller in accordance with the underwriting
standards as described in the Prospectus under
"The Mortgage Loan Program" and were sold to the
Depositor for inclusion in the Trust. See
"Description of the Mortgage Pool" herein.
The Mortgage Loans consist of _____ loans secured
by Mortgaged Properties which are located
primarily in the States of __________, __________
and __________. As of the Cut-off Date, the
average unpaid principal balance of the Mortgage
Loans was $________, the maximum unpaid principal
balance of any of the Mortgage Loans was
$_________ and the minimum unpaid principal
balance of any of the Mortgage Loans was
$_______. As of the Cut-off Date, the interest
rates borne by the Mortgage Loans (the "Mortgage
Interest Rates") ranged from ____% to ____% per
annum, and the weighted average Mortgage Interest
Rate of the Mortgage Loans was ____% per annum.
As of the Cut-off Date, the weighted average
original term to scheduled maturity of the
Mortgage Loans was _____ months and the original
term to scheduled maturity of the Mortgage Loans
ranged from [90] months to [180] months. As of
the Cut-off Date, the weighted average remaining
term to scheduled maturity of the Mortgage Loans
was ______ months and the remaining terms to
scheduled maturity of the Mortgage Loans ranged
from __ months to __ months. All of the Mortgage
Loans were originated between ___________, 199_
and __________, 199_.
As of the respective dates of origination of the
Mortgage Loans, the weighted average Combined
Loan-to-Value Ratio of the Mortgage Loans was
approximately ____%, [and the weighted average
Mortgage Loan-to-Value Ratio of the Mortgage
Loans was approximately ____%].
As of the Cut-off Date, ____% of the Mortgage Loans
were secured by first mortgages, _____% were
secured by second mortgages and approximately
____% were secured by more junior mortgages. In
the case of the Mortgage Loans secured by second
or more junior Mortgages, the related senior
mortgage loans may not necessarily be included in
the Mortgage Pool. As of the Cut-off Date, the
Mortgage Files for _____% (by aggregate principal
balance) of the Mortgage Loans contained
information as to property type. Of such Mortgage
Loans, ____% were secured by mortgages on single
family dwellings, _____% were secured by mortgages
on two- to four-family dwellings, _____% were
secured by mortgages on townhouses and ____% were
secured by mortgages on condominiums. The Mortgage
Loans for which such information is available do
not represent a statistical sampling and are not
expected to be indicative of such characteristics
of the entire Mortgage Pool.
As of the Cut-off Date, the Mortgage Files for
_____% (by aggregate principal balance) of the
Mortgage Loans contained information as to
occupancy type. Of such Mortgage Loans, ____% were
secured by mortgages on properties which are the
related borrower's primary residences, and ____%
were secured by mortgages on vacation, second home
or investor owned properties. The Mortgage Loans
for which such information is available do not
represent a
S-2
<PAGE>
statistical sampling and are not expected to be
indicative of such characteristics of the entire
Mortgage Pool. See "The Mortgage Loan
Pool--General" herein.
Unless otherwise specified to herein, references
herein to percentages of Mortgage Loans in the
Mortgage Pool refer in each case to the percentage
of the aggregate principal balance of the Mortgage
Loans in the Mortgage Pool as of the Cut-off Date,
giving effect to principal payments due on or
prior to the Cut-off Date.
Denominations............. The Offered Certificates will be issued in minimum
denominations of $1,000 and integral multiples
thereof. Each Offered Certificate will represent a
percentage interest in the Trust Fund (a
"Percentage Interest") determined by dividing the
original dollar amount represented by such
Certificate by the aggregate of the Original
Certificate Balance of all the Offered
Certificates.
Registration of the
Offered Certificates...... Each Class of Offered Certificates will initially
be represented by one or more certificates
registered in the name of Cede & Co. ("Cede"), the
nominee of The Depository Trust Company ("DTC"),
and will be available only in the form of
book-entries on the records of DTC, participating
members thereof ("Participants") and other
entities, such as banks, brokers, dealers and
trust companies, that clear through or maintain
custodial relationships with a Participant, either
directly or indirectly ("Indirect Participants").
Certificates representing the Offered Certificates
will be issued in definitive form only under the
limited circumstances described herein. All
references herein to "holders" or
"Certificateholders" shall reflect the rights of
owners of the Offered Certificates (the
"Certificate Owners" ) as they may indirectly
exercise such rights through DTC and Participants,
except as otherwise specified herein. See "Risk
Factors" and "Description of the
Certificates--Registration and Transfer of the
Certificates" in the Prospectus.
Final Scheduled
Distribution Dates........ The Final Scheduled Distribution Date for each
Class of Offered Certificates is set forth below,
although it is anticipated that the actual final
Distribution Date for such Class may occur earlier
than its Final Scheduled Distribution Date. See
"Certain Yield and Prepayment Considerations"
herein for a description of the methodology used
in calculating the Final Scheduled Distribution
Dates.
Final Scheduled
Distribution Date
-----------------
Class A-_ Certificates: _______________
Class A-_ Certificates: _______________
Class B-_ Certificates: _______________
The Certificates
A. General............... The Certificates will be issued pursuant to a
Pooling and Servicing Agreement to be dated as of
the Cut-off Date among the Master Servicer, the
Depositor and the Trustee (the "Pooling and
Servicing Agreement").
The Certificates will consist of ___________
classes of Certificates (each, a "Class"),
designated as the Class A-_ and Class A-_
Certificates (the "Class A Certificates") and the
Class B-_ and Class B-_ Certificates (the "Class B
Certificates") and the Class R Certificates (the
"Class R Certificates"). Distributions on the
Class B Certificates and Class R Certificates will
be subordinate to distributions on the Class A
Certificates to the extent described herein. Only
the Class A Certificates and Class B-_
Certificates (the "Offered Certificates") are
offered hereby.
S-3
<PAGE>
The Class A-_ Certificates will have an aggregate
principal balance of $__________ (the "Original
Class A-_ Certificate Balance") as of the Closing
Date, and will accrue interest at the rate of
____% per annum (the "Class A-_ Pass-Through
Rate"). The Class A-_ Certificates will have an
aggregate principal balance of $________ (the
"Original Class A-_ Certificate Balance") as of
the Closing Date, and will accrue interest at the
rate of ____% per annum (the "Class A-_ Pass
Through Rate"). The Class B-_ Certificates will
have an aggregate principal balance of $________
(the "Original Class B-_ Certificate Balance") as
of the Closing Date, and will accrue interest at
the rate of ____% per annum (the "Class B-_
Pass-Through Rate"). The Class B-_ Certificates
will have an aggregate principal balance of
$________ (the "Original Class B-_ Certificate
Balance") as of the Closing Date, and will accrue
interest at the rate of ____% per annum (the
"Class B-_ Pass-Through Rate"; each of the Class
A-_ Pass Through Rate, the Class A-_ Pass-Through
Rate, the Class B-_ Pass Through Rate and the
Class B-_ Pass-Through Rate, a "Pass Through
Rate"). The Class A Certificates represent an
undivided ownership interest in the Mortgage Pool
that is senior to the ownership interest
represented by the Class B Certificates and Class
R Certificates to the extent described herein.
As more fully described herein, distributions will
be made on the Class A Certificates on each
Distribution Date to the extent of available
funds: first, to pay interest on each
interest-bearing Class of Class A Certificates;
second, to principal of the Classes of Class A
Certificates then entitled to receive
distributions of principal, in the order and
subject to the priorities set forth herein under
"Description of the Certificates -- Distributions"
herein; and third, to interest on and then
principal of each Class of Class B Certificates in
order of their numerical Class designation
(beginning with the Class B-1 Certificates),
subject to the limitations set forth herein under
"Description of the Certificates --
Distributions." The Class R Certificate will only
be entitled to receive distributions, if any, upon
the termination of the Trust Fund.
On any Distribution Date, the amount available for
distribution to Certificateholders for any
Distribution Date generally will be [the sum of
(i)] the Available Payment Amount, [(ii) any
amount (the "Reserve Account Draw") deposited in
the Collection Account from the Reserve Account,
(iii) any amount withdrawn from the Spread Account
for deposit into the Collection Account and (iv)
any Yield Supplement Deposit Amount deposited in
the Collection Account from the Yield Supplement
Account]. The term "Available Payment Amount"
generally means with respect to any Distribution
Date, the amount of collections on or with respect
to the Mortgage Loans due and received by the
Master Servicer during the related Due Period, net
of the related Servicing Fee paid to the Master
Servicer and reimbursements for incurred unpaid
Servicing Fees, unreimbursed Advances and certain
expenses paid by the Master Servicer.
B. Interest Distributions.. Interest will accrue on each interest-bearing
Class of Certificates from the ____ calendar day
of each month (whether or not such day is a
Business Day), or in the case of the initial
Accrual Period, from the Cut-off Date, to, but
excluding, the ____ calendar day of the next
succeeding month (whether or not such day is a
Business Day) (each, an "Accrual Period") on the
basis of a 360 day year consisting of twelve
30-day months. Interest shall accrue at the
related Pass-Through Rate and shall be
distributed, to the extent funds are available
therefor, on each Distribution Date. With respect
to each Distribution Date, the aggregate interest
accrued during the related Accrual Period at the
related Pass-Through Rate on the Certificate
Balance outstanding on the immediately preceding
Distribution Date (after giving effect to all
payments of principal made on such preceding
Distribution Date), or, in the
S-4
<PAGE>
case of the initial Accrual Period, outstanding on
the Cut-off Date of each Class of Offered
Certificates, is referred to herein as the
"Interest Remittance Amount." See "Description of
the Certificates--Distributions" herein and in the
Prospectus.
C. Principal
Distributions............. Holders of the Offered Certificates will be
entitled to receive on each Distribution Date, in
the order and priority set forth herein, to the
extent of funds available therefor (but not more
than the Certificate Balance then outstanding), a
distribution allocable to principal which will
generally equal the sum of (a) all amounts
received by the Master Servicer from or on behalf
of the related Mortgagors on the Mortgage Loans
during the calendar month preceding the calendar
month in which such Distribution Date occurs (the
"Due Period") which, at the time of receipt, were
applied in reduction of the principal balance of
such Mortgage Loans, including (i) the principal
portion of all scheduled payments ("Monthly
Payments") received on the Mortgage Loans, (ii)
any principal prepayments of any such Mortgage
Loans in full ("Principal Prepayments") and
partial prepayments of principal on any such
Mortgage Loan that are not Principal Prepayments
(each, a "Curtailment") and (iii) the principal
portion of (A) the proceeds of any insurance
policy relating to a Mortgage Loan, a Mortgaged
Property or a REO Property, net of proceeds to be
applied to the repair of the Mortgaged Property or
released to the Mortgagor and net of expenses
reimbursable therefrom ("Insurance Proceeds"),
(B) proceeds received in connection with the
liquidation of any defaulted Mortgage Loans,
whether by trustee's sale, foreclosure sale or
otherwise ("Liquidation Proceeds"), net of fees
and advances reimbursable therefrom ("Net
Liquidation Proceeds") and (C) proceeds received
in connection with a taking of a related Mortgaged
Property by condemnation or the exercise of
eminent domain or in connection with a release of
part of any such Mortgaged Property from the
related lien ("Released Mortgaged Property
Proceeds"), (b) the principal portion of all
amounts paid by the Seller in connection with the
repurchase of, or the substitution of a
substantially similar mortgage loan for, a
Mortgage Loan as to which there is defective
documentation or a breach of a representation or
warranty contained in the related Purchase and
Sale Agreement, (c) the principal balance of each
defaulted Mortgage Loan or REO Property as to
which the Master Servicer has determined that all
amounts expected to be recovered have been
recovered (each, a "Liquidated Mortgage Loan") to
the extent not included in the amounts described
in clauses (a) and (b) above (the sum of (a), (b)
and (c) above, the "Basic Principal Amount"). The
Basic Principal Amount shall not inculde amounts
received from Mortgagors to be applied to Monthly
Payments in the future. [In addition, excess
amounts may be released from the Reserve Account
and applied to make distributions in reduction of
the Principal Balance of the Offered Certificate
Balance as described herein. See "Description of
the Certificates--Reserve Account".]
As of any Distribution Date, the "Certificate
Balance" of any Class of Offered Certificates will
equal the Original Certificate Balance of such
Class, less all amounts previously distributed on
account of principal to holders of such Class of
Offered Certificates.
D. Certificates other
than the Offered
Certificates.............. In addition to the Offered Certificates, the
following Classes of Subordinated Certificates
will be issued in the indicated approximate
initial Class Certificate Balances and will bear
interest at the indicated Pass-Through Rates, but
are not offered hereby:
S-5
<PAGE>
Initial Class
Certificate Pass-Through
Balance Rate
------------- ------------
Class B-_(1).... $ %
Class R N/A N/A
----------
(1) The Class B-_ Certificates will provide limited
credit support for the Class A Certificates and the
other Class B Certificates as described herein. Any
information contained herein with respect to the
Class B-_ Certificates and Class R Certificates is
provided only to permit a better understanding of
the Offered Certificates.
[Reserve Account.......... An account or accounts will be maintained by the
Trust (the "Reserve Account") which account shall
be an Eligible Account, as described herein. The
Reserve Account will initially be maintained at
_______________ in its trust department. Amounts
on deposit in the Reserve Account will be
available on each Distribution Date to pay the
Remittance Amount, to the extent the Available
Payment Amount on any such Distribution Date is
insufficient therefor; provided that amounts on
deposit in the Reserve Account will not be
available on any Distribution Date to the extent
the Yield Supplement Deposit Amount for such
Distribution Date exceeds the amount on deposit in
the Yield Supplement Account on such Distribution
Date. The Reserve Account will be funded by an
initial deposit from the proceeds of the sale of
the Offered Certificates of $____________ (____%
of the Original Pool Principal Balance, which is
equal to the initial Reserve Account Requirement).
Thereafter, the Available Payment Amount, if any,
remaining after payment of the Remittance Amount
will be deposited into the Reserve Account to the
extent necessary to maintain the amount in the
Reserve Account at the Reserve Account
Requirement. The Reserve Account Requirement will
generally decline so long as losses and
delinquencies do not exceed the limits described
herein. The Reserve Account Requirement may be
reduced as of any Distribution Date, or the
definition thereof may be otherwise modified,
without the consent of the Certificateholders,
provided that the Rating Agencies confirm in
writing that such reduction or modification will
not result in a reduction or withdrawal in the
rating of any Class of the Offered Certificates.]
[On each Distribution Date, all amounts on deposit
in the Reserve Account in excess of the Reserve
Account Requirement will be distributed to the
Offered Certificates, in the order and priority
set forth herein under "Description of the
Certificates -- Reserve Fund," until the principal
amount of each such Class is reduced to zero, and
any remaining excess will be distributed to the
Class __ Certificates; provided, that if both the
balance in the Reserve Account and the
Overcollateralization Amount as of any
Distribution Date have been reduced to zero,
payments of principal on each Class of Offered
Certificates will be made pro rata based on
their respective Certificate Balances. See
"Description of the Certificates--Reserve
Account."]
[The Class __ Certificateholders will not be
required to refund any amounts properly
distributed to them, regardless of whether there
are sufficient funds on a subsequent Distribution
Date to make a full distribution to the other
Classes of Certificateholders of the amount
required to be distributed to such
Certificateholders.]
[The funding and maintenance of the Reserve
Account is intended to enhance the likelihood of
timely payment to Offered Certificateholders of
the Remittance Amount; however, in certain
circumstances, the Reserve Account could be
depleted and shortfalls could result.]
S-6
<PAGE>
[Yield Supplement
Account................... On the Closing Date, the Yield Supplement Account
will be funded by an initial deposit of
$__________ from the proceeds of the issuance of
the Offered Certificates, which is equal to the
Maximum Yield Supplement Amount as of the Cut-off
Date. The "Maximum Yield Supplement Amount" as of
any date will equal the net present value
(discounted at a rate of ___% per annum) of the
aggregate amount by which (x) interest accrued on
the principal balance of each then outstanding
Mortgage Loan having a Mortgage Interest Rate of
less than ____% (each, a "Supplemented Mortgage
Loan") for the period commencing on such date and
ending on the scheduled maturity of each such
Mortgage Loan at a rate equal to ____% (the sum of
(i) ____% and (ii) the Servicing Fee Rate),
exceeds (y) interest on such principal balance at
the applicable Mortgage Interest Rate for the same
period, assuming in each case that payments on
such Mortgage Loans are made as scheduled and no
prepayments are made. The Yield Supplement Account
will initially be maintained at __________________
in its trust department. On each Distribution
Date, the Trustee will transfer to the
Distribution Account, from monies on deposit in
the Yield Supplement Account, an amount equal to
the Yield Supplement Deposit Amount, if any, in
respect of the Mortgage Loans for such
Distribution Date, which amount shall be applied
to the Interest Remittance Amount for such
Distribution Date. See "Description of the
Certificates--Yield Supplement Account").]
Servicing.................. The Master Servicer will be responsible for
servicing, managing and making collections on the
Mortgage Loans. The Master Servicer will receive a
monthly servicing fee (the "Monthly Servicing
Fee"), payable out of the amounts collected by the
Master Servicer, as compensation for acting as
Master Servicer. The Monthly Servicing Fee will be
paid on each Distribution Date for the preceding
Due Period, and, as to any Distribution Date, will
be equal to one-twelfth of the product of ____%
(the "Servicing Fee Rate") and the Pool Principal
Balance as of the preceding Distribution Date or,
with respect to the first Distribution Date, the
Original Pool Principal Balance, reduced by any
amounts set forth in the Pooling and Servicing
Agreement. As part of its servicing
responsibilities, the Master Servicer will be
required to cause to be deposited, in the manner
and at the times described herein, into an account
or accounts (the "Collection Account"), which must
be an Eligible Account, all payments due with
respect to the Mortgage Loans after the Cut-off
Date except late payment penalties, extension
fees and similar items which will be retained by
the Master Servicer as additional servicing
compensation. The Master Servicer is entitled to
receive investment earnings on amounts in the
Collection Account. See "Description of the
Certificates--Payments on Mortgage Loans; Deposits
to Collection Account" and "--Servicing
Compensation".
Ratings.................... It is a condition to the issuance of the Class
A-_, A-_ and B-_ Certificates that each be rated
___, ___ and ___, respectively by _____________
("________") and _____ , ___ and ___, respectively
by _______________ ("_____", each of ______ and
_____, a "Rating Agency"). A security rating is
not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time. No person is obligated to
maintain any rating on any Class of Certificates
and, accordingly, there can be no assurance that
the rating assigned to any Class of Certificates
upon initial issuance thereof will not be lowered
or withdrawn by a Rating Agency at any time
thereafter. In the event any rating is revised or
withdrawn, the liquidity of the related Class of
Certificates may be adversely affected. In
general, the ratings address credit risk and do
not represent any assessment of the likelihood or
rate of principal prepayments. See "Risk Factors
--Liquidity" and "Ratings" herein.
S-7
<PAGE>
Optional Termination ...... On any Distribution Date on or after the date on
which the Pool Principal Balance has declined to
less than __% of the Original Pool Principal
Balance, the Master Servicer [, the Depositor and
the Seller] will have the option, subject to
certain conditions set forth in the Pooling and
Servicing Agreement, to purchase all, but not
less than all, of the Mortgage Loans, at the
purchase price described herein. The payment of
such purchase price will effect retirement of
the Certificates which are outstanding on the
date of purchase. See
"Description of the Certificates--Termination;
Retirement of the Certificates" herein.
Certain Legal Aspects of
the Mortgage Loans........ _____% of the Mortgage Loans (by aggregate
principal balance as of the Cut-off Date) are
secured by second or more junior Mortgages which
are subordinate to one or more mortgage liens on
the related Mortgaged Property prior to the lien
of such Mortgage Loan (such senior lien, if any, a
"Senior Lien"). A primary risk with respect to
junior Mortgages is that foreclosure funds
received in connection therewith may not be
sufficient to satisfy fully both the Senior Lien
and the junior Mortgage. See "Risk Factors" and
"Certain Legal Aspects of the Mortgage Loans"
herein and in the Prospectus.
Certain Federal Income
Tax Consequences.......... [An election] [Two separate elections] will be
made to treat the Trust Fund [(exclusive of the
Yield Supplement Account)] as [a] "real estate
mortgage investment conduit[s]" ([each,] a
"REMIC") for federal income tax purposes.
Upon the issuance of the Certificates, Brown &
Wood LLP, special tax counsel to the Depositor
("Tax Counsel") will deliver its opinion generally
to the effect that, assuming compliance with all
provisions of the Pooling and Servicing Agreement,
for federal income tax purposes the Trust Fund
[(exclusive of the Yield Supplement Account)] will
qualify as a REMIC under Sections 860A through
860G of the Internal Revenue Code of 1986 (the
"Code").
For federal income tax purposes, the Class R
Certificates will be the sole class of "residual
interest" in the REMIC and the other Certificates
will represent ownership of [(i)] "regular
interests" in the REMIC which generally will be
treated as debt instruments[, and (ii) rights to
payments from the Yield Supplement Account, which
generally will be treated as interests in notional
principal contracts].
For further information regarding the federal
income tax consequences of investing in the
Offered Certificates, see "Certain Federal Income
Tax Consequences" herein and in the Prospectus.
ERISA Considerations....... See "ERISA Considerations" herein and in the
Prospectus.
Legal Investment........... Although upon their initial issuance each Class of
the Class __ Certificates will be rated _____ by
_______ and _____ by _______, the Class __
Certificates will not constitute "mortgage related
securities" under the Secondary Mortgage Market
Enhancement Act of 1984 because, among other
things, the Mortgage Pool includes Mortgage Loans
that are secured by second and more junior
Mortgages. Investors should consult their own
legal advisers in determining whether and to what
extent the Offered Certificates constitute legal
investments for such investors. See "Legal
Investment" herein.
S-8
<PAGE>
Use of Proceeds............ The Depositor will apply the net proceeds of the
sale of the Offered Certificates to purchase the
Mortgage Loans [and to make the initial deposit
into the [Reserve Account] [Yield Supplement
Account]].
S-9
<PAGE>
RISK FACTORS
Investors should consider, among other things, the matters discussed
under "Risk Factors" in the Prospectus and the following factors in connection
with the purchase of the Offered Certificates:
Risks of the Mortgage Loans
Geographic Concentration. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency on mortgage loans generally. Any concentration of the Mortgage Loans
in such a region may present risk considerations in addition to those generally
present for similar mortgage-backed securities without such concentration. In
particular, _____% and _____% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) are secured by Mortgaged Properties located in
the States of __________ and __________, respectively. In addition, any
deterioration of the real estate market or weakening of the economy in a region
of the country could result in decreases in the financial strength of borrowers
and decreases in the value of collateral serving as security for loans, which
may be reflected in increases in delinquencies of loans secured by real estate,
slower absorption rates of real estate into the market and lower sales prices
for real estate. See "Description of the Mortgage Pool" herein for further
information regarding the geographic concentration of the Mortgage Loans.
Nature of Security. Approximately _____% of the Mortgage Loans (by
aggregate principal balance as of the Cut-off Date) are secured by second or
more junior Mortgages. Although little data is available, the rate of default of
junior mortgage loans may be greater than that of mortgage loans secured by
Senior Liens on comparable properties. See "Risk Factors--Risks of the Mortgage
Loans and Private Mortgage-Backed Securities--Nature of Security" in the
Prospectus.
As of the Cut-off Date, the Mortgage Files for _____% (by aggregate
principal balance) of the Mortgage Loans contained information as to occupancy
type, and _____% (by aggregate principal balance) of such Mortgage Loans were
secured by Mortgaged Properties that are vacation, second home or investor owned
properties. It is possible that the rate of delinquencies, foreclosures and
losses on Mortgage Loans secured by non-owner occupied or investor properties
could be higher than the loans secured by the primary residence of the borrower.
Additionally, the Mortgage Loans for which information is available as to
occupancy type do not represent a statistical sampling of all the Mortgage
Loans, and the percentage of total Mortgage Loans secured by Mortgage Properties
that are vacation, second home or investor owned properties may be higher (or
lower) than _____%.
Risk of Early Defaults. _____% of the Mortgage Loans in the Mortgage
Pool (by aggregate principal balance as of the Cut-off Date) were originated
within six months prior to the Cut-off Date. The weighted average remaining term
to maturity of the Mortgage Loans in the Mortgage Pool as of the Cut-off Date is
approximately ______ months. Although little data is available, defaults on
mortgage loans are generally expected to occur with greater frequency in their
early years.
Yield and Prepayment Considerations
The yield to maturity of the Offered Certificates will depend on the
rate and timing of payment of principal on the Mortgage Loans in the Mortgage
Pool, including prepayments, liquidations due to defaults and repurchases due to
defective documentation or breaches of representations and warranties. Such
yield may be adversely affected by a higher or lower than anticipated rate of
prepayments on the Mortgage Loans. Prepayments are influenced by a number of
factors, including prevailing mortgage market interest rates, local and regional
economic conditions and homeowner mobility. See "Certain Yield and Prepayment
Considerations" herein and in the Prospectus.
[Mortgage Interest Rate Considerations
The Mortgage Interest Rate on _____% of the Mortgage Loans (by aggregate
principal balance as of the Cut-off Date) (each, a "Supplemented Mortgage Loan")
is less than _____% (the sum of (i) _____%, which is both the Class ___
Pass-Through Rate and the Class ___ Pass-Through Rate, and (ii) the Servicing
Fee Rate). Amounts withdrawn from the Yield Supplement Account are expected to
be available to fund such difference. The Yield Supplement Account will be
funded by an initial deposit of an amount equal to the Maximum Yield Supplement
Amount as of the Cut-off Date, which is equal to the net present value
(discounted at a rate of ___% per annum) of the aggregate amount by which (x)
interest accrued on the principal balance of each Supplemented Mortgage Loan as
of the Cut-off Date for the period commencing with such date and ending on the
scheduled maturity of each such Mortgage Loan at a rate per annum equal to
_____%, exceeds (y) interest on such principal balance at the applicable
S-10
<PAGE>
Mortgage Interest Rate for such period, assuming in each case that payments on
such Mortgage Loans are made as scheduled and no prepayments are made.
Disproportionate rates of prepayments between Mortgage Loans with higher and
lower Mortgage Interest Rates are therefore not expected to materially affect
the yield to the Offered Certificateholders.]
DESCRIPTION OF THE MORTGAGE POOL
General
The description herein of the Mortgage Loans comprising part of the
Trust (the "Mortgage Pool") and of the Mortgaged Properties describes the pool
of Mortgage Loans as it was constituted [as of the close of business on] after
giving effect to principal payments due on or prior to the Cut-off Date. The
Mortgage Pool consists of ___________ Mortgage Loans and has an Original Pool
Principal Balance of $_________________ as of the Cut-off Date. The promissory
notes (the "Mortgage Notes") evidencing the Mortgage Loans are secured by
mortgages on one- to four-family residential properties which are located
primarily in __________ and __________. Each Mortgage Loan is a closed-end,
[fixed-rate,] [adjustable rate,] [simple interest] mortgage loan. [____] [All
of the] Mortgage Loans are fully amortizing (i.e. provide for
substantially equal monthly payments of principal and interest over their
terms). [The remaining Mortgage Loans provide for scheduled monthly payments of
principal and interest based upon a ___ month amortization schedule and a
balloon payment ___ months following origination.] None of the Mortgage Loans
are insured or guaranteed by any governmental agency or other person (except [in
some cases] for title and hazard insurance, which insurance is required to be
obtained by the borrower). The Mortgage Loans were purchased by the Seller from
[unaffiliated] parties, as described under "The Mortgage Loan Program" in the
Prospectus.
Each Mortgage Loan was selected for inclusion in the Mortgage Pool from
among those mortgage loans that were not 30 days or more past due and had a
remaining term to scheduled maturity ranging from ____ months to _____ months
(except for _____ Mortgage Loans whose remaining terms to scheduled maturity
were _____ months). The Depositor believes that no adverse selection procedures
were employed in making such selection.
As of the Cut-Off Date, (i) the average principal balance of the
Mortgage Loans was $____________________, (ii) no Mortgage Loan had a remaining
principal balance of less than $____________, (iii) each Mortgage Loan had an
original term to scheduled maturity ranging from ____ months to _____ months,
(iv) the weighted average Mortgage Interest Rate was ______% per annum, (v) the
weighted average original term to scheduled maturity was _______ months, (vi)
the weighted average remaining term to scheduled maturity was _______ months,
(vii) the original principal balance of the Mortgage Loans ranged from
$______________ to $__________ and (viii) the average original principal balance
was $______________.
Unless otherwise specified herein, references herein to percentages of
the Mortgage Loans refer in each case to the Percentage of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date.
Of the Mortgage Loans, ____% were secured by first mortgages, _______%
were secured by second mortgages, and approximately _______% were secured by
more junior mortgages. As of the dates of origination of the Mortgage Loans, the
weighted average Combined Loan-to-Value Ratio (as defined in "Description of the
Primary Assets--Single Family Loans" in the Prospectus) of the Mortgage Loans
was _______% and the weighted average Loan-to-Value Ratio (as defined in
"Description of the Primary Assets--Single Family Loans" in the Prospectus) of
such Mortgage Loans was ________%. As of the respective dates of origination of
the Mortgage Loans, the weighted average Mortgage Loan Ratio was ________%. The
"Mortgage Loan Ratio" of a Mortgage Loan secured by a second or more junior
mortgage is equal to the ratio (expressed as a percentage) of the original
principal balance of such Mortgage Loan to the sum of (i) the original principal
balance of such Mortgage Loan and (ii) the principal balance at the time of
origination of the Mortgage Loan of any senior mortgage loan(s).
As of the Cut-off Date, the Mortgage Files for _______% (by aggregate
principal balance) of the Mortgage Loans contained information as to property
type, and of such Mortgage Loans _____% were secured by single family
properties, _______% were secured by two- to four-family properties, _____% were
secured by townhouses and _______% were secured by condominiums. As of the
Cut-off Date, the Mortgage Files for _______% (by aggregate principal balance)
of the Mortgage Loans contained information as to the occupancy type, and of
such Mortgage Loans _________% were secured by primary residences, and _______%
were secured by vacation, second home or investor owned properties. The Mortgage
Loans for which information is available as to property type or occupancy type
do not represent a statistical sampling of all the Mortgage Loans, and the
respective percentages of all the Mortgage Loans secured by the various property
types or occupancy types is expected to differ from the percentages given above.
S-11
<PAGE>
MORTGAGE POOL STATISTICS
Set forth below is a description of certain additional characteristics
of the Mortgage Pool as of the Cut-off Date, and references to percentages of
Mortgage Loans refer in each case to the percentage of the aggregate principal
balance of the Mortgage Loans in the Mortgage Pool. The percentages set forth in
the table below may not always add to 100% due to rounding.
Remaining Principal Balances
% of
Mortgage % of
Pool by Mortgage Pool
Aggregate Aggregate Number of by Number of
Range of Principal Principal Principal Mortgage Mortgage
Balances Balance Balance Loans Loans
- --------------------------- --------- --------- --------- -------------
S-12
<PAGE>
Mortgage Interest Rates
% of
Mortgage % of
Pool by Mortgage Pool
Aggregate Aggregate Number of by Number of
Range of Mortgage Principal Principal Mortgage Mortgage
Interest Rates Balance Balance Loans Loans
- --------------------------- --------- --------- --------- -------------
Months to Scheduled Maturity at Origination
% of
Mortgage % of
Pool by Mortgage Pool
Aggregate Aggregate Number of by Number of
Range of Months to Principal Principal Mortgage Mortgage
Scheduled Maturity Balance Balance Loans Loans
- --------------------------- --------- --------- --------- -------------
S-13
<PAGE>
Months Remaining to Scheduled Maturity
% of
Mortgage % of
Pool by Mortgage Pool
Range of Months Aggregate Aggregate Number of by Number of
Remaining to Principal Principal Mortgage Mortgage
Scheduled Maturity Balance Balance Loans Loans
- --------------------------- --------- --------- --------- -------------
Geographical Distribution of Mortgage Loans (1)
% of
Mortgage % of
Pool by Mortgage Pool
Aggregate Aggregate Number of by Number of
Principal Principal Mortgage Mortgage
State Balance Balance Loans Loans
- --------------------------- --------- --------- --------- -------------
- ---------------------
(1) Geographic location generally is determined by location of the related
Mortgaged Property; however, with respect to certain Mortgage Loans, geographic
location is determined by Mortgagor mailing address.
S-14
<PAGE>
Calendar Year and Month Of Origination
% of
Mortgage % of
Pool by Mortgage Pool
Aggregate Aggregate Number of by Number of
Calendar Year Principal Principal Mortgage Mortgage
and Month Balance Balance Loans Loans
- --------------------------- --------- --------- --------- -------------
Calendar Year of Maturity
% of
Mortgage % of
Pool by Mortgage Pool
Aggregate Aggregate Number of by Number of
Calendar Year Principal Principal Mortgage Mortgage
of Maturity Balance Balance Loans Loans
- --------------------------- --------- --------- --------- -------------
S-15
<PAGE>
Combined Loan-to-Value Ratios
At Origination
% of
Mortgage % of
Pool by Mortgage Pool
Aggregate Aggregate Number of by Number of
Principal Principal Mortgage Mortgage
Range of CLTV's Balance Balance Loans Loans
- --------------------------- --------- --------- --------- -------------
S-16
<PAGE>
Loan-to-Value Ratios at Origination
% of
Mortgage % of
Pool by Mortgage Pool
Range of Aggregate Aggregate Number of by Number of
Loan-to- Principal Principal Mortgage Mortgage
Value Ratios Balance Balance Loans Loans
- --------------------------- --------- --------- --------- -------------
Lien Priority
% of
Mortgage % of
Pool by Mortgage Pool
Aggregate Aggregate Number of by Number of
Principal Principal Mortgage Mortgage
Lien Priority Balance Balance Loans Loans
- --------------------------- --------- --------- --------- -------------
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Offered Certificates,
the aggregate amount of each interest payment on the Offered
Certificates and the yield to maturity of the Offered Certificates are
related to the rate and timing of payments of principal on the
Mortgage Loans, which may be in the form of scheduled and unscheduled
payments. In general, when the level of prevailing interest rates for
similar loans significantly declines, the rate of prepayment is likely
to increase, although the prepayment rate is influenced by a number of
other factors, including general economic conditions and homeowner
mobility. Defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on second
and more junior mortgage loans may be greater than that of mortgage
loans secured by first liens on comparable properties. Prepayments,
liquidations and purchases of the Mortgage Loans will result in
distributions to the related Offered Certificateholders of amounts of
principal which would otherwise be distributed over the remaining
terms of the Mortgage Loans in the Mortgage Pool.
S-17
<PAGE>
In addition, the Master Servicer [, the Depositor] [and the
Seller] may, at its option, purchase from the Trust all of the
outstanding Mortgage Loans and REO Properties, and thus effect the
early retirement of the Offered Certificates, on any Distribution Date
following the first date on which the Pool Principal Balance is less than
[__]% of the Original Pool Principal Balance. See "Description of the
Certificates--Termination; Retirement of the Certificates" herein.
The rate of prepayment on a pool of mortgage loans is
affected by prevailing market rates for mortgage loans of a comparable
term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to
refinance their mortgage loans. Depending on prevailing market rates,
the future outlook for market rates and economic conditions generally,
some mortgagors may sell or refinance mortgaged properties in order to
realize their equity in the mortgaged properties, to meet cash flow
needs or to make other investments. No representation is made as to
the particular factors that will affect the prepayment of the Mortgage
Loans, as to the relative importance of such factors, as to the
percentage of the principal balance of the Mortgage Loans that will be
paid as of any date or as to the overall rate of prepayment on the
Mortgage Loans.
The Final Scheduled Distribution Dates for the Offered Certificates
are as follows:
Final Scheduled
Distribution Date
-----------------
Class A-__ Certificates.....................................
Class A-__ Certificates.....................................
Class B-__ Certificates.....................................
The Final Scheduled Distribution Date for each Class of
Offered Certificates (other than the Class ____ Certificates) is the
date on which the Original Certificate Balance set forth on the cover
page hereof for such Class would be reduced to zero assuming that no
Prepayments or Curtailments are received on the Mortgage Loans, each
Monthly Payment of principal of and interest on the Mortgage Loans is
timely received, [and no excess amounts from the Reserve Account are
distributed to reduce the Principal Balance of any Offered
Certificate]. The Final Scheduled Distribution Date for the Class ____
Certificates is the Distribution Date following the calendar month in
which the stated maturity of the Mortgage Loan having the latest
stated maturity occurs, plus ______.
The weighted average life of each Class of the Offered
Certificates is likely to be shorter than would be the case if
payments actually made on the Mortgage Loans conformed to the
foregoing assumptions and the date on which the final payment on any
Class of Offered Certificate could occur is significantly earlier than
its respective Final Scheduled Distribution Date, because, among other
things, (i) prepayments are likely to occur, (ii) defective Mortgage
Loans may be purchased from the Trust under certain circumstances
described herein, (iii) the Master Servicer [, the Depositor] [and the Seller]
may purchase all of the Mortgage Loans when the aggregate outstanding
principal amount of the Mortgage Loans is less than __% of the Original Pool
Principal Balance [and (iv) shortfalls in principal due to losses on the
Mortgage Loans could result in withdrawals from the Reserve Account to make
payments in respect of principal on the Offered Certificates]. [In addition,
distributions of excess amounts from the Reserve Account will be
applied towards the reduction of the Certificate Balance of the
Offered Certificates.]
Greater than anticipated prepayments of principal will
increase the yield on the Offered Certificates purchased at a price
less than par. Greater than anticipated prepayments of principal will
decrease the yield on the Offered Certificates purchased at a price
greater than par. The effect on an investor's yield due to principal
prepayments on the Mortgage Loans occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period
immediately following the issuance of the Certificates will not be
entirely offset by a subsequent like reduction (or increase) in the
rate of principal payments. The weighted average life of the Offered
Certificates will also be affected by the amount and timing of
delinquencies and defaults on the Mortgage Loans in the Mortgage Pool
and the recoveries, if any, on defaulted Mortgage Loans and foreclosed
properties in the Mortgage Pool.
[____% of the Mortgage Loans (by aggregate principal balance
as of the Cut-off Date) will be Supplemented Mortgage Loans. Because
the Yield Supplement Account will be funded by an initial deposit of
an amount equal to the Maximum Yield Supplement Amount as of the
Cut-off Date (as described in "Description of the Certificates--Yield
Supplement Account"), disproportionate rates of prepayments between
Mortgage Loans with higher and lower Mortgage Interest Rates are not
expected to materially affect the yield to Class ___
Certificateholders, even if Mortgage Loans with higher Mortgage
Interest Rates prepay faster than Mortgage Loans with lower interest
Mortgage Interest Rates.]
The "weighted average life" of a Certificate refers to the
average amount of time that will elapse from the date of issuance to
the date each dollar in respect of principal of such Certificate is
repaid. The weighted average
S-18
<PAGE>
life of the Offered Certificates will be influenced by, among other factors,
the rate at which principal payments are made on the Mortgage Loans in the
Mortgage Pool.
Prepayments on Mortgage Loans are commonly measured relative
to a prepayment standard or model. The model used in this Prospectus
Supplement is the prepayment assumption (the "Prepayment Assumption"),
which represents an assumed rate of prepayment each month relative to
the then outstanding principal balance of the pool of mortgage loans
for the life of such mortgage loans. For the Offered Certificates, a
100% Prepayment Assumption assumes a conditional prepayment rate
("CPR") of __% per annum of the outstanding principal balance of such
Mortgage Loans in the first month of the life of the Mortgage Loans
and an additional ________% per annum (precisely _________% per annum)
in each month thereafter until the ___________ month; beginning in the
_____________ month and in each month thereafter during the life of
such Mortgage Loans, a conditional prepayment rate of _____% per annum
each month is assumed. As used in the table below, 0% Prepayment
Assumption assumes a conditional prepayment rate equal to 0% of the
Prepayment Assumption, i.e., no prepayments. Correspondingly, _____%
Prepayment Assumption assumes prepayment rates equal to ___% of the
Prepayment Assumption, and so forth. The Prepayment Assumption does
not purport to be a historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans. The Depositor believes that
no existing statistics of which it is aware provide a reliable basis
for holders of the Offered Certificates to predict the amount or the
timing of receipt of prepayments on the Mortgage Loans.
Since the tables were prepared on the basis of the
assumptions in the following paragraph, there are discrepancies
between characteristics of the actual Mortgage Loans and the
characteristics of the Mortgage Loans assumed in preparing the tables.
Any such discrepancy may have an effect upon the percentages of the
Principal Balances outstanding and weighted average lives of the
Offered Certificates set forth in the tables and the distributions of
principal on the Offered Certificates may be made earlier or later
than as indicated in the tables. For example, it is very unlikely that
the Mortgage Loans will prepay at the rates assumed by the Prepayment
Assumption until maturity or that all of the Mortgage Loans will
prepay at the same level of the rates assumed by the Prepayment
Assumption. Moreover, the diverse remaining terms to maturity of the
Mortgage Loans could produce slower or faster principal distributions
than indicated in the table entitled "Percent of Initial Certificate
Balance Outstanding at the Following Percentages of the Prepayment
Assumption" at the various constant percentages of the Prepayment
Assumption specified therein, even if the weighted average remaining
term to maturity of the Mortgage Loans is as assumed. Any difference
between such assumptions and the actual characteristics and
performance of the Mortgage Loans, or actual prepayment or loss
experience, will affect the percentages of original Certificate
Balances outstanding over time and the weighted average lives of the
Offered Certificates.
The tables set forth below have been prepared on the basis of
certain assumptions, including the assumptions that (i) all payments
of principal of and interest on each Mortgage Loan are timely received
and no Mortgage Loan is ever delinquent, (ii) none of the Mortgage
Loans are repurchased from the Trust, (iii) there are no Net Losses on
the Mortgage Loans and the Mortgage Loans prepay at the indicated
percentages of the Prepayment Assumption, (iv) the Master Servicer
[Depositor,] [or Seller] does not exercise its right of optional
termination as described herein, (v) distribution of principal and
interest on the Certificates will be made on the ____ day of each
calendar month regardless of the day on which the Distribution Date
actually occurs, commencing ________________, (vi) the Servicing Fee Rate
is _____% per annum of the aggregate principal balance of the Mortgage
Loans at the beginning of the related Due Period, (vii) all
prepayments are prepayments in full, (viii) the scheduled due date for
each of the Mortgage Loans is the ___________ day of each month, [(ix)
the Reserve Account Requirement (as described in "Description of the
Certificates--Reserve Account") is set initially as specified in the
Pooling and Servicing Agreement and decreases in accordance with the
Pooling and Servicing Agreement,] (x) as of the date of issuance of
the Offered Certificates, the Mortgage Loans consist of pools of loans
with the weighted average characteristics and amortization
methodologies set forth below and (xi) the Offered Certificates have
the respective Pass-Through Rates and Original Certificate Balances
set forth in this Prospectus Supplement.
Assumed
Original Original Remaining Month of
Mortgage Amortization Term to Term to Initial
Amortization Principal Interest Term Maturity Maturity Scheduled
Methodology Balance Rate (months) (months) (months) Payments
- ------------ --------- ------ ---------- -------- -------- --------
Level Pay
Level Pay
S-19
<PAGE>
Subject to the foregoing discussion and assumptions, the
following table indicates the weighted average life of each Class of
Offered Certificates, and sets forth the percentages of the initial
Certificate Balance of each such Class of Offered Certificates that
would be outstanding after each of the dates shown at various
percentages of CPR.
Percent of Initial Certificate Balance Outstanding at the
Following Percentages of the Prepayment Assumption
<TABLE>
<CAPTION>
Payment
Date Class A Certificates Class __ Certificates Class __ Certificates Class __ Certificates
- -------- ---------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
</TABLE>
*The weighted average life of a Certificate of any Class is determined
by (i) multiplying the amount of each distribution in reduction of the
related Certificate Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii)
adding the results, and (iii) dividing the sum by the highest related
Certificate Balance of the Certificate.
The following tables set forth the yields to maturity of the
Offered Certificates at various assumed prices and percentages of the
Prepayment Assumption. The information is given solely to illustrate
the yield to maturity based on such assumptions and is not a
prediction of the actual yield to maturity of any Class of Offered
Certificates.
Pre-Tax Yield to Maturity(l) --
Sensitivity of the Offered Certificates to Prepayments
Class A___ Class ___
Percentage of the Prepayment Percentage of the Prepayment
Assumption Assumption
- ---------------------------- ----------------------------
Class ___ Class ___
Percentage of the Prepayment Percentage of the Prepayment
Assumption Assumption
- ---------------------------- ----------------------------
(1) Represents a corporate bond equivalent.
(2) As a percent of the related Certificate Principal Balance.
These tables have been prepared based on the assumptions
described in the second and fourth paragraph preceding these tables
(including the assumptions regarding the characteristics and
performance of the Mortgage Loans, which differ from the actual
characteristics and performance thereof) and should be read in
conjunction therewith.
S-20
<PAGE>
THE SELLER AND FORECLOSURE
AND DELINQUENCY EXPERIENCE
General
For a general discussion of the Seller, see "The Seller" in
the Prospectus.
Servicing Portfolio
Primary servicing will be provided by ______ on a contract
basis for [__% of the principal balance] [all] of the Mortgage Loans.
[The remainder of the Mortgage Loans will be serviced by various
servicers, none of which will be servicing more than [5%] of the
principal balance of the Mortgage Loans.
________ is a _____ corporation which is actively engaged in
the servicing of various financial instruments, including first and
second mortgage loans. It has entered into an agreement by which it
will provide the primary servicing for various risk featured mortgage
loans which had been acquired by the Seller. _____ is an approved HUD
Title I and Title II servicer.] _____ services several securitized and
whole loan portfolios comprised of single-family mortgage products.
_____'s corporate offices are located at _________________________.
______ commenced mortgage servicing operations in ___ and since then
has managed and serviced [sub-prime conduit programs, and third-party
mortgage loan portfolios]. The data presented below was provided by
______ as representative servicing information for mortgage loans,
including mortgage loans it services on behalf of the Seller, and is
presented for informational purposes only. Neither the Depositor, the
Seller nor the Master Servicer makes any representations or warranties
as to the accuracy or completeness of such information.
Delinquency and Loss Experience
The following tables set forth information relating to the
delinquency and loan loss experience for mortgage loans in the
portfolio of such loans serviced by _______ (the "Servicer's
Portfolio") for each of the _____ prior years in the period ended
_____________ and for the interim periods indicated. The data
presented in the following tables is for illustrative purposes only,
and there is no assurance that future delinquency or loss experience
of the Mortgage Loans will be similar to that set forth below.
THE SERVICER'S MORTGAGE LOAN DELINQUENCY EXPERIENCE
At _____________, At ___________________,
--------------------- --------------------------
____ _____ ______ _____ ____
(Dollar Amounts in Thousands)
- ---------------------
(1) Through __________________, this was calculated as the
average of the daily principal balance outstanding in each
month during the period, not including unearned interest.
Beginning ____________________, it is calculated as the
average month end principal balance outstanding in each month
during the period, not including unearned interest.
(2) "Principal Amount Outstanding" is the net remaining principal
balance, not including unearned interest, at the end of the related
period.
(3) "Total Delinquent Balances" is the net remaining principal balance
30 days or more contractually past due at the end of the related
period.
S-21
<PAGE>
THE SERVICER'S MORTGAGE LOAN LOSS EXPERIENCE
At ____________, At _______________,
------------------ -----------------------------
----- ------- ----- ----- -----
(Dollar Amounts in Thousands)
(1) Through ___________________, this was calculated as the
average of the daily principal balance outstanding in each
month during the period, not including unearned interest.
Beginning __________________, it is calculated as the average
month end principal balance outstanding in each month during
the period, not including unearned interest.
(2) "Principal Amount Outstanding" is the net remaining principal
balance, not including unearned interest at the end of the related
period.
(3) "Total Net Credit Losses" is the net remaining principal balance,
net of any recoveries received as of the end of the related period.
(4) ___________________ percentages are annualized.
The delinquency percentages set forth in the second preceding
table are calculated on the basis of the unpaid principal balances of
mortgage loans included in the Servicer's Portfolio as of the end of
the periods indicated. The charge-off experience percentages set forth
above are calculated on the basis of the average outstanding unpaid
principal balance of mortgage loans included in the Servicer's
Portfolio during the periods indicated. However, because the amount of
loans included in the Servicer's Portfolio has increased over these
periods as a result of new originations and acquisitions, the
Servicer's Portfolio as of the end of any indicated period includes
many loans that may not have been outstanding long enough to give rise
to some or all of the indicated periods of delinquency or to have
resulted in losses. In the absence of such substantial and continual
additions of newly originated and acquired loans to the Servicer's
Portfolio, the delinquency and charge-off percentages indicated above
would be higher and could be substantially higher. The actual delinquency
percentages and loss experience with respect to the Mortgage Loans may
be expected to be substantially higher than the delinquency percentages
indicated above because the composition of the Mortgage Pool will not change.
In addition, any deterioration of the real estate market or
weakening of the economy in a region of the country could result in
decreases in the financial strength of borrowers and decreases in the
value of collateral serving as security for loans, which may be
reflected in increases in delinquencies of loans secured by real
estate, slower absorption rates of real estate into the market and
lower sales prices for real estate.
DESCRIPTION OF THE CERTIFICATES
General
The Block Mortgage Finance Asset Backed Certificates, Series
199_-__, will consist of _____ classes of Certificates, designated as
the Class A-__ and Class A-__ Certificates (the "Class A
Certificates"), the Class B-__ and Class B-__ Certificates (the "Class
B Certificates"), and the Class R Certificates (the "Class R
Certificates," and collectively with the Class A Certificates and the
Class B Certificates, the "Certificates"). Only the Class A
Certificates and Class B-__ Certificates (the "Offered Certificates")
are offered hereby.
The following summary describes certain terms of the
Certificates and the Pooling and Servicing Agreement. Reference is
made to the accompanying Prospectus for important additional
information regarding the terms of the Offered Certificates and the
underlying documents. A form of the Pooling and Servicing Agreement
has been filed as an exhibit to the Registration Statement of which
the Prospectus forms a part. The summary does not purport to be
complete and is subject to, and is qualified in its entirety by
reference to, the provisions of the Certificates and the Pooling and
Servicing Agreement. Where particular provisions or terms used in any
of such documents are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such
summaries.
S-22
<PAGE>
The Certificates represent interests in the Trust created and
held pursuant to the Pooling and Servicing Agreement. The Trust Fund
consists primarily of (i) the Mortgage Loans and all proceeds thereof,
(ii) REO Property, (iii) amounts on deposit in the Collection Account
[, Reserve Account], [Spread Account] and Yield Supplement Account]
(including all earnings thereon and proceeds thereof) and (iv) certain
other property.
Each Offered Certificate will be issued in minimum
denominations of $1,000 and integral multiples thereof. A single
Certificate may be issued in an amount different than described above.
Each Offered Certificate will represent a percentage interest (a
"Percentage Interest") in the applicable Class of Offered Certificates
determined by dividing the original dollar amount represented by such
Offered Certificate by the original aggregate principal amount of all
Offered Certificates of such Class.
The Master Servicer will service the Mortgage Loans either
directly or through subservicers in accordance with the Pooling and
Servicing Agreement and generally in accordance with the first and
junior mortgage loan servicing standards and procedures accepted by
prudent mortgage lending institutions. See "Description of the
Certificates -- Servicing Standards" and "-- Use of Subservicers" in
the Prospectus for a further description of the provisions of the
Pooling and Servicing Agreement relating to servicing standards and
the use of subservicers.
The Classes of Offered Certificates will have the respective
initial Certificate Principal Balances (subject to the permitted
variance) and Pass-Through Rates set forth or described on the cover
page hereof. The remaining beneficial ownership interest in the Trust
Fund will be evidenced by the Classes of Certificates not otherwise
offered hereby. The rights of the Class B and Class R
Certificateholders to receive distributions with respect to the
Mortgage Loans will be subordinated to the rights of the Class A
Certificateholders to the extent described herein.
Book-Entry Certificates
The Offered Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership
interests in such Offered Certificates ("Certificate Owners") will
hold their Certificates through the Depository Trust Company ("DTC")
in the United States[, or CEDEL or Euroclear (in Europe)] if they are
participants of such systems, or indirectly through organizations
which are participants in such systems. The Book-Entry Certificates
will be issued in one or more certificates which equal the aggregate
principal balance of the Certificates and will initially be registered
in the name of Cede & Co., the nominee of DTC. [CEDEL and Euroclear
will hold omnibus positions on behalf of their participants through
customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names
on the books of DTC. Citibank N.A. will act as depositary for CEDEL
and The Chase Manhattan Bank will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries").] Investors may hold such
beneficial interests in the Book-Entry Certificates in minimum
denominations representing Certificate Principal Balances of $1,000
and in integral multiples in excess thereof. Except as described
below, no person acquiring a Book-Entry Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and
until Definitive Certificates are issued, it is anticipated that the
only "Certificateholder" of the Offered Certificates will be Cede &
Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Pooling and Servicing
Agreement. Certificate Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
Payments on Mortgage Loans; Deposits to Collection Account
The Master Servicer will establish and maintain on behalf of
the Trustee an account (the "Collection Account") for the benefit of
the Certificateholders. The Collection Account will be an Eligible
Account. Subject to the investment provision described in the
following paragraphs, within one business day of receipt by the Master
Servicer of amounts in respect of the Mortgage Loans (excluding
amounts representing the Monthly Servicing Fee, late charges, bad check
fees, modification fees, assumption fees, extension fees, administrative
charges, taxes, assessments, credit insurance charges, insurance
proceeds to be applied to the restoration or repair of a Mortgaged
Property or similar items), the Master Servicer will deposit such
amounts in the Collection Account. Amounts so deposited may be
invested in Permitted Investments (as described in the Pooling and
Servicing Agreement) maturing no later than one Business Day prior to
the date on which the amount on deposit therein is required to be
deposited in the Distribution Account or on such Distribution Date if
approved by the Rating Agencies.
An "Eligible Account" is an account that is [(i) maintained
with a depository institution whose debt obligations at the time of
any deposit therein have the highest short-term debt rating by the
Rating Agencies, (ii) one or more accounts with a depository
institution which accounts are fully insured by either the Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the Federal Deposit Insurance Corporation established by such fund
with a minimum long-term unsecured debt rating of Baa3 by Moody's and
"BBB-" by
S-23
<PAGE>
S&P, (iii) a segregated trust account maintained with the Trustee or an
affiliate of the Trustee in its fiduciary capacity or (iv) otherwise acceptable
to each Rating Agency as evidenced by a letter from each Rating Agency to the
Trustee, without reduction or withdrawal of their then current ratings of the
Certificates.]
Permitted Investments are specified in the Pooling and
Servicing Agreement and are limited to investments which meet the
criteria of the Rating Agencies from time to time as being consistent
with their then current ratings of the Certificates.
Distributions
General. Distributions on the Certificates will be made by
the Trustee on the __th day of each month, or if such day is not a
business day, on the first business day thereafter, commencing on
_______ __, 199_ (each, a "Distribution Date"), to the persons in
whose names such Certificates are registered at the close of business
on the last business day of the month preceding the month of such
Distribution Date (the "Record Date").
Distributions on each Distribution Date will be made by check
mailed to the address of the person entitled thereto as it appears on
the applicable Certificate Register or, in the case of [a Book-Entry
Certificate or] a Certificateholder who holds Certificates with an
aggregate initial Certificate Principal Balance of $___________ or more
and who has so notified the Trustee in writing in accordance with the
Pooling and Servicing Agreement, by wire transfer in immediately
available funds to the account of such Certificateholder at a bank or
other depository institution having appropriate wire transfer facilities;
provided, however, that the final distribution in retirement of the
Offered Certificates will be made only upon presentment and surrender
of such Certificates at the Corporate Trust Office of the Trustee.
Deposits to the Distribution Account
The Trustee shall maintain a distribution account (the
"Distribution Account") on behalf of the Certificateholders. The
Trustee shall, promptly upon receipt, deposit in the Distribution
Account and retain therein the following:
(i) the aggregate amount remitted by the Master Servicer
from the Collection Account;
[(ii) Amounts withdrawn from the [Reserve Account]
[, Yield Maintenance Account] [, Spread Account];
(iii) all Advances; and
(iv) any amount required to be deposited by the
Master Servicer in connection with any losses on Permitted
Investments.
Withdrawals from the Distribution Account
The Trustee shall withdraw funds from the Distribution
Account for distribution to Certificateholders as described below
under "--Allocation of Available Payment Amount" and may from time to
time make withdrawals from the Distribution Account for the following
purposes:
(i) to pay to the Master Servicer as servicing compensation
earnings on or investment income with respect to funds in or credited
to the Distribution Account;
(ii) to withdraw any amount deposited in the Distribution
Account and not required to be deposited therein; and
(iii) to clear and terminate the Distribution Account upon
the termination of the Agreement.
Allocation of Available Payment Amount
General. Distributions to Certificateholders will be made on each
Distribution Date in an amount equal to the amount of Available Payment
Amount. "Available Payment Amount" as of any Distribution Date, is the sum of
the following amounts:
(i) the aggregate amount on deposit in the Collection
Account as of the close of business on the immediately preceding
Determination Date; and
S-24
<PAGE>
[(ii) amounts withdrawn from the [Reserve Account]
[, Yield Maintenance Account] [, Spread Account]; and]
(iii) Advances with respect to such Distribution Date,
less the sum of:
(x) the portion thereof representing (A)
Principal Prepayments and Liquidation Proceeds
received after the last day of the related
Prepayment Period and (B) all Scheduled Payments or
portions thereof received in respect of scheduled
principal and interest on the Mortgage Loans due
after the preceding Due Date, and
(y) amounts permitted to be withdrawn from
the Collection Account pursuant to the Pooling and
Servicing Agreement.
On each Distribution Date, the Trustee shall withdraw from
the Distribution Account the Available Payment Amount and make
distributions thereof as described below and to the extent of the
Available Payment Amount:
(i) to the Class A Certificateholders, an amount equal to the
sum of (a) interest accrued during the related Interest
Accrual Period at the applicable Pass-Through Rate for the
Class A Certificates on the Senior Certificate Principal
Balance immediately prior to the related Distribution Date,
reduced by such Class' pro rata share of shortfalls in
interest due to prepayments on the Mortgage Loans for such
Distribution Date and (b) any Unpaid Interest Shortfall with
respect to such Class; and
(ii) to the Class A Certificateholders, an amount equal to
the Class A Principal Formula Amount to reduce the
Certificate Principal Balance thereof to zero; and
[Subordinate Certificate Pay Down Rules]
Definitions.
The "Pass-Through Rate" for any Distribution Date is defined
in the Summary of Terms above. The "Unpaid Interest Shortfall" as to
any Distribution Date is the amount, if any, by which the aggregate of
the Interest Shortfalls for a Class of Certificates for prior
Distribution Dates exceeds the aggregate of the amounts paid on prior
Distribution Dates to Certificateholders of Certificates of such Class
as Unpaid Interest Shortfalls. The "Interest Shortfall" as to any
Distribution Date is the amount, if any, by which the amount paid to
Certificateholders of a Class of Certificates on such Distribution
Date is less than the amount of current interest required to be paid
to the Certificateholders of such Class on such Distribution Date.
The "Class A Principal Formula Amount" with respect to any
Distribution Date is an amount equal to the sum of (i) the Class A
Percentage of the aggregate of the principal portion of each Scheduled
Payment due during the related Due Period, whether or not received;
(ii) the Class A Prepayment Percentage of the aggregate of Principal
Prepayments for such Distribution Date; (iii) with respect to
unscheduled recoveries allocable to principal (including insurance
proceeds) of any Mortgage Loan which was finally liquidated during the
related Prepayment Period, the lesser of (A) the Class A Prepayment
Percentage of such recovery attributable to principal of such Mortgage
Loan and (B) the Class A Percentage times the related Principal
Balance; and (iv) any Unpaid Principal Shortfall for such Distribution
Date.
The "Class A Percentage" with respect to any Distribution
Date equals the percentage equivalent of a fraction the numerator of
which is the Certificate Principal Balance of the Class A Certificates
and the denominator of which is the Pool Principal Balance. The "Pool
Principal Balance" with respect to any Distribution Date equals the
aggregate of the Principal Balances of the Mortgage Loans outstanding
on the Due Date in the month preceding the month of such Distribution
Date after giving effect to all payments thereon.
The "Class A Prepayment Percentage" with respect to any
Distribution Date is 100%; provided, however, that the Class A
Prepayment Percentage for a Distribution Date occurring in or after
_______ 199_ will be equal to the Class A Percentage for such
Distribution Date if:
(a) the percentage, for the preceding Distribution Date,
determined by dividing
(i) the aggregate Certificate Principal Balances of
the Subordinate Certificates by
S-25
<PAGE>
(ii) the Pool Principal Balance
is equal to or greater than __%; and
(b) (i) either
(A) aggregate Realized Losses do not exceed
__% of the Original Certificate Principal
Balance of the Subordinate Certificates,
and no more than __% of the Mortgage Loans
(measured by Principal Balance) are ____
days or more delinquent (or are in
foreclosure or converted to REO
Properties); or
(B) aggregate Realized Losses do not exceed
__% of the Original Certificate Principal Balance
of the Subordinate Certificates; and (ii) at least
one of the following conditions is satisfied:
(1) no more than __% of the Mortgage Loans
(measured by Principal Balance) are ____ days or
more delinquent (or are in foreclosure or
converted to REO Properties) or (2) no more
than __% (or ____%, if certain additional tests
are met regarding recent performance) (measured by
Principal Balance) are ____ days or more
delinquent (or are in foreclosure or
converted to REO Properties); and
(c) no Rating Agency has reduced the original rating
assigned to the Class A Certificates due to a perceived
deterioration in the credit quality of the Mortgage Loans;
or certain other criteria more fully described in the Pooling and
Servicing Agreement are met.
The "Certificate Principal Balance" with respect to any Class
of Certificates, as of any Distribution Date, will be equal to the
Certificate Principal Balance of such Class of Certificates on the
Closing Date (the "Original Certificate Principal Balance") minus all
distributions of principal with respect thereto on previous
Distribution Dates.
A "Principal Prepayment" with respect to any Distribution
Date is any mortgagor payment or other recovery of principal on a
Mortgage Loan that is received in advance of its scheduled Due Date
and is not accompanied by an amount as to interest representing
scheduled interest due on any date or dates in any month or months
subsequent to the month of prepayment.
The "Unpaid Principal Shortfall" with respect to any
Distribution Date is the amount, if any, by which previous
distributions of principal of the Class A Certificates are less than
the aggregate Class A Principal Formula Amounts (net of amounts under
clause (iv) of the definition of "Class A Principal Formula Amount")
distributed on prior Distribution Dates.
The "Principal Balance" of any Mortgage Loan or related REO
Property equals (i) as of the Cut-off Date, the Cut-off Date Principal
Balance, and (ii) as of any other date, the Cut-off Date Principal
Balance minus the sum of (a) the principal portion of the Scheduled
Payments due with respect to such Mortgage Loan or REO Property during
each Due Period ending prior to the most recent Distribution Date
which were received or with respect to which an Advance was made, and
(b) all Principal Prepayments with respect to such Mortgage Loan or
REO Property, and all Liquidation Proceeds to the extent applied by
the Master Servicer as recoveries of principal with respect to such
Mortgage Loan or REO Property, which were distributed on any previous
Distribution Date, and (c) any Realized Loss with respect thereto
allocated for any previous Distribution Date.
A "Realized Loss" (i) with respect to any defaulted Mortgage
Loan that is finally liquidated (a "Liquidated Loan"), is the amount
of loss realized equal to the portion of the Principal Balance
remaining after application of all amounts recovered (net of amounts
reimbursable to the Master Servicer for related Advances, expenses,
Servicing Fees and other Servicing Compensation) towards interest and
principal owing on the Mortgage Loan and (ii) with respect to certain
Mortgage Loans the principal balances or the scheduled payments of
principal and interest of which have been reduced in connection with
bankruptcy proceedings, is the amount of such reduction.
Subordination of the Class B Certificates
The rights of the Certificateholders of the Class B
Certificates to receive distributions with respect to the Mortgage
Loans will be subordinated to such rights of the Certificateholders of
the Class A Certificates to the extent described below. This
subordination is intended to enhance the likelihood of regular receipt
by the Certificateholders of the Class A Certificates of the full
amount of the monthly distributions due them, and to afford such
Certificateholders protection against Realized Losses. The protection
afforded to the Certificateholders of Class A Certificates by means of
the subordination feature will be accomplished by the preferential
right of such Certificateholders to receive, prior to any distribution
being made on a Distribution Date in respect of the Class B
S-26
<PAGE>
Certificates, the amounts due them on each Distribution Date out of
the Available Payment Amount on deposit on such date in the Collection
Account and, if necessary, by the right of such Certificateholders to
receive future distributions with respect to the Mortgage Loans that
would otherwise have been payable to the Certificateholders of the
Class B Certificates.
Unless reduced by cash flow deficiencies due to delinquencies
or liquidation losses, the entitlement of the Class A Certificates to
a disproportionate percentage (100% unless certain tests are satisfied
as set forth in the definition of Class A Prepayment Percentage) of
all Principal Prepayments will have the effect of accelerating the
amortization of such Class from what it would have been if such
amounts had been distributed pro rata on the basis of the Certificate
Principal Balances of all of the Classes of Certificates. Any such
acceleration will increase the relative interests of the Class B
Certificates in the Trust Fund and the protection afforded to the
Class A Certificates afforded thereby. If, however, as a result of
losses on the Mortgage Loans, the Pool Principal Balance becomes less
than the aggregate Certificate Principal Balance of the Class A
Certificates, the protection afforded by the subordination feature
will be exhausted and the Class A Certificateholders will thereafter
bear all losses and delinquencies in respect of the Mortgage Loans.
On each Distribution Date, the Certificateholders of
Subordinate Certificates will be entitled to distributions of
principal and interest from the Available Payment Amount, if any,
remaining in the Distribution Account after distribution to the Class A
Certificateholders of amounts representing principal and interest
described above under "Distributions."
Example of Distributions
The following chart sets forth an example of distributions on
the Certificates for the first month of the Trust Fund's existence:
____ _................... Cut-off Date.
____ _ - ____ ........... (A) Prepayment Period. The Master Servicer receives
Principal Prepayments and interest thereon to
the date of such prepayment. For succeeding
Distribution Dates, the Prepayment Period will
commence on the __th of the preceding calendar
month and end on the __th of the month of such
Distribution Date.
____ __.................. (B) Record Date (the last business day of the month
preceding the month of the related Distribution
Date).
____ __.................. (C) Due Date (the ______ calendar day of the month in
which the related Distribution Date occurs).
Scheduled Payments of principal and interest
on the Mortgage Loans are due from Mortgagors.
Through ____ __.......... (D) The Master Servicer receives Scheduled Payments
due on ____ __ during this period.
____ __.................. (E) Determination Date (the __th day of each month).
The Trustee determines the amount of principal
and interest (including the amount, if any,
of Advances to be made by the Master Servicer)
to be distributed to Certificateholders on the
following Distribution Date.
____ __.................. (F) Distribution Date.
Succeeding monthly periods follow the pattern of (A) through (F),
except that the Prepayment Period is as indicated in the description
above.
- ----------------
(A) Principal Prepayments received during this period will be
distributed to Certificateholders on ____ __, 199_. When a
Mortgage Loan is prepaid in full, interest on the amount prepaid
is collected only from the last scheduled Due Date to the date
of prepayment. Interest in respect of Principal Prepayments
received during the period from the second through the __th day
of a month will be paid to the Master Servicer as additional
servicing compensation. With respect to Prepayment Interest
Shortfalls resulting from Principal Prepayments
S-27
<PAGE>
received during the period from the __th through the last day of
a calendar month, the Master Servicer will reduce its Servicing
Fee for such month [(in an amount up to one-half thereof)] and
make a corresponding deposit in the Collection Account, in each
case to the extent described under "--Servicing Compensation"
herein.
(B) Distributions of principal and interest on ____ __, 199_ will be
made to Certificateholders of record at the close of business on
the Record Date.
(C) Scheduled Payments are due on this date and, when received, will
be passed through on the related Distribution Date.
(D) Scheduled Payments due on ____ _, 199_ will be deposited by the
Master Servicer in the Collection Account within ____ business
days of receipt. Such payments will include the scheduled
principal payments, plus interest at the applicable Net Loan
Rates on the Cut-off Date Principal Balance.
(E) As of the close of business on __________ __, 199_ the Trustee will
determine the amount of principal and interest (including the amount, if
any, of Advances to be made by the Master Servicer) which will be passed
through to Certificateholders. The Trustee will be obligated to
distribute those Scheduled Payments due on ____ _, 199_ which have been
received on or before ___________ __, 199_ (or which were the subject of
an Advance), as well as all Principal Prepayments received on Mortgage
Loans during the related Prepayment Period (the Cut-off Date
through ____ __, 199_). In the event a Prepayment Interest Shortfall
occurs during such Prepayment Period, [up to one-half of] the Servicing
Fee otherwise payable to the Master Servicer for such month shall, to
the extent of such Prepayment Interest Shortfall, be deposited by the
Master Servicer in the Collection Account for distribution to
Certificateholders on ____ __, 199_.
(F) The Trustee will make distributions to Certificateholders on the
__th day of the month in which the related Due Date occurs, or
if such day is not a business day, on the next business day.
Reports to Certificateholders
On each Distribution Date, the Trustee will forward to each
Certificateholder a statement generally setting forth:
(i) the amount of the related distribution to
Certificateholders of such Class of Certificates allocable to
principal, separately identifying the aggregate amount of any
Principal Prepayments included therein, any Unpaid Principal
Shortfall included in such distribution and any remaining Unpaid
Principal Shortfall after giving effect to such distribution;
(ii) the amount of such distribution to Certificateholders of
such Class of Certificates allocable to interest, any Unpaid
Interest Shortfall included in such distribution and any
remaining Unpaid Interest Shortfall after giving effect to such
distribution;
(iii) the Certificate Principal Balance of each Class of
Certificates after giving effect to the distribution of principal
on such Distribution Date;
(iv) the Pool Principal Balance for the following Distribution Date;
(v) the Class A Percentage for the following Distribution Date;
(vi) the related amount of the Monthly Servicing Fees paid to or
retained by the Master Servicer;
(vii) the Pass-Through Rate for such Class of Certificates with
respect to the current Due Period;
(viii) the amount of Advances included in the distribution on
such Distribution Date and the aggregate amount of Advances
outstanding as of the close of business on such Distribution
Date;
(ix) the number and aggregate principal amounts of Mortgage
Loans (A) delinquent (exclusive of Mortgage Loans in foreclosure)
(1) 1 to 30 days, (2) 31 to 60 days, (3) 61 to 90 days and (4) 91
or more days and (B) in foreclosure and delinquent (1) 1 to 30
days, (2) 31 to 60 days, (3) 61 to 90 days and (4) 91 or more
days, as of the close of business on the last day of the calendar
month preceding such Distribution Date;
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(x) with respect to any Mortgage Loan that became an REO
Property during the preceding calendar month, the loan number and
Principal Balance of such Mortgage Loan as of the close of
business on the Determination Date preceding such Distribution
Date and the date of acquisition thereof;
(xi) the total number and principal balance of any REO
Properties as of the close of business on the Determination Date
preceding such Distribution Date;
(xii) the Class A Prepayment Percentage for the following
Distribution Date;
(xiii) the aggregate amount of Realized Losses incurred during the
preceding calendar month; and
(xiv) the Unpaid Liquidation Loss Amount.
In addition, within a reasonable period of time after the end of
each calendar year, the Trustee will prepare and deliver to each
Certificateholder of record during the previous calendar year a
statement containing information necessary to enable
Certificateholders to prepare their tax returns. Such statements will
not have been examined and reported upon by an independent public
accountant.
Representations and Warranties of the Seller
The Seller will make the representations, among others, as to
each Mortgage Loan conveyed by the Seller to the Depositor as of the
Closing Date described under "The Trusts--Assignment of the Primary
Assets" in the Prospectus and will also represent that:
1. [None] [No more than ___] of the Mortgage Loans are Balloon Loans;
2. As of the Cut-off Date, none of the Mortgage Loans in the
Mortgage Pool were 30 or more days contractually delinquent;
3. No more than ____% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) are secured by Mortgaged Properties
located within any single zip code area; and
4. No Mortgage Loan has a Combined Loan-to-Value Ratio in excess
of _______% as of its origination.
5. [Other Representations.]
[Reserve Account]
[An account or accounts will be maintained by the Trust (the
"Reserve Account"), which account shall be an Eligible Account. The
Reserve Account shall be initially maintained at ___________________
in its trust department. Amounts on deposit in the Reserve Account
will be available on each Distribution Date to pay the Class ____
Remittance Amount to the extent that the Available Payment Amount and
any Yield Supplement Deposit Amount on any such Distribution Date is
insufficient therefor, provided, that amounts on deposit in the
Reserve Account will not be available to the extent the Yield
Supplement Deposit Amount for any Distribution Date exceeds the amount
on deposit in the Yield Supplement Account on such Distribution Date.
An initial deposit of $_______________ (____% of the Original Pool
Principal Balance), which is equal to the initial Reserve Account
Requirement, will be made into the Reserve Account on the Closing Date
from the proceeds of the sale of the Offered Certificates. Thereafter
the Available Payment Amount, if any, remaining after payment of the
Class ____ Remittance Amount will be deposited into the Reserve
Account to the extent necessary to maintain the amount in the Reserve
Account at the Reserve Account Requirement. Subject to the conditions
set forth below, on each Distribution Date from ___________ to
_____________, the Reserve Account Requirement will be reduced by a
dollar amount equal to $_______________, determined by dividing (i)(A)
$_____________ (_______% of the Original Pool Principal Balance),
minus (B) $______________ (____% of the Original Pool Principal
Balance) by (ii) ___; provided, however, that (a) at no time will the
Reserve Account Requirement exceed the Class ___ Certificate Balance
and (b) subject to the provisions of (a) above, if the sum of (1) the
balance in the Reserve Account and (2) the Overcollateralization
Amount is less than __________________ (__________% of the Original
Pool Principal Balance), the Reserve Account Requirement shall equal
$_______________ (________% of the Original Pool Principal Balance)
minus the Overcollateralization Amount. As of the Closing Date, the
Overcollateralization Amount will be equal to $______________, and as
of any Distribution Date, the "Overcollateralization Amount" will be
equal to the excess, if any, of the Pool Principal Balance over the
Class __ Certificate Balance (after giving effect to all payments made
on such Distribution Date other than any Additional Class Principal
Remittance Amount for such Distribution Date).]
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["Net Losses" as of any date are equal to the sum of (i) the
principal balances of all Mortgage Loans which have become Liquidated
Mortgage Loans since the Cut-Off Date (determined as of the date the
related Mortgage Loan became a Liquidated Mortgage Loan), less Net
Liquidation Proceeds with respect to such Liquidated Mortgage Loans
(provided that such total not be below zero), and (ii) (without
duplication) all partial charge-offs incurred on all Mortgage Loans
since the Cut-off Date.]
[Amounts on deposit in the Reserve Account will be invested in
Permitted Investments (as defined in the Pooling and Servicing
Agreement), which may include securities or obligations of the Seller
or its affiliates if they would otherwise qualify as Permitted
Investments. All such Permitted Investments are required to mature no
later than the business day prior to each Distribution Date, except
that a portion of the amounts on deposit in the Reserve Account may be
invested in Permitted Investments with longer maturities to the extent
allowed by the Rating Agencies. On any Distribution Date, interest
earned on amounts in the Reserve Account will be distributed to the
Class R Certificateholders.]
[On any Distribution Date (after giving effect to all
distributions made on such Distribution Date), all amounts on deposit
in the Reserve Account in excess of the Reserve Account Requirement
(the "Additional Class __ Principal Remittance Amount"), if any, will
be distributed to the Class ___ Certificates, Class ____Certificates,
Class ___ Certificates and Class ____ Certificates, in that order, in
reduction of the Certificate Balances thereof to zero, and any
remaining excess will be distributed to the Class R Certificates;
provided, that if both the balance in the Reserve Account and the
Overcollateralization Amount as of any Distribution Date have been
reduced to zero, payments of principal on each Class of Class __
Certificates will be made pro rata based on their respective
Certificate Balances. The distribution of the Additional Class __
Principal Remittance Amount to the Class __ Certificates will increase
the Overcollateralization Amount. In addition, if on any Distribution
Date the amount on deposit in the Reserve Account equals or exceeds
the Class __ Certificate Balance (after giving effect to the Class __
Principal Remittance Amount and any Additional Class __ Principal
Remittance Amount for such Distribution Date), an amount equal to the
Class __ Certificate Balance will be distributed from the Reserve
Account to the Class __ Certificates in the order described above.]
[Yield Supplement Account]
[The Yield Supplement Account will be established solely to
retain funds to be applied by the Trustee to provide payments to the
Certificateholders in respect of Supplemented Mortgage Loans. The
Yield Supplement Account will be funded by an initial deposit of
$______________ from the proceeds of the sale of the Offered
Certificates, which is equal to the Maximum Yield Supplement Amount as
of the Cut-off Date.]
[On each Distribution Date, the Trustee will transfer to the
Distribution Account from monies on deposit in the Yield Supplement
Account an amount equal to the Yield Supplement Deposit Amount in
respect of the Mortgage Loans for such Distribution Date. Amounts on
deposit on any Distribution Date in the Yield Supplement Account in
excess of the Maximum Yield Supplement Amount, after giving effect to
all distributions to be made on such Distribution Date, will be paid
to the Seller in accordance with the Pooling and Servicing Agreement.]
[The Yield Supplement Account will be initially maintained at
_____________________ in its trust department. Amounts on deposit in
the Yield Supplement Account will be invested in Permitted Investments
as defined in the Pooling and Servicing Agreement. All such Permitted
Investments are required to mature no later than the Business Day
prior to each Distribution Date or on such Distribution Date if
approved by the Rating Agencies. All interest and any other investment
earnings on amounts on deposit in the Yield Supplement Account in
excess of _____% per annum will be distributed to the ______________
on each Distribution Date.]
[The "Yield Supplement Deposit Amount" on any Distribution Date
will be equal to 30 day's interest (or __ day's interest for the first
Distribution Date) accrued on each Supplemented Mortgage Loan
outstanding on the first day of the preceding Due Period at a rate per
annum equal to the excess of ___________% (the sum of (i)
____________%, which is both the Class ___ Pass-Through Rate and the
Class ___ Pass-Through Rate, and (ii) the Servicing Fee Rate) over the
Mortgage Interest Rate borne by such Mortgage Loan.]
[The "Maximum Yield Supplement Amount" as of any date will be
equal to the net present value (discounted at a rate of _____% per
annum) of the aggregate amount by which (i) interest on the principal
balance of each Mortgage Loan bearing interest at a Mortgage Interest
Rate less than _______% per annum for the period commencing on such
date and ending with the scheduled maturity of such Mortgage Loan at a
rate equal to _____% per annum, exceeds (ii) interest on such
principal balance at the applicable Mortgage Interest Rate, assuming
that payments on such Mortgage Loans are made as scheduled and no
prepayments are made.]
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Delivery of the Mortgage Files
As described in the Prospectus under "The Trusts-Assignment of
the Primary Assets," the Depositor will assign the Mortgage Loans to
the Trustee. The Mortgage Files with respect to the Mortgage Loans
underlying Series 199__-__ will be delivered to the Trustee or an
independent custodian on behalf of the Trustee on the Closing Date.
Each related Mortgage Note will be endorsed without recourse to the
order of the Trustee or in blank.
Servicing Compensation
The Master Servicer will be entitled to receive a fee for each
Due Period (the "Monthly Servicing Fee") equal to one twelfth of the
product of ______% (the "Servicing Fee Rate") and the Pool Principal
Balance as of the preceding Distribution Date or, with respect to the
first Due Period, the Original Pool Principal Balance. In addition, the
Master Servicer will retain any benefit from the investment of funds in
the Collection Account and will collect and retain any late fees,
penalty charges, bad check fees, extension, modification or assumption
fees and other administrative fees or similar charges allowed by
applicable laws with respect to the Mortgage Loans.
The Monthly Servicing Fee will compensate the Master Servicer for
performing the functions of a third party servicer of the Mortgage
Loans, including collecting and posting all payments, responding to
inquiries of borrowers on the Mortgage Loans, investigating
delinquencies, sending coupon books or past due notices to borrowers,
and monitoring the collateral. The Monthly Servicing Fee also will
compensate the Master Servicer for all fees and expenses payable to
any Subservicer and for administering the Mortgage Loans, including
accounting for collections and furnishing monthly and annual
statements to the Trustee. The Master Servicer will be required to pay
certain taxes, accounting fees, outside auditor fees, data processing
costs and other costs incurred in connection with administering the
Mortgage Loans. The Master Servicer will also be required to pay the
fees and expenses of the Trustee.
When a borrower prepays a Mortgage Loan between Due Dates, the
borrower is required to pay interest on the amount prepaid only to the
date of prepayment and not thereafter. Principal prepayments by
borrowers received during a calendar month will be distributed to
Certificateholders on the Distribution Date in the month following the
month of receipt. Pursuant to the Pooling and Servicing Agreement, the
Monthly Servicing Fee for any month will be reduced by an amount [of not
more than, one-half of the Monthly Servicing Fee] with respect to each
such prepaid Mortgage Loan sufficient to pass through to
Certificateholders the full amount of interest to which they would be
entitled in respect of such Mortgage Loan on the related Distribution
Date. If shortfalls in interest as a result of prepayments in any month
exceed [one-half of] the amount of the Monthly Servicing Fee for such
month, the amount of interest available to be distributed to
Certificateholders will be reduced by the amount of such excess.
Amendment
The Pooling and Servicing Agreement may be amended from time to
time by the Depositor, the Master Servicer and the Trustee without the
consent of the Certificateholders, to cure any ambiguity
or error, to correct or supplement any provision therein which may be
inconsistent with any other provision therein, to evidence a
succession to the Master Servicer, or to add any other provisions with
respect to matters or questions arising thereunder which are not
inconsistent with the provisions of the Pooling and Servicing
Agreement; provided that such action will not, in the opinion of
counsel satisfactory to the Trustee, adversely affect in any material
respect the interest of any Certificateholder. The Pooling and
Servicing Agreement may also be amended by the Depositor, the Master
Servicer and the Trustee, with the consent of the Holders of
Certificates evidencing not less than a majority of the Certificate
Balance of each Class of Certificates affected by such amendment for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of holders of the
Certificates; provided, however, that no such amendment may (i)
increase or reduce in any manner the amount of, or accelerate or delay
the timing of, collections of payments on Mortgage Loans or
distributions that are required to be made on any Certificate without
the consent of the holder of such Certificate or (ii) reduce the
aforesaid percentage required to consent to any such amendment,
without the consent of the holders of all Certificates then
outstanding.
The Pooling and Servicing Agreement may also be amended, from
time to time, by the Master Servicer, the Depositor and the Trustee,
without consent of the Certificateholders, to modify, eliminate or add
to the provisions of the Pooling and Servicing Agreement to the extent
necessary to (i) maintain the qualification of the Trust as a REMIC
under the Code or avoid, or minimize the risk of, the imposition of
any tax on the Trust under the Code that would be a claim against the
Trust's assets, or (ii) prevent the Trust from entering into any
"prohibited transaction" as defined in the Code.
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Notwithstanding the foregoing, no amendment may be made unless
the Trustee shall have received an opinion of counsel to the effect
that such amendment will not cause the Trust to be disqualified as a
REMIC, or subject the Trust to "prohibited transaction" or "prohibited
contribution" taxes.
[Certificates held by either Depositor or any affiliate thereof
will not be counted as outstanding for purposes of the approval of any
amendment, waiver or other consent or vote required by the Pooling and
Servicing Agreement.]
List of Certificateholders
Upon written request of the Master Servicer, the Trustee will
provide to the Master Servicer, within 15 days after receipt of such
request, a list of the names and addresses of all Certificateholders
of record as of the most recent Record Date. Upon written request by
three or more Certificateholders who in the aggregate hold
Certificates that evidence not less than 25% of the aggregate
Certificate Balance of the Offered Certificates and such request is
accompanied by a copy of the communication that such
Certificateholders propose to transmit, the Trustee or the Certificate
Registrar, at its discretion, will either afford such
Certificateholders access during business hours to the current list of
Certificateholders for purposes of communicating with other
Certificateholders with respect to their rights under the Pooling and
Servicing Agreement or the Trustee will disseminate such communication
to all Certificateholders.
The Pooling and Servicing Agreement will not provide for the
holding of any annual or other meetings of certificateholders.
Termination; Retirement of the Certificates
The obligations created by the Pooling and Servicing Agreement
will terminate upon the last action required to be taken by the
Trustee on the final Distribution Date following the earlier of (i)
the final payment or other liquidation of the principal balance of the
last Mortgage Loan remaining in the Trust and the disposition of all
property acquired by foreclosure or deed in lieu of foreclosure of any
Mortgage Loan and (ii) the purchase by the Master Servicer [, the
Depositor] [or the Seller] from the Trust of all remaining Mortgage
Loans and all property acquired in respect of any Mortgage Loan
remaining in the Trust. In no event, however, will the trust created
by the Pooling and Servicing Agreement continue beyond the expiration
of 21 years from the death of the survivor of certain persons named in
the Pooling and Servicing Agreement. Written notice of termination of
the Pooling and Servicing Agreement will be given to each
Certificateholder by the Trustee, and the final distribution will be
made only upon surrender and cancellation of the Certificates at an
office or agency appointed by the Trustee which will be specified in
the notice of termination.
At its option, the Master Servicer [, the Depositor] [or the
Seller] may purchase from the Trust, on any Distribution Date on which
such a purchase is permitted as described below, all remaining
Mortgage Loans held by the Trust at a price equal to the greater of
(a) the sum of (x) 100% of the principal balance of each Mortgage Loan
(other than any Mortgage Loan as to which title in the underlying
Mortgaged Property has been acquired and whose fair market value is
included pursuant to clause (y) below) as of the Distribution Date
upon which the proceeds of any repurchase are to be distributed, (y)
the fair market value of such acquired property (as determined by the
[Master Servicer] [Trustee] as of the close of business on the third
Business Day next preceding the date upon which notice of any such
termination is furnished to Certificateholders) and (z) interest for
the Accrual Period in which the effective date of the purchase occurs
at the applicable Mortgage Interest Rate on the principal balance of
each Mortgage Loan, (b) the aggregate fair market value (as determined
by the [Master Servicer] [Trustee] as of the close of business on such
third Business Day) of all of the assets of the Trust, plus interest
for the Accrual Period in which the effective date of the purchase
occurs at the applicable Mortgage Interest Rate on the principal
balance of each Mortgage Loan (including any Mortgage Loan as to which
title to the underlying Mortgaged Property has been acquired) or (c)
the sum of (i) the Certificate Balance of the Offered Certificates
then outstanding together with accrued and unpaid interest thereon,
and (ii) the Monthly Servicing Fee and any unpaid Monthly Servicing
Fee for such Distribution Date. A portion of such purchase price
equal to the amounts in clause (c) (i) will be distributed to holders
of the Offered Certificates, thereby effecting early retirement of the
Offered Certificates. The right of the Master Servicer to make any
such purchase is not exercisable until the Distribution Date on which,
after giving effect to principal distributions on the Certificates
that would otherwise be made on such Distribution Date, the Pool
Principal Balance has declined to less than __% of the Original Pool
Principal Balance. The termination of the Trust is required to be
effected in a manner consistent with applicable federal income tax
regulations and its status as a REMIC.
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THE TRUSTEE
The ________________________________, a national banking
association organized under the laws of the United States with its
principal place of business in the State of ____________, will be
named Trustee pursuant to the Pooling and Servicing Agreement. [The
Trustee will initially serve as Custodian for the Mortgage Files.]
Pursuant to the Pooling and Servicing Agreement, the Trustee is
required at all times to be a banking association organized and doing
business under the laws of the United States of America or of any
State, authorized under such laws to exercise corporate trust powers,
having a combined capital and surplus of at least $______________,
subject to supervision or examination by federal or state authority.
If at any time the Trustee shall cease to be eligible in accordance
with the provisions described in this paragraph, the Trustee shall
give notice of such ineligibility to the Certificateholders and shall
resign, upon the request of the Majority in Aggregate Voting Interest,
in the manner and with the effect specified in the Pooling and
Servicing Agreement.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall become effective upon the acceptance of
appointment by such successor trustee.
The Trustee, or any successor trustee or trustees, may resign at
any time by giving written notice to the Master Servicer. Upon
receiving notice of resignation, the Master Servicer is required to
promptly appoint a successor trustee or trustees meeting the
eligibility requirements set forth above in the manner set forth in
the Pooling and Servicing Agreement. If no successor trustee shall
have been appointed and have accepted appointment within 30 days after
the giving of such notice of resignation, the resigning trustee may
petition any court of competent jurisdiction for the appointment of a
successor trustee. Such court may thereupon, after such notice, if
any, as it may deem proper and prescribe, appoint a successor trustee.
The Master Servicer may remove the Trustee under the conditions
set forth in the Pooling and Servicing Agreement and appoint a
successor trustee in the manner set forth therein.
At any time, for the purpose of meeting any legal requirements of
any jurisdiction in which any part of the Trust Fund or property
securing the same may at the time be located, the Master Servicer and
the Trustee acting jointly shall have the power and shall execute and
deliver all instruments to appoint one or more persons approved by the
Trustee to act as co-trustee or co-trustees, jointly with the Trustee,
or separate trustee or separate trustees, of all or any part of the
Trust Fund, and to vest in such person or persons, in such capacity,
such title to the Trust Fund, or any part thereof, and, subject to the
provisions of the Pooling and Servicing Agreement, such powers,
duties, obligations, rights and trusts as the Master Servicer and the
Trustee may consider necessary or desirable.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, [an] [two] election[s] will be
made to treat the Trust Fund as [a] [two separate] REMIC[s]. The
Regular Certificates will constitute the regular interests in the
REMIC. The Residual Certificates will constitute the sole class of
"residual interest" in the REMIC.
The Regular Certificates generally will be treated as debt
instruments issued by the REMIC for federal income tax purposes.
Income on the Regular Certificates must be reported under an accrual
method of accounting.
The Classes of Regular Certificates, depending on their
respective issue prices (as described in the Prospectus under "Certain
Federal Income Tax Consequences"), may be treated as having been
issued with OID for federal income tax purposes. For purposes of
determining the amount and rate of accrual of OID and market discount,
the Trust Fund intends to assume that there will be prepayments on the
Mortgage Loans at a rate equal to 100% of the Prepayment Assumption.
No representation is made as to whether the Mortgage Loans will prepay
at the foregoing rate or any other rate. See "Certain Yield and
Prepayment Considerations" herein and in the Prospectus and "Certain
Federal Income Tax Consequences" in the Prospectus. Computing accruals
of OID in the manner described in the Prospectus may (depending on the
actual rate of prepayments during the accrual period) result in the
accrual of negative amounts of OID on the Certificates issued with OID
in an accrual period. Holders will be entitled to offset negative
accruals of OID only against future OID accrual on such Certificates.
The Internal Revenue Service (the "IRS") recently issued final
regulations (the "Contingent Regulations") governing the calculation
of OID on instruments having contingent interest payments. The
Contingent Regulations specifically do not apply for purposes of
calculating OID on debt instruments subject to Code Section
1272(a)(6), such as the Regular Certificates. Additionally, Treasury
regulations issued on January 27, 1994 which provide rules for
calculating OID (the "OID Regulations") do not contain provisions
specifically interpreting Code Section 1272(a)(6). The Trustee intends
to base its computations on Code Section 1272(a)(6) and the OID
Regulations as
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described in the Prospectus and this Prospectus Supplement. 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.
If the holders of any Regular Certificates are treated as holding
such Certificates at a premium, such holders should consult their tax
advisors regarding the election to amortize bond premium and the
method to be employed.
As is described more fully under "Certain Federal Income Tax
Consequences" in the Prospectus, the Offered Certificates will
represent qualifying assets under Sections 593(d), 856(c)(5)(A) and
7701(a)(19)(C) of the Code, and net interest income attributable to
the Offered Certificates will be "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B)
of the Code, to the extent the assets of the Trust Fund are assets
described in such sections. The Regular Certificates will represent
qualifying assets under Section 860G(a)(3) if acquired by a REMIC
within the prescribed time periods of the Code.
The holders of the Residual Certificates must include the taxable
income of the REMIC in their federal taxable income. The resulting tax
liability of the holders may exceed cash distributions to such holders
during certain periods. All or a portion of the taxable income from a
Residual Certificate recognized by a holder may be treated as "excess
inclusion" income, which, with limited exceptions, is subject to U.S.
federal income tax.
Also, purchasers of a Residual Certificate should consider
carefully the tax consequences of an investment in Residual
Certificates discussed in the Prospectus and should consult their own
tax advisors with respect to those consequences. See "Certain Federal
Income Tax Consequences-Taxation of Owner of Residual Certificates" in
the Prospectus. Specifically, prospective holders of Residual
Certificates should consult their tax advisors regarding whether, at
the time of acquisition, a Residual Certificate will be treated as a
"noneconomic" residual interest, a "non-significant value" residual
interest and a "tax avoidance potential" residual interest. See
"Certain Federal Income Tax Consequences-Taxation of Owner of Residual
Certificates-Noneconomic REMIC Residual Certificates", "Certain
Federal Income Tax Consequences-Taxation of Owner of Residual
Certificates-Mark to Market Rules", "-Excess Inclusions" and "-Tax and
Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations" in the Prospectus.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any
of the Offered Certificates should consult with its counsel with
respect to the potential consequences under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and the Code, of
the Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus. Section 406 of ERISA prohibits
"parties in interest" with respect to an employee benefit plan subject
to ERISA and the excise tax provisions set forth under Section 4975 of
the Code (a "Plan") from engaging in certain transactions involving
such Plan and its assets unless a statutory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes
certain excise taxes on prohibited transactions involving plans
described under that Section; ERISA authorizes the imposition of civil
penalties for prohibited transactions involving plans not covered
under Section 4975 of the Code.
Certain employee benefit plans, including governmental plans and
certain church plans, are not subject to ERISA's requirements.
Accordingly, assets of such plans may be invested in the Offered
Certificates without regard to the ERISA considerations described
herein and in the Prospectus, subject to the provisions of other
applicable federal and state law. Any such plan which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code may
nonetheless be subject to the prohibited transaction rules set forth
in Section 503 of the Code.
Except as noted above, investments by Plans are subject to
ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a
Plan's investments be made in accordance with the documents governing
the Plan. A fiduciary which decides to invest the assets of a Plan in
the Offered Certificates should consider, among other factors, the
sensitivity of the investments to the rate of principal payments
(including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has granted to [ ] an administrative
exemption (Prohibited Transaction Exemption _________________________)
(the "Exemption") from certain of the prohibited transaction rules of
ERISA and the related excise tax provisions of Section 4975 of the
Code with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that
consist of certain receivables, loans and other obligations that meet
the conditions and requirements of the Exemption. The Exemption applies
to mortgage loans such as the Mortgage Loans in the Trust Fund.
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For a general description of the Exemption and the conditions
that must be satisfied for the Exemption to apply, see "ERISA
Considerations" in the Prospectus.
It is expected that the Exemption will apply to the acquisition
and holding by Plans of the Class A Certificates and that all
conditions of the Exemption other than those within the control of the
investors will be met. In addition, as of the date hereof, there is no
single Mortgagor that is the obligor on five percent (5%) of the
Mortgage Loans included in the Trust Fund by aggregate unamortized
principal balance of the assets of the Trust Fund.
Because the characteristics of the Class B- , Class B- , Class B-
and Class R Certificates may not meet the requirements of PTCE 83-1,
the Exemption or any other issued exemption under ERISA, the purchase
and holding of the Class B- , Class B- , Class B- and Class R
Certificates by a Plan or by individual retirement accounts or other
plans subject to Section 4975 of the Code may result in prohibited
transactions or the imposition of excise taxes or civil penalties.
Consequently, transfers of the Class B- , Class B- , Class B- and
Class R Certificates will not be registered by the Trustee unless
the Trustee receives: (i) a representation from the transferee of such
Certificate, acceptable to and in form and substance satisfactory to
the Trustee, to the effect that such transferee is not an employee
benefit plan subject to Section 406 of ERISA or a plan or arrangement
subject to Section 4975 of the Code, nor a person acting on behalf of
any such plan or arrangement nor using the assets of any such plan or
arrangement to effect such transfer; (ii) if the purchaser is an
insurance company, a representation that the purchaser is an insurance
company which is purchasing such Certificates with funds contained in
an "insurance company general account" (as such term is defined in
Section V(e) of Prohibited Transaction Class Exemption 95-60 ("PTCE
95-60")) and that the purchase and holding of such Certificates are
covered under PTCE 95-60; or (iii) an opinion of counsel satisfactory
to the Trustee that the purchase or holding of such Certificate by a
Plan, any person acting on behalf of a Plan or using such Plan's
assets, will not result in the assets of the Trust Fund being deemed
to be "plan assets" and subject to the prohibited transaction
requirements of ERISA and the Code and will not subject the Trustee,
the Depositor or the Master Servicer to any obligation in addition to
those undertaken in the Pooling and Servicing Agreement. Such
representation as described above shall be deemed to have been made to
the Trustee by the transferee's acceptance of a Class B- , Class B- or
Class B- Certificate. In the event that such representation is
violated, or any attempt to transfer to a plan or person acting on
behalf of a Plan or using such Plan's assets is attempted without such
opinion of counsel, such attempted transfer or acquisition shall be
void and of no effect.
Prospective Plan investors should consult with their legal
advisors concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1 described in the Prospectus and the
Exemption, and the potential consequences in their specific
circumstances, prior to making an investment in any of the Offered
Certificates. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and
diversification, an investment in any of the Offered Certificates is
appropriate for the Plan, taking into account the overall investment
policy of the Plan and the composition of the Plan's investment
portfolio.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement between the Depositor and the Underwriter, the Depositor has
agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Depositor, the Offered Certificates. Distribution of
the Offered Certificates will be made by the Underwriter from time to
time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. In connection with the sale of the
Offered Certificates, the Underwriter may be deemed to have received
compensation from the Depositor in the form of underwriting discounts.
The Underwriter intends to make a secondary market in the Offered
Certificates, but has no obligation to do so. There can be no assurance
that a secondary market for the Offered Certificates will develop or,
if it does develop, that it will continue or that it will provide
Certificateholders with a sufficient level of liquidity of investment.
The Depositor has agreed to indemnify the Underwriter against, or
make contributions to the Underwriter with respect to, certain
liabilities, including liabilities under the Securities Act of 1933,
as amended.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the
Offered Certificates to purchase the Mortgage Loans [and to make the
initial deposit into the [Reserve Account] [Yield Supplement Account]].
S-35
<PAGE>
LEGAL MATTERS
The validity of the Certificates, including certain federal
income tax consequences with respect thereto, will be passed upon for
the Depositor by Brown & Wood LLP, New York, New York.
__________________, ____________ will pass upon certain legal matters
on behalf of the Underwriter.
RATINGS
It is a condition to the issuance of the Class A Certificates that they be
rated by (" ") and, by (" " and, together with ,
the "Rating Agencies"). It is a condition to the issuance of the Class B-___
Certificates that they be rated at least by .
The ratings assigned by to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the
mortgage loans by the related certificateholders under the agreements
pursuant to which such certificates are issued. 's ratings take into
consideration the credit quality of the related mortgage pool,
including any credit support providers, structural and legal aspects
associated with such certificates, and the extent to which the payment
stream on the mortgage pool is adequate to make the payments required
by such certificates. ratings on such certificates do not, however,
constitute a statement regarding frequency of payments of the mortgage
loans.
The ratings assigned by to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the
mortgage loans by the related certificateholders under the agreements
pursuant to which such certificates are issued. 's ratings take into
consideration the credit quality of the related mortgage pool,
including any credit support providers, structural and legal aspects
associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by
such certificates. 's ratings on such certificates do not, however,
constitute a statement regarding frequency of prepayments on the
related mortgage loans.
The ratings of the Rating Agencies do not address the possibility
that, as a result of principal prepayments, Certificateholders may
receive a lower than anticipated yield.
The security ratings assigned to the Offered Certificates should
be evaluated independently from similar ratings on other types of
securities. A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any
time by the Rating Agencies.
The Depositor has not requested a rating of the Offered
Certificates by any rating agency other than the Rating Agencies;
there can be no assurance, however, as to whether any other rating
agency will rate the Offered Certificates or, if it does, what rating
would be assigned by such other rating agency. The rating assigned by
such other rating agency to the Offered Certificates could be lower
than the respective ratings assigned by the Rating Agencies.
S-36
<PAGE>
INFORMATION CONTAINED IN HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFULL PRIOR
TO REGISTRATION OR CERTIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 11, 1996
PROSPECTUS
Asset Backed Certificates
(Issuable in Series)
---------------
Block Mortgage Finance, Inc.
Depositor
Block Financial Corporation
Master Servicer
Companion Mortgage Corporation
Seller
The Asset Backed Certificates (the "Certificates") offered hereby may be
sold from time to time in series (each, a "Series") as described in the related
Prospectus Supplement. Each Series of Certificates will be issued by a separate
trust (each, a "Trust").
The assets of each Trust (the "Trust Assets") will consist primarily of
(i) (a) first lien and junior lien mortgage loans (or participation interests
therein) secured by one- to four-family residential properties, including Title
I Loans and other types of home improvement loans (each, a "Single Family
Loan"); (b) first lien and junior lien mortgage loans secured by residential
real property, together with the manufactured housing unit located thereon
(each, a "Contract"); and/or (c) Mortgage-Backed Securities (as defined herein,
and together with the Single Family Loans and the Contracts, the "Primary
Assets"), (ii) monies due on the Primary Assets after the related Cut-off
Date, and (iii) certain other property, each as described herein and in the
related Prospectus Supplement. In addition to the foregoing, a Trust may contain
a Prefunding Account to be applied to acquire additional Primary Assets after
the related Closing Date. The amount initially deposited into a Prefunding
Account for a Series of Certificates will not exceed fifty percent (50%) of the
aggregate principal amount of such Series of Certificates. The Primary Assets
will, unless otherwise set forth in the related Prospectus Supplement, be
acquired by Block Mortgage Finance, Inc. (the "Depositor") from Companion
Mortgage Corp. (the "Seller") and conveyed by the Depositor to the related
Trust. The Primary Assets will be master serviced by Block Financial Corporation
(the "Master Servicer"). The Primary Assets and other assets of each Trust as
described herein and in the related Prospectus Supplement will be held for the
benefit of the holders of the related Series of Certificates.
Each Series of Certificates may be issuable in one or more classes (each,
a "Class"), each of which may represent beneficial ownership interests in the
Trust Assets of the related Trust. A Series may include one or more Classes of
Certificates entitled to principal distributions and disproportionate, nominal
or no interest distributions, or to interest distributions and disproportionate,
nominal or no principal distributions. The rights of one or more Classes of
Certificates of a Series may be senior or subordinate to the rights of one or
more of the other Classes of Certificates of such Series. A Series may include
two or more Classes of Certificates which differ as to the timing, sequential
order, priority of payment, interest rate or amount of distributions of
principal or interest or both.
If specified in the related Prospectus Supplement, one or more Classes of
Certificates of a Series may have the benefit of one or more of a letter of
credit, financial guaranty insurance policy, reserve fund, spread account, cash
collateral account, overcollateralization, cross-collateralization or other form
of credit enhancement. If specified in the related Prospectus Supplement, the
Primary Assets underlying a Series of Certificates may be insured under one or
more of a mortgage pool insurance policy, special hazard insurance policy,
bankruptcy bond or similar credit enhancement. In addition to or in lieu of any
or all of the foregoing, credit enhancement with respect to one or more Classes
of Certificates of a Series may be provided through subordination. See
"Description of the Certificates--Description of Credit Enhancement" herein.
The yield on each Class of Certificates of a Series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the Primary Assets in the related Trust and the timing of receipt of such
payments. See "Certain Yield and Prepayment Considerations" herein and in the
related Prospectus Supplement. A Trust may be subject to early termination under
the circumstances described herein or in the related Prospectus Supplement.
None of the Certificates of any Series will represent an interest in or
obligation of the Depositor, the Seller, the Master Servicer, the Trustee or any
of their respective affiliates. None of the Certificates of any Series or the
underlying Primary Assets will be insured or guaranteed by any governmental
agency or instrumentality or by the Depositor, the Seller, the Master Servicer,
the Trustee or any of their affiliates, except as set forth in the related
Prospectus Supplement.
<PAGE>
THESE CERTIFICATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Prospective investors should consider, among other things, the information
set forth under "Risk Factors" commencing on page __ herein and in the related
Prospectus Supplement. Prospective investors should refer to the "Index of
Principal Definitions" herein for the location of the definitions of capitalized
terms that appear in this Prospectus.
October __, 1996
2
<PAGE>
(Continued from Prospectus Cover)
Offers of the Certificates of a Series may be made through one or more
different methods, including offerings through underwriters, as described under
"Method of Distribution" herein and "Underwriting" in the related Prospectus
Supplement. There will have been no secondary market for the Certificates of any
Series prior to the offering thereof. There can be no assurance that a secondary
market for any Class of Certificates of any Series will develop or, if one does
develop, that it will continue. None of the Certificates will be listed on any
securities exchange.
If specified in the related Prospectus Supplement, one or more elections
will be made to treat the related Trust or a designated portion of the assets of
the related Trust as one or more "real estate mortgage investment conduits"
(each, a "REMIC") for federal income tax purposes. For a description of certain
tax consequences of owning the Certificates, including, without limitation,
original issue discount, see "Certain Federal Income Tax Consequences" herein
and in the related Prospectus Supplement.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement and the exhibits thereto may be inspected and copied
at the public reference facilities maintained by the Commission 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, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, 3rd
Floor, New York, New York 10007. Copies of such material may also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains an
Internet Web site that contains reports, information statements and other
information regarding the registrants that file electronically with the
Commission. The address of such Internet Web site is http://www.sec.com.
REPORTS TO HOLDERS
Periodic reports concerning the Trust Assets of each Trust are required to
be forwarded to holders of the Certificates of the related Series. See
"Description of the Certificates--Reports to Holders" herein. Any reports
forwarded to holders will not contain financial information that has been
examined and reported upon by, with an opinion expressed by, an independent
public or certified public accountant.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Depositor pursuant to Section
13(a), Section 13(c), 14 or 15(d) of the Securities and Exchange Act of 1934, as
amended, with respect to the Trust for each Series subsequent to the date of
this Prospectus and prior to the termination of the offering of the Certificates
evidencing an interest in such Trust shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Depositor will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such person,
a copy of any of or all the documents incorporated herein by reference (other
than exhibits to such documents). Requests for such copies should be directed to
the Depositor at 4435 Main Street, Suite 500, Kansas City, Missouri 64111,
Attention: Corporate Counsel.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following Summary of Prospectus is qualified in its entirety by
reference to the detailed information appearing elsewhere in this Prospectus and
by reference to the information with respect to each Series of Certificates
contained in the related Prospectus Supplement. Capitalized terms used but not
defined in this Summary of Prospectus shall have the meanings ascribed to such
terms elsewhere in this Prospectus. The Index of Principal Definitions included
in this Prospectus sets forth the pages on which the definitions of certain
principal terms appear.
Title of Certificates........ Block Mortgage Finance Asset Backed Certificates,
issuable in series (the "Certificates").
Depositor.................... Block Mortgage Finance, Inc., a Delaware
corporation (the "Depositor") and a wholly
owned, limited purpose subsidiary of the Seller.
Seller....................... Companion Mortgage Corporation, a Delaware
corporation (the "Seller") and a wholly owned
subsidiary of Block Financial Corporation.
Master Servicer.............. Block Financial Corporation, a Delaware
corporation (the "Master Servicer") and an
indirect, wholly owned subsidiary of H&R Block,
Inc.
Trustee...................... The entity or entities named as trustee in the
related Prospectus Supplement (the "Trustee").
Cut-off Date................. The date specified in the related Prospectus
Supplement after which payments due on the
related Primary Assets, as specified in the
related Prospectus Supplement, are transferred
to the related Trust and available for payment
to the holders of the related Certificates
(each, a "Cut-off Date").
Closing Date................. The date on which the Certificates of any Series
are initially issued (each, a "Closing Date") as
specified in the related Prospectus Supplement.
Description of
Certificates................. The Certificates of each Series may be issued in
one or more classes (each, a "Class") and will
represent beneficial interests in the related
Trust Assets. See "Description of the Primary
Assets" herein.
A Series of Certificates may include one or more
Classes entitled to distributions of principal
and disproportionate, nominal or no interest
distributions or distributions of interest and
disproportionate, nominal or no principal
distributions. The principal amount of any
Certificate may be zero or may be a notional
amount as specified in the related Prospectus
4
<PAGE>
Supplement. A Class of Certificates of a Series
entitled to payments of interest may receive
interest at a specified rate (a "Certificate
Interest Rate") which may be fixed or adjustable
and may differ from other Classes of the same
Series, may receive interest based on the
weighted average interest rate on the underlying
Primary Assets or may receive interest as
otherwise determined, all as described in the
related Prospectus Supplement. One or more
Classes of a Series may be Certificates upon
which interest will accrue but not be currently
paid until certain other Classes have received
principal payments due to them in full or until
the happening of certain events, as set forth in
the related Prospectus Supplement. One or more
Classes of Certificates of a Series may be
entitled to receive principal payments pursuant
to a planned amortization schedule or may be
entitled to receive interest payments based on a
notional principal amount which reduces in
accordance with a planned amortization schedule.
A Series may also include one or more Classes of
Certificates entitled to payments derived from a
specified group or groups of Primary Assets held
by the related Trust. The rights of one or more
Classes of Certificates may be senior or
subordinate to the rights of one or more of the
other Classes of Certificates. A Series may
include two or more Classes of Certificates
which differ as to the timing, sequential order,
priority of payment or amount of distributions
of principal or interest or both.
Distribution Date............ The date specified in the related Prospectus
Supplement on which payments will be made to
holders of Certificates (each, a "Distribution
Date").
Determination Date........... With respect to each Distribution Date, the
business day (each, a "Determination Date")
specified in the related Prospectus Supplement.
Record Date.................. The calendar day (each, a "Record Date") specified
in the related Prospectus Supplement.
Distributions of Interest
on the Certificates.......... Unless otherwise specified in the related
Prospectus Supplement, interest on each Class of
Certificates of a Series (other than a Class of
Certificates entitled to receive only principal)
will accrue during each period specified in the
related Prospectus Supplement (each, an "Accrual
Period") at the Certificate Interest Rate for
such Class specified in the related Prospectus
Supplement. Interest accrued on each Class of
Certificates at the applicable Certificate
Interest Rate during each Accrual Period will be
paid, to the extent monies are available
therefor, on each Distribution Date, commencing
on the day specified in the related Prospectus
Supplement, and will be
5
<PAGE>
distributed in the manner specified in such
Prospectus Supplement, except for any Class of
Certificates ("Accrual Certificates") on which
interest is to accrue and not be paid until the
principal of certain other Classes has been paid
in full or until the occurrence of certain
events as specified in such Prospectus
Supplement. If so described in the related
Prospectus Supplement, interest that has accrued
but is not yet payable on any Accrual
Certificates will be added to the principal
balance thereof on each Distribution Date and
will thereafter bear interest at the applicable
Certificate Interest Rate. Payments of interest
with respect to any Class of Certificates
entitled to receive interest only or a
disproportionate amount of interest and
principal will be paid in the manner set forth
in the related Prospectus Supplement. Payments
of interest (or accruals of interest, in the
case of Accrual Certificates) with respect to
any Series of Certificates or one or more
Classes of Certificates of such Series, may be
reduced to the extent of interest shortfalls not
covered by Advances, if any, or by any
applicable credit enhancement.
Distribution of Principal
of the Certificates.......... On each Distribution Date, commencing with the
Distribution Date specified in the related
Prospectus Supplement, principal received with
respect to the related Primary Assets during the
period specified in the related Prospectus
Supplement (each such period, a "Due Period")
will be paid to holders of the Certificates of
the related Series (other than a Class of
Certificates of such Series entitled to receive
interest only) in the priority, manner and
amount specified in such Prospectus Supplement,
to the extent funds are available therefor.
Payments of principal with respect to a Series
of Certificates or one or more Classes of such
Series may be reduced to the extent of
delinquencies or losses not covered by Advances,
if any, or any applicable credit enhancement.
Denominations................ Each Class of Certificates of a Series will be
issued in the minimum denominations set forth in
the related Prospectus Supplement. Each
Certificate will represent a percentage interest
(a "Percentage Interest") in the Certificates of
the related Class determined by dividing the
original principal balance (or original Notional
Principal Amount, in the case of Certificates
entitled to interest only and assigned a
Notional Principal Amount) represented by such
Certificate by the original aggregate principal
balance of the related Class (or original
aggregate Notional Principal Amount of the
related Class, if applicable). The "Notional
Principal Amount" with respect to any
Certificate having a Notional Principal Amount
will be calculated as set forth in the related
Prospectus Supplement.
6
<PAGE>
Registration of the
Certificates................. Each or any Class of Certificates of a Series may
be issued in definitive form or may initially be
represented by one or more certificates
registered in the name of Cede & Co. ("Cede")
("Book-Entry Certificates"), the nominee of The
Depository Trust Company ("DTC"), and available
only in the form of book-entries on the records
of DTC, participating members thereof
("Participants") and other entities, such as
banks, brokers, dealers and trust companies,
that clear through or maintain custodial
relationships with a Participant, either
directly or indirectly ("Indirect
Participants"). Certificateholders may also hold
Certificates of a Series through CEDEL or
Euroclear (in Europe), if they are participants
in such systems or indirectly through
organizations that are participants in such
systems. Certificates representing Book-Entry
Certificates will be issued in definitive form
only under the limited circumstances described
herein and in the related Prospectus Supplement.
With respect to the Book-Entry Certificates,
all references herein to "holders" shall reflect
the rights of owners of the Book-Entry
Certificates as they may indirectly exercise
such rights through DTC and Participants, except
as otherwise specified herein. See "Risk
Factors" and "Description of the
Certificates--Registration and Transfer of the
Certificates" herein.
The Trusts................... The Trust for a Series of Certificates will
include certain mortgage related assets (the
"Primary Assets") consisting of (a) Single
Family Loans, (b) Contracts and/or (c) Mortgage-
Backed Securities, together with payments in
respect of such assets and certain other
accounts, obligations or agreements, in each
case as specified in the related Prospectus
Supplement. For purposes hereof, "Mortgage
Loans" consist of Single Family Loans and
Contracts. Unless otherwise set forth in the
related Prospectus Supplement, all of the
Primary Assets will have been purchased by the
Depositor from the Seller.
A. Single Family Loans.. Unless otherwise specified in the related
Prospectus Supplement, Single Family Loans will
be secured by first, second or more junior liens
on fee simple or leasehold interests in one- to
four-family residential properties. If so
specified in the related Prospectus Supplement,
the Single Family Loans in the related Trust
Fund may include mortgage participation
certificates evidencing interests in Single
Family Loans. Such Single Family Loans may be
conventional loans (i.e., loans that are not
insured or guaranteed by any governmental
agency), insured by the Federal Housing
Authority ("FHA") or partially guaranteed by the
Veterans' Administration ("VA"), as specified in
the related Prospectus Supplement. If specified
in the related Prospectus Supplement, the Single
Family Loans
7
<PAGE>
may include (i) closed-end home equity loans
("Home Equity Loans") and (ii) title I Loans and
other types of home improvement loans each of
which will be secured by first, second or more
junior liens on fee simple or leasehold
interests in one- to four-family residential
properties. See "Description of the Primary
Assets--Single Family Loans" herein.
The payment terms of the Single Family Loans to be
included in a Trust will be described in the
related Prospectus Supplement and may include
any of the following features or combinations
thereof or other features described in the
related Prospectus Supplement:
(a) Interest may be payable at a fixed rate,
a rate adjustable from time to time in
relation to an index (which will be specified
in the related Prospectus Supplement), a rate
that is fixed for a period of time or under
certain circumstances and is followed by an
adjustable rate, a rate that otherwise varies
from time to time, or a rate that is
convertible from an adjustable rate to a
fixed rate. Changes to an adjustable rate may
be subject to periodic limitations, maximum
rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred
and added to the principal of a loan for such
periods and under such circumstances as may
be specified in the related Prospectus
Supplement. The Single Family Loans may
provide for the payment of interest at a rate
lower than the specified Mortgage Interest
Rate for a period of time or for the life of
the loan, and the amount of any difference
may be contributed from funds supplied by the
seller of the Mortgaged Property or another
source.
(b) Principal may be payable on a level debt
service basis to fully amortize the loan over
its term, may be calculated on the basis of
an assumed amortization schedule that is
significantly longer than the original term
to maturity or on an interest rate that is
different from the interest rate on the
Single Family Loan or may not be amortized
during all or a portion of the original term.
Payment of all or a substantial portion of
the principal may be due on maturity
("balloon payments"). Principal may include
interest that has been deferred and added to
the principal balance of the Single Family
Loan.
(c) Monthly payments of principal and
interest on the Mortgage Loans (and, together
with any monthly payments on the
Mortgage-Backed Securities, the "Monthly
Payments") may be fixed for the life of the
8
<PAGE>
loan, may increase over a specified period of
time or may change from period to period.
Single Family Loans may include limits on
periodic increases or decreases in the amount
of Monthly Payments and may include maximum
or minimum amounts of Monthly Payments.
(d) Prepayments of principal may be subject
to a prepayment fee, which may be fixed for
the life of the Single Family Loan or may
decline over time, and may be prohibited for
the life of the Single Family Loan or for
certain periods ("lockout periods"). Certain
Single Family Loans may permit prepayments
after expiration of the applicable lockout
period and may require the payment of a
prepayment fee in connection with any such
subsequent prepayment. Other Single Family
Loans may permit prepayments without payment
of a fee unless the prepayment occurs during
specified time periods. The Single Family
Loans may include "due-on-sale" clauses which
permit the mortgagee to demand payment of the
entire Single Family Loan in connection with
the sale or certain transfers of the related
Mortgaged Property. Other Single Family Loans
may be assumable by persons meeting the then
applicable underwriting standards for such
Mortgage Loan.
(e) The real property constituting security
for repayment of a Single Family Loan 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.
Unless otherwise specified in the related
Prospectus Supplement, all of the Single
Family Loans will be required to be covered
by standard hazard insurance policies
insuring against losses due to fire and
various other causes. The Single Family Loans
will be covered by primary mortgage insurance
policies to the extent provided in the
related Prospectus Supplement.
The Prospectus Supplement for each Series of
Certificates will specify certain information
with respect to the related Single Family Loans
including, without limitation, the number of
Mortgage Loans which are Trust Assets, the
aggregate original principal balance of the
Single Family Loans, the respective percentages
of the Single Family Loans which are secured by
first mortgages, second mortgages and more
junior mortgages, the minimum and maximum
outstanding principal balances of the Single
Family Loans, the Mortgage Interest Rate (fixed
or adjustable) together with, with respect to
adjustable rate Single Family Loans, the index
upon which the Mortgage Interest Rate is based,
the weighted average original term to maturity,
the weighted average remaining term to maturity,
the
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minimum and maximum remaining terms to maturity
and the range of origination dates. If so
specified in the related Prospectus Supplement,
such information may be approximate, based on
the expected Single Family Loans which are Trust
Assets, in which case the final information, to
the extent of any variances, will be contained
in the Form 8-K referred to below. See
"Description of the Primary Assets" herein and
"Description of the Mortgage Pool" in the
related Prospectus Supplement.
A Current Report on Form 8-K (each, a "Form 8-K")
will be available to purchasers or underwriters
of the related Series of Certificates and will
generally be filed, together with the related
primary documents, with the Securities and
Exchange Commission within fifteen days after
the related Closing Date.
B. Contracts Contracts will consist of first lien and junior
lien mortgage loans secured by residential real
property, together with the Manufactured Homes
located thereon. Contracts may be conventional,
insured by the FHA or partially guaranteed by
the VA, as specified in the related Prospectus
Supplement. See "Description of the Primary
Assets--Contracts" herein.
C. Mortgage-Backed
Securities Mortgage-Backed Securities may include (i) private
(that is, not guaranteed or insured by the
United States or any agency or instrumentality
thereof) mortgage participations, mortgage
pass-through certificates or other
mortgage-backed securities or (ii) certificates
insured or guaranteed by Federal Home Loan
Mortgage Corporation ("FHLMC"), Federal National
Mortgage Association ("FNMA") or Government
National Mortgage Association ("GNMA"). See
"Description of the Primary Assets--Mortgage-
Backed Securities" herein.
The related Prospectus Supplement for a Series
will specify, among other things, (i) the
approximate aggregate principal amount and type
of any Mortgage-Backed Securities to be included
as Trust Assets for such Series; (ii) certain
characteristics of the assets underlying the
Mortgage-Backed Securities including (A) the
payment features, (B) the approximate aggregate
principal amount insured or guaranteed by a
governmental entity, if any, (C) the servicing
fee or range of servicing fees, and (D) the
minimum and maximum stated maturities at
origination; (iii) the maximum original term to
stated maturity of the Mortgage-Backed
Securities; (iv) the weighted average
term-to-stated maturity of the Mortgage-Backed
Securities; (v) the pass-through or certificate
rate or ranges thereof for the Mortgage-Backed
Securities; (vi) the weighted average
pass-through or certificate rate of the
Mortgage-Backed Securities; (vii) the issuer of
the Mortgage-
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Backed Securities (the "MBS Issuer"), the
servicer of the Mortgage-Backed Securities (the
"MBS Servicer") and the trustee of the
Mortgage-Backed Securities (the "MBS Trustee");
(viii) certain characteristics of credit
support, if any, such as reserve funds,
insurance policies, surety bonds, letters of
credit or guaranties, underlying the
Mortgage-Backed Securities; and (ix) the terms
on which such Mortgage-Backed Securities may, or
are required to, be repurchased prior to stated
maturity.
Optional Termination......... The Master Servicer, the Seller, the Depositor
and/or any other entity specified in the related
Prospectus Supplement may have the option to
effect the early termination of a Series of
Certificates through the purchase of the Primary
Assets and other assets in the related Trust
under the circumstances and in the manner
described in "The Trusts--Optional Disposition
of Primary Assets" herein and in the related
Prospectus Supplement.
Mandatory Termination........ If so specified in the related Prospectus
Supplement, the Trustee, the Master Servicer,
the Seller, the Depositor and/or any other
entity as may be specified in such Prospectus
Supplement may be required to effect early
retirement of a Series of Certificates by
soliciting competitive bids for the purchase of
the Primary Assets and other assets in the
related Trust or otherwise, under the
circumstances and in the manner specified under
"The Trusts--Mandatory Disposition of Primary
Assets" herein and in the related Prospectus
Supplement.
Yield and Prepayment
Considerations............... The yield on each Class of Certificates of a
Series will be affected by, among other things,
the rate of payment of principal (including
prepayments) on the Primary Assets in the
related Trust and the timing of receipt of such
payments. See "Certain Yield and Prepayment
Considerations" herein and in the related
Prospectus Supplement. The Prospectus Supplement
for a Series may specify certain yield
calculations, based upon an assumed rate or
range of prepayment assumptions on the related
Primary Assets, for Classes receiving
disproportionate allocations of principal and
interest. A higher level of principal
prepayments on the related Primary Assets than
anticipated is likely to have an adverse effect
on the yield of any Class of Certificates that
is purchased at a premium (including
Certificates entitled to receive interest only)
and a lower level of principal prepayments on
the related Primary Assets than anticipated is
likely to have an adverse effect on the yield of
any Class of Certificates that is purchased at a
discount. In either case, those
Certificateholders may fail to recoup fully
their initial
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investment. See "Certain Yield and Prepayment
Considerations" herein and in the related
Prospectus Supplement.
Forward Commitments;
Prefunding................... If so specified in the related Prospectus
Supplement, a portion of the proceeds of the
sale of one or more Classes of Certificates of a
Series may be deposited in a segregated account
(a "Prefunding Account") to be applied to
acquire additional Primary Assets. The times and
requirements for the acquisition of such Primary
Assets will be set forth in the related Pooling
and Servicing Agreement or other agreement with
the Depositor and/or Seller and disclosed in the
related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement,
monies on deposit in the Prefunding Account and
not applied to acquire such additional Primary
Assets within the time set forth in the related
Pooling and Servicing Agreement or other
applicable agreement, which shall in no event
exceed one year, shall be treated as a principal
prepayment and applied in the manner described
in the related Prospectus Supplement. The amount
initially deposited into a Prefunding Account
for a Series of Certificates will not exceed
fifty percent (50%) of the aggregate principal
amount of such Series of Certificates.
Credit Enhancement........... If so specified in the related Prospectus
Supplement, credit enhancement may be provided
by any one or a combination of a letter of
credit, financial guaranty insurance policy,
reserve fund, spread account, cash collateral
account, overcollateralization,
cross-collateralization or other type of credit
enhancement to provide full or partial coverage
for certain defaults and losses relating to the
underlying Primary Assets. In addition, if
specified in the related Prospectus Supplement,
the Primary Assets underlying a Series of
Certificates may be insured under one or more of
a mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond or similar
credit enhancement. Credit support may also be
provided by subordination. The amount of any
credit enhancement may be limited or have
exclusions from coverage and may decline or be
reduced over time or under certain
circumstances, all as specified in the related
Prospectus Supplement. See "Description of the
Certificates--Description of Credit Enhancement"
herein.
A. Subordination............. A Series of Certificates may consist of one or
more classes of Senior Certificates and one or
more classes of Subordinated Certificates. The
rights of the holders of the Subordinated
Certificates of a Series to receive
distributions with respect to the Trust Assets
will be subordinated to such rights of the
holders of the Senior Certificates of the same
Series to the
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extent described in the related Prospectus
Supplement. This subordination is intended to
enhance the likelihood of regular receipt by
holders of Senior Certificates of the full
amount of monthly payments of principal and
interest due them. The protection afforded to
the holders of Senior Certificates of a Series
by means of the subordination feature will be
accomplished by: (i) the preferential right of
such holders to receive, prior to any
distribution being made in respect of the
related Subordinated Certificates, the amounts
of interest and/or principal due them on each
Distribution Date out of the funds available for
distribution on such date and, to the extent
described in the related Prospectus Supplement,
by the right of such holders to receive future
distributions on the assets in the related Trust
that would otherwise have been payable to the
holders of Subordinated Certificates; (ii)
reducing the ownership interest (if applicable)
or principal balance of the related Subordinated
Certificates through the allocation of losses on
the related Primary Assets; (iii) a combination
of clauses (i) and (ii) above; or (iv) as
otherwise described in the related Prospectus
Supplement. If so specified in the related
Prospectus Supplement, subordination may apply
only in the event of certain types of losses not
covered by other forms of credit enhancement,
such as hazard losses not covered by standard
hazard insurance policies or losses due to the
bankruptcy or fraud of the Mortgagor. The
related Prospectus Supplement will set forth
information concerning, among other things, the
amount of subordination of a Class or Classes of
Subordinated Certificates in a Series, the
circumstances in which such subordination will
be applicable, and the manner, if any, in which
the amount of subordination will decrease over
time.
B. Reserve Account........... One or more reserve accounts (each, a "Reserve
Account") may be established and maintained for
each Series of Certificates. The related
Prospectus Supplement will specify whether such
Reserve Accounts will be included in the corpus
of the Trust for such Series and will also
specify the manner of funding such Reserve
Accounts and the conditions under which the
amounts in any such Reserve Accounts will be
used to make distributions to holders of
Certificates of a particular Class or released
from such Reserve Accounts.
C. Overcollateralization..... If specified in the related Prospectus Supplement,
credit support may consist of
overcollateralization whereby the aggregate
principal amount of the Primary Assets exceeds
the aggregate principal balance of the
Certificates of such Series. Such
overcollateralization may exist on the Closing
Date or develop thereafter as a result of the
application of certain interest collections or
other collections received in connection with
the Trust Assets in excess of amounts necessary
to pay the
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<PAGE>
Certificate Interest Rate on the Certificates.
The existence of any overcollateralization and
the manner, if any, by which it increases or
decreases, will be set forth in the related
Prospectus Supplement.
D. Special Hazard Insurance
Policy.................... Certain classes of Certificates of a Series may
have the benefit of a special hazard insurance
policy or policies (each, a "Special Hazard
Policy") covering certain physical risks that
are not otherwise insured against by standard
hazard insurance policies. Each Special Hazard
Policy will be limited in scope and will cover
losses pursuant to the provisions of each such
Special Hazard Policy as described in the
related Prospectus Supplement.
E. Bankruptcy Bond........... One or more bankruptcy bonds (each, a "Bankruptcy
Bond") may be obtained covering certain losses
resulting from action which may be taken by a
bankruptcy court in connection with a Mortgage
Loan. The level of coverage and the limitations
in scope of each Bankruptcy Bond will be
specified in the related Prospectus Supplement.
F. Pool
Insurance Policy.......... A mortgage pool insurance policy or policies
(each, a "Pool Insurance Policy") may be
obtained and maintained for Mortgage Loans
relating to any Series of Certificates, which
shall be limited in scope, covering defaults on
the related Mortgage Loans in an initial amount
equal to a specified percentage of the aggregate
principal balance of all Mortgage Loans included
in the Trust as of the related Cut-off Date.
G. Cross-collateralization... If specified in the related Prospectus Supplement,
separate Classes of a Series of Certificates may
evidence the beneficial ownership of, or be
secured by, separate groups of assets included
in a Trust. In such case, credit support may be
provided by a cross-collateralization feature
which requires that distributions be made with
respect to Certificates evidencing beneficial
ownership of, or secured by, one or more asset
groups prior to distributions to Subordinated
Certificates evidencing a beneficial ownership
interest in, or secured by, other asset groups
within the same Trust.
If specified in the related Prospectus Supplement,
the coverage provided by one or more forms of
credit support may apply concurrently to two or
more separate Trusts. If applicable, the related
Prospectus Supplement will identify the Trusts
to which such credit support relates and the
manner of determining the amount of the coverage
provided thereby and of the application of such
coverage to the identified Trusts.
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<PAGE>
H. Other Arrangements....... Other arrangements as described in the related
Prospectus Supplement including, but not limited
to, one or more letters of credit, surety bonds,
other insurance or third-party guarantees may be
used to provide coverage for certain risks of
defaults or various types of losses.
Advances..................... If so specified in the related Prospectus
Supplement, the Master Servicer may be required
(i) to make advances (each, a "P&I Advance"), to
the extent deemed recoverable, or (ii) to
withdraw from any Collection Account specified
in the related Prospectus Supplement amounts on
deposit therein and held for future distribution
in respect of (A) interest on the Primary Assets
accrued but uncollected as of the end of the
related Due Period (net of the Servicing Fee)
and/or (B) principal on the Primary Assets
scheduled to be paid but uncollected as of the
end of the related Due Period, other than a
balloon payment. See "The Trusts--P & I
Advances; Servicing Advances" herein.
Servicing Fee................ The Master Servicer will be entitled to receive a
fee for its servicing duties in the amount
specified in the related Prospectus Supplement
(the "Servicing Fee"), payable from payments on
the related Primary Assets (as specified in the
related Prospectus Supplement), Liquidation
Proceeds, Released Mortgaged Property Proceeds
and certain other sources as provided in the
related Pooling and Servicing Agreement.
Ratings...................... It is a condition to the issuance of each Series
of Certificates that each Class of the
Certificates of such Series be rated by one or
more of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies, Inc.
("S&P"), Fitch Investors Service, L.P. ("Fitch")
and Duff & Phelps Credit Rating Co. ("D&P"; and
each of D&P, Fitch, Moody's and S&P, a "Rating
Agency") in one of their four highest rating
categories. A security rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time. No person is obligated to maintain any
rating on any Certificate, and, accordingly,
there can be no assurance that the ratings
assigned to any Class of Certificates upon
initial issuance thereof will not be lowered or
withdrawn by a Rating Agency at any time
thereafter. If a rating of any Class of
Certificates of a Series is revised or
withdrawn, the liquidity of such Class of
Certificates may be adversely affected. In
general, the ratings address credit risk and do
not represent any assessment of the likelihood
or rate of principal prepayments. See "Risk
Factors--Limited Liquidity" and "Ratings"
herein.
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Certain Federal Income
Tax Consequences............. The Federal income tax consequences of each Trust
will depend upon , among other factors, whether
one or more elections are made to treat a Trust
or specific portion thereof as a "real estate
mortgage investment conduit" ("REMIC") under the
Internal Revenue Code of 1986, as amended (the
"Code"), or, if no REMIC election is made,
whether the Certificates are considered to be
Standard Certificates, Stripped Certificates or
Partnership Interests. The related Prospectus
Supplement will specify whether a REMIC election
will be made.
See "Certain Federal Income Tax Consequences"
herein and in the related Prospectus Supplement.
Legal Investment............. The Prospectus Supplement for each Series of
Certificates will specify which, if any, of the
Classes of Certificates offered thereby
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). Classes of
Certificates that qualify as "mortgage related
securities" will be legal investments for
certain types of institutional investors to the
extent provided in SMMEA, subject, in any case,
to any other regulations which may govern
investments by such institutional investors.
Institutions whose investment activities are
subject to review by federal or state
authorities should consult with their counsel or
the applicable authorities to determine whether
an investment in a particular Class of
Certificates (whether or not such class
constitutes a "mortgage related security")
complies with applicable guidelines, policy
statements or restrictions. See "Legal
Investment."
ERISA Considerations......... A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or the Code should
carefully review with its legal advisors whether
the purchase or holding of Certificates could
give rise to a transaction prohibited or not
otherwise permissible under ERISA or the Code.
Certain Classes of Certificates may not be
acquired or transferred unless the Trustee and
the Depositor are furnished with a letter of
representation or an opinion of counsel to the
effect that such acquisition or transfer will
not result in a violation of the prohibited
transaction provisions of ERISA and the Code and
will not subject the Trustee, the Depositor or
the Master Servicer to additional obligations.
See "ERISA Considerations" herein and in the
related Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following information
in connection with the purchase of Certificates:
Certificates
Limited Liquidity. There is no assurance that a secondary market for any
of the Certificates will develop or, if one does develop, that it will provide
the holders with liquidity of investment or that it will continue for the life
of such Certificates. None of the Certificates will be listed on any securities
exchange.
It is a condition to the issuance of the Certificates that each Class of
Certificates be rated in one of the four highest rating categories by one or
more of Moody's, S&P, Fitch or D&P. See "Ratings" herein. A security rating is
not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time. No person is obligated to maintain the
rating on any Certificate and, accordingly, there can be no assurance that the
ratings assigned to any Class of Certificates on the date on which such
Certificates are initially issued will not be lowered or withdrawn by a Rating
Agency at any time thereafter. In the event any rating is revised or withdrawn,
the liquidity of the related Certificates may be adversely affected.
Issuance of any of the Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary trading market because investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "Description of the Certificates--Registration and Transfer of
the Certificates" herein.
Difficulty in Pledging. Because transactions in Certificates of a Series
in book-entry form may be effected only through DTC, Participants and Indirect
Participants, the ability of an Owner to pledge such a Certificate to persons or
entities that do not participate in the DTC system, or otherwise to take actions
in respect of such Certificates, may be limited due to the lack of a physical
certificate representing such Certificate. See "Description of the
Certificates--Registration and Transfer of the Certificates" herein.
Potential Delays in Receipt of Payments. Owners of Certificates issued in
book-entry form may experience some delay in their receipt of payments of
interest and principal on the Certificates because such payments will be
forwarded to DTC and DTC will credit such payments to the accounts of its
Participants which will thereafter credit them to the accounts of Owners either
directly or indirectly through Indirect Participants. See "Description of the
Certificates--Registration and Transfer of the Certificates" herein.
Basis Risk. The Primary Assets in a Trust may accrue interest at variable
rates based on changes in specified indexes (as set forth in the related
Prospectus Supplement) which may adjust monthly, quarterly, annually or
otherwise. The Certificates, however, may accrue interest at Certificate
Interest Rates that are variable rates based on different indexes and which may
adjust on different periods. As a result, there may be periods during which the
weighted average rate at which the Primary Assets are accruing interest do not
reflect the then current spread between the rates on the Primary Assets and the
Certificate Interest Rates on the Certificates. The difference between the
interest rates on the Primary Assets and the Certificate Interest Rates may
limit the Certificate Interest Rates accordingly.
Limited Assets, Limited Obligations. The Depositor does not have, nor is
it expected to have, any significant assets. Unless otherwise specified in the
related Prospectus Supplement, the Certificates of a Series will be payable
solely from the Trust Assets in the related Trust and will not have any claim
against or security interest in the Trust for any other Series. There will be no
recourse to the Depositor or any other person for any failure to receive
distributions on the Certificates. Consequently, holders of Certificates of
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each Series must rely solely upon payments with respect to the Trust Assets for
a Series of Certificates, including, if applicable, any amounts available
pursuant to any credit enhancement for such Series, for the payment of principal
of and interest on the Certificates of such Series.
The Certificates of any Series will not represent an interest in or
obligation of the Depositor, the Seller, the Master Servicer, the Trustee or any
of their respective affiliates. In addition, if the Seller fails to repurchase
any Primary Asset with respect to which it is in breach of a representation or
warranty in the related Purchase and Sale Agreement relating to the Primary
Assets sold to the Depositor for such Trust, the Depositor will have no
obligation to purchase such Primary Asset from the Trust. The Master Servicer's
servicing obligations under the related Pooling and Servicing Agreement may
include its limited obligation to make certain Advances, but only to the extent
deemed recoverable.
ERISA Considerations. An investment in a Class of Certificates of any
Series by Plans may give rise to a prohibited transaction under Section 406 of
ERISA and/or be subject to tax under Section 4975 of the Code, unless a
statutory or administrative exemption is available. Accordingly, fiduciaries of
any employee benefit plan or other plan or arrangement subject to ERISA or
Section 4975 of the Code (a "Plan") or any insurance company (whether through
its general or separate accounts) or other person investing "plan assets" of any
Plan, should consult their counsel before purchasing any Class of Certificates.
Certain Classes of Certificates will not be eligible for purchase by, on behalf
of or with "plan assets" of Plans. See "ERISA Considerations" herein and in the
related Prospectus Supplement.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
enhancement may be provided with respect to one or more Classes of Certificates
of a Series to cover certain types of losses on the underlying Primary Assets.
Credit enhancement may be provided by one or more forms, including but not
limited to subordination of one or more Classes of Certificates of such Series,
letter of credit, financial guaranty insurance policy, mortgage pool insurance
policy, special hazard insurance policy, bankruptcy bond, reserve fund, spread
account, cash collateral account, overcollateralization, cross-collateralization
or other type of credit enhancement. The coverage of any credit enhancement may
be limited or have exclusions from coverage and may decline over time or under
certain circumstances, all as specified in the related Prospectus Supplement.
See "Description of the Certificates--Description of Credit Enhancement" herein.
Prefunding Accounts May Adversely Affect Investment. If a Trust includes a
Prefunding Account and the principal balance of additional Primary Assets
delivered to the Trust after the Closing Date is less than the amount initially
deposited into the Prefunding Account, the holders of the Certificates of the
related Series will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Certificates. Since
prevailing interest rates are subject to fluctuation, there can be no assurance
that investors will be able to reinvest such prepayments at yields equaling or
exceeding the yields on the related Certificates. It is possible that the yield
on any such reinvestment will be lower, and may be substantially lower, than the
yield on the related Certificates.
The ability of a Trust to invest in subsequent Primary Assets during the
Prefunding Period (as defined in the related Prospectus Supplement) will be
dependent upon the ability of the Depositor to acquire Primary Assets that
satisfy the requirements for transfer to the Trust. The ability of the Depositor
to acquire such Primary Assets will be affected by a variety of social and
economic factors, including the prevailing level of market interest rates,
unemployment levels and consumer perceptions of general economic conditions.
Although subsequent Primary Assets must satisfy the characteristics
described in the related Prospectus Supplement, such Primary Assets may have
been originated more recently than the Primary Assets originally transferred to
the Trust and may be of a lesser credit quality. As a result, the addition of
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subsequent Primary Assets pursuant to the Prefunding Account may adversely
affect the performance of the related Certificates.
Risks of the Mortgage Loans and Private Mortgage-Backed Securities
General Economic Conditions. General economic conditions have an impact on
the ability of borrowers to repay mortgage loans. Loss of earnings, illness and
other similar factors may lead to an increase in delinquencies and bankruptcy
filings by borrowers. In the event of personal bankruptcy of a borrower under a
Mortgage Loan (a "Mortgagor"), it is possible that the holders of the related
Certificates could experience a loss with respect to such Mortgagor's Mortgage
Loan. In conjunction with a Mortgagor's bankruptcy, a bankruptcy court may
suspend, reduce or reschedule the payments of principal and interest to be paid
with respect to such Mortgage Loan, thus delaying or reducing the amount
received by the holders of the related Certificates with respect to such
Mortgage Loan. Moreover, if a bankruptcy court prevents or avoids the transfer
of the related Mortgaged Property to the related Trust, any remaining balance on
such Mortgage Loan may not be recoverable.
Real Estate Market Conditions. An investment in securities such as the
Certificates which are secured by or represent interests, either directly or
indirectly, in mortgage loans or similar assets may be affected by, among other
things, a decline in real estate values. No assurance can be given that values
of the Mortgaged Properties will remain at the levels existing on the dates of
origination of the related Mortgage Loans. If the residential real estate market
should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans, together with loans secured by
Senior Liens, if any, on the Mortgaged Properties, become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
Geographic Concentration. Certain geographic regions of the United States
from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency on mortgage loans generally. Any concentration of the Mortgage Loans
relating to any Series of Certificates in such a region may present risk
considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. See "Description of the
Mortgage Pool" in the related Prospectus Supplement for further information
regarding the geographic concentration of the Mortgage Loans underlying the
Certificates of any Series.
Nature of Security. Certain of the Mortgage Loans underlying the
Certificates of a Series may be secured by Mortgages junior or subordinate to
one or more other mortgages ("Senior Liens"), and the related Senior Liens will
not be included in the Primary Assets. Although little data is available, the
rate of default of second or more junior mortgage loans may be greater than that
of mortgage loans secured by senior liens on comparable properties. A primary
risk to holders of Mortgage Loans secured by junior Mortgages is the possibility
that adequate funds will not be received in connection with a foreclosure of the
related Senior Lien to satisfy fully both the Senior Lien and the Mortgage Loan.
If a holder of the Senior Lien forecloses on a Mortgaged Property, the proceeds
of the foreclosure or similar sale generally will be applied first to the
payment of court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest, prepayment
or acceleration penalties, if any, and any other sums due and owing to the
holder of the Senior Liens. The claims of the holder of the Senior Lien will be
satisfied in full out of proceeds of the liquidation of the Mortgage Loan, if
such proceeds are sufficient, before the related Trust as holder of the junior
Mortgage receives any payments in respect of such Mortgage Loan. If the Master
Servicer were to foreclose on any junior Mortgage Loan, it would do so subject
to any related Senior Lien. The debt related to the Mortgage Loan would not be
paid in full at such sale unless a bidder at the foreclosure sale of such
Mortgage Loan bids an amount sufficient to pay off all sums due under such
Mortgage Loan and the Senior Lien or purchases the Mortgaged Property subject to
the Senior Lien. If such
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proceeds from a foreclosure or similar sale of the related Mortgaged Property
are insufficient to satisfy such loans in the aggregate, the related Trust, as
the holder of the junior Mortgage, and, accordingly, holders of the Certificates
would bear (i) the risk of delay in distributions while a deficiency judgment
against the Mortgagor is obtained and (ii) the risk of loss if the deficiency
judgment is not realized upon. Moreover, deficiency judgments may not be
available in certain jurisdictions. In addition, a junior mortgagee may not
foreclose on the property securing a junior Mortgage unless it forecloses
subject to the Senior Lien. In servicing second Mortgages, the Master Servicer
[may, but] is not obligated to, advance funds to keep the related Senior Lien
current in the event the Mortgagor is in default thereunder until such time as
the Master Servicer satisfies the Senior Lien by sale of the Mortgaged Property,
if it determines such Advances will be recoverable from future payments and
collections on that Mortgage Loan or otherwise. The related Trust will have no
source of funds to satisfy any Senior Lien or make payments due to any senior
mortgagee. The junior Mortgages securing the Mortgage Loans are subject and
subordinate to any Senior Liens affecting the related Mortgaged Property,
including limitations and prohibitions which may be contained in such Senior
Liens upon subordinate financing.
Security Interests and Other Aspects of the Contracts. Contracts may be
secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of Federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, no party will be required to amend any certificates of title to change
the lienholder specified therein to the Trustee and no party will be required to
deliver any certificate of title to the Trustee or note thereon the Trustee's
interest. Consequently, in some states, in the absence of such an amendment, the
assignment to the Trustee of the security interest in the Manufactured Home may
not be effective or such security interest may not be perfected and, in the
absence of such notation or delivery to the Trustee, the assignment of the
security interest in the Manufactured Home may not be effective against the
creditors of the previous owner of the related Contract or a trustee in
bankruptcy of such previous owner. In addition, numerous Federal and state
consumer protection laws impose requirements on lending under loan agreements
similar to the Contracts, and the failure by the lender to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and claims by such assignees may be subject to set-off as a
result of such lender's noncompliance. These laws would apply to
the Trustee as assignee of the Contracts. The Seller will warrant that each
Contract sold by it complies with all requirements of law and will make certain
warranties relating to the validity, subsistence, perfection and priority of the
security interest in each Manufactured Home securing a Contract. A breach of any
such warranty that materially adversely affects any Contract would create an
obligation of the Seller to repurchase such Contract unless such breach is
cured. If any related credit enhancement is exhausted and recovery of amounts
due on the Contracts is dependent on repossession and resale of Manufactured
Homes securing Contracts that are in default, certain other factors may limit
the ability of the Trust to realize upon the Manufactured Homes or may limit the
amount realized to less than the amount due. See "Certain Legal Aspects of the
Mortgage Loans -- The Contracts" herein.
Certain Mortgage Loans. Certain of the Mortgage Loans underlying a Series
of Certificates may have been made to lower credit quality borrowers who have
marginal credit and fall into one of two categories: customers with moderate
income, limited assets and other income characteristics which cause difficulty
in borrowing from banks and other traditional sources of lenders, and customers
with a derogatory credit report including a history of irregular employment,
previous bankruptcy filings, repossession of property, charged-off loans and
garnishment of wages. The average Mortgage Interest Rate on those Mortgage Loans
made to these types of borrowers is generally higher than that charged by
lenders that typically impose more stringent credit requirements. The payment
experience on loans made to these types
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of borrowers is likely to be different from that on loans made to borrowers with
higher credit quality, and is likely to be more sensitive to changes in the
economic climate in the areas in which such borrowers reside.
Certain of the Mortgage Loans underlying a Series of Certificates may be
delinquent in respect of the payment of principal and interest. In addition,
certain of the Mortgagors under the Mortgage Loans underlying a Series of
Certificates may be subject to personal bankruptcy proceedings. Such Mortgage
Loans may be subject to a greater risk of default. See "Description of the
Mortgage Pools" herein and "Description of the Mortgage Pool" in the related
Prospectus Supplement.
Delays in Liquidating Defaulted Single Family Loans. Even assuming that
the Mortgaged Properties provide adequate security for the Single Family Loans
underlying a Series of Certificates, substantial delays could be encountered in
connection with the liquidation of defaulted Single Family Loans and
corresponding delays in the receipt of related proceeds by the related Trust
could occur. An action to foreclose on a Mortgaged Property securing a Single
Family 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 Mortgaged Property. In the event of a default by a
Mortgagor, these restrictions, among other things, may impede the ability of the
Master Servicer to foreclose on or sell the Mortgaged Property or to obtain Net
Liquidation Proceeds sufficient to repay all amounts due on the related Single
Family Loan. In addition, the Master Servicer will be entitled to deduct from
collections received during the preceding Due Period all previously made
Advances, for all expenses reasonably incurred in attempting to recover amounts
due and not yet repaid on Liquidated Mortgage Loans, including payments to
senior lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses, thereby reducing collections available to
the related Trust. See "Certain Legal Aspects of the Mortgage Loans--Foreclosure
of Single Family Loans" and "--Rights of Redemption" herein.
Likelihood of Disproportionate Liquidation Expenses. Liquidation expenses
with respect to defaulted mortgage loans do not vary directly with the
outstanding principal balance of the loan at the time of default. Therefore,
assuming that the Master 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 outstanding principal balance of the defaulted Mortgage Loan
having a small remaining principal balance than would be the case with the
defaulted Mortgage Loan having a large remaining principal balance. Because the
average outstanding principal balance of the Mortgage Loans is small relative to
the size of the average outstanding principal balance of the loans in a typical
pool consisting only of conventional purchase-money mortgage loans, Net
Liquidation Proceeds on Liquidated Mortgage Loans may also be smaller as a
percentage of the principal balance of a Mortgage Loan than would be the case in
a typical pool consisting only of conventional purchase-money mortgage loans.
Risk of Early Defaults. Certain of the Mortgage Loans underlying a Series
of Certificates may be recently originated as of the date of inclusion as part
of the related Trust Assets. Although little data is available, defaults on
mortgage loans are generally expected to occur with greater frequency in their
early years.
Balloon Mortgage Loans. Certain of the Mortgage Loans underlying a Series
of Certificates may provide for the payment of the unamortized principal balance
of the Mortgage Loan in a single payment at the maturity of the Mortgage Loan
that is greater than the preceding monthly payment ("Balloon Loans"). See
"Description of the Primary Assets" herein and "Description of the Mortgage
Pool" in the related Prospectus Supplement. Because Mortgagors under Balloon
Loans are required to make a relatively large single payment upon maturity, it
is possible that the default risk associated with Balloon Loans is greater than
that associated with fully-amortizing mortgage loans. The ability of a Mortgagor
on a Balloon Loan to repay
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the Mortgage Loan upon maturity frequently depends upon, among other things, the
Mortgagor's ability to refinance the Mortgage Loan, which will be affected by a
number of factors, including, without limitation, the level of mortgage rates
available in the primary mortgage market at the time, the Mortgagor's equity in
the related Mortgaged Property, the financial condition of the Mortgagor, the
condition of the Mortgaged Property, tax law, general economic conditions and
the general willingness of financial institutions and primary mortgage bankers
to extend credit.
Although a low interest rate environment may facilitate the refinancing of
a balloon payment, the receipt and reinvestment by holders of the Certificates
of the proceeds in such an environment may produce a lower return than that
previously received in respect of the related Mortgage Loan. Conversely, a high
interest rate environment may make it more difficult for the Mortgagor to
accomplish a refinancing and may result in delinquencies or defaults.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), a Mortgagor who enters military service after the origination of
such Mortgagor's Mortgage Loan (including a Mortgagor who is a member of the
National Guard or is in reserve status at the time of the origination of the
Mortgage Loan and is later called to active duty) may not be charged interest
(including fees and charges) above an annual rate of 6% during the period of
such Mortgagor's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action 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 Mortgage Loans underlying a
Series of Certificates. In addition, the Relief Act imposes limitations which
would impair the ability of the Master Servicer to foreclose on an affected
Mortgage Loan during the Mortgagor's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the related Mortgaged
Property in a timely fashion.
Legal Considerations. Applicable state laws generally regulate interest
rates and other charges, require certain disclosures and, unless an exemption is
available, require licensing of the originators of home equity Single Family
Loans. In addition, most states have other laws, public policies 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 Mortgage 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 Mortgage Loans,
may entitle the Mortgagor to a refund of amounts previously paid and, in
addition, could subject the Master Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of the Mortgage Loans" herein.
The Mortgage Loans are also subject to federal laws, including, without
limitation: (i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the Mortgagors regarding the
terms of the Mortgage Loans; (ii) the Equal Credit Opportunity Act and
Regulation B promulgated thereunder, which prohibit discrimination on the basis
of age, race, color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; (iii) the Fair Credit Reporting Act,
which regulates the use and reporting of information related to the Mortgagor's
credit experience; (iv) the Real Estate Settlement Procedures Act, which
regulates closing and servicing practices relating to first mortgage loans for
one- to four-family residential properties; and (v) certain other laws and
regulations. The Contracts are also subject to general equitable principles and
other rules in consumer credit transactions. Moreover, the Contracts may be
subject to potential personal injury litigation based on claims of exposure to
the chemical formaldehyde. See "Certain Legal Aspects of the Mortgage Loans --
The Contracts" herein. Certain of the Mortgage Loans may be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act"), which incorporates the Home Ownership and Equity Protection Act of 1994.
These provisions impose
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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 mortgage
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
Under environmental legislation and case law applicable in certain states,
it is possible that liability for environmental hazards in respect of real
property may be imposed on a holder of a mortgage note (such as the Trust)
secured by real property. See "Certain Legal Aspects of the Mortgage
Loans--Environmental Legislation" herein.
Insolvency Considerations
Insolvency Related Matters. Counsel to the Depositor and the Seller will
render an opinion to the Trustee that in the event that the Seller became a
debtor under the United States Bankruptcy Code, the transfer of the Primary
Assets from the Seller to the Depositor in accordance with the Purchase and Sale
Agreement would be treated as a true sale and not as a pledge to secure
borrowings and that the Depositor would not be substantively consolidated with
the Seller as a single entity or that the assets and/or liabilities of the
Depositor and Seller would not be consolidated. If, however, the transfer of the
Primary Assets from the Seller to the Depositor were treated as a pledge to
secure borrowings by the Seller or if the Depositor were ordered substantively
consolidated with the Seller as a single entity or of the Depositor were to
become bankrupt for any reason, the distribution of proceeds from the Primary
Assets to the Trust might be subject to the automatic stay provisions of the
United States Bankruptcy Code, which would delay the distribution of such
proceeds for an uncertain period of time. In addition, a bankruptcy trustee
would have the power to sell the Primary Assets, or the bankruptcy trustee could
substitute other collateral in lieu of the Primary Assets to secure such debt,
or such debt could be subject to reduction or adjustment by the bankruptcy court
if the Seller were to become the subject of a case for reorganization under
Chapter 11 of the United States Bankruptcy Code.
In addition, the case of Octagon Gas Systems, Inc. v. Rimmer, 995 F.2d 948
(10th Cir. 1993) contains language to the effect that accounts sold by an entity
which subsequently became a debtor in bankruptcy remained property of such
debtor's bankruptcy estate. Although the Contracts constitute chattel paper
rather than accounts under the UCC, sales of chattel paper, like sales of
accounts, are governed by Article 9 of the UCC. If the Depositor or the Seller
were to become a debtor under the United States Bankruptcy Code and a court were
to follow the reasoning of the Tenth Circuit and apply such reasoning to chattel
paper, holders of the Certificates in the related Trust could experience a delay
or reduction in distributions.
Additionally, because the Seller may have purchased the Primary Assets
from other originators or sellers, it is possible that (as a result of recourse
retained against such other originators or sellers or otherwise) the transfer of
the Primary Assets from such originators or sellers to the Seller could be
treated as a pledge rather than a sale and the corresponding negative
implications for delay and reduction of payments by a Trust could apply.
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Yield and Prepayment Considerations
The yield to maturity of each Class of Certificates of a Series will
depend on the rate and timing of payment of principal on the related Primary
Assets, including prepayments, liquidations due to defaults and repurchases due
to defective documentation or breaches of representations and warranties. Such
yield may be adversely affected by a higher or lower than anticipated rate of
prepayments on the Primary Assets. Prepayments are influenced by a number of
factors, including prevailing mortgage market interest rates, local and regional
economic conditions and homeowner mobility. The yield to maturity of certain
Classes of Certificates identified in the related Prospectus Supplement may be
particularly sensitive to the rate and timing of principal payments (including
prepayments, liquidations and repurchases) of the related Mortgage Loans, which
may fluctuate significantly from time to time. Investors in a Class of
Certificates offered at a discount from the principal amount thereof or with no
stated principal amount should fully consider the associated risks, including
the risk that an extremely rapid rate of principal payments could result in the
failure of such investors to recoup their initial investments. See "Certain
Yield and Prepayment Considerations" herein and in the related Prospectus
Supplement.
Original Issue Discount
Certain Classes of Certificates of a Series may be treated as having been
issued with original issue discount for federal income tax purposes. As a
result, holders of such Certificates will be required to include amounts in
income without the receipt of cash corresponding to that income. See "Certain
Federal Income Tax Consequences--Original Issue Discount" herein and, if
applicable, in the related Prospectus Supplement.
DESCRIPTION OF THE PRIMARY ASSETS
General
The property of each Trust will consist of: (i) the Primary Assets
(subject, if specified in the Prospectus Supplement, to certain exclusions)
having the aggregate principal balance outstanding as of the related Cut-off
Date, after giving effect to payments due on or prior to such date, specified
in the related Prospectus Supplement (the "Original Pool Principal Balance"),
(ii) all payments (subject, if specified in the Prospectus Supplement, to
certain exclusions) in respect of such Primary Assets, which may be adjusted,
to the extent specified in the related Prospectus Supplement, in the case of
interest payments on Primary Assets, to the Certificate Interest Rate; (iii)
if specified in the Prospectus Supplement, reinvestment income on such
payments; (iv) with respect to a Trust that includes Single Family Loans
and/or Contracts, all property acquired by foreclosure or deed in lieu of
foreclosure with respect to any such Single Family Loan and/or Contract; (v)
certain rights of the Trustee, the Depositor and the Master Servicer under any
policies required to be maintained in respect of the related Primary Assets; and
(vi) if so specified in the Prospectus Supplement, one or more forms of credit
enhancement (together, the "Trust Assets"). For purposes hereof, "Mortgage
Loans" consist of Single Family Loans and Contracts.
While it is expected that the Primary Assets will be acquired by the
Depositor from the Seller, if so specified in the related Prospectus Supplement,
Primary Assets may be acquired by the Depositor from affiliated or unaffiliated
originators. The following is a brief description of the Primary Assets expected
to be included in the Trusts. If specific information respecting the Primary
Assets is not known at the time the related series of Certificates initially are
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 Certificates. A copy of
the Pooling and Servicing Agreement with respect to each Series of Certificates
will be attached to the Form 8-K and will be available for inspection at the
corporate trust
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office of the Trustee specified in the related Prospectus Supplement. A schedule
of the Primary Assets relating to each Series of Certificates, will be attached
to the related Pooling and Servicing Agreement delivered to the Trustee upon
delivery of such Certificates.
Single Family Loans
Each Single Family Loan will be evidenced by a promissory note (the
"Mortgage Note") secured by a mortgage or deed of trust (the "Mortgage")
creating a first, second or more junior liens on fee simple or leasehold
interests in one- to four-family residential properties (the "Mortgaged
Properties"). If specified in the Prospectus Supplement, the Mortgage Loans may
include cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by Cooperatives and in the related proprietary leases
or occupancy agreements granting exclusive rights to occupy specific dwelling
units in such Cooperatives' buildings. The Mortgaged Properties securing the
Single Family Loans may include investment properties and vacation and second
homes. Each Single Family Loan will be selected by the Depositor for inclusion
in the Trust from among those acquired by the Depositor from the Seller or from
one or more affiliated or unaffiliated originators, including newly originated
loans.
The Single Family Loans may be (i) "conventional" mortgage loans, that is,
they will not be insured or guaranteed by any governmental agency, (ii) insured
by the Federal Housing Authority ("FHA") or (iii) partially guaranteed by the
Veteran's Administration ("VA"), as specified in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, the Single Family
Loans may include closed-end home equity loans ("Home Equity Loans"). Such Home
Equity Loans will be secured by first, second or more junior liens on fee simple
or leasehold interests in one- to four-family residential properties. See
"Mortgage Loan Program--Single Family Loans." The principal and interest on the
Single Family Loans included in the Trust for a Series of Certificates will be
payable either on the first day of each month or on different scheduled days
throughout each month, and the interest will be calculated either on a simple
interest, actuarial method or a "Rule of 78s" method, as described herein and in
the related Prospectus Supplement. When a full principal prepayment is paid on a
Single Family Loan during a month, the Mortgagor is generally charged interest
only on the days of the month actually elapsed up to the date of such
prepayment, at a daily interest rate that is applied to the principal amount of
the Single Family Loan so prepaid.
The payment terms of the Single Family Loans to be included in a Trust for
a Series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest may
be deferred and added to the principal of a Single Family Loan for such
periods and under such circumstances as may be specified in the related
Prospectus Supplement. Single Family Loans may provide for the payment of
interest at a rate lower than the specified Mortgage Interest Rate for a
period of time or for the life of the Single Family Loan, and the amount
of any difference may be contributed from funds supplied by the seller of
the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Single Family 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 Mortgage Interest Rate or may not be amortized during
all or a portion of the original term.
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Payment of all or a substantial portion of the principal may be due on
maturity ("balloon payment"). Principal may include interest that has been
deferred and added to the principal balance of the Single Family Loan.
(c) Monthly Payments of principal and interest may be fixed for the
life of the Single Family Loan, may increase over a specified period of
time or may change from period to period. Single Family Loans may include
limits on periodic increases or decreases in the amount of Monthly
Payments and may include maximum or minimum amounts of Monthly Payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Single Family Loan or may decline
over time, and may be prohibited for the life of the Single Family Loan or
for certain periods ("lockout periods"). Certain Single Family Loans may
permit prepayments after expiration of the applicable lockout period and
may require the payment of a prepayment fee in connection with any such
subsequent prepayment. Other Single Family Loans may permit prepayments
without payment of a fee unless the prepayment occurs during specified
time periods. The Single Family Loans may include "due on sale" clauses
which permit the mortgagee to demand payment of the entire Single Family
Loan in connection with the sale or certain transfers of the related
Property. Other Single Family Loans may be assumable by persons meeting
the then applicable underwriting standards of the Seller.
The related Prospectus Supplement will describe certain characteristics of
the related Single Family Loans, including without limitation (i) the range of
dates of origination and the latest scheduled maturity date, (ii) the minimum
remaining term to maturity, the weighted average original term to maturity and
the weighted average remaining term to maturity, (iii) the range of Mortgage
Interest Rates, the weighted average Mortgage Interest Rate and, with respect to
adjustable-rate Mortgage Loans, the index upon which the Mortgage Interest Rate
is based, (iv) the range of principal balances outstanding, the range of
original principal balances and the weighted average outstanding principal
balance, (v) the percentages of Single Family Loans secured by first Mortgages,
second Mortgages and more junior Mortgages, respectively, (vi) the maximum
Combined Loan-to-Value Ratio at origination, the weighted average Combined
Loan-to-Value Ratio, the maximum Loan-to-Value Ratio at origination and the
weighted average Loan-to-Value Ratio, (vii) the percentage of Mortgage Loans
secured by fee simple interests in single-family dwelling units, investor
properties, units in planned unit developments and condominiums, respectively,
the percentage of Single Family Loans secured by leasehold interests and the
percentage of Single Family Loans secured by units in cooperatives, (viii) the
percentage of Single Family Loans as to which the related Mortgagor represented
at the time of origination that the related Mortgaged Property would be occupied
by such Mortgagor as a primary or secondary residence, (ix) certain summary
information relating to the geographic concentration of the Mortgaged Properties
securing the Single Family Loans, (x) the percentage of Single Family Loans
which are Balloon Loans and the dates after origination that the balloon
payments are due, and (xi) the percentage of Single Family Loans which are
Bankruptcy Loans, the percentage of Bankruptcy Loans which are 30 days or more
contractually delinquent and the percentages of Single Family Loans other than
Bankruptcy Loans which are 30 days and 60 days or more contractually delinquent,
respectively. If so specified in the related Prospectus Supplement, the
characteristics of the Single Family Loans described in items (v) through (ix)
above, inclusive, may be based on a random sample of Single Family Loans
included in the related initial Trust Assets or expected to be included in the
related Trust Assets following the addition of any subsequently acquired Single
Family Loans (a "Sample Pool"). No assurance can be given, however, that the
characteristics of a Sample Pool are representative of the characteristics of
the initial Trust Assets or will be representative of the Mortgage Pool after
the addition of any subsequently acquired Single Family Loans. In addition, if
so specified in the related Prospectus Supplement, such information may be
approximate based on the expected characteristics of the Single Family Loans to
be included in the related Trust Assets and any significant variations therefrom
will be provided on the related Form 8-K.
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For purposes of the foregoing, the "Combined Loan-to-Value Ratio" of any
Single Family Loan is the ratio (expressed as a percentage) of (i) the sum of
(a) the original principal balance of such Single Family Loan at the date of
origination (which, if specified in the related Prospectus Supplement, may
include certain financed fees and insurance premiums) plus (b) the outstanding
balance of the Senior Lien, if any, divided by (ii) the lesser of (a) the value
of the related Mortgaged Property, based upon the appraisal, if any, or drive-by
evaluation or other method made at the time of origination of the Single Family
Loan and (b) the purchase price of the Mortgaged Property if the Single Family
Loan proceeds were used to purchase the Mortgaged Property. See "The Mortgage
Loan Program--Underwriting Procedures" herein. The "Loan-to-Value Ratio" of any
Single Family Loan is the ratio (expressed as a percentage) of (i) the original
principal balance of such Single Family Loan at the date of origination (which,
if specified in the related Prospectus Supplement, may include certain financed
fees and insurance premiums) divided by (ii) the lesser of (a) the value of the
related Mortgaged Property, based upon the appraisal, if any, or drive-by
evaluation or other method made at the time of origination of the Single Family
Loan and (b) the purchase price of the Mortgaged Property if the Single Family
Loan proceeds were used to purchase the Mortgaged Property. For Single Family
Loans secured by a first Mortgage, the Combined Loan-to-Value Ratio and the
Loan-to-Value Ratio will be the same.
A "Bankruptcy Loan" is a Single Family Loan on which the related Mortgagor
is making payments pursuant to a personal bankruptcy plan or proceeding (each, a
"Bankruptcy Plan"). The entire principal balance and the right to receive
interest accrued after the Cut-off Date with respect to each Bankruptcy Mortgage
Loan will generally be included in the assets of the related Trust, while the
right to interest accrued but unpaid prior to the related Cut-off Date under
each Bankruptcy Loan will generally be retained by the Seller. The Seller's
right to collect interest accrued on a Bankruptcy Loan prior to the date of the
related Bankruptcy Plan filing will generally be subordinate to the related
Trust's right to receive timely payments of principal and interest with respect
to such Bankruptcy Loan.
Contracts
Each Contract included as a Primary Asset in the Trust with respect to a
Series of Certificates will be secured by a Manufactured Home and a mortgage or
deed of trust relating to the real estate to which the Manufactured Home is
permanently affixed. Contracts are similar to Single Family Loans, and the
description herein to Single Family Loans is applicable to Contracts, except as
otherwise noted. The Prospectus Supplement will specify whether the Contracts
will be fully amortizing or have a balloon payment, whether they will bear
interest at a fixed, adjustable or variable rate and other pertinent information
with respect to the Contracts. As used herein, Mortgaged Property includes
Manufactured Homes, unless otherwise noted.
The Manufactured Homes securing the Contracts consist of manufactured
homes within the meaning of 42 United States Code, Section 5402(6), which
defines a "Manufactured Home" as "a structure, transportable in one or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without permanent foundation when
connected to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of this
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter." Moreover, if an election is made to treat the Trust as a REMIC
as described in "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Certificates" herein, Manufactured Homes will have a
minimum of 400 square feet of living space and a minimum width in excess of 102
inches.
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For purposes of calculating the Loan-to-Value Ratio of a Contract relating
to a Manufactured Home, the "Value" is the appraised value of the Manufactured
Home, based upon the age and condition of the Manufactured Home and the quality
and condition of the community in which it is situated, if applicable.
The related Prospectus Supplement may specify for the Contracts which are
part of the related Primary Assets, among other things, the date of origination
of the Contracts; the annual percentage rates on the Contracts; the
Loan-to-Value Ratios; the minimum and maximum outstanding principal balance as
of the Cut-off Date and the average outstanding principal balance; the
outstanding principal balances of the Contracts included in the Contract Pool;
the original maturities of the Contracts; and the last maturity date of any
Contract.
Mortgage-Backed Securities
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that is,
not guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates insured or guaranteed by FHLMC
or FNMA or GNMA.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the Classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Servicer or the MBS Trustee on the
dates specified in the related Prospectus Supplement. The MBS Issuer or the MBS
Servicer or another person specified in the related prospectus supplement may
have the right or obligation to repurchase or substitute assets underlying the
MBS after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Certificates of a Series under "Description of
the Certificates--Description of Credit Enhancement" herein may have been
provided with respect to the MBS. The type, characteristics and amount of such
credit enhancement, if any, will be a function of the characteristics of the
underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any Rating Agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a Series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or the
formula for determining such rates, (iv) the payment characteristics of the MBS,
(v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans, or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
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Payments on the Mortgage Loans
The Mortgage Loans underlying a Series of Certificates will provide for
payments that are allocated to principal and interest according to either the
actuarial method (an "Actuarial Mortgage Loan"), the simple interest method (a
"Simple Interest Mortgage Loan") or the "Rule of 78s" method (a "Rule of 78s
Mortgage Loan"), as set forth in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, no Mortgage Loan will
provide for deferred interest or negative amortization.
An Actuarial Mortgage Loan provides for payments in level monthly
installments (except, in the case of Balloon Mortgage Loans, the final payment)
consisting of interest equal to one-twelfth of the applicable Mortgage Interest
Rate times the unpaid principal balance, with the remainder of such payment
applied to principal.
A Simple Interest Mortgage Loan provides for the amortization of the
amount financed under the Mortgage Loan over a series of equal Monthly Payments
(except, in the case of a Balloon Loan, the final payment). Each Monthly Payment
consists of an installment of interest which is calculated on the basis of the
outstanding principal balance of the Mortgage Loan multiplied by the stated
Mortgage Interest Rate and further multiplied by a fraction, the numerator of
which is the number of days in the period elapsed since the preceding payment of
interest was made and the denominator of which is the number of days in the
annual period for which interest accrues on such Mortgage Loan. As payments are
received under a Simple Interest Mortgage Loan, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a fixed
monthly installment on a Simple Interest Mortgage Loan before its scheduled due
date, the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. However, the next
succeeding payment will result in an allocation of a greater amount to interest
if such payment is made on its scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a Simple Interest Mortgage
Loan is made on or prior to its scheduled due date, the principal balance of the
Mortgage Loan will amortize in the manner described in the preceding paragraph.
However, if the borrower consistently makes scheduled payments after the
scheduled due date the Mortgage Loan will amortize more slowly than scheduled.
If a Simple Interest Mortgage Loan is prepaid, the borrower is required to pay
interest only to the date of prepayment.
A Rule of 78s Mortgage Loan provides for the payment by the borrower of a
specified total amount of payments, payable in equal monthly installments on
each due date, which total represents the amount financed and add-on interest in
an amount calculated on the basis of the stated note rate for the term of the
Mortgage Loan. The rate at which such amount of add-on interest is earned and,
correspondingly, the portion of each fixed monthly payment allocated to
reduction of the outstanding principal balance are calculated in accordance with
the "sum of the digits" or "Rule of 78s". Under a Rule of 78s Mortgage Loan, the
portion of a payment allocable to interest is determined by multiplying the
total amount of add-on interest payable over the term of the Mortgage Loan by a
fraction derived as described herein. The fraction used in the calculation of
add-on interest earned each month under a Rule of 78s Mortgage Loan has as its
denominator a number equal to the sum of a series of numbers beginning with one
and ending with the number of monthly payments due under the Mortgage Loan. For
example, for a Mortgage Loan providing for twelve scheduled payments, the
denominator of each month's fraction would be 78, the sum of the series of
numbers from one to twelve. The numerator of the fraction for a given month
would be the number of payments remaining before giving effect to the payment to
which the fraction is being applied. Accordingly,
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in the case of such Mortgage Loan, the fraction for the first payment would be
12/78, for the second payment, 11/78, for the third payment, 10/78, and so on
through the final payment, for which the fraction would be 1/78. The applicable
fraction is then multiplied by the total add-on interest payable over the term
of the Mortgage Loan to determine the amount of interest "earned" that month.
The difference between the amount of the monthly payment made by the borrower
and the amount of earned add-on interest calculated for the month is applied to
principal reduction. As a result, the rate at which interest is earned in the
initial months of a Rule of 78s Mortgage Loan is somewhat higher than the
interest computed for a Mortgage Loan computed on an actuarial basis, and the
rate at which interest is earned at the end of the Mortgage Loan is somewhat
less than that computed under an actuarial basis.
Payments to holders of the related Certificates and the Servicing Fee with
respect to Rule of 78s Mortgage Loans will be computed as if such Mortgage Loans
were Simple Interest Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, amounts received upon prepayment in full of a Rule of 78s
Mortgage Loan in excess of (i) the then outstanding principal balance of such
Mortgage Loan (computed on a daily simple interest amortization basis) and (ii)
accrued interest computed on a daily simple interest basis at the Mortgage
Interest Rate, plus servicing compensation exclusive of Servicing Fees, will not
be available to make required payments of principal and interest to holders of
the related Certificates and will not be treated as collected principal for
purposes of computing the amount to be distributed.
In the event of the prepayment in full (voluntarily or by acceleration) of
a Rule of 78s Mortgage Loan, under the terms of the Mortgage Loan the entire
remaining amount of payments is due but a "refund" or "rebate" will be made to
the borrower of the portion of the total amount of the scheduled payments
remaining under the Mortgage Loan immediately prior to such prepayment which is
allocable to "unearned" add-on interest. Such rebate will be calculated in
accordance with the Rule of 78s method.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The rate of principal payments on each Class of Certificates of a Series
entitled to principal, the aggregate amount of each interest payment on each
Class of Certificates of a Series entitled to interest and the yield to maturity
of each Class of Certificates of a Series will be related to the rate and timing
of payments of principal on the related Primary Assets, which may be in the form
of scheduled and unscheduled payments. The rate of prepayment on a pool of
mortgage loans is affected by prevailing market rates for mortgage loans of a
comparable term and risk level. In general, when the level of prevailing
interest rates for similar loans significantly declines, the rate of prepayment
is likely to increase, although the prepayment rate is influenced by a number of
other factors, including general economic conditions and homeowner mobility.
Defaults on mortgage loans are expected to occur with greater frequency in their
early years. The rate of default on second or more junior mortgage loans may be
greater than that of mortgage loans secured by first liens on comparable
properties. Prepayments, liquidations and purchases of the Primary Assets will
result in distributions to the holders of amounts of principal which would
otherwise be distributed over the remaining terms of the Primary Assets.
In addition, as specified in the related Prospectus Supplement, the Master
Servicer, the Seller, the Depositor and/or another party specified in the
related Prospectus Supplement, may have the option to effect the early
termination of a Series of Certificates through the purchase of the Primary
Assets and other assets in the related Trust under the circumstances and in the
manner described in "The Trusts--Optional Disposition of Primary Assets" herein.
Further, if so specified in the related Prospectus Supplement, the Trustee, the
Master Servicer, the Seller, the Depositor and/or such other entities as may be
specified in such Prospectus Supplement may be required to effect early
retirement of a Series of Certificates by soliciting competitive bids for the
purchase of the assets of the related Trust or otherwise. See "The
Trusts--Mandatory Disposition of Primary Assets" herein.
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If the Pooling and Servicing Agreement for a Series of Certificates
provides for a Prefunding Account or other means of funding the transfer of
additional Primary Assets to the related Trust, as described under "The
Trusts--Forward Commitments; Prefunding" herein, and the Trust is unable to
acquire such additional Primary Assets within any applicable time limit, the
amounts set aside for such purpose may be required to be applied to effect the
retirement of all or a portion of one or more Classes of Certificates of such
Series.
As described above, the rate of prepayment on a pool of mortgage loans is
affected by prevailing market rates for comparable mortgage loans. When the
market interest rate is below the Mortgage Interest Rate for such Mortgage Loan,
Mortgagors may have an increased incentive to refinance their Mortgage Loans.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some Mortgagors may sell or refinance Mortgaged
Properties in order to realize their equity in such Mortgaged Properties, to
meet cash flow needs or to make other investments. No representation is made as
to the particular factors that will affect the prepayment of the Mortgage Loans
underlying any Series of Certificates, as to the relative importance of such
factors, as to the percentage of the principal balance of the Mortgage Loans
that will be paid as of any date or as to the overall rate of prepayment on the
related Mortgage Loans.
The yield to maturity of certain Classes of Certificates of a Series may
be particularly sensitive to the rate and timing of principal payments
(including prepayments) of the Primary Assets, which may fluctuate significantly
from time to time. The Prospectus Supplement relating to such Certificates will
provide certain additional information with respect to the effect of such
payments on the yield to maturity of such Certificates under varying rates of
prepayment, including the rate of prepayment, if any, which would reduce the
holder's yield to zero.
Greater than anticipated prepayments of principal will increase the yield
on Certificates purchased at a price less than par. Conversely, greater than
anticipated prepayments of principal will decrease the yield on Certificates
purchased at a price greater than par. The effect on an investor's yield due to
principal prepayments on the Primary Assets occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period immediately
following the issuance of the Certificates will not be entirely offset by a
subsequent like reduction (or increase) in the rate of principal payments. The
weighted average life of each Class of Certificates of a Series will also be
affected by the amount and timing of delinquencies and defaults on the related
Primary Assets and the recoveries, if any, on defaulted Primary Assets and
foreclosed properties in the related Trust Assets.
The "weighted average life" of a Certificate refers to the average amount
of time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life of
each Class of Certificates of a Series will be influenced by, among other
factors, the rate at which principal payments are made on the Mortgage Loans,
including final payments made upon the maturity of Balloon Loans.
THE TRUSTS
General
Unless otherwise set forth in the related Prospectus Supplement, each
Trust will be formed under a Pooling and Servicing Agreement (a "Pooling and
Servicing Agreement") among the Depositor, the Master Servicer and the Trustee
named therein (a "Trustee"). The property of each Trust will consist of: (i) the
Primary Assets (subject, if specified in the Prospectus Supplement, to certain
exclusions) as from time to time are subject to the related Pooling and
Servicing Agreement, (ii) all payments (subject, if specified in
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the Prospectus Supplement, to certain exclusions) in respect of such Primary
Assets, which may be adjusted, to the extent specified in the related Prospectus
Supplement, in the case of interest payments on Primary Assets, to the
Certificate Interest Rate; (iii) if specified in the Prospectus Supplement,
reinvestment income on such payments; (iv) with respect to a Trust that includes
Mortgage Loans, all property acquired by foreclosure or deed in lieu of
foreclosure with respect to any such Mortgage Loans; (v) certain rights of the
Trustee, the Depositor and the Master Servicer under any insurance policies
required to be maintained in respect of the related Primary Assets; and (vi) if
so specified in the Prospectus Supplement, one or more forms of credit
enhancement (together, the "Trust Assets").
Assignment of the Primary Assets
Assignment of the Single Family Loans. At the time of issuance of the
Certificates, the Depositor will assign the Single Family Loans to the Trustee,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Single Family Loans after the Cut-off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Single Family Loans. Each
Single Family Loan will be identified in a schedule appearing as an exhibit to
the Pooling and Servicing Agreement. Such schedule may include information as to
the Principal Balance of each Single Family Loan as of the Cut-off Date, as well
as information respecting the Mortgage Interest Rate, the scheduled Monthly
Payment of principal and interest as of the Cut-off Date and the maturity date
of each Mortgage Note.
In addition, as to each Single Family Loan, the Depositor will deliver to
the Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not necessarily
recorded), evidence of title insurance, if obtained, and, if applicable, the
certificate of private mortgage insurance. In instances where recorded documents
cannot be delivered due to delays in connection with recording, the Depositor
may deliver copies thereof and deliver the original recorded documents promptly
upon receipt.
With respect to any Single Family Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
cooperative note endorsed 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
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
The Seller will represent and warrant to the Depositor with respect to the
Single Family Loans sold by it that (i) the information set forth in the
schedule of Single Family Loans attached thereto is correct in all material
respects; (ii) a lender's title insurance policy or binder for each Single
Family Loan subject to the Pooling and Servicing Agreement was issued on the
date of origination thereof and each such policy or binder assurance is valid
and remains in full force and effect or a legal opinion concerning title or
title search was obtained or conducted in connection with the origination of
the Single Family Loans; (iii) at the date of assignment to the Depositor, the
Seller has good title to the Single Family Loans and the Single Family Loans
are free of offsets, defenses or counterclaims; (iv) at the date of initial
issuance of the Certificates, each Mortgage is a valid first lien on the
property securing the Mortgage Note (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions, restrictions,
rights of way, easements and other matters of public record as of the date of
the recording of such Mortgage, such exceptions appearing of record being
acceptable to mortgage lending institutions generally in the area wherein the
property subject to the Mortgage is located or specifically reflected in the
appraisal obtained by the originator, (c) other matters to which like
properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by such Mortgage and
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(d) leases and subleases pertaining to such Mortgaged Property) and to Seller's
knowledge such property is free of material damage and is in good repair or,
with respect to a junior lien Single Family Loan, that such Mortgage is a valid
junior lien Mortgage (subject only to (a) the lien of current real property
taxes and assessments, (b) covenants, conditions, restrictions, rights of way,
easements and other matters of public record as of the date of the recording of
such Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally in the area wherein the property subject to the
Mortgage is located or specifically reflected in the appraisal obtained by the
originator, (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by such Mortgage and (d) leases and subleases pertaining to such
Mortgaged Property), as the case may be, and specifying the percentage of the
Primary Assets and Single Family Loans comprised of junior lien Single Family
Loans; (v) at the date of assignment to the Depositor, no Single Family Loan is
31 or more days delinquent (with such exceptions as may be specified in the
related Prospectus Supplement) and to Seller's knowledge there are no delinquent
tax or assessment liens against the Mortgaged Property covered by the related
Mortgage; (vi) at the date of assignment to the Depositor, the portion of each
Single Family Loan, if any, which, pursuant to the terms set forth in the
related Prospectus Supplement should be insured with a private mortgage insurer
is so insured; and (vii) each Single Family Loan at the time it was made
complied in all material respects with applicable state and federal laws,
including, without limitation, usury, equal credit opportunity and disclosure
laws. The Prospectus Supplement may set forth additional representations and
warranties made by the Seller to the Depositor. The Depositor's rights against
the Seller in the event of a breach of its representations will be assigned to
the Trustee for the benefit of the Certificates of such Series.
Assignment of Contracts. The Depositor will cause the Contracts to be
assigned to the Trustee, including all security interests created thereby and
any related mortgages or deeds of trust, together with principal and interest
due on or with respect to the Contracts after the Cut-off Date. Each Contract
will be identified in a loan schedule ("Contract Loan Schedule") appearing as
an exhibit to the related Pooling and Servicing Agreement. Such Contract Loan
Schedule may specify, with respect to each Contract, among other things: the
original principal balance and the outstanding Principal Balance as of the
Cut-off Date, the Mortgage Interest Rate, the current scheduled payment of
principal and interest and the maturity date.
In addition, with respect to each Contract, the Depositor will deliver or
cause to be delivered to the Trustee, the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. To give notice of the right, title
and interest of the Trust to the Contracts, the Depositor will cause the Seller
to file a UCC-1 financing statement identifying the Trustee as the secured party
and identifying all Contracts as collateral. See "Risk Factors" and "Certain
Legal Aspects of the Mortgage Loans" herein.
The Seller will provide representations and warranties to the Depositor
concerning the Contracts. Such representations and warranties will include: (i)
that the information contained in the Contract Loan Schedule provides an
accurate listing of the Contracts and that the information respecting such
Contracts set forth in such Contract Loan Schedule is true and correct in all
material respects at the date or dates respecting which such information is
furnished; (ii) that, immediately prior to the conveyance of the Contracts, the
Seller had good title to and was sole owner of, each such Contract; (iii) that
there has been no other sale by it of such Contract and that the Contract is not
subject to any lien, charge, security interest or other encumbrance; (iv) no
contract was originated in or is subject to the laws of any jurisdiction whose
laws would make the transfer of the Contract or an interest therein to the
Depositor pursuant to the related Purchase and Sale Agreement or from the
Depositor to the Trustee pursuant to the related Pooling and Servicing Agreement
unlawful; (v) each Contract complies with all material requirements of law; (vi)
no Contract has been satisfied, subordinated in whole or in part or rescinded
and the Manufactured Home securing the Contract has not been released from the
lien of the contract in whole or in part; (vii) each Contract creates a valid
and enforceable first or junior security interest, as applicable, in favor of
the Seller in the Manufactured Home and real estate covered thereby and the
lien created thereby has been recorded or will
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be recorded within six months, and such security interest or lien has been
assigned by the Seller to the Depositor; (viii) as of the date of assignment to
the Depositor, such Manufactured Home was, to the best of the Seller's
knowledge, free of material damage and in good repair; (ix) the related
Manufactured Home is a "manufactured home" within the meaning of 42 United
States Code, Section 5402(6); (x) each Contract is a "qualified mortgage"
under Section 860G(a)(3) of the Code and each Manufactured Home is
"manufactured housing" within the meaning of Section 25(3)(10) of the Code; and
(xi) if a Contract is a Contract insured by the FHA or partially guaranteed by
the VA, the Contract has been serviced in accordance with related regulations,
the insurance or guarantee of the Contract under the related regulations and
related laws is in full force and effect, and no event has occurred which,
with or without notice or lapse of time or both, would impair such insurance
or guarantee. The Prospectus Supplement may set forth additional representations
and warranties made by the Seller to the Depositor. The Depositor's rights
against the Seller in the event of a breach of its representations will be
assigned to the Trustee for the benefit of the Certificates of such Series.
Assignment of Mortgage-Backed Securities. With respect to each Series, the
Depositor will cause any Mortgage-Backed Securities included in the related
Trust to be registered in the name of the Trustee (directly or through a
participant in a depository). The Trustee (or its custodian) will have
possession of any certificated Mortgage-Backed Securities. The Trustee will not
be in possession of or be assignee of record of any underlying assets for a
Mortgage-Backed Security. Each Mortgage-Backed Security will be identified in a
schedule appearing as an exhibit to the related Pooling and Servicing Agreement
which may specify certain information with respect to such security, including,
as applicable, the original principal amount, outstanding principal balance as
of the Cut-off Date, annual pass-through rate or interest rate and maturity date
and certain other pertinent information for each such security. The Seller will
represent and warrant to the Depositor, among other things, the information
contained in such schedule is true and correct and that immediately prior to the
transfer of the related securities to the Depositor, the Seller had good title
to, and was the sole owner of, each such security. The Depositor's rights
against the Seller in the event of a breach of its representations will be
assigned to the Trustee for the benefit of the Certificates of such Series.
Repurchase or Substitution of Single Family Loans and Contracts. The
Trustee will review the documents delivered to it with respect to the Single
Family Loans and Contracts included in the related Trust. If any document is not
delivered or is found to be defective in any material respect and the Depositor
or the Seller, if so required, cannot deliver such document or cure such defect
within the period specified in the related Prospectus Supplement after notice
thereof (which the Trustee will undertake to give within the period specified in
the related Prospectus Supplement), and if any other party obligated to deliver
such document or cure such defect has not done so and has not substituted or
repurchased the affected Single Family Loan or Contract then the Depositor will
cause the Seller, not later than the first date designated for the deposit of
payments into the Collection Account (a "Deposit Date") which is more than a
specified number of days after such period, (a) if so provided in the Prospectus
Supplement to remove the affected Single Family Loan or Contract from the Trust
and substitute one or more other Single Family Loans or Contracts therefor or
(b) repurchase the Single Family Loan or Contract from the Trustee for a price
equal to 100% of its Principal Balance plus one month's interest thereon at the
applicable Mortgage Interest Rate. This repurchase and, if applicable,
substitution obligation will, unless otherwise set forth in the related
Prospectus Supplement, generally constitute the sole remedy available to the
Trustee for a material defect in a document relating to a Single Family Loan or
Contract.
The Depositor is required to cause the Seller to do either of the
following: (a) cure any breach of any representation or warranty that materially
and adversely affects the interest of the Owners of the Certificates in a Single
Family Loan or Contract (each, a "Defective Mortgage Loan") within a specified
number of days of its discovery by the Depositor or its receipt of notice
thereof from the Trustee, (b) repurchase such Defective Mortgage Loan or
Contract not later than the first Deposit Date which is more than a specified
number of days after such period for a price equal to 100% of its Principal
Balance plus one month's interest thereon at the applicable Mortgage Interest
Rate, or (c) if so specified in the Prospectus Supplement, remove the affected
Single Family Loan or Contract from the Trust, and substitute one or more
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other mortgage loans or contracts therefor. This repurchase and, if applicable,
substitution obligation will generally constitute the sole remedies available to
the Trustee for any such breach.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans or Contracts.
Payments on the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will require the Master Servicer to cause to be
established and maintained an account (the "Collection Account") at an
institution (which may be a Depositor) meeting certain ratings and other
criteria set forth in the Pooling and Servicing Agreement (an "Eligible
Account"), into which it is required to deposit certain payments received in
respect of the Mortgage Loans, as more fully described below. Unless otherwise
specified in the related Prospectus Supplement, all funds in the Collection
Account are required to be held (i) uninvested, (ii) invested in certain
permitted investments, which are generally limited to United States government
securities and other high-quality investments and repurchase agreements or
similar arrangements with respect to such investments or (iii) invested in
certain asset management accounts maintained by the Trustee (collectively,
"Permitted Instruments"). Unless otherwise specified in the related Prospectus
Supplement, any investment earnings on funds held in the Collection Account will
be for the account of the Master Servicer.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer is required to deposit into the Collection Account within one
business day of receipt all Monthly Payments received after the related Cut-off
Date (unless the related Prospectus Supplement otherwise specifies, other than
amounts received after the Cut-off Date in respect of interest accrued on the
Mortgage Loans prior to the Cut-off Date) and all Principal Prepayments and
Curtailments collected after the Cut-off Date (net of the Servicing Fee with
respect to each Mortgage Loan and other servicing compensation payable to the
Master Servicer as permitted by the Pooling and Servicing Agreement), all Net
Liquidation Proceeds, Insurance Proceeds, Released Mortgaged Property Proceeds,
any amounts paid in connection with the repurchase of any Mortgage Loan, the
amount of any Substitution Adjustments, the amount of any losses incurred in
connection with investments in Permitted Instruments and certain amounts
relating to insufficient insurance policies and REO Property. If the related
Prospectus Supplement provides that there will be no Collection Account, all of
such payments will be deposited directly in the Distribution Account, as
specified therein.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer may make withdrawals from the Collection Account only for the
following purposes:
(i) for deposit to the Distribution Account no later than the
business day preceding each Distribution Date, the Available Payment
Amount for the related Due Period;
(ii) to reimburse itself for any accrued unpaid Servicing Fees and
unreimbursed Advances, to the extent provided in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer's right to reimburse itself for unpaid
Servicing Fees and unreimbursed Advances, will be limited to late
collections on the related Mortgage Loan, including Liquidation Proceeds,
Released Mortgaged Property Proceeds, Insurance Proceeds and such other
amounts as may be collected by the Master Servicer from the related
Mortgagor or otherwise relating to the Mortgage Loan in respect of which
such unreimbursed amounts are owed;
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(iii) to withdraw any amount received from a Mortgagor that is
recoverable and sought to be recovered as a voidable preference by a
trustee in bankruptcy pursuant to the United States Bankruptcy Code in
accordance with a final, nonappealable order of a court having competent
jurisdiction;
(iv) to make investments in Permitted Instruments and to pay itself
interest earned in respect of Permitted Instruments or on funds deposited
in the Collection Account;
(v) to withdraw any funds deposited in the Collection Account that
were not required to be deposited therein (such as servicing compensation)
or were deposited therein in error;
(vi) to pay itself the Servicing Fee and any other permitted
servicing compensation to the extent not previously retained or paid;
(vii) to withdraw funds necessary for the conservation and
disposition of REO Property;
(viii) to make Servicing Advances, as more fully described below;
(ix) with respect to a Bankruptcy Loan, to remit to the Seller
certain payments, as provided in the Pooling and Servicing Agreement;
(x) to reimburse itself for any Nonrecoverable Advances previously
made and unreimbursed; and
(xi) to clear and terminate the Collection Account upon the
termination of the Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer is required to wire transfer to the Distribution Account the
amount described in clause (i) above no later than the business day preceding
each Distribution Date.
Advances; Servicing Advances
If so specified in the related Prospectus Supplement, not later than the
close of business on the business day prior to each Distribution Date, the
Master Servicer may be required to withdraw from amounts on deposit in any
Collection Account and held for future distribution or, if so specified in the
related Prospectus Supplement, to pay from its own funds, and remit for deposit
in the Distribution Account an amount (each, a "P&I Advance"), to be distributed
on the related Distribution Date, equal to (x) the sum of the interest portions
of the aggregate amount of Monthly Payments (net of the Servicing Fee) accrued
during the related Due Period, but uncollected as of the close of business on
the related Determination Date and/or (y) principal portion of the aggregate
amount of Monthly Payments (other than balloon payments) due during the related
Due Period but uncollected as of the close of business on the related
Determination Date. Unless so specified in the related Prospectus Supplement,
the Master Servicer shall not be required to make such P&I Advance from its own
funds or be liable for the recovery thereof from collections on the related
Mortgage Loans or otherwise.
In the course of performing its servicing obligations, the Master Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations ("Servicing Advances"
and together with P&I Advances, "Advances"), including, but not limited to, the
cost of (i) maintaining REO Properties; (ii) any enforcement or judicial
proceedings, including foreclosures; and (iii) the management and liquidation of
Mortgaged Property acquired in satisfaction of the related Mortgage. To the
extent provided in the related Pooling and Servicing Agreement, the Master
Servicer may pay all or
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a portion of any Servicing Advance out of excess amounts on deposit in the
Collection Account and held for future distribution on the date on which such
Servicing Advance is made. Any such excess amounts so used will be required to
be replaced by the Master Servicer by deposit to the Collection Account no later
than the date specified in the related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer may recover Advances to the extent permitted by the Mortgage
Loans or, if not theretofore recovered from the Mortgagor on whose behalf such
Advance was made, from collections on the related Mortgage Loan, including late
collections, Liquidation Proceeds, Released Mortgaged Property Proceeds,
Insurance Proceeds and such other amounts as may be collected by the Master
Servicer from the Mortgagor or otherwise relating to the Mortgage Loan. If so
provided in the related Pooling and Servicing Agreement, to the extent the
Master Servicer, in its good faith business judgment, determines that certain
Advances will not be ultimately recoverable from late collections, Insurance
Proceeds, Liquidation Proceeds on the related Mortgage Loans or otherwise
("Nonrecoverable Advances"), the Master Servicer may reimburse itself from the
amounts on deposit in the Collection Account.
The Master Servicer is not required to make any Advance which it
determines would be a Nonrecoverable Advance.
Distributions
The Trustee is required to establish a trust account (referred to herein
as the "Distribution Account", but which may have such other designation as is
set forth in the related Prospectus Supplement) into which there shall be
deposited amounts transferred by the Master Servicer from the Collection Account
or, if so specified in the related Prospectus Supplement, collections of
Mortgage Loans deposited by the Master Servicer into the Distribution Account
directly. The Distribution Account is required to be maintained as an Eligible
Account. Amounts on deposit in the Distribution Account may be invested in
Permitted Instruments and other investments specified in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, on each
Distribution Date the Trustee is required to withdraw from the Distribution
Account and distribute the amounts set forth in the related Prospectus
Supplement, to the extent available, in the priority set forth therein, which
generally will include (in no particular order of priority):
(i) deposits into any account established for the purpose of paying
credit enhancement fees and premiums;
(ii) if a Spread Account, Reserve Account or similar account is
established with respect to a Series of Certificates, deposits into such
fund or account of the Excess Spread or other amounts required to be
deposited therein;
(iii) payments to the holders of the Certificates on account of
interest and principal, in the order and manner set forth in the related
Prospectus Supplement;
(iv) reimbursement of the Master Servicer for amounts expended by
the Master Servicer and reimbursable thereto under the related Pooling and
Servicing Agreement but not previously reimbursed; and
(v) after the payments and deposits described above and in the
related Prospectus Supplement, the balance, if any, to the persons
specified in the related Prospectus Supplement.
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The amount available to make the payments described above will generally
equal (a) the sum of (i) the Available Payment Amount for the related Due Period
and (ii) the amount available under any credit enhancement, including amounts
withdrawn from any Spread Account or Reserve Account, less (b) the amount of the
premiums or fees payable to the Credit Provider, if any, during the related Due
Period.
Generally, to the extent a Credit Provider makes payments to holders of
Certificates, such Credit Provider will be subrogated to the rights of such
holders with respect to such payments and shall be deemed, to the extent of the
payments so made, to be a registered holder of such Certificates.
For purposes of the provisions described above, the following terms have
the respective meanings ascribed to them below, each determined as of any
Distribution Date.
"Available Payment Amount" generally means the result of (a) collections
on or with respect to the Mortgage Loans due and received by the Master Servicer
during the related Due Period, net of the Servicing Fee paid to the Master
Servicer during the related Due Period and reimbursements for accrued unpaid
Servicing Fees, unreimbursed Advances and for certain expenses paid by the
Master Servicer, plus (b) the amount of Advances, if any, less, if so specified
in the related Prospectus Supplement.
"Mortgage Loan Losses" means, for Mortgage Loans that become Liquidated
Mortgage Loans during the related Due Period, the amount, if any, by which (i)
the sum of the outstanding principal balance of each such Mortgage Loan
(determined immediately before such Mortgage Loan became a Liquidated Mortgage
Loan) and accrued and unpaid interest thereon at the Mortgage Interest Rate to
the date on which such Mortgage Loan became a Liquidated Mortgage Loan exceeds
(ii) the Net Liquidation Proceeds received during such Due Period in connection
with the liquidation of such Mortgage Loan which have not theretofore been used
to reduce the Principal Balance of such Mortgage Loan.
"Distribution Date" means the monthly date specified in the related
Prospectus Supplement on which payments will be made to holders of the related
Certificates.
Optional Disposition of Primary Assets
The Master Servicer, the Seller, the Depositor and/or any other entities
specified in the related Prospectus Supplement, may have the option to effect
the early termination of a Series of Certificates through the purchase of the
Primary Assets and other assets in the related Trust when the outstanding
principal balance of a Class of Certificates specified in the related Prospectus
Supplement declines to the percentage of the original principal balance of such
Class specified in the related Prospectus Supplement or at such other time as is
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the related Pooling and Servicing Agreement
will establish a minimum price at which such Primary Assets and other assets in
the related Trust may be sold. Such minimum price may include certain expenses
and other amounts which the purchaser may be required to pay at the time of
sale. Unless
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otherwise specified in the related Prospectus Supplement, the proceeds of any
such sale will be distributed to holders of the Certificates on the Distribution
Date next following the date of disposition.
Mandatory Disposition of Primary Assets
If so specified in the related Prospectus Supplement, the Trustee or such
other entity as may be specified in such Prospectus Supplement may be required
to effect early retirement of a Series of Certificates by soliciting competitive
bids for the purchase of the Primary Assets and other assets in the related
Trust or otherwise, under the circumstances set forth in such Prospectus
Supplement. The procedures for the solicitation of such bids will be described
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer and any Underwriter will be permitted
to submit bids. If so specified in the related Prospectus Supplement, a minimum
bid or reserve price may be established. If so specified in the related
Prospectus Supplement, the Underwriter or such other entity specified in such
Prospectus Supplement will be required to confirm that the accepted bid will
result in the sale of the Primary Assets and other assets of the Trust at their
fair market value.
Forward Commitments; Prefunding
If so specified in the related Prospectus Supplement, a Pooling and
Servicing Agreement or other agreement may provide for the transfer by the
Seller to the Depositor and from the Depositor to the related Trust of
additional Primary Assets after the Closing Date for the related Certificates.
Such additional Primary Assets will be required to conform to the requirements
set forth in the related Pooling and Servicing Agreement or other agreement
providing for such transfer. As specified in the related Prospectus Supplement,
such transfer may be funded by the establishment of a Prefunding Account (a
"Prefunding Account"). If a Prefunding Account is established, all or a portion
of the proceeds of the sale of one or more Classes of Certificates of the
related Series will be deposited in such account to be released as additional
Primary Assets are transferred. Unless otherwise specified in the related
Prospectus Supplement, a Prefunding Account will be required to be maintained as
an Eligible Account. The related Pooling and Servicing Agreement or other
agreement providing for the transfer of additional Primary Assets will generally
establish a specified period of time within which such transfers must be made.
Unless otherwise specified in the related Prospectus Supplement, amounts set
aside to fund such transfers (whether in a Prefunding Account or otherwise) and
not so applied within the required period of time will be deemed to be principal
prepayments and applied in the manner set forth in such Prospectus Supplement.
THE DEPOSITOR
Block Mortgage Finance, Inc., a Delaware corporation, was incorporated in
October, 1996 for the limited purpose of acquiring, owning and transferring the
Primary Assets and selling interests therein secured thereby. The Depositor is a
wholly owned subsidiary of the Seller. The principal executive offices of the
Depositor are located at 4435 Main Street, Suite 500, Kansas City, Missouri
64111. Its telephone number is (816) 751-6090.
Neither the Depositor nor any of the Depositor's affiliates will insure or
guarantee distributions on the Certificates of any Series, unless otherwise set
forth in the related Prospectus Supplement.
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THE SELLER
Companion Mortgage Corporation, a Delaware corporation, is a wholly owned
subsidiary of the Master Servicer. Its sole business activity consists of
purchasing, investing in and selling Mortgage Loans. Seller's principal
executive offices are located at 4435 Main Street, Suite 500, Kansas City,
Missouri 64111. Its telephone number is 816-751-6000.
The Seller is licensed, to the extent required, to purchase, invest in and
sell Mortgage Loans in the states in which the Mortgaged Properties are located.
The Seller will sell and assign the Mortgage Loans to the Depositor pursuant to
the Purchase and Sale Agreement. Each Mortgage Loan will be serviced by the
Master Servicer. The Master Servicer will be entitled to receive the Servicing
Fees and certain other servicing compensation. Neither the Master Servicer or
the Seller nor any of their affiliates will insure or guarantee the
Certificates. The Certificates are not insured or guaranteed by any governmental
agency.
THE MASTER SERVICER
The Master Servicer is an indirect wholly owned subsidiary of H&R Block,
Inc. ("Block"). The Master Servicer and its subsidiaries are engaged in various
financial and computer technology businesses, including consumer finance,
commercial finance, electronically delivered financial services and personal
productivity computer software products. Block is a diversified services company
engaged primarily in income tax return preparation services, financial services
and computer-based information and communications services.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Certificates for one or more of the following
purposes: (i) to purchase the related Mortgage Loans, (ii) to repay indebtedness
which has been incurred to obtain funds to acquire such Mortgage Loans, (iii) to
establish any Reserve Funds described in the related Prospectus Supplement and
(iv) to pay costs of structuring and issuing such Certificates, including the
costs of obtaining credit enhancements, if any. If so specified in the related
Prospectus Supplement, the purchase of the Mortgage Loans for a Series may be
effected by an exchange of Certificates with the Seller for such Mortgage Loans.
THE MORTGAGE LOAN PROGRAM
Unless otherwise specified in the related prospectus supplement, Seller
will acquire the Mortgage Loans either from National Consumer Services Corp.,
L.L.C. ("NCS") or NF Investments, Inc. ("NFI") pursuant to wholesale or
correspondent lending programs or from Block Mortgage Company, L.L.C. ("BMC")
pursuant to a retail lending program through which BMC originates Mortgage Loans
through a loan underwriting and processing arrangement with NCS.
National Consumer Services Corp., L.L.C.
NCS was formed in September 1995 to originate nonconforming Mortgage Loans
through a broker network and to underwrite, process and purchase nonconforming
Mortgage Loans originated through mortgage lenders owned by franchisees of H&R
Block Tax Services, Inc. ("HRB Tax Services"), an indirect wholly owned
subsidiary of Block. NCS began originating broker loans in November 1995 and
began in
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January 1996 underwriting, processing and purchasing Mortgage Loans originated
by mortgage loan companies owned by franchisees of HRB Tax Services.
NCS primarily originates closed-end, fixed-rate mortgages targeted
primarily at B and C credit quality customers, although NCS's Mortgage Loan
program also competes for A credit quality customers.
NCS acquires Mortgage Loans through the following means:
* Wholesale originations through a network of approximately 225
brokers located in 8 states. These brokers are managed by an
in-house sales force of approximately 15 sales representatives.
* Correspondent lender programs through approximately 20 lenders
located in 6 states.
* Retail originations through mortgage loan companies owned by
franchisees of HRB Tax Services.
* Bulk purchases from other lenders identified by state sales
representatives.
NF Investments, Inc.
NFI was formed in March 1986 under the name National Mortgage Investments
Co., Inc. In October 1995, NFI changed its name to NF Investments, Inc. From
inception until October 2, 1995, NFI engaged in the business of originating,
selling and servicing mortgage loans secured by liens on one-to-four-family
residential properties and had become one of the leading mortgage banking firms
in Atlanta, Georgia.
On October 2, 1995, NFI sold its conforming mortgage loan origination
business to The Dime Savings Bank of New York, FSB. NFI retained the rights to
offer second mortgages and nonconforming first mortgages and retained its
servicing business. Since the sale of its conforming mortgage loan origination
business, NFI has focused primarily on servicing residential mortgage loans and
originating nonconforming residential mortgage loans. NFI originates primarily
adjustable-rate first mortgages for A and B credit quality borrowers. NFI
obtains Mortgage Loans through a network of approximately 150 brokers in 10
states.
Block Mortgage Company, L.L.C.
BMC is a mortgage loan lender that was formed in August 1995 by Bay
Colony, Ltd. ("Bay Colony"), a former franchisee of HRB Tax Services. In June
1996, Block acquired Bay Colony and BMC. NCS underwrites and processes all
mortgage loans originated by BMC utilizing the same underwriting criteria and
procedures utilized by NCS for Mortgage Loans originated by NCS. Mortgage Loans
originated by BMC are purchased by the Seller.
Mortgage Loans
The Mortgage Loans consist primarily of purchase money loans, refinancings
and home equity borrowings. The Mortgage Loans are originated through retail,
wholesale and correspondent lending programs conducted through NCS, NFI and BMC.
Mortgage Loans originated through retail programs ("Retail Loans") are
originated through H&R Block tax preparation offices by BMC or mortgage lenders
owned by franchisees of HRB Tax Services. All Retail Loans are underwritten by
NCS pursuant to loan underwriting and processing arrangements between NCS and
the applicable mortgage lenders. Mortgage Loans originated through wholesale
programs ("Wholesale Loans") are generally originated through mortgage brokers
eligible to refer Mortgage Loan applications to NCS or NFI. Wholesale Loans are
generally underwritten by NCS or NFI, processed primarily by the mortgage broker
and closed by NCS or NFI in its
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name. Mortgage Loans acquired pursuant to correspondent programs ("Correspondent
Loans") are purchased from approved correspondent lenders in negotiated
transactions. Correspondent Loans generally are closed in the name of the
applicable correspondent lenders and are subsequently sold and ultimately
assigned to the Seller. Correspondent lenders are generally required to follow
the Seller's loan underwriting policies, as described below, with respect to
Correspondent Loans.
Underwriting Procedures
The underwriting procedures pertaining to the Mortgage Loans evaluate the
prospective mortgagor's credit standing and ability to repay the Mortgage Loan,
as well as the value and adequacy of the underlying Mortgaged Property that
serves as collateral for the Mortgage Loan.
All Mortgage Loan applications received by NCS or NFI (NCS and NFI may
hereinafter be referred to as a "Mortgage Loan Underwriter") are subject to a
credit investigation. As part of such investigation, the Mortgage Loan
Underwriter (i) reviews at least two independent credit bureau reports (which
may consist of a merged report), (ii) obtains verification of income and
employment, which generally includes at least one current pay stub, and either
the borrower's most recent W-2 form or verification of employment (verbal or
written), (iii) conducts a title search and (iv) obtains an independent
appraisal of the property, as described further below. In addition, in the
case of a junior Mortgage Loan, the Mortgage Loan Underwriter may obtain a
written or telephone verification of the current principal balance and payment
history for the mortgage loan secured by the Senior Lien.
After the investigation is completed, the Mortgage Loan Underwriter
decides whether to accept or reject the loan application and assigns a loan
class based upon the borrower's credit history and ability to repay the loan.
Generally, borrowers must have a debt-to-income ratio not greater than 55%.
For purposes of this calculation, "debt" is defined as the sum of all deed of
trust or mortgage payments, including escrow payments for hazard insurance
premiums, real estate taxes, mortgage insurance premiums and any owner's a
ssociation dues, plus payments on any installment debt, and alimony or child
support payments and "income" is defined as stable monthly gross income from
the borrower's primary
source of employment plus acceptable secondary income.
The Seller generally has not acquired first-priority Mortgage Loans when
the Combined Loan-to-Value Ratio exceeded 90% and generally has not acquired
junior Mortgage Loans when the Combined Loan-to-Value Ratio has exceeded 90%,
except in connection with its "High LTV" program, under which the Seller has
acquired Mortgage Loans with Combined Loan-to-Value Ratios of up to 125%. Under
the High LTV program, certain borrowers with high credit ratings have been
permitted to borrow: (i) varying amounts under Mortgage Loans with Combined
Loan-to-Value Ratios not exceeding 100%, or (ii) up to an amount (at least 40%
of which is for home improvement) generally not exceeding $25,000 under Mortgage
Loans with Combined Loan-to-Value Ratios not exceeding 125%. Borrowers under the
High LTV program must also meet minimum credit score levels to qualify. A
Mortgage Loan Underwriter's determination of an acceptable Combined
Loan-to-Value Ratio for a particular Mortgage Loan application is based on the
quality, condition and appreciation history of the related Mortgaged Property
and prospective market conditions with regard to such Mortgaged Property. If
the related Mortgaged Property constitutes rural property, the Combined
Loan-to-Value Ratio will not exceed 80%.
Certain Mortgage Loans may be acquired under the Seller's No Income
Verification ("NIV") program. To qualify for the NIV program, a borrower
generally must have a debt-to-income ratio of no greater than 45% and a Combined
Loan-to-Value Ratio of no greater than 85%. The credit investigation of an
applicant for a loan under the NIV program is generally the same as described
above except that the income of the borrower will not be verified.
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An appraisal satisfying either FNMA/FHLMC or state guidelines is required
for all Mortgage Loans acquired by the Seller, except for the High LTV program
where the stronger credit quality of the borrowers warrant a more limited
appraisal. In addition to the appraisal evaluation which each Mortgaged Property
undergoes, the Underwriter has established a system for conducting periodic
reviews of each appraiser using internal and third party appraisers.
Terms
The Mortgage Loans include fixed- and variable-rate, closed-end Mortgage
Loans. The fixed-rate Mortgage Loans are predominantly simple interest Mortgage
Loans that provide for the amortization of the amount financed under the
Mortgage Loan over a series of equal Monthly Payments. Each Monthly Payment
includes an installment of interest that is calculated on the basis of the
outstanding principal balance of the Mortgage Loan multiplied by the stated
Mortgage Interest Rate and further multiplied by a fraction, of which the
numerator is the number of days in the period elapsed since the preceding
payment of interest was made and the denominator is the number of days in the
annual period for which interest accrues on such Mortgage Loan. As payments are
received under a simple interest Mortgage Loan, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a fixed
monthly installment on a simple interest Mortgage Loan before its scheduled due
date, the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. The fixed-rate
Mortgage Loans acquired by the Seller typically have original terms to maturity
ranging from 180 to 360 months and, except for balloon Mortgage Loans, provide
for Monthly Payments of principal and interest in substantially equal
installments for the contractual term of the related Note in sufficient amounts
to fully amortize the principal thereof by maturity. Generally, the fixed-rate
balloon Mortgage Loans will have an amortization schedule based upon a 360-month
term and have a term to maturity of 180 months.
The variable-rate Mortgage Loans are either simple interest Mortgage Loans
which amortize over 180 to 360 months as explained above, or loans that amortize
over 180 to 360 months with the monthly principal and interest amounts computed
as of the first of the month, regardless of when the Monthly Payment is actually
received. The variable rate loans are indexed to short term base rates (such as
30 day LIBOR) and may adjust every six to 12 months.
Payments on the Mortgage Loans in the form of late payment charges, or
other miscellaneous administrative charges, to the extent collected from
borrowers, will be retained by the Master Servicer as additional servicing
compensation.
Unless specified in the related Prospectus Supplement, none of the
Mortgage Loans will be insured by the Federal Housing Administration, guaranteed
by the Veterans Administration or otherwise insured or guaranteed in any manner
(except in some cases for title and hazard insurance, which insurance is
required to be obtained by the borrower).
Servicing
The Master Servicer has established policies for servicing Mortgage Loans.
The Master Servicer retains the right to service the Mortgage Loans and will
generally assign subservicing rights to servicers (including NFI) who are
FNMA/FHLMC approved servicers. Servicing includes but is not limited to customer
service, collections and loss mitigation, remittance processing, investor
reporting, foreclosure and REO.
The Master Servicer or its subservicers (collectively, "Servicer") utilize
an on-line real-time servicing system. It provides payment processing and
cashiering functions, automated payoff statements, on-line collections, hazard
insurance and tax monitoring, and a full range of investor reporting
requirements
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for both fix-rate and adjustable-rate loans. The servicing standards applied by
the Master Servicer or the Servicer shall be comparable to those used in the
industry as a whole for assets similar to the Primary Assets.
The Pooling and Servicing Agreements which govern the distribution of a
cash flows within the REMIC Trusts may require that the Master Servicer advance
interest and principal on any delinquent Mortgage Loan until satisfaction of the
Note, liquidation of the Mortgaged Property or charge-off of the Mortgage Loan
to the extent the Master Servicer deems such Advances of interest and principal
to be ultimately recoverable. Realized losses on Mortgage Loans are paid out
of the related Reserve Account, Spread Account, Overcollateralization Account,
or similar account or, if necessary, from the related monoline insurance
company to the extent such coverage exists and is otherwise disclosed in the
related Prospectus Supplement.
Once a Mortgage Loan becomes 30 days delinquent, the Servicer takes
additional steps to evaluate the borrower's ability to repay the Mortgage Loan
and may also inspect the Mortgaged Property. Collection activity on accounts 60
days delinquent typically emphasize curing the delinquency, including the use of
formal forbearance, refinance and voluntary liquidation, and other means
directed at curing the delinquency. Depending on the circumstances surrounding
the delinquent account, a temporary suspension of payments or a repayment plan
to return the account to an up-to-date status may be authorized by the
collection supervisor. In any event, it is the Master Servicer's policy to work
with the delinquent customer to resolve the past due balance before legal action
is initiated.
In most cases, accounts that cannot be cured by reasonable means will be
moved to foreclosure as soon as all legal documentation permits. Foreclosures
are initiated by the collections manager after performing a pre-foreclosure loan
analysis and require the approval of the Master Servicer. When foreclosure
proceedings are initiated, a third-party appraiser inspects the Mortgaged
Property, completes a drive-by evaluation and obtains comparable sales prices
and listings in the area. In addition, the Servicer checks the status of the
homeowner's insurance, Senior Liens, and property taxes. Subject to applicable
state law, all legal expenses are assessed to the account and become the
responsibility of the borrower.
The Servicer may not foreclose on the property securing a junior Mortgage
Loan unless it forecloses subject to all Senior Liens, in which case the Trust
generally will pay the entire amount due on any Senior Liens to the senior
mortgagee at or prior to the foreclosure sale. If any senior mortgage loan is in
default after the Servicer has initiated its foreclosure action, the Servicer
may advance funds to keep such senior mortgage loan current until such time as
the Trust satisfies such senior mortgage loan. Such amounts are added to the
balance of the Mortgage Loan. In the event that foreclosure proceedings have
been instituted on any senior mortgage prior to the initiation of the Servicer's
foreclosure action, the Servicer will either cause the Trust to satisfy the
senior mortgage loan at the time of the foreclosure sale or take other action to
protect the Trust's interest in the related Mortgaged Property.
Delinquency and Loss Experience
The related Prospectus Supplement will set forth information relating to
the delinquency and loan loss experience for mortgage loans serviced by the
subservicer named in the related Prospectus Supplement (which may include
mortgage loans owned by the Seller). The data presented is unlikely to be
indicative of the delinquency and loss experience that will be experienced on
the mortgage loans in a specific Trust, in light of the fact that such portfolio
may include Mortgage Loans which were originated by different originators under
different underwriting standards and which have a different geographic
distribution from the Mortgage Loans in a Mortgage Pool for a specific Trust. In
addition, the portfolio of mortgage loans serviced by the subservicer may
include mortgage loans with a variety of payment and other characteristics which
may not correspond to those of the Mortgage Loans in a specific Mortgage Pool.
There is no
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assurance that future delinquency or loss experience of the related Mortgage
Loans will be similar to that set forth in the related Prospectus Supplement.
DESCRIPTION OF THE CERTIFICATES
General
The following summary describes certain terms of the Certificates, common
to each Pooling and Servicing Agreement. A form of the Pooling and Servicing
Agreement has been filed as an Exhibit to the Registration Statement of which
this Prospectus forms a part. The summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the provisions of
the Certificates, the Pooling and Servicing Agreement and the related Prospectus
Supplement. Where particular provisions or terms used in any of such documents
are referred to, the actual provisions (including definitions of terms) are
incorporated by reference as part of such summaries.
The Certificates will represent beneficial interests in the assets of the
related Trust, including (i) the Primary Assets and all proceeds thereof, (ii)
REO Property, (iii) amounts on deposit in the funds and accounts established
with respect to the related Trust, including all investments of amounts on
deposit therein, and (iv) certain other property, as described in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, one or
more Classes of Certificates of a Series may have the benefit of one or more of
a letter of credit, financial guaranty insurance policy, reserve fund, spread
account, cash collateral account, overcollateralization, cross-collateralization
or other form of credit enhancement. If so specified in the related Prospectus
Supplement, the Primary Assets underlying a Series of Certificates may be
insured under one or more of a mortgage pool insurance policy, special hazard
insurance policy, bankruptcy bond or similar credit enhancement. In addition to,
or in lieu of any or all of the foregoing, credit enhancement with respect to
one or more Classes of Certificates of a Series may be provided through
Subordination. Any such credit enhancement may be included in the assets of the
related Trust. See "--Description of Credit Enhancement" herein.
A Series of Certificates may include one or more Classes entitled to
distributions of principal and disproportionate, nominal or no interest
distributions or distributions of interest and disproportionate, nominal or no
principal distributions. The principal amount of any Certificate may be zero or
may be a notional amount as specified in the related Prospectus Supplement. A
Class of Certificates of a Series entitled to payments of interest may receive
interest at a specified rate (a "Certificate Interest Rate") which may be fixed,
variable or adjustable and may differ from other Classes of the same Series, may
receive interest based on the weighted average Mortgage Interest Rate on the
related Mortgage Loans, or may receive interest as otherwise determined, all as
described in the related Prospectus Supplement. One or more Classes of a Series
may be Certificates upon which interest will accrue but not be currently paid
until certain other Classes have received principal payments due to them in full
or until the occurrence of certain events, as set forth in the related
Prospectus Supplement. One or more Classes of Certificates of a Series may be
entitled to receive principal payments pursuant to a planned amortization
schedule or may be entitled to receive interest payments based on a notional
principal amount which reduces in accordance with a planned amortization
schedule. A Series may also include one or more Classes of Certificates entitled
to payments derived from a specified group or groups of Primary Assets held by
the related Trust. The rights of one or more Classes of Certificates may be
senior or subordinate to the rights of one or more of the other Classes of
Certificates. A Series may include two or more Classes of Certificates which
differ as to the timing, sequential order, priority of payment or amount of
distributions of principal or interest or both.
Each Class of Certificates of a Series will be issued in the denominations
specified in the related Prospectus Supplement. Each Certificate will represent
a percentage interest (a "Percentage Interest") in the
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Certificates of the respective Class, determined by dividing the original
principal balance (or Notional Principal Amount, in the case of certain
Certificates entitled to receive interest only) represented by such Certificate
by the original principal balance (or Notional Principal Amount) of such Class.
The related Prospectus Supplement will set forth the amount or method of
calculating the Notional Principal Amount with respect to any Certificate.
One or more Classes of Certificates of a Series may be issuable in the
form of fully registered definitive certificates or, if so specified in the
related Prospectus Supplement, one or more Classes of Certificates of a Series
(the "Book-Entry Certificates") may initially be represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), the nominee of The
Depository Trust Company ("DTC"), and available only in the form of book-entries
on the records of DTC, participating members thereof ("Participants") and other
entities, such as banks, brokers, dealers and trust companies, that clear
through or maintain custodial relationships with a Participant, either directly
or indirectly ("Indirect Participants"). Certificateholders may also hold
Certificates of a Series through CEDEL or Euroclear (in Europe), if they are
participants in such systems or indirectly through organizations that are
participants in such systems. Certificates representing the Book-Entry
Certificates will be issued in definitive form only under the limited
circumstances described herein and in the related Prospectus Supplement. With
respect to Book-Entry Certificates, all references herein to "holders" of
Certificates shall reflect the rights of owners ("Owners") of the Book-Entry
Certificates, as they may indirectly exercise such rights through DTC and
Participants, except as otherwise specified herein. See "--Registration of
Certificates" herein.
Unless otherwise specified in the related Prospectus Supplement, on each
Distribution Date there shall be paid to each person in whose name a Certificate
is registered on the related Record Date (which in case of the Book-Entry
Certificates initially will be only Cede, as nominee of DTC), the portion of the
aggregate payment to be made to holders of such Class to which such holder is
entitled, if any, based on the Percentage Interest, held by such holder of such
Class.
Interest
Unless otherwise specified in the related Prospectus Supplement, interest
will accrue on each Class of Certificates of a Series (other than a Class of
Certificates entitled to receive only principal) during each period specified in
the related Prospectus Supplement (each, an "Accrual Period") at the Certificate
Interest Rate for such Class specified in the related Prospectus Supplement.
Interest accrued on each Class of Certificates at the applicable Certificate
Interest Rate during each Accrual Period will be paid, to the extent monies are
available therefor, on each Distribution Date, commencing on the day specified
in the related Prospectus Supplement and will be distributed in the manner
specified in such Prospectus Supplement, except for any Class of Certificates
("Accrual Certificates") on which interest is to accrue and not be paid until
the principal of certain other Classes has been paid in full or the occurrence
of certain events as specified in such Prospectus Supplement. If so described in
the related Prospectus Supplement, interest that has accrued but is not yet
payable on any Accrual Certificates will be added to the principal balance
thereof on each Distribution Date and will thereafter bear interest at the
applicable Certificate Interest Rate. Payments of interest with respect to any
Class of Certificates entitled to receive interest only or a disproportionate
amount of interest and principal will be paid in the manner set forth in the
related Prospectus Supplement. Payments of interest (or accruals of interest, in
the case of Accrual Certificates) with respect to any Series of Certificates or
one or more Classes of Certificates of such Series, may be reduced to the extent
of interest shortfalls not covered by Advances, if any, or by any applicable
credit enhancement.
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Indices Applicable to Floating Rate and Inverse Floating Rate Classes
LIBOR
Unless otherwise specified in the related Prospectus Supplement, on the
LIBOR Determination Date (as such term is defined in the related Prospectus
Supplement) for each class of Certificates of a Series as to which the
applicable interest rate is determined by reference to an index denominated as
LIBOR, the Person designated in the related Pooling and Servicing Agreement (the
"Calculation Agent") will determine LIBOR by reference to the quotations, as set
forth on the Reuters Screen LIBO Page (as defined in the International Swap
Dealers Association, Inc. Code of Standard Wording, Assumptions and Provisions
for Swaps, 1986 Edition), offered by the principal London office of each of the
designated reference banks meeting the criteria set forth herein (the "Reference
Banks") for making one-month United States dollar deposits in leading banks in
the London Interbank market, as of 11:00 a.m. (London time) on such LIBOR
Determination Date. In lieu of relying on the quotations for those Reference
Banks that appear at such time on the Reuters Screen LIBO Page, the Calculation
Agent will request each of the Reference Banks to provide such offered
quotations at such time.
LIBOR will be established by the Calculation Agent on each LIBOR
Determination Date as follows:
(a) If on any LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual
Period shall be the arithmetic mean of such offered quotations (rounded
upwards if necessary to the nearest whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
Interest Accrual Period (as such term is defined in the related Prospectus
Supplement) shall be whichever is the higher of (i) LIBOR as determined on
the previous LIBOR Determination Date or (ii) the Reserve Interest Rate.
The "Reserve Interest Rate" shall be the rate per annum which the
Calculation Agent determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 1/32%) of the
one-month United States dollar lending rates that New York City banks
selected by the Calculation Agent are quoting, on the relevant LIBOR
Determination Date, to the principal London offices of at least two of the
Reference Banks to which such quotations are, in the opinion of the
Calculation Agent being so made, or (ii) in the event that the Calculation
Agent can determine no such arithmetic mean, the lowest one-month United
States dollar lending rate which New York City banks selected by the
Calculation Agent are quoting on such LIBOR Determination Date to leading
European banks.
(c) If on any LIBOR Determination Date for a Class specified in the
related Prospectus Supplement, the Calculation Agent is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (b) above, LIBOR for the next Interest Accrual Period shall be
LIBOR as determined on the preceding LIBOR Determination Date, or, in the
case of the first LIBOR Determination Date, LIBOR shall be deemed to be
the per annum rate specified as such in the related Prospectus Supplement.
Each Reference Bank (i) shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; (ii) shall not
control, be controlled by, or be under common control with the Calculation
Agent; and (iii) shall have an established place of business in London. If any
such Reference Bank should be unwilling or unable to act as such or if
appointment of any such Reference Bank is terminated, another leading bank
meeting the criteria specified above will be appointed.
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The establishment of LIBOR on each LIBOR Determination Date by the
Calculation Agent and its calculation of the rate of interest for the applicable
classes for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal Home
Loan Bank District (the "Eleventh District"). The Eleventh District Cost of
Funds Index for a particular month reflects the interest costs paid on all types
of funds held by Eleventh District member institutions and is calculated by
dividing the cost of funds by the average of the total amount of those funds
outstanding at the end of that month and of the prior month and annualizing and
adjusting the result to reflect the actual number of days in the particular
month. If necessary, before these calculations are made, the component figures
are adjusted by the Federal Home Loan Bank of San Francisco ("FHLBSF") to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are: (i) savings deposits, (ii)
time deposits, (iii) FHLBSF advances, (iv) repurchase agreements and (v) all
other borrowings. Because the component funds represent a variety of maturities
whose costs may react in different ways to changing conditions, the Eleventh
District Cost of Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District Cost
of Funds Index, which may cause it to move in a manner different from indices
tied to specific interest rates, such as United States Treasury bills or LIBOR.
Because the liabilities upon which the Eleventh District Cost of Funds Index is
based were issued at various times under various market conditions and with
various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month prior to the month in which it its
due to be published. Additionally, the Eleventh District Cost of Funds Index may
not necessarily move in the same direction as market interest rates at all
times, since as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, the Eleventh District Cost of Funds Index is
influenced by the differential between the prior and the new rates on those
deposits or borrowings. In addition, movements of the Eleventh District Cost of
Funds Index, as compared to other indices tied to specific interest rates, may
be affected by changes instituted by the FHLBSF in the method used to calculate
the Eleventh District Cost of Funds Index.
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 Certificates 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 Certificates") 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.
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Unless otherwise specified in the related Prospectus Supplement, if on the
tenth day of the month in which any Interest Accrual Period commences for a
Class of COFI Certificates the most recently published Eleventh District Cost of
Funds Index relates to a month prior to the third preceding month, the index for
such current Interest Accrual Period and for each succeeding Interest Accrual
Period will, except as described in the next to last sentence of this paragraph,
be based on the National Monthly Median Cost of Funds Ratio to SAIF-Insured
Institutions (the "National Cost of Funds Index") published by the Office of
Thrift Supervision (the "OTS") for the third preceding month (or the fourth
preceding month if the National Cost of Funds Index for the third preceding
month has not been published on such tenth day of an Interest Accrual Period).
Information on the National Cost of Funds Index may be obtained by writing the
OTS at 1700 G Street, N.W., Washington, D.C. 20552 or calling (202) 906-6677,
and the current National Cost of Funds Index may be obtained by calling (202)
906-6988. If on any such tenth day of the month in which an Interest Accrual
Period commences the most recently published National Cost of Funds Index
relates to a month prior to the fourth preceding month, the applicable index for
such Interest Accrual Period and each succeeding Interest Accrual Period will be
based on LIBOR, as determined by the Calculation Agent in accordance with the
Pooling and Servicing Agreement relating to such 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, particularly if LIBOR is
the alternative index, could increase its volatility.
The establishment of COFI by the Calculation Agent and its calculation of
the rates of interest for the applicable Classes for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
Treasury Index
Unless otherwise specified in the related Prospectus Supplement, on the
Treasury Index Determination Date (as such term is defined in the related
Prospectus Supplement) for each Class of Certificates of a Series as to which
the applicable interest rate is determined by reference to an index denominated
as a Treasury Index, the Calculation Agent will ascertain the Treasury Index for
Treasury securities of the maturity and for the period (or, if applicable, date)
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Treasury Index for any period means the
average of the yield for each business day during the period specified therein
(and for any date means the yield for such date), expressed as a per annum
percentage rate, on (i) U.S. Treasury securities adjusted to the "constant
maturity" (as further described below) specified in such Prospectus Supplement
or (ii) if no "constant maturity" is so specified, U.S. Treasury securities
trading on the secondary market having the maturity specified in such Prospectus
Supplement, in each case as published by the Federal Reserve Board in its
Statistical Release No. H.15(519). Statistical Release No. H.15(519) is
published on Monday or Tuesday of each week and may be obtained by writing or
calling the Publications Department at the Board of Governors of the Federal
Reserve System, 21st and C Streets, Washington, D.C. 20551, (202) 452-3244. If
the Calculation Agent has not yet received Statistical Release No. H.15(519) for
such week, then it will use such Statistical Release from the immediately
preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market. These market
yields are calculated from composites of quotations reported by five leading
U.S. Government securities dealers to the Federal Reserve Bank of New York. This
method provides a yield for a given maturity even if no security with that exact
maturity is outstanding. In the event that the Treasury Index is no longer
published, a new index based upon comparable data and methodology will be
designated in accordance with the Pooling and Servicing Agreement relating to
the particular Series of Certificates. 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.
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Prime Rate
Unless otherwise specified in the related Prospectus Supplement, on the
Prime Rate Determination Date (as such term is defined in the related Prospectus
Supplement) for each Class of Certificates of a Series as to which the
applicable interest rate is determined by reference to an index denominated as
the Prime Rate, the Calculation Agent will ascertain the Prime Rate for the
related Interest Accrual Period. Unless otherwise specified in the related
Prospectus Supplement, the "Prime Rate" for an Interest Accrual Period will be
the "prime rate" as published in the "Money Rates" section of The Wall Street
Journal (or if not so published, the "prime rate" as published in a newspaper of
general circulation selected by the Calculation Agent in its sole discretion) on
the related Prime Rate Determination Date. If a prime rate range is given, then
the average of such range will be used. In the event that the "prime rate" is no
longer published, a new index based upon comparable data and methodology will be
designated in accordance with the Pooling and Servicing Agreement relating to
the particular Series of Certificates. 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.
Principal
On each Distribution Date, commencing with the Distribution Date specified
in the related Prospectus Supplement, principal with respect to the related
Mortgage Loans during the period specified in the related Prospectus Supplement
(each such period, a "Due Period") will be paid to holders of the Certificates
of the related Series (other than a Class of Certificates of such Series
entitled to receive interest only) in the priority, manner and amount specified
in such Prospectus Supplement, to the extent funds are available therefor.
Unless otherwise specified in the related Prospectus Supplement, such principal
payments will generally include to the extent of funds available (i) the
principal portion of all scheduled payments ("Monthly Payments") on the related
Mortgage Loans during the related Due Period, (ii) any principal prepayments of
any such Mortgage Loans in full ("Principal Prepayments") and in part
("Curtailments") received during the related Due Period or such other period
(each, a "Prepayment Period") specified in the related Prospectus Supplement,
(iii) the principal portion of (A) the proceeds of any insurance policy relating
to a Mortgage Loan, a Mortgaged Property or a REO Property net of any amounts
applied to the repair of the Mortgaged Property or released to the Mortgagor and
net of reimbursable expenses ("Insurance Proceeds"), (B) proceeds received in
connection with the liquidation of any defaulted Mortgage Loans ("Liquidation
Proceeds"), net of fees and advances reimbursable therefrom ("Net Liquidation
Proceeds") and (C) net proceeds received in connection with a taking of a
related Mortgaged Property by condemnation or the exercise of eminent domain or
in connection with any partial release of any such Mortgaged Property from the
related lien ("Released Mortgaged Property Proceeds"), (iv) the principal
portion of all amounts paid by the Seller in connection with the purchase of a
Mortgage Loan as to which there is defective documentation or a breach of a
representation or warranty contained in the related Purchase and Sale Agreement
and (v) the principal balance of each defaulted Mortgage Loan or REO Property as
to which the Master Servicer has determined that all amounts expected to be
recovered have been recovered (each, a "Liquidated Mortgage Loan"), to the
extent not included in the amounts described in clauses (i) through (iv) above.
Payments of principal with respect to a Series of Certificates or one or more
Classes of such Series may be reduced to the extent of delinquencies or losses
not covered by Advances or any applicable credit enhancement.
Reports to Holders
On each Distribution Date, there will be forwarded to each holder a
statement prepared by the Trustee setting forth, among other things, the
information as to such Distribution Date required by the related Pooling and
Servicing Agreement, which generally will include, except as otherwise provided
therein or the related Prospectus Supplement, if applicable:
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(i) the Available Payment Amount (and any portion of the Available
Payment Amount that has been deposited in the Distribution Account but may
not be withdrawn therefrom pursuant to an order of a court of competent
jurisdiction imposing a stay pursuant to Section 362 of the United States
Bankruptcy Code);
(ii) the principal balance of each Class of Certificates as reported
in the report for the immediately preceding Distribution Date, or, with
respect to the first Distribution Date for a Series of Certificates, the
Original Principal Balance of such Class;
(iii) the principal portion of all Monthly Payments received during
the related Due Period;
(iv) the amount of interest received on the Primary Assets during
the related Due Period;
(v) the aggregate amount of the Advances, if any, to be made with
respect to the Distribution Date;
(vi) certain delinquency and foreclosure information as described
more fully in the related Pooling and Servicing Agreement, and the amount
of Mortgage Loan Losses during the related Due Period;
(vii) the amount of interest and principal due to the holders of
each Class of Certificates of such Series on such Distribution Date;
(viii) the amount then available in any Spread Account, Reserve
Account or Prefunding Account;
(ix) the amount of the payments, if any, to be made from any credit
enhancement on the Distribution Date;
(x) the amount to be distributed on the Distribution Date to the
holders of any subordinated or residual Certificates issued pursuant to
the related Pooling and Servicing Agreement and not otherwise offered
pursuant to this Prospectus or the related Prospectus Supplement;
(xi) the principal balance of each Class of Certificates of such
Series after giving effect to the payments to be made on the Distribution
Date;
(xii) with respect to the Trust, the weighted average maturity and
the weighted average Mortgage Interest Rate of the Primary Assets as of
the last day of the related Due Period;
(xiii) the amount of all payments or reimbursements to the Master
Servicer for accrued unpaid Servicing Fees, unreimbursed Advances, and
interest in respect of Permitted Instruments or funds on deposit in the
Collection Account and certain other amounts during the related Due
Period;
(xiv) the Pool Principal Balance as of the immediately preceding
Distribution Date, the Pool Principal Balance after giving effect to
payments received and Mortgage Loan Losses incurred during the related Due
Period and the ratio of the Pool Principal Balance to the Original Pool
Principal Balance. As of any Distribution Date, the "Pool Principal
Balance" equals the aggregate outstanding principal balance of all Primary
Assets, together with all amounts in any Prefunding Account not otherwise
distributed pursuant to the terms of the Pooling and Servicing Agreement,
as reduced by the aggregate Mortgage Loan Losses, at the end of the
related Due Period;
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(xv) certain information with respect to the funding, availability
and release of monies from any Spread Account, Reserve Account or
Prefunding Account;
(xvi) the number of Primary Assets outstanding at the beginning and
at the end of the related Due Period;
(xvii) the amounts that are reimbursable to the Master Servicer, the
Trustee or the Depositor, as appropriate; and
(xviii) such other information as the Depositor reasonably
determines to be necessary or appropriate.
Description of Credit Enhancement
To the extent specified in the related Prospectus Supplement, credit
enhancement for one or more Classes of a Series of Certificates may be provided
by one or more of a letter of credit, financial guaranty insurance policy,
mortgage pool insurance policy, special hazard insurance policy, bankruptcy
bond, reserve fund, spread account, cash collateral account,
overcollateralization, cross-collateralization subordination or other type of
credit enhancement to cover one or more risks with respect to the Primary Assets
or the Certificates, as specified in the related Prospectus Supplement. Credit
enhancement may also be provided by subordination of one or more Classes of
Certificates of a Series to one or more other Classes of Certificates of such
Series. Any credit enhancement will be limited in amount and scope of coverage.
Unless otherwise specified in the related Prospectus Supplement, credit
enhancement for a Series of Certificates will not be available for losses
incurred with respect to any other Series of Certificates. To the extent credit
enhancement for any Series of Certificates is exhausted, or losses are incurred
which are not covered by such credit enhancement, the holders of the
Certificates will bear all further risk of loss.
The amounts and types of credit enhancement, as well as the provider
thereof (the "Credit Provider"), if applicable, with respect to each Series of
Certificates will be set forth in the related Prospectus Supplement. To the
extent provided in the applicable Prospectus Supplement and the related Pooling
and Servicing Agreement, any credit enhancement may be periodically modified,
reduced or substituted, either as the aggregate principal balance of the
Certificates decreases, upon the occurrence of certain events or otherwise.
Unless otherwise specified in the related Prospectus Supplement, to the extent
permitted by the applicable Rating Agencies and provided that the then current
rating of the affected Certificates is not reduced or withdrawn as a result
thereof, any credit enhancement may be cancelled, reduced or modified in amount
or scope of coverage or both.
The descriptions of credit enhancement arrangements included in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of governing documents, copies of which will be available upon
request.
Financial Guaranty Insurance Policy. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond (a
"Certificate Insurance Policy") may be obtained and maintained for a Class or
Series of Certificates. The issuer of the Certificate Insurance Policy (the
"Insurer") will be described in the related Prospectus Supplement and a copy of
the form of Certificate Insurance Policy will be filed with the related Form
8-K.
Unless otherwise specified in the related Prospectus Supplement, a
Certificate Insurance Policy will be unconditional and irrevocable and will
guarantee to holders of the applicable Certificates that an amount equal to the
full amount of distributions due to such holders will be received by the Trustee
or its agent on behalf of such holders for distribution on each Distribution
Date. The specific terms of any Certificate
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Insurance Policy will be set forth in the related Prospectus Supplement. A
Certificate Insurance Policy may have limitations and generally will not insure
the obligation of the Seller to purchase or substitute for a defective Primary
Asset and will not guarantee any specific rate of principal prepayments. Unless
otherwise specified in the related Prospectus Supplement, the Insurer will be
subrogated to the rights of each holder to the extent the Insurer makes payments
under the Certificate Insurance Policy.
Letter of Credit. If so specified in the related Prospectus Supplement,
all or a component of credit enhancement for a Class or a Series of Certificates
may be provided by a letter of credit (a "Letter of Credit") issued by a bank or
other financial institution (a "Letter of Credit Issuer") identified in the
related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, each Letter of Credit will be irrevocable. A Letter of
Credit may provide coverage with respect to one or more Classes of Certificates
or the underlying Primary Assets or, if specified in the related Prospectus
Supplement, may support a specified obligation or be provided in lieu of the
funding with cash of a Reserve Account or Spread Account. The amount available,
conditions to drawing, if any, and right to reimbursement with respect to a
Letter of Credit will be specified in the related Prospectus Supplement. A
Letter of Credit will expire on the date specified in the related Prospectus
Supplement, unless earlier terminated or extended in accordance with its terms.
Mortgage Pool Insurance Policy. If so specified in the related Prospectus
Supplement, credit enhancement with respect to a Series of Certificates may be
provided by a mortgage pool insurance policy (a "Pool Insurance Policy") issued
by the insurer (a "Pool Insurer") specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Pool Insurance Policy will, subject to limitations described in such
Prospectus Supplement, insure against losses due to defaults in the payment of
principal or interest on the underlying Single Family Loans or Contracts up to
the amount specified in such Prospectus Supplement (or in the related Form 8-K).
The Pooling and Servicing Agreement with respect to any Series of Certificates
for which a Pool Insurance Policy is provided will require the Master Servicer
or other party specified therein to use reasonable efforts to maintain at the
expense of the Trust the Pool Insurance Policy and to present claims to the Pool
Insurer in the manner required thereby. No Pool Insurance Policy will be a
blanket policy against loss and each such policy will be subject to the
limitations and conditions precedent described in the related Prospectus
Supplement.
Special Hazard Insurance Policy. If so specified in the related Prospectus
Supplement, credit enhancement with respect to a Series of Certificates may be
provided in part by an insurance policy (a "Special Hazard Policy") covering
losses due to physical damage to a Mortgaged Property other than a loss of the
type covered by a standard hazard insurance policy or flood insurance policy or
losses resulting from the application of co-insurance clauses contained in
standard hazard insurance policies. The Prospectus Supplement relating to a
Series of Certificates for which a Special Hazard Policy is provided will
identify the issuer of such policy and any limitations on coverage. No Special
Hazard Policy will cover extraordinary losses such as those due to war, civil
insurrection, governmental action, errors in design or workmanship, chemical
contamination or similar causes. Each Special Hazard Policy will contain an
aggregate limit on claims specified in the related Prospectus Supplement. No
claim will be paid under any Special Hazard Policy unless hazard insurance on
the Mortgaged Property is in force and protection and preservation expenses have
been paid.
Spread Account and Reserve Account. If so specified in the related
Prospectus Supplement, all or any component of credit enhancement for a Series
of Certificates may be provided by a reserve account (a "Reserve Account") or a
spread account (a "Spread Account"). A Reserve Account or Spread Account may be
funded by a combination of cash, one or more letters of credit or one or more
Permitted Instruments provided by the Depositor or other party identified in the
related Prospectus Supplement, amounts otherwise distributable to one or more
Classes of Certificates subordinated to one or more other Classes of
Certificates or all or any portion of Excess Spread. If so specified in the
related Prospectus Supplement, a Reserve
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Account for a Series of Certificates may be funded in whole or in part on the
applicable Closing Date. If so specified in the related Prospectus Supplement,
cash deposited in a Reserve Account or a Spread Account may be withdrawn and
replaced with one or more letters of credit or Permitted Instruments. A Reserve
Account or Spread Account may be pledged or otherwise made available to a Credit
Provider. If so specified in the related Prospectus Supplement, a Reserve
Account or Spread Account may not be deemed part of the assets of the related
Trust or the related REMIC or may be deemed to be pledged or provided by one or
more of the Depositor, the holders of the Class of Certificates otherwise
entitled to the amounts deposited in such account or such other party as is
identified in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, a Spread Account or Reserve Account may also include an
account (a "Yield Supplement Account"). Funds on deposit in the Yield Supplement
Account for any Series may be applied to supplement interest payable on the
related Mortgage Loans if necessary to pay interest to holders of one or more
Classes of Certificates of such Series at the applicable Certificate Interest
Rate.
Cash Collateral Account. If so specified in the related Prospectus
Supplement, all or any portion of credit enhancement for a Series of
Certificates may be provided by the establishment of a cash collateral account
(a "Cash Collateral Account"). A Cash Collateral Account will be similar to a
Reserve Account or Spread Account except that generally a Cash Collateral
Account is funded initially by a loan from a cash collateral lender (the "Cash
Collateral Lender"), the proceeds of which are invested with the Cash Collateral
Lender or other eligible institution. Unless otherwise specified in the related
Prospectus Supplement, the Cash Collateral Account will be required to be
maintained as an Eligible Account. The loan from the Cash Collateral Lender will
be repaid from Excess Spread, if any, or such other amounts as are specified in
the related Prospectus Supplement. Amounts on deposit in the Cash Collateral
Account will be available in generally the same manner described above with
respect to a Spread Account or Reserve Account. As specified in the related
Prospectus Supplement, a Cash Collateral Account may be deemed to be part of the
assets of the related Trust, may be deemed to be part of the assets of a
separate cash collateral trust or may be deemed to be property of the party
specified in the related Prospectus Supplement and pledged for the benefit of
the holders of one or more Classes of Certificates of a Series.
Subordination. If so specified in the related Prospectus Supplement,
distributions of scheduled principal, Principal Prepayments, Curtailments,
interest or any combination thereof otherwise payable to one or more Classes of
Certificates of a Series ("Subordinated Certificates") may instead be payable to
holders of one or more other Classes of Certificates of such Series ("Senior
Certificates") under the circumstances and to the extent specified in such
Prospectus Supplement. If so specified in the related Prospectus Supplement,
delays in receipt of scheduled payments on the Mortgage Loans and losses on
defaulted Mortgage Loans will be borne first by the various Classes of
Subordinated Certificates and thereafter by the various Classes of Senior
Certificates, in each case under the circumstances and subject to the
limitations specified in such Prospectus Supplement. A Series of Certificates
may include one or more Classes of Subordinate Certificates entitled to receive
cash flows remaining after distributions are made to all other Classes
designated as being senior thereto. Such right to receive payments will
effectively be subordinate to the rights of holders of such senior designated
Classes of Certificates. A Series may also include one or more Classes of
Subordinate Certificates that will be allocated losses prior to any losses being
allocated to Classes of Subordinate Certificates designated as being senior
thereto. The aggregate losses in respect of defaulted Mortgage Loans which must
be borne by the Subordinated Certificates by virtue of subordination and the
amount of the distributions otherwise distributable to the Subordinated
Certificates that will be distributable to Senior Certificates on any
Distribution Date may be limited as specified in the related Prospectus
Supplement or the availability of subordination may otherwise be limited as
specified in the related Prospectus Supplement. If losses or delinquencies were
to exceed the amounts payable and available to holders of Subordinated
Certificates of a Series or if such amounts were to exceed any limitation on the
amount of subordination available, holders of Senior Certificates of such Series
could experience losses.
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In addition, if so specified in the related Prospectus Supplement, amounts
otherwise payable to holders of Subordinated Certificates on any Distribution
Date may be deposited in a Reserve Account or Spread Account, as described
above. Such deposits may be made on each Distribution Date, on each Distribution
Date for a specified period or to the extent necessary to cause the balance in
such account to reach or maintain a specified amount, as specified in the
related Prospectus Supplement, and thereafter, amounts may be released from such
Reserve Account or Spread Account in the amounts and under the circumstances
specified in such Prospectus Supplement.
Distributions may be allocated as among Classes of Senior Certificates and
as among Classes of Subordinated Certificates in order of their final scheduled
payment dates, in accordance with a schedule or formula or otherwise, as
specified in the related Prospectus Supplement. As between Classes of
Subordinated Certificates, payments to holders of Senior Certificates on account
of delinquencies or losses and deposits to any Reserve Account or Spread Account
will be allocated as specified in the related Prospectus Supplement. Principal
Prepayments and Curtailments may be paid disproportionately to Classes of Senior
Certificates pursuant to a "shifting interest" structure or otherwise, as
specified in the related Prospectus Supplement.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more Classes of Certificates relative to the
amortization of the related Primary Assets. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more Classes of Certificates. This acceleration feature
creates, with respect to the Primary Assets or groups thereof,
overcollateralization which results from the excess of the aggregate principal
balance of the related Primary Assets, or a group thereof, over the principal
balance of the related Class of Certificates. Such acceleration may continue for
the life of the related Certificates, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to certain provisions specified in the related Prospectus Supplement,
such limited acceleration feature may cease, unless necessary to maintain the
required level of overcollateralization.
Cross-Collateralization. If specified in the related Prospectus
Supplement, the beneficial ownership of separate groups of Primary Assets
included in the Trust for a series may be evidenced by separate Classes of a
related Series of Certificates. In such case, credit enhancement may be provided
by a cross-support feature which may require that distributions be made with
respect to Certificates evidencing beneficial ownership of one or more groups of
Primary Assets prior to distribution to Subordinated Certificates evidencing a
beneficial ownership interest in other groups of Primary Assets within the same
Trust. The Prospectus Supplement for a Series which includes a cross-support
feature will describe the manner and conditions for applying such cross-support
feature.
Payment of Certain Expenses
If so specified in the related Prospectus Supplement, in order to provide
for the payment of the fees of the Credit Provider, if any, the Trustee may be
required to establish a credit enhancement account and to deposit therein on the
dates specified in the related Prospectus Supplement, from amounts on deposit in
the Distribution Account, in the priority indicated, an amount that is
sufficient to pay the premiums or fees due to the Credit Provider.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling and Servicing Agreement will provide for the payment to the Trustee from
time to time of its fees and the reasonable expenses, disbursements and advances
incurred or made by the Trustee from amounts on deposit in the Distribution
Account.
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Servicing Compensation
As compensation for servicing and administering the Mortgage Loans, the
Master Servicer is entitled to a fee in the amount specified in the related
Prospectus Supplement (the "Servicing Fee"), payable from all or a portion of
payments on the related Primary Assets, Liquidation Proceeds, Released Mortgaged
Property Proceeds, Insurance Proceeds and certain other collections on the
related Primary Assets, as specified in the related Prospectus Supplement. In
addition to the Servicing Fee, the Master Servicer will generally be entitled
under the related Pooling and Servicing Agreement to retain as additional
servicing compensation any assumption, modification and other administrative
fees (including bad check charges, late payment fees and similar fees), the
excess of any Net Liquidation Proceeds over the outstanding principal balance of
a Liquidated Mortgage Loan, to the extent not otherwise required to be remitted
to the Trustee for deposit into the Distribution Account, and interest paid on
funds on deposit in the Collection Account.
Servicing Standards
General Servicing Standards. The Master Servicer will agree to service the
Mortgage Loans in accordance with the Pooling and Servicing Agreement and, in
servicing and administering the Mortgage Loans, to employ or cause to be
employed procedures, including collection, foreclosure and REO Property
management procedures, and exercise the same care it customarily employs and
exercises in servicing and administering assets similar to the Primary Assets
for other third party portfolios or its own account, in accordance with accepted
servicing practices of prudent servicing institutions that service assets
similar to the Primary Assets and giving due consideration to the holders of the
related Certificates, and any Credit Provider's interests. The interests of the
holders of each Class of Certificates of any Series and the Credit Provider, if
any, may differ with respect to servicing decisions which may affect the rate at
which prepayments are received. No holder of a Certificate will have the right
to make any decisions with respect to the underlying Primary Assets. The Master
Servicer will have the right and obligation to make such decisions in accordance
with its normal servicing procedures and the standards set forth in the related
Pooling and Servicing Agreement, and, in certain cases, the consent or approval
of the Credit Provider, if any, may be permitted or required.
Hazard Insurance. The Master Servicer will exercise its best reasonable
efforts to cause to be maintained fire and hazard insurance with extended
coverage (sometimes referred to as "standard hazard insurance") customary in the
area where the Mortgaged Property is located, to the extent required or
permitted under the related Mortgage, in an amount which is at least equal to
the lesser of (i) the outstanding Principal Balance owing on the Mortgage Loan
plus the outstanding balances of each Senior Lien, if any, and (ii) the full
insurable value of the premises securing the Mortgage Loan, but in no event less
than the amount necessary to prevent the Mortgagor from becoming a coinsurer
thereunder. Generally, if the Mortgaged Property is in an area identified in the
Federal Register by the Flood Emergency Management Agency as Flood Zone "A", the
Mortgage Note will require the Mortgagor to maintain a flood insurance policy
with a generally acceptable insurance carrier in an amount representing coverage
not less than that required under guidelines promulgated by the Federal National
Mortgage Association. The Master Servicer will also be required to maintain on
REO Property, to the extent such insurance is available at commercially
reasonable rates, fire and hazard insurance in the applicable amounts described
above, liability insurance and, to the extent required and available under the
National Flood Insurance Act of 1968, as amended, and the Master Servicer
determines that such insurance is necessary in accordance with accepted
servicing practices of prudent servicing institutions for assets similar to the
Primary Assets, flood insurance in an amount equal to that required above. Any
amounts collected by the Master Servicer under any such policies (other than
amounts to be applied to the restoration or repair of the Mortgaged Property, or
to be released to the Mortgage in accordance with the related Mortgagor or
customary mortgage servicing procedures) will be deposited in the Collection
Account, subject to retention by the Master Servicer to the extent such amounts
constitute servicing compensation or to withdrawal pursuant to the related
Pooling and Servicing Agreement.
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If the Master Servicer obtains and maintains a blanket policy or master
forced placed insurance policy insuring all of the Mortgage Loans against some
or all of the risks described above, then, to the extent such policy names the
Master Servicer as loss payee and provides coverage in an amount equal to the
aggregate outstanding principal balance on the Mortgage Loans without
co-insurance, the Master Servicer will be deemed conclusively to have satisfied
its obligations with respect to such insurance coverage.
In general, the standard hazard insurance policy covers physical damage to
or destruction of the improvements on the property by fire, lightning,
explosion, smoke, windstorm and hail, and riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although the
policies relating to Mortgage Loans will be underwritten by different insurers
under different state laws in accordance with different applicable state forms
and therefore will not contain identical terms and conditions, the basic terms
thereof are dictated by respective state laws, and most such policies typically
do not cover any physical damage resulting from war, revolution, governmental
actions, floods and other water related causes, earth movement (including
earthquakes, landslides and mudflows), nuclear reactions, wet or dry rot,
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. No other insurance coverage (other than
title insurance as specified herein) is required under the Mortgage Loans or the
Pooling and Servicing Agreement.
The Mortgagors under some of the Mortgage Loans may obtain credit life or
disability insurance policies. Such policies require the insurers to make
payments on the related Mortgage Loans in the event of death or certain events
of disability of the Mortgagor. To the extent such policies are obtained, the
proceeds thereof will constitute assets of the related Trust. No Mortgagor is
required to obtain credit life or disability insurance.
Since, as a general matter, the cost of construction of residential
properties has increased in recent years, if the amount of hazard insurance
maintained on the improvements securing a Mortgage Loan were to decline as its
principal balance decreased, hazard insurance proceeds could be insufficient to
restore fully the damaged property in the event of a loss.
Enforcement of "Due-on-Sale" Clauses. When a Mortgaged Property has been
or is about to be conveyed by the Mortgagor, the Master Servicer, on behalf of
the Trustee, is required, to the extent it has knowledge of such conveyance or
prospective conveyance to enforce the rights of the Trustee as the mortgagee of
record to accelerate the maturity of the related Mortgage Loan under any
"due-on-sale" clause contained in the related Mortgage or Mortgage Note;
provided, however, that the Master Servicer will not be permitted to exercise
any such right if the "due-on-sale" clause, in the reasonable belief of the
Master Servicer, is not enforceable under applicable law or unless, in the
Master Servicer's reasonable judgment, doing so would materially increase the
risk of default or delinquency on, or materially impair the security for, such
Mortgage Loan. See "Certain Legal Aspect of Mortgage Loans--Enforceability of
Certain Provisions." In such event, the Master Servicer will be required to
enter into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed, pursuant to which such person
becomes liable under the Mortgage Note and, unless prohibited by applicable law
or the Mortgage Note or Mortgage, the Mortgagor remains liable thereon. The
Master Servicer will also be authorized (with the prior approval of any Credit
Provider, if required) to enter into a substitution of liability agreement with
such person, pursuant to which the original Mortgagor is released from liability
and such person is substituted as Mortgagor and becomes liable under the
Mortgage Note.
Realization Upon Defaulted Mortgage Loans. The Master Servicer is required
to use its best reasonable efforts to foreclose upon or otherwise comparably
effect the ownership in the name of the Trustee on behalf of the holders of the
related Certificates of Mortgaged Properties relating to defaulted Mortgage
Loans as to which no satisfactory arrangements can be made for collection of
delinquent payments; provided,
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however, that the Master Servicer will not be required to foreclose if it
determines that foreclosure would not be in the best interests of the holders or
any Credit Provider. In connection with such foreclosure or other conversion,
the Master Servicer is required to exercise collection and foreclosure
procedures which are consistent with accepted servicing practices of prudent
servicing institutions for assets similar to the Primary Assets.
Collection of Mortgage Loan Payments. Each Pooling and Servicing Agreement
will require the Master Servicer to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans.
Consistent with the foregoing, the Master Servicer may at its own discretion
waive any late payment charge, assumption fee or any penalty interest in
connection with the prepayment of a Mortgage Loan or any other fee or charge
which the Master Servicer would be entitled to retain as servicing compensation
and may waive, vary or modify any term of any Mortgage Loan or consent to the
postponement of strict compliance with any such term or in any matter grant
indulgence to any Mortgagor, subject to the limitations set forth in the related
Pooling and Servicing Agreement.
Use of Subservicers
The Master Servicer will be permitted under each Pooling and Servicing
Agreement to enter into subservicing agreements ("Subservicing Agreements") for
any servicing and administration of Mortgage Loans with any institution (each, a
"Subservicer") which is in compliance with the laws of each state necessary to
enable it to perform its obligations under such Subservicing Agreement. The
related Prospectus Supplement shall set forth whether a Subservicer is required
to be designated by Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC") as an approved Seller-Servicer
for first and second mortgage loans or the standards under which a Subservicer
may service the Mortgage Loans.
Notwithstanding any Subservicing Agreement, unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will not be relieved of
its obligations under a Pooling and Servicing Agreement, and the Master Servicer
shall be obligated to the same extent and under the same terms and conditions as
if it alone were servicing and administering the Mortgage Loans. The Master
Servicer will be entitled to enter into any agreement with a Subservicer for
indemnification of the Master Servicer by such Subservicer and nothing contained
in any Pooling and Servicing Agreement shall be deemed to limit or modify such
indemnification.
Servicing Certificates and Audits
The Pooling and Servicing Agreement for each Series will generally provide
that on or before a specified date in each year, beginning the first such date
that is at least a specified number of months after the Cut-off Date, there will
be furnished to the related Trustee a report of a firm of independent certified
public accountants stating that (i) it has obtained a letter of representation
regarding certain matters from the management of the Master Servicer which
includes an assertion that the Master Servicer has complied with certain minimum
mortgage loan servicing standards (to the extent applicable to commercial and
multifamily mortgage loans), identified in the Uniform Single Attestation
Program for Mortgage Bankers established by the Mortgage Bankers Association of
America, with respect to the Master Servicer's servicing of mortgage loans
during the most recently completed calendar year and (ii) on the basis of an
examination conducted by such firm in accordance with standards established by
the American Institute of Certified Public Accountants, such representation is
fairly stated in all material respects, subject to such exceptions and other
qualifications that, in the opinion of such firm, such standards require it to
report. In rendering its report such firm may rely, as to the matters relating
to the direct servicing of mortgage loans by sub-servicer, upon comparable
reports of firms of independent public accountants rendered on the basis of
examination conducted in accordance with the same standards (rendered within one
year of such report) with respect to those sub-
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servicers. The Prospectus Supplement may provide that additional reports of
independent certified public accountants relating to the servicing of mortgage
loans may be required to be delivered to the Trustee.
In addition, the Pooling and Servicing Agreement for each Series will
generally provide that the Master Servicer will each deliver to the Trustee, the
Depositor and each Rating Agency, annually on or before a date specified in the
Pooling and Servicing Agreement, a statement signed by an officer of the Master
Servicer to the effect that, based on a review of its activities during the
preceding calendar year, to the best of such officer's knowledge, the Master
Servicer has fulfilled in all material respects its obligations under the
Pooling and Servicing Agreement throughout such year or, if there has been a
default in the fulfillment of any such obligation, specifying each default known
to such officer.
Limitations on Liability of the Master Servicer and Its Agents
Each Pooling and Servicing Agreement will provide that the Master Servicer
and any director, officer, employee or agent of the Master Servicer may rely on
any document of any kind that is reasonably and in good faith believed to be
genuine and adopted or signed by the proper authorities respecting any matters
arising under the Pooling and Servicing Agreement. In addition, the Master
Servicer will not be required to appear with respect to, prosecute or defend any
legal action that is not incidental to the Master Servicer's duty to service the
Primary Assets in accordance with the related Pooling and Servicing Agreement,
other than certain claims made by third parties with respect to such Pooling and
Servicing Agreement. Additional information with respect to the limitation on
liabilities of the Master Servicer will be provided in the related Prospectus
Supplement.
Removal and Resignation of Master Servicer
Unless otherwise specified in the related Prospectus Supplement, any
Credit Provider or either the Trustee or the holders of Certificates of a Series
representing a majority in principal amount of Certificates of such Series,
voting as a single class (a "Majority in Aggregate Voting Interest"), with the
consent of any Credit Provider, may, pursuant to the related Pooling and
Servicing Agreement, remove the Master Servicer upon the occurrence and
continuation of any of the following events (each a "Master Servicer Termination
Event"):
(i) Any failure by the Master Servicer to deliver to the Trustee for
distribution to Certificateholders any proceeds or payment required to be
so delivered under the terms of the Certificates and the Pooling and
Servicing Agreement that shall continue unremedied for a period of five
Business Days (an "Event of Nonpayment"); or
(ii) Failure on the part of the Master Servicer duly to observe or
to perform in any material respect any other covenants or agreements of
the Master Servicer set forth in the Certificates or in the Pooling and
Servicing Agreement which failure materially and adversely affects the
rights of Certificateholders and which failure shall continue unremedied
for a period of 60 days after the date on which written notice of such
failure requiring the same to be remedied shall have been given to the
Master Servicer by the Trustee, or to the Master Servicer and to the
Trustee by the Holders of Certificates evidencing not less than a majority
of the aggregate principal amount of Certificates of such Series; or
(iii) The Master Servicer shall file a petition commencing a
voluntary case under any chapter of the federal bankruptcy laws, or the
Master Servicer shall file a petition or answer or consent seeking
reorganization, arrangement, adjustment or composition under any other
similar applicable federal law, or shall consent to the filing of any such
petition, answer or consent, or the Master Servicer shall appoint, or
consent to the appointment of, a custodian, receiver, liquidator, trustee,
assignee, sequestrator or other similar official in bankruptcy or
insolvency, of it or of any
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substantial part of its property, or shall make an assignment for the
benefit of creditors, or shall admit in writing its inability to pay its
debts generally as they become due; or
(iv) Any order for relief against the Master Servicer shall have
been entered by a court having jurisdiction in the premises under any
chapter of the federal bankruptcy laws, and such order shall have
continued undischarged or unstayed for a period of 120 days, or a decree
or order by a court having jurisdiction in the premises shall have been
entered approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of the Master Servicer under any
other similar applicable federal law, and such decree or order shall have
continued undischarged or unstayed for a period of 120 days, or a decree
or order of a court having jurisdiction in the premises for the
appointment of a custodian, receiver, liquidator, trustee, assignee,
sequestrator or other similar official in bankruptcy or insolvency of the
Master Servicer or of any substantial part of its property, or for the
winding up or liquidation of its affairs, shall have been entered, and
such decree or order shall have remained in force undischarged or unstayed
for a period of 120 days.
To the extent specified in the related Prospectus Supplement, the
Depositor may, with the consent of any Credit Provider and holders representing
a majority in aggregate Percentage Interest of each Class of Certificates of a
Series, remove the Master Servicer upon 90 days' prior written notice. No such
removal shall be effective until the appointment and acceptance of a successor
Master Servicer other than the Trustee (unless the Trustee agrees to serve)
meeting the requirements described below and otherwise acceptable to any Credit
Provider and majority in Percentage Interest of each Class of Certificates of
such Series.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer may not assign the related Pooling and Servicing Agreement nor
resign from the obligations and duties thereby imposed on it except by mutual
consent of the Master Servicer, any Credit Provider, the Trustee, the Depositor
and the Majority in Aggregate Voting Interest or upon the determination that the
Master Servicer's duties thereunder are no longer permissible under applicable
law and such incapacity cannot be cured by the Master Servicer. No such
resignation shall become effective until a successor has assumed the Master
Servicer's responsibilities and obligations in accordance with the Pooling and
Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, upon
removal or resignation of the Master Servicer other than as described in the
second preceding paragraph, the Trustee will be the successor servicer (the
"Successor Master Servicer"). The Trustee, as Successor Master Servicer, is
obligated to make any Servicing Advances and certain other Advances, unless it
determines reasonably and in good faith that such Advances would not be
recoverable. If, however, the Trustee is unwilling or unable to act as Successor
Master Servicer, or if any Credit Provider so requests in writing, the Trustee
may appoint, or petition a court of competent jurisdiction to appoint, any
established mortgage loan servicing institution acceptable to such Credit
Provider having a net worth of not less than the amount set forth in the related
Pooling and Servicing Agreement whose regular business includes the servicing of
assets similar to the Primary Assets (which portfolio of assets shall have a
principal balance of not less than $100,000,000) as the Successor Master
Servicer in the assumption of all or any part of the responsibilities, duties or
liabilities of the Master Servicer.
The Trustee and any other Successor Master Servicer in such capacity is
entitled to the same reimbursement for Advances and other Servicing Compensation
as the Master Servicer. See "--Servicing Compensation" above.
Registration and Transfer of the Certificates
If so specified in the related Prospectus Supplement, one or more Classes
of Certificates of a Series will be issued in definitive certificated form and
will be transferable and exchangeable at the office of the
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registrar identified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, no service charge will be made
for any such registration or transfer of such Certificates, but the owner may be
required to pay a sum sufficient to cover any tax or other governmental charge.
If so specified in the related Prospectus Supplement, one or more Classes
of Certificates of a Series ("Book-Entry Certificates") may be initially
represented by one or more certificates registered in the name of The Depository
Trust Company ("DTC") or other securities depository and be available only in
the form of book-entries. Any Book-Entry Certificates will initially be
registered in the name of Cede, the nominee of DTC. Certificateholders may also
hold Certificates of a Series through CEDEL or Euroclear (in Europe), if they
are participants in such systems or indirectly through organizations that are
participants in such systems. CEDEL and Euroclear will hold omnibus positions on
behalf of their participants through customers' certificates accounts in CEDEL's
and Euroclear's names on the books of their respective Depositaries which in
turn will hold such positions in customers' certificates accounts in the
Depositaries' names on the books of DTC. Citibank, N.A. ("Citibank"), will act
as depositary for CEDEL and The Chase Manhattan Bank ("Chase"), will act as
depositary for Euroclear (in such capacities, the "Depositaries").
Transfers between DTC participants will occur in the ordinary way in
accordance with DTC rules. Transfers between CEDEL Participants and Euroclear
Participants will occur in the ordinary way in accordance with their applicable
rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL 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
its 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 its Depositary to take action to effect
final settlement on its behalf by delivering or receiving certificates through
DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of certificates received in
CEDEL or Euroclear as a result of a transaction with a DTC participant will be
made during subsequent certificates settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
certificates settled during such processing will be reported to the relevant
Euroclear or CEDEL Participant on such business day. Cash received in CEDEL or
Euroclear as a result of sales of certificates by or through a CEDEL Participant
or a Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement date but will be available in the relevant CEDEL or Euroclear
cash account only as of the business day following settlement in DTC. For
information with respect to tax documentation procedures relating to the
Certificates, see "Certain Federal Income Tax Consequences--Taxation of Certain
Foreign Investors" herein.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC accepts securities for deposit
from its participating organizations ("Participants") and facilitates the
clearance and settlement of securities transactions between Participants in such
securities through electronic book-entry changes in accounts of Participants,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to the
DTC system is also available to others such as banks, brokers,
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dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Beneficial owners ("Owners") that are not Participants but desire to
purchase, sell or otherwise transfer ownership of Book-Entry Certificates may do
so only through Participants (unless and until Definitive Certificates are
issued). In addition, Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and
Participants. Owners will not receive or be entitled to receive certificates
representing their respective interests in the Book-Entry Certificates, except
under the limited circumstances described below.
Unless and until Definitive Certificates are issued, it is anticipated
that the only "holder" of Book-Entry Certificates of any Series will be Cede, as
nominee of DTC. Owners will only be permitted to exercise the rights of holders
indirectly through Participants and DTC.
While any Book-Entry Certificates of a Series 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 Book-Entry Certificates and is required to receive and
transmit distributions of principal of, and interest on, the Book-Entry
Certificates. Participants with whom Owners have accounts with respect to Book
Entry Certificates are similarly required to make book-entry transfers and
receive and transmit such distributions on behalf of their respective Owners.
Accordingly, although Owners will not possess certificates, the Rules provide a
mechanism by which Owners will receive distributions and will be able to
transfer their interests.
Unless and until Definitive Certificates are issued, Owners who are not
Participants may transfer ownership of Book-Entry Certificates of a Series only
through Participants by instructing such Participants to transfer Book-Entry
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Book-Entry Certificates, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Book-Entry Certificates will be
executed through DTC and the accounts of the respective Participants at DTC will
be debited and credited. Similarly, the respective Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Owners.
Book-Entry Certificates of a Series will be issued in registered form to
Owners, or their nominees, rather than to DTC (such Book-Entry Certificates
being referred to herein as "Definitive Certificates") only under the
circumstances provided in the related Pooling and Servicing Agreement, which
generally will include, except if otherwise provided therein, if (i) DTC or the
Master Servicer advises the Trustee in writing that DTC is no longer willing or
able to discharge properly its responsibilities as nominee and depository with
respect to the Book-Entry Certificates of such Series and the Master Servicer is
unable to locate a qualified successor, (ii) the Master Servicer, at its sole
option, elects to terminate the book-entry system through DTC or (iii) after the
occurrence of a Master Servicer Termination Event, a majority of the aggregate
Percentage Interest of any Class of Certificates of such Series advises DTC in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) to the exclusion of any physical certificates being issued to Owners is
no longer in the best interests of Owners of such Class of Certificates. Upon
issuance of Definitive Certificates of a Series to Owners, such Book-Entry
Certificates will be transferable directly (and not exclusively on a book-entry
basis) and registered holders will deal directly with the Trustee with respect
to transfers, notices and distributions.
DTC has advised the Master Servicer and the Depositor that, unless and
until Definitive Certificates are issued, DTC will take any action permitted to
be taken by a holder only at the direction of one or more Participants to whose
DTC accounts the Certificates are credited. DTC has advised the Master Servicer
and the Depositor that DTC will take such action with respect to any Percentage
Interests of the Book-Entry
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Certificates of a Series only at the direction of and on behalf of such
Participants with respect to such Percentage Interests of the Book-Entry
Certificates. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Book-Entry Certificates.
Centrale de Livraison de Valeurs Mobilieres S.A. ("CEDEL") is incorporated
under the laws of Luxembourg as a professional depository. CEDEL holds
securities for its participating organizations ("CEDEL Participants") and
facilitates the clearance and settlement of securities transactions between
CEDEL Participants through electronic book-entry changes in accounts of CEDEL
Participants, thereby eliminating the need for physical movement of securities.
Transactions may be settled in CEDEL in any of 28 currencies, including United
States dollars. CEDEL provides to its Participants, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. CEDEL interfaces with
domestic markets in several countries. As a professional depository, CEDEL is
subject to regulation by the Luxembourg Monetary Institute. CEDEL Participants
are recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include any underwriters, agents or
dealers with respect to a Series of Certificates offered hereby. Indirect access
to CEDEL is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold securities
for participants of the Euroclear System ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 27
currencies, including United States dollars. The Euroclear System 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. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator"), under contract with Euroclear
Clearance System S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers with respect to
a Series of Certificates offered hereby. 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 that 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.
Certificates 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 Euroclear 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 the
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
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Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Certain Federal Income Tax Consequences." CEDEL or the Euroclear Operator,
as the case may be, will take any other action permitted to be taken by a
Certificateholder under the Pooling and Servicing Agreement or the relevant
Supplement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect such actions on its behalf through DTC.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts that are general in nature.
Because such legal aspects are governed in part by applicable state laws (which
laws may differ substantially from one another), the summaries do not purport to
be complete nor to reflect the laws of any particular state nor to encompass the
laws of all states in which the Single Family Loans and Contracts may be
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Single Family Loans and
Contracts.
Single Family Loans
The Single Family Loans will be secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
Mortgaged Property subject to a Single Family Loan is located. A mortgage
conveys legal title to or creates a lien upon the property to the mortgagee
subject to a condition subsequent, i.e., the payment of the indebtedness secured
thereby. There are two parties to a mortgage, the mortgagor, who is the borrower
and homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust has
three parties, the borrower-homeowner called the trustor (similar to a
mortgagor), a lender called the beneficiary (similar to a mortgagee), and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by law, the express provisions of the deed of trust or
mortgage, and, in some cases, the directions of the beneficiary. Some states use
a security deed or deed to secure debt which is similar to a deed of trust
except that it has only two parties: a grantor (similar to a mortgagor) and a
grantee (similar to a mortgagee). Mortgages, deeds of trust and deeds to secure
debt are not prior to liens for real estate taxes and assessments and other
charges imposed under governmental police powers. Priority between mortgages,
deeds of trust and deeds to secure debt and other encumbrances depends on their
terms in some cases and generally on the order of recordation of the mortgage,
deed of trust or the deed to secure debt in the appropriate recording office.
If so specified in the related Prospectus Supplement, a Mortgage Pool may
include loans on units in cooperatives ("Cooperative Loans"). Cooperative Loans
are evidenced by notes secured by security interests in shares issued by
cooperatives, which are corporations entitled to be treated as housing
cooperatives under federal tax law, and in the related proprietary leases or
occupancy agreements granting rights to occupy specific dwelling units within
the cooperative buildings. The security agreement will create a lien upon or
grant a title interest in the property which it covers, the priority of which
lien will depend on the terms of the agreement and the order of recordation in
the appropriate recording office. Ownership of a unit in a cooperative is held
through the ownership of stock in the corporation, together with the related
proprietary lease or occupancy agreement. Such ownership interest is generally
financed through a
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cooperative share loan evidenced by a promissory note and secured by an
assignment of and a security interest in the proprietary lease or occupancy
agreement and a security interest in the related cooperative shares.
Each cooperative owns in fee or has a leasehold interest in the real
property and improvements, including all separate dwelling units therein. The
cooperative is responsible for property management and generally for the payment
of real estate taxes, insurance and similar charges, the cost of which is shared
by the owners. The cooperative building or underlying land may be subject to one
or more mortgages (generally incurred in connection with the construction or
purchase of the building) for which the cooperative is responsible. The interest
of an occupant under proprietary leases or occupancy agreements is generally
subordinate to that of the holder of such a mortgage or land lease. If the
cooperative is unable to meet the payment obligations under such mortgage or any
land lease, the holder of such mortgage or land lease could foreclose the
mortgage or terminate the land lease, which may have the effect of terminating
all proprietary leases or occupancy agreements. In the event of such foreclosure
or termination, the value of any collateral held by a lender which financed the
purchase by a tenant/shareholder of cooperative shares or, in the case of the
Mortgage Loans, the collateral securing the Cooperative Loans could be
eliminated or significantly reduced.
Foreclosure of Single Family Loans
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
defendant. Although judicial foreclosure proceedings are often not contested by
any of the parties defendant, any activity by any one defendant may materially
delay completion of a foreclosure.
Foreclosure of a deed of trust or a security deed is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or security deed which authorizes the sale of the property to a
third party upon any default by the borrower under the terms of the note, deed
of trust or security deed. In some states, the trustee must record a notice of
default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other individual
having an interest in the real property, including any junior lienholders. The
borrower, or any other person having a junior encumbrance on the real estate,
may, during a specified period, cure the default by paying the entire amount in
arrears plus the costs and expenses incurred in enforcing the obligations.
Generally, state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest in the real property.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is often a
public sale. Because of the difficulty a potential buyer at the sale would have
in determining the exact status of title and because the physical condition of
the property subject to the lien of the mortgage or the deed of trust may have
deteriorated during the foreclosure proceedings, a third party may be unwilling
to purchase the property at a foreclosure sale. Potential buyers may further
question the prudence of purchasing property at a foreclosure sale as a result
of several court decisions permitting such a sale to be rescinded as a
fraudulent conveyance, including the 1980 decision of the United States Court of
Appeals for the Fifth Circuit in Durrett v. Washington National Insurance
Company. The court in Durrett held that even a non-collusive, regularly
conducted foreclosure sale was a fraudulent transfer under section 67d of the
former Bankruptcy Act (which is analogous to section 548 of the current United
States Bankruptcy Code) and, therefore, could be rescinded in favor of the
bankrupt's estate, if (i) the foreclosure sale was held while the debtor was
insolvent and not more than one year prior to the filing of the bankruptcy
petition, and (ii) the price paid for the foreclosed property did not represent
"fair consideration" (which is analogous to "reasonably equivalent value" under
the United States Bankruptcy
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Code). However, on May 23, 1994, Durrett was effectively overruled by the United
States Supreme Court in BFP v. Resolution Trust Corporation, as Receiver for
Imperial Federal Savings and Loan Association, et al., in which the Court held,
in relevant part, that " `reasonable equivalent value', for the foreclosed
property, is the price in fact received at foreclosure sale, so long as all the
requirements of the State's foreclosure law have been complied with."
For these reasons, it is common for the lender to purchase the property
from the trustee or referee for an amount equal to some or all of the principal
amount of the indebtedness secured by the mortgage or deed of trust, accrued and
unpaid interest and the expenses of foreclosure. The lender thereby assumes the
burdens of ownership, including the obligation to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to render
the property suitable for sale. In some states there is a statutory minimum
purchase price which the lender may offer for the property. 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 from the sale of the property may be
substantially less than the loan balance.
A second mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage, in which case it
must either pay the entire amount due on the first mortgage to the first
mortgagee prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the first mortgage in the event the mortgagor is
in default thereunder, in either event adding the amounts expended to the
balance due on the second loan, and may be subrogated to the rights of the first
mortgagee. In addition, in the event that the foreclosure of a second mortgage
triggers the enforcement of a "due-on-sale" clause, the second mortgagee may be
required to pay the full amount of the first mortgage to the first mortgagee.
Accordingly, with respect to those Single Family Loans which are second mortgage
loans, if the lender purchases the property, the lender's title will be subject
to all senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale generally
are applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. Any remaining proceeds are generally payable to
the holders of junior mortgages or deeds or trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceedings.
Under the Pooling and Servicing Agreement (and the REMIC Provisions of the
Code), the Master Servicer may hire an independent contractor to operate any REO
Property. The costs of such operation may be significantly greater than the cost
of direct operation by the Master Servicer.
Some states impose prohibitions or limitations on remedies available to
the mortgagee, including the right to recover the debt from the mortgagor. See
"--Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
Junior Mortgages
Some of the Single Family Loans may be secured by second or more junior
mortgages or deeds of trust, which are subordinate to first or more senior
mortgages or deeds of trust held by other lenders. The rights of the holders, as
the holders of a junior deed of trust or a junior mortgage, are subordinate in
lien and in payment to those of the holder of the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive and apply hazard insurance and condemnation proceeds and, upon default
of the mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure
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proceedings by the holder of the senior mortgage the junior mortgagee's or
junior beneficiary's lien will be extinguished unless the junior mortgagee
satisfies the defaulted senior loan or asserts its subordinate interest in a
property in foreclosure proceedings. See "--Foreclosure in General" herein.
Furthermore, the terms of the second or more junior mortgage or deed of
trust are subordinate to the terms of the first or senior mortgage or deed of
trust. In the event of a conflict between the terms of the senior mortgage or
deed of trust and the junior mortgage or deed of trust, the terms of the senior
mortgage deed of trust will govern generally. Upon a failure of the mortgagor or
trustor to perform any of its obligations, the senior mortgagee or beneficiary,
subject to the terms of the senior mortgage or deed of trust, may have the right
to perform the obligation itself. Generally, all sums so expended by the
mortgagee or beneficiary become part of the indebtedness secured by the mortgage
or deed of trust. To the extent a senior mortgagee expends such sums, such sums
will generally have priority over all sums due under the junior mortgage. See
"Risk Factors--Risks of the Mortgage Loans--Nature of Security" for a further
discussion of certain risks associated with junior mortgage loans.
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 some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. 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 rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has expired.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment would be a personal judgment
against the former borrower equal in most cases to the difference between the
net amount realized upon the public sale of the real property and the amount due
to the lender. Other 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. Finally, other statutory provisions limit any deficiency judgment
against the former borrower following a judicial 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 judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through a Chapter 11 or
Chapter 13 plan to cure a monetary default in respect of a mortgage loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original mortgage loan payment schedule even though the lender
accelerated the mortgage loan and final judgment of foreclosure had been entered
in state court provided no sale of the residence had yet occurred prior to the
filing of the debtor's petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a mortgage loan default by
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paying arrearages over a number of years. Also, if the last payment on the
original payment schedule for a loan secured only by a security interest in real
property that is the debtor's principal residence is due before the date on
which the final payment on a Chapter 13 plan is due, the Chapter 13 plan may
provide for the payment of the claim as modified pursuant to the Chapter 13
plan. If a Chapter 13 plan proposes to cure a default, the amount necessary to
cure the default is determined in accordance with the underlying agreement and
applicable nonbankruptcy law. This effectively overrules Rake v. Wade, 113 S.
Ct. 2187 (1993).
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
13 except with respect to mortgage payment arrearages, which may be cured within
a reasonable time period.
Courts with federal bankruptcy jurisdiction have also approved full or
partial surrender of collateral in full or partial satisfaction of the debt
based on appraisal evidence that may or may not reflect the amount ultimately
received from a sale of the collateral. Courts with federal bankruptcy
jurisdiction have also approved full or partial substitution of new collateral
for the existing collateral, including but not limited to stock and partnership
interests, based on appraisal evidence that may or may not reflect the amount
ultimately received from a sale of the substitute collateral.
The United States Bankruptcy Code provides priority to certain tax liens
over the lien of the mortgage. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act, and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the applicable laws. In some cases, this liability
may affect assignees of the Mortgage Loans.
Enforceability of Certain Provisions
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans will include a debt-acceleration clause, which permits the
lender to accelerate the debt upon a monetary default of the borrower, after the
applicable cure period. The courts of all states will enforce clauses providing
for acceleration in the event of a material payment default. However, courts of
any state, exercising equity jurisdiction, may refuse to allow a lender to
foreclose a mortgage or deed of trust when an acceleration of the indebtedness
would be inequitable or unjust and the circumstances would render the
acceleration unconscionable.
Some courts have imposed general equitable principles to limit the
remedies available in connection with foreclosure. These equitable principles
are generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. For example, some courts have required that
the lender undertake affirmative and expensive actions to determine the causes
for the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lenders' judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lenders to foreclose if the default under the mortgage instrument or deed
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of trust is not monetary, such as the borrower's failure to maintain adequately
the property or the borrower's execution of a second mortgage or deed of trust
affecting the property. Finally, some courts have been willing to relieve a
borrower from the consequences of the default if the borrower has not received
adequate notice of the default.
Unless otherwise specified in the related Prospectus Supplement the
Mortgage Loans will generally contain due-on-sale clauses, which permit the
lender to accelerate the maturity of the Mortgage Loan if the borrower sells,
transfers, or conveys the related Mortgaged Property. The enforceability of
these clauses has been the subject of legislation or litigation in many states.
Some jurisdictions automatically enforce such clauses, while others require a
showing of reasonableness and hold, on a case-by-case basis, that a "due on
sale" clause may be invoked only where a sale threatens the legitimate security
interests of the lender.
The Garn-St. Germain Depository Institutions Act of 1982 purports to
preempt state laws which prohibit the enforcement of "due-on-sale" provisions in
certain loans made after October 15, 1982. The Master Servicer may thus be able
to accelerate the Mortgage Loans that were originated after that date and
contain a "due-on-sale" provision, upon transfer of an interest in the related
Mortgaged Property, regardless of its ability to demonstrate that a sale
threatens its legitimate security interest. Each Pooling and Servicing Agreement
will provide that the Master Servicer, on behalf of the Trustee, will enforce
any right of the Trustee as the mortgagee of record to accelerate a Mortgage
Loan in the event of a sale or other transfer of the related Mortgaged Property
unless, in the Master Servicer's reasonable judgment, doing so would materially
increase the risk of default or delinquency on, or materially impair the
security for, such Mortgage Loan.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March, 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges. The Seller will represent and warrant in
the related Purchase and Sale Agreement that each related Mortgage Loan was
originated in compliance with applicable state law in all material respects.
Environmental Legislation
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and possibly under state law in a number of states, a secured party
which takes a deed in lieu of foreclosure, acquires a mortgaged property at a
foreclosure sale or which has been involved in decisions which may lead to
contamination of a property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as the related Trust).
The Pooling and Servicing Agreement requires that the Master Servicer, in making
a determination to foreclose on or otherwise acquire a Mortgaged Property, take
into account (and the Master Servicer is not required to foreclose or otherwise
acquire a Mortgaged Property in the case of) the existence of hazardous wastes
or hazardous substances on such Mortgaged Property. If title to a Mortgaged
Property securing a Mortgage Loan is acquired by a Trust and
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cleanup costs are incurred in respect of the Mortgaged Property, the holders of
the Certificates might incur a loss if such costs were required to be paid by
the Trust and sufficient funds were not available from any Reserve Account,
Spread Account or similar account or from collections on the Mortgage Loans.
Forfeitures in Drug and RICO Proceedings
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that (i) its mortgage was executed and recorded before commission of
the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
The Contracts
General. As a result of the Depositor's assignment of the Contracts to the
Trustee, the holders of Certificates will succeed collectively to all the rights
(including the right to receive payment on the Contracts) and will assume
certain obligations of the Depositor. Each Contract evidences both (a) the
obligation of the obligor to repay the loan evidenced thereby, and (b) the grant
of a security interest in the Manufactured Home to secure repayment of such
loan. Certain aspects of both features of the Contracts are described more fully
below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the Manufactured Homes initially were registered.
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 Pooling and
Servicing Agreement, the Depositor will transfer physical possession of the
Contracts to the Trustee or its custodians. In addition, the Depositor will
cause to be made an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the Contracts.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any Manufactured Home securing
a Contract is registered. In the event the Depositor fails, due to clerical
errors, to effect such notation or delivery, or files the security interest
under the wrong law (for example, under a motor vehicle title statute rather
than under the UCC, in a few states), the Trustee may not have a first priority
security interest in the Manufactured Home securing a Contract. As manufactured
homes have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the manufactured home under applicable state
real estate law. In order to perfect a security interest in a manufactured home
under real estate law, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state
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where the manufactured home is located. These filings must be made in the real
estate records office of the county where the manufactured home is located. So
long as the Mortgagor does not violate this agreement, a security interest in
the Manufactured Home will be governed by the certificate of title laws or the
UCC, and the notation of the security interest on the certificate of title or
the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to a site, other parties could obtain
an interest in the Manufactured Home which is prior to the security interest
transferred to the Trustee. With respect to a Series of Certificates and as
described in the related Prospectus Supplement, the Depositor may be required to
perfect a security interest in the Manufactured Home under applicable real
estate laws. If such real estate filings are not required and if any of the
foregoing events were to occur, the only recourse would be to pursue the Trust's
rights to require the Seller to repurchase for breach of warranties.
The Depositor will assign its security interest in the Manufactured Homes
to the Trustee. Neither the Depositor nor the Trustee will amend the
certificates of title to identify the Trust as the new secured party.
Accordingly, the Depositor will continue to be named as the secured party on the
certificates of title relating to the Manufactured Homes. In most states, such
assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the Depositor's rights as the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be held
effective against creditors of the Depositor.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trust against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest is not perfected, such security interest would be subordinate to, among
others, subsequent purchasers for value of Manufactured Homes and holders of
perfected security interests. There also exists a risk in not identifying the
Trust as the new secured party on the certificate of title that, through fraud
or negligence, the security interest of the Trust could be released.
Enforcement of Security Interests in Manufactured Homes. The Master
Servicer on behalf of the Trustee, to the extent required by the related Pooling
and Servicing Agreement, may take action to enforce the Trustee's security
interest with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such Contracts in default. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home 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 certain 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 so that
the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled to
be paid out of the sale proceeds before such proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter only if and after
the owner registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured
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Home to another state and not re-register the Manufactured Home in such state,
and if steps are not taken to re-perfect the Trustee's security interest in such
state, the security interest in the Manufactured Home would cease to be
perfected. A majority of states generally require surrender of a certificate of
title to re-register a Manufactured Home; accordingly, the Trustee must
surrender possession if it holds the certificate of title to such Manufactured
Home, or, in the case of a Manufactured Home registered in a state which
provides for notation of lien, the Trustee would receive notice of surrender if
the security interest in the Manufactured Home is noted on the certificate of
title. Accordingly, the Trustee would have the opportunity to re-perfect its
security interest in the Manufactured Home in the state of relocation. In states
which do not require a certificate of title for registration of a Manufacture
Home, re-registration could defeat perfection. In the ordinary course of
servicing the Contracts, the Master Servicer will be required to take steps to
effect such re-perfection upon receipt of notice of reregistration or
information from the obligor as to relocation. Similarly, when an obligor under
a Contract sells a Manufactured Home, the Trustee must surrender possession of
the certificate of title or will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related Contract before release of the lien. Under each Pooling and Servicing
Agreement, the Master Servicer is obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Seller will represent in the related Purchase and Sale Agreement that there are
no such liens with respect to any Manufactured Home securing payment on any
Contract. However, such liens could arise at any time during the term of a
Contract. No notice will be given to the Trustee in the event such a lien
arises.
Under the laws of most states, a creditor is entitled to obtain a
deficiency judgment from a debtor for any deficiency on repossession and resale
of the manufactured home securing such debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments.
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. Numerous federal and state consumer protection
laws impose requirements applicable to the origination of 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.
Transfer of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses.
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the lender and permit the acceleration
of the maturity of the Contracts by the lender upon any such sale or transfer
for which consent has not been granted. In certain cases, the transfer may be
made by a delinquent obligor in order to avoid a repossession proceeding with
respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes.
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LEGAL INVESTMENT MATTERS
The Certificates may, if so set forth in the related Prospectus
Supplement, constitute "mortgage related securities" for purposes of SMMEA, so
long as they are rated in one of the two highest rating categories by the Rating
Agency or Agencies identified in the related Prospectus Supplement and, as such,
would be legal investments for persons, trusts, corporations, partnership,
associations, business trusts and business entities (including but not limited
to state-chartered savings banks, commercial banks, saving and loan associations
and insurance companies, as well as trustees and state government employee
retirement systems) created pursuant to or existing under the laws of the United
States or any state (including the District of Columbia and Puerto Rico) whose
authorized investments are subject to state regulation to the same extent that,
under applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, in all states which
enacted legislation prior to October 4, 1991 specifically limiting the legal
investment authority of any of such entities with respect to "mortgage related
securities," the Certificates will constitute legal investments for entities
subject to such legislation only to the extent provided in such legislation.
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 any securities or require the sale or other disposition of any
securities, so long as such contractual commitment was made or such securities
were acquired prior to the enactment of such legislation. Alaska, Arkansas,
Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina,
Ohio, South Dakota, Utah, Virginia and West Virginia each enacted legislation
overriding the exemption afforded by SMMEA prior to the October 4, 1991
deadline.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain Classes of the Certificates. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the FDIC,
the OTS, the NCUA or other federal or state agencies with similar authority
should review any applicable rule, guidelines and regulations prior to
purchasing the Certificates. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement"). The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC and the OTS with respect to the depository institutions
that they regulate. The Policy Statement prohibits depository institutions from
investing in certain "high-risk mortgage securities" except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. 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.
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.
Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of certain anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code") and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
Further, the authorities on which this discussion, and the opinion referred to
below, are based are subject to change or differing interpretations, which could
apply retroactively. Taxpayers and preparers of tax returns (including those
filed by any REMIC or other issuer) should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice (i) is given with
respect to events that have occurred at the time the advice is rendered and is
not given with respect to the consequences of contemplated actions, and (ii) is
directly relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their own tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "State and Other Tax Consequences."
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities ("REMIC Certificates")
representing interests in a Trust, or a portion thereof, which the Trustee will
covenant to elect to have treated as a REMIC under Sections 860A through 860G
(the "REMIC Provisions") of the Code. The Prospectus Supplement for each series
of Certificates will indicate whether a REMIC election (or elections) will be
made for the related Trust and, if such an election is to be made, will identify
all "regular interests" and "residual interests" in the REMIC. For purposes of
this tax discussion, references to a "Certificateholder" or a "holder" are to
the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations, which are effective
with respect to debt instruments issued on or after April 4, 1994, do not
adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
REMICS
Classification of REMICs
Upon the issuance of each series of REMIC Certificates, the special tax
counsel to the Depositor identified in the related Prospectus Supplement ("Tax
Counsel") will deliver their opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the related Trust (or each applicable portion thereof) will qualify as a REMIC
and the REMIC Certificates offered with respect thereto will be considered to
evidence ownership of "regular interests" ("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual Certificates") in that REMIC within the
meaning of the REMIC Provisions.
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If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a separate
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust's status as a REMIC under the
REMIC Provisions. It is not anticipated that the status of any Trust as a REMIC
will be terminated.
Characterization of Investments in REMIC Certificates
In general, in the opinion of Tax Counsel, the REMIC Certificates will be
"qualifying real property loans" within the meaning of Section 593(d) of the
Code, "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code and assets described in Section 7701(a)(19)(C) of the Code in the same
proportion that the assets of the REMIC underlying such Certificates would be so
treated. Moreover, in the opinion of Tax Counsel, if 95% or more of the assets
of the REMIC qualify for any of the foregoing treatments at all times during a
calendar year, the REMIC Certificates will qualify for the corresponding status
in their entirety for that calendar year. Interest (including original issue
discount) on the REMIC Regular Certificates and income allocated to the class of
REMIC Residual Certificates will be interest described in Section 856(c)(3)(B)
of the Code to the extent that such Certificates are treated as "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code. In addition, in
the opinion of Tax Counsel, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3)(C) of the Code if
transferred to another REMIC on its startup day in exchange for regular or
residual interests therein. The determination as to the percentage of the
REMIC's assets that constitute assets described in the foregoing sections of the
Code will be made with respect to each calendar quarter based on the average
adjusted basis of each category of the assets held by the REMIC during such
calendar quarter. The Trustee will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Primary Assets,
payments on Primary Assets held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Primary Assets, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Primary Assets for purposes of all of the foregoing sections. In
addition, in some instances Primary Assets may not be treated entirely as assets
described in the foregoing sections. If so, the related Prospectus Supplement
will describe the Primary Assets that may not be so treated. The REMIC
Regulations do provide, however, that payments on Primary Assets held pending
distribution are considered part of the Primary Assets for purposes of Sections
593(d) and 856(c)(5)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate elections
may be made to treat designated portions of the related Trust as REMICs ("Tiered
REMICs") for federal income tax purposes. Upon the issuance of any such series
of REMIC Certificates, Tax Counsel will deliver their opinion generally to the
effect that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and the
REMIC Certificates issued by the Tiered REMICs, respectively, will be considered
to evidence ownership of REMIC Regular Certificates or REMIC Residual
Certificates in the related REMIC within the meaning of the REMIC Provisions.
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Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701 (a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates
General
Except as otherwise stated in this discussion, in the opinion of Tax
Counsel, REMIC Regular Certificates will be treated for federal income tax
purposes as debt instruments issued by the REMIC and not as ownership interests
in the REMIC or its assets. Moreover, holders of REMIC Regular Certificates that
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
Original Issue Discount
In the opinion of Tax Counsel, certain REMIC Regular Certificates may be
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in income
as it accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to such income. In addition, Section 1272(a)
(6) of the Code provides special rules applicable to REMIC Regular Certificates
and certain other debt instruments issued with original issue discount.
Regulations have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Primary Assets held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Committee Report indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption used by the Trustee in reporting original
issue discount for each series of REMIC Regular Certificates (the "Prepayment
Assumption") will be consistent with this standard and will be disclosed in the
related Prospectus Supplement. However, neither the Depositor, the Trustee nor
the Master Servicer will make any representation that the Mortgage Loans will in
fact prepay at a rate conforming to the Prepayment Assumption or at any other
rate.
In the opinion of Tax Counsel, the original issue discount, if any, on a
REMIC Regular Certificate will be the excess of its stated redemption price at
maturity over its issue price. The issue price of a particular class of REMIC
Regular Certificates will be the first cash price at which a substantial amount
of REMIC Regular Certificates of that class is sold (excluding sales to bond
houses, brokers and underwriters). If less than a substantial amount of a
particular class of REMIC Regular Certificates is sold for cash on or prior to
the date of their initial issuance (the "Closing Date"), the issue price for
such class will be treated as the fair market value of such class on the Closing
Date. Under the OID Regulations, the stated redemption price of a REMIC Regular
Certificate is equal to the total of all payments to be made on such Certificate
other than "qualified stated interest." "Qualified stated interest" includes
interest that is unconditionally payable at least annually at a single fixed
rate, or in the case of a variable rate debt instrument, at a "qualified
floating rate," an "objective rate," a combination of a single fixed rate and
one or more "qualified floating rates" or one "qualified inverse floating rate,"
or a combination of "qualified
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floating rates" that generally does not operate in a manner that accelerates or
defers interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. Generally, an adjustable rate instrument that
is determined to have original issue discount is converted to a fixed rate
instrument for which a schedule of hypothetical accruals is determined. Original
issue discount on the adjustable rate instrument is accrued in accordance with
that schedule with adjustments in each period to account for the divergence of
the actual interest rate on the instrument from the interest rate for that
period assumed in the preparation of the hypothetical schedule.
Certain Classes of the REMIC Regular Certificates may provide for the
first interest payment with respect to such Certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" for original issue discount is each monthly period that ends on a
Distribution Date, in some cases, as a consequence of this "long first accrual
period," some or all interest payments may be required to be included in the
stated redemption price of the REMIC Regular Certificate and accounted for as
original issue discount. Because interest on REMIC Regular Certificates must in
any event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that portion of the
interest paid on the first Distribution Date in excess of interest accrued for a
number of days corresponding to the number of days from the Closing Date to the
first Distribution Date should be included in the stated redemption price of
such REMIC Regular Certificate. However, the OID Regulations state that all or
some portion of such accrued interest may be treated as a separate asset the
cost of which is recovered entirely out of interest paid on the first
Distribution Date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount, in the
opinion of Tax Counsel, original issue discount on a REMIC Regular Certificate
will be considered to be de minimis if it is less than 0.25% of the stated
redemption price of the REMIC Regular Certificate multiplied by its weighted
average life. For this purpose, the weighted average life of the REMIC Regular
Certificate is computed as the sum of the amounts determined, as to each payment
included in the stated redemption price of such REMIC Regular Certificate, by
multiplying (i) the number of complete years (rounding down for partial years)
from the issue date until such payment is expected to be made (presumably taking
into account the Prepayment Assumption) by (ii) a fraction, the numerator of
which is the amount of the payment, and the denominator of which is the stated
redemption price at maturity of such REMIC Regular Certificate. Under the OID
Regulations, original issue discount of only a de minimis amount (other than de
minimis original issue discount attributable to a so-called "teaser" interest
rate or an initial interest holiday) will be included in income as each payment
of stated principal is made, based on the product of the total amount of such de
minimis original issue discount and a fraction, the numerator of which is the
amount of such principal payment and the denominator of which is the outstanding
stated principal amount of the REMIC Regular Certificate. The OID Regulations
also would permit a Certificateholder to elect to accrue de minimis original
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issue discount into income currently based on a constant yield method. See
"--Taxation of Owners of REMIC Regular Certificates--Market Discount" for a
description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of
a de minimis amount, in the opinion of Tax Counsel, the holder of such
Certificate must include in ordinary gross income the sum of the "daily
portions" of original issue discount for each day during its taxable year on
which it held such REMIC Regular Certificate, including the purchase date but
excluding the disposition date. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount will be
determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(i) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the Mortgage Loans being prepaid at a rate
equal to the Prepayment Assumption and (ii) using a discount rate equal to the
original yield to maturity of the Certificate. For these purposes, the original
yield to maturity of the Certificate will be calculated based on its issue price
and assuming that distributions on the Certificate will be made in all accrual
periods based on the Primary Assets being prepaid at a rate equal to the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such
Certificate, increased by the aggregate amount of original issue discount that
accrued with respect to such Certificate in prior accrual periods, and reduced
by the amount of any distributions made on such REMIC Regular Certificate in
prior accrual periods of amounts included in its stated redemption price. The
original issue discount accruing during any accrual period, computed as
described above, will be allocated ratably to each day during the accrual period
to determine the daily portion of original issue discount for such day.
In the opinion of Tax Counsel, a subsequent purchaser of a REMIC Regular
Certificate that purchases such Certificate at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) less than its
remaining stated redemption price will also be required to include in gross
income the daily portions of any original issue discount with respect to such
Certificate. However, each such daily portion will be reduced, if such cost is
in excess of its "adjusted issue price," in proportion to the ratio such excess
bears to the aggregate original issue discount remaining to be accrued on such
REMIC Regular Certificate. The adjusted issue price of a REMIC Regular
Certificate on any given day equals the sum of (i) the adjusted issue price (or,
in the case of the first accrual period, the issue price) of such Certificate at
the beginning of the accrual period which includes such day and (ii) the daily
portions of original issue discount for all days during such accrual period
prior to such day.
Market Discount
In the opinion of Tax Counsel, a Certificateholder that purchases a REMIC
Regular Certificate at a market discount, that is, in the case of a REMIC
Regular Certificate issued without original issue discount, at a purchase price
less than its remaining stated principal amount, or in the case of a REMIC
Regular Certificate issued with original issue discount, at a purchase price
less than its adjusted issue price, will
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recognize income upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "--Taxation of Owners of REMIC
Regular Certificates--Premium." Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable.
However, in the opinion of Tax Counsel, market discount with respect to a
REMIC Regular Certificate will be considered to be de minimis for purposes of
Section 1276 of the Code if such market discount is less than 0.25% of the
remaining stated redemption price of such REMIC Regular Certificate multiplied
by the number of complete years to maturity remaining after the date of its
purchase. In interpreting a similar rule with respect to original issue discount
on obligations payable in installments, the OID Regulations refer to the
weighted average maturity of obligations, and it is likely that the same rule
will be applied with respect to market discount, presumably taking into account
the Prepayment Assumption. If market discount is treated as de minimis under
this rule, it appears that the actual discount would be treated in a manner
similar to original issue discount of a de minimis amount. See "--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount." Such treatment
would result in discount being included in income at a slower rate than discount
would be required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Conference Committee Report (the "Committee Report")
apply. The Committee Report indicates that in each accrual period market
discount on REMIC Regular Certificates should accrue, at the Certificateholder's
option: (i) on the basis of a constant yield method, (ii) in the case of a REMIC
Regular Certificate issued without original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total amount of stated interest
remaining to be paid on the REMIC Regular Certificate as of the beginning of the
accrual period, or (iii) in the case of a REMIC Regular Certificate issued with
original issue discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount accrued in the accrual
period bears to the total original issue discount remaining on the REMIC Regular
Certificate at the beginning of the accrual period. Moreover, the Prepayment
Assumption used in calculating the accrual of original issue discount is to be
used in calculating the accrual of market discount. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a REMIC
Regular Certificate purchased at a discount in the secondary market.
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To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includable in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includable in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium
In the opinion of Tax Counsel, a REMIC Regular Certificate purchased at a
cost (excluding any portion of such cost attributable to accrued qualified
stated interest) greater than its remaining stated redemption price will be
considered to be purchased at a premium. The holder of such a REMIC Regular
Certificate may elect under Section 171 of the Code to amortize such premium
under the constant yield method over the life of the Certificate. If made, such
an election will apply to all debt instruments having amortizable bond premium
that the holder owns or subsequently acquires. Amortizable premium will be
treated as an offset to interest income on the related REMIC Regular
Certificate, rather than as a separate interest deduction. The OID Regulations
also permit Certificateholders to elect to include all interest, discount and
premium in income based on a constant yield method, further treating the
Certificateholder as having made the election to amortize premium generally. See
"--Taxation of Owners of REMIC Regular Certificates--Market Discount." The
Committee Report states that the same rules that apply to accrual of market
discount (which rules will require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have original issue discount) will also apply in
amortizing bond premium under Section 171 of the Code.
Realized Losses
In the opinion of Tax Counsel, under Section 166 of the Code, both
corporate holders of the REMIC Regular Certificates and noncorporate holders of
the REMIC Regular Certificates that acquire such Certificates in connection with
a trade or business should be allowed to deduct, as ordinary losses, any losses
sustained during a taxable year in which their Certificates become wholly or
partially worthless as the result of one or more realized losses on the Primary
Assets. However, it appears that a noncorporate holder that does not acquire a
REMIC Regular Certificate in connection with a trade or business will not be
entitled to deduct a loss under Section 166 of the Code until such holder's
Certificate becomes wholly worthless (i.e., until its outstanding principal
balance has been reduced to zero) and that the loss will be characterized as a
short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Primary Assets until it can be established that any such
reduction ultimately will not be recoverable. As a result, the amount of taxable
income reported in any period by the holder of a REMIC Regular Certificate could
exceed the amount of economic income actually realized by
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the holder in such period. Although the holder of a REMIC Regular Certificate
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General
As residual interests, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Primary Assets or as debt instruments issued by the
REMIC.
In the opinion of Tax Counsel, a holder of a REMIC Residual Certificate
generally will be required to report its daily portion of the taxable income or,
subject to the limitations noted in this discussion, the net loss of the REMIC
for each day during a calendar quarter that such holder owned such REMIC
Residual Certificate. For this purpose, the taxable income or net loss of the
REMIC will be allocated to each day in the calendar quarter ratably using a "30
days per month/90 days per quarter/360 days per year" convention unless
otherwise disclosed in the related Prospectus Supplement. The daily amounts will
then be allocated among the REMIC Residual Certificateholders in proportion to
their respective ownership interests on such day. Any amount included in the
gross income or allowed as a loss of any REMIC Residual Certificateholder by
virtue of this allocation will be treated as ordinary income or loss. The
taxable income of the REMIC will be determined under the rules described below
in "--Taxable Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers subject to
limitations under Section 469 of the Code on the deductibility of "passive
losses."
In the opinion of Tax Counsel, a holder of a REMIC Residual Certificate
that purchased such Certificate from a prior holder of such Certificate also
will be required to report on its federal income tax return amounts representing
its daily portion of the taxable income (or net loss) of the REMIC for each day
that it holds such REMIC Residual Certificate. These daily portions generally
will equal the amounts of taxable income or net loss determined as described
above. The Committee Report indicates that certain modifications of the general
rules may be made, by regulations, legislation or otherwise, to reduce (or
increase) the income or loss of a holder of a REMIC Residual Certificateholder
that purchased such REMIC Residual Certificate from a prior holder of such
Certificate at a price greater than (or less than) the adjusted basis such REMIC
Residual Certificate would have had in the hands of an original holder of such
Certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includable
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates, because it is unlikely that unrelated
deductions will be available to offset such income due to
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the rules relating to "excess inclusions," residual interests without
"significant value" and "noneconomic" residual interests discussed below. The
fact that the tax liability associated with the income allocated to REMIC
Residual Certificateholders may exceed the cash distributions received by such
REMIC Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return.
Taxable Income of the REMIC
In the opinion of Tax Counsel, the taxable income of the REMIC will equal
the income from the Primary Assets, including stated interest and any OID or
market discount on the Mortgage Loans, and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses to
REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by the amortization of
any premium received on issuance) on the REMIC Regular Certificates (and any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby), amortization of any premium on the Primary Assets, bad debt
deductions with respect to the Primary Assets and, except as described below,
for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the Trustee
intends to treat the fair market value of the Mortgage Loans as being equal to
the aggregate issue prices of the REMIC Regular Certificates and REMIC Residual
Certificates. Such aggregate basis will be allocated among the Mortgage Loans
collectively and the other assets of the REMIC in proportion to their respective
fair market values. The issue price of any REMIC Certificates offered hereby
will be determined in the manner described above under "--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount." Accordingly, if one or
more classes of REMIC Certificates are retained initially rather than sold, the
Trustee may be required to estimate the fair market value of such interests in
order to determine the basis of the REMIC in the Primary Assets and other
property held by the REMIC.
Subject to the possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Primary Assets that it holds will be equivalent to the
method of accruing original issue discount income for REMIC Regular
Certificateholders (that is, under the constant yield method taking into account
the Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such discount in income currently, as it accrues, on a
constant interest basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method of accruing discount income that
is analogous to that required to be used by a REMIC as to Primary Assets with
market discount that it holds.
In the opinion of Tax Counsel, Primary Assets will be deemed to have been
acquired with discount (or premium) to the extent that the REMIC's basis
therein, determined as described in the preceding paragraph, is less than (or
greater than) its stated redemption price. Any such discount will be includable
in the income of the REMIC as it accrues, in advance of receipt of the cash
attributable to such income, under a method similar to the method described
above for accruing original issue discount on the REMIC Regular Certificates. It
is anticipated that each REMIC will elect under Section 171 of the Code to
amortize any premium on the Primary Assets. Premiums on Primary Assets to which
such election applies may be amortized under a constant yield method, presumably
taking into account a Prepayment Assumption.
In the opinion of Tax Counsel, the REMIC will be allowed deductions for
interest (including original issue discount) on the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) equal to the deductions that would
be allowed if the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
were indebtedness of the REMIC. Original issue
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discount will be considered to accrue for this purpose as described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount,"
except that the de minimis rule and the adjustments for subsequent holders of
REMIC Regular Certificates (including any other Class of Certificates
constituting "regular interests" in the REMIC not offered hereby) described
therein will not apply.
In the opinion of Tax Counsel, if a class of REMIC Regular Certificates is
issued at a price in excess of the stated redemption price of such class (such
excess, "Issue Premium"), the REMIC will have an additional item of income in
each taxable year in an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of the REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions." If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions
In the opinion of Tax Counsel, the adjusted basis of a REMIC Residual
Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made, and
by net losses allocated, to such REMIC Residual Certificateholder.
In the opinion of Tax Counsel, a REMIC Residual Certificateholder is not
allowed to take into account any net loss for any calendar quarter to the extent
such net loss exceeds such REMIC Residual Certificateholder's adjusted basis in
its REMIC Residual Certificate as of the close of such calendar quarter
(determined without regard to such net loss). Any loss that is not currently
deductible by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Certificate. The ability of REMIC
Residual Certificateholders to deduct net losses may be subject to additional
limitations under the Code, as to which REMIC Residual Certificateholders should
consult their tax advisors.
In the opinion of Tax Counsel any distribution on a REMIC Residual
Certificate will be treated as a non-taxable return of capital to the extent it
does not exceed the holder's adjusted basis in such REMIC Residual Certificate.
To the extent a distribution on a REMIC Residual Certificate exceeds such
adjusted basis, it will be treated as gain from the sale of such REMIC Residual
Certificate. Holders of certain REMIC Residual Certificates may be entitled to
distributions early in the term of the related REMIC under circumstances in
which their bases in such REMIC Residual Certificates will not be sufficiently
large that such distributions will be treated as nontaxable returns of capital.
Their bases in such REMIC Residual Certificates will initially equal the amount
paid for such REMIC Residual Certificates and will be increased by their
allocable shares of taxable income of the Trust. However, such basis increases
may not occur until
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the end of the calendar quarter, or perhaps the end of the calendar year, with
respect to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may
not amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of its share of any net
losses of the REMIC or upon the sale of its REMIC Residual Certificate. See
"--Sales of REMIC Certificates." For a discussion of possible modifications of
these rules that may require adjustments to income of a holder of a REMIC
Residual Certificate other than an original holder in order to reflect any
difference between the cost of such REMIC Residual Certificate to such holder
and the adjusted basis such REMIC Residual Certificate would have had in the
hands of the original holder, see "--Taxation of Owners of REMIC Residual
Certificates--General."
Excess Inclusions
In the opinion of Tax Counsel, any "excess inclusions" with respect to a
REMIC Residual Certificate will, with an exception discussed below for certain
REMIC Residual Certificates held by thrift institutions, be subject to federal
income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the " daily accruals" for each day during such
quarter that such REMIC Residual Certificate was held by such REMIC Residual
Certificateholder. The "daily accruals" of a REMIC Residual Certificateholder
will be determined by allocating to each day during a calendar quarter its
ratable portion of the product of the "adjusted issue price" of the REMIC
Residual Certificate at the beginning of the calendar quarter and 120% of the
"long-term federal rate" in effect on the Closing Date. For this purpose, the
adjusted issue price of a REMIC Residual Certificate as of the beginning of any
calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by all distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates" below.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions, losses
or loss carryovers, but only if the REMIC Residual Certificates are considered
to have "significant value." The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to 2% of the aggregate issue prices of
all of the related REMIC's Regular and Residual Certificates. In addition, based
on the Prepayment Assumption, the anticipated weighted average life of the
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REMIC Residual Certificates must equal or exceed 20% of the anticipated weighted
average life of the REMIC, based on the Prepayment Assumption and on any
required or permitted clean up calls or required qualified liquidation provided
for in the REMIC's organizational documents. Although it has not done so, the
Treasury also has authority to issue regulations that would treat the entire
amount of income accruing on a REMIC Residual Certificate as an excess inclusion
if the REMIC Residual Certificates are considered not to have "significant
value." The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered to have "significant value" under the
REMIC Regulations; provided, however, that any disclosure that a REMIC Residual
Certificate will have "significant value" will be based upon certain
assumptions, and the Depositor will make no representation that a REMIC Residual
Certificate will have "significant value" for purposes of the above-described
rules. The above-described exception for thrift institutions applies only to
those residual interests held directly by, and deductions, losses and loss
carryovers incurred by, such institutions (and not by other members of an
affiliated group of corporations filing a consolidated income tax return) or by
certain wholly-owned direct subsidiaries of such institutions formed or operated
exclusively in connection with the organization and operation of one or more
REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls, or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the "applicable federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) on the REMIC Residual Certificate equals at
least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee, as to which the transferor
also is required to make a reasonable investigation to determine such
transferee's historic payment of its debts and ability to continue to pay its
debts as they come due in the future. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of such REMIC Residual Certificate by such a purchaser to
another purchaser at some future date may be disregarded in accordance with the
above-described rules which would result in the retention of tax liability by
such purchaser.
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The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
Mark-to-Market Rules
On January 4, 1995, the IRS released proposed regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate issued after January 4, 1995 would not
be treated as a security and thus generally could not be marked to market.
Prospective purchasers of a REMIC Residual Certificate should consult their tax
advisors regarding the possible application of the mark-to-market requirement to
REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate 2% of a taxpayer's adjusted gross income. In
addition, Section 68 of the Code provides that the amount of itemized deductions
otherwise allowable for an individual whose adjusted gross income exceeds a
specified amount will be reduced by the lesser of (i) 3% of the excess of the
individual's adjusted gross income over such amount or (ii) 80% of the amount of
itemized deductions otherwise allowable for the taxable year. The amount of
additional taxable income reportable by REMIC Certificateholders that are
subject to the limitations of either Section 67 or Section 68 of the Code may be
substantial. Furthermore, in determining the alternative minimum taxable income
of such a holder of a REMIC Certificate that is an individual, estate or trust,
or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should consult
carefully with their tax advisors prior to making an investment in such
Certificates.
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Sales of REMIC Certificates
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of Owners
of REMIC Residual Certificates--Basis Rules, Net Losses and Distributions."
Except as described below, any such gain or loss generally will be capital gain
or loss. The Code as of the date of this Prospectus provides for a top marginal
tax rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includable in
the seller's income with respect to such REMIC Regular Certificate had income
accrued thereon at a rate equal to 110% of the "applicable federal rate"
(generally, a rate based on an average of current yields on Treasury securities
having a maturity comparable to that of the Certificate, which rate is computed
and published monthly by the IRS), determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount of ordinary income actually
includable in the seller's income prior to such sale. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
such REMIC Regular Certificate at a market discount will be taxable as ordinary
income to the extent of any accrued and previously unrecognized market discount
that accrued during the period the Certificate was held. See "--Taxation of
Owners of REMIC Regular Certificates--Market Discount" herein.
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c) (1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in Certificates or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the limitation on the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if a
person who sells or otherwise disposes of a REMIC Residual Certificate
reacquires the Certificate, any other residual interest
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in a REMIC or any similar interest in a "taxable mortgage pool" (as defined in
Section 7701 (i) of the Code) within six months of the date of such sale, the
sale will be subject to the "wash sale" rules of Section 1091 of the Code. In
that event, any loss realized by the REMIC Residual Certificateholder on the
sale will not be deductible, but instead will be added to such REMIC Residual
Certificateholder's adjusted basis in the newly-acquired asset.
Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of the
negligence, bad faith or willful misconduct of the Master Servicer or the
Trustee. Any such tax not borne by the Master Servicer or the Trustee will be
payable out of the related Trust resulting in a reduction in amounts payable to
holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations
If a REMIC Residual Certificate is transferred to a "disqualified
organization," a tax would be imposed in an amount (determined under the REMIC
Regulations) equal to the product of (i) the present value (discounted using the
"applicable federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected to accrue with respect to
the Certificate, which rate is computed and published monthly by the IRS) of the
total anticipated excess inclusions with respect to such REMIC Residual
Certificate for periods after the transfer and (ii) the highest marginal federal
income tax rate applicable to corporations. The anticipated excess inclusions
must be determined as of the date that the REMIC Residual Certificate is
transferred and must be based on events that have occurred up to the time of
such transfer, the Prepayment Assumption and any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents. Such a tax generally would be imposed on the transferor of the REMIC
Residual Certificate, except that where such transfer is through an agent for a
disqualified organization, the tax would instead be imposed on such agent.
However, a transferor of a
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REMIC Residual Certificate would in no event be liable for such tax with respect
to a transfer if the transferee furnishes to the transferor an affidavit that
the transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of REMIC Residual Certificates and certain other
provisions that are intended to meet this requirement will be included in the
Pooling and Servicing Agreement, and will be discussed more fully in any
Prospectus Supplement relating to the offering of any REMIC Residual
Certificate.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in such entity, then a tax will
be imposed on such entity equal to the product of (i) the amount of excess
inclusions on the REMIC Residual Certificate that are allocable to the interest
in the pass-through entity held by such disqualified organization and (ii) the
highest marginal federal income tax rate imposed on corporations. A pass-through
entity will not be subject to this tax for any period, however, if each record
holder of an interest in such pass-through entity furnishes to such pass-through
entity (i) such holder's social security number and a statement under penalties
of perjury that such social security number is that of the record holder or (ii)
a statement under penalties of perjury that such record holder is not a
disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should be treated as
realizing a loss equal to the amount of such difference. The character of any
such loss as ordinary or capital is uncertain. Further, any such loss may be
subject to the "wash sale" rules of Section 1091 of the Code. See "--Sales of
REMIC Certificates" herein.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Code, the
REMIC will be treated as a partnership and Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee will file REMIC federal income tax returns on behalf of
the related REMIC, will be designated as and will act as the "tax matters
person" with respect to the REMIC in all respects, and generally will hold at
least a nominal amount of REMIC Residual Certificates.
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As the tax matters person, the Trustee will, subject to certain notice
requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders will generally be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the Trustee as tax matters person, and the IRS concerning any such REMIC
item. Adjustments made to the REMIC tax return may require a REMIC Residual
Certificateholder to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from such an audit,
could result in an audit of a REMIC Residual Certificateholder's return. No
REMIC will be registered as a tax shelter pursuant to Section 6111 of the Code
because it is not anticipated that any REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face certain information including the amount of original issue
discount and the issue date, and requiring such information to be reported to
the IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method requires information relating to the holder's purchase
price that the Master Servicer will not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules will
be borne by the Trustee. Certificateholders may request any information with
respect to the returns described in Section 1.6049-7(e)(2) of the Treasury
regulations. Such request should be directed to the Trustee at the address
specified in the related Prospectus Supplement.
Backup Withholding With Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax.
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Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
Foreign Investors in REMIC Certificates
A REMIC Regular Certificateholder that is not a "United States person" and
is not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC Regular
Certificate will not be subject to United States federal income or withholding
tax in respect of a distribution on a REMIC Regular Certificate, provided that
the holder complies to the extent necessary with certain identification
requirements (including delivery of a statement, signed by the Certificateholder
under penalties of perjury, certifying that such Certificateholder is not a
United States person and providing the name and address of such
Certificateholder). For these purposes, "United States person" means a citizen
or resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, or an estate or trust whose income from sources
without the United States is includable in gross income for United States
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States. It is possible that the IRS may
assert that the foregoing tax exemption should not apply with respect to a REMIC
Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons will
be prohibited under the related Pooling and Servicing Agreement.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Certificates offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the certificates
offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section 4975
of the Code imposes similar prohibited transaction restrictions on tax-qualified
retirement or annuity plans described in Section 401(a) or 403(a) of the Code
("Qualified
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Plans") and on individual retirement accounts ("IRAs") described in Section 408
of the Code (collectively, "Tax-Favored Plans"). Generally, any person who has
discretionary authority or control respecting the management or disposition of
"plan assets" of any ERISA Plan or Tax-Favored Plan (collectively, "Plans"), and
any person who provides investment advice with respect to such assets for a fee,
is a fiduciary of the Plan involved.
Any fiduciary or other Plan investor considering whether to purchase any
Certificates on behalf of or with "plan assets" of any Plan should consult with
its counsel and refer to the applicable Prospectus Supplement for guidance
regarding the ERISA considerations applicable to the Certificates offered
thereby.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA), are not subject to the requirements of ERISA or Section 4975 of the
Code. Accordingly, assets of such plans may be invested in the Certificates
without regard to the ERISA considerations described herein and in the
applicable Prospectus Supplement, subject to the provisions of other applicable
federal and state law. However, any such plan that is a Qualified Plan and
exempt from taxation under Section 501(a) of the Code is subject to the
prohibited transaction rules set forth in Section 503(b) of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that an ERISA Plan's
investments be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "plan assets" of Plans and persons (referred to as "parties in
interest" in ERISA or "disqualified persons" in Section 4975 of the Code) who
have certain specified relationships to the Plans, unless a statutory or
administrative exemption is available. Certain "parties in interest" (or
"disqualified persons") that participate in a prohibited transaction may be
subject to a penalty or an excise tax imposed pursuant to Section 502 of ERISA
or Section 4975 of the Code, unless a statutory or administrative exemption is
available.
Plan Asset Regulation
An investment of Plan Assets in Certificates may cause the Mortgage Loans
and other assets of the related Trust to be deemed "plan assets" of all Plans
involved. Section 2510.3-101 of the U.S. Department of Labor (the "DOL")
regulations (the "DOL Regulation") addresses whether a Plan's assets would be
deemed to include an interest in the underlying assets of an entity (such as a
Trust), for purposes of applying the general fiduciary responsibility provisions
of ERISA and the prohibited transaction provisions of ERISA and Section 4975 of
the Code, when a Plan acquires an "equity interest" (such as a Certificate) in
such entity. Because of the factual nature of certain of the rules set forth in
the DOL Regulation, the assets of a Plan which acquires Certificates of any
Class may be deemed to include merely its interest in the Certificates or both
such interest and an undivided interest in the assets of the related Trust. For
example, one of the exceptions in the DOL Regulation states that the underlying
assets of an entity (such as any Class of Certificates) will not be considered
to be "plan assets" if less than 25% of the value of each class of equity
interests (in such Class of Certificates) is held by "benefit plan investors,"
which are defined as ERISA Plans and Tax-Favored Plans, but this exception is
tested immediately after each acquisition of the equity interest in the entity
(or Certificates), whether upon initial issuance or in the secondary market.
Therefore, certain Classes of Certificates may not be acquired or transferred
unless the Trustee and the Depositor are furnished with a letter of
representation or an opinion of counsel to the effect that such an acquisition
or transfer will not result in a violation of the prohibited transaction
provisions of ERISA and the Code and will not subject the Trustee, the Depositor
or the Master Servicer to additional obligations. Therefore, it may not be
appropriate to use Plan Assets to acquire or hold Certificates in reliance upon
the availability of any exception under the DOL Regulation because of the
factual nature of these exceptions. For purposes of the sections of this
Prospectus and any Prospectus Supplement headed "ERISA Considerations," the
terms "Plan
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Assets" and "assets of a Plan" have the meaning specified in the DOL Regulation
and include an undivided interest in the underlying assets of certain entities
in which a Plan invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust and cause the Depositor, the Master
Servicer, any Subservicer, the Trustee, any Credit Provider and certain
affiliates thereof, to be considered or become "parties in interest" (or
"disqualified persons") with respect to the assets of any Plan that are invested
in Certificates issued by the Trust. If so, the acquisition or holding of
Certificates by or on behalf of a Plan or with Plan Assets could also give rise
to a prohibited transaction under ERISA and Section 4975 of the Code, unless a
statutory or administrative exemption is available. Certificates acquired by a
Plan would be assets of that Plan. Under the DOL Regulation, the Trust,
including the Mortgage Loans and other assets held in the Trust, may also be
deemed to be assets of each Plan that acquires Certificates. Special caution
should be exercised before Plan Assets are used to acquire a Certificate in such
circumstances, especially if, with respect to such Plan Assets, a Depositor, the
Master Servicer, a Subservicer, the Trustee, any Credit Provider or an affiliate
thereof either (1) has investment discretion with respect to the investment of
Plan Assets, or (2) has authority or responsibility to give (or regularly gives)
investment advice with respect to Plan Assets for a fee pursuant to an agreement
or understanding that such advice will serve as a primary basis for investment
decisions with respect thereto.
Any person who has discretionary authority or control with respect to the
management or disposition of the assets of a Plan, and any person who provides
investment advice with respect to such assets for a fee (in the manner described
above), is a fiduciary with respect to such Plan. If the Primary Assets and
other Trust assets were deemed to be Plan Assets, any party exercising
management or discretionary control regarding those assets may be deemed to be a
"fiduciary" with respect to all Plans involved and, therefore, subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to such Plans. In addition, if
the Primary Assets and other Trust assets were deemed to be Plan Assets, the
acquisition or holding of Certificates by or on behalf of a Plan or with Plan
Assets, as well as the normal operations of the Trust, may constitute or result
in a prohibited transaction under ERISA and Section 4975 of the Code.
Prohibited Transaction Exemptions
Underwriters' Exemptions. The DOL has issued individual exemptions (each,
an "Exemption"), to a large number of investment banking firms, broker-dealers
and banks or their affiliates (each, an "Underwriter"), which generally exempt
from the application of the prohibited transaction provisions of Section 406 of
ERISA, and the excise taxes imposed on prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions (among others)
relating to the servicing and operation of mortgage pools and the purchase, sale
and holding of mortgage pass-through certificates issued by a trust as to which
an Underwriter to whom the DOL has issued an Exemption (or any of its
affiliates) is the sole underwriter or the manager or co-manager of the
underwriting syndicate, or a selling or placement agent, with respect to such
certificates, provided that certain conditions set forth in the applicable
Exemption are satisfied. The Prospectus Supplement for each Series will state
(in the section headed "ERISA Considerations") whether the DOL has issued an
Exemption to an Underwriter with respect to that Series and identify the Classes
of Certificates of that Series to which any such Exemption may apply.
General Conditions. Each Exemption sets forth six general conditions which
must be satisfied for a transaction involving the purchase, sale and holding of
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of Certificates with Plan Assets must be on terms that are at least
as favorable to the Plans involved as they would be in an arm's-length
transaction with an unrelated party. Second, an Exemption only applies to
Certificates evidencing rights and interests that are not subordinated to the
rights and interests evidenced by the other Certificates of the same Trust.
Third, the Certificates, at
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the time of their acquisition with Plan Assets, must be rated in one of the
three highest generic rating categories by S&P, Moody's, D&P or Fitch. Fourth,
the Trustee cannot be an affiliate of any member of the "Restricted Group,"
which consists of any Underwriter, the Depositor, the Master Servicer, any
Subservicer and any Mortgagor with respect to Mortgage Loans constituting more
than 5% of the aggregate unamortized principal balance of the Mortgage Loans
held in the related Trust as of the date of initial issuance of the
Certificates. Fifth, the sum of all payments made to and retained by the
Underwriters must represent not more than reasonable compensation for
underwriting or placing the Certificates; the sum of all payments made to and
retained by the Depositor pursuant to the assignment of the Primary Assets and
other Trust assets to the related Trust must represent not more than the fair
market value of such obligations; and the sum of all payments made to and
retained by the Master Servicer and any Subservicers must represent not more
than reasonable compensation for such persons' services under the related
Pooling and Servicing Agreement and reimbursement of such persons' reasonable
expenses in connection therewith. Sixth, each Exemption states that the
investing Plan must be an accredited investor as defined in Rule 501 (a) (1) of
Regulation D of the Securities and Exchange Commission under the Securities Act
of 1933, as amended.
A Plan fiduciary or other investor of Plan Assets contemplating purchasing
a Certificate must make its own determination that the general conditions
described above will be satisfied with respect to such Certificate.
If the general conditions of an applicable Exemption are satisfied, the
Exemption may provide exemptive relief from the restrictions imposed by Section
406(a) of ERISA, and the excise taxes imposed by Section 4975 (a) and (b) by
reason of Section 4975(c)(1)(A) through (D) of the Code, in connection with the
direct or indirect sale, exchange, transfer, holding or the direct or indirect
acquisition or disposition in the secondary market of Certificates by a Plan or
with Plan Assets. However, no exemption is provided from the restrictions of
Section 406(a)(1)(E) and (2) of ERISA for the acquisition or holding of a
Certificate by or with Plan Assets of an Excluded Plan by any person who has
discretionary authority or renders investment advice with respect to Plan Assets
of such Excluded Plan. For purposes of the sections of this Prospectus and any
Prospectus Supplement headed "ERISA Considerations," the term "Excluded Plan"
means a Plan sponsored by any member of the Restricted Group.
Specific Conditions. If certain specific conditions of an applicable
Exemption are also satisfied, the Exemption may provide exemptive relief from
the restrictions imposed by Section 406(b)(1) and (2) of ERISA, and the excise
taxes imposed by Section 4975 (a) and (b) by reason of Section 4975(c)(1)(E) of
the Code, in connection with (1) the direct or indirect sale, exchange or
transfer of Certificates, in the initial issuance of Certificates between a
Depositor or an Underwriter and an investor of Plan Assets, when the person who
has discretionary authority or renders investment advice with respect to the
investment of the relevant Plan Assets in the Certificates is a Mortgagor with
respect to 5% or less of the fair market value of the Mortgage Loans or other
assets held in the Trust (or an affiliate of such a person), and (2) the direct
or indirect acquisition or disposition in the secondary market and holding of
Certificates by a Plan or with Plan Assets.
Further, if certain specific conditions of an applicable Exemption are
satisfied, the Exemption may provide exemptive relief from the restrictions
imposed by Section 406(a) and (b) of ERISA, and the excise taxes imposed by
Section 4975(a) and (b) by reason of Section 4975(c) of the Code, for
transactions in connection with the servicing, management and operation of the
Mortgage Pools. The Depositor expects that those specific conditions of an
applicable Exemption will be satisfied with respect to the Certificates so that
the Exemption would provide exemptive relief from those restrictions and excise
taxes for transactions in connection with the servicing, management and
operation of the Mortgage Pools, provided that the general conditions of the
Exemption are satisfied.
94
<PAGE>
An applicable Exemption also may provide exemptive relief from the
restrictions imposed by Section 406(a) of ERISA, and the excise taxes imposed by
Section 4975(a) and (b) by reason of Section 4975(e)(1)(A) through (D) of the
Code, if such restrictions are otherwise deemed to apply merely because a person
is deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e) (2) of
the Code) with respect to a Plan by virtue of providing services to the Plan(s)
involved, or by virtue of having certain specified relationships to such a
person, solely as a result of the ownership of Certificates by a Plan or with
Plan Assets.
Advance Determinations. Before purchasing any Class of Certificates of any
Series, a Plan fiduciary or other investor of Plan Assets should itself
determine that (1) the DOL has issued an Exemption to an Underwriter with
respect to that Series which will be disclosed in the related Prospectus
Supplement, (2) the Exemption applies to Certificates of that Class, (3) the
Certificates constitute "certificates" as defined in the Exemption, and (4) the
specific and general conditions and any other requirements set forth in the
Exemption would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided by an applicable Exemption,
the Plan fiduciary or other investor of Plan Assets should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
Certificates with Plan Assets.
Any Plan fiduciary or other investor of Plan Assets who proposes to
purchase Certificates with Plan Assets should consult with its counsel with
respect to the potential applicability of ERISA and Section 4975 of the Code to
such investment and the availability of exemptive relief under an Exemption or
any other prohibited transaction exemption in connection therewith. In
particular, in connection with a contemplated purchase of Certificates
representing a beneficial ownership interest in a pool of single-family
residential mortgage loans, any fiduciary or other Plan investor should consider
the availability of an Exemption or Prohibited Transaction Class Exemption 83-1
("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. The Prospectus Supplement for any Series of Certificates may contain
additional information regarding the application of an Exemption, PTCE 83-1 or
any other prohibited transaction exemption with respect to the Certificates
offered thereby. However, PTCE 83-1 does not provide exemptive relief with
respect to Certificates evidencing interests in Trusts which include Cooperative
Loans.
Tax Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section
501(a) of the Code (a "Tax Exempt Investor") nonetheless will be subject to
federal income taxation to the extent that its income is "unrelated business
taxable income" ("UBTI") (within the meaning of Section 512 of the Code). All
"excess inclusions" of a REMIC allocated to a REMIC Residual Certificate held by
a Tax-Exempt Investor will be considered UBTI and, therefore, will be subject to
federal income tax. See "Certain Federal Income Tax Consequences--Taxation of
Owners of REMIC Residual Interests."
Consultation With Counsel
Any Plan fiduciary or other investor of Plan Assets who proposes to
acquire or hold Certificates on behalf of or with Plan Assets of any Plan should
consult with its counsel with respect to the potential applicability of the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code to the proposed investment and
the availability of exemptive relief under an Exemption, such as PTCE 83-1 (for
a pool of single family residential mortgage loans) or any other prohibited
transaction exemption.
95
<PAGE>
PLAN OF DISTRIBUTION
The Certificates of each Series may be sold to or through Underwriters by
a negotiated firm commitment underwriting and public reoffering by the
Underwriters or such other underwriting arrangement as may be specified in the
related Prospectus Supplement or may be offered or placed either directly or
through agents. The Depositor intends that Certificates will be offered through
such various methods from time to time and that offerings may be made
concurrently through more than one of such methods or that an offering of a
particular Series of Certificates may be made through a combination of such
methods.
The distribution of Certificates may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or in negotiated transactions or otherwise at varying
prices to be determined at the time of sale.
In connection with the sale of the Certificates, Underwriters or agents
may receive compensation in the form of discounts, concessions or commissions.
Underwriters may sell Certificates to certain dealers at prices less a
concession. Underwriters may allow and such dealers may reallow a concession to
certain other dealers. Underwriters, dealers and agents that participate in the
distribution of the Certificates of a Series may be deemed to be underwriters
and any discounts or commissions received by them from the Depositor or the
related Trust and any profit on the resale of the Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933. Any such Underwriters or agents will be identified, and any such
compensation received from the Depositor or the related Trust will be described,
in the related Prospectus Supplement.
Under agreements which may be entered into by the Depositor, Underwriters
and agents who participate in the distribution of the Certificates may be
entitled to indemnification by the Depositor against certain liabilities,
including liabilities under the Securities Act of 1933.
The Underwriters may, from time to time, buy and sell Certificates, but
there can be no assurance that an active secondary market will develop and there
is no assurance that any such market, if established, will continue.
RATINGS
Each Class of Certificates of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings assigned to a
Certificate upon initial issuance will not be lowered or withdrawn by a Rating
Agency at any time thereafter. In general, ratings address credit risk and do
not represent any assessment of the likelihood or rate of principal prepayments.
LEGAL MATTERS
The legality of the Certificates of each Series will be passed upon for
the Depositor by Morrison & Hecker L.L.P. and for the Underwriters by Brown &
Wood LLP, and certain federal income tax
96
<PAGE>
consequences of the issuance of the Certificates will be passed upon by Brown &
Wood LLP or Morrison & Hecker L.L.P. as tax counsel ("Tax Counsel"), as
specified in the related Prospectus Supplement.
97
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
Term Page
- ---- ----
30 days per month/90 days per quarter/360 days per year.................81
Accrual Certificates.................................................6, 46
Accrual Period.......................................................5, 46
accrual period......................................................77, 78
Actuarial Mortgage Loan.................................................29
adjusted issue price................................................78, 84
Advance Rate............................................................35
Advances................................................................36
applicable federal rate.........................................85, 87, 88
assets of a Plan........................................................93
Available Payment Amount................................................38
backup withholding tax..................................................90
Balloon Loans...........................................................21
balloon payment.........................................................26
balloon payments.........................................................8
Bankruptcy Bond.........................................................14
Bankruptcy Loan.........................................................27
Bankruptcy Plan.........................................................27
Basic Principal Amount..................................................38
Bay Colony..............................................................41
benefit plan investors..................................................92
Block...................................................................40
BMC.....................................................................40
Book-Entry Certificates..........................................7, 46, 61
Calculation Agent.......................................................47
Cash Collateral Account.................................................54
Cash Collateral Lender..................................................54
Cede.................................................................7, 46
CEDEL...................................................................63
CEDEL Participants......................................................63
Certain Federal Income Tax Consequences.................................91
Certificate Insurance Policy............................................52
Certificate Interest Rate............................................5, 45
Certificateholder.......................................................74
Certificates..........................................................1, 4
certificates............................................................95
Chase...................................................................61
chattel paper...........................................................70
Citibank................................................................61
Class.................................................................1, 4
clearing agency.........................................................61
clearing corporation....................................................61
Closing Date.........................................................4, 76
Code................................................................16, 74
COFI Certificates.......................................................48
Collection Account......................................................35
Combined Loan-to-Value Ratio............................................27
i
<PAGE>
Term Page
- ---- ----
Commission .............................................................3
Committee Report........................................................79
Considerations...........................................................1
constant maturity.......................................................49
Contract.................................................................1
Contract Loan Schedule..................................................33
Contributions Tax.......................................................88
conventional............................................................25
conversion transaction..................................................87
Cooperative.............................................................63
Cooperative Loans...................................................25, 64
Correspondent Loans.....................................................42
Credit Provider.........................................................52
Curtailments............................................................50
Cut-off Date.............................................................4
D&P.....................................................................15
daily accruals..........................................................84
daily portions..........................................................78
debt....................................................................42
Defective Mortgage Loan.................................................34
Definitive Certificates.................................................62
Deposit Date............................................................34
Depositaries............................................................61
Depositor.............................................................1, 4
Determination Date.......................................................5
disqualified organization...........................................88, 89
disqualified person.....................................................95
disqualified persons................................................92, 93
Distribution Account....................................................37
Distribution Date....................................................5, 38
DOL.....................................................................92
DOL Regulation..........................................................92
DTC..............................................................7, 46, 61
due on sale.........................................................26, 69
Due Period...........................................................6, 50
due-on-sale.................................................57, 66, 69, 72
earned..................................................................30
Eleventh District.......................................................48
Eligible Account........................................................35
equity interest.........................................................92
ERISA...............................................................16, 91
ERISA Plans.............................................................91
Euroclear...............................................................63
Euroclear Operator......................................................63
Euroclear Participants..................................................63
Event of Nonpayment.....................................................59
evidences of indebtedness...............................................87
ii
<PAGE>
Term Page
- ---- ----
excess inclusions...............................................82, 84, 95
Excluded Plan...........................................................94
Exemption...............................................................93
fair consideration......................................................65
FHA..................................................................7, 25
FHLBSF..................................................................48
FHLMC...............................................................10, 58
fiduciary...............................................................93
Fitch...................................................................15
fixture filing..........................................................70
FNMA................................................................10, 58
Form 8-K................................................................10
GNMA....................................................................10
High LTV................................................................42
high-risk mortgage securities...........................................73
holder..............................................................62, 74
Holders..................................................................7
holders.................................................................46
Home Equity Loans....................................................8, 25
HRB Tax Services........................................................40
Income..................................................................42
income paying...........................................................73
Index of Principal Definitions...........................................2
Indirect Participants............................................7, 46, 62
Insurance Proceeds......................................................50
Insurer.................................................................52
interest bearing........................................................73
IRAs....................................................................92
Issue Premium...........................................................83
Letter of Credit........................................................53
Letter of Credit Issuer.................................................53
Liquidated Mortgage Loan................................................50
Liquidation Proceeds....................................................50
Loan-to-Value Ratio.....................................................27
loans secured by an interest in real property...........................76
lockout periods......................................................9, 26
long first accrual period...............................................77
long-term federal rate..................................................84
Majority in Aggregate Voting Interest...................................59
Manufactured Home.......................................................27
manufactured home.......................................................34
manufactured housing....................................................34
Mark-to-Market Regulations..............................................86
Master Servicer.......................................................1, 4
Master Servicer Termination Event.......................................59
MBS.....................................................................28
MBS Agreement...........................................................28
iii
<PAGE>
Term Page
- ---- ----
MBS Issuer..........................................................11, 28
MBS Servicer........................................................11, 28
MBS Trustee.........................................................11, 28
Money Rates.............................................................50
Monthly Payments.....................................................8, 50
Moody's.................................................................15
Mortgage................................................................25
Mortgage Loan Losses....................................................38
Mortgage Loan Underwriter...............................................42
Mortgage Loans.......................................................7, 24
Mortgage Note...........................................................25
mortgage related securities.........................................16, 73
Mortgage-Backed Securities..............................................28
Mortgaged Properties....................................................25
Mortgagor...............................................................19
National Cost of Funds Index............................................49
NCS.....................................................................40
net income from foreclosure property....................................88
Net Liquidation Proceeds................................................50
NFI.....................................................................40
NIV.....................................................................42
noneconomic.....................................................82, 85, 86
Nonrecoverable Advances.................................................37
Notional Principal Amount................................................6
objective rate..........................................................76
OID Regulations.........................................................74
original issue discount.................................................76
Original Pool Principal Balance.........................................24
OTS.....................................................................49
out-of-pocket...........................................................36
Owners..............................................................46, 62
P&I Advance.........................................................15, 36
Participants.....................................................7, 46, 61
parties in interest.................................................92, 93
party in interest.......................................................95
pass-through entity.................................................86, 89
passive losses..........................................................81
peaceful................................................................71
Percentage Interest..................................................6, 45
Permitted Instruments...................................................35
Plan....................................................................18
Plan Assets.............................................................92
plan assets.........................................................18, 92
Plans...................................................................92
Policy Statement........................................................73
Pool Insurance Policy...............................................14, 53
Pool Insurer............................................................53
iv
<PAGE>
Term Page
- ---- ----
Pool Principal Balance..................................................51
Pooling and Servicing Agreement.........................................31
portfolio income........................................................81
Prefunding Account..................................................12, 39
Prepayment Assumption...................................................76
Prepayment Period.......................................................50
Primary Assets........................................................1, 7
Prime Rate..............................................................50
prime rate..............................................................50
Principal Prepayments...................................................50
prohibited transactions.................................................88
Prohibited Transactions Tax.............................................88
prudent investor........................................................73
PTCE 83-1...............................................................95
qualified floating rate.................................................76
qualified floating rates................................................76
qualified inverse floating rate.........................................76
qualified mortgage......................................................34
qualified mortgages.....................................................75
Qualified Plans.........................................................91
Qualified stated interest...............................................76
qualified stated interest...............................................76
qualifying real property loans......................................75, 76
Rating Agency...........................................................15
real estate assets..................................................75, 76
reasonably equivalent value.............................................65
rebate..................................................................30
Record Date .............................................................5
Reference Banks.........................................................47
refund..................................................................30
regular interests...............................................74, 82, 83
Released Mortgaged Property Proceeds....................................50
Relief Act..............................................................22
REMIC................................................................3, 16
REMIC Certificates......................................................74
REMIC Provisions........................................................74
REMIC Regular Certificates..............................................74
REMIC Regulations.......................................................74
REMIC Residual Certificates.............................................74
Reserve Account.....................................................13, 53
Reserve Interest Rate...................................................47
residual interests......................................................74
Restricted Group........................................................94
Retail Loans............................................................41
RICO....................................................................70
Riegle Act..............................................................22
Rule of 78s.........................................................25, 29
v
<PAGE>
Term Page
- ---- ----
Rule of 78s Mortgage Loan...............................................29
Rules...................................................................62
S&P.....................................................................15
Sample Pool ............................................................26
self-help...............................................................71
Seller................................................................1, 4
Senior Certificates.....................................................54
Senior Liens............................................................19
Series...................................................................1
Servicer................................................................43
Servicing Advances......................................................36
Servicing Fee.......................................................15, 56
shifting interest.......................................................55
significant value...............................................82, 84, 85
significiant value......................................................85
Simple Interest Mortgage Loan...........................................29
Single Family Loan.......................................................1
SMMEA...................................................................16
Special Hazard Policy...............................................14, 53
Spread Account..........................................................53
standard hazard insurance...............................................56
Subordinated Certificates...............................................54
Subservicer.............................................................58
Subservicing Agreements.................................................58
Successor Master Servicer...............................................60
sum of the digits.......................................................29
Tax Counsel.........................................................74, 97
Tax Exempt Investor.....................................................95
tax matters person......................................................89
Tax-Favored Plans.......................................................92
taxable mortgage pool...................................................88
teaser..................................................................77
Terms and Conditions....................................................63
Tiered REMICs...........................................................75
Title V.................................................................69
Trust....................................................................1
Trust Assets.....................................................1, 24, 32
Trustee..............................................................4, 31
UBTI....................................................................95
Underwriter.............................................................93
unearned................................................................30
United States person....................................................91
unrelated business taxable income.......................................84
unrelated business taxable income.......................................95
VA...................................................................7, 25
Value...................................................................28
wash sale...........................................................88, 89
vi
<PAGE>
Term Page
- ---- ----
weighted average life...................................................31
Wholesale Loans.........................................................41
Yield Supplement Account................................................54
vii
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement Page
Summary of Terms........................................................ S-
Risk Factors............................................................ S-
Description of the Mortgage Pool........................................ S-
Mortgage Pool Statistics................................................ S-
Certain Yield and Prepayment Considerations............................. S-
The Seller and Foreclosure and Delinquency Experience................... S-
Description of the Certificates......................................... S-
The Trustee............................................................. S-
Certain Federal Income Tax Consequences................................. S-
ERISA Considerations.................................................... S-
Underwriting............................................................ S-
Use of Proceeds......................................................... S-
Legal Matters........................................................... S-
Ratings................................................................. S-
Prospectus
Available Information...................................................
Reports to Holders......................................................
Incorporation of Certain Documents by Reference.........................
Summary of Prospectus...................................................
Risk Factors............................................................
Description of the Primary Assets.......................................
Certain Yield and Prepayment Considerations.............................
The Trusts..............................................................
The Depositor...........................................................
The Seller..............................................................
The Master Servicer.....................................................
Use of Proceeds.........................................................
The Mortgage Loan Program...............................................
Description of the Certificates.........................................
Certain Legal Aspects of the Mortgage Loans.............................
Legal Investment Matters................................................
Certain Federal Income Tax Consequences.................................
State and Other Tax Consequences........................................
ERISA Considerations....................................................
Plan of Distribution....................................................
Ratings.................................................................
Legal Matters...........................................................
Index of Principal Definitions..........................................
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Expenses in connection with the offering of the Certificates
being registered herein are estimated as follows:
SEC registration fee..................................$ 303.03
Legal fees and expenses............................... *
Accounting fees and expenses.......................... *
Blue sky fees and expenses............................ *
Rating agency fees.................................... *
Trustees' fees and expenses........................... *
Printing.............................................. *
Miscellaneous......................................... *
-----
Total........................................... $ *
=====
------------
* To be completed by amendment.
Item 15. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the corporation), by reason of the fact that he or she is or
was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. Depending on the character of the
proceeding, a corporation may indemnify against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit
or proceeding if the person indemnified acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no cause to believe his or her conduct was
unlawful. In the case of an action by or in the right of the
corporation, no indemnification may be made in respect to any claim,
issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court
of Chancery or the court in which such action or suit was brought
shall determine that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court
shall deem proper. Section 145 further provides that to the extent a
director or officer of a corporation has been successful in the
defense of any action, suit or proceeding referred to above or in the
defense of any claim, issue or matter therein, he or she shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith.
The Bylaws of the Registrant provide, in effect, that, to
the extent and under the circumstances permitted by Section 145 of
the General Corporation Law of Delaware, the Registrant shall
indemnify any person who was or is a party or is threatened to be
made a party to any action, suit or proceeding of the type described
above by reason of the fact that he or she is or was a director,
officer, employee or agent of the Registrant.
<PAGE>
Item 16. Exhibits.
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of Block Mortgage Finance, Inc.*
3.2 Bylaws of Block Mortgage Finance, Inc.*
4.1 Form of Pooling and Servicing Agreement (including form of
Certificates)*
5.1 Opinion of Brown & Wood LLP with respect to legality*
8.1 Opinion of Brown & Wood LLP with respect to tax matters*
10.1 Form of Purchase Agreement*
23.1 Consent of Brown & Wood LLP (included in Exhibits 5.1 and 8.1)*
23.2 Consent of Morrison & Hecker L.L.P. (included in Exhibit 8.2)*
[24.1 Power of Attorney (included on Page II-5)]
- ----------------------
* To be filed by amendment.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to this
Registration Statement;
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933, as amended
(the "Act");
(ii) To reflect in the prospectus any facts
or events arising after the effective date of this
Registration Statement (or the most recent
post-effective amendment hereof) which, individually
or in the aggregate, represent a fundamental change
in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered
(if the total dollar value of securities offered
would not exceed that which was registered) and any
deviation from the low or high and of the estimated
maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent
change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table
in the effective Registration Statement;
(iii) To include any material information with
respect to the plan of distribution not previously
disclosed in this Registration Statement or any
material change to such information in this
Registration Statement.
(2) That, for the purpose of determining any
liability under the Act, each such post-effective amendment
shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
(b) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Act, each filing of
the Trust Fund's annual reports pursuant to Section 13(a) or Section
15(d) of the Certificates Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to
the underwriter at the closing specified in the underwriting agreements,
certificates in such denominatiaons and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
(d) Insofar as indemnification for liabilities arising under
the Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
<PAGE>
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
as amended, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3
and has duly caused the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Kansas City, the State Missouri on the eleventh day of October, 1996.
BLOCK MORTGAGE FINANCE, INC.
By: /s/ Bret G. Wilson
-------------------------------------------
Name: Bret G. Wilson
Title:Vice President, Secretary and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned
Directors and Officers of Block Mortgage Finance, Inc., a Delaware
corporation (the "Company"), hereby constitute and appoint William P.
Anderson, Clifford A. Davis and Bret G. Wilson with full power of
substitution and resubstitution, their true and lawful
attorneys-in-fact and agents to sign the names of the undersigned
Directors and Officers in the capacities indicated below to the
registration statement to which this Power of Attorney is attached as
an exhibit, and all amendments (including post-effective amendments)
and supplements thereto, and all instruments or documents filed as a
part thereof or in connection therewith, and to file the same, with
all exhibits thereto, and all other instruments or documents in
connection therewith, with the Securities and Exchange Commission; and
each of the undersigned hereby ratifies and confirms all that said
attorneys, agents or any of them shall do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ William P. Anderson President October 11, 1996
- ---------------------------- (Principal Executive Officer)
and Director
/s/ Clifford A. Davis Vice President, Treasurer October 11, 1996
- ---------------------------- (Principal Financial Officer)
and Director
/s/ Bret G. Wilson Vice President, Secretary October 11, 1996
- ---------------------------- and Director
/s/ Richard E. Skaggs Director October 11, 1996
- ----------------------------
<PAGE>
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
BLOCK MORTGAGE FINANCE, INC.
(Exact name of Registrant as specified in its charter)
---------------------
EXHIBIT
VOLUME
<PAGE>
EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of Block Mortgage Finance,
Inc.*
3.2 Bylaws of Block Mortgage Finance, Inc.*
4.1 Form of Pooling and Servicing Agreement (including form
of Certificates)*
5.1 Opinion of Brown & Wood LLP with respect
to legality*
8.1 Opinion of Brown & Wood LLP with respect to
certain tax matters*
10.1 Form of Purchase Agreement*
23.1 Consent of Brown & Wood LLP
(included in Exhibits 5.1 and 8.1)*
23.2 Consent of Morrison & Hecker
(included in Exhibits 8.2)*
24.1 Power of Attorney (included on Page II-5)
____________________________
* To be filed by amendment.
